<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 15, 1998
REGISTRATION NO. 333-51517
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
KIRKLAND'S, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
TENNESSEE 5990 62-1287151
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
805 N. PARKWAY, JACKSON, TN 38305
(901) 668-2444
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
ROBERT E. ALDERSON
PRESIDENT AND CHIEF OPERATING OFFICER
805 N. PARKWAY
JACKSON, TN 38305
(901) 668-2444
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
WITH COPIES TO:
<TABLE>
<S> <C>
BARRY M. ABELSON, ESQ. THOMAS R. BROME, ESQ.
ROBERT A. FRIEDEL, ESQ. CRAVATH, SWAINE & MOORE
PEPPER HAMILTON LLP 825 EIGHTH AVENUE
3000 TWO LOGAN SQUARE NEW YORK, NY
PHILADELPHIA, PA 19103 (212) 474-1000
(215) 981-4000
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(a), MAY
DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
Subject to Completion, Dated July 15, 1998
PROSPECTUS
SHARES
KIRKLAND'S, INC.
COMMON STOCK
---------------------------
All of the shares of common stock, no par value (the "Common Stock"), of
Kirkland's, Inc. ("Kirkland's" or the "Company") offered hereby (the "Offering")
are being sold by the Company, except for any shares sold pursuant to the
Underwriters' over-allotment option which will be sold by certain shareholders
of the Company (the "Option Shareholders"). Prior to the Offering, there has
been no public market for the Common Stock. It is currently estimated that the
initial public offering price will be between $ and $ per
share. See "Underwriting" for a list of the factors to be considered in
determining the initial public offering price. At the request of the Company,
the Underwriters have reserved up to 7% of the shares of Common Stock offered
hereby for sale at the initial public offering price to employees of the Company
and other persons associated with the Company. Approximately $18.0 million of
the net proceeds of the Offering will be used to redeem shares of Series C
Preferred Stock held by affiliates of the Company, including Carl Kirkland, the
Company's Chief Executive Officer, Robert E. Alderson, the Company's President,
and Kirkland Holdings LLC, one of the Company's principal shareholders.
The Company has applied to have the Common Stock approved for quotation on
the Nasdaq National Market under the symbol "KIRK."
---------------------------
THE SHARES OF COMMON STOCK OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 9.
---------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share................................. $ $ $
- ---------------------------------------------------------------------------------------------------------------------
Total(3).................................. $ $ $
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The Company, each of its operating subsidiaries and the Option Shareholders
have agreed to indemnify the Underwriters against certain liabilities,
including liabilities under the Securities Act of 1933, as amended (the
"Securities Act"). See "Underwriting."
(2) Before deducting expenses of the Offering payable by the Company, estimated
at $750,000. The Option Shareholders will not be required to pay any of
these expenses.
(3) The Option Shareholders have granted the Underwriters a 30-day option to
purchase up to additional shares of Common Stock solely to cover
over-allotments, if any. If such option were exercised in full, the total
Price to Public and Underwriting Discounts and Commissions would be
$ and $ , respectively, and the Option Shareholders would
receive $ . No proceeds from the sale of shares pursuant to an
exercise of the over-allotment option will be received by the Company. See
"Underwriting."
---------------------------
The shares of Common Stock offered by this Prospectus are offered by the
Underwriters, subject to prior sale, withdrawal, cancellation or modification of
the offer without notice, to delivery to and acceptance by the Underwriters and
to certain further conditions. It is expected that delivery of certificates
representing the shares of Common Stock will be made at the offices of Lehman
Brothers Inc., New York, New York, on or about , 1998.
---------------------------
LEHMAN BROTHERS
THE ROBINSON-HUMPHREY COMPANY
BANCAMERICA ROBERTSON STEPHENS
MORGAN KEEGAN & COMPANY, INC.
, 1998.
<PAGE> 3
The Company currently operates 145 stores in 26 states. The Company's
existing stores are located in middle markets such as Little Rock, Arkansas;
Birmingham, Alabama; and Tulsa, Oklahoma as well as in metropolitan markets such
as Atlanta, Dallas and Houston and small markets such as Paducah, Kentucky;
Florence, Alabama; and Lancaster, Pennsylvania. The following map and store list
show the number of stores that Kirkland's operates in each state and the cities
in which the Company's stores are located.
[In the printed version, a gatefold is included which contains a map indicating
the cities where Kirkland's stores are located and a group of photographs
depicting various merchandise displays together with the Company's logo.]
<TABLE>
<S> <C> <C> <C> <C> <C>
ALABAMA-8 GEORGIA-7 KENTUCKY-5 MISSOURI-4 OHIO-7 TEXAS-20
Birmingham(2) Atlanta(6) Louisville(2) St. Louis(2) Dayton Houston(7)
Huntsville Columbus Lexington Springfield Cincinnati(3) Dallas(5)
Montgomery Florence Joplin Canton Corpus
Mobile ILLINOIS-6 Paducah Cleveland Christi
Dothan Chicago(4) NEBRASKA-1 Dublin Austin(2)
Florence Moline LOUISIANA-9 Lincoln Lubbock
Tuscaloosa St. Louis Monroe OKLAHOMA-2 Amarillo
Baton Rouge(2) NEW MEXICO-2 Tulsa El Paso
ARKANSAS-3 IOWA-3 New Orleans(2) Albuquerque(2) Oklahoma City Midland
Little Rock(2) Davenport Lafayette Waco
Fayetteville Cedar Rapids Shreveport NORTH PENNSYLVANIA-2
Des Moines Slidell CAROLINA-9 Lancaster VIRGINIA-7
FLORIDA-16 Houma Charlotte(2) Erie Roanoke
Jacksonville(2) INDIANA-5 Greensboro Richmond(3)
Tallahassee Evansville MARYLAND-2 Fayetteville SOUTH Lynchburg
Orlando(3) Ft. Wayne Baltimore Wilmington CAROLINA-2 Chesapeake
Tampa(2) Indianapolis Waldorf Durham Myrtle Beach Newport
Fort Walton South Bend Cary Spartanburg News
Panama City Terre Haute MICHIGAN-1 Raleigh
Naples Olcemos High Point TENNESSEE-12 WEST
Pensacola KANSAS-2 Jackson VIRGINIA-2
St. Petersburg Kansas City(2) MISSISSIPPI-7 Knoxville(2) Charleston
Vero Beach Jackson(2) Memphis(3) Barboursville
Daytona Beach Tupelo Nashville(4)
Coral Springs Harrisburg Chattanooga WISCONSIN-1
Biloxi Johnson City Appleton
Columbus
Meridian
</TABLE>
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK. SUCH
TRANSACTIONS MAY INCLUDE THE PURCHASE OF SHARES OF COMMON STOCK FOLLOWING THE
PRICING OF THE OFFERING TO COVER A SYNDICATE SHORT POSITION IN THE COMMON STOCK
OR FOR THE PURPOSE OF MAINTAINING THE PRICE OF THE COMMON STOCK, AND THE
IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
The "Kirkland's" logo, Cedar Creek(R) private label brand and Now That's
Real Style!(R) are registered trademarks and/or service marks of the Company.
The Company also claims common law trademark rights in the Kirkland
Collection(TM) for which the Company has filed an application for federal
registration in the United States Patent and Trademark Office. All other
trademarks or service marks appearing in this Prospectus are trademarks or
service marks of the companies that utilize them.
2
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the financial statements and notes thereto appearing elsewhere
in this Prospectus. Historically, Kirkland's, Inc. has operated Kirkland's
stores through separate corporations (collectively, the "Kirkland Companies"),
and Kirkland's, Inc. has served as a management company for the Kirkland
Companies. Unless the context otherwise requires, all references to the
"Company" or "Kirkland's," with respect to any date or period prior to
completion of the Offering, mean Kirkland's, Inc. together with all Kirkland
Companies. The outstanding shares of the Kirkland Companies will be acquired by
Kirkland's, Inc. in connection with the Offering. Unless the context otherwise
requires, all information in this Prospectus (i) gives retroactive effect to (a)
a -for-one stock split of the Common Stock which will occur immediately
prior to the completion of the Offering, and (b) the contribution to Kirkland's,
Inc. of all of the outstanding common stock of the Kirkland Companies and (ii)
assumes that the Offering is consummated at an initial public offering price of
$ per share on , 1998. See "Use of Proceeds" and "Certain
Transactions - Pre-Offering Transactions."
THE COMPANY
Kirkland's is a leading specialty retailer of decorative home accessories
and gifts. The Company's stores offer a broad selection of distinctive
merchandise, including framed art, candles, lamps, picture frames, rugs, garden
accessories and artificial plants, as well as an extensive assortment of holiday
merchandise. The Company's stores are designed to provide style-conscious
customers, the majority of whom are women age 25 and older, with a distinctive
shopping experience characterized by a diverse, ever-changing merchandise
selection at surprisingly attractive prices. Management believes that the
Company's exclusive focus on decorative home accessories and gifts has led to
its emergence as a leader in its retail category and a destination store for
many mall shoppers. Kirkland's has generated operating income in each year since
opening its first store in 1966, and currently maintains one of the highest
operating margins among comparable specialty retailers.
The Company's 145 stores in 26 states average approximately 4,400 square
feet per store and are located primarily in enclosed malls. Although originally
focused in the Southeast, the Company has expanded beyond that region.
Currently, 60 of the Company's stores are located outside the Southeast,
including 11 of the 20 new stores opened during 1997 and two of the eight new
stores opened during the first half of 1998. In addition to operating in many
middle markets, the Company also has stores in major metropolitan markets such
as Atlanta, Houston, Chicago and Dallas, as well as in smaller markets. The
Company has been able to operate stores successfully across a broad range of
demographic and geographic markets.
Kirkland's has developed and refined a merchandising strategy that
differentiates it from other retailers of products for the home. The Company's
merchandising strategy is to (i) offer distinctive, high quality home
accessories and gifts at affordable prices, (ii) maintain a breadth of product
categories, (iii) provide a carefully edited selection of the best-selling items
within each category, rather than merchandising complete product collections and
(iv) present merchandise in a visually appealing manner to create an inviting
atmosphere which inspires decorating ideas. The Company believes that this
strategy creates a shopping experience which appeals to the style-conscious as
well as the price-conscious shopper.
The Company's goal is to be the leading specialty retailer of decorative
home accessories and gifts in each of its markets. The following elements of the
Company's business strategy, which have evolved over 32 years of successful
operations, differentiate Kirkland's from its competitors and position the
Company for continued growth:
Distinctive, Item-Focused Merchandising. While a Kirkland's store
contains items covering a broad range of complementary product categories,
the store emphasizes only the best-selling items within each category. The
Company does not seek to dictate a design theme to its customers, nor does
it necessarily seek to dominate any particular product category. The
Company instead takes a disciplined approach to identifying fashionable
merchandise reflecting the latest trends, selecting and test-marketing
products
3
<PAGE> 5
and monitoring and reacting to individual item sales. No single merchandise
category accounted for more than 15% of net sales in 1997.
Changing Merchandise Mix. The merchandise mix in a Kirkland's store
changes frequently throughout the year, in response to both market and
sales trends and changes in seasons. The Company's information systems
permit close tracking of individual item sales, enabling management to
react quickly to both fast-selling and slow-moving items. In addition, the
Company strategically increases selling space devoted to gifts and holiday
merchandise during peak selling seasons such as Christmas and Easter. The
Company believes that its ever-changing mix of merchandise creates an
exciting environment for customers, encouraging frequent return visits to
its stores.
Visually Appealing Store Environment. Kirkland's distinguishes itself
through its stores' "interior design" look, achieved by its emphasis on
visual merchandising. Using multiple types of fixtures, the Company groups
complementary merchandise creatively throughout the store, rather than
displaying products strictly by category or product type. This visual
presentation helps customers to picture the merchandise in their own homes
and thus inspires decorating ideas. As a result, this strategy provides the
opportunity for add-on sales and also encourages customers to browse for
longer periods of time.
Competitive Pricing. Kirkland's merchandise ranges in price from
approximately $5 to approximately $250, with most items selling for under
$30. Kirkland's shoppers regularly experience the satisfaction of paying
noticeably less for items similar or identical to those sold by other
retailers or through catalogs. Consequently, the Company does not routinely
engage in promotions or sales and typically holds only two regular sales
events each year. Management believes that the Company's competitive
pricing is an important element in making Kirkland's a destination store
for many mall shoppers.
Flexible Real Estate Strategy. The Company's stores are predominantly
located in enclosed malls in middle, metropolitan and smaller markets. The
Company believes that its stores' broad appeal makes Kirkland's a desirable
tenant for community, regional and super-regional malls targeting both
middle and upper-income customers as well as for selected non-mall venues.
The flexibility of the Kirkland's concept enables the Company to select the
most promising real estate opportunities that meet requisite economic and
demographic criteria within the Company's target markets.
Kirkland's opened its first store in 1966 and expanded steadily thereafter,
focusing primarily on middle markets in the Southeast. The Company accelerated
its expansion beginning in 1990, more than doubling its store base from 50
stores at the end of 1990 to 104 stores at the end of 1995. In June 1996, Advent
International Corporation led a leveraged recapitalization of the Company. See
"Certain Transactions - Recapitalization." Since then, the Company has made
considerable investments in management and infrastructure to support an
increased rate of expansion in the future. The net proceeds from the Offering
will reduce the Company's total indebtedness and position the Company
financially for continued growth.
The Company anticipates that its future expansion will come primarily from
opening new stores, expanding or remodeling existing stores and introducing new
retail formats. The Company intends to open approximately 25 stores in 1998
(eight of which were opened during the first half of 1998) and approximately 30
stores in 1999, and believes that there are currently over 500 additional malls
in the United States that could provide attractive locations for the Kirkland's
concept. The Company is also engaged in a selective expansion and remodeling
program to update store appearance and expand store size. The Company intends to
expand six stores in 1998 (four of which have been expanded during the first
half of 1998) and seven stores in 1999, and to remodel a like number of stores
in each of those years (five of which have been remodeled during the first half
of 1998). In addition, the Company has developed several new retail formats,
including temporary stores, outlet stores, strip center stores and more upscale
stores called "the Kirkland Collection," which it believes have significant
potential to create new channels through which to reach and expand Kirkland's
target customer base.
On June 30, 1998, the Company entered into an agreement to purchase all of
the capital stock of The Briar Patch Management Corporation ("Briar Patch"), a
specialty retailer of home accessories and gifts based
4
<PAGE> 6
in Savannah, Georgia. Briar Patch currently operates 34 stores in six
southeastern states, primarily in markets that are smaller than Kirkland's
traditional markets. The Company believes that the acquisition of Briar Patch
will enhance the Company's long-term growth opportunities. The acquisition is
scheduled to close on July 31, 1998, subject to customary closing conditions.
The Company is incorporated in Tennessee, its principal executive offices
are located at 805 N. Parkway, Jackson, Tennessee 38305, and its telephone
number is 901-668-2444. The Company's Internet website address is
http://www.kirklands.com.
THE OFFERING
Common Shares Offered by the
Company..........................
Common Shares Outstanding after
the Offering(1)..................
Use of Proceeds.................. To repay indebtedness, including
mandatorily redeemable preferred stock.
Proposed Nasdaq Symbol........... KIRK
- ---------------
(1) Based on an assumed initial public offering price of $ per share. The
number of shares of Common Stock to be issued to existing shareholders upon
recapitalization or exchange of their preferred stock will be determined by
reference to the actual initial public offering price. See "Certain
Transactions - Pre-Offering Transactions." Excludes an aggregate of 23,004
shares of Common Stock reserved for issuance under the Company's 1996
Executive Incentive and Non-Qualified Stock Option Plan, 1998 Incentive Plan
and Employee Stock Purchase Plan. Options to purchase 10,154 shares of
Common Stock have been granted under the Company's 1996 Executive Incentive
and Non-Qualified Stock Option Plan, of which options to purchase
shares will be exercisable upon completion of the Offering.
PRE-OFFERING TRANSACTIONS
The following transactions will occur immediately prior to the completion
of this Offering: (i) a -for-one stock split of the Common Stock; (ii) the
recapitalization or exchange of all of the outstanding shares of Class A
Preferred Stock ("Class A Preferred Stock") and Class B Preferred Stock ("Class
B Preferred Stock") of Kirkland's, Inc. and the Kirkland Companies into or for
shares of Common Stock (the number of shares of Common Stock to be issued will
equal the aggregate stated value of $41.0 million plus accrued dividends
($ at , 1998) on the preferred stock, divided by the actual
initial public offering price; assuming an initial public offering price of
$ and a consummation of the Offering on , 1998, shares of
Common Stock will be issued to existing stockholders for their preferred stock);
and (iii) the contribution of all of the outstanding shares of common stock of
the Kirkland Companies to Kirkland's, Inc., resulting in the Kirkland Companies
becoming wholly-owned subsidiaries of Kirkland's, Inc. Subsequent to these
transactions, but prior to completion of the Offering, Kirkland's, Inc. and the
Kirkland Companies will issue 11,905 shares of common stock upon the exercise of
outstanding warrants, and such shares of the Kirkland Companies will be
contributed to Kirkland's, Inc. All of these transactions are herein
collectively referred to as the "Pre-Offering Transactions." See "Use of
Proceeds" and "Certain Transactions - Pre-Offering Transactions".
5
<PAGE> 7
SUMMARY COMBINED FINANCIAL DATA
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
-------------------------------------------------- -----------------
1993 1994 1995 1996 1997 1997 1998
------- ------- -------- -------- -------- ------- -------
(IN THOUSANDS, EXCEPT SHARE, PER SHARE AND SELECTED STORE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net sales......................... $85,326 $99,901 $112,035 $127,946 $153,584 $26,178 $30,615
Gross profit...................... 33,080 38,088 43,200 47,508 56,586 7,559 9,505
Operating expenses................ 17,177 19,572 24,192 27,915 35,004 7,392 9,178
Severance charge(1)............... -- -- -- -- 756 -- --
Recapitalization expenses......... -- -- -- 854 -- -- --
Owners' compensation(2)........... 12,314 15,123 13,926 -- -- -- --
Depreciation and amortization..... 1,581 1,847 2,362 3,383 4,142 1,003 1,156
------- ------- -------- -------- -------- ------- -------
Operating income(loss)............ 2,008 1,546 2,720 15,356 16,684 (836) (829)
Interest expense, net(3).......... 719 814 1,253 6,247 10,099 2,508 2,313
Other income, net................. (184) (255) (221) (147) (154) (57) (64)
Income tax provision (benefit).... -- -- -- 2,693 2,817 (923) (920)
------- ------- -------- -------- -------- ------- -------
Net income(loss).................. 1,473 987 1,688 6,563 3,922 (2,364) (2,158)
Accretion of redeemable preferred
stock and dividends
accrued(4)...................... -- -- -- 2,313 3,755 939 998
------- ------- -------- -------- -------- ------- -------
Net income (loss) allocable to
common stock.................... $ 1,473 $ 987 $ 1,688 $ 4,250 $ 167 $(3,303) $(3,156)
======= ======= ======== ======== ======== ======= =======
Earnings (loss) per common share
Basic........................... $14,730 $ 9,870 $ 16,880 $ 76.18 $ 1.67 $(33.03) $(34.04)
Diluted......................... $14,730 $ 9,870 $ 16,880 $ 65.55 $ 1.35 $(33.03) $(34.04)
Weighted average common and common
equivalent shares outstanding
Basic........................... 100 100 100 55,789 100,000 100,000 92,714
Diluted......................... 100 100 100 64,838 123,549 100,000 92,714
PRO FORMA DATA(5):
Pro forma net income (loss)....... $ 7,603 $(1,107)
======== =======
Pro forma net income (loss) per
common share:
Basic........................... $ $
======== =======
Diluted......................... $ $
======== =======
Pro forma weighted average number
of common shares outstanding:
Basic...........................
======== =======
Diluted.........................
======== =======
OTHER DATA:
EBITDA(6)......................... $16,087 $18,771 $ 19,229 $ 19,740 $ 21,736 $ 224 $ 391
Net cash provided by (used in)
operating activities............ 3,422 2,040 1,269 11,065 8,669 (7,564) (7,874)
Net cash provided by (used in)
investing activities............ 2,818 2,652 (4,130) (4,205) (5,479) (735) (903)
Net cash provided by (used in)
financing activities............ 772 1,320 3,278 (982) (3,537) (617) 73
</TABLE>
6
<PAGE> 8
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
-------------------------------------------------- -----------------
1993 1994 1995 1996 1997 1997 1998
------- ------- -------- -------- -------- ------- -------
(IN THOUSANDS, EXCEPT SHARE, PER SHARE AND SELECTED STORE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED STORE DATA:
Comparable store net sales
increase(7)..................... 7.1% 4.4% 0.7% 1.4% 5.2% 4.8% 3.7%
Number of stores at end of
period.......................... 80 91 104 120 138 120 140
Average net sales per store (in
thousands)(8)................... $ 1,159 $ 1,159 $ 1,145 $ 1,147 $ 1,178 $ 216 $ 220
Average gross square footage per
store(9)........................ 3,753 3,821 3,942 4,091 4,186 4,174 4,382
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1998
----------------------------
ACTUAL AS ADJUSTED(10)
--------- ---------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Working capital............................................. $ 13,793 $14,754
Total assets................................................ 44,596 44,596
Total long-term and short-term debt, including mandatorily
redeemable Class C Preferred Stock........................ 92,682 43,585
Common stock warrants....................................... 879 --
Redeemable convertible preferred stock (Class A and Class B
Preferred Stock).......................................... 47,584 --
Shareholders' deficit....................................... (105,651) (7,130)
</TABLE>
- ---------------
(1) The 1997 severance charge represents the total salary continuation payments
which the Company is required to make to a former management employee who
resigned in 1997.
(2) Owners' compensation represents distributions to the Company's shareholders
during the periods when Kirkland's, Inc. and the Kirkland Companies were
Subchapter S corporations, prior to the Recapitalization. Such
distributions ceased upon the Recapitalization. See "Certain
Transactions - Recapitalization."
(3) Interest expense includes amounts associated with the Class C Preferred
Stock of $990,000 and $1.8 million in 1996 and 1997, respectively, and
$450,000 and $385,000 for the three months ended March 31, 1997 and 1998,
respectively. Interest expense also includes the accretion to the fair
value of detachable put warrants to purchase Common Stock, issued by the
Company in connection with its issuance of subordinated debt, of $190,000
and $389,000 in 1996 and 1997, respectively, and $97,000 for the three
months ended March 31, 1997. The holders of these warrants agreed to
terminate the put as of January 1, 1998.
(4) Reflects the accretion of the Class A Preferred Stock and Class B Preferred
Stock to its redemption value and the accrual of dividends on such
preferred stock at 8% annually.
(5) Assumes the Pre-Offering Transactions (as defined on page 5) were effected
as of the beginning of the period, at an assumed initial public offering
price of $ per share. At a different initial public offering price,
the pro forma number of shares outstanding and pro forma net income (loss)
per share would be different. See "Certain Transactions - Pre-Offering
Transactions." Also assumes repayment of $20.0 million of subordinated debt
(together with accrued interest) and $12.2 million of senior debt and the
purchase or redemption of all outstanding Class C Preferred Stock (together
with amounts classified as interest associated with such preferred stock)
from the proceeds of the sale of the shares of Common Stock offered hereby.
See "Use of Proceeds," "Capitalization," "Unaudited Pro Forma Condensed
Combined Financial Data" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
(6) The term EBITDA as used herein represents income before income taxes, net
interest expense, depreciation and amortization expense, owners'
compensation and non-recurring charges. While EBITDA should not be
considered in isolation or as a substitute for net income, cash flow from
operations or any other measure of income or cash flow that is prepared in
accordance with generally accepted accounting principles or as a measure of
a company's profitability or liquidity, EBITDA has been presented because
the Company believes it is commonly used in this or a similar format by
investors to analyze and compare operating performance as well as to
provide additional information with respect to the ability of the Company
to meet its future debt service, capital expenditure and working capital
requirements. EBITDA may differ in method of calculation from similarly
titled measures used by
7
<PAGE> 9
other companies. This information should be read in conjunction with the
Combined Statement of Cash Flows contained in the Combined Financial
Statements and notes thereto included elsewhere in this Prospectus.
(7) For periods ended on or before December 31, 1996, comparable stores were
defined as those stores opened prior to January 1 of the preceding fiscal
year. Effective January 1, 1997, in response to increased expansion and
remodeling activity, the Company modified the way comparable store net
sales are calculated to more accurately reflect the Company's ongoing
expansion and remodeling program. Commencing January 1, 1997, the Company
excluded from comparable store net sales calculations each store that was
expanded, remodeled or relocated during the applicable period. Each such
store is returned to the comparable store base on January 1 of the first
year following the one-year anniversary of the expansion, remodeling or
relocation.
(8) Calculated using net sales of all stores open at both the beginning and the
end of the period.
(9) Calculated using gross square footage of all stores open at both the
beginning and the end of the period. Gross square footage includes the
storage, receiving and office space that generally occupies approximately
30% of total store space.
(10) Adjusted to give effect to the Pre-Offering Transactions and the sale of
the shares of Common Stock offered hereby and the application of the
estimated net proceeds therefrom. See "Use of Proceeds," "Capitalization"
and "Unaudited Pro Forma Condensed Combined Financial Statements."
8
<PAGE> 10
RISK FACTORS
In addition to the other information contained in this Prospectus, the
following risk factors should be considered carefully in evaluating an
investment in shares of the Common Stock offered by this Prospectus.
AGGRESSIVE EXPANSION STRATEGY; MANAGEMENT OF GROWTH; ACQUISITION OF BRIAR PATCH
The Company intends to pursue an expansion strategy involving opening more
stores than it has in recent years, and its future operating results will depend
to a substantial extent upon its ability to open and operate new stores
successfully. In addition to planned openings of new mall-based stores, the
Company plans to expand by developing new retail formats both in malls and
non-mall venues. The new formats may involve different risks than the Company's
current mall-based activities. The Company also has an ongoing expansion and
remodeling program, and intends to expand and remodel six stores in 1998 (of
which four have been expanded and remodeled during the first half of 1998) and
seven stores in 1999, and to remodel (without expanding) a like number of stores
in each of those years (of which five have been remodeled during the first half
of 1998). The Company will also enter certain new markets in new regions of the
United States which may present competitive and merchandising challenges that
are different from those currently encountered by the Company in its existing
markets. In addition, the Company's ability to open new stores on a timely basis
will depend upon a number of factors, including the ability to properly identify
and enter new markets, locate suitable store sites, negotiate acceptable lease
terms, access adequate inventory, secure capital resources and financing,
construct or refurbish sites, hire, train and retain skilled managers and
personnel, and manage other factors, some of which may be beyond the Company's
control. The failure by the Company to open new stores on a timely basis or
otherwise to achieve its expansion plans could materially adversely affect the
Company's business, results of operations and financial performance. There can
be no assurance that the Company's new stores, when opened, will be profitable
or achieve sales or profitability levels comparable to the Company's existing
stores. Furthermore, the Company believes that its expansion within existing
markets could adversely affect the financial performance of the Company's
existing stores within those markets.
The agreement governing the Company's senior credit facility limits the
number of new stores which the Company is permitted to open during any given
year to 25. The credit agreement does not limit the number of stores which may
be remodeled or expanded nor does it restrict the Company's planned introduction
of new retail store formats. The Company is in negotiations to obtain a new
senior credit facility to replace the Company's existing senior credit facility
upon completion of the Offering. In addition to increasing the total amount of
borrowings available under the facility, the new senior credit facility is
expected to provide for an increase in the permitted number of new store
openings. There can be no assurance that the new senior credit facility will be
successfully negotiated or that the improved terms sought by the Company will be
obtained. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources."
To manage its expansion, the Company will need to continually evaluate the
adequacy of its existing systems and procedures and to adapt accordingly. In
addition, the success of the Company's expansion program will be dependent on
its ability to promote and/or recruit enough qualified district managers, store
managers and sales associates to support the expected growth in the number of
its stores, and there can be no assurance that the training and supervision of a
large number of new managers and associates will not adversely affect the
performance of the Company's stores. In addition, the Company relies upon its
existing management information systems for operating and monitoring all major
aspects of its business, including sales, warehousing, distribution, purchasing,
inventory control, merchandise planning and replenishment, as well as various
financial functions. Any failure by the Company to upgrade such systems or
unexpected difficulties encountered with such systems as its business expands,
or in general any disruption in these systems, could adversely affect the
Company's results of operations and financial performance.
The acquisition of Briar Patch, which is scheduled to close on July 31,
1998, is expected to be financed with additional borrowings under the Company's
senior credit agreement and is subject to customary closing conditions.
Accordingly, there can be no assurance that the acquisition will be successfully
completed. The full benefits of the acquisition of Briar Patch will require the
integration of each company's administrative, finance,
9
<PAGE> 11
sales and marketing organizations, and the implementation of appropriate
operations, financial and management systems and controls in order to capture
the efficiencies that are expected to result from the acquisition. However, the
integration of Briar Patch into the Company's operations will involve a number
of risks, including the possible diversion of management's attention from other
business concerns, the possible loss of key employees of Briar Patch, potential
difficulties in integrating the operations of Briar Patch with those of the
Company and the potential inability to replicate successfully the Company's
operating efficiencies in Briar Patch's operations. Consequently, no assurance
can be given as to the effect of the integration of Briar Patch on the Company's
business or results of operations.
The Company believes that cash generated from operations and available
borrowings under revolving credit facilities will be sufficient to satisfy its
currently anticipated working capital and capital expenditure requirements
through the end of 1999. However, in connection with its expansion strategy, the
Company may be required to seek additional funds, and there can be no assurance
that such funds will be available on satisfactory terms. Failure to obtain such
financing could delay or prevent the Company's planned expansion, which could
adversely affect the Company's results of operations and financial performance.
MERCHANDISING RISKS; INVENTORY
The Company's success depends, in large part, on its ability to anticipate
and respond, in a timely manner, to changing merchandise trends and consumer
demands. Accordingly, any failure by the Company to identify and respond to
emerging trends could adversely affect consumer acceptance of the merchandise in
the Company's stores and the Company's image with its customers, which in turn
could materially adversely affect the Company's business, financial condition
and results of operations. In addition, if the Company miscalculates either the
market for the merchandise in its stores or its customers' purchasing habits, it
may be faced with a significant amount of unsold inventory, which could have a
material adverse effect on the Company's business, financial condition and
results of operations. A major shift in consumer demand away from gift items and
home accessories could also have a material adverse effect on the Company's
business, results of operations and financial condition.
The Company purchases its products from approximately 140 vendors with
which it has no long-term purchase commitments or exclusive contracts. None of
the Company's vendors supplied more than 8% of the Company's merchandise
purchases in 1997 or during the first quarter of 1998. The Company has
historically enjoyed a positive experience with respect to vendor fulfillment
and retention and, except as described below, the Company has generally not
experienced difficulty in obtaining desired merchandise from vendors on
acceptable terms. In March through May 1998, the Company experienced delays in
merchandise deliveries from certain vendors, leading to a decline in inventory
on hand in the stores. Although the Company believes that timeliness of
merchandise deliveries has improved during June and July 1998, there can be no
assurances that the Company will not experience difficulties in obtaining
merchandise in a timely manner in the future. The Company's results of
operations could be adversely affected by a disruption in purchases from any of
its key vendors, any of which could discontinue selling to the Company at any
time.
FOREIGN-SOURCED MERCHANDISE
Many of the Company's vendors are importers of merchandise manufactured in
the Far East, Mexico and India. While the Company believes that buying from
vendors instead of directly from manufacturers reduces or eliminates the risks
involved with relying on products manufactured abroad, its vendors are subject
to those risks, and it remains subject to those risks to the extent that their
effects are passed through by its vendors to the Company or cause disruptions in
supply. These risks include fluctuations in the value of currencies, increases
in customs duties and related fees resulting from position changes by the United
States Customs Service, import controls and trade barriers (including the
unilateral imposition of import quotas), loss of "most favored nation" ("MFN")
trading status, restrictions on the transfer of funds, work stoppages, economic
uncertainties, changes in foreign government regulations and, in certain parts
of the world, political instability causing disruption of trade from the
countries in which the suppliers of the Company's vendors are located.
10
<PAGE> 12
The Company's ability to obtain merchandise cost-effectively through
importers from manufacturers in China, from which the Company currently
purchases approximately 30% of its merchandise, is subject to retention by China
of its MFN tariff status and its compliance with certain other requirements.
Pursuant to MFN status, products imported for the Company from China currently
receive the lower tariff rates made available to most of the United States'
major trading partners. In the case of China, however, this MFN treatment is
made possible under the Trade Act of 1974 by virtue of certain Presidential
findings that waive restrictions that would otherwise render China ineligible
for MFN treatment. China's MFN status is reviewed annually. Although the
President has waived these restrictions each year since 1979, there can be no
assurance that China will continue to enjoy MFN status in the future. If
products manufactured in China enter the United States without the benefit of
MFN treatment, such products will be subject to significantly higher duty rates,
ranging between 20% and 66% of customs value. Any such increased duties or
tariffs could significantly increase the cost or reduce the supply of products
from China. In addition, the United States Trade Representative is monitoring
China due to concerns regarding the protection of intellectual property rights
and market barriers to United States exports to and investments in China.
China's failure to comply with the terms of agreements entered into with the
United States regarding these matters could result in sanctions against China,
and the imposition of new duties on certain imports from China potentially
including products to be supplied to the Company. Any significant increase in
duties or tariffs on the products imported for the Company from China could have
a material adverse effect on the Company's results of operations and financial
condition.
Historically, instability in the political and economic environments of the
countries in which the Company's vendors obtain its products has not had a
material adverse effect on the Company's operations. The Company cannot predict,
however, the effect that future changes in economic or political conditions in
such foreign countries could have on operations. Although the Company believes
that it could access alternative sources in the event of disruptions or delays
in supply due to the impact of future changes in economic or political
conditions in foreign countries on its vendors, such disruptions or delays could
adversely affect the Company's results of operations unless and until
alternative supply arrangements could be made. In addition, merchandise
purchased from alternative sources may be of lesser quality or more expensive
than merchandise currently purchased abroad by the Company.
Although the majority of the foreign-sourced products sold by the Company
are not currently subject to quotas, countries in which the Company's vendors
obtain these products may, from time to time, impose new or adjust prevailing
quotas or other restrictions on exported products, and the United States may
impose new duties, tariffs and other restrictions on imported products, any of
which could disrupt the supply of such products to the Company and adversely
affect its operations. Other restrictions on the importation of products
obtained for the Company by vendors are periodically considered by the United
States Congress, and no assurances can be given that tariffs or duties on such
products may not be raised, resulting in higher costs to the Company, or that
import quotas with respect to such products may not be imposed or made more
restrictive.
COMPETITION
The business in which the Company is engaged is highly competitive. The
Company competes with a variety of specialty stores, department stores, discount
stores and catalog retailers that carry merchandise in one or more categories
also carried by the Company. One or more of its competitors are present in
substantially all of the malls in which the Company has stores. Many of the
Company's competitors are larger than the Company and have access to
significantly greater financial, marketing and other resources than the Company.
The Company believes that its stores compete primarily on the basis of
merchandise quality and selection, price, visual appeal of the merchandise and
the store and convenience of location. There can be no assurance that the
Company will continue to be able to compete successfully against existing or
future competition. Expansion by the Company into the markets served by its
competitors, entry of new competitors or expansion of existing competitors into
the Company's markets could have a material adverse effect on the Company's
business, financial condition and results of operations.
11
<PAGE> 13
SEASONALITY; VARIATIONS IN QUARTERLY RESULTS
The Company has experienced, and expects to continue to experience,
substantial seasonal fluctuations in its sales and operating results, which are
typical of many mall-based specialty retailers and common to most retailers
generally. Due to the importance of the fall selling season, which includes
Thanksgiving and Christmas, the fourth calendar quarter has historically
contributed, and is expected to continue to contribute, a substantial majority
of the Company's operating income and net income for the entire year. The
Company expects this pattern to continue during the current fiscal year and
anticipates that in subsequent years the fourth quarter will continue to
contribute disproportionately to its operating results, particularly during
November and December. Any factors negatively affecting the Company during the
fourth quarter in any year, including unfavorable economic conditions, could
have a material adverse effect on the Company's financial condition and results
of operations. The Company's quarterly results of operations may also fluctuate
significantly as a result of a variety of other factors, including, among other
things, the timing of new store openings, pre-opening expenses associated with
new stores, the relative proportion of new stores to mature stores, net sales
contributed by new stores, increases or decreases in comparable store sales,
adverse weather conditions, shifts in the timing of holidays and changes in the
Company's product mix. The market price of the Common Stock may fluctuate
significantly in response to changes in the Company's quarterly results of
operations.
ECONOMIC CONDITIONS AND FLUCTUATIONS IN CONSUMER SPENDING
The Company's sales are also subject to a number of factors relating to
consumer spending, including general economic conditions affecting disposable
consumer income such as employment, business conditions, interest rates, the
level of consumer debt and taxation. The Company's sales could also be adversely
affected by a weak retail environment. No assurances can be given that purchases
of home accessories and gift items will not decline during recessionary periods
or that a prolonged recession will not have a material adverse effect on the
Company's business, financial condition and results of operations. In addition,
economic downturns during the fourth quarter could adversely affect the Company
to a greater extent than if such downturns occurred at other times of the year.
COMPARABLE STORE SALES RESULTS
Numerous factors affect comparable store sales results, including among
others, weather conditions, retail trends, the retail sales environment,
economic conditions and the Company's success in executing its business
strategy. The Company's comparable store sales results have experienced
fluctuations in the past. In addition, the Company anticipates that opening new
stores in existing markets may result in decreases in comparable store sales for
existing stores in such markets. There can be no assurance that comparable store
sales for any particular period will not decrease in the future. Variations in
the Company's comparable store sales results could cause the price of the Common
Stock to fluctuate significantly and could have a material adverse effect on the
Company.
RISKS ASSOCIATED WITH INDEBTEDNESS
Following the Offering, the Company will continue to have substantial
indebtedness and, as a result, significant debt service obligations. On a pro
forma basis, giving effect to the sale of the shares offered hereby and the
application of the estimated net proceeds therefrom on January 1, 1998, the
Company would have had total outstanding indebtedness as of March 31, 1998 of
approximately $43.6 million, including approximately $43.1 million outstanding
under its senior credit facility, and its total interest expense for the first
quarter of 1998 would have been $1.1 million. On a pro forma basis, giving
effect to the sale of the shares offered hereby and the application of the
estimated net proceeds therefrom on January 1, 1997, the Company would have had
total outstanding indebtedness as of December 31, 1997 of approximately $36.6
million, including approximately $36.1 million outstanding under its senior
credit facility, and its total interest expense for the year ended December 31,
1997 would have been $4.3 million. The degree to which the Company is leveraged
could have several material adverse effects, including, but not limited to, the
following: (i) making it more difficult for the Company to satisfy its
obligations; (ii) limiting the Company's ability to obtain additional financing
to
12
<PAGE> 14
fund future working capital, capital expenditures, acquisitions and other
general corporate requirements; (iii) increasing the Company's vulnerability to
a downturn in general economic conditions; (iv) requiring the dedication of a
substantial portion of the Company's cash flow from operations to the payment of
principal of, and interest on, its indebtedness, thereby reducing the
availability of such cash flow to fund working capital, capital expenditures,
acquisitions and other general corporate requirements; (v) limiting the
Company's flexibility in planning for, or reacting to, changes in its business
and the industry; and (vi) placing the Company at a competitive disadvantage
with respect to less highly leveraged competitors. The Company's senior credit
facility contains financial and operating covenants including, but not limited
to, restrictions on the Company's ability to incur additional indebtedness and
issue preferred stock, pay dividends or make other distributions, create liens,
sell assets and enter into certain mergers and consolidations.
The Company's inability to service its obligations would have a material
adverse effect on the market value and marketability of the Common Stock. In
addition, failure by the Company to comply with the covenants contained in its
bank credit facility may result in an event of default, which, if not cured or
waived, could have a material adverse effect on the Company.
MARKET CONCENTRATION
Approximately 85 of the Company's 145 stores are located in the
southeastern region of the United States. The Company's current expansion plans
anticipate that many of its new stores will be located in the states where the
Company currently has operations or in contiguous states. Consequently, the
Company's results of operations are more subject to regional economic
conditions, weather conditions, demographic and population changes and other
factors specific to a particular region than are the operations of more
geographically diversified competitors. In addition, changes in such regional
factors which reduce the appeal of the Company's stores and merchandise to local
consumers could have a material adverse effect on the Company's business,
results of operations and financial condition. The Company expects to open new
stores in certain markets in which it is already operating, which could
adversely affect the financial performance at existing stores within those
markets.
DEPENDENCE ON CUSTOMER TRAFFIC IN MALLS
Substantially all of the Company's existing stores are located in enclosed
malls. As a result, the Company must rely, in part, on the ability of mall
anchor tenants and other tenants to generate customer traffic in the vicinity of
the Company's stores. The Company's future operating results will also depend on
many other factors that are beyond the Company's control, including the overall
level of mall traffic and general economic conditions affecting consumer
confidence and spending.
DEPENDENCE ON KEY PERSONNEL
The Company believes that it has benefitted substantially from the
leadership and performance of its senior management, especially Carl Kirkland
(Chief Executive Officer) and Robert E. Alderson (President and Chief Operating
Officer). Although the Company maintains key man insurance in the amount of $3
million on each of Messrs. Kirkland and Alderson, the loss of the services of
either of these individuals for any reason could have a material adverse effect
on the Company's business, financial condition and results of operations. Many
members of the Company's management have substantial experience and expertise in
the Company's business and have made significant contributions to its growth and
success. As the Company continues to grow, it will continue to hire, appoint or
otherwise change senior managers and other key executives. The Company has
employment agreements with Mr. Kirkland, Mr. Alderson and other members of
senior management which expire, in the cases of Mr. Kirkland and Mr. Alderson,
in June 2000. There can be no assurance that the Company will be able to retain
its executive officers and key personnel or attract additional qualified members
to its management team beyond the stated terms of these employment agreements or
otherwise in the future.
13
<PAGE> 15
VIOLATION OF LEASE TERMS
A substantial number of the Company's store leases contain provisions that
permit the landlord to terminate the lease upon a change in control of the
Company. The Offering and the Pre-Offering Transactions may give rise to a
change in control under certain of the Company's leases. There can be no
assurance that the Company's landlords under leases which contain the above
provisions will not attempt to terminate those leases or to alter the terms
thereunder, and that such actions would not have a material adverse effect on
the Company's business, results of operations or financial condition.
HOLDING COMPANY STRUCTURE
Upon completion of the Offering, all of the Kirkland Companies will be
subsidiaries of the Company and the Company will be a holding company that will
derive substantially all of its operating income from its subsidiaries. The
Company expects that distributions from its subsidiaries will be its principal
source of the funds to meet its obligations. The Kirkland Companies are, and any
additional subsidiaries formed following the Offering will be, separate and
distinct legal entities and will have no obligation, contingent or otherwise, to
pay any dividend or make any other distribution to the Company, other than for
interest and principal payments on indebtedness owed to the Company, if any. The
ability of the Company's subsidiaries to make payments will be subject to, among
other things, the availability of sufficient cash and restrictive covenants in
the documents governing the Company's senior credit facility which prohibit the
Company's subsidiaries from paying dividends or making other distributions to
the Company, including indebtedness owed to the Company. The Kirkland Companies
are co-borrowers under the senior credit facility, their obligations thereunder
are secured by security interests in the Kirkland Companies' assets and have
been guaranteed by the Company, and the stock of the Kirkland Companies will be
pledged by the Company to the bank as security for its guarantee. The Company's
inability to service its obligations would have a material adverse effect on the
market value and marketability of the Common Stock.
IMPACT OF YEAR 2000 ISSUE
An issue exists for all companies that rely on computers as the year 2000
approaches. The "Year 2000" issue is the result of past practice in the computer
industry of using two digits rather than four to identify the applicable year.
This practice will result in incorrect results when computers perform arithmetic
operations, comparisons or data field sorting involving years later than 1999.
Independent of the Year 2000 issue, the Company intends to install a new
point-of-sale ("POS") system throughout its store network in 1998 at a cost of
approximately $1.5 million, which will be Year 2000 compliant. The Company
anticipates that it will be able to test its entire system using its internal
programming staff and outside computer consultants and intends to make the
necessary modifications to prevent disruption to its operations. The Company
does not expect costs in connection with any such modifications to be material.
However, if such modifications are not completed in a timely manner or if costs
are greater than anticipated, the Year 2000 issue may have a material adverse
effect on the operations of the Company. The Company is in the process of
exploring with each of its key vendors the impact the Year 2000 issue will have
on their ability to source products for the Company and process purchase orders
with delivery requirements and terms involving years later than 1999. There can
be no assurance that the systems of vendors on which the Company's systems rely
will be modified in a timely manner to account for the Year 2000 issue, or that
a failure to so modify by a vendor, or a modification that is incompatible with
the Company's systems, will not have a material adverse effect on the operations
of the Company. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Year 2000 Issue."
NO PRIOR PUBLIC MARKET; VOLATILITY
Prior to this Offering, there has been no public market for the Common
Stock, and there can be no assurance that an active trading market will develop
or be sustained. The initial public offering price for the shares of Common
Stock to be sold in this Offering will be determined by agreement among the
Company and the representatives of the Underwriters and may bear no relationship
to the Company's book value, net worth or any other established criteria of
value or the price at which the Common Stock will trade after completion
14
<PAGE> 16
of this Offering. The market price of the Common Stock could be subject to
significant fluctuations in response to the Company's operating results, general
trends in prospects for the retail industry, changes in equity analysts'
recommendations regarding the Company and other factors. In addition, the stock
market in recent years has experienced extreme price and volume fluctuations
that often have been unrelated or disproportionate to the operating performance
of companies. These fluctuations, as well as general economic and market
conditions, may adversely affect the market price of the Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of Common Stock in the public market following
this Offering could have an adverse effect on the market price of the Common
Stock. The shares offered hereby by the Company (plus any of the
shares purchased pursuant to the exercise of the Underwriters' over-allotment
option) will be freely tradeable in the public market, except to the extent
purchased by "affiliates" or "underwriters" (as those terms are defined under
the Securities Act) of the Company. As described in "Underwriting," upon the
expiration of certain "lock-up" agreements not to sell such shares until 180
days after the date of this Prospectus, 11,905 shares will be eligible for sale
immediately in the public market without restriction pursuant to Rule 144(k)
under the Securities Act, and 134,778 shares ( shares if the
Underwriters' over-allotment option is exercised in full) to be outstanding upon
consummation of this Offering will become eligible for sale in the public
market, subject to compliance with the holding period, volume and manner of sale
requirements of Rule 144 under the Securities Act. Holders of such shares of
Common Stock have the right to require the Company to register the shares for
sale under the Securities Act in certain circumstances and have the right to
include those shares in a Company-initiated registration. If the Company is
required to include shares of Common Stock held by these holders pursuant to
these registration rights in a Company-initiated registration, sales made by
such holders may have an adverse effect on the Company's ability to raise needed
capital and on the price of the Common Stock. In addition, if these holders
exercise their demand registration rights and cause a large number of shares to
be registered and sold in the public market, such sales may have an adverse
effect on the market price of the Common Stock. Following this Offering, the
Company also intends to file registration statements with the Securities and
Exchange Commission covering 23,004 shares of Common Stock issued or reserved
for issuance under the Company's 1996 Executive Incentive and Non-Qualified
Stock Option Plan, 1998 Incentive Plan and Employee Stock Purchase Plan. Upon
effectiveness of such registration statements, any shares subsequently issued
under such plans will be eligible for sale in the public market, except to the
extent restricted by the lock-up agreements referred to above and subject to
compliance with Rule 144 in the case of affiliates of the Company. Sales of a
large number of shares of Common Stock issued under these plans in the public
market may have an adverse effect on the market price of the Common Stock. See
"Shares Eligible for Future Sale."
CHARTER AND BYLAW PROVISIONS; ANTI-TAKEOVER EFFECT OF TENNESSEE LAWS
The Company's Amended and Restated Charter (the "Charter") authorizes the
issuance of "blank check" preferred stock with such designations, rights and
preferences as may be determined from time to time by the Company's Board of
Directors. Accordingly, the Board is empowered, without shareholder approval, to
issue preferred stock with dividend, liquidation, conversion, voting or other
rights which could materially adversely affect the voting power or other rights
of the holders of the Common Stock (including those of the purchasers in the
Offering). Holders of the Common Stock will have no preemptive rights to
subscribe for a pro rata portion of any capital stock which may be issued by the
Company. In the event of issuance, such preferred stock could be utilized, under
certain circumstances, as a method of discouraging, delaying or preventing a
change in control of the Company. Although the Company has no present intention
to issue any shares of preferred stock, there can be no assurance that the
Company will not do so in the future.
The Company's Charter and Restated Bylaws (the "Bylaws") contain certain
corporate governance provisions that may deter and inhibit unsolicited changes
in control of the Company. First, the Charter provides for a classified Board of
Directors, with directors (after the expiration of the terms of the initial
classified board of directors in 1999, 2000 and 2001) serving three year terms
from the year of their respective elections and being subject to removal only
for cause and upon the vote of 80% of the voting power of all
15
<PAGE> 17
outstanding capital stock of the Company entitled to vote (the "Voting Power").
Second, the Charter and the Bylaws do not generally permit shareholders to call,
or to require that the Board of Directors call, a special meeting. The Charter
and Bylaws also limit the business permitted to be conducted at any such special
meeting. In addition, Tennessee law permits action to be taken by the
shareholders by written consent only if the action is consented to by holders of
the number of shares required to authorize shareholder action and if all
shareholders entitled to vote are parties to the written consent. Third, the
Bylaws establish an advance notice procedure for shareholders to nominate
candidates for election as directors or to bring other business before meetings
of shareholders of Kirkland's. Only those shareholder nominees who are nominated
in accordance with this procedure will be eligible for election as directors of
Kirkland's, and only such shareholder proposals may be considered at a meeting
of shareholders as have been presented to Kirkland's in accordance with the
procedure. Finally, the Charter provides that the affirmative vote of at least
80% of the Voting Power is required to amend or repeal the foregoing provisions
of the Charter. In addition, the Bylaws provide that the amendment or repeal by
shareholders of any Bylaws made by the Board of Directors of Kirkland's would
require the affirmative vote of at least 80% of the Voting Power.
Furthermore, the Company is subject to certain provisions of Tennessee law,
including certain Tennessee corporate takeover acts which are, or may be,
applicable to the Company. These acts are the Investor Protection Act, the
Business Combination Act and the Tennessee Greenmail Act, and these acts seek to
limit the parameters in which certain business combinations and share exchanges
occur. The existence of the Charter, Bylaws and Tennessee law provisions could
be expected to have an anti-takeover effect, including possibly discouraging
takeover attempts that might result in a premium over the market price for the
Common Stock. See "Description of Capital Stock - Anti-Takeover Effect of
Charter and Bylaw Provisions and Tennessee Laws."
CONTROL BY CERTAIN SHAREHOLDERS
The Company's current directors, executive officers, existing shareholders
and their affiliates will, in the aggregate, beneficially own approximately
% of the Company's outstanding shares of Common Stock after this Offering,
assuming no exercise of the Underwriters' over-allotment option. As a result,
these shareholders, acting together, would be able to exercise a controlling
influence over matters requiring approval by the shareholders of the Company,
including the election of directors, and over the business and affairs of the
Company, including determinations with respect to mergers or other business
combinations involving the Company and the acquisition or disposition of assets
by the Company.
DILUTION
Investors purchasing Common Stock in the Offering will, on a pro forma
basis, incur immediate and substantial dilution in the amount of $ per
share. To the extent that currently outstanding options to purchase Common Stock
are exercised, there will be further dilution. See "Dilution."
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus contains forward-looking statements relating to future
events or the future financial performance of the Company. Such statements may
relate, but are not limited to, expectations of future operating results or
financial performance, capital expenditures, construction or expansion of
facilities (including new stores), plans for growth and future operations, or
financing, as well as assumptions relating to the foregoing. Forward-looking
statements are inherently subject to risks and uncertainties, some of which
cannot be predicted or quantified. Such risks include, but are not limited to,
the matters discussed in the foregoing paragraphs under "Risk Factors." Future
events and actual results could differ materially from those set forth in,
contemplated by or underlying the forward-looking statements.
16
<PAGE> 18
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the
shares offered hereby will be approximately $50.4 million, after
deducting underwriting discounts and commissions and estimated offering
expenses. The Company expects to use the net proceeds from the Offering as
follows: (i) $20.2 million to repay outstanding subordinated debt (including
approximately $210,000 of accrued interest); (ii) $18.0 million to purchase or
redeem all of the outstanding shares of mandatorily redeemable Class C Preferred
Stock (including approximately $900,000 of amounts classified as interest
associated with the Class C Preferred Stock); and (iii) $12.2 million to repay
outstanding senior indebtedness. Substantially all of the shares of Class C
Preferred Stock are held by affiliates of the Company. The Company will not
receive any proceeds from the sale of shares pursuant to any exercise of the
Underwriters' over-allotment option. See "Certain Transactions - Pre-Offering
Transactions."
As of March 31, 1998, the Company's senior indebtedness consisted of $55.3
million outstanding under a senior credit facility which matures in June 2002.
As of March 31, 1998, the weighted average interest rate on the senior
indebtedness expected to be repaid with net proceeds of the Offering was 9.1%.
Immediately following the completion of the Offering, the Company expects to
have remaining outstanding senior indebtedness of approximately $43.1 million.
The Company's subordinated debt consists of $20.0 million of notes bearing
interest at 12.25% until June 13, 1998 and at 12.5% thereafter and maturing on
June 30, 2003. By their terms, the notes are required to be repaid in full with
proceeds of the Offering. The Company's Class C Preferred Stock was issued in
connection with the Recapitalization and had an aggregate stated value of $17.1
million at March 31, 1998. The Company pays an annual amount equal to 9% of the
outstanding balance to the holders which has been reflected as interest expense
in the Company's Combined Financial Statements.
DIVIDEND POLICY
The Company intends to retain future earnings to finance the continued
growth and development of its business, and does not, therefore, anticipate
paying any cash dividends on its Common Stock in the foreseeable future. In
addition, the Company's senior credit facility prohibits the payment of cash
dividends without the prior written consent of two-thirds of the lenders. No
dividends have been paid on the Common Stock subsequent to 1995. Future cash
dividends, if any, will be determined by the Board of Directors, and will be
based upon the Company's earnings, capital requirements, financial condition,
debt covenants and other factors deemed relevant by the Board of Directors.
17
<PAGE> 19
DILUTION
The pro forma net negative tangible book value of the Company as of March
31, 1998, after giving effect to the Pre-Offering Transactions, was $57.2
million, or $ per share of outstanding Common Stock on such date. Pro
forma net negative tangible book value per share is determined by dividing the
pro forma net negative tangible book value of the Company (total tangible assets
less total liabilities) by the number of shares of Common Stock outstanding on a
pro forma basis, giving effect to the Pre-Offering Transactions. Without taking
into effect any changes in pro forma net negative tangible book value after
March 31, 1998, other than to give effect to the sale by the Company of the
shares of Common Stock offered hereby and the application of the
estimated net proceeds therefrom (after deducting estimated offering expenses
and the underwriting discounts and commissions), the as adjusted pro forma net
negative tangible book value of the Company as of March 31, 1998 would have been
$7.1 million, or $ per share. This represents an immediate increase in
pro forma net tangible book value of $ per share to existing
shareholders and an immediate dilution of $ per share to purchasers of
Common Stock in the Offering. The following table illustrates this per share
dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $
Net negative tangible book value per share at March 31,
1998................................................... $ ()
Adjustment(1).............................................
------
Pro forma net negative tangible book value per share
before the Offering.................................... ()
Increase attributable to new shareholders.................
------
Adjusted pro forma net negative tangible book value per
share after the Offering............................... ()
------
Dilution per share to new shareholders...................... $
======
</TABLE>
- ---------------
(1) The adjustment gives effect to the Pre-Offering Transactions.
The following table sets forth, on a pro forma basis as of March 31, 1998,
giving effect to the Pre-Offering Transactions, the number of shares of Common
Stock purchased from the Company, the total consideration paid to the Company,
the average price per share paid by existing shareholders, and the average price
per share to be paid by purchasers of Common Stock in the Offering:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
-------------------- --------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ---------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing shareholders(1)............. % $ % $
New investors........................ $
--------- ----- ---------- -----
Total........................... 100.0% $ 100.0%
========= ===== ========== =====
</TABLE>
- ---------------
(1) With respect to the Company's executive officers, directors and
greater-than-10% shareholders, and assuming the exercise of all outstanding
stock options, the number of shares of Common Stock purchased from the
Company, the total consideration paid to the Company, and the average price
per share paid by such persons, are as follows:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
-------------------- --------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ---------- ------- -------------
<S> <C> <C> <C> <C> <C>
% % $
</TABLE>
Except as otherwise indicated, the foregoing tables do not include (i)
10,154 shares of Common Stock issuable upon exercise of outstanding options at
exercise prices ranging from $0.45 to $285.65 per share, of which shares
are subject to options which will be exercisable upon completion of the
Offering, or (ii) 12,850 shares of Common Stock reserved for future issuance
under the Company's 1996 Executive Incentive and Non- Qualified Stock Option
Plan, 1998 Incentive Plan and Employee Stock Purchase Plan. See
"Management - Employee Benefit Plans."
18
<PAGE> 20
CAPITALIZATION
The following table sets forth, as of March 31, 1998, (i) the actual
capitalization of the Company, (ii) the pro forma capitalization of the Company
after giving effect to the Pre-Offering Transactions and (iii) the pro forma as
adjusted capitalization of the Company after giving effect to the Pre-Offering
Transactions and the sale of the shares of Common Stock offered hereby and the
application of the estimated net proceeds therefrom (after deducting estimated
offering expenses and underwriting discounts and commissions). The information
set forth below should be read in conjunction with the Company's Combined
Financial Statements and notes thereto and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" appearing elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1998
----------------------------------------
PRO FORMA
ACTUAL PRO FORMA(1) AS ADJUSTED
--------- ------------ -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Short-term debt........................................ $ 4,588 $ 4,588 $ 4,588
========= ========= =========
Long-term debt:
Senior credit facility............................... $ 50,887 $ 50,887 $ 38,687
Subordinated debt.................................... 19,775 19,775 --
Other indebtedness................................... 310 310 310
Mandatorily redeemable preferred stock(Class C)...... 17,122 17,122 --
--------- --------- ---------
Total long-term debt.............................. 88,094 88,094 38,997
--------- --------- ---------
Common stock warrants.................................. 879 -- --
--------- --------- ---------
Redeemable convertible preferred stock
(Class A and Class B Preferred Stock)................ 47,584 -- --
--------- --------- ---------
Shareholders' deficit:
Common Stock, at stated value, 92,100 shares issued
and outstanding, actual; 50,000,000 shares
authorized, shares issued and
outstanding pro forma; and 50,000,000 shares
authorized, shares issued and
outstanding, pro forma as adjusted(2)............. 203 203 203
Paid-in capital...................................... 1,295 49,758 100,041
Accumulated deficit.................................. (107,149) (107,149) (107,374)
--------- --------- ---------
Total shareholders' deficit....................... (105,651) (57,188) (7,130)
--------- --------- ---------
Total capitalization......................... $ 35,494 $ 35,494 $ 36,455
========= ========= =========
</TABLE>
- ---------------
(1) See "Unaudited Pro Forma Combined Condensed Financial Statements."
(2) Excludes approximately 10,154 shares of Common Stock reserved for issuance
upon the exercise of options at exercise prices ranging from $0.45 to
$285.65 per share, outstanding at March 31, 1998, of which shares were
subject to options which will be exercisable upon completion of the
Offering.
19
<PAGE> 21
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
Pursuant to the terms of a Purchase, Contribution and Exchange Agreement
dated April 29, 1998, by and among Kirkland's, Inc. and each of the Company's
shareholders and warrantholders, immediately prior to completion of the Offering
as a part of the Pre-Offering Transactions: (i) all of the outstanding shares of
Class A Preferred Stock and Class B Preferred Stock of Kirkland's, Inc. and the
Kirkland Companies will be recapitalized into or exchanged for an aggregate of
42,689 shares of Common Stock (at an assumed initial public offering price of
$ per share), and (ii) all of the outstanding shares of common stock of
the Kirkland Companies will be contributed to Kirkland's, Inc., resulting in the
Kirkland Companies becoming wholly-owned subsidiaries of Kirkland's, Inc.
Subsequently, but prior to completion of the Offering, the warrantholders of
Kirkland's, Inc., and the Kirkland Companies will exercise their warrants to
purchase 11,905 shares of common stock of Kirkland's, Inc. and each of the
Kirkland Companies, and the Kirkland Companies' common stock issued upon such
exercise will be contributed to Kirkland's, Inc. See "Certain
Transactions - Pre-Offering Transactions." Also pursuant to the agreement,
Kirkland's, Inc. will purchase or redeem from current shareholders all of the
outstanding shares of Class C Preferred Stock of Kirkland's, Inc. and each of
the Kirkland Companies that has Class C Preferred Stock outstanding, using a
portion of the net proceeds of the Offering.
The pro forma combined condensed balance sheet as of March 31, 1998 and the
pro forma combined condensed statements of operations for the fiscal year 1997
and the three months ended March 31, 1998 which follow give effect to: (i) the
Pre-Offering Transactions, and (ii) the Offering and the application of the
estimated net proceeds therefrom as if such transactions had occurred as of the
beginning of the period.
In the opinion of the Company all adjustments necessary to present fairly
such pro forma combined condensed statements of operations have been made. These
unaudited pro forma combined condensed statements of operations are not
necessarily indicative of what actual results would have been had the
transactions occurred at the beginning of the respective periods nor do they
purport to indicate the results of future operations of the Company. These
unaudited pro forma financial statements should be read in conjunction with the
accompanying notes.
20
<PAGE> 22
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
MARCH 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRE-OFFERING OFFERING PRO FORMA
HISTORICAL ADJUSTMENTS SUBTOTAL ADJUSTMENTS AS ADJUSTED
---------- ----------------- --------- ----------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................... $ 2,177 $ 2,177 $ 2,177
Inventories................................. 22,546 22,546 22,546
Other current assets........................ 2,760 2,760 2,760
--------- --------- ---------
Total current assets...................... 27,483 27,483 27,483
Property and equipment, net................... 12,894 12,894 12,894
Noncurrent deferred income taxes.............. 201 201 201
Debt issue costs, net......................... 4,018 4,018 4,018
--------- --------- ---------
Total assets.............................. $ 44,596 $ 44,596 $ 44,596
========= ========= =========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND
SHAREHOLDERS' DEFICIT
Current liabilities:
Current maturities of long-term debt........ $ 4,588 $ 4,588 $ 4,588
Accounts payable and accrued liabilities.... 9,102 9,102 $ (576) (c) 8,141
(385) (e)
--------- -------- --------- -------- ---------
Total current liabilities................. 13,690 13,690 (961) 12,729
Senior credit facility........................ 50,887 50,887 (12,200) (d) 38,687
Subordinated debt............................. 19,775 19,775 (19,775) (c) --
Other indebtedness............................ 310 310 310
Class C Preferred Stock....................... 17,122 17,122 (17,122) (e) --
Common stock warrants......................... 879 $ (879) (a) -- --
--------- -------- --------- -------- ---------
Total liabilities......................... 102,663 (879) 101,784 (50,058) 51,726
--------- -------- --------- -------- ---------
Redeemable convertible preferred stock:
Class A..................................... 35,223 (35,223) (b) -- --
Class B..................................... 12,361 (12,361) (b) -- --
--------- -------- --------- -------- ---------
47,584 (47,584) -- --
--------- -------- --------- -------- ---------
Shareholders' deficit:
Common stock................................ 203 203 203
Paid-in capital............................. 1,295 879 (a) 49,758 50,283 (f) 100,041
47,584 (b)
Accumulated deficit......................... (107,149) (107,149) (225) (c) (107,374)
--------- -------- --------- -------- ---------
Total shareholders' deficit............... (105,651) 48,463 (57,188) 50,058 (7,130)
--------- -------- --------- -------- ---------
Total liabilities, redeemable preferred
stock and shareholders' deficit......... $ 44,596 $ -- $ 44,596 $ -- $ 44,596
========= ======== ========= ======== =========
</TABLE>
- ---------------
(a) Represents the exercise by the warrantholders of Kirkland's, Inc. and
Kirkland Companies of their warrants to purchase, for $.01 per share, 11,905
shares of common stock of Kirkland's, Inc. and each of the Kirkland
Companies, and the contribution to Kirkland's, Inc. of the Kirkland
Companies' common stock issued upon such exercise.
(b) Represents the issuance of 42,689 shares of Common Stock upon the
recapitalization or exchange of all outstanding Class A Preferred Stock and
Class B Preferred Stock of Kirkland's Inc. and the Kirkland Companies (at an
assumed initial public offering price of $ per share).
(c) Represents the full repayment of the subordinated debt and accrued interest
thereon from the estimated net proceeds of the Offering. The accretion of
$225,000 of debt discount associated with the early extinguishment of the
subordinated debt is also reflected. See "Use of Proceeds."
(d) Represents the repayment of approximately $12.2 million of senior
indebtedness from the estimated net proceeds of the Offering. See "Use of
Proceeds."
(e) Represents the purchase or redemption of mandatorily redeemable Class C
Preferred Stock for $17.5 million (including $385,000 of accrued amounts
classified as interest associated with such preferred stock) from the
estimated net proceeds of the Offering. See "Use of Proceeds."
(f) Represents the sale of the shares of Common Stock offered hereby at an
assumed initial public offering price of $ per share, less
underwriting discounts and commissions and estimated offering expenses.
21
<PAGE> 23
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
PRE-OFFERING OFFERING PRO FORMA
HISTORICAL ADJUSTMENTS SUBTOTAL ADJUSTMENTS AS ADJUSTED
---------- ------------ -------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net sales............................................. $153,584 $153,584 $153,584
Cost of sales (including store occupancy costs)....... 96,998 96,998 96,998
-------- ------- -------- ------- --------
Gross profit........................................ 56,586 56,586 56,586
Operating expenses.................................... 35,004 35,004 35,004
Severance charge...................................... 756 756 756
Depreciation and amortization......................... 4,142 4,142 4,142
-------- ------- -------- ------- --------
Operating income.................................... 16,684 16,684 16,684
Interest expense:
Senior credit facility and other indebtedness....... 5,506 5,506 $(1,159)(d) 4,347
Subordinated debt................................... 2,484 2,484 (2,484)(e) --
Class C Preferred Stock............................. 1,800 1,800 (1,800)(f) --
Accretion of common stock warrants.................. 389 $ (389)(b) -- --
Interest income....................................... (80) (80) (80)
Other income, net..................................... (154) (154) (154)
-------- ------- -------- ------- --------
Income before income taxes........................ 6,739 389 7,128 5,443 12,571
Income tax provision.................................. 2,817 2,817 2,151(g) 4,968
-------- ------- -------- ------- --------
Net income........................................ 3,922 389 4,311 3,292 7,603
Accretion of redeemable preferred stock and dividends
accrued............................................. 3,755 (3,755)(c) -- --
-------- ------- -------- ------- --------
Net income allocable to common stock(a)............... $ 167 $ 4,144 $ 4,311 $ 3,292 $ 7,603
======== ======= ======== ======= ========
Income per common share(a):
Basic............................................... $ 27.49 $
======== ========
Diluted............................................. $ 23.59 $
======== ========
Weighted average number of common shares
outstanding(a):
Basic............................................... 142,689
======== ========
Diluted............................................. 166,238
======== ========
</TABLE>
FOR THE THREE MONTHS ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
PRE-OFFERING OFFERING PRO FORMA
HISTORICAL ADJUSTMENTS SUBTOTAL ADJUSTMENTS AS ADJUSTED
---------- ------------ -------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net sales............................................. $ 30,615 $ 30,615 $ 30,615
Cost of sales (including store occupancy costs)....... 21,110 21,110 21,110
-------- ------- -------- ------- --------
Gross profit........................................ 9,505 9,505 9,505
Operating expenses.................................... 9,178 9,178 9,178
Depreciation and amortization......................... 1,156 1,156 1,156
-------- ------- -------- ------- --------
Operating loss...................................... (829) (829) (829)
Interest expense:
Senior credit facility and other indebtedness....... 1,354 1,354 $ (287)(d) 1,067
Subordinated debt................................... 576 576 (576)(e) --
Class C Preferred Stock............................. 385 385 (385)(f) --
Interest income....................................... (2) (2) (2)
Other income, net..................................... (64) (64) (64)
-------- ------- -------- ------- --------
Income (loss) before income taxes................. (3,078) (3,078) 1,248 (1,830)
Income tax provision (benefit)........................ (920) (920) 197(g) (723)
-------- ------- -------- ------- --------
Net loss.......................................... (2,158) (2,158) 1,051 (1,107)
Accretion of redeemable preferred stock and dividends
accrued............................................. 998 $ (998)(c) -- -- --
-------- ------- -------- ------- --------
Net loss allocable to common stock(a)................. $ (3,156) $ 998 $ (2,158) $ 1,051 $ (1,107)
======== ======= ======== ======= ========
Income (loss) per common share(a):
Basic............................................... $ (15.94) $
======== ========
Diluted............................................. $ (15.94) $
======== ========
Weighted average number of common shares
outstanding(a):
Basic............................................... 135,403
======== ========
Diluted............................................. 135,403
======== ========
</TABLE>
- ---------------
(a) Assumes the Pre-Offering Transactions (as defined on page 5) were effected
as of the beginning of the period, at an assumed initial public offering
price of $ per share. At a different initial public offering price, the
pro forma number of shares outstanding and pro forma net income (loss) per
share would be different. See "Certain Transactions - Pre-Offering
Transactions."
(b) Represents the reduction in accretion resulting from the exercise of
detachable put warrants to purchase 11,905 shares of common stock of
Kirkland's, Inc. and each of the Kirkland Companies, and the contribution to
Kirkland's, Inc. of the Kirkland Companies' common stock issued upon such
exercise. The holders of these warrants agreed to terminate the put as of
January 1, 1998.
(c) Represents the reduction in accretion and dividends accrued resulting from
the issuance of 42,689 shares of Common Stock upon the recapitalization or
exchange of all outstanding Class A Preferred Stock and Class B Preferred
Stock of Kirkland's, Inc. and the Kirkland Companies (at an assumed initial
public offering price of $ per share).
(d) Represents the interest and amortization expense reduction resulting from
repayment of approximately $12.2 million of senior indebtedness from the
estimated net proceeds of the Offering. See "Use of Proceeds."
(e) Represents the interest and amortization expense reduction resulting from
repayment of approximately $20.0 million of subordinated debt and accrued
interest from the estimated net proceeds of the Offering. See "Use of
Proceeds."
(f) Represents the interest expense reduction resulting from repayment of all
outstanding mandatorily redeemable Class C Preferred Stock and amounts
classified as interest associated with such preferred stock from the
estimated net proceeds of the Offering. See "Use of Proceeds."
(g) Represents the tax effect of the foregoing adjustments, resulting in an
effective statutory tax rate of approximately 39.5%, excluding the accretion
of common stock warrants for 1997.
22
<PAGE> 24
SELECTED COMBINED FINANCIAL DATA
The selected statement of income data for each of the three years in the
period ended December 31, 1997 and the selected balance sheet data as of
December 31, 1996 and 1997 have been derived from the audited combined financial
statements of the Company included elsewhere in this Prospectus. The selected
balance sheet data and the selected statement of income data as of and for the
years ended December 31, 1996 and 1997 have been derived from the Company's
financial statements for such periods audited by PricewaterhouseCoopers LLP,
independent public accountants. The selected statement of income data for the
year ended December 31, 1995 have been derived from the Company's financial
statements for such period audited by KPMG Peat Marwick LLP, independent public
accountants. The selected balance sheet data as of December 31, 1993, 1994 and
1995 and the selected statement of income data for the years ended December 31,
1993 and 1994 have been derived from the audited combined financial statements
of the Company not included in this Prospectus. The selected financial data
presented below as of March 31, 1997 and 1998 and for the three-month periods
then ended have been derived from the unaudited combined financial statements of
the Company, which, in management's opinion, include all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation of
the information set forth therein. The results of operations for the three
months ended March 31, 1998 are not necessarily indicative of results to be
expected for the entire year. The other data and selected store data for all
periods presented below have been derived from internal records of the Company's
operations. The data set forth below should be read in conjunction with the
Combined Financial Statements and notes thereto, and with "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------------------------- -----------------
1993 1994 1995 1996 1997 1997 1998
------- ------- -------- -------- -------- ------- -------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net sales.................................... $85,326 $99,901 $112,035 $127,946 $153,584 $26,178 $30,615
Gross profit................................. 33,080 38,088 43,200 47,508 56,586 7,559 9,505
Operating expenses........................... 17,177 19,572 24,192 27,915 35,004 7,392 9,178
Severance charge(1).......................... -- -- -- -- 756 -- --
Recapitalization expenses.................... -- -- -- 854 -- -- --
Owners' compensation(2)...................... 12,314 15,123 13,926 -- -- -- --
Depreciation and amortization................ 1,581 1,847 2,362 3,383 4,142 1,003 1,156
------- ------- -------- -------- -------- ------- -------
Operating income(loss)....................... 2,008 1,546 2,720 15,356 16,684 (836) (829)
Interest expense:
Senior, subordinated and other notes
payable.................................. 777 940 1,415 5,114 7,990 1,961 1,930
Class C Preferred Stock.................... -- -- -- 990 1,800 450 385
Accretion of common stock warrants(3)...... -- -- -- 190 389 97 --
Interest income.............................. (58) (126) (162) (47) (80) -- (2)
Other income, net............................ (184) (255) (221) (147) (154) (57) (64)
Income tax provision (benefit)............... -- -- -- 2,693 2,817 (923) (920)
------- ------- -------- -------- -------- ------- -------
Net income(loss)............................. 1,473 987 1,688 6,563 3,922 (2,364) (2,158)
Accretion of redeemable preferred stock and
accrual of dividends(4).................... -- -- -- 2,313 3,755 939 998
------- ------- -------- -------- -------- ------- -------
Net income (loss) allocable to common
stock...................................... $ 1,473 $ 987 $ 1,688 $ 4,250 $ 167 $(3,303) $(3,156)
======= ======= ======== ======== ======== ======= =======
Earnings (loss) per common share
Basic...................................... $14,730 $ 9,870 $ 16,880 $ 76.18 $ 1.67 $(33.03) $(34.04)
Diluted.................................... $14,730 $ 9,870 $ 16,880 $ 65.55 $ 1.35 $(33.03) $(34.04)
Weighted average common and common equivalent
shares outstanding
Basic...................................... 100 100 100 55,789 100,000 100,000 92,714
Diluted.................................... 100 100 100 62,838 123,549 100,000 92,714
</TABLE>
23
<PAGE> 25
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------------- -----------------
1993 1994 1995 1996 1997 1997 1998
------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT SELECTED STORE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
EBITDA(5)................................. $16,087 $18,771 $19,229 $19,740 $21,736 $ 224 $ 391
Net cash provided by (used in) operating
activities.............................. 3,422 2,040 1,269 11,065 8,669 (7,564) (7,874)
Net cash (used in) investing activities... 2,818 2,652 (4,130) (4,205) (5,479) (735) (903)
Net cash provided by (used in) financing
activities.............................. 772 1,320 3,278 (982) (3,537) (617) 73
SELECTED STORE DATA:
Comparable store net sales increase(6).... 7.1% 4.4% 0.7% 1.4% 5.2% 4.8% 3.7%
Number of stores at end of period......... 80 91 104 120 138 120 140
Average net sales per store (in
thousands)(7)........................... $ 1,159 $ 1,159 $ 1,145 $ 1,147 $ 1,178 $ 216 $ 220
Average gross square footage per
store(8)................................ 3,753 3,821 3,942 4,091 4,186 4,174 4,382
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------ MARCH 31,
1993 1994 1995 1996 1997 1998
------- ------- ------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital........................... $11,147 $12,494 $15,017 $ 17,173 $ 15,792 $ 13,793
Total assets.............................. 22,518 25,461 32,584 45,636 49,884 44,596
Total long-term and short-term debt,
including mandatorily redeemable Class C
Preferred Stock......................... 9,491 10,479 13,291 92,134 88,597 92,682
Common stock warrants..................... -- -- -- 490 879 879
Redeemable convertible preferred stock
(Class A and Class B Preferred Stock)... -- -- -- 46,836 50,591 47,584
Shareholders' equity (deficit)............ $ 8,405 $ 9,724 $11,879 $(102,655) $(102,488) $(105,651)
</TABLE>
- ---------------
(1) The 1997 severance charge represents the total salary continuation payments
which the Company is required to make to a former management employee who
resigned in 1997.
(2) Owners' compensation represents distributions to the Company's shareholders
during the periods when Kirkland's, Inc. and the Kirkland Companies were
Subchapter S corporations, prior to the Recapitalization. Such distributions
ceased upon the Recapitalization. See "Certain
Transactions - Recapitalization."
(3) Reflects accretion to the fair value of detachable put warrants to purchase
Common Stock, issued by the Company in connection with its issuance of
subordinated debt. The holders of these warrants agreed to terminate the put
as of January 1, 1998.
(4) Reflects the accretion of the Class A Preferred Stock and Class B Preferred
Stock to its redemption value and the accrual of dividends on such preferred
stock at 8% annually.
(5) The term EBITDA as used herein represents income before income taxes, net
interest expense, depreciation and amortization expense, owners'
compensation and non-recurring charges. While EBITDA should not be
considered in isolation or as a substitute for net income, cash flow from
operations or any other measure of income or cash flow that is prepared in
accordance with generally accepted accounting principles or as a measure of
a company's profitability or liquidity, EBITDA has been presented because
the Company believes it is commonly used in this or a similar format by
investors to analyze and compare operating performance as well as to provide
additional information with respect to the ability of the Company to meet
its future debt service, capital expenditure and working capital
requirements. EBITDA may differ in method of calculation from similarly
titled measures used by other companies. This information should be read in
conjunction with the Combined Statement of Cash Flows contained in the
Combined Financial Statements and notes thereto included elsewhere in this
Prospectus.
(6) For periods ended on or before December 31, 1996, comparable stores were
defined as those stores opened prior to January 1 of the preceding fiscal
year. Effective January 1, 1997, in response to increased expansion and
remodeling activity, the Company modified the way comparable store net sales
are calculated to more accurately reflect the Company's ongoing expansion
and remodeling program. Commencing January 1, 1997, the Company excluded
from comparable store net sales calculations each store that was expanded,
remodeled or relocated during the applicable period. Each such store is
returned to the comparable store base on January 1 of the first year
following the one-year anniversary of the expansion, remodeling or
relocation.
(7) Calculated using net sales of all stores open at both the beginning and the
end of the period.
(8) Calculated using gross square footage of all stores open at both the
beginning and the end of the period. Gross square footage includes the
storage, receiving and office space that generally occupies approximately
30% of total store space.
24
<PAGE> 26
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
A number of the matters and subject areas discussed in "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business" and elsewhere in this Prospectus are not limited to historical or
current facts and deal with potential future circumstances and developments, and
are accordingly "forward-looking statements." Prospective investors are
cautioned that such forward-looking statements, which may be identified by words
such as "anticipate," "believe," "expect," "estimate," "intend," "plan" and
similar expressions, are only predictions and that actual events or results may
differ materially.
OVERVIEW
Kirkland's opened its first store in 1966 and has generated operating
income in each year of its operations. The Company has expanded its business
steadily over the years, focusing originally on middle markets in the Southeast,
and more recently opening stores in markets of varying size and geography. The
Company accelerated its expansion beginning in 1990, more than doubling its
store base from 50 stores at the end of 1990 to 104 stores at the end of 1995.
During this same period, which preceded the Recapitalization (as defined below),
the Company's net sales and operating income before owners' compensation grew at
compounded annual rates of 20.3% and 24.3%, respectively. In 1995, the Company's
operating income before owners' compensation as a percentage of net sales was
14.9%.
On June 12, 1996, the Company completed a leveraged recapitalization (the
"Recapitalization") which included the following principal components: (i) the
creation of two classes of redeemable convertible preferred stock - Class A
Preferred Stock and Class B Preferred Stock; (ii) the creation of a class of
mandatorily redeemable preferred stock - Class C Preferred Stock; (iii) the
distribution of all of the Class B Preferred Stock and Class C Preferred Stock
to the existing shareholders of the Company; (iv) the sale of newly issued
shares of common stock and all of the Class A Preferred Stock for cash of $30.8
million to a group of new investors led by Advent International Corporation
("Advent"); (v) the issuance of $20.0 million of senior subordinated notes due
June 2003; (vi) the issuance of $52 million of variable rate senior debt under
the Company's senior credit facility, with quarterly principal and interest
payments through June 2002; (vii) the repurchase and cancellation of 68.4% of
the aggregate common stock of the existing shareholders of the Company for cash
of $83.1 million; and (viii) the repayment of existing indebtedness of the
Company totaling $19.2 million. Total transaction - related fees for the
Recapitalization amounted to approximately $6.3 million. Of this amount,
financing costs of approximately $5.9 million associated with the senior
subordinated notes and the senior debt were deferred and are being amortized
over the life of this debt. The Company will apply a portion of the net proceeds
of the Offering to repay the senior subordinated notes and a portion of the
senior debt. See "Use of Proceeds." Moreover, the Company expects to enter into
a new credit facility upon completion of the Offering to refinance the existing
senior credit facility and, in such event, the Company will write off the
remaining unamortized portion of the senior debt financing costs ($4.0 million
at March 31, 1998) in the quarter in which the refinancing occurs.
In connection with the Recapitalization, the Company entered into
employment agreements with three key management employees and a consulting
agreement with another individual, all of whom were existing shareholders of the
Company. On January 7, 1998, the Company redeemed and retired the stock of one
of these management employees in connection with his November 1997 resignation.
As a result of his resignation, the Company incurred a severance charge of
$756,000 in 1997, representing the total salary continuation payments which the
Company is required to make to this former management employee through June
2000. See "Certain Transactions - January 1998 Redemption."
Prior to June 12, 1996, the Company elected to be taxed as a Subchapter S
corporation for federal income tax purposes. As a result, the Company recorded
no taxes and shareholders paid tax on their respective shares of taxable income,
even if such income was not distributed. The Company's typical practice was to
pay, on an annual basis, a substantial portion of the Company's income to
shareholders as owners' compensation.
Until the Pre-Offering Transactions, which will take place immediately
prior to completion of the Offering, Kirkland's, Inc. and the Kirkland Companies
will continue to receive certain tax benefits ("surtax exemptions") due to
graduating tax rates applicable to each separate corporate entity. The benefits
derived
25
<PAGE> 27
from such surtax exemptions amounted to approximately 10% of income before
income taxes in 1996 and 1997. These benefits will no longer be available to the
Company after the Kirkland Companies become wholly-owned subsidiaries of the
Company pursuant to the Pre-Offering Transactions.
As a result of the Recapitalization, the Company has incurred an expense
related to the accretion of common stock warrants based on the increase in their
fair market value through 1997. The fair value of the warrants, subsequent to
issuance, was based on the difference between the exercise price of $.01 and the
fair market value of the Company's Common Stock. As discussed in "Description of
Capital Stock - Warrants," these warrants will be exercised in connection with
the Offering. Following the exercise of the warrants, no further accretion
expense will be incurred.
The Recapitalization also included the issuance of the Class A Preferred
Stock and Class B Preferred Stock. Approximately $430,000 of issuance costs were
incurred in connection with the Class A Preferred Stock. These costs were
recorded as a reduction in the amount contributed and are being accreted against
income over the expected conversion period of approximately two years. The Class
A Preferred Stock and Class B Preferred Stock each carry an 8% annual dividend,
which reduces net income allocable to common stock. The accrual of such
dividends and the related accretion of the preferred stock to its redemption
value will terminate in connection with the conversion or exchange of such
preferred stock into or for Common Stock pursuant to the Pre-Offering
Transactions.
Since the Recapitalization, the Company has continued to expand, opening 17
new stores in 1996, 20 new stores in 1997 and eight new stores in the first half
of 1998. The Company also has made considerable investments in management and
infrastructure to support an increased rate of expansion in the future. These
investments have included management personnel additions within the areas of
finance, real estate and merchandising. Further, in 1997, a new regional
management structure was implemented to augment the Company's existing district
management structure. The Company also made a strategic decision to increase the
number of salaried assistant managers in its stores in order to strengthen
store-level operations as well as to identify and train future store manager
candidates. In addition, in March 1998 the Company commenced an expansion of its
headquarters facility to a total of approximately 40,000 square feet, at an
estimated cost of $2.2 million to be funded from cash flow from operations.
As a result of the growth in the number of stores operated by the Company
over the past several years, increases in the Company's total net sales have
been principally attributable to increases in the number of units sold and, to a
lesser extent, to increases in the prices of the Company's merchandise. In
contrast, changes in comparable store net sales have generally been primarily
due to increases in merchandise prices and, to a lesser extent, to changes in
the number of units sold.
In 1997, the Company had net sales of $153.6 million and its operating
income (before severance charge) as a percentage of net sales was 11.4%, one of
the highest among comparable specialty retailers.
26
<PAGE> 28
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, combined
statement of income data expressed as a percentage of net sales:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------- --------------
1995 1996 1997 1997 1998
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net sales.................................. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales (including store occupancy
costs)................................... 61.4 62.9 63.2 71.1 69.0
----- ----- ----- ----- -----
Gross profit............................. 38.6 37.1 36.8 28.9 31.0
Operating expenses......................... 21.6 21.8 22.8 28.2 30.0
Severance charge(1)........................ -- -- 0.5 -- --
Recapitalization expenses.................. -- 0.7 -- -- --
Owners' compensation(2).................... 12.4 -- -- -- --
Depreciation and amortization.............. 2.1 2.6 2.7 3.8 3.8
----- ----- ----- ----- -----
Operating income (loss).................. 2.5 12.0 10.8 (3.1) (2.8)
Interest expense:
Senior, subordinated and other notes
payable............................... 1.3 4.0 5.2 7.5 6.3
Class C Preferred Stock(3)............... -- 0.8 1.2 1.7 1.3
Accretion of common stock warrants....... -- 0.1 0.3 0.4 --
Interest income............................ (0.1) -- (0.1) -- --
Other income, net.......................... (0.2) (0.1) (0.1) (0.2) (0.2)
----- ----- ----- ----- -----
Income (loss) before income taxes........ 1.5 7.2 4.3 (12.5) (10.2)
Income tax provision (benefit)............. -- 2.1 1.8 (3.5) (3.1)
----- ----- ----- ----- -----
Net income (loss)........................ 1.5 5.1 2.5 (9.0) (7.1)
Accretion of redeemable preferred stock and
accrual of dividends (Class A and B
Preferred Stock)......................... -- 1.8 2.4 3.6 3.2
----- ----- ----- ----- -----
Net income (loss) allocable to common
stock.................................... 1.5 3.3 0.1 (12.6) (10.3)
===== ===== ===== ===== =====
</TABLE>
- ---------------
(1) The 1997 severance charge represents the total salary continuation payments
which the Company is required to make to a former management employee who
resigned in 1997.
(2) Owners' compensation represents distributions to the Company's shareholders
during the periods when Kirkland's, Inc. and the Kirkland Companies were
Subchapter S corporations, prior to the Recapitalization. Such distributions
ceased upon the Recapitalization.
(3) The mandatorily redeemable Class C Preferred Stock is reflected as debt, and
the amounts paid by the Company with respect to such preferred stock are
classified as interest expense, in the Company's Combined Financial
Statements. See Note 6 of "Notes to Combined Financial Statements."
Three Months Ended March 31, 1998 Compared to Three Months Ended March 31,
1997
Net sales increased by 16.9% to $30.6 million for the three months ended
March 31, 1998 from $26.2 million for the three months ended March 31, 1997.
This increase resulted primarily from the opening of 18 new stores during the
final three quarters of 1997 and three new stores during the first quarter of
1998 and an increase in comparable store net sales of 3.7%, offset in part by
the closing of two stores in the first quarter of 1997 and one store in the
first quarter of 1998. Of this $4.4 million increase, new stores and stores not
in the comparable store net sales calculation accounted for $3.6 million.
Increases in comparable store net sales contributed the remaining $0.8 million.
The increase in comparable store net sales was due primarily to a higher average
transaction size, partially offset by a decline in the number of transactions.
The increase in average transaction size resulted primarily from the Company's
strategy of increasing its average product prices and deemphasizing lower-priced
products. Comparable store net sales were adversely impacted by the shift in the
timing of the Easter holiday to April in 1998 from March in 1997. As a result of
this shift, there were fewer holiday shopping days in March 1998 than in March
1997.
27
<PAGE> 29
Gross profit, equal to net sales less cost of sales, was $9.5 million, or
31.0% of net sales, in the first three months of 1998 as compared to $7.6
million, or 28.9% of net sales, in the first three months of 1997. Cost of sales
includes the cost of inventory and store occupancy costs. The increase in gross
profit as a percentage of net sales resulted from an improvement in product
gross margin (gross profit before store occupancy costs, as a percentage of net
sales) due to strong sell-through, offset in part by an increase in store
occupancy costs as a percentage of net sales.
Operating expenses were $9.2 million, or 30.0% of net sales, in the first
three months of 1998 as compared to $7.4 million, or 28.2% of net sales, in the
first three months of 1997. This increase as a percentage of net sales was
primarily attributable to an increase in store salary expense, due principally
to the Company's strategic decision in late 1996 to increase the number of
salaried assistant store managers. This decision, which was implemented over the
course of the year in 1997, led to a higher number of salaried assistant store
managers in the first three months of 1998 as compared to the prior year period.
In addition, the increase as a percentage of net sales resulted from an increase
in corporate salary expense, primarily due to the implementation of a new store
operations regional management structure during 1997 in anticipation of future
store growth. To a lesser extent, the percentage increase also resulted from an
increase in the amount of local warehouse space leased by the Company.
Depreciation and amortization expense was $1.2 million, or 3.8% of net
sales, in the first three months of 1998 as compared to $1.0 million, or 3.8% of
net sales, in the first three months of 1997. The increase in the dollar amount
of this expense resulted primarily from an increase in depreciable assets due to
the Company's new store openings during 1997.
Interest expense on senior, subordinated and other notes payable decreased
slightly to $1.9 million in the first three months of 1998 from $2.0 million in
the first three months of 1997. Average debt balances were lower in the first
three months of 1998 as compared to the prior year period due to amortization
payments made during 1997. Interest expense associated with mandatorily
redeemable Class C Preferred Stock issued in connection with the
Recapitalization (reflected as debt on the Company's Combined Financial
Statements) decreased to $385,000 in the first three months of 1998 from
$450,000 in the first three months of 1997, reflecting the redemption in January
1998 of the Class C Preferred Stock of a former management employee.
The Company received an income tax benefit of $920,000 in the first three
months of 1998 as compared to a benefit of $923,000 in the first three months of
1997. The income tax benefit expressed as a percentage of income before income
taxes for the first three months of 1998 and 1997 was 29.9% and 28.1%,
respectively. The effective tax rate was lower than the statutory tax rate by
approximately 10% of income before income taxes due to surtax exemptions in the
first three months of both 1998 and 1997.
Net loss allocable to common stock decreased slightly to $3.2 million in
the first three months of 1998 from $3.3 million in the first three months of
1997, resulting principally from the above factors.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Net sales increased by 20.0% to $153.6 million for the year ended December
31, 1997 from $127.9 million for the year ended December 31, 1996. This increase
resulted primarily from the opening of 20 new Kirkland's stores, including the
Company's first outlet store, and an increase in comparable store net sales of
5.2%, offset in part by the closing of one store in 1996 and two stores in 1997.
Of this $25.7 million increase, new stores and stores not in the comparable
store net sales calculation accounted for $20.4 million. Increases in comparable
store net sales contributed the remaining $5.3 million. The Company's net sales
also benefited from the operation of the Company's first two temporary stores
during the fourth quarter. The increase in comparable store net sales was due
primarily to a higher average transaction size as compared to the prior year. To
a lesser extent, the Company's comparable stores also experienced an increase in
the number of transactions.
Gross profit was $56.6 million, or 36.8% of net sales, in 1997 as compared
to $47.5 million, or 37.1% of net sales, in 1996. The decline in gross profit as
a percentage of net sales resulted primarily from an increase in store occupancy
costs as a percentage of net sales in 1997.
Operating expenses were $35.0 million, or 22.8% of net sales, in 1997 as
compared to $27.9 million, or 21.8% of net sales, in 1996. This increase as a
percentage of net sales was primarily attributable to an increase
28
<PAGE> 30
in store salary expense. In particular, the Company made strategic decisions in
late 1996 to increase the salary levels of store managers and to increase, over
the course of the year in 1997, the overall number of salaried assistant store
managers. To a lesser extent, the increase as a percentage of net sales also
resulted from an increase in corporate salary expense in anticipation of future
store growth.
The Company incurred no recapitalization expenses in 1997, as compared to
$854,000 of such expenses, or 0.7% of net sales, in 1996 in connection with the
Recapitalization. A severance charge of $756,000, or 0.5% of net sales, was
recorded in 1997 representing the remaining obligations of the Company under an
employment agreement with a former management employee who resigned during the
year.
Depreciation and amortization expense was $4.1 million, or 2.7% of net
sales, in 1997 as compared to $3.4 million, or 2.6% of net sales, in 1996. This
increase as a percentage of net sales resulted from a full year of amortization
of debt issuance costs associated with the Recapitalization.
Interest expense on senior, subordinated and other notes payable increased
to $8.0 million in 1997 from $5.1 million in 1996, primarily due to a full year
of interest on the additional debt incurred in connection with the
Recapitalization completed in June 1996. Interest expense associated with
mandatorily redeemable Class C Preferred Stock increased to $1.8 million in 1997
from $1.0 million in 1996, due to a full year on this obligation incurred in
connection with the Recapitalization. Further, expense relating to the accretion
of common stock warrants increased to $389,000 in 1997 from $190,000 in 1996.
The Company had $20.1 million of debt outstanding immediately prior to the
Recapitalization and $94 million of debt outstanding upon completion of the
Recapitalization.
Income tax provision increased to $2.8 million for 1997 from $2.7 million
in 1996. The income tax provision expressed as a percentage of income before
income taxes in 1997 and 1996 was 41.8% and 29.1%, respectively. The Company
received a tax benefit from surtax exemptions which lowered its statutory tax
rate by 10.3% and 10.0% of income before income taxes in 1997 and 1996,
respectively. The 1997 effective tax rate was higher than the 1996 effective tax
rate due to a charge of 10.4% related to a valuation allowance recorded in 1997
regarding the realization of net operating loss carry-forwards that originated
in 1997 on a separate return basis. In addition, the 1996 effective tax rate was
reduced by a one-time benefit of $379,000 in connection with the termination of
Subchapter S corporation status, which took place in connection with the
Recapitalization.
Net income allocable to common stock decreased to $167,000, or 0.1% of net
sales, in 1997 from $4.3 million, or 3.3% of net sales, in 1996. This decrease
resulted from the above factors as well as the increase in accretion of
redeemable convertible Class A and Class B Preferred Stock and dividends accrued
to $3.8 million, or 2.4% of net sales, in 1997 from $2.3 million, or 1.8% of net
sales, in 1996, due to the preferred stock being outstanding for a full year in
1997.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Net sales increased by 14.2% to $127.9 million for the year ended December
31, 1996 from $112.0 million for the year ended December 31, 1995. This increase
resulted primarily from the opening of 17 new Kirkland's stores and an increase
in comparable store net sales of 1.4%, offset in part by the closing of one
Kirkland's store during 1996. Of this $15.9 million increase, new stores and
stores not in the comparable store net sales calculation accounted for $14.5
million. Increases in comparable store net sales contributed the remaining $1.4
million. The increase in comparable store net sales was due primarily to a
higher average transaction size, reflecting higher average unit prices as
compared to the prior year, partially offset by a decline in the number of
transactions.
Gross profit was $47.5 million, or 37.1% of net sales, in 1996 as compared
to $43.2 million, or 38.6% of net sales, in 1995. The decline in gross profit as
a percentage of net sales resulted primarily from an increase in store occupancy
costs as a percentage of net sales and, to a lesser extent, from a decrease in
the Company's product gross margin. In 1995, product gross margin was
particularly high due to strong sell-through and the attendant lower mark-down
rates.
Operating expenses were $27.9 million, or 21.8% of net sales, in 1996 as
compared to $24.2 million, or 21.6% of net sales, in 1995. This increase as a
percentage of net sales was primarily due to the minimum wage increase and an
increase in the amount of local store warehouse space leased by the Company.
29
<PAGE> 31
The Company incurred recapitalization expenses of $854,000, or 0.7% of net
sales, in 1996 in connection with the Recapitalization. There were no
recapitalization expenses in 1995. The Company incurred no owners' compensation
expenses in 1996, as compared to $13.9 million of such expenses, or 12.4% of net
sales, in 1995.
Depreciation and amortization expense was $3.4 million, or 2.6% of net
sales, in 1996 as compared to $2.4 million, or 2.1% of net sales, in 1995. This
increase as a percentage of net sales resulted primarily from the amortization
of debt issuance costs associated with the Recapitalization, which expense was
not incurred in 1995. In addition, depreciation expense also increased as a
percentage of net sales due to additional depreciable assets from new stores.
Interest expense on senior, subordinated and other notes payable increased
to $5.1 million in 1996 from $1.4 million in 1995, primarily due to interest on
the debt incurred in connection with the Recapitalization. Interest expense
associated with mandatorily redeemable Class C Preferred Stock was $1.0 million
in 1996. No Class C Preferred Stock was outstanding during 1995. Additionally,
the accretion of common stock warrants totaled $190,000 in 1996. No such
accretion was recorded in 1995 as no warrants were outstanding in 1995.
Income tax provision in 1996 was $2.7 million, or 29.1% of income before
income taxes. The Company received a tax benefit from surtax exemptions which
lowered its statutory tax rate by 10.0% in 1996. Prior to the Recapitalization
of June 1996, the Company elected to be taxed as a Subchapter S corporation for
federal income tax purposes. As a result, in 1995 the Company recorded no taxes
and instead shareholders paid tax on their respective shares of taxable income,
even if such income was not distributed. The Company's typical practice was to
pay, on an annual basis, a substantial portion of the Company's income to
shareholders as owners' compensation. This practice ceased with the
Recapitalization, in connection with which the Company's S corporation status
was terminated.
Net income allocable to common stock increased to $4.3 million, or 3.3% of
net sales, in 1996 from $1.7 million, or 1.5% of net sales, in 1995. This
increase resulted from the above factors, offset in part by the accretion of
redeemable convertible Class A and Class B Preferred Stock and dividends accrued
of $2.3 million. No preferred stock and no warrants were outstanding in 1995.
RECENT OPERATING RESULTS
The Company's net sales increased 8.1% to $32.8 million for the three
months ended June 30, 1998 from $30.3 million for the three months ended June
30, 1997, primarily due to net sales from new stores. The Company's comparable
store net sales decreased 5.2% in the second quarter of 1998, attributable
primarily to (i) a difficult comparison to the second quarter of 1997, when
comparable store net sales increased 11.3%, and (ii) a decline in average
inventory per store as compared to the prior year. The Company believes that the
decline in average inventory per store resulted primarily from delays in
merchandise delivery from certain vendors during March, April and May 1998. The
timeliness of merchandise deliveries has improved during June and July 1998. See
"Risk Factors - Merchandising Risks; Inventory."
SEASONALITY AND QUARTERLY FLUCTUATIONS
The Company has historically experienced and expects to continue to
experience substantial seasonal fluctuations in its net sales and operating
income. The Company believes this is the general pattern typical of its segment
of the retail industry and, as a result, expects that this pattern will continue
in the future. The Company's quarterly results of operations may also fluctuate
significantly as a result of a variety of other factors, including the timing of
new store openings. Consequently, comparisons between quarters are not
necessarily meaningful and the results for any quarter are not necessarily
indicative of future results.
30
<PAGE> 32
The following table sets forth certain unaudited financial and operating
data for the Company in each quarter during 1996 and 1997. The unaudited
quarterly information includes all normal recurring adjustments which management
considers necessary for a fair presentation of the information shown.
<TABLE>
<CAPTION>
1996
------------------------------------------------------------
THREE MONTHS ENDED
---------------------------------------------- YEAR ENDED
MARCH 31 JUNE 30 SEPT. 30 DEC. 31 DEC. 31
--------- -------- --------- -------- ----------
(IN THOUSANDS, EXCEPT STORE DATA)
<S> <C> <C> <C> <C> <C>
Net sales.............................. $21,742 $24,358 $27,635 $54,211 $127,946
Gross profit........................... 6,709 8,386 9,382 23,031 47,508
Operating income(1).................... 3 645 2,085 12,623 15,356
Stores open at period end.............. 104 111 113 120 120
Comparable store net sales increase
(decrease)(3)........................ 4.0% 4.0% (1.1)% 0.3% 1.4%
</TABLE>
<TABLE>
<CAPTION>
1997
------------------------------------------------------------
THREE MONTHS ENDED
---------------------------------------------- YEAR ENDED
MARCH 31 JUNE 30 SEPT. 30 DEC. 31 DEC. 31
--------- -------- --------- -------- ----------
(IN THOUSANDS, EXCEPT STORE DATA)
<S> <C> <C> <C> <C> <C>
Net sales.............................. $26,178 $30,316 $33,120 $63,970 $153,584
Gross profit........................... 7,559 9,980 11,381 27,666 56,586
Operating income (loss)(2)............. (836) 1,228 1,760 14,532 16,684
Stores open at period end.............. 120 127 135 138 138
Comparable store net sales
increase(3).......................... 4.8% 11.3% 6.7% 1.2% 5.2%
</TABLE>
- ---------------
(1) Operating income for the third quarter of 1996 reflects $854,000 of
recapitalization expenses incurred in connection with the Recapitalization.
(2) Operating income for the fourth quarter of 1997 reflects a severance charge
of $756,000 representing the total salary continuation payments which the
Company is required to make to a former management employee who resigned in
1997.
(3) For periods ended on or before December 31, 1996, comparable stores were
defined as those stores opened prior to January 1 of the preceding fiscal
year. Effective January 1, 1997, in response to increased expansion and
remodeling activity, the Company modified the way comparable store net sales
are calculated to more accurately reflect the Company's ongoing expansion
and remodeling program. Commencing January 1, 1997, the Company excluded
from comparable store net sales calculations each store that was expanded,
remodeled or relocated during the applicable period. Each such store is
returned to the comparable store base on January 1 of the first year
following the one-year anniversary of the expansion, remodeling or
relocation.
LIQUIDITY AND CAPITAL RESOURCES
Most of the Company's capital requirements relate to new store openings and
seasonal working capital. The Company's working capital requirements are for
inventory purchases, which typically reach their peak in the fourth quarter of
the year. Historically, the Company has funded its store expansion program and
met its working capital requirements from internally generated funds and
borrowings under its credit facilities.
During 1995, 1996 and 1997, net cash provided by operating activities was
$1.3 million, $11.1 million and $8.7 million, whereas $7.9 million was used in
operating activities in the first quarter of 1998. During 1995, 1996, 1997 and
the first quarter of 1998, net cash used in investing activities was $4.1
million, $4.2 million, $5.5 million and $903,000, respectively, consisting
primarily of capital expenditures related to new stores and expansions or
remodels of existing stores. In 1995, financing activities provided net cash of
$3.3 million, due primarily to proceeds from the issuance of long-term debt. In
1996 and 1997, $1.0 million and $3.5 million, respectively, was used in
financing activities. In the first quarter of 1998, net cash of $73,000 was
provided by financing activities. In 1996, the principal sources of cash from
financing activities were proceeds from the issuance of long-term debt and the
Class A Preferred Stock and Common Stock in connection with the
Recapitalization, whereas the principal uses of cash used in financing
activities in 1996 were the repurchase of a portion of shareholders' Common
Stock and repayment of long-term debt in connection with the
31
<PAGE> 33
Recapitalization. In 1997, the cash used in financing activities was for
repayment of long-term debt. In the first quarter of 1998, the principal sources
of cash in financing activities were proceeds from the issuance of long-term
debt, offset by the payment of $6.9 million for the redemption of stock. See
"Certain Transactions -- January 1998 Redemption."
The Company expects to open approximately 25 new stores during 1998, eight
of which were opened during the first half of 1998. Capital expenditures,
including leasehold improvements and furniture and fixtures, for the 20 new
stores opened during 1997 averaged approximately $185,000 (net of landlord
allowances), and initial gross inventory requirements (which were partially
financed by trade credit) averaged approximately $230,000 per store. Opening
inventory requirements at new stores vary significantly depending upon the time
of year when the store is opened, expected sales volume and store size. The
Company's cash needs for opening new stores in 1998 are expected to total $8.4
million, $4.6 million of which is budgeted for capital expenditures and $3.8
million of which is budgeted for initial inventory. During the first quarter of
1998, the Company incurred $600,000 in capital expenditures for the three new
stores opened during the quarter and $550,000 in initial inventory purchases
relating to such new stores.
The Company intends to expand six stores in 1998 and to remodel an
additional six stores in 1998. Capital expenditures for the Company's 1998
expansions and remodels are expected to total $2.5 million, of which $300,000
was incurred for the one expansion and the one remodel in the first quarter.
The Company's total planned capital expenditures for 1998 are $11.0
million, of which $900,000 was incurred in the first quarter. In addition to
providing for new stores, expanded stores and remodeled stores, these planned
capital expenditures include $2.2 million for the Company's planned corporate
headquarters expansion and $1.5 million for the upgrade of the Company's POS
computer system.
The Company's principal sources of capital are internally generated funds
and borrowings under its credit facilities. In accordance with the agreement
governing the Company's senior credit facility, the Company has a $20 million
revolving line of credit. The line of credit has a maturity date of June 30,
2001 and bears interest at the Company's option either at (i) 3.25% plus LIBOR
or (ii) the higher of the prime rate plus 2.25% or the federal funds rate plus
2.75%. The line of credit requires a thirty-day consecutive zero balance between
December 1 and March 1 of each year. In addition, the line of credit restricts
levels of capital expenditures and restricts the incurrence of debt and payments
in respect of capital stock and junior indebtedness. As of March 31, 1998, the
Company had no outstanding borrowings under the line of credit and availability
to borrow up to $20 million.
The line of credit also requires the maintenance of various financial
ratios and covenants, which the Company has maintained as required. For the 12
months ended March 31, 1998, the Company was required to maintain (i) a ratio of
total debt to EBITDA of less than 3.5x, (ii) an adjusted net worth of greater
than $70 million, (iii) a ratio of EBITDA to interest expense of greater than
2.4x, and (iv) a fixed charge coverage ratio (EBITDA plus lease expense minus
taxes minus capital expenditures, divided by interest plus principal payments
plus lease expense) of 1.0x. For the same period, the levels at which these
ratios and covenants were actually maintained by the Company were (i) 3.3x, (ii)
$74.4 million, (iii) $2.9x and (iv) 1.04x, respectively.
The Company is in negotiations to obtain a $45 million senior term loan and
a $35 million five-year revolving credit facility which the Company plans to
enter into upon completion of the Offering, to replace its existing senior
credit facility. The new revolving credit facility is expected to replace the
Company's current line of credit facility. Borrowings under the new revolving
credit facility are expected to be subject to certain customary conditions and
contain customary events of default. There can be no assurance that the new
revolving credit facility will be successfully negotiated.
The Company plans to finance the Briar Patch acquisition and related
working capital needs with $6.0 million in additional borrowings under its
senior credit agreement.
The Company believes that it can adequately fund its planned capital
expenditures and working capital requirements (including the acquisition of
Briar Patch) through the end of 1999 from net cash provided by operations and
availability under revolving credit facilities.
32
<PAGE> 34
INFLATION
The Company does not believe that its operating results have been
materially affected by inflation during the preceding three years. There can be
no assurance, however, that the Company's operating results will not be
adversely affected by inflation in the future.
IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued FAS 130,
Reporting Comprehensive Income ("SFAS No. 130"). This statement establishes
standards for reporting comprehensive income and its components in a full set of
general-purpose financial statements. SFAS No. 130 requires that all items that
are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. This statement is effective
for fiscal years beginning after December 15, 1997. Currently, the Company does
not have any items that are required to be recognized as components of
comprehensive income.
In June 1997, the Financial Accounting Standards Board issued FAS 131,
Disclosure about Segments of an Enterprise and Related Information ("SFAS No.
131"). This statement revises the current requirements for reporting business
segments by redefining such segments as the way management disaggregates the
business for purposes of making operating decisions and allocating internal
resources. SFAS No. 131 is effective for fiscal years beginning after December
15, 1997, and although management believes that SFAS No. 131 will not impact the
Company's presentation, the Company will adopt SFAS No. 131 in fiscal 1998.
YEAR 2000 ISSUE
An issue exists for all companies that rely on computers as the year 2000
approaches. The "Year 2000" issue is the result of past practice in the computer
industry of using two digits rather than four to identify the applicable year.
This practice will result in incorrect results when computers perform arithmetic
operations, comparisons or data field sorting involving years later than 1999.
The Company anticipates that it will be able to test its entire system for Year
2000 compliance using its internal programming staff and outside computer
consultants and intends to make the necessary modifications to prevent
disruption to its operations. The Company does not expect costs in connection
with any such modifications to be material. Independent of the Year 2000 issue,
in 1998 the Company intends to install a new POS system which will be Year 2000
compliant at a cost of approximately $1.5 million.
As a fundamental business consideration, the Company depends heavily on its
vendors to meet the purchasing requirements dictated by the Company's business
needs. To that end, the Company is in the process of exploring with each of its
key vendors the impact the Year 2000 issue will have on their ability to source
products for the Company and process purchase orders with delivery requirements
and terms involving years later than 1999. As an ongoing measure, the Company
will continue to address this risk with each new vendor to ensure similar
safeguards.
Finally, the Company recognizes the potential impact the Year 2000 issue
may have on its customers, creditors and other service providers. The Company
has reviewed its exposure to business interruption or substantial loss in these
areas and believes no risk of material adverse consequences presently exists.
33
<PAGE> 35
BUSINESS
THE COMPANY
Kirkland's is a leading specialty retailer of decorative home accessories
and gifts. The Company's stores offer a broad selection of distinctive
merchandise, including framed art, candles, lamps, picture frames, rugs, garden
accessories and artificial plants, as well as an extensive assortment of holiday
merchandise. The Company's stores are designed to provide style-conscious
customers, the majority of whom are women age 25 and older, with a distinctive
shopping experience characterized by a diverse, ever-changing merchandise
selection at surprisingly attractive prices. Management believes that the
Company's exclusive focus on decorative home accessories and gifts has led to
its emergence as a leader in its retail category and a destination store for
many mall shoppers. Kirkland's has generated operating income in each year since
opening its first store in 1966, and currently maintains one of the highest
operating margins among comparable specialty retailers.
The Company's 145 stores in 26 states average approximately 4,400 square
feet per store and are located primarily in enclosed malls. Although originally
focused in the Southeast, the Company has expanded beyond that region.
Currently, 60 of the Company's stores are located outside the Southeast,
including 11 of the 20 new stores opened during 1997 and two of the eight new
stores opened during the first half of 1998. In addition to operating in many
middle markets, Kirkland's also has stores in major metropolitan markets such as
Atlanta, Houston, Chicago, and Dallas, as well as in smaller markets such as
Paducah, Kentucky, Florence, Alabama and Lancaster, Pennsylvania. The Company
has been able to operate stores successfully across a broad range of demographic
and geographic markets.
Kirkland's has developed and refined a merchandising strategy that
differentiates it from other retailers of products for the home. The Company's
merchandising strategy is to (i) offer distinctive, high quality home
accessories and gifts at affordable prices, (ii) maintain a breadth of product
categories, (iii) provide a carefully edited selection of the best-selling items
within each category, rather than merchandising complete product collections,
and (iv) present merchandise in a visually appealing manner to create an
inviting atmosphere which inspires decorating ideas. The Company believes that
this strategy creates a shopping experience which appeals to the style-conscious
as well as the price-conscious shopper.
INDUSTRY OVERVIEW
Kirkland's competes in the large market for decorative home accessories and
gifts, which encompasses such varied product groups as candles, decorative
pillows and rugs, framed art, pottery and holiday merchandise. The Company
believes that the U.S. retail market for home furnishings, housewares, bedding,
bath and tabletop merchandise exceeded $66 billion in 1996, and that purchases
of gifts, including gifts of decorative home accessories, represented
approximately $36 billion (a portion of which is included in the broader retail
category discussed above). The market for decorative home accessories and gifts
is highly fragmented, with competition coming from a variety of retailers
including department stores, discount stores, other specialty stores and catalog
retailers.
The Company believes that the decorative home accessories and gift markets
are benefitting from certain favorable demographic trends. First, the
"cocooning" trend continues to have a significant impact on the market. As
consumers retreat to their homes to spend time at home with family and friends,
they buy products to enhance their home environment. Second, the U.S. Bureau of
the Census reports that the percentage of the U.S. population represented by
people between the ages of 35 and 64 is currently 38% and is expected to
increase to approximately 40% by 2005. As this percentage increases, the target
customer base for retailers of home accessories and gifts will likewise
increase. Furthermore, people typically realize their peak earnings potential
within this age bracket, which in turn will enable them to spend greater amounts
on purchases for the home.
These demographic patterns, along with the prevailing environment of low
interest rates, have produced a discernible shift in the composition of general
merchandise, apparel and furniture ("GAF") sales away from
34
<PAGE> 36
apparel to home furnishings. From 1990 to 1996, apparel purchases as a
percentage of GAF declined by approximately 11%, while home furnishings as a
percentage of GAF increased by approximately 10%.
The Company believes that these favorable demographic trends and the shift
in consumer spending patterns toward home furnishings provide a substantial
opportunity for a well-positioned specialty retailer like Kirkland's.
BUSINESS STRATEGY
The Company's goal is to be the leading specialty retailer of decorative
home accessories and gifts in each of its markets. The following elements of the
Company's business strategy, which have evolved over 32 years of successful
operations, differentiate Kirkland's from its competitors and position the
Company for continued growth:
Distinctive, Item-Focused Merchandising. While a Kirkland's store
contains items covering a broad range of complementary product categories,
the store emphasizes only the best-selling items within each category. The
Company does not seek to dictate a design theme to its customers, nor does
it necessarily seek to dominate any particular product category. The
Company instead takes a disciplined approach to identifying fashionable
merchandise reflecting the latest trends, selecting and test-marketing
products, and monitoring and reacting to individual item sales. No single
merchandise category accounted for more than 15% of net sales in 1997.
Changing Merchandise Mix. The merchandise mix in a Kirkland's store
changes frequently throughout the year, in response to both market and
sales trends and changes in seasons. The Company's information systems
permit close tracking of individual item sales, enabling management to
react quickly to both fast-selling and slow-moving items. In addition, the
Company strategically increases selling space devoted to gifts and holiday
merchandise during peak selling seasons such as Christmas and Easter. The
Company believes that its ever-changing mix of merchandise creates an
exciting environment for customers, encouraging frequent return visits to
its stores.
Visually Appealing Store Environment. Kirkland's distinguishes itself
through its stores' "interior design" look, achieved by its emphasis on
visual merchandising. Using multiple types of fixtures, the Company groups
complementary merchandise creatively throughout the store, rather than
displaying products strictly by category or product type. This visual
presentation helps customers to picture the merchandise in their own homes
and thus inspires decorating ideas. As a result, this strategy provides the
opportunity for add-on sales and also encourages customers to browse for
longer periods of time.
Competitive Pricing. Kirkland's merchandise ranges in price from
approximately $5 to approximately $250, with most items selling for under
$30. Kirkland's shoppers regularly experience the satisfaction of paying
noticeably less for items similar or identical to those sold by other
retailers or through catalogs. Consequently, the Company does not routinely
engage in promotions or sales and typically holds only two regular sales
events each year. Management believes that the Company's competitive
pricing is an important element in making Kirkland's a destination store
for many mall shoppers.
Flexible Real Estate Strategy. The Company's stores are predominantly
located in enclosed malls in middle, metropolitan and smaller markets. The
Company believes that its stores' broad appeal makes Kirkland's a desirable
tenant for community, regional and super-regional malls targeting both
middle and upper-income customers as well as for selected non-mall venues.
The flexibility of the Kirkland's concept enables the Company to select the
most promising real estate opportunities that meet requisite economic and
demographic criteria within the Company's target markets.
GROWTH STRATEGY
The Company's growth strategy includes opening new stores, expanding and
remodeling existing stores and introducing new retail formats. In addition, the
Company has entered into an agreement to acquire Briar Patch, a specialty
retailer of home accessories and gifts based in Savannah, Georgia.
35
<PAGE> 37
Open New Stores. The Company intends to continue opening new stores both
in existing and new markets, emphasizing mall locations in both middle markets
and metropolitan markets. The broad appeal of the Kirkland's concept has enabled
it to operate successfully in diverse geographic and demographic markets,
thereby increasing the number of potential sites available to the Company. The
Company believes that there are currently more than 500 additional malls in the
United States that could provide attractive locations for the Kirkland's
concept. Of the 20 new stores opened in 1997, 11 were opened outside of the
Southeast and one was located in a state in which the Company previously had no
stores. The Company intends to open approximately 25 stores in 1998 (eight of
which were opened during the first half of 1998), of which two are expected to
be in states in which the Company does not already operate (one of which was
opened during the first half of 1998), and approximately 30 stores in 1999.
During the first quarter of 1998, the Company opened three new stores and signed
leases for an additional 13 stores, including additional locations in Florida,
Indiana, Iowa, Louisiana, North Carolina, Ohio, Pennsylvania, Texas and Virginia
as well as locations in two new markets, New York and Wisconsin.
Expand and Remodel Existing Stores. The Company has an ongoing expansion
and remodeling program which will continue to be an important part of the
Company's strategy. The expansion initiative targets stores with proven high
sales volumes that management believes could operate more effectively and
produce higher sales with more square footage and mall frontage. Depending on
the circumstances, an expansion may take place in a store's existing location or
may accompany a relocation within the same mall. Expanded stores have been among
the Company's best performing stores. Since 1993, the Company has expanded 26
stores from an average size of approximately 3,500 square feet to a larger size
of approximately 5,100 square feet, remodeling them in the process. The average
cost of expanding and remodeling each of these stores was approximately
$210,000. In addition, the Company's 70 new stores opened since 1994 have
averaged approximately 4,600 square feet. The Company intends to expand a total
of six stores in 1998 (four of which have been expanded during the first half of
1998) and seven stores in 1999.
The Company's remodeling initiative improves fixtures and displays, and
strengthens the visual impact of the store, without expanding its square
footage. Since 1993, the Company has remodeled four existing stores without
concurrent increases in store size. The average cost of remodeling each of these
stores was approximately $150,000. The Company intends to remodel (without
expanding) a total of six stores in 1998 (five of which have been remodeled
during the first half of 1998) and seven stores in 1999.
The following table provides a history of the Company's store openings and
closings, as well as its expansion and remodeling program for the past five
years and the first quarter of 1998.
<TABLE>
<CAPTION>
MARCH 31,
1993 1994 1995 1996 1997 1998
----- ----- ----- ----- ----- ---------
<S> <C> <C> <C> <C> <C> <C>
Stores open at beginning of period...... 67 80 91 104 120 138
New stores opened(1).................... 13 11 13 17 20 3
Stores closed........................... 0 0 0 1 2 1
Stores open at end of period............ 80 91 104 120 138 140
Stores expanded and remodeled........... 2 3 5 3 6 3
Stores remodeled........................ 0 0 2 0 2 4
Average gross square footage per
store(2).............................. 3,753 3,821 3,942 4,091 4,186 4,382
</TABLE>
- ---------------
(1) Excludes two temporary stores opened in 1997 during the holiday season only.
(2) Calculated using gross square footage of all stores open at both the
beginning and the end of the period. Gross square footage includes the
storage, receiving and office space that generally occupies approximately
30% of total store space.
Introduce New Retail Formats. The Company has developed several new retail
formats which it believes have significant potential. These alternative formats
leverage Kirkland's expertise in home accessory and gift merchandising and
create new channels through which to reach and expand Kirkland's target customer
base.
- Temporary Stores. During the 1997 Christmas season, the Company
operated two stores in malls under short-term lease arrangements. This
strategy enabled the Company to capture incremental sales and profits
during the peak holiday selling season, while avoiding the expense of
constructing and
36
<PAGE> 38
fixturing a permanent store. Due to the success of this initial test, the
Company intends to increase its use of temporary stores during the 1998
holiday season. In addition to providing an incremental profit opportunity,
these stores will enable the Company to test new markets where it is
considering opening permanent stores.
- Outlet Stores. Management believes that the strong price/quality
relationship in a Kirkland's store makes Kirkland's an attractive tenant
for certain outlet malls. In November 1997, the Company opened its first
outlet store in the Grapevine Mills outlet center in Dallas, Texas. The
store, which contains a mix of core Kirkland's merchandise as well as
certain merchandise purchased exclusively for the outlet mall customer,
capitalizes on the Company's ability to recognize and capture special
purchasing opportunities, such as vendor overstocks or closeouts. Based on
the initial success of its first outlet store, the Company anticipates
opening one new outlet store in 1998 and is targeting four new sites for
additional outlet stores in 1999.
- Strip Center Stores. Management continues to evaluate the
attractiveness of opening Kirkland's stores in non-mall, community strip
and selected power centers. The Company currently operates two stores in
such strip centers, one in Memphis, Tennessee and one in Kansas City,
Missouri, and will open a third store in a power center in Louisville,
Kentucky in 1998.
- Upscale "the Kirkland Collection" Stores. Management has developed
a more upscale version of the traditional Kirkland's store specifically to
address the needs of certain more exclusive, high-end malls. The first of
these stores was opened in Houston, Texas in May 1998, offering an upscale
mix of certain core Kirkland's merchandise supplemented by selected higher
end merchandise that will not be found in traditional Kirkland's stores.
Acquisition of Briar Patch. On June 30, 1998, the Company entered into an
agreement to purchase all of the outstanding capital stock of Briar Patch, a
specialty retailer of home accessories and gifts based in Savannah, Georgia. The
purchase price is $5.6 million in cash, subject to adjustment based on Briar
Patch's working capital at closing. The Company plans to finance the purchase
price with additional borrowings under its senior credit agreement. The
acquisition is scheduled to close on July 31, 1998, subject to customary closing
conditions.
Briar Patch currently operates 34 stores in six southeastern states,
primarily in markets that are smaller than Kirkland's traditional markets. For
the fiscal year ended January 31, 1998, Briar Patch had sales of $21.5 million
and a net loss of $459,000. The Company believes that an opportunity exists to
improve the operating performance of the Briar Patch stores through the
application of Kirkland's resources and experience in merchandising, store
operations, real estate and finance. Accordingly, the Company believes that the
acquisition of Briar Patch will enhance the Company's long-term growth
opportunities.
MERCHANDISING
Merchandising Strategy. The Company's merchandising strategy is to (i)
offer distinctive, high quality home accessories and gifts at affordable prices,
(ii) maintain a breadth of product categories, (iii) provide a carefully edited
selection of the best-selling items within each category, rather than
merchandising complete product collections, and (iv) present merchandise in a
visually appealing manner to create an inviting atmosphere which inspires
decorating ideas. The Company believes that this strategy creates a shopping
experience which appeals to the style-conscious as well as the price-conscious
shopper. Kirkland's does not attempt to dictate fashion to its customers.
Rather, the Company identifies and capitalizes on existing or developing trends
when selecting merchandise for sale.
The Company continuously introduces new products to its merchandise
assortment in order to (i) maintain customer interest through the freshness of
its product selections, (ii) enhance Kirkland's reputation as a leader in
identifying high quality, fashionable products and (iii) allow merchandise which
has peaked in sales to be discontinued and replaced by new items. In addition,
the Company strategically increases selling space devoted to gifts and holiday
merchandise during peak selling seasons such as Christmas and
37
<PAGE> 39
Easter. Management estimates that approximately 10% of the Company's merchandise
assortment is designed exclusively for Kirkland's. The Company packages some of
its merchandise using its exclusive Cedar Creek private label brand. Management
estimates that approximately 20% of the Company's merchandise assortment is sold
under the Cedar Creek private brand name.
The Company's stores generally carry 1,500 to 3,000 different items of
inventory, or "SKUs," depending on store size. The Company offers an affordable
assortment of the best-selling items within a category as well as new items
which management believes could generate significant consumer interest, rather
than offering complete product collections. As a result, the Company is able to
reduce the accumulation of slow-moving inventory and resulting markdowns.
Regional differences in home decor are addressed by tailoring inventories to
local tastes or market opportunities.
Product Categories. The Company's major merchandise categories include
framed art, candles, lamps, picture frames, rugs, garden accessories and
artificial plants, as well as an extensive assortment of holiday merchandise. No
single merchandise category accounted for more than 15% of net sales in 1997.
Consistent with the Company's item-focused strategy, a vital part of the product
mix is a wide variety of decorative home accessories and other assorted
merchandise that does not necessarily fit into a designated category. Decorative
accessories consist of such varied products as pillows, sconces and porcelain
items. Other merchandise includes flags, dolls and angels. Christmas holiday
merchandise accounted for approximately 12% of net sales in both 1996 and 1997.
Pricing. Kirkland's merchandise ranges in price from approximately $5 to
approximately $250, with most items selling for under $30. The average sale at
the Company's stores in 1997 was $17.22, up from $16.74 in 1996 and $16.27 in
1995. The Company's merchandising strategy does not depend on price discounting.
Kirkland's stores typically have only two regular annual sale events, one in
January and one in July.
Visual Merchandising. Kirkland's distinguishes itself through its stores'
"interior design" look, achieved by its emphasis on visual merchandising. The
Company employs a Director of Visual Merchandising and seven specialists who
support the stores' merchandising efforts. The Visual Merchandising team
provides store managers with recommended display directives such as photographs
and drawings, weekly placement guides and display manuals. In addition, each
store manager has some flexibility to creatively highlight those products that
are expected to have the greatest appeal to local shoppers.
THE KIRKLAND'S STORE
Format. The prototype Kirkland's store is between 4,200 and 5,200 square
feet, of which approximately 70% typically represents selling space. Merchandise
is generally displayed according to display guidelines and directives given to
each store from the Visual Merchandising team with input from purchasing and
operations personnel. This procedure ensures uniform display standards and
efficient allocation of products throughout the Company's stores. Using multiple
types of fixtures, the Company groups complementary merchandise creatively
throughout the store, rather than displaying products strictly by category or
product type. This visual presentation helps customers to picture the
merchandise in their own homes and thus inspires decorating ideas. As a result,
this strategy provides the opportunity for add-on sales and also encourages
customers to browse for longer periods of time. The check-out counter is
generally located towards the center of the store, and virtually all stores
offer complimentary gift wrapping at the rear of the store, a customer service
feature which is not typical in mall-based shops.
Shopping Experience. Kirkland's stores are designed to provide customers
with a distinctive shopping experience characterized by a diverse, ever-changing
merchandise selection at surprisingly attractive prices. Consistent with its
item-focused merchandising strategy, the Company continually evaluates new
merchandise and assesses the sales trends of items already in the stores. This
active management of the merchandise mix leads to frequent introduction of new
items, which in turn encourages shoppers to visit the stores frequently.
Kirkland's shoppers regularly experience the satisfaction of paying noticeably
less for items similar or identical to those sold by other retailers or through
catalogs. Management believes that Kirkland's exclusive focus on decorative home
accessories and gifts has led to its emergence as a leader in its retail
category and a destination store for many mall shoppers.
38
<PAGE> 40
Store Operations. Kirkland's stores are open seven days a week during mall
hours. The Company's store operations are managed by two Vice Presidents of
Store Operations, five regional managers and 25 district managers who generally
have responsibility for six to 10 stores within a geographic district.
Individual stores are managed by a store manager and one or two assistant store
managers. The store manager is responsible for the day-to-day operation of the
store, including inventory receipt and merchandise display, personnel functions,
store security and sales. A typical store has one or two full-time sales
associates and six to twelve part-time sales associates, depending on the
season. Additional part-time sales associates are typically hired to assist with
increased traffic and sales volume in the fourth quarter. Kirkland's compensates
its district and store managers with a base salary plus a performance bonus
based on store sales, expense control and loss prevention. Sales associates are
compensated on an hourly basis.
The Company believes that its continued success is dependent in part on its
ability to attract, retain and motivate quality employees. In particular, the
success of the Company's expansion program will be dependent on its ability to
promote and/or recruit qualified district and store managers and maintain
quality sales associates. To date, the majority of the Company's district
managers were previously Kirkland's store managers. Store managers, many of whom
are selected from among the Company's sales associates, currently complete a
formal training program before taking responsibility for a store. Store managers
are responsible for the hiring and training of new sales associates, assisted
where appropriate by two full-time recruiters. The Company is continuing to
develop enhanced training programs for its store managers, assistant managers
and sales associates. The Company constantly looks for motivated and talented
people to promote from within Kirkland's, in addition to recruiting from outside
the Company.
Site Selection. Kirkland's seeks to locate its stores in malls which are
destinations for large numbers of shoppers and which reinforce the Company's
quality image. To assess potential new mall locations, management reviews
financial and demographic criteria and analyzes the quality of tenants and
competitive factors, square footage availability, frontage space and location
and other relevant criteria to determine the overall acceptability of a mall and
the optimal locations within it. The Company prefers to locate its stores in
regional or super-regional malls with a history of high sales per square foot
and multiple national department stores as anchors, and seeks approximate store
frontage of 35 to 40 feet on average. The Company believes that it is a
desirable tenant to mall developers because of its long and successful operating
history, sales productivity, ability to attract customers and its strong
position in the decorative home accessory and gift categories.
PURCHASING, ALLOCATION AND DISTRIBUTION
Purchasing. Management believes that its disciplined approach to
purchasing, its relationships with its suppliers and its strong buying power
contribute to its successful purchasing strategy. The Company buys inventory on
a centralized basis to take advantage of volume purchase discounts and improve
its ability to control inventory product mix. The Company's 10-person
centralized buying group is responsible for all purchasing decisions and price
negotiations with vendors. Kirkland's purchases merchandise on a product by
product basis, rather than based upon category classifications.
The Company manages its total purchases based upon annual budgets which are
set at the beginning of the year and updated throughout the year. The Company
purchases its products from approximately 140 vendors. In 1997, approximately
55% of the Company's total purchases were from importers of merchandise
manufactured primarily in the Far East, Mexico and India, with the balance
purchased from domestic manufacturers and wholesalers. For its purchases of
merchandise manufactured abroad, the Company believes that buying from importers
instead of directly from foreign manufacturers enables it to maximize
flexibility and minimize risks. Kirkland's believes that its executive
management and buyers are more effective by focusing on managing the retail
business and allowing importers to handle the procurement and shipment of
foreign-manufactured merchandise for its stores. The purchase of approximately
45% of its products from domestic manufacturers and wholesalers enables the
Company to reduce the lead time between ordering products and displaying them in
the Company's stores.
39
<PAGE> 41
Allocation and Distribution. The Company continually strives to improve
its merchandising, distribution, planning and allocation methods to manage its
inventory more efficiently. The Company closely watches inventory levels on a
per store basis to ensure that sufficient merchandise quantities are on hand at
each store location. Each Kirkland's store is internally classified for
merchandising purposes based on certain criteria including store sales, size,
location and historical performance. Although all Kirkland's stores carry
similar merchandise, the variety and depth of products in a given store may vary
depending on the store's rank and classification. Inventory purchases and
allocation are also tailored based on regional or demographic differences
between stores. Information from the Company's POS computer system is regularly
reviewed and analyzed to assist in making merchandise allocation and
distribution decisions.
Historically, Kirkland's has operated a hybrid distribution system
employing both vendor-to-store direct distribution and certain elements of
centralized warehouse distribution in order to maintain a low cost operating
structure. Most of the Company's inventory is shipped directly to the stores by
the Company's suppliers to avoid costly investments in central warehouse
infrastructure and distribution management. This method allows for the quick and
efficient delivery of merchandise to the Company's stores. Merchandise shipped
directly to the stores is inspected and ticketed at the store (other than
approximately 30% of such merchandise which is pre-ticketed by the vendor),
displayed on the store floor by store personnel and later entered into the main
computer system at the Company's headquarters. To accommodate this practice,
each store leases local warehouse facilities on a short-term basis to store
surplus inventory and holiday items.
The Company also operates two leased distribution centers in Jackson,
Tennessee, with over 165,000 square feet of total warehouse space. The Company
also holds options to lease additional space at these facilities if needed.
These facilities are used to receive, process and store inventory for new stores
before they are opened as well as to warehouse and distribute a limited amount
of holiday, private brand and bulk merchandise in advance of the holiday selling
season and certain private brand and bulk merchandise throughout the year. The
storage and handling of certain holiday merchandise at the Jackson distribution
centers allows management to better allocate inventory shipments during the
Christmas season. The Company has achieved operating efficiencies with the
central distribution of Christmas merchandise and is in the process of expanding
this practice for future years. The Company believes that adequate additional
distribution center space will be available in the future on acceptable terms as
may be needed in order to accommodate the Company's expansion plans.
Based on future vendor requirements and Company needs, the Company may in
the future determine to place more emphasis on centralized distribution. In this
regard, the Company may in the future deem it appropriate to purchase or
construct a centralized distribution center.
MANAGEMENT INFORMATION SYSTEMS
The Company historically has placed emphasis on its management information
and inventory control systems. The Company believes that its systems are an
important factor in enabling it to achieve its goals of effective merchandising
and store execution.
The Company's management information systems include automated POS
merchandising and financial applications. Merchandise is bar-coded, enabling the
Company to manage and control inventory. Sales are updated daily in the
merchandise reporting systems by polling sales information from each store's POS
terminals. The Company's POS system consists of registers providing price
look-up and scanning of bar-coded labels on an item basis. Through automated
dial-up electronic communication to each store, sales item information is
uploaded to the main system nightly. Information obtained from such daily
polling is used to implement merchandising decisions and to identify the
required merchandise reorders for each store. Inventory is counted in the stores
through a year-end complete physical count utilizing hand-held scanning
equipment.
The Company's management information and control systems enable the
Company's corporate headquarters to regularly identify sales trends, replenish
depleted store inventories, reprice merchandise, monitor merchandise mix and
determine inventory shrinkage at individual stores and throughout the Company's
store
40
<PAGE> 42
network. Management believes that these systems provide a number of benefits,
including improved store inventory management, better in-stock availability,
higher operating efficiency and fewer markdowns.
During 1998, the Company intends to install a new POS system which will
include a new, more advanced cash register software system. This system, which
will be Year 2000 compliant and will be compatible with the Company's existing
hardware systems, will allow for future expansion to accommodate the Company's
growth plans. See "Risk Factors - Impact of Year 2000 Issue."
ADVERTISING AND PROMOTION
Historically, the Company has not engaged in extensive advertising because
it believes that it has benefited from its strategic locations in high-traffic
shopping malls and valuable "word-of-mouth" advertising by its customers. Many
shopping mall leases require some advertising, although an industry shift to
"media funds" has largely been implemented, whereby a retailer contributes at
agreed levels to the shopping mall's advertising fund based on the square
footage of the store. The Company places local newspaper advertisements on
occasion to promote specific items in its stores.
Kirkland's stores have two planned annual sale events, one in January and
one in July. These special events enable the Company both to sell merchandise
that the Company has purchased at particularly advantageous prices and to clear
previously marked-down inventory. In order to boost traffic in typical periods
of weakness for retailers, the Company occasionally holds special promotional
sales for a particular merchandise category, such as framed art.
TRADEMARKS
The Company has registered its "Kirkland's" logo with the United States
Patent and Trademark Office on the Principal Register. In addition, the Company
holds several trademark registrations in connection with its Cedar Creek private
label brand as well as a registration for the mark "Now That's Real Style!" The
Company is in the process of applying for a trademark registration of "the
Kirkland Collection." The Company is not aware of any claims of infringement or
other challenges to the Company's right to use its marks in the United States.
COMPETITION
The retail market for gifts and decorative home accessories is highly
competitive. Accordingly, the Company competes with a variety of specialty
stores, department stores, discount stores and catalog retailers that carry
merchandise in one or more categories also carried by the Company. The Company
believes that its stores compete primarily on the basis of merchandise quality
and selection, price, visual appeal of the merchandise and the store and the
convenience of location. Although the Company faces competition from a broad
range of retailers, the Company believes that its direct competitors are few, if
any. Specialty retailers tend to have higher prices and a more narrow assortment
of products than Kirkland's. Department stores typically have higher prices than
Kirkland's for similar merchandise. Wholesale clubs may have lower prices than
Kirkland's, but the product assortment is generally more limited. The Company
believes that it competes effectively with other retailers due to its experience
in identifying a broad collection of distinctive merchandise, pricing it to be
appealing to the target Kirkland's customer, and presenting it in a visually
appealing manner.
In addition to competing for customers, the Company competes with other
retailers for suitable store locations and qualified management personnel. Many
of the Company's competitors are larger and have substantially greater
financial, marketing and other resources than the Company does. See "Risk
Factors - Competition."
PROPERTIES
The Company currently leases all of its store locations and expects that
its policy of leasing rather than owning will continue as the Company grows. The
Company's leases typically provide for 10-year terms, many
41
<PAGE> 43
with the ability for the Company to terminate the lease in the middle of the
term if sales at the leased premises do not reach a certain annual level. The
leases typically provide for payment of percentage rent (i.e., a percentage of
sales in excess of a specified level) and the rate of increase in ancillary
charges is generally capped.
As current leases expire, the Company believes that it will be able either
to obtain lease renewals if desired for present store locations or to obtain
leases for equivalent or better locations in the same general area. To date, the
Company has not experienced unusual difficulty in either renewing leases for
existing locations or securing leases for suitable locations for new stores. A
majority of the Company's store leases contain provisions that would permit the
landlord to terminate the lease upon a change in control of the Company. The
Offering and the Pre-Offering Transactions may give rise to a change in control
under certain of the Company's leases. Based primarily on the Company's belief
that it maintains good relations with its landlords, that most of its leases are
at market rents and that it has historically been able to secure leases for
suitable locations, management believes that these provisions will not have a
material adverse effect on the business or financial condition of the Company,
although no assurance can be made in this regard.
The Company's corporate headquarters, located in Jackson, Tennessee, is
owned by the Company and currently consists of approximately 18,000 square feet
of office space. The Company has commenced an expansion of its headquarters
facility to a total of approximately 40,000 square feet, at an estimated cost of
$2.2 million to be incurred in 1998, funded from cash flow from operations.
EMPLOYEES
The Company employed approximately 500 full-time and approximately 1,300
part-time employees at March 31, 1998. Of these, approximately 75 were corporate
and warehouse center personnel and 1,725 were store employees. The number of
part-time employees fluctuates with seasonal needs. None of the Company's
employees is covered by a collective bargaining agreement. The Company believes
that its relationship with its employees is good.
LEGAL PROCEEDINGS
The Company is involved in various routine legal proceedings incidental to
the conduct of its business. The Company believes that any resulting liability
from existing legal proceedings, individually or in the aggregate, will not have
a material adverse effect on its operations or financial condition.
42
<PAGE> 44
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The following table and biographies set forth information concerning the
individuals who serve as directors, executive officers and key employees of the
Company:
<TABLE>
<CAPTION>
YEAR OF EXPIRATION
NAME AGE POSITION OF TERM AS DIRECTOR
---- --- -------- -------------------
<S> <C> <C> <C>
DIRECTORS AND EXECUTIVE OFFICERS:
Carl Kirkland...................... 57 Chief Executive Officer and
Chairman of the Board of
Directors
Robert E. Alderson................. 51 President, Chief Operating
Officer and Director
Reynolds C. Faulkner............... 34 Senior Vice President, Chief
Financial Officer and Director
Steven J. Collins.................. 29 Director of Finance and --
Treasurer
David M. Mussafer(a)(b)............ 35 Director
R. Wilson Orr, III(a).............. 35 Director
John P. Oswald (b)................. 38 Director
Alexander S. McGrath(a)............ 36 Director
KEY EMPLOYEES:
James W. Harris.................... 51 Vice President of Operations --
and Personnel
Chris T. LaFont.................... 37 Vice President of Merchandise --
Janna B. Alford.................... 36 Vice President of Operations --
</TABLE>
- ---------------
(a) Member of Compensation Committee
(b) Member of Audit Committee
DIRECTORS AND EXECUTIVE OFFICERS
Carl Kirkland has been the Chief Executive Officer since he founded the
Company in 1966, and he served as President from 1966 through November 1997. Mr.
Kirkland has been Chairman of the Board since June 1996. He has over 30 years of
experience in the retail industry. Mr. Kirkland also serves on the board of
directors of Hibbett Sporting Goods, Inc.
Robert E. Alderson has been President and Chief Operating Officer of the
Company since November 1997 and prior to that served as Senior Vice President of
the Company since joining in 1986. He also served as Chief Administrative
Officer from 1986 to 1997. Prior to joining the Company, he was a senior partner
at the law firm of Menzies, Rainey, Kizer & Alderson.
Reynolds C. Faulkner has been a Director of the Company since September
1996 and joined as Senior Vice President and Chief Financial Officer in February
1998. Prior to joining the Company, from July 1989 to January 1998, Mr. Faulkner
was an investment banker in the corporate finance department of The Robinson-
Humphrey Company, LLC, most recently serving as a Managing Director and head of
the retail practice group. In this capacity, Mr. Faulkner was involved in
numerous public and private financings and mergers and acquisitions of companies
in the retail industry.
Steven J. Collins joined the Company and has been the Director of Finance
since January 1997. From January 1997 to February 1998, he also served as the
Company's Chief Financial Officer. From 1995 to 1997 he was an associate with
Advent, a private equity investment firm. See "Principal Shareholders." Prior to
that, he worked in the mergers and acquisitions department of Merrill Lynch &
Co. and was an accountant with Coopers & Lybrand.
Alexander S. McGrath has been a director of the Company since June 1996.
Mr. McGrath is currently a general partner of Capital Resource Partners II,
L.P., a mezzanine and private equity investment firm which is the general
partner of Capital Resource Lenders II, L.P., a warrantholder of and
subordinated lender to the Company. He joined Capital Resource Lenders in 1988
as an associate, and has been a general partner of
43
<PAGE> 45
Capital Resource Partners II, L.P. since 1993. Prior to that, he was an
associate at Investments Orange Nassau Inc., a private equity investment firm.
See "Principal and Selling Shareholders."
David M. Mussafer has been a Director of the Company since June 1996. Mr.
Mussafer is currently a Managing Director of Advent, a private equity investment
firm which beneficially owns Common Stock of the Company through its interests
in certain members of Kirkland Holdings L.L.C., one of the Company's principal
shareholders. Mr. Mussafer joined Advent in 1991 and has been a principal of the
firm since 1993. See "Principal and Selling Shareholders."
R. Wilson Orr, III has been a Director of the Company since June 1996.
Since 1993, Mr. Orr has been a principal of SSM Corporation, a private equity
investment firm and an affiliate of SSM/Kirkland Equity Partners, L.P. which is
a member of Kirkland Holdings L.L.C., one of the Company's principal
shareholders. He joined SSM Corporation in 1988 as a Vice President and partner.
From 1984 to 1988, he worked in corporate lending at Chemical Bank. See
"Principal and Selling Shareholders."
John P. Oswald has been a Director of the Company since June 1996. Since
1994, Mr. Oswald has been a partner of the Capital Trust Group, a private equity
investment firm and an affiliate of CT/Kirkland Equity Partners, L.P., which is
a member of Kirkland Holdings L.L.C., one of the Company's principal
shareholders. Mr. Oswald is a beneficial owner of Capital Trust Investments,
Ltd., a warrantholder of and subordinated lender to the Company. He is also
President and Chief Executive Officer of Bridge East Capital, a private equity
investment partnership, an affiliate of the Capital Trust Group. Prior to that
he was a partner with the law firm of Lord, Day & Lord from 1986 to 1994 and an
associate with Arthur Andersen LLP from 1984 to 1986. See "Principal and Selling
Shareholders."
KEY EMPLOYEES
Chris T. LaFont has been Vice President of Merchandise since September
1997. Mr. LaFont is responsible for all merchandise buying decisions for the
Company. From 1988 to September 1997, he served as Vice President of Visual
Merchandising. Mr. LaFont started his career with Kirkland's in 1981 as a
management trainee.
James W. Harris has been Vice President of Operations and Personnel since
1987. Mr. Harris is responsible for store personnel recruitment and training as
well as general store operations. Prior to joining the Company, Mr. Harris was
with Goldsmith's, a division of Federated Department Stores, from 1972 to 1987,
where he held various positions in store operations.
Janna B. Alford has been Vice President of Operations since February 1997.
From April 1995 to February 1997, Ms. Alford held the positions of Director of
Loss Prevention and Director of Store Operations for the Company. Prior to that
she was with County Seat, a retailer of youth-oriented apparel, where she held
positions in loss prevention and operations from 1989 to 1995.
CLASSIFIED BOARD OF DIRECTORS
Upon completion of the Offering, the Board of Directors of the Company will
be divided into three classes of directors each containing, as nearly as
possible, an equal number of directors. Directors within each class are elected
to serve three-year terms and approximately one-third of the directors sit for
election at each annual meeting of the Company's shareholders. The year of
expiration of the term of each of the Company's directors is set forth in the
table above under the caption "Directors, Executive Officers and Key Employees."
A classified board of directors may have the effect of deterring or delaying any
attempt by any group to obtain control of the Company by a proxy contest since
such third party would be required to have its nominees elected at two separate
annual meetings of the Board of Directors in order to elect a majority of the
members of the Board of Directors. Directors who are elected to fill a vacancy
(including vacancies created by an increase in the number of directors) must be
confirmed by the shareholders at the next annual meeting of shareholders whether
or not such director's term expires at such annual meeting. See "Risk
Factors - Charter and Bylaw Provisions; Anti-Takeover Effect of Tennessee Laws."
44
<PAGE> 46
DIRECTOR COMPENSATION
To date, directors who are affiliated with the Company or any of the
Company's shareholders have not received separate compensation for their
services in that capacity. The Company intends in the future to compensate its
directors who are not also employees of the Company. The amount of such
compensation has not been determined but will be consistent with amounts paid by
comparable public companies.
COMMITTEES OF THE BOARD
Following completion of this Offering, the Board of Directors will have an
Audit Committee, composed of Messrs. Mussafer and Oswald, and a Compensation
Committee, composed of Messrs. McGrath, Mussafer and Orr. The principal
functions of the Audit Committee will include making recommendations to the
Board regarding the selection of independent public accountants to audit
annually the books and records of the Company, reviewing the proposed scope of
each audit and reviewing the recommendations of the independent public
accountants as a result of their audit of the Company. The Audit Committee will
also periodically review the activities of the Company's accounting staff and
the adequacy of the Company's internal controls. The Compensation Committee will
be responsible for establishing the salaries of the executive officers of the
Company, incentives and other forms of compensation and for administering the
Company's employee benefit plans.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Company's Board of Directors will be
formed upon completion of the Offering. Messrs. McGrath, Mussafer and Orr, who
were not at any time officers or employees of the Company, will be the only
members of the Compensation Committee. No executive officer of the Company
serves as a member of the Board of Directors or Compensation Committee of
another entity which has one or more executive officers who serve as a member of
the Company's Board of Directors or Compensation Committee.
45
<PAGE> 47
EXECUTIVE COMPENSATION
The following table sets forth certain compensation information with
respect to the Company's Chief Executive Officer and the other executive
officers of the Company whose salary and bonus exceeded $100,000 for the year
ended December 31, 1997 (the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION ------------
----------------------------------------- SECURITIES ALL OTHER
OTHER ANNUAL UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) COMPENSATION ($) OPTIONS (#) (1)($)
- --------------------------- ---- ---------- --------- ---------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Carl Kirkland........... 1997 275,000 250,000 712,500(3) 2,381 3,472
Chief Executive
Officer(2)
Robert E. Alderson...... 1997 275,000 250,000 149,500(3) 2,381 2,747
President, Chief
Operating Officer and
Chief Administrative
Officer(4)
Bruce Moore............. 1997 275,000 -- 259,000(3) 2,381 2,548
Senior Vice
President,General
Merchandise Manager and
Chief Operating
Officer(5)
Steven J. Collins....... 1997 75,000 35,000 -- 230 --
Chief Financial Officer
and Director of
Finance(6)
</TABLE>
- ---------------
(1) Includes $1,552, $1,552 and $1,552 contributed under the Company's 401(k)
Plan for the benefit of Messrs. Kirkland, Alderson and Moore, respectively.
Also includes $1,920, $1,195 and $976 of premiums paid for term life
insurance for Messrs. Kirkland, Alderson and Moore, respectively.
(2) Mr. Kirkland also served as the Company's President until November 1997.
(3) Represents amounts classified as interest associated with the Class C
Preferred Stock held by the executives, which will be redeemed upon the
completion of the Offering, at which time such payments will terminate.
(4) Mr. Alderson became the Company's President and Chief Operating Officer in
November 1997.
(5) Mr. Moore resigned as an executive officer of the Company in November 1997
and his employment with the Company terminated on January 7, 1998. In
connection with such termination, all of his options to purchase Common
Stock were canceled. See "Certain Transactions - January 1998 Redemption."
(6) Mr. Collins served as the Company's Chief Financial Officer until February
1998.
46
<PAGE> 48
STOCK OPTIONS GRANTED TO CERTAIN EXECUTIVE OFFICERS DURING 1997
The following table sets forth certain information regarding options for
the purchase of Common Stock that were awarded to the Company's Named Executive
Officers during the year ended December 31, 1997:
OPTION GRANTS IN 1997
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
PERCENT OF ANNUAL RATES OF STOCK
NUMBER OF TOTAL PRICE
SECURITIES OPTIONS APPRECIATION FOR
UNDERLYING GRANTED EXERCISE OR OPTION TERM ($)
OPTIONS TO EMPLOYEES BASE PRICE EXPIRATION ----------------------
NAME GRANTED (#) IN 1997 ($/SH) DATE 5% 10%
---- ----------- ------------ ----------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Carl Kirkland........... -- -- -- -- -- --
Robert E. Alderson...... -- -- -- -- -- --
Bruce Moore............. -- -- -- -- -- --
Steven J. Collins(1).... 230 7.4% $95.00 6/23/07 $154.74 $246.41
</TABLE>
- ---------------
(1) Granted under the Company's 1996 Executive Incentive and Non-Qualified Stock
Option Plan. The option vested as to one-half of the underlying shares on
August 1, 1997 and will vest as to the balance on August 1, 1998.
STOCK OPTIONS EXERCISED BY CERTAIN EXECUTIVE OFFICERS DURING 1997 AND YEAR-END
OPTION VALUES.
The following table sets forth certain information regarding options for
the purchase of Common Stock that were exercised and/or held by the Named
Executive Officers during the year ended December 31, 1997.
AGGREGATED OPTION EXERCISES IN YEAR ENDED
DECEMBER 31, 1997 AND YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
DECEMBER 31, 1997 DECEMBER 31, 1997
SHARES ---------------------- --------------------
ACQUIRED ON VALUE # EXERCISABLE/ $ EXERCISABLE/
NAME EXERCISE REALIZED UNEXERCISABLE UNEXERCISABLE(1)
---- ----------- -------- ---------------------- --------------------
<S> <C> <C> <C> <C>
Carl Kirkland(2)...................... -- -- 0/2,381 $ /$
Robert E. Alderson(2)................. -- -- 0/2,381 $ /$
Bruce Moore(3)........................ -- -- 0/2,381 $ /$
Steven J. Collins..................... -- -- 115/115 $ /$
</TABLE>
- ---------------
(1) Value based on the $ per share assumed initial public offering price
less the per share exercise price.
(2) The options held by Messrs. Kirkland and Alderson will become fully vested
upon completion of the Offering.
(3) Mr. Moore's options were canceled in connection with the redemption of his
preferred and common stock on January 7, 1998. See "Certain
Transactions - January 1998 Redemption."
EMPLOYEE BENEFIT PLANS
1996 Executive Incentive and Non-Qualified Stock Option Plan
The Company maintains the Kirkland's, Inc. 1996 Executive Incentive and
Non-Qualified Stock Option Plan (as amended, the "Stock Option Plan"). The
Company believes that the Stock Option Plan will promote the long-term growth
and profitability of the Company by providing key employees with incentives to
improve shareholder value and to contribute to the growth and financial success
of the Company. Moreover, the Company believes that the Stock Option Plan will
help the Company to attract, retain and reward quality employees.
47
<PAGE> 49
The Stock Option Plan is administered by the Board of Directors or the
Compensation Committee. The plan administrator has exclusive authority to: (i)
grant Awards (as defined below) under the Stock Option Plan, including
determining individuals to whom Awards are granted, the amount of such Awards,
any applicable vesting terms and any other terms of an Award; and (ii) make all
interpretations and determinations affecting the Stock Option Plan.
Participation in the Stock Option Plan is limited to employees of the
Company or any of its subsidiaries (the "Participants"). Awards under the Stock
Option Plan may be in the form of incentive stock options ("ISOs") that meet the
requirements of Section 422 of the Internal Revenue Code of 1986, as amended
(the "Code"), or "non-qualified" stock options ("NQSOs") (collectively,
"Awards"). ISOs may only be granted to individuals who are employees of the
Company at the date of grant. Awards under the Stock Option Plan are not
transferable by the Participants, except upon death.
The Stock Option Plan provides for the grant of stock options to purchase
up to an aggregate of 12,304 shares of Common Stock. In the event of any stock
split, reverse stock split, stock dividend, recapitalization, reclassification
or other similar event, appropriate proportional adjustments may be made to the
number of shares reserved for issuance under the Stock Option Plan and the
number, kind and price of shares covered by outstanding Awards. Stock options
may not be exercised more than 10 years after the date of grant (five years
after the date of grant with respect to an ISO granted to any person who owns
stock of the Company possessing 10% or more of the total voting power of all the
Company's stock at the time of the grant).
The Board has the discretion to award stock options to Participants as
either ISOs or as NQSOs. The exercise price of an ISO must be not less than the
fair market value of the Common Stock on the date the option is granted.
Although the Stock Option Plan permits the exercise price of an NQSO to be less
than the fair market value of the Common Stock on the date the option is
granted, the exercise price of all NQSOs granted under the Stock Option Plan to
date have been equal to the fair market value of the Common Stock on the date of
grant.
As of the date of this Prospectus, options to purchase 10,154 shares of
Common Stock are outstanding, including options for 2,381 shares held by each of
Carl Kirkland and Robert E. Alderson and an option for 2,283 shares held by
Reynolds C. Faulkner. Options granted with respect to the remaining 3,109 shares
of Common Stock (the "Employee Options") are held by approximately 225 employees
other than executive officers (other than an option for 230 shares which was
granted to Mr. Collins). The Employee Options generally expire upon termination
of employment and become exercisable on July 1, 2000 (except for the option
granted to Mr. Collins, which became exercisable with respect to 115 shares in
August 1997 and will become exercisable with respect to the remainder of the
shares in August 1998). Generally, if the holder of an Employee Option
terminates employment because of death or disability, any Award exercisable at
the date of such termination may be exercised for a period of one year from the
date of termination or until the expiration of the stated term of the Award,
whichever period is shorter. An additional 2,150 shares of Common Stock are
available for issuance in connection with future grants under the Stock Option
Plan.
1998 Incentive Plan
Prior to the completion of the Offering, the Company intends to adopt the
Kirkland's, Inc. 1998 Incentive Plan (the "Incentive Plan"). The Incentive Plan
will provide for the award of up to 8,000 shares of Common Stock to the
Company's employees, directors, consultants and other individuals who perform
services for the Company.
The Compensation Committee of the Board of Directors will administer the
Incentive Plan. Under the terms of the Incentive Plan, the Compensation
Committee will be required to be composed of two or more directors. The
Compensation Committee will have the authority to interpret the Incentive Plan
and to determine and designate the persons to whom options or awards are made
and the terms, conditions and restrictions applicable to each option or award
(including, but not limited to, the exercise price, any vesting schedule or
provisions for the acceleration thereof and any forfeiture provisions).
48
<PAGE> 50
The Incentive Plan contains provisions for granting various stock-based
awards, including ISOs, NQSOs, stock appreciation rights ("SARs") and restricted
stock (all as further described below). The term of the Incentive Plan is ten
years, subject to earlier termination or amendment.
The Compensation Committee will have the power to select award recipients
and their allotments and to determine the price, terms and vesting schedule for
awards granted. While there are no predetermined performance formulas or
measures or other specific criteria used to determine recipients of awards under
the Incentive Plan, awards will be based generally upon consideration of the
grantee's position and responsibilities, the nature of services provided, the
value of the services to the Company, the present and potential contribution of
the grantee to the success of the Company, the anticipated number of years of
service remaining and other factors which the Board or the Compensation
Committee may deem relevant.
Stock Options. The Incentive Plan provides for the grant of ISOs to
employees of the Company. The Incentive Plan also provides for the grant of
NQSOs to employees of the Company, directors of the Company, and consultants and
other individuals who perform services for the Company but are not employed by
the Company. The exercise price of any ISO granted under the Incentive Plan may
not be less than 100% of the fair market value of the Company's Common Stock on
the date of grant. Options granted under the Incentive Plan may be exercised for
cash or in exchange for shares of Common Stock owned by the option holder having
a fair market value on the date of exercise equal to the option exercise price.
The aggregate fair market value, determined on the date of grant, of the shares
with respect to which ISOs are exercisable for the first time by an employee
during any calendar year may not exceed $100,000.
Under the Incentive Plan, each option will be exercisable at such time and
to such extent as specified in the pertinent option agreement between the
Company and the option recipient. However, no award shall be exercisable with
respect to any shares of Common Stock later than ten years after the date of
such award. Unless otherwise specified by the Compensation Committee with
respect to a particular option, all options will be non-transferable, except
upon death. The shares subject to expired options or terminated options which
remain unexercised will become available for future grants.
Stock Appreciation Rights. The Incentive Plan also provides for the grant
of SARs, either alone or in tandem with ISOs or NQSOs. A SAR entitles its holder
to a cash payment of the excess of the fair market value of Common Stock of the
Company on the date of exercise, over the fair market value of the Common Stock
on the date of grant.
If an option or SAR recipient ceases to be employed by, or to render
services to, the Company for any reason other than retirement, death, disability
or termination for cause, unless otherwise specified by the Compensation
Committee with respect to a particular option, any option or SAR exercisable on
the date of such termination generally may be exercised for a period of one
month from the date of such termination or until the expiration of the stated
term of the option or SAR, whichever period is shorter. In the event of
termination of employment or service by reason of retirement, death or
disability, unless otherwise specified by the Compensation Committee with
respect to a particular option or SAR, any option exercisable at the date of
such termination generally may be exercised for a period of one year (in the
case of death) or six months (in the case of disability or retirement) from the
date of termination or until the expiration of the stated term of the option or
SAR, whichever period is shorter. If a participant's employment or service is
terminated for cause, unless otherwise specified by the Compensation Committee
with respect to a particular option or SAR, any option or SAR not exercised
prior to the date of such termination will be automatically and immediately
forfeited.
In anticipation of a change of control of the Company, the Compensation
Committee, in its discretion, may: (i) cause all outstanding options and SARs to
become immediately exercisable, (ii) provide for the cancellation of options and
SARs and a cash payment to the holders of such canceled awards or (iii) provide
for the cancellation of options and the substitution of options to purchase
shares in a successor corporation.
Restricted Stock. "Restricted Stock" are shares of the Company's Common
Stock granted to an employee for no cash consideration, which will be forfeited
to the Company if, during a restriction period specified by the Compensation
Committee at the time of the grant of the Restricted Stock, (i) the grantee
49
<PAGE> 51
ceases to be an employee of the Company, or (ii) certain individual or corporate
performance goals are not met. In the event of death or disability: (i)
restrictions based on employment will lapse with respect to a percentage of
Restricted Stock held by the grantee equal to the percentage of the restriction
period that had elapsed as of the date of death or commencement of disability,
and (ii) restrictions based on performance will lapse to the extent determined
by the Compensation Committee. In the event of a change of control of the
Company, the Compensation Committee may, in its discretion, cause all
restrictions on shares of Restricted Stock to lapse.
Shares of Common Stock underlying any award that is forfeited under the
Incentive Plan will become available for future grants.
Employee Stock Purchase Plan
Prior to the completion of the Offering, the Company intends to adopt an
Employee Stock Purchase Plan (the "Purchase Plan"), which will allow
substantially all full-time employees of the Company, subject to certain
limitations, to purchase shares of the Company's Common Stock at a discount from
the prevailing market price at the time of purchase. Such shares will either be
issued by the Company from its authorized and unissued Common Stock or purchased
by the Company on the open market. Any employee owning five percent or more of
the voting power or value of the Company will not be eligible to participate in
the Purchase Plan. A maximum of 2,700 shares of the Company's Common Stock will
be available for purchase under the Purchase Plan.
An eligible employee will be able to specify, before the commencement of
each quarter, an amount to be withheld from his or her paycheck and credited to
an account established for him or her (the "Participation Account"). Amounts in
the Participation Account will be applied to the purchase of shares of the
Company's Common Stock on the last day of each quarter. The price of such shares
will be equal to % of the average of the high and low sales prices per share
of the Company's Common Stock on the principal national securities exchange on
which the Common Stock is listed or admitted to trading or, if not listed or
traded on any such exchange, on the Nasdaq National Market. Only whole shares of
Common Stock will be purchased under the Purchase Plan. Amounts withheld from an
employee's paycheck and not applied to the purchase of whole shares of Common
Stock will, at the election of the employee, either remain credited to the
employee's Participation Account or be returned to the employee. Upon
termination of an employee's employment, all amounts credited to such employee's
Participation Account will be returned to him or her.
The Purchase Plan will be administered by the Compensation Committee of the
Board of Directors. The Board of Directors may amend or terminate the Purchase
Plan. The Purchase Plan is intended to comply with the requirements of Section
423 of the Code.
401(k) Plan
The Company maintains the Kirkland's, Inc. Retirement Plan ("401(k) Plan")
for the benefit of its eligible employees. The 401(k) Plan is intended to be
qualified under Code section 401(a) and consists of a 401(k) component, a 401(m)
matching component and a profit-sharing component. Employees eligible to
participate in the 401(k) Plan are those employees who have completed at least
one year of service and attained age of 21.
Under the 401(k) component, participants may elect to defer up to $10,000
per year (as adjusted by the Internal Revenue Service) to the 401(k) Plan,
subject to other limits of the Code. Under the 401(m) matching component, the
Company, in its discretion, may match each participant's elective deferrals, up
to 5% of compensation. Currently, the Company matches 25% of each participant's
elective deferrals. Under the profit-sharing component, the Company may make
additional contributions in amounts to be determined by the Company in its sole
discretion. Such Company profit-sharing contributions will be allocated among
eligible participants in proportion to each such participant's compensation.
Matching contributions and profit-sharing contributions vest ratably over
six years, or earlier upon attainment of the appropriate retirement age, upon
retirement for disability, upon death, or upon termination
50
<PAGE> 52
of the 401(k) Plan. All assets of the 401(k) Plan are currently invested,
subject to participant-directed elections, in annuity contracts underwritten by
Aetna Life Insurance and Annuity Company.
Payment of 401(k) Plan benefits are made in cash in the form of a single
lump sum, periodic installments or an annuity. Distribution of a participant's
vested interest generally occurs on the earlier of (i) termination of employment
(including by reason of retirement, death or disability) or (ii) the April 1
following the calendar year in which the participant attains age 70 1/2.
Supplemental Executive Retirement Plan
Following the completion of the Offering, the Company intends to adopt a
non-qualified deferred compensation plan known as a supplemental executive
retirement plan ("SERP"). Only a select group of highly compensated management
employees chosen by the Board of Directors will be eligible to participate in
the SERP. Pursuant to the SERP, participants will be entitled to elect, in
advance, to reduce salary or bonus income and have that reduction credited to an
account under the SERP. To the extent all or a portion of the participant's
deferral relates to amounts that could have been contributed to the SERP, but
for the application of certain legal restrictions, the Company will also credit
a matching contribution amount to the SERP equal to what would have been
contributed to the SERP, in the absence of those restrictions.
EMPLOYMENT AGREEMENTS
In connection with the Recapitalization, the Company entered into
employment agreements with Carl Kirkland, Robert Alderson and Bruce Moore. Under
the terms of these employment agreements, Mr. Kirkland was employed as Chairman
and Chief Executive Officer, Mr. Alderson was employed as Chief Administrative
Officer and Mr. Moore was employed as Chief Operating Officer and General
Merchandise Manager. The term of these employment agreements expires on June 12,
2000. The employment agreements provide for an annual salary of $987,500 for Mr.
Kirkland, $424,500 for Mr. Alderson and $534,000 for Mr. Moore, of which amounts
$712,500, $149,500 and $259,000, respectively, represent interest paid in
connection with the mandatorily redeemable Class C Preferred Stock. These
agreements provide for each executive to receive an annual bonus beginning with
the fiscal year ended December 31, 1996. The bonus includes a performance-based
component of up to $175,000 based on the Company's achievement of the projected
EBITDA targets established by the Board, as well as a discretionary component of
up to $75,000. Each executive is entitled to receive the full $175,000
performance-based component of the bonus if the Company achieves at least 95% of
its projected EBITDA target for a particular fiscal year, none of the bonus for
achievement of the target for the year at a level of 85% or less, and a pro rata
portion of $175,000 for achievement of the target for the year at a level of
between 85% and 95%. There are no limits on the projected EBITDA target to be
established by the Board. The Board may consider performance measures such as
team leadership, new store openings and customer satisfaction in determining the
discretionary bonus component. Mr. Moore's employment with the Company, and his
employment agreement, terminated on January 7, 1998. See "Certain
Transactions - January 1998 Redemption."
The employment agreements with Messrs. Kirkland and Alderson automatically
terminate upon the occurrence of certain events such as a sale of the Company, a
change of control or a public offering of Common Stock generating gross proceeds
of at least $30 million (a "Qualified Public Offering"). The employment
agreements provide that upon the occurrence of any of the aforementioned events,
the Company and the executives will enter into new employment agreements which
will provide for a $275,000 annual salary, retain the equivalent bonus and
non-competition provisions of the existing employment agreements, and coincide
with the remaining term of the existing employment agreements. As a result of
the Offering, the existing employment agreements will automatically terminate,
and the Company will enter into new employment agreements with each of Mr.
Kirkland and Mr. Alderson consistent with the foregoing terms.
In February 1998, the Company entered into an employment agreement with
Reynolds C. Faulkner. Under the terms of that agreement, Mr. Faulkner serves as
the Company's Senior Vice President and Chief Financial Officer at an annual
salary of $225,000, and will be eligible to receive an annual bonus of up to
$100,000 at the discretion of the Board. In addition, Mr. Faulkner received a
signing bonus of $100,000 upon
51
<PAGE> 53
commencement of his employment. The term of Mr. Faulkner's agreement extends
until February 2, 2001, or until earlier termination of employment. If Mr.
Faulkner's employment is terminated prior to February 2, 2001 by the Company
without cause or by Mr. Faulkner under specified circumstances, Mr. Faulkner
will be entitled to a severance payment equal to the discounted present value of
12 months' salary and benefits, together with a pro-rated annual bonus.
Each of Messrs. Kirkland and Alderson received an option for 2,381 shares
of Common Stock at a per share exercise price of $0.45 in connection with the
Recapitalization. The terms of the options granted to Messrs. Kirkland and
Alderson provide that those options will vest immediately prior to completion of
the Offering. On February 2, 1998, Mr. Faulkner received a fully vested option
for 2,283 shares of Common Stock of the Company under the Stock Option Plan at a
per share exercise price of $285.65. All or part of the shares purchased upon
the exercise of Mr. Faulkner's option will be subject to transfer restrictions
and repurchase rights to the Company at the fair market value of the shares
until February 1, 2004. All or part of the transfer restrictions and repurchase
rights will lapse following the Offering upon the occurrence of certain events,
such as a sale or change of control of the Company or the termination of Mr.
Faulkner's employment with the Company by reason of death, disability,
termination by the Company without cause or termination by Mr. Faulkner under
specified circumstances.
Each of the three employment agreements described above also contains
non-competition provisions prohibiting the executive from competing against the
Company during the term of the employment agreement and for three years
thereafter without the prior written consent of the Company. The executives are
also entitled to certain additional benefits (beyond those generally available
to employees of the Company) including an automobile allowance and additional
life insurance.
In February 1997, the Company entered into an employment agreement with
Steven J. Collins pursuant to which Mr. Collins was appointed the Company's
Chief Financial Officer and Director of Finance. The employment agreement
provides for an annual salary of $75,000 with an annual year-end
performance-based bonus of up to $35,000. The employment agreement is terminable
by either party at any time and contains non-competition and confidentiality
provisions. In June 1997, Mr. Collins received a stock option to purchase 230
shares of Common Stock, at a per share exercise price of $95.00, which vested as
to one-half of the underlying shares on August 1, 1997 and will vest as to the
balance on August 1, 1998. In February 1998, Mr. Collins' employment agreement
was amended to reflect that Mr. Collins would cease to be the Company's Chief
Financial Officer and would continue to serve as the Company's Director of
Finance.
52
<PAGE> 54
CERTAIN TRANSACTIONS
RECAPITALIZATION
On June 12, 1996, the Company completed the recapitalization pursuant to
which Advent became the largest beneficial owner of the equity of the Company.
The Company completed the Recapitalization to permit the founding and management
shareholders, consisting of Carl Kirkland, Robert E. Kirkland, Robert E.
Alderson and Bruce Moore (collectively, the "Principal Shareholders") to realize
a portion of the value of their interest in the Company. In connection with the
Recapitalization (i) Advent (through affiliated entities) together with other
investors (collectively, "the 1996 Investors") purchased 68,400 shares of common
stock and 68,400 shares of Class A Preferred Stock from Kirkland's, Inc. and
each of the Kirkland Companies for a purchase price of $30.8 million, (ii) a
portion of the common stock of Kirkland's, Inc. and each of the Kirkland
Companies held by the Principal Shareholders was redeemed at a total redemption
price of $80.2 million and all such common stock held by shareholders other than
the Principal Shareholders, consisting principally of employees of the Company
and family members of the Principal Shareholders (collectively, the "Minority
Shareholders"), was redeemed at a total redemption price of $2.9 million, (iii)
the Company paid bonuses to certain of the Minority Shareholders in the total
amount of $432,000, (iv) certain shares of common stock of Kirkland's, Inc. and
each of the Kirkland Companies held by the Principal Shareholders were
reclassified into 31,600 shares of Class B Preferred Stock and 20,000 shares of
Class C Preferred Stock of Kirkland's, Inc. and each of the Kirkland Companies,
(v) the Company borrowed $55.3 million of senior debt under a credit facility
from a group of banks, (vi) the Company borrowed $20 million of subordinated
debt from a group of institutional lenders and issued warrants to such lenders
to purchase 16,722 shares of common stock of Kirkland's, Inc. and each of the
Kirkland Companies, (vii) the Company repaid $19.2 million of its existing
indebtedness and (viii) the Company paid certain related expenses, including
investment banking and financial advisory fees, in the total amount of $6.3
million. The $6.3 million of expenses paid in connection with the
Recapitalization included investment banking /advisory fees of $1.0 million paid
to Advent, $2.9 million paid to Lehman Brothers Inc. and $1.0 million paid to
The Robinson-Humphrey Company, LLC. Lehman Brothers Inc. and The
Robinson-Humphrey Company, LLC are Underwriters in the Offering.
Concurrent with the consummation of the Recapitalization, the Company
issued an aggregate of $20 million of subordinated notes to a group of
institutional lenders. As of March 31, 1998, approximately $8.0 million, $6.4
million, $3.8 million and $1.8 million were outstanding to Capital Resource
Lenders II, L.P., Allied Capital Corporation, Marlborough Capital Investment
Fund, L.P. and Capital Trust Investments Ltd., respectively. In 1996 and 1997
and the first quarter of 1998, the Company paid an aggregate of $1.4 million,
$2.5 million and $576,000, respectively, in interest to these lenders in
proportion to the principal amount of the notes held by each lender. In
connection with the issuance of the notes, the Company also issued warrants to
purchase an aggregate of 16,722 shares of common stock of Kirkland's, Inc. and
each of the Kirkland Companies to the lenders. Of the total warrants issued,
warrants to purchase 4,817 shares of such common stock only become exercisable
if the Company fails to meet specific valuation targets as of the date of the
Offering. As the applicable valuation targets will be met upon completion of the
Offering, these contingent warrants will be canceled upon completion of the
Offering. The remainder of the warrants (for 11,905 shares) will be exercised at
a per share price of $0.01 upon completion of the Offering by Capital Resource
Lenders II, L.P., Allied Capital Corporation, Marlborough Capital Investment
Fund, L.P. and Capital Trust Investments Ltd. for 4,762 shares, 3,810 shares,
2,262 shares and 1,071 shares of common stock of Kirkland's, Inc. and each of
the Kirkland Companies, respectively.
In connection with the Recapitalization, the Company and its current
shareholders and warrantholders entered into a Shareholders Agreement. The
agreement, which expires by its terms upon completion of the Offering, provided
for the nomination and election of each of the Company's current directors.
Certain of the directors of the Company are affiliated with some of the
subordinated lenders to and warrantholders of the Company and with other
entities that participated in the Recapitalization: Mr. Mussafer is a Managing
Director of Advent; Mr. Oswald is affiliated with CT/Kirkland Equity Partners,
L.P. (a member of Kirkland Holdings L.L.C., one of the Company's principal
shareholders) and Capital Trust Investments, Ltd. (a subordinated lender and
warrantholder); Mr. McGrath is a general partner of Capital Resource Partners
II,
53
<PAGE> 55
L.P., the general partner of Capital Resource Lenders II, L.P. (a subordinated
lender and warrantholder); and Mr. Orr is affiliated with SSM/Kirkland Equity
Partners, L.P. (a member of Kirkland Holdings L.L.C.)
PRE-OFFERING TRANSACTIONS
Kirkland Companies. Historically, the Company has operated all of the
Kirkland's stores through separate corporations (the "Kirkland Companies"), and
Kirkland's, Inc. has served as a management company for the Kirkland Companies.
As of March 31, 1998, there were 140 such corporations in existence in addition
to Kirkland's, Inc. The shareholders of the Kirkland Companies are the same as
the shareholders of Kirkland's, Inc. The percentage ownership of Kirkland's,
Inc. and in each of the Kirkland Companies is the same, except with respect to
the Class C Preferred Stock which is treated by the Company as debt for
accounting purposes.
Preferred Stock. Prior to the Offering, Kirkland's, Inc. and substantially
all of the Kirkland Companies had three classes of preferred stock outstanding.
The Class A Preferred Stock and Class B Preferred Stock entitled the holders to
cash dividends equal to 8% of the stated value of such preferred stock annually.
No dividends have been paid on the Class A Preferred Stock or Class B Preferred
Stock to the holders of such preferred stock. The Company accrued and paid
amounts classified as interest to the holders of Class C Preferred Stock at an
annual rate equal to 9% of the stated value of such preferred stock. Upon
completion of the Offering, the Class A Preferred Stock and Class B Preferred
Stock will become convertible at the election of the holders and redeemable at
the election of the Company, and the Class C Preferred Stock will become
mandatorily redeemable.
Purchase, Contribution and Exchange Agreement. Pursuant to the terms of a
Purchase, Contribution and Exchange Agreement dated April 28, 1998, by and among
Kirkland's, Inc. and each of the Company's shareholders and warrantholders,
immediately prior to completion of the Offering and as a part of the Pre-
Offering Transactions, all of the outstanding shares of Class A Preferred Stock
and Class B Preferred Stock of Kirkland's, Inc. and the Kirkland Companies will
be recapitalized into or exchanged for shares of Common Stock, as discussed
below. Also pursuant to the agreement, all of the outstanding shares of common
stock of the Kirkland Companies will be contributed to Kirkland's, Inc.,
resulting in the Kirkland Companies becoming wholly-owned subsidiaries of the
Company. Subsequently, the warrantholders of Kirkland's, Inc. and the Kirkland
Companies will exercise their warrants to purchase 11,905 shares of common stock
of Kirkland's, Inc. and each of the Kirkland Companies, and the Kirkland
Companies common stock issued upon such exercise will be contributed to
Kirkland's, Inc. Also pursuant to the agreement, although not part of the
Pre-Offering Transactions, Kirkland's, Inc. will purchase or redeem from current
shareholders all of the outstanding shares of Class C Preferred Stock of
Kirkland's, Inc. and each of the Kirkland Companies that has Class C Preferred
Stock outstanding for an aggregate of $18.0 million (including approximately
$900,000 of amounts classified as interest associated with the Class C Preferred
Stock), to be paid from the net proceeds of the Offering. See "Use of Proceeds."
The number of shares of Common Stock issuable upon recapitalization or
exchange of the Class A Preferred Stock and Class B Preferred Stock will equal
the aggregate stated value of $41.0 million plus accrued dividends ($
at , 1998) on the preferred stock, divided by the actual initial
public offering price. Assuming an initial public offering price of $
and a consummation of the Offering on , 1998, shares of
Common Stock will be issued to existing stockholders for their preferred stock.
If the initial public offering price is $ (i.e., the top of the estimated
initial public offering price range), the number of shares of Common Stock
issuable upon such recapitalization or exchange will be , and if the
initial public offering price is $ (i.e., the bottom of the estimated
initial public offering price range), the number of shares of Common Stock
issuable upon such recapitalization or exchange will be .
JANUARY 1998 REDEMPTION
By agreement dated December 26, 1997, in connection with the termination of
his employment with the Company, the Company redeemed all of the preferred and
common stock of the Company held by Bruce Moore, the Company's former Senior
Vice President, Chief Operating Officer and General Merchandise Manager.
Pursuant to the agreement, on January 7, 1998 the Company paid Mr. Moore
approximately $6.9
54
<PAGE> 56
million in redemption of all shares of Class B Preferred Stock, Class C
Preferred Stock and common stock of Kirkland's, Inc. and each of the Kirkland
Companies held by Mr. Moore, together with a one-time compensation payment of
$259,000. In addition, under the terms of the agreement, Mr. Moore's stock
options were canceled. Pursuant to the agreement, the Company will make salary
continuation payments to Mr. Moore in the annual amount of $275,000 and provide
Mr. Moore with certain additional benefits through June 12, 2000 as provided for
in his employment agreement with the Company. Mr. Moore remains subject to the
non-competition and confidentiality provisions of his employment agreement
through June 11, 2003. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
CONSULTING AGREEMENT
In connection with the Recapitalization, the Company entered into a
consulting agreement with Robert E. Kirkland, a shareholder of the Company and a
cousin of the Company's Chief Executive Officer. Under the provisions of the
consulting agreement, Mr. Kirkland provides consulting services and advice
regarding purchasing and marketing of merchandise, leasing, store selection,
operations, internal management and other matters mutually agreed upon as
directed by the Board of the Company. The agreement provides for an annual
consulting fee of $679,000 and a term expiring in June 2003. The consulting
agreement automatically terminates upon the occurrence of certain events,
including a sale of the Company, a change of control or a Qualified Public
Offering. The Offering will constitute a Qualified Public Offering, and,
accordingly, Mr. Kirkland's consulting agreement will automatically terminate
upon its completion. The Company has no plans to renew the consulting
arrangement with Mr. Kirkland following the Offering.
INVENTORY PURCHASES FROM SIGNIFICANT SHAREHOLDER
The Company purchases inventory from CBK, Inc., a wholesaler owned by
Robert E. Kirkland, a shareholder of the Company. See "Principal and Selling
Shareholders." These purchases aggregated approximately $3.3 million, $2.3
million, $1.4 million and $244,000 during the years ended December 31, 1995,
1996 and 1997 and the first quarter of 1998, respectively.
INVENTORY PURCHASES FROM AN AFFILIATE OF A SIGNIFICANT SHAREHOLDER
The Company purchases inventory from Homemaker Industries, Inc., a
manufacturer in which Advent is a significant shareholder. These purchases
aggregated approximately $610,109, $297,774, $216,847 and $142,000 during the
years ended December 31, 1995, 1996 and 1997 and the first quarter of 1998,
respectively. David M. Mussafer and John P. Oswald are directors of the
Kirkland's, Inc. and are also members of the Board of Directors of Homemaker
Industries, Inc. Mr. Mussafer and Mr. Oswald are also affiliated with members of
Kirkland Holdings L.L.C., one of the Company's principal shareholders. See
"Principal and Selling Shareholders."
CHARTER OF AIRPLANES
For the years ended December 31, 1995, 1996 and 1997 and the first quarter
of 1998, the Company spent $44,076, $29,136, $75,898 and $14,789, respectively,
for the rental of aircraft for business travel from Kirkland Aviation, Inc., an
entity owned by Carl Kirkland. In addition, for the years ended December 31,
1995, 1996 and 1997 and the first quarter of 1998, the Company spent $15,292,
$18,311, $13,404 and $2,539, respectively, for the rental of aircraft for
business travel from Alderson Aviation, Inc., an entity owned by Robert E.
Alderson.
RELATIONSHIP WITH THE ROBINSON-HUMPHREY COMPANY, LLC
Reynolds C. Faulkner, a director of the Company since September 1996 and
the Company's Senior Vice President and Chief Financial Officer since February
1998, was a Managing Director at The Robinson-Humphrey Company, LLC prior to
joining the Company as an executive officer. The Robinson-Humphrey
55
<PAGE> 57
Company, LLC is one of the Underwriters in the Offering and has from time to
time provided investment banking services to the Company, including services
rendered in connection with the Recapitalization, and may continue to provide
such services in the future. In addition, R-H Capital Partners, L.P., an
affiliate of The Robinson-Humphrey Company, LLC, is a member of Kirkland
Holdings L.L.C., one of the Company's principal shareholders.
The Company considers the terms of its transactions with CBK, Inc.,
Homemaker Industries, Inc., Kirkland Aviation, Inc., Alderson Aviation, Inc. and
The Robinson-Humphrey Company, LLC to be at arms length and reasonably
equivalent to terms it could obtain through negotiations with an unaffiliated
third party under similar economic conditions. In the future, the Company will
not enter into any transactions with officers, directors or other affiliates
unless the terms are as favorable to the Company as those generally available
from unaffiliated third parties and the transactions are approved by a majority
of the Company's disinterested directors.
56
<PAGE> 58
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock at March 31, 1998, assuming that the
Pre-Offering Transactions had occurred as of such date, by (i) each director and
Named Executive Officer, (ii) each person known to the Company to beneficially
own more than 5% of the Common Stock, and (iii) all directors and executive
officers as a group, both before and after giving effect to the sale of Common
Stock in the Offering. As of such date, and based on the foregoing assumption,
there were 146,683 shares of Common Stock outstanding before giving effect to
the sale of Common Stock in the Offering.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
---------------------------------
PERCENT OF CLASS
--------------------
NUMBER BEFORE AFTER
NAME OF SHARES OFFERING OFFERING
- ---- --------- -------- --------
<S> <C> <C> <C>
Carl Kirkland(1)............................................ 8,042 5.4
c/o Kirkland's, Inc.
805 N. Parkway
Jackson, TN 38305
Robert E. Alderson(2)....................................... 19,842 13.3
c/o Kirkland's, Inc.
805 N. Parkway
Jackson, TN 38305
Reynolds C. Faulkner(3)..................................... 2,283 1.5
Steven J. Collins(3)........................................ 230 *
David M. Mussafer(4)........................................ 64,321 43.9
c/o Advent International Corporation
101 Federal Street
Boston, MA 02110
R. Wilson Orr, III(5)....................................... 15,615 10.6
c/o SSM Venture Partners, L.P.
845 Crossover Lane, Suite 140
Memphis, TN 38117
John P. Oswald(6)........................................... 14,083 9.6
c/o CT Capital International, Inc.
575 Fifth Avenue, 40th Floor
New York, NY 10017
Alexander S. McGrath(7)..................................... 4,762 3.2
Bruce Moore................................................. -- --
Kirkland Holdings L.L.C.(8)................................. 100,095 65.0
101 Federal Street
Boston, MA 02110
Robert E. Kirkland.......................................... 11,561 7.9
c/o Kirkland's, Inc.
805 N. Parkway
Jackson, TN 38305
All executive officers and directors as a group
(8 persons)(9)............................................ 129,178 83.9
</TABLE>
- ---------------
* Represents less than 1% of the outstanding shares of Common Stock.
(1) Includes 2,381 shares of Common Stock issuable upon exercise of stock
options granted by the Company. Also includes 2,000 shares held by Mr.
Kirkland as Trustee for the benefit of the children of Robert E. Alderson.
If the
57
<PAGE> 59
Underwriters' over-allotment option is exercised in full, of the shares
owned by Mr. Kirkland will be sold, as a result of which he will
beneficially own shares of Common Stock, or % of the Common Stock
then outstanding, following the Offering.
(2) Includes 2,381 shares of Common Stock issuable upon exercise of stock
options granted by the Company. Also includes 7,900 shares held by Mr.
Alderson as Trustee for the benefit of the children of Carl Kirkland. If
the Underwriters' over-allotment option is exercised in full, of
the shares owned by Mr. Alderson will be sold, as a result of which he will
beneficially own shares of Common Stock, or % of the Common
Stock then outstanding, following the Offering.
(3) All of the shares of Common Stock beneficially owned by Messrs. Faulkner
and Collins are issuable upon exercise of stock options granted by the
Company.
(4) Mr. Mussafer may be deemed to beneficially own 64,321 shares of Common
Stock which Advent may be deemed to beneficially own. See note (8) below.
Mr. Mussafer, a director of the Company, is a Managing Director of Advent.
If the Underwriters' over-allotment option is exercised in full,
of the shares which may deemed to be beneficially owned by Advent will be
sold, as a result of which Mr. Mussafer may be deemed to beneficially own
shares of Common Stock, or % of the Common Stock then
outstanding, following the Offering.
(5) Mr. Orr may be deemed to beneficially own 15,615 shares of Common Stock
which SSM/Kirkland Equity Partners, L.P. beneficially owns as a member of
Kirkland Holdings L.L.C. Mr. Orr, a director of the Company, is a partner
of SSM Corporation which is an affiliate of SSM/Kirkland Equity Partners,
L.P. If the Underwriters' over-allotment option is exercised in full,
of the shares owned by SSM/Kirkland Equity Partners, L.P. will be
sold, as a result of which Mr. Orr may be deemed to beneficially own
shares of Common Stock, or % of the Common Stock then
outstanding, after the offering.
(6) Mr. Oswald may be deemed to beneficially own the 1,071 shares of Common
Stock beneficially owned by Capital Trust Investments, Ltd. and 13,012
shares of Common Stock which CT/Kirkland Equity Partners, L.P. beneficially
owns as a member of Kirkland Holdings L.L.C. Mr. Oswald, a director of the
Company, is a partner of CT Capital International which is an affiliate of
Capital Trust Investments, Ltd. and CT/Kirkland Equity Partners, L.P. If
the Underwriters' over-allotment option is exercised in full, of
the shares owned by CT/Kirkland Equity Partners, L.P. will be sold, as a
result of which Mr. Oswald may be deemed to beneficially own
shares of Common Stock, or % of the Common Stock then
outstanding, following the Offering.
(7) Mr. McGrath may be deemed to beneficially own the 4,762 shares of Common
Stock beneficially owned by Capital Resource Lenders II, L.P. Mr. McGrath,
a director of the Company, is a general partner of Capital Resource
Partners II, L.P., the general partner of Capital Resource Lenders II, L.P.
(8) The members of Kirkland Holdings L.L.C. and their beneficial ownership of
the shares of Common Stock held by Kirkland Holdings L.L.C. (expressed as a
percentage) are Advent Direct Investment Program Limited Partnership
(17.58%), Global Private Equity II Limited Partnership (45.06%), Advent
Partners Limited Partnership (1.62%), SSM/Kirkland Equity Partners, L.P.
(15.60%), CT/Kirkland Equity Partners, L.P. (13.00%), TCW/Kirkland Equity
Partners, L.P. (1.62%), Marlborough/Kirkland Equity Partners, L.P. (0.65%)
and R-H Capital Partners, L.P. (4.87%), an affiliate of The
Robinson-Humphrey Company, LLC, one of the Underwriters. In its capacity as
the manager of the following venture capital funds: Advent Direct
Investment Program Limited Partnership, Global Private Equity II Limited
Partnership and Advent Partners Limited Partnership, Advent exercises sole
voting and investment power with respect to the 64,321 shares held by these
funds and, accordingly, Advent may be deemed to beneficially own such
shares. In addition, Advent, as general partner of Advent Partners Limited
Partnership, which is a limited partner of SSM/Kirkland Equity Partners,
L.P., CT/Kirkland Equity Partners, L.P., TCW/Kirkland Equity Partners, L.P.
and Marlborough/Kirkland Equity Partners, L.P., has an economic interest in
the Common Stock held by such entities. If the Underwriters' over-allotment
option is exercised in full, of the shares beneficially owned by
Kirkland Holdings L.L.C. will be sold, as a result of which it will
beneficially own shares of Common Stock, or % of the Common Stock
then outstanding, following the Offering.
(9) Includes 7,275 shares of Common Stock issuable upon exercise of stock
options granted by the Company. If the Underwriters' over-allotment option
is exercised in full, of the shares subject thereto beneficially
owned by the directors and executive officers of the Company will be sold,
as a result of which they will beneficially own shares of Common
Stock, or % of the Common Stock then outstanding, following the
Offering.
58
<PAGE> 60
DESCRIPTION OF CAPITAL STOCK
GENERAL
Upon completion of the Offering, the Company will be authorized to issue up
to 50,000,000 shares of Common Stock, no par value, and 10,000,000 shares of
Preferred Stock, no par value. Upon completion of the Offering, there will be no
Preferred Stock outstanding, as all of the outstanding Preferred Stock will be
converted into shares of Common Stock or will be redeemed with a portion of the
net proceeds of the Offering. See "Use of Proceeds" and "Certain
Transactions - Pre-Offering Transactions."
Upon the completion of the Offering, there will be shares of Common
Stock issued and outstanding and 10,154 shares of Common Stock reserved for
issuance under the Company's employee benefits plans, including shares
issuable upon the exercise of options which will be outstanding upon the
completion of the Offering. As of the date of this Prospectus, the Company has
92,100 shares of Common Stock, 68,400 shares of Class A Preferred Stock, 23,700
shares of Class B Preferred Stock and 17,122 shares of Class C Preferred Stock
issued and outstanding. Pursuant to the Pre-Offering Transactions which will
take place immediately prior to completion of the Offering, all of the
outstanding shares of Class A Preferred Stock and Class B Preferred Stock will
be recapitalized into or exchanged for shares of Common Stock. All of the
outstanding shares of the Class C Preferred Stock will be purchased or redeemed
with a portion of the net proceeds of the Offering. See "Use of Proceeds" and
"Certain Transactions - Pre-Offering Transactions."
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share held of
record on each matter submitted to a vote of shareholders. All holders of Common
Stock are entitled to share equally in dividends declared on the Common Stock.
See "Dividend Policy." Stock dividends may be paid on Common Stock, whether or
not there are shares of Preferred Stock outstanding. In the event of any
voluntary or involuntary liquidation, dissolution or winding up of the Company,
after payment has been made to the holders of shares of Preferred Stock, if any,
for the full amount to which they are entitled, the holders of the shares of
Common Stock are entitled to share equally in the assets available for
distribution.
The Company will be selling Common Stock pursuant to the Offering. All
currently outstanding shares of Common Stock are, and upon issuance as set forth
herein, the shares of Common Stock being sold by the Company will be, duly
authorized, validly issued, fully paid and non-assessable.
The rights, preferences and privileges of holders of Common Stock are
subject to, and may be adversely affected by, the rights of the holders of
shares of any series of Preferred Stock which the Company may designate and
issue in the future. See "Risk Factors - Charter and Bylaws Provisions;
Anti-Takeover Effect of Tennessee Laws."
Prior to the Offering, the Common Stock was divided into two series
consisting of Voting Common Stock and Non-Voting Common Stock, and the holders
of Voting Common Stock were entitled, as a group, to elect a total of four
nominees to the Board of Directors. Pursuant to an amendment to the Charter,
upon the completion of the Offering, the provisions dividing the Common Stock
into two series will be eliminated, and the holders of Common Stock will be
entitled to elect the entire Board of Directors.
PREFERRED STOCK
Pursuant to an amendment to the Charter to be filed prior to the completion
of the Offering, the Board of Directors will be authorized, without further
action by the shareholders, to issue up to 10,000,000 shares of Preferred Stock
in one or more series or classes and to establish the designations, preferences,
qualifications, privileges, limitations, restrictions, options, conversion
rights and other special or relative rights of any series of Preferred Stock so
issued. The issuance of shares of Preferred Stock could adversely affect the
voting power and other rights of holders of Common Stock. Because the terms of
the Preferred Stock may be fixed by the Board of Directors of the Company
without shareholder action, the Preferred Stock could be issued quickly with
terms designed to defeat a proposed takeover of the Company, or to make the
removal of management of
59
<PAGE> 61
the Company more difficult. The authority to issue Preferred Stock or rights to
purchase Preferred Stock could be used to discourage a change in control of the
Company. Management of the Company is not aware of any such threatened
transaction to obtain control of the Company, and the Board of Directors has no
current plans to designate and issue any shares of Preferred Stock.
WARRANTS
In connection with the issuance of subordinated notes for $20 million to
certain institutional lenders in the Recapitalization, the Company issued
warrants for 16,722 shares of Common Stock to these subordinated lenders.
Purchase warrants for 11,905 shares of Common Stock are currently exercisable
and will be automatically exercised in connection with the Offering. Contingent
warrants for the remaining 4,817 shares of Common Stock will be canceled in
connection with the Offering as a result of the Company meeting certain
valuation targets. The exercise price for the purchase warrants and the
contingent warrants is $0.01 per share, subject to certain anti-dilution
adjustment provisions. See "Certain Transactions - Recapitalization."
LIMITATION OF DIRECTORS' LIABILITY
The Amended and Restated Charter provides that no director of the Company
will be personally liable to the Company or any of its shareholders for monetary
damages for breach of any fiduciary duty except for liability arising from (i)
any breach of a director's duty of loyalty to the Company or its shareholders,
(ii) any acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, or (iii) any unlawful distributions.
The Company believes that this provision will assist it in securing and
maintaining the services of qualified directors who are not employees of the
Company.
REGISTRATION RIGHTS
Pursuant to a registration rights agreement dated June 12, 1996 (the
"Registration Rights Agreement"), at any time after the Offering, Kirkland's
Holding L.L.C. and Messrs. Carl Kirkland, Robert E. Kirkland and Robert E.
Alderson ("Non-Mezzanine Holders") and the beneficial owners of 11,905 shares of
Common Stock ("Mezzanine Holders") are entitled to require the Company to
register their shares of Common Stock for resale under the Securities Act,
provided, in each case, that the anticipated gross proceeds of the related
offering exceed $5 million. The Registration Rights Agreement provides for up to
one demand by the Mezzanine Holders and up to two demands by Non-Mezzanine
Holders. The Company may, at the good faith discretion of its Board, delay up to
four months a demand registration request if it is preparing, or within 30 days
of such request prepares, to register a public offering. The Non-Mezzanine
Holders and Mezzanine Holders are also entitled to unlimited piggyback
registrations (except with respect to certain registrations in connection with
stock options or benefit plans). Their registration rights with respect to the
Offering have been waived. In addition, the Non-Mezzanine Holders and Mezzanine
Holders may require the Company to register their shares an unlimited number of
times on a Form S-2 or S-3, once the Company has qualified for use of such
forms, but the Company will not be obligated to effect these registrations
during the 90 days prior to or for 180 days following the effective date of a
registration statement relating to a public offering. To the extent permitted by
applicable federal and state laws and regulations, the Company is required to
bear the expenses of all such registrations (except underwriting discounts and
commissions attributable to shares sold). The Registration Rights Agreement
includes customary indemnification and contribution provisions among the Company
and the Mezzanine Holders, and the Non-Mezzanine Holders.
ANTI-TAKEOVER EFFECT OF CHARTER AND BYLAW PROVISIONS AND TENNESSEE LAWS
The Company's Amended and Restated Charter (the "Charter") and Restated
Bylaws (the "Bylaws") as well as Tennessee law contain various other provisions
intended to (i) promote stability of Kirkland's shareholder base and (ii) render
more difficult certain unsolicited or hostile attempts to take over Kirkland's
which could disrupt Kirkland's, divert the attention of Kirkland's directors,
officers and employees and adversely affect the independence and integrity of
Kirkland's business. A summary of these provisions of the Charter, Bylaws and
Tennessee law is set forth below.
60
<PAGE> 62
Classified Board; Removal of Directors. Pursuant to the Charter, the
number of directors of Kirkland's will be between three and fifteen directors as
determined by a majority vote of the Company's Board of Directors. The directors
will be divided into three classes, each class to consist as nearly as possible
of one-third of the directors. Directors elected by shareholders at an annual
meeting of shareholders will be elected by a plurality of all votes cast at such
annual meeting. Initially, the terms of office of the three classes of directors
will expire, respectively, at the annual meeting of shareholders in 1999, 2000
and 2001. After the expiration of the terms of the initial classified Board of
Directors, the terms of the successors of each of the three classes of directors
will expire three years from the year of their respective election.
The Charter provides that except as otherwise provided for or fixed by or
pursuant to an amendment to the Charter setting forth the rights of the holders
of any class or series of preferred stock, newly created directorships resulting
from any increase in the number of directors and any vacancies on the Board of
Directors of Kirkland's resulting from death, resignation, disqualification,
removal or other cause will be filled by the affirmative vote of a majority of
the remaining directors then in office, even though less than a quorum of the
Board, or by a sole remaining director. Any director elected in accordance with
the preceding sentence will hold office for the full term of the class of
directors in which the new directorship was created or the vacancy occurred and
until such director's successor shall have been duly elected and qualified. No
decrease in the number of directors constituting the Board of Directors of
Kirkland's will shorten the term of any incumbent director. Subject to the
rights of holders of any preferred stock, any director may be removed from
office only for cause by the affirmative vote of the holders of at least 80% of
the voting power of all the outstanding capital stock of Kirkland's entitled to
vote generally in the election of directors (the "Voting Power"), voting
together as a single class.
These provisions of the Charter would preclude a third party from removing
incumbent directors and simultaneously gaining control of the Board of Directors
of Kirkland's by filling the vacancies created by removal with its own nominees.
Under the classified board provisions described above, it would take at least
two elections of directors for any individual or group to gain control of the
Board of Directors of Kirkland's. Accordingly, these provisions could discourage
a third party from initiating a proxy contest, making a tender offer or
otherwise attempting to gain control of the Company.
Special Shareholders' Meetings and Right to Act by Written Consent. The
Charter and the Bylaws provide that a special meeting of shareholders may be
called only by the Chairman of the Board or the President of the Company or upon
a resolution adopted by a majority of the entire Board of Directors of
Kirkland's. Shareholders are not generally permitted to call, or to require that
the Board of Directors call, a special meeting of shareholders pursuant to the
terms of the Charter. Moreover, the business permitted to be conducted at any
special meeting of shareholders is limited to the business brought before the
meeting pursuant to the notice of the meeting given by Kirkland's. Tennessee law
provides that shareholders may act by written consent if all shareholders
entitled to vote are parties to the written consent. The affirmative vote of the
number of shares necessary to authorize shareholder action, evidenced by such
written consent, constitutes the act of the shareholders.
Procedures for Shareholder Nominations and Proposals. The Bylaws establish
an advance notice procedure for shareholders to nominate candidates for election
as directors and to propose any new business at any annual meeting ("Shareholder
Notice Procedure"). Only persons nominated in accordance with the Shareholder
Notice Procedure are eligible to serve as directors, and only business brought
before the annual meeting in accordance with the Shareholder Notice Procedure
may be conducted at the annual meeting. Under the Shareholder Notice Procedure,
notice of shareholder nominations and proposals for new business at the annual
meeting must be delivered to the Secretary of Kirkland's 120 days before the
month and day that the Company's proxy statement to its shareholders was mailed
to shareholders the previous year. For nominations and proposals for any special
meetings, the Bylaws require notice not more than 90 days nor less than 60 days
before the special meeting. The Bylaws provide that notice to the Secretary of
Kirkland's with respect to any shareholder nomination or proposal must include
certain information regarding the nominee, the proposal and the shareholder
nominating a director or proposing business. According to the Bylaws, the
Chairman of the Board has the power to determine whether a shareholder
nomination or proposal was brought in accordance with the Shareholder Notice
Procedure.
61
<PAGE> 63
By requiring advance notice of nominations by shareholders, the Shareholder
Notice Procedure will afford the Board of Directors an opportunity to consider
the qualifications of the proposed nominees and, to the extent deemed necessary
or desirable by the Board of Directors, to inform shareholders about such
qualifications. By requiring advance notice of other proposed business, the
Shareholder Notice Procedure will provide a more orderly procedure for
conducting annual meetings of shareholders and, to the extent deemed necessary
or desirable by the Board of Directors, will provide the Board of Directors with
an opportunity to inform shareholders, prior to such meetings, of the Board of
Directors' position regarding action to be taken with respect to such business,
so that shareholders can better decide whether to attend such a meeting or to
grant a proxy regarding the disposition of any such business.
Although the Bylaws do not give the Board of Directors any power to approve
or disapprove shareholder nominations for the election of directors or proposals
for action, the Chairman of the Board has the power to determine compliance with
the Shareholder Notice Procedure. The Bylaws also may have the effect of
precluding a contest for the election of directors or the consideration of
shareholder proposals if the proper procedures are not followed, and of
discouraging or deterring a third party from conducting a solicitation of
proxies to elect its own slate of directors or to approve its own proposal,
without regard to whether consideration of such nominees or proposals might be
harmful or beneficial to Kirkland's and its shareholders.
Amendment of Kirkland's Charter and Bylaws. The Charter provides that,
unless previously approved by the Board of Directors, the affirmative vote of at
least 80% of the Voting Power, voting together as a single class, would be
required to (i) amend or repeal the provisions of the Charter with respect to
the election of directors and the right to call a special shareholders' meeting,
(ii) adopt any provision inconsistent with such provisions and (iii) amend or
repeal the provisions of the Charter with respect to amendments to the Charter
or the Bylaws. In addition, the Bylaws provide that the amendment or repeal by
shareholders of any Bylaws made by the Board of Directors would require the
affirmative vote of at least 80% of the Voting Power.
Tennessee Corporate Takeover Acts. Tennessee has enacted several corporate
takeover acts for the purpose of protecting its substantial interest in domestic
corporations conducting a significant amount of business within the state.
Business Combination Act. Tennessee's Business Combination Act
provides that a party (such party is called an "interested shareholder") owning
10% or more of the stock in a "resident domestic corporation" (which Kirkland's
is) cannot engage in a business combination with the resident domestic
corporation unless the combination (i) takes place at least five years after the
interested shareholder first acquired 10% or more of the resident domestic
corporation, and (ii) either (A) is approved by at least two-thirds of the
non-interested voting shares of the resident domestic corporation or (B)
satisfies certain fairness conditions specified in the Business Combination Act.
These provisions apply unless one of two events occurs. A business
combination with an entity can proceed without delay when approved by the target
corporation's board of directors before that entity becomes an interested
shareholder, or the resident domestic corporation may enact a charter amendment
or bylaw to remove itself entirely from the Business Combination Act. This
charter amendment or bylaw must be approved by a majority of the shareholders
who have held shares for more than one year prior to the vote. It may not take
effect for at least two years after the vote. The Company has not adopted a
charter or bylaw amendment removing the Company from coverage under the Business
Combination Act.
The Business Combination Act further provides an exemption from liability
for officers and directors of resident domestic corporations who do not approve
proposed business combinations or charter amendments and bylaws removing their
corporations from the Business Combination Act's coverage as long as the
officers and directors act in "good faith belief" that the proposed business
combination would adversely affect their corporation's employees, customers,
suppliers or the communities in which their corporation operates and such
factors are permitted to be considered by the board of directors under the
applicable charter.
Investor Protection Act. Tennessee's Investor Protection Act
("Investor Protection Act") applies to tender offers directed at corporations
(called "offeree companies") that have "substantial assets" in Tennessee and
that are either incorporated in or have a principal office in Tennessee. The
Company satisfies
62
<PAGE> 64
both of these requirements. The Investor Protection Act requires an offeror
making a tender offer for an offeree company to file with the Commissioner of
Commerce and Insurance (the "Commissioner") a registration statement. When the
offeror intends to gain control of the offeree company, the registration
statement must indicate any plans the offeror has for the offeree. The
Commissioner may require additional information material concerning the takeover
offer and may call for hearings. The Investor Protection Act does not apply to
an offer that the offeree company's board of directors recommends to
shareholders.
In addition to requiring the offeror to file a registration statement with
the Commissioner, the Investor Protection Act requires the offeror and the
offeree company to deliver to the Commissioner all solicitation materials used
in connection with the tender offer. The Investor Protection Act prohibits
"fraudulent, deceptive, or manipulative acts or practices" by either side, and
gives the Commissioner standing to apply for equitable relief to the Chancery
Court of Davidson County, Tennessee, or to any other chancery court having
jurisdiction whenever it appears to the Commissioner that the offeror, the
offeree company or any of its respective affiliates has engaged in or is about
to engage in a violation of the Investor Protection Act. Upon proper showing,
the chancery court may grant injunctive relief. The Investor Protection Act
further provides civil and criminal penalties for violations.
Greenmail Act. The Tennessee Greenmail Act ("Greenmail Act") applies
to any corporation chartered under the laws of Tennessee which has a class of
voting stock registered or traded on a national securities exchange or
registered with the Securities and Exchange Commission pursuant to Section 12(g)
of the Exchange Act. The Greenmail Act provides that it is unlawful for any
corporation or subsidiary to purchase, either directly or indirectly, any of its
shares at a price above the market value, as defined in the Greenmail Act, from
any person who holds more than 3% of the class of the securities purchased if
such person has held such shares for less than two years, unless either the
purchase is first approved by the affirmative vote of a majority of the
outstanding shares of each class of voting stock or the corporation makes an
offer of at least equal value per share to all holders of shares of such class.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is BankBoston, N.A.
63
<PAGE> 65
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering (assuming an initial public offering price
of $ per share; see "Certain Transactions - Pre-Offering Transactions"),
the Company will have shares of Common Stock outstanding. Of these
shares, the shares of Common Stock offered hereby will be freely
tradeable without restriction or further registration, except for shares
purchased by "affiliates" or "underwriters" of the Company (as those terms are
defined under the Securities Act), which will become eligible for sale in the
public market subject to compliance with Rule 144 under the Securities Act. The
remaining 146,683 outstanding shares of Common Stock ( shares if the
Underwriters' over-allotment option is exercised in full) will be restricted
securities (the "Restricted Shares") and may not be sold unless they are
registered under the Securities Act or are sold pursuant to an exemption from
registration, such as the exemption provided by Rule 144 under the Securities
Act. All of the Restricted Shares will be subject to the 180-day "lock-up"
agreements described below. Upon expiration of such lock-up agreements, 11,905
of the Restricted Shares will be eligible for sale immediately in the public
market without restriction pursuant to Rule 144(k), and 93,388 of the Restricted
Shares will become eligible for sale, subject to compliance with the volume
limitations and manner of sale requirements of Rule 144. The remaining 41,390
Restricted Shares will become eligible for sale commencing one year after the
date of this Prospectus. Holders of all of these Restricted Shares have the
right to require the Company to register the shares for sale under the
Securities Act in certain circumstances and have the right to include those
shares in a Company-initiated registration.
In general, Rule 144 allows a person who has beneficially owned Restricted
Shares for at least one year, including persons who may be deemed affiliates of
the Company, to sell, within any three-month period, up to the number of
Restricted Shares that does not exceed the greater of (i) 1% of the then
outstanding shares of Common Stock and (ii) the average weekly trading volume
during the four calendar weeks preceding the date on which notice of the sale is
filed with the Commission. A person who is not deemed to have been an affiliate
of the Company at any time during the three months preceding a sale and who has
beneficially owned his or her Restricted Shares for at least two years would be
entitled to sell such Restricted Shares without regard to the volume limitations
described above and certain other conditions of Rule 144.
Under Rule 701, any employee, officer or director or consultant to the
Company who purchased shares pursuant to a written compensatory plan or
contract, including the 1996 Executive Incentive and Non-Qualified Stock Option
Plan, who is not an affiliate of the Company, is entitled to sell such shares
without having to comply with the public information, holding period, volume
limitation or notice provisions of Rule 144 commencing 90 days after the date of
effectiveness (the "Effective Date") of the Registration Statement of which this
Prospectus is a part (the "Registration Statement"). In addition, under Rule
701, any affiliate who purchased shares pursuant to a written compensatory plan
or contract is entitled to sell such shares without having to comply with the
Rule 144 holding period restrictions commencing 90 days after the Effective
Date, subject to the "lock-up" agreements described above.
The shares underlying certain options which will be exercisable upon
completion of the Offering will also, upon exercise of the options, become
eligible for sale subject to the applicable "lock-up" agreements, as described
above, and compliance with Rule 144. An additional shares underlying
options which will become exercisable periodically beginning in August 1998 will
become eligible for sale subject to compliance with Rule 144. In addition, the
Company may issue up to an 12,850 additional shares of Common Stock pursuant to
the 1996 Executive Incentive and Non-Qualified Stock Option Plan, the 1998
Incentive Plan and the Purchase Plan. See "Management - Employee Benefit Plans."
The Company intends to file one or more registration statements under the
Securities Act to register Common Stock to be issued pursuant to these plans,
which would allow the shares issued thereunder to be freely tradeable without
restriction or further registration, except for shares purchased by "affiliates"
or "underwriters" of the Company.
Prior to this Offering, there has been no public market for the securities
of the Company. No predictions can be made of the effect, if any, that the sale
or availability for sale of shares of additional Common Stock will have on the
market price of the Common Stock. Nevertheless, sales of a substantial number of
such shares by existing shareholders or by shareholders purchasing in the
Offering could have an adverse effect on the market price of the Common Stock.
64
<PAGE> 66
UNDERWRITING
Under the terms of and subject to the conditions contained in an
underwriting agreement (the "Underwriting Agreement"), among the Company and
each of the underwriters named below (the "Underwriters"), for whom Lehman
Brothers Inc., The Robinson-Humphrey Company, LLC, BancAmerica Robertson
Stephens and Morgan Keegan & Company, Inc. are acting as representatives (the
"Representatives"), each of the several Underwriters has agreed to purchase from
the Company, and the Company has agreed to sell to each Underwriter, the
aggregate number of shares of Common Stock set forth opposite the name of such
Underwriter below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS COMMON SHARES
------------ -------------
<S> <C>
Lehman Brothers Inc. .................................
The Robinson-Humphrey Company, LLC....................
BancAmerica Robertson Stephens........................
Morgan Keegan & Company, Inc. ........................
-----------
Total.......................................
===========
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters to purchase shares of Common Stock are subject to the approval of
certain legal matters by counsel and to certain other conditions and that, if
any of the shares of Common Stock are purchased by the Underwriters pursuant to
the Underwriting Agreement, all the shares of Common Stock agreed to be
purchased by the Underwriters pursuant to the Underwriting Agreement must be so
purchased.
The Company has been advised by the Representatives that the Underwriters
propose to offer shares of Common Stock directly to the public initially at the
public offering price set forth on the cover page of this Prospectus and to
certain selected dealers (who may include the Underwriters) at such public
offering price less a selling concession not to exceed $ per share. The
selected dealers may reallow a concession not to exceed $ per share.
After the initial offering of the Common Stock, the offering price, the
concession to selected dealers and the reallowance to other dealers may be
changed by the Underwriters.
The Company and its directors, executive officers and existing shareholders
have agreed not to, directly or indirectly, (i) offer for sale, sell, pledge or
otherwise dispose of (or enter into any transaction or device which is designed
to, or could reasonably be expected to, result in the disposition by any person
at any time in the future of) any shares of Common Stock or securities
convertible into or exchangeable for Common Stock, or sell or grant options,
rights or warrants with respect to any shares of Common Stock or securities
convertible into or exchangeable for Common Stock (except that such restrictions
will not apply to the shares offered pursuant to this Offering, shares offered
directly by the Company pursuant to the Company's existing employee benefit
plans or as consideration for future acquisitions, and shares offered in private
transactions provided that the transferee agrees to the restrictions discussed
herein) or (ii) enter into any swap or other derivatives transaction that
transfers to another, in whole or in part, any of the economic benefits or risks
of ownership of such shares of Common Stock, whether any such transaction
described in clause (i) or (ii) above is to be settled by delivery of Common
Stock or other securities, in cash or otherwise, in each case for a period of
180 days from the date of this Prospectus without the prior written consent of
Lehman Brothers Inc.
Carl Kirkland, Robert E. Alderson and Kirkland Holdings L.L.C. (the "Option
Shareholders") have granted to the Underwriters an option to purchase up to an
additional shares of Common Stock at the initial public offering
price to the public, less the underwriting discounts and commissions shown on
the cover page of this Prospectus, solely to cover over-allotments, if any. See
"Principal and Selling Shareholders" and "Certain Transactions." The option may
be exercised at any time up to 30 days after the date of this Prospectus. To the
extent that the Underwriters exercise such option, each of the Underwriters will
be committed (subject to certain conditions) to purchase a number of additional
shares proportionate to such Underwriter's initial commitment as indicated in
the preceding table.
65
<PAGE> 67
The Company, each of its operating subsidiaries and the Option Shareholders
have agreed to indemnify the Underwriters against certain liabilities, including
liabilities under the Securities Act, and to contribute to payments which the
Underwriters may be required to make in respect thereof.
Until the distribution of the shares of Common Stock offered hereby is
completed, rules of the Commission may limit the ability of the Underwriters and
certain selling group members to bid for and purchase the Common Stock. As an
exception to these rules, the Representatives are permitted to engage in certain
transactions that stabilize the price of the Common Stock. Such transactions may
consist of bids or purchases for the purpose of pegging, fixing or maintaining
the price of the Common Stock.
If the Underwriters create a short position in the Common Stock in
connection with the Offering (i.e., if they sell more shares of Common Stock
than are set forth on the cover page of this Prospectus), the Representatives
may reduce that short position by purchasing the Common Stock in the open
market. The Representatives may also elect to reduce any short position by
exercising all or part of the over-allotment option described herein.
The Representatives also may impose a penalty bid on certain Underwriters
and selling group members. This means that if the Representatives purchase
Common Stock in the open market to reduce the Underwriters' short position or to
stabilize the price of the Common Stock, they may reclaim the amount of the
selling concession from the Underwriters and selling group members who sold
those shares of Common Stock as part of the Offering.
In general, purchases of a security for the purposes of stabilization or to
reduce a syndicate short position could cause the price of the security to be
higher than it might otherwise be in the absence of such purchases. The
imposition of a penalty bid might have an effect on the price of a security to
the extent that it were to discourage resales of the security by purchasers in
the applicable offering.
Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Common Stock. In addition, neither
the Company nor any of the Underwriters makes any representation that the
Representatives will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.
Prior to the Offering, there has been no public market for the Common
Stock. The initial public offering price will be negotiated between the Company
and the Representatives. Among the factors to be considered in determining the
initial public offering price, in addition to prevailing market conditions, will
be the market values of publicly traded companies that the Underwriters believe
to be somewhat comparable to the Company, the demand for the Common Stock and
for similar securities of companies comparable to the Company and other factors
deemed relevant. There can, however, be no assurance that an active trading
market will develop for the Common Stock or that the prices at which the Common
Stock will sell in the public market after the Offering will not be lower than
the price at which it will be sold in the Offering.
At the request of the Company, the Underwriters have reserved up to 5% of
the shares of Common Stock offered hereby for sale at the initial public
offering price to employees of the Company and other persons associated with the
Company. The number of shares of Common Stock available for sale to the general
public in the Offering will be reduced to the extent such persons purchase such
reserved Common Stock. Any reserved shares of Common Stock not so purchased will
be offered by the Underwriters to the general public on the same basis as the
Common Stock offered hereby.
The Representatives have informed the Company that the Underwriters do not
intend to confirm sales of shares of Common Stock offered hereby to accounts
over which they exercise discretionary authority without the prior specific
written approval of such customers.
R-H Capital Partners, L.P., an affiliate of The Robinson-Humphrey Company,
LLC, one of the Underwriters in the Offering, is a member of Kirkland Holdings
L.L.C., one of the Company's principal shareholders. In addition, as of April
15, 1998, Lehman Commercial Paper Inc. ("Lehman"), an affiliate of Lehman
Brothers Inc., one of the Underwriters in the Offering, was the lender under one
of the tranches of the
66
<PAGE> 68
Company's senior credit facility for approximately $22.1 million of the $38.4
million then outstanding under that tranche. Upon completion of the Offering,
the Company expects to use approximately $12.2 million of the net proceeds to
repay a portion of this tranche, approximately $7.5 million of which will be
used to repay Lehman's proportionate share. As a result of Lehman, an affiliate
of Lehman Brothers Inc., receiving greater than 10% of the net proceeds of the
Offering, the National Association of Securities Dealers, Inc. ("NASD")
requires, among other things, under Rule 2710(c)(8) of the NASD's Conduct Rules,
that the initial public offering price be no higher than that recommended by a
"qualified independent underwriter," who must participate in the preparation of
the registration statement and the prospectus and who must exercise the usual
standards of "due diligence" with respect thereto. The Robinson-Humphrey
Company, LLC is acting as a qualified independent underwriter in this Offering,
and the initial public offering price of the shares is not higher than the price
recommended by The Robinson-Humphrey Company, LLC, which price was determined
based on the factors discussed above. In accordance with such Rule 2710(c)(8),
the Underwriters will not make sales of shares of Common Stock offered hereby to
customers' discretionary accounts without the prior specific written approval of
such customers. Certain of the Underwriters have also, from time to time,
provided investment banking services to the Company for which they have received
customary fees. See "Certain Transactions - The Recapitalization."
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby is being passed
upon for the Company by Pepper Hamilton LLP and the Underwriters are being
represented by Cravath, Swaine & Moore, New York, New York.
EXPERTS
The combined financial statements as of December 31, 1997 and 1996 and for
each of the years then ended included in this Prospectus and in the Registration
Statement have been so included in reliance upon the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
The combined financial statements for the year ended December 31, 1995
included in this Prospectus and in the Registration Statement have been included
in reliance upon the report of KPMG Peat Marwick LLP, independent public
accountants, given on the authority of said firm as experts in accounting and
auditing.
INFORMATION CONCERNING INDEPENDENT PUBLIC ACCOUNTANTS
In June 1996, the Company engaged PricewaterhouseCoopers LLP as independent
public accountants to audit the Company's financial statements for the year
ended December 31, 1996, replacing the firm of KPMG Peat Marwick LLP, which had
previously served as the Company's independent public accountants and had
completed its audit of the Company's financial statements for the year ended
December 31, 1995. The Company's decision to change accountants was ratified by
the Board of Directors of the Company.
The reports of KPMG Peat Marwick LLP on the Company's combined financial
statements for the two most recent fiscal years preceding the change of
accountants contained no adverse opinion or disclaimer of opinion, and were not
qualified or modified as to uncertainty, audit scope or accounting principles.
67
<PAGE> 69
AVAILABLE INFORMATION
The Company is not currently subject to the informational requirements of
the Securities Exchange Act. As a result of the Offering, the Company will be
required to file reports and other information with the Securities and Exchange
Commission (the "Commission") pursuant to the informational requirements of the
Securities Exchange Act.
The Company has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act with respect to the securities offered hereby. As
permitted by the rules and regulations of the Commission, this Prospectus, which
is part of the Registration Statement, omits certain information, exhibits,
schedules and undertakings set forth in the Registration Statement. For further
information pertaining to the Company and the securities offered hereby,
reference is made to such Registration Statement and the exhibits and schedules
thereto. Statements contained in this Prospectus as to the contents or
provisions of any documents referred to herein are not necessarily complete, and
in each instance, reference is made to the copy of the document, if applicable,
filed as an exhibit to the Registration Statement. The Company will issue annual
and quarterly reports. Annual reports will include audited financial statements
prepared in accordance with accounting principles generally accepted in the
United States and a report of the Company's independent auditors with respect to
the examination of such financial statements. In addition, the Company will
issue to its security holders such other unaudited quarterly or other interim
reports as it deems appropriate.
The Registration Statement may be inspected without charge at the office of
the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of the
Registration Statement may be obtained from the Commission at prescribed rates
from the Public Reference Section of the Commission at such address, and at the
Commission's regional offices located at 7 World Trade Center, 13th Floor, New
York, New York 10048, and at Northwestern Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. In addition, registration
statements and certain other filings made with the Commission through its
Electronic Data Gathering, Analysis and Retrieval ("EDGAR") system are publicly
available through the Commission's site on the Internet's World Wide Web,
located at http://www.sec.gov. The Registration Statement, including all
exhibits thereto and amendments thereof, has been filed with the Commission
through EDGAR.
68
<PAGE> 70
KIRKLAND'S, INC. AND AFFILIATES
INDEX TO COMBINED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.................... F-2
Independent Auditors' Report................................ F-3
Combined Balance Sheet as of December 31, 1996 and 1997 and
March 31, 1998............................................ F-4
Combined Statement of Income for the years ended December
31, 1995, 1996 and 1997 and the three months ended March
31, 1997 and 1998......................................... F-5
Combined Statement of Changes in Shareholders' Equity
(Deficit) for the years ended December 31, 1995, 1996 and
1997 and the three months ended March 31, 1998............ F-6
Combined Statement of Cash Flows for the years ended
December 31, 1995, 1996 and 1997 and the three months
ended March 31, 1997 and 1998............................. F-7
Notes to Combined Financial Statements...................... F-8
</TABLE>
F-1
<PAGE> 71
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Kirkland's, Inc. and Affiliates
The transaction described in Note 13 in the combined financial statements
has not been consummated. When it has been consummated, we will be in a position
to furnish the following report:
"In our opinion, the accompanying combined balance sheet and the related
combined statements of income, of changes in shareholders' equity (deficit) and
of cash flows present fairly, in all material respects, the financial position
of Kirkland's, Inc. and Affiliates at December 31, 1996 and 1997, and the
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above."
PRICEWATERHOUSECOOPERS LLP
Memphis, Tennessee
February 13, 1998, except for Note 8
which is as of April 27, 1998 and Note 13
which is as of , 1998
F-2
<PAGE> 72
When the transaction referred to in Note 13 of the Notes to Combined
Financial Statements has been consummated, we will be in a position to render
the following report.
KPMG Peat Marwick LLP
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Kirkland's, Inc. and Affiliates:
We have audited the accompanying combined statements of income, changes in
shareholders' equity (deficit) and cash flows of Kirkland's, Inc. and Affiliates
(formerly Kirkland's Retail Organization) for the year ended December 31, 1995.
These combined financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these combined
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the results of operations and the cash flows
of Kirkland's, Inc. and Affiliates for the year ended December 31, 1995, in
conformity with generally accepted accounting principles.
Memphis, Tennessee
March 26, 1996, except as to
Note 13, which is as of
, 1998
F-3
<PAGE> 73
KIRKLAND'S, INC. AND AFFILIATES
COMBINED BALANCE SHEET
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA
INDEBTEDNESS
AND EQUITY
DECEMBER 31, (NOTE 1)
---------------------- MARCH 31, MARCH 31,
1996 1997 1998 1998
--------- --------- ----------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................... $ 11,228 $ 10,881 $ 2,177
Inventories....................................... 16,985 20,036 22,546
Prepaid expenses and other current assets......... 822 1,005 1,009
Income taxes refundable........................... -- -- 1,059
Deferred income taxes............................. 552 596 692
--------- --------- ---------
Total current assets....................... 29,587 32,518 27,483
Property and equipment, net......................... 10,613 12,895 12,894
Noncurrent deferred income taxes.................... 165 201 201
Debt issue costs, net............................... 5,271 4,270 4,018
--------- --------- ---------
Total assets............................... $ 45,636 $ 49,884 $ 44,596
========= ========= =========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND SHAREHOLDERS' DEFICIT
Current liabilities:
Current maturities of long-term debt.............. $ 3,583 $ 4,421 $ 4,588
Accounts payable.................................. 1,315 1,696 2,878
Income taxes payable.............................. 1,565 1,774 --
Accrued liabilities............................... 5,951 8,835 6,224
--------- --------- ---------
Total current liabilities.................. 12,414 16,726 13,690
--------- --------- ---------
Long-term debt:
Senior credit facility............................ 48,281 44,051 50,887 38,687
Subordinated debt................................. 19,721 19,764 19,775 --
Mandatorily redeemable preferred stock (Class
C).............................................. 20,000 20,000 17,122 --
Other notes payable............................... 549 361 310 310
--------- --------- --------- --------
88,551 84,176 88,094 38,997
--------- --------- --------- --------
Common stock warrants............................... 490 879 879 --
--------- --------- --------- --------
Total liabilities.......................... 101,455 101,781 102,663 51,726
--------- --------- --------- --------
Commitments and contingencies (Notes 7 and 11)......
Redeemable convertible preferred stock, no par
value:
Class A........................................... 31,899 34,468 35,223 --
Class B........................................... 14,937 16,123 12,361 --
--------- --------- --------- --------
46,836 50,591 47,584 --
--------- --------- --------- --------
Shareholders' deficit:
Common stock, at stated value; 100,000, 100,000 and
92,100 shares issued and outstanding at December
31, 1996, 1997 and March 31, 1998, respectively... 235 210 203 203
Paid-in capital..................................... 6,157 2,293 1,295 100,041
Accumulated deficit................................. (109,047) (104,991) (107,149) (107,374)
--------- --------- --------- --------
Total shareholders' deficit................ (102,655) (102,488) (105,651) (7,130)
--------- --------- --------- --------
Total liabilities, redeemable preferred
stock and shareholders' deficit.......... $ 45,636 $ 49,884 $ 44,596 $ 44,596
========= ========= ========= ========
</TABLE>
See accompanying notes to combined financial statements.
F-4
<PAGE> 74
KIRKLAND'S, INC. AND AFFILIATES
COMBINED STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------- --------------------------
1995 1996 1997 1997 1998
-------- ---------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales................ $112,035 $ 127,946 $ 153,584 $ 26,178 $ 30,615
Cost of sales (including
store occupancy
costs)................. 68,835 80,438 96,998 18,619 21,110
-------- ---------- ----------- ----------- -----------
Gross profit... 43,200 47,508 56,586 7,559 9,505
Operating expenses....... 24,192 27,915 35,004 7,392 9,178
Severance charge......... -- -- 756 -- --
Recapitalization
expenses............... -- 854 -- -- --
Owners' compensation..... 13,926 -- -- -- --
Depreciation and
amortization........... 2,362 3,383 4,142 1,003 1,156
-------- ---------- ----------- ----------- -----------
Operating
income
(loss)....... 2,720 15,356 16,684 (836) (829)
Interest expense:
Senior, subordinated
and other notes
payable............. 1,415 5,114 7,990 1,961 1,930
Class C Preferred
Stock............... -- 990 1,800 450 385
Accretion of common
stock warrants...... -- 190 389 97 --
Interest income.......... (162) (47) (80) -- (2)
Other income, net........ (221) (147) (154) (57) (64)
-------- ---------- ----------- ----------- -----------
Income (loss)
before income
taxes........ 1,688 9,256 6,739 (3,287) (3,078)
Income tax provision
(benefit).............. -- 2,693 2,817 (923) (920)
-------- ---------- ----------- ----------- -----------
Net income
(loss)....... 1,688 6,563 3,922 (2,364) (2,158)
Accretion of redeemable
preferred stock and
accrual of dividends
(Class A and B
Preferred Stock)....... -- 2,313 3,755 939 998
-------- ---------- ----------- ----------- -----------
Net income (loss)
allocable to common
stock.................. $ 1,688 $ 4,250 $ 167 $ (3,303) $ (3,156)
======== ========== =========== =========== ===========
Income (loss) per common
share:
Basic.................. $ 16,880 $ 76.18 $ 1.67 $ (33.03) $ (34.04)
======== ========== =========== =========== ===========
Diluted................ $ 16,880 $ 65.55 $ 1.35 $ (33.03) $ (34.04)
======== ========== =========== =========== ===========
Weighted average number
of common shares
outstanding:
Basic.................. 100 55,789 100,000 100,000 92,714
======== ========== =========== =========== ===========
Diluted................ 100 64,838 123,549 100,000 92,714
======== ========== =========== =========== ===========
</TABLE>
See accompanying notes to combined financial statements.
F-5
<PAGE> 75
KIRKLAND'S, INC. AND AFFILIATES
COMBINED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK ACCUMULATED
---------------- PAID-IN EARNINGS
SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
------- ------ ------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994.............. 100 $ 639 $ 2,637 $ 6,449 $ 9,725
Sale of common stock in affiliated
corporations............................ 13 13
Owners' contributions..................... 453 453
Net income................................ 1,688 1,688
------- ----- ------- --------- ---------
Balance at December 31, 1995.... 100 652 3,090 8,137 11,879
Sale of common stock in affiliated
corporations............................ 17 17
Discontinuance of Subchapter S corporation
election................................ 8,013 (8,013) --
Distribution to shareholders.............. (1,534) (1,534)
Distribution of redeemable preferred stock
to common shareholders:
Class C................................. (20,000) (20,000)
Class B................................. (14,206) (14,206)
Issuance of additional shares to existing
common shareholders..................... 31,568 --
Sale of common stock to investors......... 68,400 31 31
Repurchase and cancellation of
common stock............................ (68) (465) (1,099) (81,528) (83,092)
Accretion of redeemable preferred stock
and dividends accrued................... (2,313) (2,313)
Net income................................ 6,563 6,563
------- ----- ------- --------- ---------
Balance at December 31, 1996.... 100,000 235 6,157 (109,047) (102,655)
Retirement of common stock in affiliated
corporations............................ (25) (109) 134 --
Accretion of redeemable preferred stock
and dividends accrued................... (3,755) (3,755)
Net income................................ 3,922 3,922
------- ----- ------- --------- ---------
Balance at December 31, 1997.... 100,000 210 2,293 (104,991) (102,488)
Redemption of stock from former
shareholder (unaudited)................. (7,900) (7) (7)
Accretion of redeemable preferred stock
and dividends accrued (unaudited)....... (998) (998)
Net loss (unaudited)...................... (2,158) (2,158)
------- ----- ------- --------- ---------
Balance at March 31, 1998
(unaudited)................... 92,100 $ 203 $ 1,295 $(107,149) $(105,651)
======= ===== ======= ========= =========
</TABLE>
See accompanying notes to combined financial statements.
F-6
<PAGE> 76
KIRKLAND'S, INC. AND AFFILIATES
COMBINED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------ -------------------
1995 1996 1997 1997 1998
------- -------- ------- -------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................... $ 1,688 $ 6,563 $ 3,922 $ (2,364) $(2,158)
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Depreciation of property and
equipment....................... 2,362 2,790 3,141 753 904
Amortization of debt issue
costs........................... -- 593 1,001 250 252
Accretion of common stock
warrants........................ -- 190 389 97 --
Loss on disposal of property and
equipment....................... 3 52 56 -- --
Deferred tax benefit.............. -- (717) (80) 218 (96)
Changes in assets and liabilities:
Inventories..................... (4,816) 319 (3,051) (4,206) (2,510)
Prepaid expenses and other
assets....................... (124) (143) (183) -- (4)
Accounts payable................ 1,728 (2,196) 381 1,658 1,182
Income taxes payable............ -- 1,565 209 (2,408) (2,833)
Accrued liabilities............. 428 2,049 2,884 (1,562) (2,611)
------- -------- ------- -------- -------
Net cash provided by (used
in) operating activities... 1,269 11,065 8,669 (7,564) (7,874)
------- -------- ------- -------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and
equipment......................... 10 52 12 -- --
Capital expenditures................. (4,140) (4,257) (5,491) (735) (903)
------- -------- ------- -------- -------
Net cash used in investing
activities................. (4,130) (4,205) (5,479) (735) (903)
------- -------- ------- -------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) under
notes payable to banks............ 224 (448) -- -- --
Proceeds from issuance of long-term
debt.............................. 5,804 79,124 -- -- 7,000
Debt issue costs..................... -- (5,864) -- -- --
Principal payments on long-term
debt.............................. (3,216) (19,533) (3,537) (617) (37)
Redemption of stock from former
shareholder....................... -- -- -- -- (6,890)
Proceeds from issuance of redeemable
convertible preferred stock (Class
A), net........................... -- 30,317 -- -- --
Proceeds from issuance of common
stock............................. 13 48 -- -- --
Repurchase of common stock........... -- (83,092) -- -- --
Owners' contributions
(distributions)................... 453 (1,534) -- -- --
------- -------- ------- -------- -------
Net cash provided by (used
in) financing activities... 3,278 (982) (3,537) (617) 73
------- -------- ------- -------- -------
Cash and cash equivalents
Net increase (decrease)...... 417 5,878 (347) (8,916) (8,704)
Beginning of year............ 4,933 5,350 11,228 11,228 10,881
------- -------- ------- -------- -------
End of year.................. $ 5,350 $ 11,228 $10,881 $ 2,312 $ 2,177
======= ======== ======= ======== =======
Supplemental Disclosures:
Interest paid........................ $ 1,195 $ 5,045 $ 9,041 $ 2,565 $ 2,193
======= ======== ======= ======== =======
Income taxes paid.................... $ -- $ 1,298 $ 2,687 $ 1,267 $ 2,010
======= ======== ======= ======== =======
</TABLE>
See accompanying notes to combined financial statements.
F-7
<PAGE> 77
KIRKLAND'S, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE 1 -- DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Kirkland's Inc. and Affiliates (the "Company") is comprised of a service
organization and affiliated retail specialty stores (138 at December 31, 1997).
The Company is a leading specialty retailer of decorative home accessories and
gifts with stores in 26 states. Kirkland's, Inc. operates the retail specialty
stores through separate corporations under common ownership.
Basis of Presentation
The combined financial statements include the accounts of Kirkland's, Inc.
and its affiliated corporations. The statements are presented on a combined
basis due to common ownership, common management and the integrated nature of
business activities/operations. Significant intercompany accounts and
transactions are eliminated.
Reclassifications
Certain prior years' amounts have been reclassified to conform to the 1997
presentation.
Cash Equivalents
Cash equivalents consist of investments with maturities of 90 days or less
at the date of purchase.
Inventories
Inventories are stated at the lower of cost or market with cost being
determined using the average cost method which approximates current cost.
Property and Equipment
Property and equipment are stated at cost. Tenant allowances provided by
the lessors for reimbursement and construction costs incurred in connection with
store openings are recorded as reductions to the basis of the respective tenant
improvements. Depreciation is computed on a straight-line basis over the
estimated useful lives of the respective assets. Furniture, fixtures and
equipment are depreciated over 5-7 years. Buildings are depreciated over 40
years. Leasehold improvements are amortized over the shorter of the useful life
of the asset or the lease term. Maintenance and repairs are expensed as incurred
and improvements are capitalized.
Property and equipment, at the individual store level, are reviewed for
impairment whenever an event or change in circumstances indicates the carrying
amount of an asset or group of assets may not be recoverable. The impairment
review includes comparison of future cash flows expected to be generated by the
asset or group of assets with their associated carrying value. If the carrying
value of the asset or group of assets exceeds the expected cash flows
(undiscounted and without interest charges), an impairment loss is recognized to
the extent the carrying amount of the asset exceeds its fair value.
Debt Issue Costs
Debt issue costs are amortized by the straight-line method over the life of
the debt and are shown net of accumulated amortization of $593,000 and
$1,594,000 at December 31, 1996 and 1997, respectively. Use of the straight-line
method of amortization approximates the results of the application of the
interest method.
Preopening Expenses
Preopening expenses, which consist primarily of payroll and occupancy
costs, are expensed as incurred.
F-8
<PAGE> 78
KIRKLAND'S, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
Advertising Expenses
Advertising is expensed as incurred. Advertising expense was $628,000,
$771,000 and $802,000 in 1995, 1996 and 1997, respectively.
Income Taxes
Prior to June 12, 1996, the Company elected to be taxed as a Subchapter S
corporation for federal income tax purposes. As a result, no income taxes were
recorded until that date. Instead, the shareholders paid tax on their respective
shares of taxable income, even if such income was not distributed. Effective
June 12, 1996, the Company discontinued its election to be treated as an S
corporation. As a result of this change, the Company capitalized its retained
earnings as of that date ($8,013,000) into Paid-in capital.
The Company accounts for income taxes under the liability method. Under
this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse. The initial adoption of the
provisions of Statement of Financial Accounting Standards No. 109, Accounting
for Income Taxes ("SFAS 109"), resulted in a deferred tax benefit of $379,000.
Authorized Capital
The Kirkland's, Inc. authorized capital at December 31, 1997 consisted of
500,000 shares of common stock, 68,400 shares of Class A Preferred Stock and
31,600 shares of Class B Preferred Stock. The number of shares of Class A and
Class B Preferred Stock discussed elsewhere in these financial statements
represents the aggregate combined shares of Kirkland's, Inc. and each of its
affiliated corporations. See Note 8 for a description of the terms of each
issue.
Stock Options and Warrants
The Company applies APB Opinion 25 in accounting for its stock compensation
plans. No compensation expense is recognized for stock options issued to
employees when the option's exercise price is greater than or equal to the fair
value of the Company's common stock on the grant date. Otherwise, compensation
expense is recorded, over the vesting period, in an amount equal to the
difference between the fair value of the common stock on the grant date and the
exercise price. The Company has provided pro forma disclosures of net income as
if the fair value based method of accounting for the plan, as prescribed by
Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation, had been applied (see Note 9). Pro forma disclosures include the
effects of employees' stock options granted during the years ended December 31,
1996 and 1997.
The fair value of detachable put warrants issued in connection with the
issuance of debt is initially recorded as a discount to the related debt and
amortized to interest expense, using the effective interest method, over the
term of the related debt. The warrants are adjusted to their current fair value
(as defined in the applicable debt agreement) for each subsequent period through
the accretion of common stock warrants account in the combined statements of
income.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of certain assets and liabilities
and disclosure of contingencies at the date of the financial statements and the
related reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
F-9
<PAGE> 79
KIRKLAND'S, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
Fair Value of Financial Instruments
At December 31, 1996 and 1997, the Company did not have any outstanding
financial derivative instruments. Financial instruments include cash, accounts
payable, a revolving credit agreement and long-term debt. The carrying amounts
of these financial instruments, except long-term debt, approximate fair value
because of their short maturities. Long-term debt approximates fair value based
on the short periods of interest rate repricing for variable rate long-term debt
and estimates based on the current borrowing rates available to the Company for
bank loans with similar terms and average maturities for fixed rate long-term
debt.
Interim Data
The interim financial data is unaudited; however, in the opinion of the
Company this interim data includes all adjustments, consisting of normal
recurring adjustments, necessary for a fair statement of the results of the
interim periods.
Pro Forma Information (unaudited)
The pro forma information at March 31, 1998 adjusts the historical March
31, 1998 balances of long-term debt and the equity accounts to give effect to
the recapitalization and exchange of the Class A and B Preferred Stock into or
for common stock, the exercise of common stock warrants by warrantholders and
the purchase or redemption of Class C Preferred Stock and other debt upon the
closing of an anticipated initial public offering of common stock (the
"Offering").
Noncash Supplemental Disclosure
The following noncash transactions have been excluded from the Statement of
Cash Flows (in thousands): (unaudited)
<TABLE>
<CAPTION>
1996
-------
<S> <C> <C>
Accretion of redeemable Class A and B Preferred Stock and
- - dividends accrued........................................... $ 2,313
- - Distribution of redeemable Class B and C Preferred Stock.... 34,206
Issuance of common stock warrants in connection with senior
- - subordinated debt........................................... 300
1997
-------
Accretion of redeemable Class A and B Preferred Stock and
- - dividends accrued........................................... $ 3,755
</TABLE>
New Accounting Pronouncements
Statement of Financial Accounting Standards ("SFAS") No. 130 -- In June
1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 130,
Reporting Comprehensive Income. SFAS No. 130 establishes standards for reporting
and display of comprehensive income and its components in a full set of
general-purpose financial statements. SFAS No. 130 requires that all items that
are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. SFAS No. 130 is effective for
fiscal years beginning after December 15, 1997. Currently, the Company does not
have any items that are required to be recognized as components of comprehensive
income.
SFAS No. 131 -- In June 1997, the FASB issued SFAS No. 131, Disclosure
about Segments of an Enterprise and Related Information. SFAS No. 131 revises
the current requirements for reporting business segments by redefining such
segments as the way management disaggregates the business for purposes of making
operating decisions and allocating internal resources. SFAS No. 131 is effective
for fiscal years
F-10
<PAGE> 80
KIRKLAND'S, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
beginning after December 15, 1997, and although management believes that SFAS
No. 131 will not impact the Company's presentation, the Company will adopt SFAS
No. 131 in fiscal 1998.
Earnings Per Share
Earnings per share is calculated in accordance with the provisions of SFAS
No. 128 Earnings Per Share. SFAS No. 128 requires the Company to report both
basic earnings per share and diluted earnings per share. Basic earnings per
share is computed by dividing net income allocable to common stock by the
weighted average number of shares outstanding during the period.
Diluted earnings per share are computed using the weighted average number
of shares determined for the basic computations plus the number of shares of
common stock that would be issued assuming all potentially issuable shares
having a dilutive effect on earnings per share were outstanding for the period.
<TABLE>
<CAPTION>
WEIGHTED
(IN THOUSANDS) AVERAGE PER SHARE
INCOME SHARES AMOUNT
---------------- ---------- ---------
<S> <C> <C> <C>
DECEMBER 31, 1997
Basic income........................................ $ 167 100,000 $ 1.67
Effect of dilutive securities:
Warrants......................................... 16,452
Options.......................................... 7,097
------ ---------- -------
Dilutive income..................................... $ 167 123,549 $ 1.35
------ ---------- -------
DECEMBER 31, 1996
Basic income........................................ $4,250 55,789 $ 76.18
Effect of dilutive securities:
Warrants......................................... 9,049
------ ---------- -------
Dilutive income..................................... $4,250 64,838 $ 65.55
------ ---------- -------
DECEMBER 31, 1995
Basic income........................................ $1,688 100 $16,880
------ ---------- -------
Dilutive income..................................... $1,688 100 $16,880
------ ---------- -------
</TABLE>
At December 31, 1996 and 1997, 7,797,000 shares of Class A Preferred Stock
and 3,602,400 shares of Class B Preferred Stock were outstanding. The holders of
both classes of stock may convert their shares into common stock upon the
occurrence of an initial public offering at the rate of the liquidation value
divided by the initial public offering price (see Note 8). These shares were not
included in the calculation of earnings per share for 1996 and 1997 due to the
antidilutive effect they would have on earnings per share if converted.
Stock options to acquire 7,143 shares of common stock of the Company at
$0.45 per share were granted during 1996. The options had no dilutive impact on
earnings per share during the year ended December 31, 1996.
Contingent common stock warrants reserved for the holders of the
subordinated notes (see Note 6) entitling them to purchase 3.5% of the fully
diluted equity of the Company were included in the calculation of diluted
earnings per share for the years ended December 31, 1996 and 1997 due to certain
valuation thresholds not being met as of the applicable date.
Stock options to acquire 3,769 shares of common stock of the Company at
$95.00 per share were granted during 1997. The options were not included in the
calculation of earnings per share for the year ended December 31, 1997 because
the options' exercise price was greater than the average fair market value of
the common stock.
F-11
<PAGE> 81
KIRKLAND'S, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 -- LEVERAGED RECAPITALIZATION
On June 12, 1996, the Company completed a leveraged recapitalization (the
"Recapitalization") pursuant to which Advent International Corporation, a
private equity investment firm, became the largest beneficial owner of the
Company. The Recapitalization permitted the founding and management shareholders
to realize a portion of the value of their interest in the Company. The
Recapitalization included the following principal components:
- The creation of two new classes of redeemable convertible preferred stock
("Class A Preferred Stock" and "Class B Preferred Stock"). The Class A
Preferred Stock was recorded at its liquidation value of $30,749,000 less
an issuance cost of $432,000. The Class B Preferred Stock was recorded at
its liquidation value of $14,206,000. (See Note 8).
- The creation of a new class of mandatorily redeemable preferred stock
("Class C Preferred Stock"). The Class C Preferred Stock was recorded at
its liquidation value of $20,000,000. (See Note 6).
- The distribution of 100% of the Class B Preferred Stock and Class C
Preferred Stock to the existing shareholders of the Company.
- The sale of newly issued shares of common stock and 100% of the Class A
Preferred Stock for cash of $30,780,000 to the new investors
("Investors").
- The issuance of $20 million of senior subordinated note due June 2003
("Senior Subordinated Note") (See Note 6).
- The issuance of $52 million of variable rate Senior Debt, under the
Company's bank credit facility, with quarterly principal and interest
payments through June 2002 (the "Senior Debt") (See Note 6).
- The repurchase and cancellation of 68.4% of the aggregate common stock of
the existing shareholders for cash of $83,092,000.
- The repayment of existing indebtedness of the Company totaling
$19,193,000.
Total transaction-related fees for the Recapitalization amounted to
approximately $6,296,000. Of this amount, financing costs of $5,864,000
associated with the Senior Subordinated Notes and the Senior Debt were deferred
and are being amortized over the life of this debt.
NOTE 3 -- PROPERTY AND EQUIPMENT
Property and equipment comprised the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1997
------- -------
<S> <C> <C>
Land..................................................... $ 300 $ 300
Buildings................................................ 965 965
Equipment................................................ 18,151 21,556
Leasehold improvements................................... 5,795 6,482
------- -------
25,211 29,303
Less accumulated depreciation............................ 14,598 16,408
------- -------
$10,613 $12,895
======= =======
</TABLE>
F-12
<PAGE> 82
KIRKLAND'S, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 -- ACCRUED LIABILITIES
Accrued liabilities comprised the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1996 1997
------ ------
<S> <C> <C>
Accrued compensation....................................... $ 925 $1,661
Sales taxes payable........................................ 1,857 2,234
Percentage rent accrual.................................... 472 552
Gift certificates and store credits........................ 720 997
Accrued interest payable................................... 1,689 2,358
Other...................................................... 288 1,033
------ ------
$5,951 $8,835
====== ======
</TABLE>
NOTE 5 -- INCOME TAXES
As discussed in Note 1, prior to June 12, 1996, the Company had elected to
be treated as a Subchapter S corporation for federal income tax purposes.
Accordingly, the financial statements do not reflect a provision for federal
income taxes prior to June 12, 1996.
The provision for income taxes for 1996 and 1997 consists of the following
(in thousands):
<TABLE>
<CAPTION>
1996 1997
------ ------
<S> <C> <C>
Current
Federal.................................................. $2,634 $2,324
State.................................................... 776 573
------ ------
3,410 2,897
------ ------
Deferred
Federal.................................................. (277) (64)
State.................................................... (61) (16)
Adoption of SFAS 109 due to discontinuance of S
corporation election.................................. (379) --
------ ------
(717) (80)
------ ------
$2,693 $2,817
====== ======
</TABLE>
F-13
<PAGE> 83
KIRKLAND'S, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
Significant components of the Company's deferred tax assets as of December
31, 1996 and 1997 respectively, are as follows (in thousands):
<TABLE>
<CAPTION>
1996 1997
---- ------
<S> <C> <C>
Current deferred tax assets
Inventory valuation methods............................. $192 $ 211
Accruals................................................ 360 385
---- ------
552 596
Noncurrent deferred tax assets
Property and equipment.................................. 165 201
Net operating loss carryforwards........................ -- 741
---- ------
717 1,538
Deferred valuation allowance.............................. -- (741)
---- ------
$717 $ 797
==== ======
</TABLE>
At December 31, 1997, certain of the affiliated corporations were in a net
operating loss carryforward position. These loss carryforwards aggregated
approximately $2.5 million and will expire, if unused, in 2012. The deferred
valuation allowance at December 31, 1997 is based on management's conclusion
that sufficient positive evidence, as defined in SFAS 109, regarding realization
of certain tax carryforward items does not exist due to potential separate
return limitations on the use of such items.
A reconciliation of the provision for income taxes to the amount computed
by applying the federal statutory tax rate of 35% to income before income taxes
for 1996 and 1997, respectively, is as follows:
<TABLE>
<CAPTION>
1996 1997
----- -----
<S> <C> <C>
Statutory Federal income tax rate.......................... 35.0% 35.0%
State income taxes, net of Federal income tax effect....... 5.4 5.2
Benefit from termination of S corporation election......... (4.0) --
Benefit from surtax exemptions............................. (10.0) (10.3)
Recording of valuation allowance........................... -- 10.4
Other...................................................... 2.7 1.5
----- -----
29.1% 41.8%
===== =====
</TABLE>
F-14
<PAGE> 84
KIRKLAND'S, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 -- INDEBTEDNESS
Long-term debt
Long-term debt consists of the following ($ in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1997
------- -------
<S> <C> <C>
Senior Credit Facility:
Senior Debt (Tranche A), principal and interest payable
quarterly at varying amounts through June 2001,
interest at a floating rate, as specified in the debt
agreement (average rate of 9.3% in 1997)............... $19,750 $16,750
Senior Debt (Tranche B), principal and interest payable
quarterly at varying amounts through June 2002,
interest at a rate, as specified in the debt agreement
(average rate of 9.5% in 1997)......................... 31,922 31,531
------- -------
51,672 48,281
Senior Subordinated Notes, interest payable quarterly,
principal due in June 2003, interest at 12.25% in 1996 and
1997, 12.50% thereafter, net of unamortized debt discount
of $236,000 ($279,000 in 1996)............................ 19,721 19,764
Various notes payable, with interest rates varying from
prime to prime plus 1%, principal and interest payable
quarterly or annually, maturing through 2003 (average rate
of 9.4% in 1997).......................................... 741 552
------- -------
72,134 68,597
Less current portion........................................ 3,583 4,421
------- -------
Total long-term............................................. $68,551 $64,176
======= =======
</TABLE>
The principal maturities of long-term debt outstanding at December 31, 1997
in years subsequent to 1998 are as follows: $5,672,000 in 1999; $6,480,000 in
2000; $22,347,000 in 2001; $9,913,000 in 2002 and $19,764,000 thereafter.
On June 12, 1996, the Company entered into a senior credit facility (the
"Senior Debt Agreement") with a syndicate bank group providing for up to $52
million of senior term debt. Borrowings under the Senior Debt Agreement (Tranche
A) bear interest at a floating rate (the higher of the federal funds rate plus
.5% or the prime rate) plus 2.25% or a Eurodollar Rate, as defined in the Senior
Debt Agreement, plus 3.25%. Borrowings under the Senior Debt Agreement (Tranche
B) bear interest at a floating rate (the higher of the federal funds rate plus
.5% or the prime rate) plus 2.75%, or a Eurodollar Rate, as defined, plus 3.75%.
In accordance with the Senior Debt Agreement, the Company has a $20 million
revolving credit agreement ("Line of Credit") with the same syndicate bank
group. The Line of Credit has a maturity date of June 30, 2001 and bears
interest at a floating rate (the higher of the federal funds rate plus .5% or
the prime rate) plus 2.25%, or a Eurodollar Rate, as defined in the Senior Debt
Agreement, plus 3.25%. The Line of Credit requires a 30-day consecutive zero
balance between December 1 and March 1 of each year. There were no borrowings
outstanding under the Line of Credit at December 31, 1996 and 1997. The Company
is required to pay a commitment fee to the bank at a rate per annum equal to .5%
on the unused portion of the Line of Credit.
On June 12, 1996, the Company also entered into a Senior Subordinated Note
and Warrant Purchase Agreement (the "Subordinated Note Agreement"). The holders
of the subordinated notes also received warrants to purchase, for $0.01 per
share, 11,905 shares of common stock of the Company. Additional warrants
("Incentive Warrants") are reserved for the holders of the notes, entitling them
to purchase, for $0.01 per share, an additional 4,817 shares of common stock in
the event certain valuation targets are not met. The Incentive Warrants will be
based on the net valuation of the Company at a sale of the Company's
F-15
<PAGE> 85
KIRKLAND'S, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
common stock or an initial public offering, as defined in the Subordinated Note
Agreement. Under the original provisions of this agreement, these warrants could
be sold back (i.e., put) to the Company at the holders' option on the maturity
date of the debt for fair market value, as defined in the Subordinated Note
Agreement. The holders agreed to terminate the put as of January 1, 1998. An
initial value of $300,000 was allocated to the warrants and recorded as debt
discount. The debt discount is being amortized over the life of the notes.
Prior to June 12, 1996, the Company had operating lines of credit of
approximately $15.6 million with various banks. The lines had varying maturities
and bore interest at rates ranging from 8.25% to 9.5%.
Under the most restrictive covenants of these agreements, the Company is
required to maintain stated levels of earnings and net worth. These agreements
are secured by substantially all of the Company's assets.
Mandatorily redeemable preferred stock
In connection with the Recapitalization, the Company distributed all of the
1,740,000 authorized shares of no par value Class C Preferred Stock. The Class C
Preferred Stock has a liquidation preference to the Class A Preferred Stock and
the Class B Preferred Stock and had a liquidation value of $20 million at
December 31, 1996 and 1997. The Class C Preferred Stock has no conversion
privileges, is non-voting and can be redeemed in whole or in part at the option
of the Company at any time, and shall be mandatorily redeemable in whole at the
earliest to occur of July 2003 or change in control or refinancing. In
connection with the Class C Preferred Stock, the Company pays an annual amount
equal to 9% of the outstanding balance to the holders which has been reflected
in interest expense in the accompanying combined statement of income.
NOTE 7 -- LONG-TERM LEASES
The Company leases retail store facilities under noncancelable operating
leases with terms ranging from five to ten years and expiring at various dates
through 2009. Most of these agreements include renewal options and provide for
minimum rentals and contingent rentals based on sales performance in excess of
specified minimums. Rent expense under operating leases was $7,615,000,
$9,296,000 and $11,363,000 in 1995, 1996 and 1997, respectively, and contingent
rental expense was $459,000, $468,000 and $539,000 in 1995, 1996 and 1997,
respectively.
Future minimum lease payments under all operating leases with initial terms
of one year or more are as follows: $12,045,000 in 1998; $11,452,000 in 1999;
$10,871,000 in 2000; $10,470,000 in 2001; $10,121,000 in 2002; and $32,559,000
thereafter.
NOTE 8 -- CAPITAL STRUCTURE
On April 27, 1998, the charters of the Company and each affiliated
corporation were amended to establish the capital structure described below.
Common Stock
The Kirkland's, Inc. authorized capital includes 500,000 shares of voting
common stock. The holders of the common stock have one vote per share and are
entitled to elect a total of four directors to the Board of Directors of the
Company. A director elected by the holders of the stock cannot be removed except
for cause unless the removal receives approval by a majority vote. The holders
of the stock are not entitled to cumulative voting in the election of directors.
F-16
<PAGE> 86
KIRKLAND'S, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
Redeemable Convertible Preferred Stock
The Class A Preferred Stock and the Class B Preferred Stock have voting
privileges on par with common shareholders and have liquidation values of
$30,749,000 and $14,206,000, respectively, plus accrued dividends. The dividends
accrue at 8% compounded annually through July 1999 and 10% compounded annually
thereafter. The Class A Preferred Stock and Class B Preferred Stock can be
redeemed in whole or in part at the option of the Company once all Class C
Preferred Stock has been redeemed. The Class A Preferred Stock and Class B
Preferred Stock are mandatorily redeemable at the earliest to occur of July 2004
or a liquidity event as defined, including a qualified public offering. Class A
Preferred Stock and Class B Preferred Stock must be redeemed in equal
proportions. Additionally, the holders of Class A Preferred Stock and Class B
Preferred Stock may convert their shares into common stock upon the occurrence
of an initial public offering of the Company's common stock at a rate of the
liquidation value divided by the initial public offering price.
NOTE 9 -- EMPLOYEE BENEFIT PLANS
Stock Options
On June 12, 1996, the Company adopted the "1996 Executive Incentive and
Non-Qualified Stock Option Plan" (the "1996 Plan") which provides employees and
officers with opportunities to purchase an aggregate of 12,304 shares of the
Company's common stock. The 1996 Plan requires that incentive stock options be
issued at exercise prices which are at least 100% of the fair market value of
the stock at the date of the grant.
On June 12, 1996, the Company granted incentive stock options to purchase
7,143 shares of common stock of the Company. The options were granted under the
Plan to three of the Company's key management employees who are also substantial
stockholders. The options vest on the eighth anniversary of the grant date and
provide for accelerated vesting immediately prior to the closing of a sale of
the Company or an initial public offering of the Company's common stock. The
exercise price is $0.45 per share. Subsequent to December 31, 1997, the options
granted to one of the key management employees were canceled in connection with
his resignation from the Company and the redemption of his stock (see Note 12).
On June 27, 1997, the Company granted non-qualified stock options to
various employees under the 1996 Plan to purchase 3,769 shares of the common
stock of the Company. The exercise price for the options is $95.00 per share.
This exercise price is not less than the fair value of the Company's common
stock as determined by the Company's Board of Directors. The options generally
become exercisable on July 1, 2000 provided that the optionee is an employee of
the Company on that date.
Transactions under the Company's stock option plans in each of the two
years in the period ended December 31, 1997 are as follows:
<TABLE>
<CAPTION>
NUMBER WEIGHTED AVERAGE
OF SHARES EXERCISE PRICE
----------- ----------------
<S> <C> <C>
Outstanding at December 31, 1995 -- --
Granted........................................ 7,143 $ 0.45
Exercised...................................... -- --
Canceled....................................... -- --
------ ------
Outstanding at December 31, 1996................. 7,143 0.45
Granted........................................ 3,769 95.00
Exercised...................................... -- --
Canceled....................................... (660) 95.00
------ ------
Outstanding at December 31, 1997................. 10,252 $29.51
====== ======
</TABLE>
F-17
<PAGE> 87
KIRKLAND'S, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
The weighted average fair value of options granted during the year ended
December 31, 1996 and 1997 was determined to be $0.25 and $32.06 per share,
respectively. None of the options are exercisable at December 31, 1997. Had
compensation expense for the Company's stock option plan been determined based
on the fair values at the grant date for stock option awards granted during the
years ended December 31, 1996 and 1997, in accordance with the method of
accounting prescribed by Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation, the Company's net income would have
been reduced to the pro forma amounts indicated below (in thousands, except per
share amounts):
<TABLE>
<CAPTION>
YEAR ENDED
----------------------------
DECEMBER 31, DECEMBER 31,
1996 1997
------------ ------------
<S> <C> <C>
Net income allocable to common stock, as
reported......................................... $4,250 $ 167
Pro forma.......................................... 4,250 147
Net income per common share, as reported:
Basic............................................ $76.18 $1.67
Fully diluted.................................... $65.55 $1.35
Pro forma:
Basic............................................ $76.18 $1.47
Fully diluted.................................... $65.55 $1.19
</TABLE>
The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option pricing model based upon the following
assumptions: expected volatility of 55% in 1996 and 1997; risk-free interest
rates of 6.5% in 1996 and 5.5% in 1997; expected lives of 5 years for 1996 and
1997 and no expected dividend payments. The weighted average remaining
contractual life of the options was 7.5 years at December 31, 1996 and 5.1 years
at December 31, 1997.
401(k) Savings Plan
The Company retains a defined contribution 401(k) employee benefit plan
which covers all employees meeting certain age and service requirements. Up to
5% of the employee's compensation may be matched at the Company's discretion.
This discretionary percentage has been maintained at 25% of an employee's
contribution subject to Plan maximums. The Company's matching contributions were
approximately $39,000, $50,000 and $57,000 in 1995, 1996 and 1997, respectively.
The Company has the option to make additional contributions to the Plan on
behalf of covered employees; however, no such contributions were made in 1995,
1996 or 1997.
NOTE 10 -- RELATED PARTIES
Inventory is purchased in the ordinary course of business from an entity
owned by a substantial shareholder of the Company. It is management's opinion
that these purchases are made on substantially the same terms as those
prevailing at the time for comparable transactions with other entities.
Purchases approximated $3.3 million, $2.3 million and $1.4 million in 1995, 1996
and 1997, respectively.
The Company purchases inventory from a manufacturer in which one of the
Investors also has a significant ownership interest. Purchases from this
manufacturer totaled $610,109, $297,774 and $216,847 in 1995, 1996 and 1997,
respectively.
The Company also paid other substantial shareholders approximately $59,000,
$47,000 and $89,000 in 1995, 1996 and 1997, respectively, for rental of aircraft
in connection with business travel.
F-18
<PAGE> 88
KIRKLAND'S, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11 -- COMMITMENTS AND CONTINGENCIES
Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentration of risk are primarily cash and cash equivalents. The Company
places its cash and cash equivalents in insured depository institutions and
attempts to limit the amount of credit exposure to any one institution within
the covenant restrictions imposed by the Company's debt agreements. At December
31, 1996 and 1997, the Company's uninsured cash balance totaled $10.4 million
and $10.1 million, respectively.
Employment Agreements
In July 1996, the Company entered into employment agreements with three key
management employees and a consulting agreement with another individual, all of
whom were shareholders of the Company. The management agreements have terms of
four years and require annual payments of $825,000. Additionally, these
employees own all of the outstanding Class C Preferred Stock. These employment
agreements also require the Company to pay an annual amount equal to 9% of the
outstanding balance of this preferred stock (see Note 6). The consulting
agreement has a term of seven years and requires an annual payment of $679,000.
Subsequent to December 31, 1997, one of the management employees resigned and
his stock was redeemed (see Note 12).
Litigation
The Company is party to pending legal proceedings and claims. Although the
outcome of such proceedings and claims cannot be determined with certainty, the
Company's management is of the opinion that it is unlikely that these
proceedings and claims will have a material effect on the financial condition or
operating results of the Company.
NOTE 12 -- SUBSEQUENT EVENT
During the fourth quarter of 1997, a management employee of the Company
resigned and the Company began negotiations to settle his employment agreement
and repurchase his stock. The final settlement became effective on January 7,
1998. The redemption was financed through $7 million in additional borrowings
under the Company's Tranche B Senior Debt. The total amount paid to the former
management employee amounted to $6,888,566, which represents the stated value of
his Class B Preferred Stock, Class C Preferred Stock and common stock. In
connection with the redemption, the options previously granted to the former
officer under the 1996 Plan to purchase 2,381 shares of common stock of the
Company were canceled.
The former management employee's employment agreement had approximately two
and one-half years remaining and stipulated annual payments to the former
management employee of $534,000. A portion of the payments will continue to be
made in the future. The Company recorded an aggregate charge of $756,000 of
which $676,000 was accrued as of December 31, 1997 to provide for the balance of
the required payments to be made subsequent to that date. This amount is
included within severance charge on the combined statement of income.
NOTE 13 -- EFFECT OF CONTEMPLATED TRANSACTION
As noted elsewhere in this Prospectus, prior to the closing of the
Offering, all of the outstanding shares of Class A Preferred Stock and Class B
Preferred Stock of Kirkland's, Inc. and each affiliated corporation
(collectively, the "Kirkland Companies") will be recapitalized or exchanged for
an aggregate of 42,679 shares of Kirkland's, Inc. common stock (assuming an
initial public offering price of $ per share), and all of the outstanding
shares of common stock of the Kirkland Companies will be contributed to
Kirkland's, Inc. (the "Contribution"), resulting in the Kirkland Companies
becoming wholly owned subsidiaries of Kirkland's, Inc.
F-19
<PAGE> 89
KIRKLAND'S, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
As the common stock ownership interest of Kirkland's, Inc. and the Kirkland
Companies is identical, the exchange will be accounted for at historical cost as
an exchange between companies under common control. As of December 31, 1997,
Kirkland's, Inc. had 100,000 shares of common stock and, in the aggregate, the
Kirkland Companies had 11,328,000 shares of common stock outstanding.
As a result of the Contribution, the number of outstanding shares of common
stock will be 100,000, before the effect the redemption of 7,900 shares from a
former management employee described in Note 12 (92,100 after such redemption).
The accompanying combined financial statements, including all common share
and per common share information therein, give retroactive effect to the
Contribution as if the Contribution occurred as of the beginning of the earliest
period.
Subsequent to the Offering, the Company will be authorized to issue up to
50 million shares of common stock and 10 million shares of preferred stock.
F-20
<PAGE> 90
- ------------------------------------------------------
- ------------------------------------------------------
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR BY ANY OF THE
UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN SHARES OF COMMON STOCK
OFFERED HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSONS IN ANY
JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION TO
SUCH PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL UNDER ANY CIRCUMSTANCE CREATE ANY IMPLICATION THAT THE INFORMATION HEREIN
IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Summary............................... 3
Risk Factors.......................... 9
Use of Proceeds....................... 17
Dividend Policy....................... 17
Dilution.............................. 18
Capitalization........................ 19
Unaudited Pro Forma Combined Condensed
Financial Statements................ 20
Selected Combined Financial Data...... 23
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 25
Business.............................. 34
Management............................ 43
Certain Transactions.................. 53
Principal and Selling Shareholders.... 57
Description of Capital Stock.......... 59
Shares Eligible for Future Sale....... 64
Underwriting.......................... 65
Legal Matters......................... 67
Experts............................... 67
Available Information................. 68
Index to Combined Financial
Statements.......................... F-1
</TABLE>
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY
REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
SHARES
KIRKLAND'S, INC.
COMMON STOCK
------------------------
PROSPECTUS
, 1998
------------------------
LEHMAN BROTHERS
THE ROBINSON-HUMPHREY
COMPANY
BANCAMERICA ROBERTSON STEPHENS
MORGAN KEEGAN
& COMPANY, INC.
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 91
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth an itemization of all estimated expenses,
all of which will be paid by the Company, in connection with the issuance and
distribution of the securities being registered:
<TABLE>
<CAPTION>
NATURE OF EXPENSE AMOUNT
----------------- --------
<S> <C>
SEC Registration Fee...................................... $ 18,659
Nasdaq National Market Listing Fee........................ 83,500
NASD Fee.................................................. 6,825
Printing and engraving fees............................... 100,000
Registrant's counsel fees and expenses.................... *
Accounting fees and expenses.............................. 150,000
Officers and Directors Liability Insurance................ 150,000
Blue Sky expenses and counsel fees........................ 5,000
Transfer agent and registrar fees......................... 5,000
Miscellaneous............................................. *
--------
TOTAL................................................... $750,000
========
</TABLE>
- ---------------
* To be filed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Tennessee Business Corporation Act ("TBCA") sets forth in Sections
48-18-502 through 48-18-508 the circumstances governing the indemnification of
directors, officers, employees and agents of a corporation against liability
incurred in the course of their official capacities. Section 48-18-502 of the
TBCA provides that a corporation may indemnify any director against liability
incurred in connection with a proceeding if (i) the director acted in good
faith, (ii) the director reasonably believed, in the case of conduct in his or
her official capacity with the corporation, that such conduct was in the
corporation's best interest, or, in all other cases, that his or her conduct was
not opposed to the best interests of the corporation and (iii) in connection
with any criminal proceeding, the director had no reasonable cause to believe
that his or her conduct was unlawful. In actions brought by or in the right of
the corporation, however, the TBCA provides that no indemnification may be made
if the director or officer is adjudged to be liable to the corporation.
Similarly, the TBCA prohibits indemnification in connection with any proceeding
charging improper personal benefit to a director, if such director is adjudged
liable on the basis that a personal benefit was improperly received. In cases
where the director is wholly successful, on the merits or otherwise, in the
defense of any proceeding instigated because of his or her status as a director
of a corporation, Section 48-18-503 of the TBCA mandates that the corporation
indemnify the director against reasonable expenses incurred in the proceeding.
Notwithstanding the foregoing, Section 48-18-505 of the TBCA provides that a
court of competent jurisdiction, upon application, may order that a director or
officer be indemnified for reasonable expense if, in consideration of all
relevant circumstances, the court determines that such individual is fairly and
reasonably entitled to indemnification, whether or not the standard of conduct
set forth above was met. Officers, employees, and agents who are not directors
are entitled, through the provisions of Section 48-18-507 of the TBCA to the
same degree of indemnification afforded to directors under Sections 48-18-503
and 48-18-505.
The Amended and Restated Charter (the "Charter") and Amended and Restated
Bylaws (the "Bylaws") of the Company will provide that the Company will
indemnify from liability, and advance expenses to, any present or former
director or officer of the Company to the fullest extent allowed by the TBCA, as
amended from time to time, or any subsequent law, rule, or regulation adopted.
Additionally, the Charter provides that no director of the Company will be
personally liable to the Company or any of its shareholders for monetary damages
for breach of any fiduciary duty except for liability arising from (i) any
breach of a
II-1
<PAGE> 92
director's duty of loyalty to the Company or its shareholders, (ii) any acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) any unlawful distributions, or (iv) receiving any
improper personal benefit.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since May 1, 1995, the Company has sold the following securities (giving
retroactive effect to a - for-one stock split to be effected in connection
with the Pre-Offering Transactions described in the Prospectus) without
registration under the Securities Act:
1. In June 1996, in connection with the Recapitalization, the Company
issued an aggregate of 68,400 shares of Common Stock and 68,400 shares of
Class A Preferred Stock to Kirkland Holdings, L.L.C., an accredited
investor, in exchange for a $30.8 million investment in the Company by
Holdings.
2. In June 1996, in connection with the Recapitalization, certain of
the outstanding shares of Common Stock of the Company held by four
accredited investors were recapitalized into 31,600 shares of Class B
Preferred Stock and 20,000 shares of Class C Preferred Stock.
3. In June 1996, in connection with the Recapitalization, the Company
granted incentive stock options for 2,381 shares of Common Stock of the
Company to each of three executive officers under the Company's 1996
Executive Incentive and Non-Qualified Stock Option Plan (the "1996 Option
Plan"), pursuant to the terms of the employment agreements between the
Company and each officer. The per share exercise price of these stock
options is $0.045.
4. In June 1997, the Company granted stock options to approximately
225 of its employees to purchase an aggregate of 3,769 shares of Common
Stock under the 1996 Option Plan at an exercise price of $95.00 per share.
5. In February 1998, the Company granted a stock option for 2,283
shares of Common Stock to an executive officer under the 1996 Option Plan.
The per share exercise price of this stock option is $285.65.
6. In April 1998, the Company entered into a Contribution, Redemption
and Purchase Agreement with its existing shareholders and warrantholders,
pursuant to which the Company agreed to sell, and the other parties agreed
to purchase (i) a number of shares of Common Stock equal to the aggregate
stated value of the Class A Preferred Stock and Class B Preferred Stock
($41.0 million) plus accrued dividends on the preferred stock ($
at , 1998), divided by the initial public offering price,
pursuant to the exchange or recapitalization of the preferred stock; and
(ii) 11,905 shares of Common Stock pursuant to the exercise of warrants.
The Company believes that the transactions described in paragraphs 1
through 5 above were exempt from registration under Section 3(b) or 4(2) of the
Securities Act because the subject securities were either (i) issued pursuant to
a compensatory benefit plan pursuant to Rule 701 under the Securities Act or
(ii) sold to a limited group of persons, each of whom was believed to have been
a sophisticated investor or to have had a preexisting business or personal
relationship with the Company or its management and to have been purchasing for
investment without a view to further distribution.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S>
**1.1 Form of Underwriting Agreement
*2.1 Recapitalization Agreement dated June 12, 1996, by and among
Kirkland Holdings L.L.C., Kirkland's, Inc., Certain
Companies Affiliated with Kirkland's, Inc., Carl Kirkland,
Robert Kirkland, Bruce Moore and Robert Alderson (Certain
exhibits and schedules have been omitted in accordance with
Item 601(b)(2) of Regulation S-K. A copy of such exhibits
and schedules shall be furnished supplementally to the
Securities and Exchange Commission upon request.)
</TABLE>
II-2
<PAGE> 93
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S>
*2.2 Contribution, Redemption and Purchase Agreement dated as of
April 29, 1998 by and among Kirkland's, Inc., Affiliates of
Kirkland's, Inc., Kirkland Holdings L.L.C., Members of
Kirkland Holdings L.L.C., Capital Resource Lenders II, L.P.,
Allied Capital Corporation, Allied Capital Corporation II,
the Marlborough Capital Investment Fund, L.P., Capital Trust
Investments, Ltd., the Allison Leigh Alderson Trust, the Amy
Katherine Alderson Trust, the Carl T. Kirkland Grantor
Retained Annuity Trust 97-1, Carl Kirkland, Robert Kirkland,
and Robert Alderson (Certain exhibits and schedules have
been omitted in accordance with Item 601(b)(2) of Regulation
S-K. A copy of such exhibits and schedules shall be
furnished supplementally to the Securities and Exchange
Commission upon request.)
*3.1 Amended and Restated Charter of Kirkland's, Inc.
*3.2 Form of Amended and Restated Charter of Kirkland's, Inc. (to
become effective immediately prior to completion of the
Offering)
*3.3 Bylaws of Kirkland's, Inc.
3.4 Form of Amended and Restated Bylaws of Kirkland's, Inc. (to
become effective immediately prior to completion of the
Offering)
*4.1 Form of Specimen Stock Certificate
**5.1 Opinion of Pepper Hamilton LLP
10.1 Credit Agreement dated as of June 12, 1996, among Kirkland's
Holdings, L.L.C., the entities listed on Schedule 1.1A
thereto, the several banks and other financial institutions
or entities from time to time parties to the agreement, the
First National Bank of Boston, and Lehman Commercial Paper
Inc. (with 3 amendments)
*10.2 Senior Subordinated Note Due 2003 in the amount of
$8,000,000 dated June 12, 1996 issued to Capital Resource
Lenders II, L.P. (Identical Senior Subordinated Notes Due
2003, except as to the payee and the amount of the notes,
were issued to The Marlborough Capital Investment Fund, L.P.
($3,800,000), Allied Capital Corporation ($3,600,000),
Allied Capital Corporation II ($2,800,000), and Capital
Trust Investments, Ltd. ($1,800,000)
*10.3 Advent Fee Agreement dated as of June 12, 1996, by and among
Advent International Corporation, Kirkland's, Inc., and
Affiliates of Kirkland's, Inc.
*10.4 Registration Rights Agreement dated as of June 12, 1996, by
and among Kirkland Holdings L.L.C., Kirkland's, Inc.,
Capital Resource Lenders II, L.P., Allied Capital
Corporation, Allied Capital Corporation II, the Marlborough
Capital Investment Fund, L.P., Capital Trust Investments,
Ltd., Carl Kirkland, Robert Kirkland, Bruce Moore and Robert
Alderson
*10.5 Consulting Agreement by and between the Company and Robert
Kirkland dated June 12, 1996
*10.6 Employment Agreement by and between the Company and Carl
Kirkland dated June 12, 1996 (Identical Employment
Agreements, except as to the employee and the annual salary,
were entered into with Robert Alderson ($424,500) and Bruce
Moore ($534,000))
10.7 Employment Agreement by and between the Company and Reynolds
Faulkner dated as of February 2, 1998
*10.8 Employment Agreement by and between the Company and Steven
J. Collins dated February 1, 1997
*10.9 1996 Executive Incentive and Non - Qualified Stock Option
Plan, as amended
*10.10 1998 Incentive Plan
</TABLE>
II-3
<PAGE> 94
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S>
*10.11 Employee Stock Purchase Plan
*10.12 401(k) Plan
*10.13 Shareholders Agreement dated as of June 12, 1996, by and
among Kirkland Holdings L.L.C., Kirkland's, Inc., Capital
Resource Lenders II, L.P., Allied Capital Corporation,
Allied Capital Corporation II, the Marlborough Capital
Investment Fund, L.P., Capital Trust Investments, Ltd., Carl
Kirkland, Robert Kirkland, Bruce Moore and Robert Alderson
*10.14 Redemption Agreement dated December 26, 1997 by and among
Kirkland's, Inc., Certain Companies Affiliated with
Kirkland's, Inc., and Bruce Moore
10.15 Stock Option Agreement by and between the Company and Carl
Kirkland dated June 11, 1996 (Identical Stock Option
Agreements, except as to the name of the employee, were
entered into with Robert Alderson and Bruce Moore)
10.16 Stock Option Agreement by and between the Company and
Reynolds C. Faulkner dated as of February 2, 1998.
10.17 Amendment to Employment Agreement by and between the Company
and Steven J. Collins dated as of February 1, 1998
16 Letter of KPMG Peat Marwick LLP
21 Subsidiaries of the Company
23.1 Consent of PricewaterhouseCoopers LLP
23.2 Consent of KPMG Peat Marwick LLP
**23.3 Consent of Pepper Hamilton LLP (included in Exhibit 5.1)
*24.1 Power of Attorney
*27.1 Financial Data Schedule
*27.2 Financial Data Schedule
*27.3 Financial Data Schedule
*27.4 Financial Data Schedule
*27.5 Financial Data Schedule
</TABLE>
- ---------------
* Previously filed.
** To be filed by amendment.
(b) Financial Statement Schedules:
All schedules have been omitted because they are not applicable, not
required or the required information is included in the Financial Statements or
the notes thereto.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-4
<PAGE> 95
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For purposes of determining any liability under the Securities
Act, each post - effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
II-5
<PAGE> 96
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-1 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Jackson, State of Tennessee, on the 15th day of July,
1998.
KIRKLAND'S, INC.
By: /s/ CARL KIRKLAND
------------------------------------
Carl Kirkland
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ CARL KIRKLAND Chief Executive Officer; Director July 15, 1998
- ------------------------------------------ (principal executive officer)
Carl Kirkland
/s/ REYNOLDS C. FAULKNER Senior Vice President and Chief Financial July 15, 1998
- ------------------------------------------ Officer; Director (principal financial
Reynolds C. Faulkner officer)
/s/ STEVEN J. COLLINS Director of Finance and Treasurer July 15, 1998
- ------------------------------------------ (principal accounting officer)
Steven J. Collins
/s/ ROBERT E. ALDERSON Director July 15, 1998
- ------------------------------------------
Robert E. Alderson
* Director July 15, 1998
- ------------------------------------------
Alexander S. McGrath
* Director July 15, 1998
- ------------------------------------------
David M. Mussafer
* Director July 15, 1998
- ------------------------------------------
R. Wilson Orr, III
* Director July 15, 1998
- ------------------------------------------
John P. Oswald
*By: July 15, 1998
- ------------------------------------
Robert E. Alderson,
Attorney-in-Fact
</TABLE>
II-6
<PAGE> 97
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S> <C>
3.4 Form of Amended and Restated Bylaws of Kirkland's, Inc. (to
become effective immediately prior to completion of the
Offering)
10.1 Credit Agreement dated as of June 12, 1996, among Kirkland's
Holdings, L.L.C., the entities listed on Schedule 1.1A
thereto, the several banks and other financial institutions
or entities from time to time parties to the agreement, the
First National Bank of Boston, and Lehman Commercial Paper
Inc. (with 3 amendments)
10.7 Employment Agreement by and between the Company and Reynolds
Faulkner dated as of February 2, 1998
10.15 Stock Option Agreement by and among the Company and Carl
Kirkland dated June 11, 1996 (Identical Stock Option
Agreements, except as to the name of the employee, were
entered into with Robert Alderson and Bruce Moore)
10.16 Stock Option Agreement by and between the Company and
Reynolds C. Faulkner dated as of February 2, 1998
10.17 Amendment to Employment Agreement by and between the Company
and Steven J. Collins dated as of February 1, 1998
16 Letter of KPMG Peat Marwick LLP
21 Subsidiaries of the Company
23.1 Consent of PricewaterhouseCoopers LLP
23.2 Consent of KPMG Peat Marwick LLP
</TABLE>
<PAGE> 1
EXHIBIT 3.4
AMENDED AND RESTATED BYLAWS OF
KIRKLAND'S INC.
ARTICLE I
OFFICES
Section 1. The principal office of Kirkland's, Inc. (the
"Corporation"), is 805 North Parkway, Jackson, Tennessee 38305. The principal
office may be changed at any time upon a resolution adopted by the Board of
Directors of the Corporation (the "Board of Directors"). The Corporation may
have offices and places of business at such other places within or without the
State of Tennessee as shall be determined by the Board of Directors.
Section 2. The registered office of the Corporation for any
particular state may be, but need not be, identical with the principal office of
the Corporation in that state, and the address of the registered office may be
changed from time to time by appropriate resolution of the Board of Directors.
ARTICLE II
SHAREHOLDERS
Section 1. Meetings. All meetings of shareholders shall be
held either in the principal office of the Corporation or at any other place
within or without the City of Jackson, Tennessee, as designated by the Board of
Directors.
Section 2. Annual Meeting. The annual meeting of the
shareholders shall be held on the second Tuesday in May of each year or such
other date, in any particular year, designated by the Board of Directors, for
the purpose of electing directors and for the transaction of any other business
authorized to be transacted by the shareholders. If the appointed day is a legal
holiday the meeting shall be held at the same time on the next succeeding day
not a holiday. In the event that the annual meeting is committed by oversight or
otherwise on the date herein provided for, the Board of Directors shall cause a
meeting in lieu thereof to be held as soon thereafter as conveniently may be,
and any business transacted or elections held at such meeting shall be as valid
as if transacted or held at the annual meeting. Such subsequent meeting shall be
called in the same manner as provided for the annual shareholders meeting.
Section 3. Special Meetings. Special meetings of shareholders
may be called at any time, but only by the chairman of the Board of Directors
(the "Chairman of the Board"), the president of the Corporation (the
"President"), or upon a resolution adopted by or affirmative vote of a majority
of the Board of Directors, and not by the shareholders.
Section 4. Notice Of Meetings. Notice of all shareholders'
meetings stating the time, place and the objects for which such meetings are
called shall be given by the Chairman of the Board, the President or any
vice-president (a "Vice-President") or the Secretary (the
<PAGE> 2
"Secretary") or any assistant secretary (an "Assistant Secretary") of the
Corporation to each shareholder of record entitled to vote at such meeting not
less than ten (10) days or more than two (2) months prior to the date of the
meeting by written notice delivered personally, mailed or delivered via
overnight courier to each shareholder. If delivered personally, such notice
shall be deemed to be delivered when received. If mailed or delivered via
overnight courier service, such notice shall be deemed to be delivered when
deposited in the United States Mail in a sealed envelope with postage thereon
prepaid, or deposited with the overnight courier service, as the case may be,
addressed to the shareholder at his address as it appears on the stock record
books of the Corporation, unless he shall have filed with the Secretary a
written request that notice intended for him be mailed to some other address, in
which case it shall be mailed to the address designated in such request.
Any meeting at which all shareholders entitled to vote have
waived or at any time shall waive notice shall be a legal meeting for the
transaction of business, notwithstanding that notice has not been given as
herein before provided. The waiver must be in writing, signed by the shareholder
entitled to the notice, and be delivered to the Corporation for inclusion in the
minutes or filing with the corporate records.
Section 5. Notice for Nominations and Proposals.
5.1. Annual Meetings. Nominations for the election of
directors and proposals for any new business to be taken up at any annual
meeting of shareholders may be made by the Board of Directors or, as provided in
this bylaw, by any shareholder of the Corporation entitled to vote generally in
the election of directors, subject to the rights of the holders of preferred
stock, if applicable. In order for a shareholder of the Corporation to make any
such nominations and/or proposals, he shall give notice thereof in writing,
delivered or mailed by first class United States mail, postage prepaid, to the
Secretary so that it is received at least 120 calendar days in advance of the
month and day the Corporation's proxy statement to shareholders was mailed to
shareholders the preceding year, or, if the Corporation's common stock is not
registered under the Securities Exchange Act of 1934 (the "Exchange Act"), not
fewer than 90 days nor more than 120 days prior to any such meeting; provided,
however, that if notice or public disclosure of the meeting is effected fewer
than 40 calendar days before the meeting, such written notice from the
shareholder shall be delivered or mailed, as prescribed, to the Secretary not
later than the close of the 10th calendar day following the day on which notice
of the meeting was mailed to shareholders. Each such notice given by a
shareholder with respect to nominations for the election of directors shall set
forth (i) the name, age, business address and, if known, residence address of
each nominee proposed in such notice, (ii) the principal occupation or
employment of each such nominee, and (iii) the number of shares of stock of the
Corporation which are beneficially owned by each such nominee. As to any other
business that the shareholder proposes to bring before the meeting, such notice
shall set forth (i) a brief description of the business desired to be brought
before the meeting, (ii) the reasons for conducting such business at the meeting
and any material interest in such business of such shareholder and (iii) the
beneficial owner, if any, on whose behalf the proposal is made. As to
-2-
<PAGE> 3
the shareholder giving the notice and the beneficial owner, if any, on whose
behalf the nomination or proposal is made, such notice shall set forth (i) the
name and address of such shareholder, as it appears on the Corporation's books,
and of such beneficial owner and (ii) the class and number of shares of the
Corporation which are owned beneficially and of record by such shareholder and
such beneficial owner.
5.2. Special Meetings. Only such business shall be
conducted at a special meeting of shareholders as shall have been brought before
the meeting pursuant to the Corporation's notice of meeting. Nominations of
persons for election to the Board of Directors may be made at a special meeting
of shareholders at which directors are to be elected pursuant to the
Corporation's notice of meeting (i) by or at the direction of the Board of
Directors or (ii) provided that the Board of Directors has determined that
directors shall be elected at such meeting, by any shareholder of the
Corporation who is a shareholder of record at the time of giving of notice
provided for in this bylaw, who shall be entitled to vote at the meeting and who
complies with the notice procedures set forth in this bylaw. In the event the
Corporation calls a special meeting of shareholders for the purpose of electing
one or more directors to the Board of Directors, any such shareholder may
nominate a person or persons (as the case may be), for election to such
position(s) as specified in the Corporation's notice of meeting for inclusion in
the shareholder's notice required by Section 5.1 of these Bylaws if such
nomination shall be delivered to the Secretary at the principal executive
offices of the Corporation not earlier than the close of business on the 90th
day prior to such special meeting and not later than the close of business on
the later of the 60th day prior to such special meeting or the 10th day
following the day on which public announcement is first made of the date of the
special meeting and of the nominees proposed by the Board of Directors to be
elected at such meeting. In no event shall the public announcement of an
adjournment of a special meeting commence a new time period for the giving of a
shareholder's notice as described above.
5.3. General. Only such persons who are nominated by a
shareholder in accordance with the procedures set forth in this bylaw shall be
eligible to serve as directors and only such business shall be conducted at a
meeting of shareholders as shall have been brought before the meeting in
accordance with the procedures set forth in this bylaw. Except as otherwise
provided by law, the charter of the Corporation (the "Charter") or these Bylaws,
the Chairman of the Board shall have the power and duty to determine whether a
nomination or any business proposed to be brought before the meeting was made or
proposed, as the case may be, in accordance with the procedures set forth in
this bylaw and, if any proposed nomination or business is not in compliance with
this bylaw, to declare that such defective proposal or nomination shall be
disregarded.
5.4. Public Announcement. For purposes of this bylaw,
"public announcement" shall mean disclosure in a press release reported by the
Dow Jones News Service, Associated Press or comparable national news service or
in a document publicly filed by the Corporation with the Securities and Exchange
Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act.
-3-
<PAGE> 4
5.5. Non-Exclusivity. Notwithstanding the foregoing
provisions of this Section 5, in the event the Common Stock of the Corporation
is registered under the Exchange Act, a shareholder shall also comply with all
applicable requirements of the Exchange Act and the rules and regulations
thereunder with respect to the matters set forth in this bylaw. Nothing in this
Section 5 shall be deemed to affect any rights (i) of shareholders to request
inclusion of proposals in the Corporation's proxy statement pursuant to Rule
14a-8 under the Exchange Act or (ii) of the holders of any series of Preferred
Stock to elect directors under specified circumstances.
Section 6. Quorum. Except as may be otherwise provided by law,
a majority of the outstanding shares of the Corporation entitled to vote,
represented in person or by proxy, shall constitute a quorum at a meeting of
shareholders. In the event that a majority of the outstanding shares are
represented at any meeting, action on a matter is approved if the votes cast
favoring the action exceed the votes cast opposing the action, unless the
question is one upon which by express provision of law or of the Charter or of
these Bylaws a larger or different vote is required, in which case such express
provision shall govern and control the decision of each question. If a quorum of
the shares entitled to vote shall fail to be obtained at any meeting, or in the
event of any other proper business purpose, the chair of the meeting or the
holders of a majority of the shares present, in person or by proxy, may adjourn
the meeting to another place, date or time by announcement to shareholders
present in person at the meeting and no other notice of such place, date or time
need be given.
Section 7. Organization. At every meeting of the shareholders
the Chairman of the Board, or, in his absence, the President, or in the absence
of the Chairman of the Board and the President, a director or an officer of the
Corporation designated by the Board shall act as chairman. The Secretary, or, in
his absence, an Assistant Secretary, shall act as secretary at all meetings of
the shareholders. In the absence from any such meeting of the Secretary and any
Assistant Secretary, the chairman may appoint any person to act as secretary of
the meeting.
Section 8. Closing of Transfer Books or Fixing of Record Date.
For the purpose of determining the shareholders entitled to notice of or to vote
at any meeting of shareholders or any adjournment thereof, or shareholders
entitled to receive payment of any dividend, or in order to make a determination
of shareholders for any other proper purpose, the Board of Directors may provide
that the stock transfer book shall be closed for a stated period not to exceed
in any case thirty days. If the stock transfer book shall be closed for the
purpose of determining shareholders, such books shall be closed for at least ten
(10) days immediately preceding such meeting. In lieu of closing the stock
transfer books, the Board of Directors may fix in advance a date as the record
date for any such determination of shareholders, such date in any case to be not
more than thirty (30) days and not less than ten (10) days prior to the date on
which the particular action requiring such determination of shareholders is to
be taken. If the stock transfer books are not closed and no record date is fixed
for the determination of shareholders entitled to notice of or to vote at a
meeting of shareholders, or shareholders entitled to receive payment of a
dividend,
-4-
<PAGE> 5
the date on which notice of the meeting is mailed or the date on which the
resolution of the Board of Directors declaring such dividend is adopted, as the
case may be, shall be the record date for such determination of shareholders.
When a determination of shareholders entitled to vote at any meeting of
shareholders has been made as provided in this Section, such determination shall
apply to any adjournment thereof.
Section 9. Voting Lists. The officer or agent having charge of
the stock transfer books for common shares of the Corporation shall make
available, within two (2) business days after notice of a meeting is given, a
complete list of the shareholders entitled to vote at such meeting or any
adjournment thereof, arranged in alphabetical order, with the address of and the
number of shares held by each shareholder, which list, for a period beginning
within two (2) business days after notice of such meeting is given, shall be
kept on file at the registered office of the Corporation and shall be subject to
inspection by any shareholder at any time during usual business hours. Such list
shall be kept open at the time and place of the meeting and be subject to the
inspection of any shareholder during the entire time of the meeting. In the
event of any challenge to the right of any person to vote at the meeting, the
presiding officer at such meeting may rely on said list as proper evidence of
the right of parties to vote at such meeting.
Section 10. Proxies. Shareholders of record who are entitled
to vote may vote at any meeting either in person or by written proxy, which
shall be filed with the secretary of the meeting before being voted. Such proxy
shall entitle the holders thereof to vote at any adjournment of such meeting,
but shall not be valid after the final adjournment thereof. No proxy shall be
valid after the expiration of eleven months from the date of its execution
unless the shareholder executing it shall have specified therein the length of
time it is to continue in force, which shall be for some limited period. A proxy
is revocable by the shareholder unless it conspicuously states that it is
irrevocable and the appointment of the proxy is coupled with an interest.
Section 11. Voting of Shares. Except as otherwise provided in
the Charter or these Bylaws, each share of Common Stock shall have all voting
rights accorded to holders of Common Stock pursuant to the Tennessee Business
Corporation Act, at the rate of one vote per share.
Section 12. Informal Action by Shareholders. Any action
required to be taken at a meeting of the shareholders, or any other action which
may be taken at a meeting of the shareholders, may be taken without a meeting if
all shareholders entitled to vote on the action consent to taking such action
without a meeting. If all shareholders entitled to vote on the action consent to
taking such action without a meeting, then the affirmative vote of the number of
shares that would be necessary to authorize such action at a meeting is the act
of the shareholders.
The action must be evidenced by one or more written consents
describing the action taken, signed by each shareholder entitled to vote on the
action, indicating each signing
-5-
<PAGE> 6
shareholder's vote or abstention on the action, and delivered to the Corporation
for inclusion in the minutes or filing with the corporate records.
Section 13. Business and Order of Business. At each meeting of
the shareholders such business may be transacted as may properly be brought
before such meeting, except as otherwise provided by law or in these Bylaws. The
order of business at all meetings of the shareholders shall be as determined by
the Chairman, unless otherwise determined by a majority in interest of the
shareholders present in person or by proxy at such meeting and entitled to vote
thereat.
ARTICLE III
BOARD OF DIRECTORS
Section 1. Number. The number of directors of the Corporation
shall be such number, neither fewer than three nor more than fifteen (exclusive
of directors, if any, to be elected by holders of Preferred Stock of the
Corporation, voting separately as a class), as determined by a majority vote of
the Board of Directors. The Board of Directors has the power to fix or change
the number of directors, including an increase or decrease in the number of
directors, from time to time as established by a majority vote of the Board of
Directors. A director need not be a shareholder or a resident of the state of
Tennessee.
Section 2. Powers of Directors. The Board of Directors shall
have the entire management of the business of the Corporation. In the management
and control of the property, business and affairs of the Corporation, the Board
of Directors is hereby vested with all the powers possessed by the Corporation
itself, so far as this delegation of authority is not inconsistent with the laws
of the State of Tennessee, with the Charter, or with these Bylaws. The Board of
Directors shall have the power to determine what constitutes net earnings,
profits, and surplus, respectively, what amount shall be reserved for working
capital and to establish reserves for any other proper purpose, and what amount
shall be declared as dividends, and such determination by the Board of Directors
shall be final and conclusive. The Board of Directors shall have the power to
declare dividends for and on behalf of the Corporation, which dividends may
include or consist of stock dividends.
Section 3. Regular Meetings of the Board. Immediately after
the annual election of directors, the newly elected directors may meet at the
same place for the purpose of organization, the election of corporate officers
and the transaction of other business; if a quorum of the directors be then
present no prior notice of such meeting shall be required. Other regular
meetings of the Board of Directors shall be held at such times and places as the
Board of Directors by resolution may determine and specify, and if so determined
no notice thereof need be given, provided that, unless all the directors are
present at the meeting at which said resolution is passed, the first meeting
held pursuant to said resolution shall not be held for at least five (5) days
following the date on which the resolution is passed.
-6-
<PAGE> 7
Section 4. Special Meetings. Special meetings of the Board of
Directors may be held at any time or place whenever called by the Chairman of
the Board, the President, or any Vice-President or the Secretary, or by written
request of at least two directors, notice thereof being given to each director
by the Secretary or other officer calling the meeting, or they may be held at
any time without formal notice provided all of the directors are present or
those not present shall at any time waive or have waived notice thereof.
Section 5. Notice. Notice of any special meetings shall be
given at least two (2) days previously thereto by written notice delivered
personally, by mail, by telegram, by overnight courier service, or by facsimile.
If mailed, such notice shall be mailed to each director at his business address
no less than five (5) days previously thereto, and shall be deemed to be
delivered when deposited in the United States mail so addressed, with postage
thereon prepaid. If notice be given by telegram, such notice shall be deemed to
be delivered when the telegram is delivered to the telegraph company. If notice
be delivered via overnight courier service, such notice shall be deemed to be
delivered when deposited with the overnight courier service. If notice be given
by facsimile, such notice shall be deemed to be delivered when information of
the transmission is received.
Section 6. Quorum. A majority of the members of the Board of
Directors, as constituted for the time being, shall constitute a quorum for the
transaction of business, but a lesser number may adjourn any meeting and the
meeting may be held as adjourned without further notice. If a quorum is present
when a vote is taken, the affirmative vote of a majority of the directors
present is the act of the Board of Directors, except as otherwise provided by
law or by these Bylaws. The fact that a director has an interest in a matter to
be voted on by the meeting shall not prevent his being counted for purposes of a
quorum.
Section 7. Presumption of Assent. A director of the
Corporation who is present at a meeting of the Board of Directors at which
action on any corporate matter is taken shall be presumed to have assented to
the action taken unless his dissent shall be entered in the minutes of the
meeting or unless he shall file his written dissent to such action with the
person acting as the secretary of the meeting before the adjournment thereof or
shall forward such dissent by registered mail to the Secretary immediately after
the adjournment of the meeting. Such right to dissent shall not apply to a
director who voted in favor of such action.
Section 8. Informal Action by Directors. Any action required
to be taken at a meeting of the Board of Directors, or any other action which
may be taken at a meeting of the Board of Directors, may be taken without a
meeting if all directors consent to taking such action without a meeting. If all
directors consent to taking such action without a meeting, the affirmative vote
of the [majority of the directors] [the number of directors that would be
necessary to authorize or take such action at a meeting] is the act of the Board
of Directors. The action must be evidenced by one or more written consents
describing the action taken, signed by each director, indicating each signing
director's vote or abstention on the action, and shall be included in the
minutes or filed with the corporate records reflecting the action taken.
-7-
<PAGE> 8
Section 9. Meetings by any Form of Communication. The Board of
Directors shall have the power to permit any and all directors to participate in
a regular or special meeting by, or conduct the meeting through the use of any
means of communication by which all directors participating may simultaneously
hear each other during the meeting. A director participating in a meeting by
this means is deemed to be present in person at the meeting.
Section 10. Organization. At each meeting of the Board of
Directors, the Chairman of the Board, or, in his absence, the Chief Executive
Officer of the Corporation (the "Chief Executive Officer'), or, in the absence
of the Chairman of the Board and the Chief Executive Officer, the President, or
in the absence of the Chairman of the Board, the Chief Executive Officer and the
President, a director or an officer of the Corporation designated by the Board
of Directors shall act as chairman. The Secretary, or, in the Secretary's
absence, any person appointed by the chairman, shall act as secretary of the
meeting.
Section 11. Removal. No director of the Corporation may be
removed at any time unless for cause. Upon finding of cause as determined by a
majority of the Board of Directors (excluding the director which is the subject
of removal), the director may be removed only upon the affirmative vote of the
holders of at least 80% of outstanding shares of capital stock of the
Corporation entitled to vote generally in the election of directors (the "Voting
Power"), considered for this purpose as one class, except as otherwise required
by law.
Section 12. Vacancy. Unless the Board of Directors otherwise
determines, and subject to the rights of the holders of any series of Preferred
Stock, newly created directorships resulting from any increase in the authorized
number of directors or any vacancies on the Board of Directors resulting from
death, resignation, retirement, disqualification, removal from office or other
cause may be filled only by a majority vote of the directors then in office,
though less than a quorum, and shall not be filled by the shareholders unless
there are no directors remaining on the Board of Directors. Any director so
chosen (a "vacancy director") shall be a director of the same class as the
director whose vacancy he or she fills. Such vacancy director shall hold office
until the next annual meeting of shareholders and until his or her successor
shall have been elected and qualified. The shareholders shall thereupon elect a
director to fill the vacancy having been temporarily filled by the vacancy
director, which individual may include the incumbent vacancy director. The
director so elected shall be a director of the same class as the vacancy
director and shall serve until the annual meeting of shareholders at which the
term of office of such class expires and until such director's successor shall
have been duly elected and qualified.
Section 13. Resignations. A director may resign at any time by
delivering written notice to the Board of Directors, the Chairman of the Board
or the President. Resignation is effective when the notice is delivered, unless
the notice specifies a later effective date.
Section 14. Compensation. By resolution of the Board of
Directors, the directors may be paid their expenses, if any, of attendance at
each meeting of the Board of Directors. No
-8-
<PAGE> 9
such payment shall preclude any director from serving the Corporation in any
other capacity and receiving compensation therefor.
ARTICLE IV
COMMITTEES.
Section 1. Appointment and Powers. The Board of Directors may,
by resolution passed by a majority of the whole Board of Directors, create one
or more committees, each committee to consist of two or more directors of the
Corporation, which, to the extent provided in said resolution or in these Bylaws
and not inconsistent with Section 48-18-206 of the Tennessee Business
Corporation Act, shall have and may exercise the powers of the Board of
Directors in the management of the business and affairs of the Corporation, and
may authorize the seal of the Corporation to be affixed to all papers which may
require it. Such committee or committees shall have such name or names as may be
determined from time to time by resolution adopted by the Board of Directors.
The Board of Directors may, by resolution passed by a majority of the whole
Board of Directors, abolish any such committee.
Section 2. Term of Office and Vacancies. Each member of a
committee shall continue in office until a director to succeed him shall have
been elected and shall have qualified, or until he ceases to be a director or
until he shall have resigned or shall have been removed in the manner
hereinafter provided. Any vacancy in a committee shall be filled by the vote of
a majority of the whole Board of Directors at any regular or special meeting
thereof.
Section 3. Organization. Unless otherwise provided by the
Board of Directors, each committee shall appoint a chairman. Each committee
shall keep a record of its acts and proceedings and report the same from time to
time to the Board of Directors as the Board of Directors may require.
Section 4. Resignations. Any member of a committee may resign
from the committee at any time by giving written notice to the Chairman of the
Board, the President or the Secretary. Such resignation shall take effect at the
time of the receipt of such notice or at any later time specified therein, and,
unless otherwise specified therein, the acceptance of such resignation shall not
be necessary to make it effective.
Section 5. Removal. Any member of a committee may be removed
from the committee with or without cause at any time by resolution passed by a
majority of the whole Board of Directors at any regular or special meeting.
Section 6. Meetings. Regular meetings of each committee, of
which no notice shall be required, shall be held on such days and at such places
as the chairman of the committee shall determine or as shall be fixed by a
resolution passed by a majority of all the members of such committee. Special
meetings of each committee will be called by the Secretary at the request of any
two members of such committee, or in such other manner as may be determined
-9-
<PAGE> 10
by the committee. Notice of each special meeting of a committee shall be mailed
to each member thereof at least two days before the meeting or shall be given
personally or by telephone or other electronic transmission at least one day
before the meeting. Every such notice shall state the date, time and place of
the meeting, but need not state the purposes of the meeting. No notice of any
meeting of a committee shall be required to be given to any alternate.
Section 7. Quorum and Manner of Acting. Unless otherwise
provided by resolution of the Board of Directors, a majority of a committee
shall constitute a quorum for the transaction of business and the act of a
majority of those present at a meeting at which a quorum is present shall be the
act of such committee. The members of each committee shall act only as a
committee and the individual members shall have no power as such. Actions taken
at a meeting of any committee shall be reported to the Board of Directors at its
next meeting following such committee meeting; provided that, when the meeting
of the Board of Directors is held within two (2) days after the committee
meeting, such report may be made to the Board of Directors at its second meeting
following such committee meeting.
Section 8. Compensation. Each member of a committee shall be
paid such compensation, if any, as shall be fixed by the Board of Directors.
ARTICLE V
WAIVER OF NOTICE
Whenever any notice is required to be given by these Bylaws,
or the Charter, or any other laws of the State of Tennessee, a waiver thereof in
writing signed by the person or persons entitled to such notice and filed with
the minutes or corporate records, whether before or after the time stated
therein, shall be deemed equivalent thereto. Where the person or persons
entitled to such notice sign the minutes of any shareholders' or directors'
meeting, which minutes contain the statement that said person or persons have
waived notice of the meeting, then such person or persons are deemed to have
waived notice in writing. [A shareholder's attendance at a meeting waives
objection to lack of notice or defective notice of the meeting, unless the
shareholder at the beginning of the meeting (or promptly upon the shareholder's
arrival) objects to holding the meeting or transacting business at the meeting,
and also waives objection to consideration of a particular matter at the meeting
that is not within the purpose or purposes described in the meeting notice,
unless the shareholder objects to considering the matter when it is presented. A
director's attendance at or participation in a meeting waives any required
notice to the director of the meeting unless the director at the beginning of
the meeting (or promptly upon the director's arrival) objects to holding the
meeting or transacting business at the meeting and does not thereafter vote for
or assent to action taken at the meeting.]
-10-
<PAGE> 11
ARTICLE VI
OFFICERS
Section 1. Number. The officers of the Corporation shall be a
Chairman of the Board, Chief Executive Officer, President, Chief Financial
Officer, Chief Operating Officer, one or more Vice Presidents (the number
thereof to be determined by the Board of Directors), and a Secretary, each of
whom shall be elected by the Board of Directors. Such other officers and
assistant officers as may be deemed necessary may be elected or appointed by the
Board of Directors. Any two or more offices may be held by the same person,
except the offices of President and Secretary.
Section 2. Election and Term of Office. The officers of the
Corporation to be elected by the Board of Directors shall be elected annually by
the Board of Directors at the first meeting of the Board of Directors held after
each annual meeting of the shareholders. If the election of officers shall not
be held in such meeting, such election shall be held as soon thereafter as
conveniently may be. Each officer shall hold office until his successor is duly
elected and is qualified or until his death or until he resigns or is removed in
the manner hereinafter provided.
Section 3. Removal. Any officer or agent elected or appointed
by the Board of Directors may be removed by the Board of Directors whenever in
its judgment the best interests of the Corporation would be served thereby, but
such removal shall be without prejudice to the contract rights, if any, of the
person so removed.
Section 4. Vacancies. A vacancy in any office because of
death, resignation, removal, disqualification or otherwise, may be filled by the
Board of Directors for the unexpired portion of the term.
Section 5. Chairman of the Board. The Chairman of the Board
shall preside at all meetings of the shareholders and the directors. The
Chairman of the Board shall represent the Corporation in all matters involving
the shareholders of the Corporation. He shall also perform such other duties the
Board of Directors may assign to him from time to time.
Section 6. Chief Executive Officer. The Chief Executive
Officer shall in general supervise and control all of the business and affairs
of the Corporation. He shall, in the absence of the Chairman of the Board,
preside at all meetings of the shareholders and of the Board of Directors and
shall enforce the observance of the Bylaws of the Corporation and the rules of
order for the meetings of the Board of Directors and the shareholders. He shall
keep the Board of Directors appropriately informed on the business and affairs
of the Corporation. He may sign, either alone or with the Secretary, an
Assistant Secretary or any other proper officer of the Corporation thereunto
authorized by the Board of Directors, certificates for shares of the
Corporation, any deed, mortgages, bonds, contracts, or other instruments which
the Board of Directors has authorized to be executed, except in cases where the
signing and execution thereof
-11-
<PAGE> 12
shall be expressly delegated by the Board of Directors or by these Bylaws to
some other officer or agent of the Corporation, or shall be required by law to
be otherwise signed or executed, and in general shall perform all duties
incident to the office of President and such other duties as may be prescribed
by the Board of Directors from time to time.
Section 7. President. The President shall have general and
active management of the business of the Corporation and shall see that all
orders and resolutions of the Board of Directors are carried into effect. He
shall, in the absence of the Chairman of the Board and the Chief Executive
Officer, preside at all meetings of the shareholders and of the Board of
Directors. He may sign, either alone or with any other proper officer, as
necessary, certificates for shares of the Corporation, any deed, mortgages,
bonds, contracts, or other instruments which the Board of Directors has
authorized to be executed, except in cases where the signing and execution
thereof shall be expressly delegated by the Board of Directors or by these
Bylaws to some other officer or agent of the Corporation, or shall be required
by law to be otherwise signed or executed, and in general shall perform all
duties incident to the office of Chief Executive Officer and such other duties
as may be prescribed by the Board of Directors from time to time.
Section 8. Chief Financial Officer. The Chief Financial
Officer shall arrange for the keeping of adequate records of all assets,
liabilities and transactions of the corporation. He shall provide for the
establishment of internal controls and see that adequate audits are currently
and regularly made. He shall submit to the President, the Chairman of the Board
and the Board of Directors timely statements of the accounts of the corporation
and the financial results of the operations thereof.
Section 9. Chief Operating Officer. The Chief Operating
Officer shall supervise the operation of the Corporation, subject to the
policies and directions of the Board of Directors. He shall provide for the
proper operation of the Corporation and oversee the internal interrelationship
amongst any and all departments of the Corporation. He shall submit to the
President and the Board of Directors timely reports on the operations of the
Corporation.
Section 10. The Vice-Presidents. In the absence of the
President or in the event of his death, inability or refusal to act, the
Vice-President (or in the event there be more than one Vice-President, the
Vice-Presidents in the order designated at the time of their election, or in the
absence of any designation, then in the order of their election) shall perform
the duties of the President, and when so acting, shall have all the powers of
and be subject to all the restrictions upon the President . Any Vice-President
may sign, either alone or with the Secretary or an Assistant Secretary,
certificates for shares of the Corporation any deed, mortgages, bonds, contracts
or other instruments which the Board of Directors has authorized to be executed,
except in cases where the signing and execution thereof shall be expressly
delegated by the Board of Directors or by these bylaws to some other officer or
agent of the Corporation, or shall be required by law to be otherwise signed or
executed, and shall perform such other duties as from time to time may be
assigned to him by the President or by the Board of Directors.
-12-
<PAGE> 13
Section 11. The Secretary. The Secretary shall: (a) prepare
and keep the minutes of the shareholders' and of the Board of Directors'
meetings in one or more books provided for that purpose; (b) see that all
notices are duly given in accordance with the provisions of these bylaws or as
required by law; (c) be custodian of the corporate records and of the seal (if
any) of the Corporation and see that said seal is affixed to all documents, the
execution of which on behalf of the Corporation under its seal is duly
authorized; (d) keep a register of the post office address of each shareholder
which shall be furnished to the Secretary by such shareholder; (e) sign with the
President or a Vice-President certificates for shares of the Corporation, the
issuance of which shall have been authorized by resolution of the Board of
Directors; (f) have general charge of the stock transfer books of the
Corporation; and (g) in general perform all duties as from time to time may be
assigned to him by the President or by the Board of Directors.
Section 12. Assistant Secretaries. The Assistant Secretaries,
when authorized by the Board of Directors, may sign with the President or a
Vice-President certificates for shares of the Corporation the issuance of which
shall have been authorized by a resolution of the Board of Directors. The
Assistant Secretaries, in general, shall perform such duties as shall be
assigned to them by the Secretary, or by the President or the Board of
Directors.
Section 13. Registered Agent. The Board of Directors shall
appoint a Registered Agent for the Corporation in accordance with the Tennessee
Business Corporation Act and may pay the agent such compensation from time to
time as it may deem appropriate.
ARTICLE VII
CONTRACTS, LOANS, CHECKS AND DEPOSITS
Section 1. Contracts. The Board of Directors may authorize any
officer or officers, agent or agents, to enter into any contract or execute and
deliver any instrument in the name of and on behalf of the Corporation, and such
authority may be general or confined to specific instances.
Section 2. Loans. No loans shall be contracted on behalf of
the Corporation and no evidences of indebtedness shall be issued in its name
unless authorized by a resolution of the Board of Directors. Such authority may
be general or confined to specific instances. Notwithstanding the foregoing, the
Corporation shall not make any loan other than a sale on credit in the ordinary
course of business or a life insurance policy loan, either directly or
indirectly, to any director or officer of the Corporation except with the
consent of the holders of a majority of all the outstanding shares owned or
controlled by shareholders other than a shareholder for whose benefit such
action is being taken, or if the Board of Directors determines that the loan
benefits the Corporation and approves the transaction.
Section 3. Checks, Drafts, etc. All checks, drafts, or other
orders for the pavement of money, notes or other evidences of indebtedness
issued in the name of the
-13-
<PAGE> 14
Corporation, shall be signed by such officer or officers, agent or agents of the
Corporation and in such manner as shall from time to time be determined by
resolution of the Board of Directors.
Section 4. Deposits. All funds of the Corporation not
otherwise employed shall be deposited from time to time to the credit of the
Corporation in such banks, trust companies or other depositories as the Board of
Directors may select.
ARTICLE VIII
SHARES OF STOCK
Section 1. Certificates for Shares. Certificates representing
shares of the Corporation shall be in such form as shall be determined by the
Board of Directors. Such certificates shall be signed by the President or
Vice-President and by the Secretary or an Assistant Secretary. The use of
facsimile signatures on any stock certificate of the Corporation is authorized.
All such certificates shall state the name of the Corporation, that it is
organized under the laws of the State of Tennessee, the name of the person to
whom issued, and the number of shares and class of shares that the certificate
represents. All certificates for shares shall be consecutively numbered or
otherwise identified. The name and address of the person to whom the shares
represented thereby are issued, with the number of shares and date of issue,
shall be entered on the stock transfer books of the Corporation. All
certificates surrendered to the Corporation for transfer shall be canceled and
no new certificate shall be issued until the former certificate for a number of
shares shall have been surrendered and canceled, except that in case of a lost,
destroyed or mutilated certificate a new one may be issued therefor upon such
terms and indemnity to the Corporation as the Board of Directors may prescribe.
Section 2. Registered Ownership of Shares. The Corporation
shall be entitled to treat the person in whose name any share of its stock is
registered as the owner thereof for all purposes and shall not be bound to
recognize any equitable or other claim to, or interest in, such share on the
part of any other person, whether or not the Corporation shall have notice
thereof, except as expressly provided by applicable law.
Section 3. Transfer of Shares. Shares of stock may be
transferred by delivery of the certificate accompanied either by an assignment
in writing on the back of the certificate or by a written power of attorney to
sell, assign and transfer the same on the books of the Corporation, signed by
the person appearing on the certificate to be the owner of the shares
represented thereby, and shall be transferable on the books of the Corporation
upon surrender thereof so assigned or endorsed. The person registered on the
books of the Corporation as the owner of any shares of stock shall be entitled
to all the rights of ownership with respect to such shares. It shall be the duty
of every shareholder to notify the Corporation of his post office address.
-14-
<PAGE> 15
ARTICLE IX
DIVIDENDS
The Board of Directors may from time to time declare, and the
Corporation may pay dividends on its outstanding shares in the manner and upon
the terms and conditions provided by the Tennessee Business Corporation Act and
by its Charter.
ARTICLE X
FISCAL YEAR
The books of the Corporation shall be on a calendar year basis
and shall begin on the lst day of January and end on the 31st day of December of
each year.
ARTICLE XI
SEAL
This Corporation may or may not have a seal and in any event
the failure to affix a corporate seal to any instrument executed by the
Corporation shall not affect the validity thereof. If a seal is adopted, the
seal of this Corporation shall include the following letters cut or engraved
thereon:
KIRKLAND'S INC.
ARTICLE XII
INDEMNIFICATION
Section 1. Definitions. As used in this Article XII:
(a) "Director" shall mean any individual who is or was
a director of the Corporation, or any individual who, [while a director of the
Corporation], is or was serving at the Corporation's request as a director,
officer, partner, trustee, employee, or agent of another foreign or domestic
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise. A director is considered to be serving an employee benefit plan at
the Corporation's request if the director's duties to the Corporation also
impose duties on or otherwise involves services by the director to the plan or
to participants in or beneficiaries of the plan. "Director" includes, unless the
context requires otherwise, the estate or personal representative of the
director;
(b) "Employee or Agent" shall mean any individual who
is or was an employee or agent of the Corporation [other than a director or
officer of the Corporation], or any individual who, is or was serving at the
Corporation's request as an employee or agent of another foreign or domestic
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise;
-15-
<PAGE> 16
(c) "Expenses" shall include reasonable costs,
disbursements and counsel fees;
(d) "Independent Legal Counsel" means a law firm, or a
member of a law firm, that (i) is experienced in matters of corporation law;
(ii) neither presently is, nor in the past five years has been, retained to
represent the Corporation or the corporate agent claiming indemnification or any
other party to the action, suit, or proceeding giving rise to a claim for
indemnification, in any matter material to the Corporation, the claimant or any
such other party; and (iii) would not, under applicable standards of
professional conduct then prevailing, have a conflict of interest in
representing either the Corporation or such corporate agent in an action to
determine the Corporation's or such person's rights under this Article XII;
(e) "Liability" shall mean any obligation to pay a
judgment, settlement, penalty, fine (including an excise tax assessed with
respect to an employee benefit plan), or reasonable expenses incurred with
respect to a proceeding;
(f) "Officer" shall mean any individual who is or was
an officer of the Corporation, or any individual who is or was serving at the
Corporation's request as an employee or agent of another foreign or domestic
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise; and
(g) "Proceeding" shall mean any threatened, pending, or
completed action, suit or proceeding, whether civil, criminal, administrative,
or investigative and whether formal or informal.
Section 2. General. Except as provided in Section 4 of this
Article XII, the Corporation shall indemnify any director or officer who is made
a party to any proceeding because the individual is or was a director or officer
against liability incurred in the proceeding if:
(a) the following standards are met:
(i) the individual's conduct was in good faith;
(ii) the individual reasonably believed,
(A) in the case of conduct in the
individual's official capacity with the Corporation, that the individual's
conduct was in the best interest of the Corporation; and
(B) in all other cases, that the
individual's conduct was at least not opposed to the best interests of the
Corporation; and
-16-
<PAGE> 17
(iii) in the case of any criminal proceeding, the
individual had no reasonable cause to believe the individual's conduct was
unlawful;
For purposes of Section 2(a)(ii)(B) hereof, with respect to an employee benefit
plan maintained by the Corporation, the individual shall be deemed to have
reasonably believed that the individual's conduct was not opposed to the best
interests of the Corporation if such conduct was for a purpose the individual
reasonably believed was in the interests of the participants in and
beneficiaries of the plan; and
(b) the individual was wholly successful, on the merits
or otherwise, in the defense of any proceedings to which the individual was a
party because that individual is or was a director or officer of the
Corporation.
Section 3. Termination of Proceedings. The termination of any
action or proceeding by judgment, order, settlement, conviction or upon a plea
of nolo contendere or its equivalent shall not, of itself, create a presumption
that the director or officer (i) did not act in good faith and in a manner that
the individual reasonably believed to be in, or not opposed to, the best
interests of the Corporation and (ii) with respect to any criminal proceeding,
had reasonable cause to believe that the individual's conduct was unlawful.
Section 4. Limitations. The Corporation shall not indemnify a
director or officer in connection with a proceeding by or in the right of the
Corporation in which such individual was adjudged liable to the Corporation or
in connection with any other proceeding charging improper personal benefit to
the individual, whether or not involving action in the individual's official
capacity, in which the individual was adjudged liable on the basis that personal
benefit was improperly received by such individual.
Section 5. Expenses. The Corporation shall pay for or
reimburse the reasonable expenses incurred by a director or officer who is a
party to a proceeding in advance of final disposition of the proceeding if:
(i) the director or officer furnishes the
Corporation a written affirmation of his good faith belief that he has met the
standard of conduct set forth in Section 2 of this Article XII;
(ii) the director or officer furnishes the
Corporation a written undertaking, executed personally or on his behalf, to
repay the advance if it is ultimately determined that he is not entitled to
indemnification; and
(iii) a determination is made that the facts then
known to those making the determination would not preclude indemnification under
this Article XII.
-17-
<PAGE> 18
Section 6. Determination and Authorization of Indemnification.
The Corporation may not indemnify a director or officer under Section 2 of this
Article XII unless authorized in the specific case after a determination has
been made that indemnification of the director or officer is permissible in the
circumstances because he has met the standard set forth in Section 2 of this
Article XII and is in accordance with the Procedures for Submission and
Determination of Claims for Indemnification set forth in the Appendix to these
Bylaws. The determination shall be made:
(i) By the Board of Directors by majority vote of a
quorum consisting of directors not at the time parties to the proceeding;
(ii) If a quorum cannot be obtained under Section
6(i) of this Article XII, by majority vote of a committee duly designated by the
Board of Directors (in which designation directors who are parties may
participate), consisting solely of two or more directors not at the time parties
to the proceeding;
(iii) By independent legal counsel:
(A) Selected by the Board of Directors or
its committee in the manner prescribed in Section 6(i) or Section 6(ii) of this
Article XII; or
(B) If a quorum of the Board of Directors
cannot be obtained under Section 6(i) and a committee cannot be designated under
Section 6(ii) of this Article XII, selected by majority vote of the full Board
of Directors (in which directors who are parties may participate); or
(iv) By the shareholders, but shares owned by or
voted under the control of directors who are at the time parties to the
proceeding may not be voted on the determination.
Section 7. Determination and Authorization of Expenses
Authorization of indemnification and evaluation that indemnification is
permissible as to reasonableness of expenses under Section 5 of this Article XII
shall be made in the same manner as the determination that indemnification is
permissible, except that, if the determination is made by independent legal
counsel, authorization of indemnification and evaluation as to reasonableness of
expenses shall be made by those entitled under Section 6(iii) of this Article
XII to select counsel.
Section 8. Employees and Agents. The Corporation may indemnify
and advance expenses to an employee or agent of the Corporation to the same
extent as a director or officer under Section 2 of this Article XII, subject to
the determination and authorization of indemnification procedures set forth in
Section 6 of this Article XII and in the Appendix to these Bylaws.
-18-
<PAGE> 19
Section 9. Applicability. The indemnification and advancement
of expenses granted pursuant to this Article XII shall not be deemed exclusive
of any other rights to which a director, officer, employee or agent seeking
indemnification or advancement of expenses may be entitled, whether contained in
the Charter or Bylaws of the Corporation, or authorized in a resolution of
shareholders, a resolution of directors, or an agreement providing for such
indemnification, to the extent permitted by applicable law.
Section 10. Intent and Interpretation. It is the intention of
this Article XII to provide for indemnification of directors and officers to the
fullest extent permitted by the Tennessee Business Corporation Act, and this
Article XII shall be interpreted accordingly. If this Article XII or any portion
hereof shall be invalidated on any ground by any court of competent
jurisdiction, then the Corporation shall nevertheless indemnify each director,
officer, employee, and agent of the Corporation as to costs, charges, and
expenses (including attorneys' fees), judgments, fines, and amounts paid in
settlement with respect to any proceeding, including an action by or in the
right of the Corporation, to the full extent permitted by any applicable portion
of this Article XII that shall not have been invalidated and to the full extent
permitted by applicable law. If the Tennessee Business Corporation Act is
amended or other Tennessee law is enacted to permit further or additional
indemnification of a director, officer, employee or agent of the Corporation
beyond that provided in this Article XII, then the Corporation shall be
permitted to indemnify such director, officer, employee or agent to the fullest
extent permitted by the Tennessee Business Corporation Act, as so amended, or by
such other Tennessee law.
Section 11. Insurance. The Corporation may purchase and
maintain insurance on behalf of an individual who is or was a director, officer,
employee, or agent of the Corporation, or who, while a director, officer,
employee, or agent of the Corporation, is or was serving at the request of the
Corporation as a director, officer, partner, trustee, employee, or agent of
another foreign or domestic corporation, partnership, joint venture, trust,
employee benefit plan, or other enterprise, against liability asserted against
or incurred by the individual in that capacity or arising from the individual's
status as a director, officer, employee, or agent, whether or not the
Corporation would have power to indemnify him against the same liability under
applicable state law.
ARTICLE XIII
AMENDMENTS
The Board of Directors is expressly authorized to repeal,
alter, amend or rescind these Bylaws of the Corporation by vote of a majority of
the Board of Directors at a legal meeting held in accordance with these Bylaws.
Notwithstanding any other provision of the Charter or these Bylaws (and
notwithstanding some lesser percentage may be specified by law), the Bylaws
shall be repealed, altered, amended or rescinded by the shareholders of the
-19-
<PAGE> 20
Corporation only by affirmative vote of at least 80 % of the outstanding shares
of capital stock of the Corporation entitled to vote generally, considered for
this purpose as one class.
ATTEST:
-------------------------------------
Name:
Title:
-20-
<PAGE> 21
APPENDIX
PROCEDURES FOR SUBMISSION AND
DETERMINATION OF CLAIMS FOR INDEMNIFICATION
PURSUANT TO ARTICLE XII OF THE BYLAWS.
Section 1. Purpose. The Procedures for Submission and
Determination of Claims for Indemnification Pursuant to Article XII of the
Bylaws (the "Procedures") are to implement the provisions of Article XII of the
Bylaws of the Corporation (the "Bylaws") in compliance with the requirements of
Section 6 of Article XII.
Section 2. Definitions. For purposes of these Procedures:
(a) All terms that are defined in Section 1 of Article
XII of the Bylaws shall have the meanings ascribed to them therein when used in
these Procedures unless otherwise defined herein.
(b) "Change of control" shall mean:
(i) the acquisition in one or more transactions by
any "Person" (as the term person is used for
purposes of Sections 13(d) or 14(d) of the
Securities Exchange Act of 1934 (the "Exchange
Act")) of "Beneficial ownership" (within the
meaning of Rule 13d-3 promulgated under the
Exchange Act) of twenty-five percent (25%) or
more of the combined voting power of the
Corporation's then outstanding voting
securities (the "Voting Securities"), provided
that for purposes of this clause (i) Voting
Securities acquired directly from the
Corporation by any Person shall be excluded
from the determination of such Person's
Beneficial ownership of Voting Securities (but
such Voting Securities shall be included in
the calculation of the total number of Voting
Securities then outstanding); or
(ii) approval by shareholders of the Corporation
of:
(A) a merger, reorganization or consolidation
involving the Corporation if the
shareholders of the Corporation
immediately before such merger,
reorganization or consolidation do not or
will not own directly or indirectly
immediately following such merger,
reorganization or consolidation, more
than fifty percent (50%) of the combined
voting
A-1
<PAGE> 22
power of the outstanding voting
securities of the Corporation resulting
from or surviving such merger,
reorganization or consolidation in
substantially the same proportion as
their ownership of the Voting Securities
outstanding immediately before such
merger, reorganization or consolidation;
or
(B) a complete liquidation or dissolution of
the Corporation; or
(C) an agreement for the sale or other
disposition of all or substantially all
of the assets of the Corporation; or
(iii) acceptance by shareholders of the Corporation
of shares in a share exchange if the
shareholders of the Corporation immediately
before such share exchange do not or will not
own directly or indirectly immediately
following such share exchange more than fifty
percent (50%) of the combined voting power of
the outstanding voting securities of the
entity with which the shareholders effect
such share exchange in substantially the same
proportion as their ownership of the Voting
Securities outstanding immediately before
such share exchange.
Section 3. Submission and Determination of Claims.
(a) To obtain indemnification or advancement of
expenses under [Section 2, Section 5 or Section 8 of] Article XII of the Bylaws,
a corporate agent shall submit to the Secretary of the Corporation a written
request therefor, including therein or therewith such documentation and
information as is reasonably available to the corporate agent and is reasonably
necessary to permit a determination as to whether and what extent the Corporate
agent is entitled to indemnification or advancement of expenses, as the case may
be. The Secretary shall, promptly upon receipt of a request for indemnification,
advise the Board of Directors thereof in writing if a determination in
accordance with Section 6 of Article XII of the Bylaws is required.
(b) Upon written request by an corporate agent for
indemnification pursuant to Section 3(a) hereof, a determination with respect to
the corporate agent's entitlement thereto in the specific case, if required by
the Bylaws, shall be made in accordance with Section 6 of Article XII of the
Bylaws, and, if it is so determined that the corporate agent is entitled to
A-2
<PAGE> 23
indemnification, payment to the corporate agent shall be made within ten days
after such determination. The corporate agent shall cooperate with the person,
persons or entity making such determination, with respect to the corporate
agent's entitlement to indemnification, including providing to such person,
persons or entity upon reasonable advance request any documentation or
information which is not privileged or otherwise protected from disclosure and
which is reasonably available to the corporate agent and reasonably necessary to
such determination.
(c) If entitlement to indemnification is to be made by
independent legal counsel pursuant to Section 6(iii) of Article XII of the
Bylaws such counsel shall be selected as provided in this Section 3(c). If a
change of control shall not have occurred, the independent legal counsel shall
be selected by the Board of Directors as set forth in Section 6(iii) of Article
XII of the Bylaws, and the Corporation shall give written notice to the
corporate agent advising the corporate agent of the identity of the independent
legal counsel so selected. If a change of control shall have occurred, the
independent legal counsel shall be selected by the corporate agent (unless the
corporate agent shall request that such selection be made by the Board of
Directors, in which event the immediately preceding sentence shall apply), and
the corporate agent shall give written notice to the Corporation advising it of
the identity of the independent legal counsel so selected. In either event, the
corporate agent or the Corporation, as the case may be, may, within seven days
after such written notice of selection shall have been given, deliver to the
Corporation or to the corporate agent, as the case may be, a written objection
to such selection. Such objection may be asserted only on the ground that the
independent legal counsel so selected does not meet the requirements of
"independent legal counsel" as defined in Section 1 of Article XII of the
Bylaws, and the objection shall set forth with particularity the factual basis
of such assertion. If such written objection is made, the independent legal
counsel so selected may not serve as independent legal counsel unless and until
a court has determined that such objection is without merit. If, within twenty
days after the next regularly scheduled Board of Directors meeting following
submission by the corporate agent of a written request for indemnification
pursuant to Section 3(a) hereof, no independent legal counsel shall have been
selected and not objected to, either the Corporation or the corporate agent may
petition the [SPECIFY COURT] Court of the State of Tennessee or other court of
competent jurisdiction for resolution of any objection which shall have been
made by the Corporation or the corporate agent to the other's selection of
independent legal counsel and/or for the appointment as independent legal
counsel of a person selected by the Court or by such other person as the Court
shall designate, and the person with respect to whom an objection is favorably
resolved or the person so appointed shall act as independent legal counsel under
Section 6(iii) of Article XII of the Bylaws. The Corporation shall pay any and
all reasonable fees and expenses (including without limitation any advance
retainers reasonably required by counsel) of independent legal counsel incurred
by such independent legal counsel in connection with acting pursuant to Section
6(iii) of Article XII of the Bylaws, and the Corporation shall pay all
reasonable fees and expenses (including without limitation any advance retainers
reasonably required by counsel) incident to the procedures of Section 6(iii) of
Article XII of the Bylaws and this Section 3(c), regardless of the manner in
which independent legal counsel was selected or appointed. Upon the delivery of
A-3
<PAGE> 24
its opinion pursuant to Section 6(iii) of Article XII of the Bylaws or, if
earlier, the due commencement of any judicial proceeding or arbitration pursuant
to Section 4(a)(3) of these Procedures, independent legal counsel shall be
discharged and relieved of any further responsibility in such capacity (subject
to the applicable standards of professional conduct then prevailing).
(d) If a change of control shall have occurred, in
making a determination with respect to entitlement to indemnification under the
Bylaws, the person, persons or entity making such determination shall presume
that an corporate agent is entitled to indemnification under the Bylaws if the
corporate agent has submitted a request for indemnification in accordance with
Section 3(a) hereof, and the Corporation shall have the burden of proof to
overcome that presumption in connection with the making by any person, persons
or entity of any determination contrary to that presumption.
Section 4. Review and Enforcement of Determination.
(a) In the event that (1) advancement of expenses is
not timely made pursuant to Section 5 of Article XII of the Bylaws, (2) payment
of indemnification is not made pursuant to Section 2 of Article XII of the
Bylaws within ten days after receipt by the Corporation of written request
therefor, (3) a determination is made pursuant to Section 6 of Article XII of
the Bylaws that a corporate agent is not entitled to indemnification under the
Bylaws, (4) the determination of entitlement to indemnification is to be made by
independent legal counsel pursuant to Section 6(iii) of Article XII of the
Bylaws and such determination shall not have been made and delivered in a
written opinion within ninety days after receipt by the Corporation of the
written request for indemnification, or (5) payment of indemnification is not
made within ten days after a determination has been made pursuant to Section 6
of Article XII of the Bylaws that a corporate agent is entitled to
indemnification, the corporate agent shall be entitled to an adjudication in an
appropriate court of the State of Tennessee, or in any other court of competent
jurisdiction, of the corporate agent's entitlement to such indemnification or
advancement of expenses. Alternatively, the corporate agent, at his or her
option, may seek an award in arbitration to be conducted by a single arbitrator
pursuant to the rules of the American Arbitration Association. The corporate
agent shall commence such proceeding seeking an adjudication or an award in
arbitration within one year following the date on which the corporate agent
first has the right to commence such proceeding pursuant to this Section 4(a).
The Corporation shall not oppose the corporate agent's right to seek any such
adjudication or award in arbitration.
(b) In the event that a determination shall have been
made pursuant to Section 6 of Article XII of the Bylaws that a corporate agent
is not entitled to indemnification, any judicial proceeding or arbitration
commenced pursuant to this Section 4 shall be conducted in all respects as a de
novo trial, or arbitration, on the merits and the corporate agent shall not be
prejudiced by reason of that adverse determination. If a change of control shall
have occurred, the Corporation shall have the burden of proving in any judicial
proceeding or arbitration
A-4
<PAGE> 25
commenced pursuant to this Section 4 that the corporate agent is not entitled to
indemnification or advancement of expenses, as the case may be.
(c) If a determination shall have been made or deemed
to have been made pursuant to Section 6 of Article XII of the Bylaws that a
corporate agent is entitled to indemnification, the Corporation shall be bound
by such determination in any judicial proceeding or arbitration commenced
pursuant to this Section 4, absent (1) a misstatement or omission of a material
fact in connection with the corporate agent's request for indemnification, or
(2) a prohibition of such indemnification under applicable law.
(d) The Corporation shall be precluded from asserting
in any judicial proceeding or arbitration commenced pursuant to this Section 4
that the procedures and presumptions of these Procedures are not valid, binding
and enforceable, and shall stipulate in any such judicial proceeding or
arbitration that the Corporation is bound by all the provisions of these
Procedures.
(e) In the event that a corporate agent, pursuant to
this Section 4, seeks to enforce the corporate agent's rights under, or to
recover damages for breach of, Article XII of the Bylaws or these Procedures in
a judicial proceeding or arbitration, the Corporate agent shall be entitled to
recover from the Corporation, and shall be indemnified by the Corporation
against, any and all expenses [(of the types described in the definition of
expenses in Section 1 of Article XII of the Bylaws)] actually and reasonably
incurred in such judicial proceeding or arbitration, but only if the corporate
agent prevails therein. If it shall be determined in such judicial proceeding or
arbitration that the corporate agent is entitled to receive part but not all of
the indemnification or advancement of expenses sought, the expenses incurred by
the corporate agent in connection with such judicial proceeding or arbitration
shall be appropriately prorated.
Section 5. AMENDMENTS. These Procedures may be amended at any
time and from time to time in the same manner as any bylaw of the Corporation in
accordance with the Amended and Restated Charter of the Corporation and the
Bylaws; provided, however, that notwithstanding any amendment, alteration or
repeal of these Procedures or any provision hereof, any corporate agent shall be
entitled to utilize these Procedures with respect to any claim for
indemnification arising out of any action taken or omitted prior to such
amendment, alteration or repeal except to the extent otherwise required by law.
A-5
<PAGE> 1
EXHIBIT 10.1
CREDIT AGREEMENT
AMONG
KIRKLAND HOLDINGS L.L.C.
THE BORROWERS SPECIFIED HEREIN,
THE SEVERAL LENDERS
FROM TIME TO TIME PARTIES HERETO,
THE FIRST NATIONAL BANK OF BOSTON,
AS ADMINISTRATIVE AGENT
AND
LEHMAN COMMERCIAL PAPER INC.,
AS ADVISOR AND ARRANGER
DATED AS OF JUNE 12, 1996
<PAGE> 2
TABLE OF CONTENTS
Page
SECTION 1. DEFINITIONS..................................................... 2
1.1 Defined Terms.................................................. 2
1.2 Other Definitional Provisions.................................. 22
SECTION 2. AMOUNT AND TERMS OF COMMITMENTS................................. 22
2.1 Tranche A Term Loans........................................... 22
2.2 Procedure for Tranche A Term Loan Borrowing.................... 22
2.3 Tranche B Term Loans........................................... 23
2.4 Procedure for Tranche B Term Loan Borrowing.................... 23
2.5 Revolving Credit Commitments................................... 23
2.6 Procedure for Revolving Credit Borrowing....................... 24
2.7 Clean-Up....................................................... 24
2.8 Commitment Fees, etc. ......................................... 25
2.9 Repayment of Loans; Evidence of Debt........................... 25
2.10 Termination or Reduction of Revolving Credit Commitments...... 26
2.11 Optional Prepayments.......................................... 26
2.12 Mandatory Prepayments and Commitment Reductions............... 27
2.13 Conversion and Continuation Options........................... 28
2.14 Minimum Amounts and Maximum Number of Eurodollar Tranches..... 29
2.15 Interest Rates and Payment Dates.............................. 29
2.16 Computation of Interest and Fees.............................. 30
2.17 Inability to Determine Interest Rate.......................... 30
2.18 Pro Rata Treatment and Payments; Use of Proceeds.............. 31
2.19 Illegality.................................................... 32
2.20 Requirements of Law........................................... 32
2.21 Taxes ........................................................ 33
2.22 Indemnity..................................................... 35
2.23 Change of Lending Office...................................... 35
2.24 Right of Contribution......................................... 35
2.25 Swing Line Commitment......................................... 36
2.26 Procedure for Swing Line Borrowing............................ 36
2.27 Refunded Swing Line Loans; Swing Line Loan Participations..... 37
SECTION 3. LETTERS OF CREDIT............................................... 38
3.1 L/C Commitment................................................. 38
3.2 Procedure for Issuance of Letter of Credit..................... 39
3.3 Fees, Commissions and Other Charges............................ 39
3.4 L/C Participations............................................. 40
3.5 Reimbursement Obligation of the Borrowers...................... 41
3.6 Obligations Absolute........................................... 41
3.7 Letter of Credit Payments...................................... 41
3.8 Applications................................................... 42
-i-
<PAGE> 3
Page
SECTION 4. REPRESENTATIONS AND WARRANTIES.................................. 42
4.1 Financial Condition............................................ 42
4.2 No Change...................................................... 43
4.3 Corporate Existence; Compliance with Law....................... 43
4.4 Corporate Power; Authorization; Enforceable Obligations........ 43
4.5 No Legal Bar................................................... 44
4.6 No Material Litigation......................................... 44
4.7 No Default..................................................... 44
4.8 Ownership of Property; Liens................................... 44
4.9 Intellectual Property.......................................... 44
4.10 No Burdensome Restrictions.................................... 45
4.11 Taxes ........................................................ 45
4.12 Federal Regulations........................................... 45
4.13 ERISA ........................................................ 45
4.14 Investment Company Act; Other Regulations..................... 46
4.15 Subsidiaries.................................................. 46
4.16 Purpose of Loans; Limitations on Use.......................... 46
4.17 Environmental Matters......................................... 46
4.18 Accuracy of Information....................................... 47
4.19 Security Documents............................................ 48
4.20 Solvency...................................................... 48
4.21 Purchase Agreement Representations and Warranties............. 48
SECTION 5. CONDITIONS PRECEDENT............................................ 48
5.1 Conditions to Initial Extension of Credit...................... 48
5.2 Conditions to Each Extension of Credit......................... 53
SECTION 6. AFFIRMATIVE COVENANTS........................................... 54
6.1 Financial Statements........................................... 54
6.2 Certificates; Other Information................................ 55
6.3 Payment of Obligations......................................... 56
6.4 Conduct of Business and Maintenance of Existence, etc. ........ 56
6.5 Maintenance of Property; Insurance............................. 56
6.6 Inspection of Property; Books and Records; Discussions......... 57
6.7 Notices........................................................ 57
6.8 Environmental Laws............................................. 58
6.9 Interest Rate Protection....................................... 58
6.10 Further Assurances............................................ 58
6.11 Additional Collateral......................................... 58
6.12 Key Man Life Insurance........................................ 59
6.13 Store Locations............................................... 59
6.14 Landlord Waivers.............................................. 59
6.15 Purchase Agreement Affirmative Covenants...................... 59
6.16 Termination of Series C Preferred Voting Rights............... 60
SECTION 7. NEGATIVE COVENANTS.............................................. 60
-ii-
<PAGE> 4
Page
7.2 Limitation on Indebtedness..................................... 63
7.3 Limitation on Liens............................................ 64
7.4 Limitation on Guarantee Obligations............................ 65
7.5 Limitation on Fundamental Changes.............................. 65
7.6 Limitation on Sale of Assets................................... 66
7.7 Limitation on Restricted Payments.............................. 66
7.8 Limitation on Capital Expenditures............................. 67
7.9 Limitation on Investments, Loans and Advances.................. 67
7.10 Limitation on Optional Payments and Modifications
of Debt Instruments and Preferred Stock, etc................. 68
7.11 Limitation on Transactions with Affiliates.................... 68
7.12 Limitation on Sales and Leasebacks............................ 68
7.13 Limitation on Changes in Fiscal Year.......................... 69
7.14 Limitation on Negative Pledge Clauses......................... 69
7.15 Limitation on Lines of Business............................... 69
7.16 Limitation on Activities of the Parent........................ 69
7.17 Purchase Agreement Negative Covenants......................... 69
SECTION 8. EVENTS OF DEFAULT............................................... 70
SECTION 9. THE ADMINISTRATIVE AGENT........................................ 73
9.1 Appointment.................................................... 73
9.2 Delegation of Duties........................................... 74
9.3 Exculpatory Provisions......................................... 74
9.4 Reliance by Administrative Agent............................... 74
9.5 Notice of Default.............................................. 75
9.6 Non-Reliance on Administrative Agent and Other Lenders......... 75
9.7 Indemnification................................................ 75
9.8 Administrative Agent in Its Individual Capacity................ 76
9.9 Successor Administrative Agent................................. 76
9.10 The Arranger.................................................. 76
SECTION 10. GUARANTEE...................................................... 77
10.1 Guarantee..................................................... 77
10.2 No Subrogation, Contribution, Reimbursement or Indemnity...... 77
10.3 Amendments, etc. with respect to the Obligations.............. 77
10.4 Guarantee Absolute and Unconditional.......................... 78
10.5 Reinstatement................................................. 79
10.6 Payments...................................................... 79
SECTION 11. MISCELLANEOUS.................................................. 79
11.1 Amendments and Waivers........................................ 79
11.2 Notices....................................................... 80
11.3 No Waiver; Cumulative Remedies................................ 82
11.4 Survival...................................................... 82
11.5 Payment of Expenses and Taxes................................. 82
-iii-
<PAGE> 5
Page
11.6 Successors and Assigns; Participations and Assignments........ 83
11.7 Adjustments; Set-off.......................................... 86
11.8 Counterparts.................................................. 87
11.9 Severability.................................................. 87
11.10 Integration.................................................. 87
11.11 GOVERNING LAW................................................ 87
11.12 Submission To Jurisdiction; Waivers.......................... 87
11.13 Acknowledgements............................................. 88
11.14 WAIVERS OF JURY TRIAL........................................ 88
11.15 Confidentiality.............................................. 89
11.16 Reliance on Representations and Actions of Designated
Borrower.................................................... 89
-iv-
<PAGE> 6
SCHEDULES:
1.1A Schedule of Borrowers
1.1B Commitments and Addresses of Lenders
1.1C Mortgaged Property
1.1D Tranche A Term Loan Amortization Schedule
1.1E Tranche B Term Loan Amortization Schedule
4.4 Consents, Authorizations, Filings and Notices
4.19(b) UCC Filing Jurisdictions
4.19(c) Mortgage Filing Jurisdiction
5.1(y) Prior Credit Facilities
7.2(d) Existing Indebtedness
7.3(f) Existing Liens
7.4(a) Existing Guarantee Obligations
7.11 Transactions with Affiliates
EXHIBITS:
A-1 Form of Revolving Credit Note
A-2 Form of Tranche A Term Note
A-3 Form of Tranche B Term Note
A-4 Form of Swing Line Note
B Form of Borrowers Security Agreement
C Form of Mortgage
D Form of Assignment and Acceptance
E-1 Form of Parent Pledge Agreement
E-2 Form of Management Pledge Agreement
F Form of Assignment of Insurance
G Form of Closing Certificate
H-1 Legal Opinion of Pepper, Hamilton & Scheetz
H-2 Legal Opinion of Baker, Donelson, Bearman & Caldwell
I-1 Form of Alternative Revolving Credit Note
I-2 Form of Alternative Tranche A Term Note
I-3 Form of Alternative Tranche B Term Note
J Form of Swing Line Loan Participation Certificate
-v-
<PAGE> 7
CREDIT AGREEMENT, dated as of June 12, 1996, among Kirkland's Holdings
L.L.C., a Delaware limited liability company (the "Parent"), the entities listed
on Schedule 1.1A hereto, as joint and several borrowers hereunder (the
"Borrowers"), the several banks and other financial institutions or entities
from time to time parties to this Agreement (the "Lenders"), The First National
Bank of Boston, as Administrative Agent (as hereinafter defined) for the Lenders
hereunder, and Lehman Commercial Paper Inc., as advisor and arranger with
respect to the credit facilities contained herein (the "Arranger").
W I T N E S S E T H
WHEREAS, funds (the "Advent Funds") affiliated with Advent International
Corporation ("Advent") own 64.26% of the membership interests of the Parent;
WHEREAS, the Parent has agreed to acquire all of the Class A Preferred
Stock and common stock from each of the Borrowers which after the transactions
contemplated by the Recapitalization Agreement (as defined herein) will comprise
approximately 68.4% of the common stock of each of the Borrowers;
WHEREAS, immediately following the Parent's investment in the Borrowers, a
portion of the capital stock of the Borrowers owned by Carl Kirkland, Bruce
Moore, Robert Alderson (collectively, the "Management Shareholders") and Robert
Kirkland (together with the Management Shareholders, the "Individual
Shareholders") will be redeemed (the "Redemptions");
WHEREAS, the Redemptions will be financed by (a) the issuance by the
Borrowers of: (i) $20,000,000 of 12.25% to 12.50% senior subordinated notes (the
"Subordinated Debt") to Capital Resource Lenders II, L.P., Allied Capital
Corporation, Allied Capital Corporation II and The Marlboro Capital Investment
Fund, L.P., and Capital Trust Investments, Ltd. (collectively, the "Subordinated
Debt Holders"); (ii) at least $30,749,220 of Series A Redeemable Preferred Stock
(the "Series A Preferred") to the Parent; and (iii) at least $14,205,780 of
Series B Redeemable Preferred Stock (the "Series B Preferred") to the Individual
Shareholders and (b) borrowings under the credit facilities provided for herein
in an amount not to exceed $52,000,000;
WHEREAS, following the Redemptions, certain Individual Shareholders will
purchase common stock of the Borrowers and the Borrowers will recapitalize so
that each of the Individual Shareholders owns 25% of the outstanding Class B
Preferred Stock and 7.9% of the outstanding common stock of the Borrowers;
WHEREAS, in connection with the issuance of the Subordinated Debt, the
Borrowers have issued to the Subordinated Debt Holders the Warrants (as defined
below);
WHEREAS, the Borrowers have requested that the Lenders make the Loans and
issue and participate in the Letters of Credit (as defined herein) to provide
for a portion of the financing required for the Redemptions and the ongoing
working capital needs of the Borrowers;
<PAGE> 8
2
WHEREAS, all the obligations of the Borrowers under the Loan Documents (as
defined herein) will be secured by, among other things, (i) a security interest
in and perfected lien on certain assets and property of the Borrowers and (ii) a
pledge of all the issued and outstanding capital stock of each Borrower, and all
such obligations will be unconditionally guaranteed by the Parent;
NOW, THEREFORE, the parties hereto hereby agree as follows:
SECTION 1. DEFINITIONS
1.1 Defined Terms. As used in this Agreement, the following terms shall
have the following meanings:
"Affiliate": as to any Person, any other Person which, directly or
indirectly, is in control of, is controlled by, or is under common control
with, such Person. For purposes of this definition, "control" of a Person
means the power, directly or indirectly, either to (a) vote 10% or more of
the securities having ordinary voting power for the election of directors
of such Person or (b) direct or cause the direction of the management and
policies of such Person, whether by contract or otherwise.
"Administrative Agent": The First National Bank of Boston, together
with its affiliates, as the administrative agent for the Lenders under
this Agreement and the other Loan Documents, and together with any of
their respective successors.
"Advent": as defined in the recitals hereto.
"Advent Funds": as defined in the recitals hereto.
"Aggregate Outstanding Revolving Extensions of Credit": as to any
Revolving Credit Lender at any time, an amount equal to the sum of (a) the
aggregate principal amount of all Revolving Credit Loans made by such
Lender then outstanding, (b) such Lender's Revolving Credit Percentage of
the L/C Obligations then outstanding and (c) such Lender's Revolving
Credit Percentage of the aggregate principal amount of Swing Line Loans
then outstanding.
"Agreement": this Credit Agreement, as amended, supplemented or
otherwise modified from time to time.
"Alternative Note": as defined in Section 11.6(d).
"Alternative Noteholder": as defined in Section 11.6(e).
<PAGE> 9
3
"Applicable Margin": for each Type of Loan, the rate per annum set
forth under the relevant column heading below:
<TABLE>
<CAPTION>
Eurodollar
Base Rate Loans Loans
--------------- ----------
<S> <C> <C>
Revolving Credit Loans 2-1/4% 3-1/4%
Tranche A Loans 2-1/4% 3-1/4%
Tranche B Term Loans 2-3/4% 3-3/4%
</TABLE>
"Application": an application, in such form as the Issuing Lender
may specify from time to time, requesting the Issuing Lender to open a
Letter of Credit.
"Arranger": as defined in the preamble hereto.
"Asset Sale": any sale or other disposition by the Parent, any
Borrower or any of their Subsidiaries of any asset or assets of the
Parent, such Borrower or such Subsidiary (including any sale and leaseback
of assets and any mortgage of real property other than pursuant to a
Mortgage); provided, that any sale of assets expressly permitted by
clauses (a), (b), (c) or (d) of Section 7.6 shall not constitute an "Asset
Sale" hereunder.
"Assignee": as defined in Section 11.6(c).
"Assignment of Insurance": the Assignments of Insurance, each
executed and delivered by [the appropriate Borrower], substantially in the
form of Exhibit F, as the same may be amended, supplemented or otherwise
modified from time to time.
"Available Revolving Credit Commitment": as to any Lender at any
time, an amount equal to the excess, if any, of (a) such Lender's
Revolving Credit Commitment over (b) such Lender's Aggregate Outstanding
Revolving Extensions of Credit; provided, that in calculating any Lender's
Aggregate Outstanding Revolving Extensions of Credit for the purpose of
determining such Lender's Available Revolving Credit Commitment pursuant
to Section 2.8(a), the aggregate unpaid principal amount of Swing Line
Loans then outstanding shall be deemed to be zero.
"Base Rate": for any day, a rate per annum (rounded upwards, if
necessary, to the next 1/16 of 1%) equal to the greater of (a) the Prime
Rate in effect on such day, and (b) the Federal Funds Effective Rate in
effect on such day plus 1/2 of 1%. For purposes hereof: "Prime Rate" shall
mean the rate of interest per annum publicly announced from time to time
by the Administrative Agent as its prime or base rate in effect at its
principal office in Boston, Massachusetts; and "Federal Funds Effective
Rate" shall mean, for any day, the weighted average of the rates on
overnight federal funds transactions with members of the Federal Reserve
System arranged by federal funds brokers, as published on the next
succeeding Business Day by the Federal Reserve Bank of New York, or, if
such rate is not so published for any day which is a Business Day, the
average of the quotations for the day of such transactions received
<PAGE> 10
4
by the Administrative Agent from three federal funds brokers of recognized
standing selected by it. Any change in the Base Rate due to a change in
the Prime Rate or the Federal Funds Effective Rate shall be effective as
of the opening of business on the effective day of such change in the
Prime Rate or the Federal Funds Effective Rate, respectively.
"Base Rate Loans": Loans the rate of interest applicable to which is
based upon the Base Rate.
"Board": the Board of Governors of the Federal Reserve System of the
United States (or any successor).
"Borrowers Security Agreement": the Borrowers Security Agreement to
be executed and delivered by each Borrower, substantially in the form of
Exhibit B, as the same may be amended, supplemented or otherwise modified
from time to time.
"Borrowing Date": any Business Day specified in a notice pursuant to
Section 2.2, 2.4, 2.6 or 2.26 as a date on which the Designated Borrower
requests the Lenders to make Loans hereunder.
"Business": as defined in Section 4.17.
"Business Day": a day other than a Saturday, Sunday or other day on
which commercial banks in Boston, Massachusetts are authorized or required
by law to close.
"Capital Expenditures": for any period, with respect to any Person,
the aggregate of all expenditures by such Person and its Subsidiaries for
the acquisition or leasing (pursuant to a capital lease) of fixed or
capital assets or additions to equipment (including replacements,
capitalized repairs and improvements during such period) which should be
capitalized under GAAP on a combined balance sheet of such Person and its
Subsidiaries.
"Capital Lease Obligations": as to any Person, the obligations of
such Person to pay rent or other amounts under any lease of (or other
arrangement conveying the right to use) real or personal property, or a
combination thereof, which obligations are required to be classified and
accounted for as capital leases on a balance sheet of such Person under
GAAP and, for the purposes of this Agreement, the amount of such
obligations at any time shall be the capitalized amount thereof at such
time determined in accordance with GAAP.
"Capital Stock": any and all shares, interests, participations or
other equivalents (however designated) of capital stock of a corporation,
any and all equivalent ownership interests in a Person (other than a
corporation) and any and all warrants, rights or options to purchase any
of the foregoing.
<PAGE> 11
5
"Cash Equivalents": (a) marketable direct obligations issued by, or
unconditionally guaranteed by, the United States Government or issued by
any agency thereof and backed by the full faith and credit of the United
States, in each case maturing within one year from the date of
acquisition; (b) certificates of deposit, time deposits, eurodollar time
deposits or overnight bank deposits having maturities of six months or
less from the date of acquisition issued by any Lender or by any
commercial bank organized under the laws of the United States or any state
thereof having combined capital and surplus of not less than $250,000,000;
and (c) commercial paper of (i) an issuer rated at least A-1 by Standard &
Poor's Ratings Services or P-1 by Moody's Investors Service, Inc., or
carrying an equivalent rating by a nationally recognized rating agency, if
both of the two named rating agencies cease publishing ratings of
commercial paper issuers generally or (ii) the holding company of any
Lender, and, in either case, maturing within six months from the date of
acquisition.
"C/D Assessment Rate": for any day as applied to any Base Rate Loan,
the annual assessment rate in effect on such day which is payable by a
member of the Bank Insurance Fund maintained by the Federal Deposit
Insurance Corporation (the "FDIC") classified as well-capitalized and
within supervisory subgroup "B" (or a comparable successor assessment risk
classification) within the meaning of 12 C.F.R. Section 327.3(d) (or any
successor provision) to the FDIC (or any successor) for the FDIC's (or
such successor's) insuring time deposits at offices of such institution in
the United States.
"C/D Reserve Percentage": for any day as applied to any Base
Rate Loan, that percentage (expressed as a decimal) which is in effect
on such day, as prescribed by the Board, for determining the maximum
reserve requirement for a Depositary Institution (as defined in
Regulation D of the Board as in effect from time to time) in respect of
new non-personal time deposits in Dollars having a maturity of 30 days
or more.
"Certificate of Designations": the Certificate of Designations,
dated June 7, 1996 and effective as of June 12, 1996 at 12:01 a.m., of
each Borrower.
"Closing Date": the date on which the conditions precedent set forth
in Section 5.1 shall be satisfied.
"Code": the Internal Revenue Code of 1986, as amended from time to
time.
"Collateral": all assets of the Loan Parties or the Individual
Shareholders, now owned or hereafter acquired, upon which a Lien is
purported to be created by any Security Document.
"Combined Current Assets": at a particular date, all amounts (other
than cash and Cash Equivalents) which would, in conformity with GAAP, be
set forth opposite
<PAGE> 12
6
the caption "total current assets" (or any like caption) on a combined
balance sheet of the Borrowers and their Subsidiaries at such date.
"Combined Current Liabilities": at a particular date, all amounts
which would, in conformity with GAAP, be set forth opposite the caption
"total current liabilities" (or any like caption) on a combined balance
sheet of the Borrowers and their Subsidiaries at such date, but excluding
(a) the current portion of any Funded Debt of the Borrowers and their
Subsidiaries and (b) without duplication of clause (a) above, all
Indebtedness consisting of Revolving Credit Loans or Swing Line Loans to
the extent otherwise included therein.
"Combined EBITDA": for any period, Combined Net Income for such
period plus, without duplication and to the extent reflected as a charge
in the statement of such Combined Net Income for such period, the sum of
(a) total income tax expense, (b) interest expense, amortization or
writeoff of debt discount and debt issuance costs and commissions,
discounts and other fees and charges associated with Indebtedness
(including the Loans), (c) depreciation and amortization expense, (d)
amortization of intangibles (including, but not limited to, goodwill) and
organization costs, (e) any extraordinary expenses or losses (including,
whether or not otherwise includable as a separate item in the statement of
such Combined Net Income for such period, losses on sales of assets
outside of the ordinary course of business), (f) any other noncash charges
(excluding inventory writedowns and LIFO charges) and (g) if applicable,
restructuring charges, write-off of goodwill and licensing agreements and
minus, to the extent included in the statement of such Combined Net Income
for such period, the sum of (a) non-cash interest income, (b) any
extraordinary income or gains (including, whether or not otherwise
includable as a separate item in the statement of such Combined Net Income
for such period, gains on the sales of assets outside of the ordinary
course of business) and (c) any other noncash income, all as determined on
a combined basis.
"Combined Fixed Charge Coverage Ratio": for any period, the ratio of
(a) (i) the sum of (without duplication) (A) Combined EBITDA for such
period, (B) any Management Fee accrued during such period and (C) Combined
Lease Expense minus (ii) the sum of (without duplication) (A) any
provision for cash income taxes made by the Borrowers or any of their
Subsidiaries on a combined basis in respect of such period, and (B)
Capital Expenditures actually paid in cash for such period to (b) the sum
(without duplication) of (I) Combined Interest Expense for such period,
(II) any Management Fee accrued during such period, (III) scheduled
payments required to have been made during such period on account of
principal of Indebtedness of the Borrowers or any of their Subsidiaries
(including the Loans but excluding optional principal prepayments in
respect of Revolving Credit Loans) and (IV) Combined Lease Expense,
determined without duplication of items included in Combined Interest
Expense.
<PAGE> 13
7
"Combined Interest Coverage Ratio": for any period, the ratio of (a)
Combined EBITDA plus the Management Fee for such period to (b) Combined
Interest Expense for such period.
"Combined Interest Expense": for any period, total interest expense
(including that attributable to Capital Lease Obligations), both expensed
and capitalized, of the Borrowers and their Subsidiaries for such period
with respect to all outstanding Indebtedness of the Borrowers and their
Subsidiaries (including, without limitation, all commissions, discounts
and other fees and charges owed with respect to letters of credit and
bankers' acceptance financing and net costs under Interest Rate Protection
Agreements to the extent such net costs are allocable to such period in
accordance with GAAP), determined on a combined basis in accordance with
GAAP.
"Combined Lease Expense": for any period, the aggregate amount of
fixed and contingent rentals payable by the Borrowers and their
Subsidiaries, determined on a combined basis in accordance with GAAP, for
such period with respect to leases of real and personal property; provided
that amounts included in Capital Lease Obligations shall be excluded from
Combined Lease Expense.
"Combined Management Fee Ratio": for any fiscal year, the ratio of
(a) Combined EBITDA plus the Management Fee for such fiscal year to (b)
the sum of (I) Combined Interest Expense for such fiscal year plus (II)
any Management Fee accrued during such fiscal year.
"Combined Net Income": for any period, the combined net income (or
loss) of the Borrowers and their Subsidiaries, determined on a combined
basis in accordance with GAAP; provided that there shall be excluded (a)
the income (or deficit) of any Person accrued prior to the date it becomes
a Subsidiary of the Borrowers or is merged into or combined with the
Borrowers or any of their Subsidiaries, (b) the income (or deficit) of any
Person (other than a Subsidiary of the Borrowers) in which the Borrowers
or any of their Subsidiaries has an ownership interest, except to the
extent that any such income is actually received by the Borrowers or such
Subsidiary in the form of dividends or similar distributions and (c) the
undistributed earnings of any Subsidiary of the Borrowers to the extent
that the declaration or payment of dividends or similar distributions by
such Subsidiary is not at the time permitted by the terms of any
Contractual Obligation (other than under any Loan Document) or Requirement
of Law applicable to such Subsidiary.
"Combined Net Worth": at a particular date, all amounts which would,
in conformity with GAAP, be included on a combined balance sheet of the
Borrowers and their Subsidiaries as at such date for Preferred Stock plus
any increase or decrease in retained earnings between the Closing Date and
such date.
"Combined Total Debt": at any date, the aggregate principal amount
of all Funded Debt (other than Revolving Credit Loans, Swing Line Loans
and
<PAGE> 14
8
Reimbursement Obligations) of the Borrowers and their Subsidiaries at such
date, determined on a combined basis in accordance with GAAP.
"Combined Total Debt Ratio": as of the last day of any period, the
ratio of (a) Combined Total Debt as of such day to (b) Combined EBITDA
plus the Management Fee for such period.
"Combined Working Capital": the excess of Combined Current Assets
over Combined Current Liabilities.
"Commercial Letter of Credit": as defined in Section 3.1(a).
"Commitment": as to any Lender, the sum of the Tranche A Term Loan
Commitment, the Tranche B Term Loan Commitment and the Revolving Credit
Commitment of such Lender.
"Commonly Controlled Entity": an entity, whether or not
incorporated, which is under common control with any Borrower within the
meaning of Section 4001 of ERISA or is part of a group which includes any
Borrower and which is treated as a single employer under Section 414 of
the Code.
"Confidential Information Memorandum": the Confidential Information
Memorandum dated as of May, 1996 with respect to the Borrowers and the
credit facilities provided for herein.
"Consulting Agreement": the consulting agreement dated June 12,
1996, between Kirkland's Inc. and Robert Kirkland.
"Contractual Obligation": as to any Person, any provision of any
security issued by such Person or of any agreement, instrument or other
undertaking to which such Person is a party or by which it or any of its
property is bound.
"Default": any of the events specified in Section 8, whether or not
any requirement for the giving of notice, the lapse of time, or both, has
been satisfied.
"Designated Borrower": Kirkland's Inc., a Tennessee corporation, on
behalf of itself or any of the other Borrowers in accordance with the
terms hereof.
"Dollars" and "$": dollars in lawful currency of the United States.
"Environmental Laws": any and all foreign, Federal, state, local or
municipal laws, rules, orders, regulations, statutes, ordinances, codes,
decrees, requirements of any Governmental Authority or other Requirements
of Law (including common law) regulating, relating to or imposing
liability or standards of conduct concerning the protection of human
health or the environment, as now or may at any time hereafter be in
effect.
<PAGE> 15
9
"ERISA": the Employee Retirement Income Security Act of 1974, as
amended from time to time.
"Eurocurrency Reserve Requirements": for any day as applied to a
Eurodollar Loan, the aggregate (without duplication) of the rates
(expressed as a decimal fraction) of reserve requirements in effect on
such day (including, without limitation, basic, supplemental, marginal and
emergency reserves under any regulations of the Board or other
Governmental Authority having jurisdiction with respect thereto) dealing
with reserve requirements prescribed for eurocurrency funding (currently
referred to as "Eurocurrency Liabilities" in Regulation D of the Board)
maintained by a member bank of the Federal Reserve System.
"Eurodollar Base Rate": with respect to each day during each
Interest Period pertaining to a Eurodollar Loan, the rate of interest
determined on the basis of the rate for deposits in dollars for a period
equal to such Interest Period commencing on the first day of such Interest
Period appearing on Page 3750 of the Telerate Service as of 11:00 A.M.,
London time, two Business Days prior to the beginning of such Interest
Period. In the event that such rate does not appear on Page 3750 of the
Telerate Service (or otherwise on such service), the "Eurodollar Base
Rate" shall be determined by reference to such other publicly available
service for displaying eurodollar rates as may be agreed upon by the
Administrative Agent and the Designated Borrower or, in the absence of
such agreement, the "Eurodollar Base Rate" shall instead be the rate per
annum equal to the rate at which the Administrative Agent is offered
Dollar deposits at or about 10:00 A.M., New York City time, two Business
Days prior to the beginning of such Interest Period in the interbank
eurodollar market where the eurodollar and foreign currency and exchange
operations in respect of its Eurodollar Loans are then being conducted for
delivery on the first day of such Interest Period for the number of days
comprised therein and in an amount comparable to the amount of its
Eurodollar Loans to be outstanding during such Interest Period.
"Eurodollar Loans": Loans the rate of interest applicable to which
is based upon the Eurodollar Rate.
"Eurodollar Rate": with respect to each day during each Interest
Period pertaining to a Eurodollar Loan, a rate per annum determined for
such day in accordance with the following formula (rounded upward to the
nearest 1/100th of 1%):
Eurodollar Base Rate
----------------------------------------
1.00 - Eurocurrency Reserve Requirements
"Eurodollar Tranche": the collective reference to Eurodollar Loans
that are Tranche A Term Loans, Tranche B Term Loans or Revolving Credit
Loans, as the case may be, the then current Interest Periods with respect
to all of which begin on the same date and end on the same later date
(whether or not such Loans shall originally have been made on the same
day).
<PAGE> 16
10
"Event of Default": any of the events specified in Section 8,
provided that any requirement for the giving of notice, the lapse of time,
or both, has been satisfied.
"Excess Cash Flow": for any period, Combined Net Income for such
period, plus the sum of (i) depreciation expense and amortization expense
deducted from earnings in determining such Combined Net Income, (ii) the
net increase during such period (if any) in deferred tax accounts, (iii)
any proceeds received by the Borrowers during such period in respect of
the key man life insurance policies required hereunder and (iv) the
decrease during such period (if any) in Combined Working Capital minus the
sum of (i) the net decrease during such period (if any) in deferred tax
accounts, (ii) the aggregate amount actually paid in cash during such
period on account of Capital Expenditures permitted hereunder (but only to
the extent not financed by Indebtedness or capital contributions), in each
case, determined on a consolidated basis in accordance with GAAP, (iii)
the increase during such period (if any) in Combined Working Capital and
(iv) scheduled principal payments on Indebtedness of the Borrowers and
their Subsidiaries not prohibited hereunder during such period (not
including optional principal prepayments in respect of Revolving Credit
Loans or Swing Line Loans). For purposes of calculating Excess Cash Flow
for the fiscal year ending December 31, 1996, (i) any change in Combined
Working Capital shall be calculated for the entire fiscal year ending
December 31, 1996, and (ii) all other amounts shall be calculated based on
the period from the Closing Date through December 31, 1996.
"Excess Cash Flow Application Date": as defined in Section 2.12(c).
"Financing Lease": any lease of property, real or personal, the
obligations of the lessee in respect of which are required in accordance
with GAAP to be capitalized on a balance sheet of the lessee.
"Funded Debt": as to any Person, all Indebtedness of such Person
that matures more than one year from the date of its creation or matures
within one year from such date but is renewable or extendible, at the
option of such Person, to a date more than one year from such date or
arises under a revolving credit or similar agreement that obligates the
lender or lenders to extend credit during a period of more than one year
from such date, including, without limitation, all current maturities and
current sinking fund payments in respect of such Indebtedness whether or
not required to be paid within one year from the date of its creation and,
in the case of the Borrowers, all current maturities in respect of the
Loans.
"GAAP": generally accepted accounting principles in the United
States in effect from time to time.
"Governmental Authority": any nation or government, any state or
other political subdivision thereof and any entity exercising executive,
legislative, judicial, regulatory or administrative functions of or
pertaining to government.
<PAGE> 17
11
"Guarantee Obligation": as to any Person (the "guaranteeing
person"), any obligation of (a) the guaranteeing person or (b) another
Person (including, without limitation, any bank under any letter of
credit) to induce the creation of which the guaranteeing person has issued
a reimbursement, counterindemnity or similar obligation, in either case
guaranteeing or in effect guaranteeing any Indebtedness, leases, dividends
or other obligations (the "primary obligations") of any other third Person
(the "primary obligor") in any manner, whether directly or indirectly,
including, without limitation, any obligation of the guaranteeing person,
whether or not contingent, (i) to purchase any such primary obligation or
any property constituting direct or indirect security therefor, (ii) to
advance or supply funds (1) for the purchase or payment of any such
primary obligation or (2) to maintain working capital or equity capital of
the primary obligor or otherwise to maintain the net worth or solvency of
the primary obligor, (iii) to purchase property, securities or services
primarily for the purpose of assuring the owner of any such primary
obligation of the ability of the primary obligor to make payment of such
primary obligation or (iv) otherwise to assure or hold harmless the owner
of any such primary obligation against loss in respect thereof; provided,
however, that the term Guarantee Obligation shall not include endorsements
of instruments for deposit or collection in the ordinary course of
business. The amount of any Guarantee Obligation of any guaranteeing
person shall be deemed to be the lower of (a) an amount equal to the
stated or determinable amount of the primary obligation in respect of
which such Guarantee Obligation is made and (b) the maximum amount for
which such guaranteeing person may be liable pursuant to the terms of the
instrument embodying such Guarantee Obligation, unless such primary
obligation and the maximum amount for which such guaranteeing person may
be liable are not stated or determinable, in which case the amount of such
Guarantee Obligation shall be such guaranteeing person's maximum
reasonably anticipated liability in respect thereof as determined by the
Borrowers in good faith.
"Incur": as defined in Section 7.2.
"Indebtedness": of any Person at any date, without duplication, (a)
all indebtedness of such Person for borrowed money, (b) all obligations of
such Person for the deferred purchase price of property or services (other
than current trade payables incurred in the ordinary course of such
Person's business), (c) all obligations of such Person evidenced by notes,
bonds, debentures or other similar instruments, (d) all indebtedness
created or arising under any conditional sale or other title retention
agreement with respect to property acquired by such Person (even though
the rights and remedies of the seller or lender under such agreement in
the event of default are limited to repossession or sale of such
property), (e) all Capital Lease Obligations (and not operating lease
obligations) of such Person, (f) all obligations, contingent or otherwise,
of such Person as an account party under acceptance, letter of credit or
similar facilities, (g) all obligations of such Person to purchase,
redeem, retire or otherwise acquire for value any Capital Stock of such
Person, (h) all Guarantee Obligations of such Person and (i) all
obligations of the kind referred to in clauses (a) through (h) above
secured by any Lien on property (including, without limitation,
<PAGE> 18
12
accounts and contract rights) owned by such Person, whether or not such
Person has assumed or become liable for the payment of such obligation.
"Individual Shareholders": as defined in the recitals hereto.
"Insolvency": with respect to any Multiemployer Plan, the condition
that such Plan is insolvent within the meaning of Section 4245 of ERISA.
"Insolvent": pertaining to a condition of Insolvency.
"Insurance Policies": (i) key man life insurance policies on each of
the three Management Shareholders in the amount of $3,000,000 per person,
on terms satisfactory to the Arranger, (ii) the insurance policies the
Borrowers are required to maintain pursuant to Sections 6.5 and 6.12 and
(iii) the insurance policies the Borrowers are required to maintain
pursuant to Section 4.2 of the Borrowers Security Agreement.
"Interest Payment Date": (a) as to any Base Rate Loan, the last day
of each March, June, September and December to occur while such Loan is
outstanding, (b) as to any Eurodollar Loan having an Interest Period of
three months or less, the last day of such Interest Period, (c) as to any
Eurodollar Loan having an Interest Period longer than three months, each
day which is three months, or a whole multiple thereof, after the first
day of such Interest Period and the last day of such Interest Period.
"Interest Period": as to any Eurodollar Loan, (a) initially, the
period commencing on the borrowing or conversion date, as the case may be,
with respect to such Eurodollar Loan and ending one, two, three or six
months thereafter, as selected by the Borrowers in their notice of
borrowing or notice of conversion, as the case may be, given with respect
thereto; and (b) thereafter, each period commencing on the last day of the
next preceding Interest Period applicable to such Eurodollar Loan and
ending one, two, three or six months thereafter, as selected by the
Borrowers by irrevocable notice to the Administrative Agent not less than
three Business Days prior to the last day of the then current Interest
Period with respect thereto; provided that, all of the foregoing
provisions relating to Interest Periods are subject to the following:
(i) if any Interest Period would otherwise end on a day that is not
a Business Day, such Interest Period shall be extended to the next
succeeding Business Day unless the result of such extension would be to
carry such Interest Period into another calendar month in which event such
Interest Period shall end on the immediately preceding Business Day;
(ii) any Interest Period that would otherwise extend beyond the
Revolving Credit Termination Date (in the case of Revolving Credit Loans)
or beyond the date final payment is due on the Tranche A Term Loans or the
Tranche B Term Loans (in the case of the Term Loans) shall end on the
Revolving Credit Termination Date or such date of final payment, as
applicable;
<PAGE> 19
13
(iii) any Interest Period that begins on the last Business Day of a
calendar month (or on a day for which there is no numerically
corresponding day in the calendar month at the end of such Interest
Period) shall end on the last Business Day of a calendar month; and
(iv) the Borrowers shall select Interest Periods so as not to
require a payment or prepayment of any Eurodollar Loan during an Interest
Period for such Loan.
"Interest Rate Protection Agreement": any interest rate protection
agreement, interest rate futures contract, interest rate option, interest
rate cap or other interest rate hedge arrangement, to or under which the
Borrowers or any Subsidiary is a party or a beneficiary on the date hereof
or becomes a party or a beneficiary after the date hereof.
"Issuing Lender": The First National Bank of Boston, in its capacity
as issuer of any Letter of Credit and any other Lender designated as
"Issuing Lender" hereunder by the Designated Borrower with the consent of
the Arranger, the Administrative Agent and such Lender.
"L/C Commitment": $5,000,000.
"L/C Fee Payment Date": the last day of each March, June, September
and December and the last day of the Revolving Credit Commitment Period.
"L/C Obligations": at any time, an amount equal to the sum of (a)
the aggregate then undrawn and unexpired amount of the then outstanding
Letters of Credit and (b) the aggregate amount of drawings under Letters
of Credit which have not then been reimbursed pursuant to Section 3.5.
"L/C Participants": the collective reference to all the Revolving
Credit Lenders other than the Issuing Lender.
"Letters of Credit": as defined in Section 3.1(a).
"Lien": any mortgage, pledge, hypothecation, assignment, deposit
arrangement, encumbrance, lien (statutory or other), charge or other
security interest or any preference, priority or other security agreement
or preferential arrangement of any kind or nature whatsoever (including,
without limitation, any conditional sale or other title retention
agreement and any capital lease having substantially the same economic
effect as any of the foregoing).
"Loan": any loan made by any Lender pursuant to this Agreement.
"Loan Documents": this Agreement, the Notes, the Applications and
the Security Documents.
<PAGE> 20
14
"Loan Parties": the Parent, the Borrowers and each other Subsidiary
of the Parent or the Borrowers which is a party to a Loan Document.
"Management Contracts": the collective reference to the letter
agreements, each dated June 12, 1996, between Kirkland's, Inc. and each of
the Management Shareholders.
"Management Fee": the amount payable to (a) the Management
Shareholders pursuant to clause (b) of the third sentence of Section 2 of
the Management Contracts and (b) to Robert Kirkland pursuant to Section 3
of the Consulting Agreement.
"Management Pledge Agreement": the Pledge Agreement to be executed
and delivered by the Management Shareholders substantially in the form of
Exhibit E-2, as the same may be amended, supplemented or otherwise
modified from time to time.
"Management Shareholders": as defined in the recitals hereto.
"Material Adverse Effect": a material adverse effect on (a) the
consummation of the Recapitalization in accordance with the
Recapitalization Documents, (b) the business, assets, results of
operations, financial condition or prospects of the Parent, the Borrowers
and their Subsidiaries taken as a whole or (c) the validity or
enforceability of this Agreement or any of the other Loan Documents or the
rights or remedies of the Administrative Agent or the Lenders hereunder or
thereunder.
"Material Environmental Amount": an amount payable by the Borrowers
and/or their Subsidiaries in excess of $250,000 for remedial costs,
compliance costs, compensatory damages, punitive damages, fines, penalties
or any combination thereof.
"Materials of Environmental Concern": any gasoline or petroleum
(including crude oil or any fraction thereof) or petroleum products or any
hazardous or toxic substances, materials or wastes, defined or regulated
as such in or under any Environmental Law, including, without limitation,
asbestos, polychlorinated biphenyls and urea-formaldehyde insulation.
"Mortgage": the mortgage or deed of trust made by the appropriate
Loan Party in favor of, or for the benefit of, the Administrative Agent
for the benefit of the Lenders, substantially in the form of Exhibit C
(with such changes thereto as shall be advisable under the law of the
jurisdiction in which such mortgage or deed of trust is to be recorded),
as the same may be amended, supplemented or otherwise modified from time
to time.
"Mortgaged Property": the real property listed on Schedule 1.1C, as
to which the Administrative Agent for the benefit of the Lenders shall be
granted a Lien pursuant to each Mortgage.
<PAGE> 21
15
"Multiemployer Plan": a Plan which is a multiemployer plan as
defined in Section 4001(a)(3) of ERISA.
"Net Cash Proceeds": (a) in connection with any Asset Sale or any
Recovery Event, the proceeds thereof in the form of cash and Cash
Equivalents (including any such proceeds received by way of deferred
payment of principal pursuant to a note or installment receivable or
purchase price adjustment receivable or otherwise, but only as and when
received) of such Asset Sale or Recovery Event, net of attorneys' fees,
accountants' fees, investment banking fees, amounts required to be applied
to the repayment of Indebtedness secured by a Lien expressly permitted
hereunder on any asset which is the subject of such Asset Sale or Recovery
Event (other than any Lien in favor of the Administrative Agent for the
benefit of the Lenders) and other customary fees and expenses actually
incurred in connection therewith and net of taxes paid or reasonably
estimated to be payable as a result thereof (after taking into account any
available tax credits or deductions and any tax sharing arrangements) and
(b) in connection with any issuance or sale of equity securities or debt
securities or instruments or the incurrence of loans, the cash proceeds
received from such issuance or incurrence, net of attorneys' fees,
investment banking fees, accountants' fees, underwriting discounts and
commissions and other customary fees and expenses actually incurred in
connection therewith.
"Non-Excluded Taxes": as defined in Section 2.21(a).
"Non-U.S. Lender": as defined in Section 2.21(b).
"Notes": the collective reference to the Tranche A Term Notes, the
Tranche B Term Notes, the Revolving Credit Notes and the Swing Line Notes.
"Obligations": the unpaid principal of and interest on (including,
without limitation, interest accruing after the maturity of the Loans and
Reimbursement Obligations and interest accruing after the filing of any
petition in bankruptcy, or the commencement of any insolvency,
reorganization or like proceeding, relating to the Borrowers, whether or
not a claim for post-filing or post-petition interest is allowed in such
proceeding) the Notes and all other obligations and liabilities of the
Borrowers to the Administrative Agent or to any Lender, whether direct or
indirect, absolute or contingent, due or to become due, or now existing or
hereafter incurred, which may arise under, out of, or in connection with,
this Agreement, any other Loan Document, the Letters of Credit, any
Interest Rate Protection Agreement entered into with any Lender or any
other document made, delivered or given in connection herewith or
therewith, whether on account of principal, interest, reimbursement
obligations, fees, indemnities, costs, expenses (including, without
limitation, all fees, charges and disbursements of counsel to the
Administrative Agent or to any Lender that are required to be paid by the
Borrowers pursuant hereto).
<PAGE> 22
16
"Parent Pledge Agreement": the Parent Pledge Agreement to be
executed and delivered by the Parent, substantially in the form of Exhibit
E, as the same may be amended, supplemented or otherwise modified from
time to time.
"Participant": as defined in Section 11.6(b).
"PBGC": the Pension Benefit Guaranty Corporation established
pursuant to Subtitle A of Title IV of ERISA (or any successor).
"Person": an individual, partnership, corporation, business trust,
joint stock company, trust, unincorporated association, joint venture,
Governmental Authority or other entity of whatever nature.
"Plan": at a particular time, any employee benefit plan which is
covered by ERISA and in respect of which the Borrowers or a Commonly
Controlled Entity is (or, if such plan were terminated at such time, would
under Section 4069 of ERISA be deemed to be) an "employer" as defined in
Section 3(5) of ERISA.
"Pledge Agreements": the collective reference to the Management
Pledge Agreement and the Parent Pledge Agreement.
"Preferred Stock": the collective reference to the Series A
Preferred, the Series B Preferred and the Series C Preferred, in each
case, as defined in the recitals hereto.
"Prior Credit Facilities": the debt obligations referred to on
Schedule 5.1(y).
"Pro Forma Balance Sheet": as defined in Section 4.1(a).
"Projections": as defined in Section 6.2(c).
"Properties": the collective reference to the real property owned,
leased or operated by the Parent, the Borrowers or any of their
Subsidiaries.
"Purchase Agreement": the Senior Subordinated Note and Warrant
Purchase Agreement dated as of June 12, 1996 among the Subordinated Debt
Holders and the Borrowers.
"Recapitalization": as defined in the Recapitalization Agreement.
"Recapitalization Agreement": the Recapitalization Agreement dated
April 26, 1996 among the Parent, the Borrowers and the Individual
Shareholders, together with such amendments, waivers, supplements and
other modifications thereto as shall be reasonably satisfactory to the
Administrative Agent and the Lenders (the consent of the Administrative
Agent and the Lenders shall only be required with respect to material
amendments, waivers, supplements and other modifications).
<PAGE> 23
17
"Recapitalization Documents": the Recapitalization Agreement and any
agreement or other document entered into or executed by any Loan Party in
connection with the Recapitalization Agreement.
"Recovery Event": any settlement of or payment in respect of a
property or casualty insurance claim relating to any asset of the Parent,
the Borrowers or any of their Subsidiaries.
"Refunded Swing Line Loans": as defined in Section 2.27(a).
"Register": as defined in Section 11.6(g).
"Registration Rights Agreement" the Registration Rights Agreement
dated as of June 12, 1996 among the Parent, Kirkland's Inc., the other
corporations listed on the signature pages thereto, the Subordinated Debt
Holders and the Individual Shareholders, as amended, supplemented or
otherwise modified from time to time.
"Reimbursement Obligation": the obligation of the Borrowers to
reimburse the Issuing Lender pursuant to Section 3.5 for amounts drawn
under Letters of Credit.
"Reinvestment Deferred Amount": with respect to any Reinvestment
Event, the aggregate Net Cash Proceeds received by the Parent, the
Borrowers or any of their Subsidiaries in connection therewith which are
not applied to prepay the Term Loans or reduce the Revolving Credit
Commitments pursuant to Section 2.12(b) as a result of the delivery of a
Reinvestment Notice.
"Reinvestment Event": any Recovery Event in respect of which the
Designated Borrower has delivered a Reinvestment Notice.
"Reinvestment Notice": a written notice executed by a Responsible
Officer of the Designated Borrower to the Administrative Agent within 30
days of the Reinvestment Event to which it relates stating that no Event
of Default has occurred and is continuing and that the Borrowers (directly
or indirectly through another Subsidiary), in good faith, intend and
expect to use all or a specified portion of the Net Cash Proceeds of a
Recovery Event to restore or replace the assets in respect of which such
Recovery Event occurred within twelve months from the date of receipt of
such Net Cash Proceeds (provided that if the affected assets constituted
Collateral, such restored or replacement assets shall also constitute
Collateral).
"Reinvestment Prepayment Amount": with respect to any Reinvestment
Event, the Reinvestment Deferred Amount relating thereto less any amount
expended prior to the relevant Reinvestment Prepayment Date to restore or
replace the assets in respect of which a Recovery Event has occurred.
"Reinvestment Prepayment Date": with respect to any Reinvestment
Event, the earliest of (a) the first date occurring after such
Reinvestment Event on which an
<PAGE> 24
18
Event of Default shall have occurred, (b) the date occurring twelve months
after such Reinvestment Event and (c) the date on which the applicable
Borrower shall have determined not to, or shall have otherwise ceased to,
restore or replace the assets in respect of which a Recovery Event has
occurred.
"Reorganization": with respect to any Multiemployer Plan, the
condition that such plan is in reorganization within the meaning of
Section 4241 of ERISA.
"Reportable Event": any of the events set forth in Section 4043(b)
of ERISA, other than those events as to which the thirty day notice period
is waived under subsection .13, .14, .16, .18, .19 or .20 of PBGC Reg.
Section 2615.
"Required Lenders": at any date shall mean the holders of 66-2/3% or
more of (a) until the Closing Date, the Commitments and (b) thereafter,
the sum of (i) the aggregate unpaid principal amount of the Term Loans and
(ii) the aggregate Revolving Credit Commitments, or, if the Revolving
Credit Commitments have been terminated, the Aggregate Outstanding
Revolving Extensions of Credit of the Revolving Credit Lenders.
"Requirement of Law": as to any Person, the Certificate of
Incorporation and By-Laws or other organizational or governing documents
of such Person, and any law, treaty, rule or regulation or determination
of an arbitrator or a court or other Governmental Authority, in each case
applicable to or binding upon such Person or any of its property or to
which such Person or any of its property is subject.
"Responsible Officer": the chief executive officer, president or
chief financial officer of the Parent, the Designated Borrower or any
other Borrower, as the case may be, but in any event, with respect to
financial matters, the chief financial officer of the Parent, the
Designated Borrower or any other Borrower, as the case may be.
"Revolving Credit Commitment": as to any Lender, the obligation of
such Lender, if any, to make Revolving Credit Loans to and/or issue or
participate in Letters of Credit issued on behalf of a Borrower hereunder
in an aggregate principal and/or face amount not to exceed the amount set
forth under the heading "Revolving Credit Commitment" opposite such
Lender's name on Schedule 1.1B, as the same may be changed from time to
time pursuant to the terms hereof.
"Revolving Credit Commitment Period": the period from and including
the Closing Date to but not including the Revolving Credit Termination
Date, or such earlier date on which the Revolving Credit Commitments shall
have been terminated.
"Revolving Credit Lender": each Lender which has a Revolving Credit
Commitment or which has made Revolving Credit Loans.
"Revolving Credit Loans": as defined in Section 2.5(a).
<PAGE> 25
19
"Revolving Credit Note": as defined in Section 2.9(e).
"Revolving Credit Percentage": as to Revolving Credit Lender at any
time, the percentage which such Lender's Revolving Credit Commitment then
constitutes of the aggregate Revolving Credit Commitments (or, at any time
after the Revolving Credit Commitments shall have expired or terminated,
the percentage which the aggregate principal amount of such Lender's
Revolving Credit Loans then outstanding constitutes of the aggregate
principal amount of the Revolving Credit Loans then outstanding).
"Revolving Credit Termination Date": June 30, 2001.
"Security Documents": the collective reference to each Mortgage, the
Borrowers Security Agreement, the Pledge Agreements, the Assignments of
Insurance and all other security documents hereafter delivered to the
Administrative Agent granting a Lien on any asset or assets of any Person
to secure the obligations and liabilities of the Borrowers hereunder
and/or under any of the other Loan Documents or to secure any guarantee of
any such obligations and liabilities.
"Series C Preferred": the $20,000,000 of Series C Redeemable
Preferred Stock issued by the Borrowers pursuant to the Recapitalization
Agreement.
"Shareholders Agreement": the Shareholders Agreement dated as of
June 12, 1996 among the Parent, the Borrowers, the Individual Shareholders
and the Subordinated Debt Holders, as amended, supplemented or otherwise
modified from time to time.
"Single Employer Plan": any Plan which is covered by Title IV of
ERISA, but which is not a Multiemployer Plan.
"Solvent": when used with respect to any Person, means that, as of
any date of determination, (a) the amount of the "present fair saleable
value" of the assets of such Person will, as of such date, exceed the
amount of all "liabilities of such Person, contingent or otherwise", as of
such date, as such quoted terms are determined in accordance with
applicable federal and state laws governing determinations of the
insolvency of debtors, (b) the present fair saleable value of the assets
of such Person will, as of such date, be greater than the amount that will
be required to pay the liability of such Person on its debts as such debts
become absolute and matured, (c) such Person will not have, as of such
date, an unreasonably small amount of capital with which to conduct its
business, and (d) such Person will be able to pay its debts as they
mature. For purposes of this definition, (i) "debt" means liability on a
"claim", and (ii) "claim" means any (x) right to payment, whether or not
such a right is reduced to judgment, liquidated, unliquidated, fixed,
contingent, matured, unmatured, disputed, undisputed, legal, equitable,
secured or unsecured or (y) right to an equitable remedy for breach of
performance if such breach gives rise to a right to payment, whether or
not such right to an equitable remedy is reduced to judgment, fixed,
contingent, matured or unmatured, disputed, undisputed, secured or
unsecured.
<PAGE> 26
20
"Standby Letter of Credit": as defined in Section 3.1(a).
"Subordinated Debt": as defined in the recitals hereto.
"Subordinated Debt Holders": as defined in the recitals hereto.
"Subordination Agreement": the Subordination and Intercreditor
Agreement dated as of June 12, 1996 by and among the Administrative Agent,
on behalf of the Lenders, and the Subordinated Debt Holders.
"Subsidiary": as to any Person, a corporation, partnership or other
entity of which shares of stock or other ownership interests having
ordinary voting power (other than stock or such other ownership interests
having such power only by reason of the happening of a contingency) to
elect a majority of the board of directors or other managers of such
corporation, partnership or other entity are at the time owned, or the
management of which is otherwise controlled, directly or indirectly
through one or more intermediaries, or both, by such Person. Unless
otherwise qualified, all references to a "Subsidiary" or to "Subsidiaries"
in this Agreement shall refer to a Subsidiary or Subsidiaries of a
Borrower.
"Swing Line Commitment": the obligation of the Swing Line Lender to
make Swing Line Loans pursuant to Section 2.25 in an aggregate principal
amount at any one time outstanding not to exceed $2,500,000.
"Swing Line Lender": as defined in Section 2.25.
"Swing Line Loan Participation Certificate": a certificate
substantially in the form of Exhibit J.
"Swing Line Loans": as defined in Section 2.25.
"Swing Line Note": as defined in Section 2.9(e).
"Swing Line Participation Amount": as defined in Section 2.27(c).
"Term Loan Lenders": the collective reference to the Tranche A Term
Loan Lenders and the Tranche B Term Loan Lenders.
"Term Loans": the collective reference to the Tranche A Term Loans
and Tranche B Term Loans.
"Tranche A Loans": the collective reference to the Tranche A Term
Loans, the Revolving Credit Loans and Swing Line Loans.
"Tranche A Term Loan": as defined in Section 2.1.
<PAGE> 27
21
"Tranche A Term Loan Commitment": as to any Lender, the obligation
of such Lender, if any, to make a Tranche A Term Loan to the Borrowers
hereunder in a principal amount not to exceed the amount set forth under
the heading "Tranche A Term Loan Commitment" opposite such Lender's name
on Schedule 1.1B.
"Tranche A Term Loan Lender": each Lender which has a Tranche A Term
Loan Commitment or which has made a Tranche A Term Loan.
"Tranche A Term Loan Percentage": as to any Tranche A Term Loan
Lender at any time, the percentage which such Lender's Tranche A Term Loan
Commitment then constitutes of the aggregate Tranche A Term Loan
Commitments (or, at any time after the Closing Date, the percentage which
the aggregate principal amount of such Lender's Tranche A Term Loans then
outstanding constitutes of the aggregate principal amount of the Tranche A
Term Loans then outstanding).
"Tranche A Term Note": as defined in Section 2.9(e).
"Tranche B Term Loan": as defined in Section 2.3.
"Tranche B Term Loan Commitment": as to any Tranche B Term Loan
Lender, the obligation of such Lender, if any, to make a Tranche B Term
Loan to the Borrowers hereunder in a principal amount not to exceed the
amount set forth under the heading "Tranche B Term Loan Commitment"
opposite such Lender's name on Schedule 1.1B.
"Tranche B Term Loan Lender": each Lender which has a Tranche B Term
Loan Commitment or which has made a Tranche B Term Loan.
"Tranche B Term Loan Percentage": as to any Lender at any time, the
percentage which such Lender's Tranche B Term Loan Commitment then
constitutes of the aggregate Tranche B Term Loan Commitments (or, at any
time after the Closing Date, the percentage which the aggregate principal
amount of such Lender's Tranche B Term Loans then outstanding constitutes
of the aggregate principal amount of the Tranche B Term Loans then
outstanding).
"Tranche B Term Note": as defined in Section 2.9(e).
"Transferee": as defined in Section 11.6(i).
"Type": as to any Loan, its nature as a Base Rate Loan or a
Eurodollar Loan.
"Uniform Customs": the Uniform Customs and Practice for Documentary
Credits (1993 Revision), International Chamber of Commerce Publication No.
500, as the same may be amended from time to time.
"United States": the United States of America.
<PAGE> 28
22
"U.S. Taxes": as defined in Section 11.6(d).
"Warrants": collectively, (a) the warrants to purchase up to 10% of
the common stock of each of the Borrowers and (b) the Contingent Warrants
(as defined in the Purchase Agreement) to purchase up to 3.5% of the
common stock of each of the Borrowers, in each case, pursuant to the
Purchase Agreement.
"Wholly Owned Subsidiary": as to any Person, any other Person all of
the Capital Stock of which (other than directors' qualifying shares
required by law) is owned by such Person directly and/or through other
Wholly Owned Subsidiaries.
1.2 Other Definitional Provisions. (a) Unless otherwise specified
therein, all terms defined in this Agreement shall have the defined
meanings when used in the other Loan Documents or any certificate or other
document made or delivered pursuant hereto or thereto.
(b) As used herein and in the other Loan Documents, and any certificate or
other document made or delivered pursuant hereto or thereto, accounting terms
relating to the Parent, the Borrowers and their Subsidiaries not defined in
Section 1.1 and accounting terms partly defined in Section 1.1, to the extent
not defined, shall have the respective meanings given to them under GAAP.
(c) The words "hereof", "herein" and "hereunder" and words of similar
import when used in this Agreement shall refer to this Agreement as a whole and
not to any particular provision of this Agreement, and Section, Schedule and
Exhibit references are to this Agreement unless otherwise specified.
(d) The meanings given to terms defined herein shall be equally applicable
to both the singular and plural forms of such terms.
SECTION 2. AMOUNT AND TERMS OF COMMITMENTS
2.1 Tranche A Term Loans. Subject to the terms and conditions hereof, each
Tranche A Term Loan Lender severally agrees to make term loans (a "Tranche A
Term Loan") to the Borrowers, jointly and severally, on the Closing Date in an
amount not to exceed the amount of the Tranche A Term Loan Commitment of such
Lender. The Tranche A Term Loans may from time to time be (a) Eurodollar Loans,
(b) Base Rate Loans or (c) a combination thereof, as determined by the
Designated Borrower and notified to the Administrative Agent in accordance with
Sections 2.2 and 2.13.
2.2 Procedure for Tranche A Term Loan Borrowing. The Designated Borrower,
as agent for the Borrowers, shall give the Administrative Agent irrevocable
notice (which notice must be received by the Administrative Agent prior to 10:00
A.M., New York City time, one Business Day prior to the anticipated Closing
Date) requesting that the Tranche A Term Loan Lenders make Tranche A Term
Loan(s) on the Closing Date and specifying (a)
<PAGE> 29
23
the amount to be borrowed, (b) the account to which the proceeds of such Loans
should be deposited and (c) the Closing Date. The Tranche A Term Loans made on
the Closing Date shall initially be Base Rate Loans and no Tranche A Term Loan
may be converted into or continued as a Eurodollar Loan having an Interest
Period in excess of one month prior to the date which is 60 days after the
Closing Date. Upon receipt of such notice, the Administrative Agent shall
promptly notify each Tranche A Term Loan Lender thereof. Not later than 12:00
Noon, New York City time, on the Closing Date, each Tranche A Term Loan Lender
shall make available to the Administrative Agent at its office specified in
Section 11.2 an amount in immediately available funds equal to the Tranche A
Term Loan to be made by such Lender. The Administrative Agent shall on such date
by 2:00 P.M., New York City time, deposit to the designated account, in
accordance with the instructions of the Designated Borrower, the aggregate of
the amounts made available to the Administrative Agent by the Tranche A Term
Loan Lenders in immediately available funds.
2.3 Tranche B Term Loans. Subject to the terms and conditions hereof, each
Tranche B Term Loan Lender severally agrees to make term loans (a "Tranche B
Term Loan") to the Borrowers, jointly and severally, on the Closing Date in an
amount not to exceed the amount of the Tranche B Term Loan Commitment of such
Lender then in effect. The Tranche B Term Loans may from time to time be (a)
Eurodollar Loans, (b) Base Rate Loans or (c) a combination thereof, as
determined by the Designated Borrower and notified to the Administrative Agent
in accordance with Sections 2.4 and 2.13.
2.4 Procedure for Tranche B Term Loan Borrowing. The Designated Borrower,
as agent for the Borrowers, shall give the Administrative Agent irrevocable
notice (which notice must be received by the Administrative Agent prior to 10:00
A.M., New York City time, one Business Day prior to the anticipated Closing
Date) requesting that the Tranche B Term Loan Lenders make the Tranche B Term
Loan(s) on the Closing Date and specifying (a) the amount to be borrowed, (b)
the account to which the proceeds of such Loans shall be deposited and (c) the
Closing Date. The Tranche B Term Loans made on the Closing Date shall initially
be Base Rate Loans and no Tranche B Term Loan may be converted into or continued
as a Eurodollar Loan having an Interest Period in excess of one month prior to
the date which is 60 days after the Closing Date. Upon receipt of such notice,
the Administrative Agent shall promptly notify each Tranche B Term Loan Lender
thereof. Not later than 12:00 Noon, New York City time, on the Closing Date,
each Tranche B Term Loan Lender shall make available to the Administrative Agent
at its office specified in Section 11.2 an amount in immediately available funds
equal to the Tranche B Term Loan to be made by such Lender. The Administrative
Agent shall on such date by 2:00 P.M., New York City time, deposit to the
designated account, in accordance with the instructions of the Designated
Borrower, the aggregate of the amounts made available to the Administrative
Agent by the Tranche B Term Loan Lenders in immediately available funds.
2.5 Revolving Credit Commitments. (a) Subject to the terms and conditions
hereof, each Revolving Credit Lender severally agrees to make revolving credit
loans ("Revolving Credit Loans") to the Borrowers, jointly and severally, from
time to time during the Revolving Credit Commitment Period in an aggregate
principal amount at any one time outstanding which, when added to such Lender's
Revolving Credit Percentage of the sum of
<PAGE> 30
24
(i) the L/C Obligations then outstanding and (ii) the aggregate principal amount
of the Swing Line Loans then outstanding, does not exceed the amount of such
Lender's Revolving Credit Commitment. During the Revolving Credit Commitment
Period, the Borrowers may use the Revolving Credit Commitments by borrowing,
prepaying the Revolving Credit Loans in whole or in part, and reborrowing, all
in accordance with the terms and conditions hereof.
(b) The Revolving Credit Loans may from time to time be (i)
Eurodollar Loans, (ii) Base Rate Loans or (iii) a combination thereof, as
determined by the Designated Borrower and notified to the Administrative Agent
in accordance with Sections 2.6 and 2.13, provided that no Revolving Credit Loan
shall be made as a Eurodollar Loan after the day that is one month prior to the
Revolving Credit Termination Date.
2.6 Procedure for Revolving Credit Borrowing. The Borrowers
may borrow under the Revolving Credit Commitments during the Revolving Credit
Commitment Period on any Business Day, provided that the Designated Borrower
shall give the Administrative Agent irrevocable notice (which notice must be
received by the Administrative Agent prior to 12:00 Noon, New York City time,
(a) three Business Days prior to the requested Borrowing Date, if all or any
part of the requested Revolving Credit Loans are to be Eurodollar Loans or (b)
one Business Day prior to the requested Borrowing Date, otherwise), specifying
(i) the amount to be borrowed, (ii) the requested Borrowing Date, (iii) whether
the borrowing is to be of Eurodollar Loans, Base Rate Loans, or a combination
thereof, (iv) the identity of the Borrower or Borrowers to which the proceeds of
the Revolving Credit Loan should be made available and (v) if the borrowing is
to be entirely or partly of Eurodollar Loans, the respective amounts of each
such Type of Loan and the respective lengths of the initial Interest Periods
therefor; provided that prior to the date which is 60 days after the Closing
Date no Revolving Credit Loan may be made, converted or continued as a
Eurodollar Loan having an Interest Period in excess of one month. Each borrowing
under the Revolving Credit Commitments shall be in an amount equal to (x) in the
case of Base Rate Loans, $1,000,000 or a whole multiple thereof (or, if the then
Available Revolving Credit Commitments are less than $1,000,000, such lesser
amount) and (y) in the case of Eurodollar Loans, $2,500,000 or a whole multiple
of $1,000,000 in excess thereof; provided, that the Swing Line Lender may
request, on behalf of the Borrowers, borrowings under the Revolving Credit
Commitments which are Base Rate Loans in other amounts pursuant to Section
2.27(a). Upon receipt of any such notice from the Designated Borrower, the
Administrative Agent shall promptly notify each Revolving Credit Lender thereof.
Each Revolving Credit Lender will make the amount of its pro rata share of each
borrowing available to the Administrative Agent for the account of the
appropriate Borrower at the office of the Administrative Agent specified in
Section 11.2 prior to 11:00 A.M., New York City time, on the Borrowing Date
requested by the Designated Borrower in funds immediately available to the
Administrative Agent. The aggregate of the amounts made available to the
Administrative Agent by the Revolving Credit Lenders will then be made available
to the appropriate Borrower by the Administrative Agent in accordance with the
instructions of the Designated Borrower in like funds as received by the
Administrative Agent.
2.7 Clean-Up. Notwithstanding the foregoing provisions of this
Section 2 for a period of not less than 30 consecutive days during each period
from December 1 to
<PAGE> 31
25
March 1 during the term of this Agreement the aggregate outstanding principal
amount of the Revolving Credit Loans and Swing Line Loans shall be reduced to
zero.
2.8 Commitment Fees, etc. (a) The Borrowers jointly and
severally agree to pay to the Administrative Agent for the account of each
Revolving Credit Lender a commitment fee for the period from and including the
Closing Date to the last day of the Revolving Credit Commitment Period, computed
at the rate of 1/2 of 1% per annum on the average daily amount of the Available
Revolving Credit Commitment of such Lender during the period for which payment
is made, payable quarterly in arrears on the last day of each March, June,
September and December and on the last day of the Revolving Credit Commitment
Period, commencing on the first of such dates to occur after the date hereof.
(b) The Borrowers jointly and severally agree to pay to the
Arranger the fees in the amounts and on the dates previously agreed to in
writing by Advent and the Arranger.
(c) The Borrowers jointly and severally agree to pay to the
Administrative Agent the fees in the amounts and on the dates previously agreed
to in writing by the Administrative Agent and the Borrowers.
2.9 Repayment of Loans; Evidence of Debt. (a) The Borrowers
jointly and severally hereby unconditionally promise to pay to the
Administrative Agent for the account of the appropriate Lender (i) the then
unpaid principal amount of each Revolving Credit Loan of such Revolving Credit
Lender on the last day of the Revolving Credit Commitment Period (or such
earlier date on which the Revolving Credit Loans become due and payable pursuant
to Section 8), (ii) the principal amount of the Tranche A Term Loans of such
Tranche A Term Loan Lender, in 20 consecutive quarterly installments, according
to the amortization schedule set forth on Schedule 1.1D, commencing on September
30, 1996 (or on such earlier date on which the then unpaid principal amount of
the Tranche A Term Loans become due and payable pursuant to Section 8) and (iii)
the principal amount of the Tranche B Term Loans of such Tranche B Term Loan
Lender, in 24 consecutive quarterly installments, according to the amortization
schedule set forth on Schedule 1.1E, commencing on September 30, 1996 (or on
such earlier date on which the then unpaid principal amount of such Tranche B
Term Loans become due and payable pursuant to Section 8). The Borrowers jointly
and severally hereby further agree to pay interest on the unpaid principal
amount of the Loans from time to time outstanding from the date hereof until
payment in full thereof at the rates per annum, and on the dates, set forth in
Section 2.15.
(b) Each Lender shall maintain in accordance with its usual
practice an account or accounts evidencing indebtedness of the Borrowers to such
Lender resulting from each Loan of such Lender from time to time, including the
amounts of principal and interest payable and paid to such Lender from time to
time under this Agreement.
(c) The Administrative Agent, on behalf of the Borrowers,
shall maintain the Register pursuant to Section 11.6(g), and a subaccount
therein for each Lender, in which shall be recorded (i) the amount of each
Revolving Credit Loan, Tranche A Term Loan and Tranche B Term Loan made
hereunder, the Type thereof and each Interest Period applicable
<PAGE> 32
26
thereto, (ii) the amount of any principal or interest due and payable or to
become due and payable from the Borrowers to each Lender hereunder and (iii)
both the amount of any sum received by the Administrative Agent hereunder from
the Borrowers and each Lender's share thereof.
(d) The entries made in the Register and the accounts of each
Lender maintained pursuant to Section 2.9(b) shall, to the extent permitted by
applicable law, be prima facie evidence of the existence and amounts of the
obligations of the Borrowers therein recorded; provided, however, that the
failure of any Lender or the Administrative Agent to maintain the Register or
any such account, or any error therein, shall not in any manner affect the
obligation of the Borrowers to repay (with applicable interest) the Loans made
to such Borrowers by such Lender in accordance with the terms of this Agreement.
(e) Each of the Borrowers agrees that, upon the request to the
Administrative Agent by any Lender, the Borrowers will execute and deliver to
such Lender (i) a promissory note of the Borrowers evidencing any Revolving
Credit Loans of such Lender, substantially in the form of Exhibit A-1 with
appropriate insertions as to date and principal amount (together with any
alternative note substantially in the form of Exhibit I-1 issued in lieu thereof
or in exchange therefor, a "Revolving Credit Note"), and/or (ii) a promissory
note of the Borrowers evidencing any Tranche A Term Loan of such Lender,
substantially in the form of Exhibit A-2with appropriate insertions as to date
and principal amount (together with any alternative note substantially in the
form of Exhibit I-2 issued in lieu thereof or in exchange therefor, a "Tranche A
Term Note") and/or (iii) a promissory note of the Borrowers evidencing any
Tranche B Term Loans of such Lender, substantially in the form of Exhibit A-3
with appropriate insertions as to date and principal amount (together with any
alternative note substantially in the form of Exhibit I-3 issued in lieu thereof
or in exchange therefor, a "Tranche B Term Note") and/or (iv) in the case of a
request by the Swing Line Lender, a promissory note of the Borrowers evidencing
any Swing Line Loans of the Swing Line Lender, substantially in the form of
Exhibit A-4 with appropriate insertions as to the date and principal amount (a
"Swing Line Note").
2.10 Termination or Reduction of Revolving Credit Commitments.
The Designated Borrower shall have the right, upon not less than three Business
Days' notice to the Administrative Agent, to terminate the Revolving Credit
Commitments or, from time to time, to reduce the amount of the Revolving Credit
Commitments; provided that no such termination or reduction of Revolving Credit
Commitments shall be permitted if, after giving effect thereto and to any
prepayments of the Revolving Credit Loans and Swing Line Loans made on the
effective date thereof, the sum of the Aggregate Outstanding Revolving
Extensions of Credit of all Revolving Credit Lenders would exceed the Revolving
Credit Commitments then in effect. Any such reduction shall be in an amount
equal to $500,000, or a whole multiple thereof, and shall reduce permanently the
Revolving Credit Commitments then in effect.
2.11 Optional Prepayments. The Borrowers may at any time and
from time to time prepay the Loans, in whole or in part, without premium or
penalty, upon at least three Business Days' irrevocable notice to the
Administrative Agent by the Designated Borrower,
<PAGE> 33
27
specifying the date and amount of prepayment and whether the prepayment is of
Eurodollar Loans, Base Rate Loans or a combination thereof, and, if of a
combination thereof, the amount allocable to each, provided, that if a
Eurodollar Loan is prepaid on any day other than the last day of the Interest
Period applicable thereto, the Borrowers shall also pay any amounts owing
pursuant to Section 2.22. Upon receipt of any such notice, the Administrative
Agent shall promptly notify each Lender thereof. If any such notice is given,
the amount specified in such notice shall be due and payable on the date
specified therein, together with accrued interest to such date on the amount
prepaid. Partial prepayments of the Term Loans shall be applied pro rata to the
Tranche A Term Loans and the Tranche B Term Loans, and to the remaining
installments of principal thereof pro rata in accordance with the remaining
outstanding principal amounts thereof. Notwithstanding the foregoing, so long as
any Tranche A Term Loans are outstanding, each Tranche B Term Loan Lender shall
have the right to refuse all or any portion of any prepayment pursuant to this
Section 2.11 allocable to such Lender's Tranche B Term Loans, and the amount so
refused shall be applied to prepay the Tranche A Term Loans in accordance with
the preceding sentence. Amounts prepaid on account of the Term Loans may not be
reborrowed. Partial prepayments of Term Loans and Revolving Credit Loans shall
be in an aggregate principal amount of $500,000 or a whole multiple thereof.
Partial prepayments of Swing Line Loans shall be in an aggregate principal
amount of $100,000 or a whole multiple thereof.
2.12 Mandatory Prepayments and Commitment Reductions.
(a) If any class of equity or debt securities or instruments of the Parent, the
Borrowers or any of their Subsidiaries shall be issued or sold or the Parent,
the Borrowers or any of their Subsidiaries shall incur or permit the incurrence
of loans (except (i) any Capital Stock issued pursuant to the Recapitalization
or to an employee of a Borrower in connection with a Guarantee Obligation or a
loan or advance permitted by Sections 7.4(e) or 7.9(c)(ii), respectively, (ii)
any debt securities or instruments issued or loans incurred in accordance with
Section 7.2 and (iii) so long as such equity investment is not for the purpose
of and does not have the effect of curing a Default or Event of Default, any
Person who owns Capital Stock in the Parent, the Borrowers or any of their
Subsidiaries on the date hereof (subsequent to the Recapitalization) may make a
one-time equity investment in the Parent, which the Parent shall invest in the
equity of the Borrowers, in the aggregate amount of up to $5,000,000), an amount
equal to 100% of the Net Cash Proceeds thereof shall be applied on the date of
such issuance or incurrence toward the prepayment of the Term Loans and the
reduction of the Revolving Credit Commitments as set forth in paragraph (d) of
this Section 2.12.
(b) If on any date the Parent, the Borrowers or any of their
Subsidiaries shall receive Net Cash Proceeds from any Asset Sale or from any
Recovery Event (other than, if no Event of Default shall have occurred and be
continuing, to the extent that such Net Cash Proceeds are to be used to restore
or replace the assets in respect of which such Recovery Event occurred within
twelve months from the date of such Recovery Event, as certified by a
Responsible Officer of the Designated Borrower pursuant to a Reinvestment
Notice), such Net Cash Proceeds shall be applied on such date toward the
prepayment of the Term Loans and the reduction of the Revolving Credit
Commitments as set forth in paragraph (d) of this Section 2.12; provided, that,
notwithstanding the foregoing, on each Reinvestment Prepayment Date, an amount
equal to the Reinvestment Prepayment Amount with respect to the relevant
<PAGE> 34
28
Reinvestment Event shall be applied toward the prepayment of the Term Loans and
the reduction of the Revolving Credit Commitments as set forth in paragraph (d)
of this Section 2.12.
(c) If, for any fiscal year of the Borrowers ending after the
Closing Date, there shall be Excess Cash Flow, the Borrowers shall, on the
relevant Excess Cash Flow Application Date, apply toward the prepayment of the
Term Loans and the reduction of the Revolving Credit Commitments as set forth in
paragraph (d) of this Section 2.12 a percentage of such Excess Cash Flow equal
to 75%. Each such prepayment and commitment reduction shall be made on a date
(an "Excess Cash Flow Application Date") no later than five days after the
earlier of (i) the date on which the financial statements of the Borrowers
referred to in Section 6.1(a), for the fiscal year with respect to which such
prepayment is made, are required to be delivered to the Lenders and (ii) the
date such financial statements are actually delivered.
(d) Amounts to be applied in connection with prepayments and
Commitment reductions made pursuant to this Section 2.12 shall be applied,
first, to the prepayment of the Term Loans and, second, to reduce permanently
the Revolving Credit Commitments. Any such reduction of the Revolving Credit
Commitments shall be accompanied by prepayment of the Revolving Credit Loans
and/or Swing Line Loans to the extent, if any, that the sum of the Aggregate
Outstanding Revolving Extensions of Credit of all Revolving Credit Lenders
exceeds the amount of the aggregate Revolving Credit Commitments as so reduced,
provided that if the aggregate principal amount of Revolving Credit Loans and
Swing Line Loans then outstanding is less than the amount of such excess
(because L/C Obligations constitute a portion thereof), the Borrowers shall, to
the extent of the balance of such excess, replace outstanding Letters of Credit
and/or deposit an amount in cash in a cash collateral account established with
the Administrative Agent for the benefit of the Lenders on terms and conditions
satisfactory to the Administrative Agent. The application of any prepayment
pursuant to this Section 2.12 shall be made, within each category of Loans to be
prepaid as provided above, first to Base Rate Loans and second to Eurodollar
Loans. Each prepayment of the Loans under this Section 2.12 shall be accompanied
by accrued interest to the date of such prepayment on the amount prepaid. All
prepayments of the Term Loans pursuant to this Section 2.12 shall be applied pro
rata to the Tranche A Term Loans and the Tranche B Term Loans and to the
remaining installments of principal thereof in the inverse order of scheduled
maturity. Notwithstanding the foregoing, so long as any Tranche A Term Loans are
outstanding, each Tranche B Term Loan Lender shall have the right to refuse all
or any portion of any prepayment pursuant to this Section 2.12 allocable to such
Lender's Tranche B Term Loans and the amount so refused shall be applied first
pro rata to prepay the Tranche A Term Loans and second to reduce permanently the
Revolving Credit Commitments as provided above. Amounts prepaid on account of
the Term Loans may not be reborrowed.
2.13 Conversion and Continuation Options. (a) The Borrowers
may elect from time to time to convert Eurodollar Loans to Base Rate Loans by
the Designated Borrower giving the Administrative Agent at least two Business
Days' prior irrevocable notice of such election, provided that any such
conversion of Eurodollar Loans may only be made on the last day of an Interest
Period with respect thereto. The Borrowers may elect from time to time to
<PAGE> 35
29
convert Base Rate Loans to Eurodollar Loans by the Designated Borrower giving
the Administrative Agent at least three Business Days' prior irrevocable notice
of such election. Any such notice of conversion to Eurodollar Loans shall
specify the length of the initial Interest Period therefor. Upon receipt of any
such notice, the Administrative Agent shall promptly notify each Lender thereof.
All or any part of outstanding Eurodollar Loans and Base Rate Loans may be
converted as provided herein, provided that (i) no Loan may be converted into a
Eurodollar Loan when any Event of Default has occurred and is continuing and the
Administrative Agent has or the Required Lenders have determined in its or their
sole discretion not to permit such a conversion and (ii) no Loan may be
converted into a Eurodollar Loan after the date that is one month prior to (i)
the Revolving Credit Termination Date, with respect to the Tranche A Loans and
(ii) the Tranche B Termination Date, with respect to the Tranche B Term Loans.
(b) Any Eurodollar Loans may be continued as such upon the
expiration of the then current Interest Period with respect thereto by the
Designated Borrower giving irrevocable notice to the Administrative Agent, in
accordance with the applicable provisions of the term "Interest Period" set
forth in Section 1.1, of the length of the next Interest Period to be applicable
to such Loans, provided that no Eurodollar Loan may be continued as such (i)
when any Event of Default has occurred and is continuing and the Administrative
Agent has or the Required Lenders have determined in its or their sole
discretion not to permit such a continuation or (ii) after the date that is one
month prior to (A) the Revolving Credit Termination Date, with respect to the
Tranche A Loans or (B) the Tranche B Termination Date, with respect to the
Tranche B Term Loans, and provided, further, that if the Designated Borrower
shall fail to give any required notice as described above in this paragraph or
if such continuation is not permitted pursuant to the preceding proviso such
Loans shall be automatically converted to Base Rate Loans on the last day of
such then expiring Interest Period.
2.14 Minimum Amounts and Maximum Number of Eurodollar
Tranches. Notwithstanding anything to the contrary in this Agreement, all
borrowings, conversions, continuations and optional prepayments of Loans
hereunder and all selections of Interest Periods hereunder shall be in such
amounts and be made pursuant to such elections so that, (a) after giving effect
thereto, the aggregate principal amount of the Loans comprising each Eurodollar
Tranche shall be equal to $2,500,000 or a whole multiple of $1,000,000 in excess
thereof, (b) no more than two Eurodollar Tranches in respect of the Revolving
Credit Loans shall be outstanding at any one time and (c) no more than seven
Eurodollar Tranches in respect of all Loans (including the Revolving Credit
Loans) shall be outstanding at any one time.
2.15 Interest Rates and Payment Dates. (a) Each Eurodollar
Loan shall bear interest for each day during each Interest Period with respect
thereto at a rate per annum equal to the Eurodollar Rate determined for such day
plus the Applicable Margin.
(b) Each Base Rate Loan shall bear interest at a rate per
annum equal to the Base Rate plus the Applicable Margin.
<PAGE> 36
30
(c) If all or a portion of (i) any principal of any Loan or
Reimbursement Obligations, (ii) any interest payable thereon, (iii) any
commitment fee or (iv) any other amount payable hereunder shall not be paid when
due (whether at the stated maturity, by acceleration or otherwise), the
principal of the Loans and Reimbursement Obligations and any such overdue
interest, commitment fee or other amount shall bear interest at a rate per annum
which is (x) in the case of principal of the Loans, the rate that would
otherwise be applicable thereto pursuant to the foregoing provisions of this
Section plus 2% and (y) in the case of Reimbursement Obligations, and any
overdue interest, commitment fee or other amount, the rate applicable to Tranche
A Loans which are Base Rate Loans plus 2%, in each case from the date of such
non-payment until such overdue principal, interest, commitment fee or other
amount is paid in full (as well after as before judgment).
(d) Interest shall be payable in arrears on each Interest
Payment Date, provided that interest accruing pursuant to paragraph (c) of this
Section 2.15 shall be payable from time to time on demand.
2.16 Computation of Interest and Fees. (a) Interest on Loans
and Reimbursement Obligations, commitment fees, letter of credit commissions and
interest on overdue interest, commitment fees and other amounts payable
hereunder shall be calculated on the basis of a 360-day year for the actual days
elapsed, except that, with respect to Base Rate Loans the rate of interest on
which is calculated on the basis of the Prime Rate, the interest thereon shall
be calculated on the basis of a 365- (or 366-, as the case may be) day year for
the actual days elapsed. The Administrative Agent shall as soon as practicable
notify the Designated Borrower and the Lenders of each determination of a
Eurodollar Rate. Any change in the interest rate on a Loan resulting from a
change in the Base Rate or the Eurocurrency Reserve Requirements shall become
effective as of the opening of business on the day on which such change becomes
effective. The Administrative Agent shall as soon as practicable notify the
Designated Borrower and the Lenders of the effective date and the amount of each
such change in interest rate.
(b) Each determination of an interest rate by the
Administrative Agent pursuant to any provision of this Agreement shall be
conclusive and binding on the Borrowers and the Lenders in the absence of
manifest error. The Administrative Agent shall, at the request of the Designated
Borrower, deliver to the Designated Borrower a statement showing the quotations
used by the Administrative Agent in determining any interest rate pursuant to
Section 2.15(a).
2.17 Inability to Determine Interest Rate. If prior to the
first day of any Interest Period:
(a) the Administrative Agent shall have determined (which
determination shall be conclusive and binding upon the Borrowers) that,
by reason of circumstances affecting the relevant market, adequate and
reasonable means do not exist for ascertaining the Eurodollar Rate for
such Interest Period, or
<PAGE> 37
31
(b) the Administrative Agent shall have received notice from
the Required Lenders that the Eurodollar Rate determined or to be
determined for such Interest Period will not adequately and fairly
reflect the cost to such Lenders (as conclusively certified by such
Lenders) of making or maintaining their affected Loans during such
Interest Period,
the Administrative Agent shall give telecopy or telephonic notice thereof to the
Designated Borrower and the Lenders as soon as practicable thereafter. If such
notice is given (x) any Eurodollar Loans requested to be made on the first day
of such Interest Period shall be made as Base Rate Loans, (y) any Loans that
were to have been converted on the first day of such Interest Period to
Eurodollar Loans shall be continued as Base Rate Loans and (z) any outstanding
Eurodollar Loans shall be converted, on the first day of such Interest Period,
to Base Rate Loans. Until such notice has been withdrawn by the Administrative
Agent, no further Eurodollar Loans shall be made or continued as such, nor shall
the Borrowers have the right to convert Loans to Eurodollar Loans.
2.18 Pro Rata Treatment and Payments; Use of Proceeds. (a)
Each borrowing by the Borrowers from the Lenders hereunder, each payment by the
Borrowers on account of any commitment fee and any reduction of the Commitments
of the Lenders shall be made pro rata according to the respective Tranche A Term
Loan Percentages, Tranche B Term Loan Percentages or Revolving Credit
Percentages, as the case may be, of the relevant Lenders. Except as provided in
Section 2.11 and 2.12, each payment (including each prepayment) by the Borrowers
on account of principal of and interest on the Term Loans shall be made pro rata
according to the respective outstanding principal amounts of the Term Loans then
held by the Term Loan Lenders (or, in the case of installment payments made
pursuant to Section 2.9 or payments of accrued interest in respect thereof, the
affected Term Loans then held by the relevant Term Loan Lenders). Each payment
(including each prepayment) by the Borrowers on account of principal of and
interest on the Revolving Credit Loans shall be made pro rata according to the
respective outstanding principal amounts of the Revolving Credit Loans then held
by the Revolving Credit Lenders. All payments (including prepayments) to be made
by the Borrowers hereunder and under the Notes, whether on account of principal,
interest, fees or otherwise, shall be made without setoff or counterclaim and
shall be made prior to 12:00 Noon, New York City time, on the due date thereof
to the Administrative Agent, for the account of the Lenders, at the
Administrative Agent's office specified in Section 11.2, in Dollars and in
immediately available funds. The Administrative Agent shall distribute such
payments to the Lenders promptly upon receipt in like funds as received. If any
payment hereunder (other than payments on the Eurodollar Loans) becomes due and
payable on a day other than a Business Day, such payment shall be extended to
the next succeeding Business Day. If any payment on a Eurodollar Loan becomes
due and payable on a day other than a Business Day, the maturity thereof shall
be extended to the next succeeding Business Day unless the result of such
extension would be to extend such payment into another calendar month, in which
event such payment shall be made on the immediately preceding Business Day. In
the case of any extension of any payment of principal pursuant to the preceding
two sentences, interest thereon shall be payable at the then applicable rate
during such extension.
<PAGE> 38
32
(b) Unless the Administrative Agent shall have been notified
in writing by any Lender prior to a borrowing that such Lender will not make the
amount that would constitute its share of such borrowing available to the
Administrative Agent, the Administrative Agent may assume that such Lender is
making such amount available to the Administrative Agent, and the Administrative
Agent may, in reliance upon such assumption, make available to the Borrower a
corresponding amount. If such amount is not made available to the Administrative
Agent by the required time on the Borrowing Date therefor, such Lender shall pay
to the Administrative Agent, on demand, such amount with interest thereon at a
rate equal to the daily average Federal Funds Effective Rate for the period
until such Lender makes such amount immediately available to the Administrative
Agent. A certificate of the Administrative Agent submitted to any Lender with
respect to any amounts owing under this Section 2.18(b) shall be conclusive in
the absence of manifest error. If such Lender's share of such borrowing is not
made available to the Administrative Agent by such Lender within three Business
Days of such Borrowing Date, the Administrative Agent shall also be entitled to
recover such amount with interest thereon at the rate per annum applicable to
Base Rate Loans hereunder, on demand, from the Borrowers.
(c) The Borrowers shall use the proceeds of the Loans only in
the manner expressly contemplated by Section 4.16.
2.19 Illegality. Notwithstanding any other provision herein,
if the adoption of or any change in any Requirement of Law or in the
interpretation or application thereof shall make it unlawful for any Lender to
make or maintain Eurodollar Loans as contemplated by this Agreement, (a) the
commitment of such Lender hereunder to make Eurodollar Loans, continue
Eurodollar Loans as such and convert Base Rate Loans to Eurodollar Loans shall
forthwith be cancelled and (b) such Lender's Loans then outstanding as
Eurodollar Loans, if any, shall be converted automatically to Base Rate Loans on
the respective last days of the then current Interest Periods with respect to
such Loans or within such earlier period as required by law. If any such
conversion of a Eurodollar Loan occurs on a day which is not the last day of the
then current Interest Period with respect thereto, the Borrowers shall pay to
such Lender such amounts, if any, as may be required pursuant to Section 2.22.
2.20 Requirements of Law. (a) If the adoption of or any change
in any Requirement of Law or in the interpretation or application thereof or
compliance by any Lender with any request or directive (whether or not having
the force of law) from any central bank or other Governmental Authority made
subsequent to the date hereof:
(i) shall subject any Lender to any tax of any kind
whatsoever with respect to this Agreement, any Note, any Letter of
Credit, any Application or any Eurodollar Loan made by it, or change
the basis of taxation of payments to such Lender in respect thereof
(except for Non-Excluded Taxes covered by Section 2.21 and changes in
the rate of tax on the overall net income of such Lender);
(ii) shall impose, modify or hold applicable any
reserve, special deposit, compulsory loan or similar requirement
against assets held by, deposits or other liabilities in or for the
account of, advances, loans or other extensions of credit by, or
<PAGE> 39
33
any other acquisition of funds by, any office of such Lender which
is not otherwise included in the determination of the Eurodollar
Rate hereunder; or
(iii) shall impose on such Lender any other condition;
and the result of any of the foregoing is to increase the cost to such Lender,
by an amount which such Lender deems to be material, of making, converting into,
continuing or maintaining Eurodollar Loans or issuing or participating in
Letters of Credit, or to reduce any amount receivable hereunder in respect
thereof, then, in any such case, the Borrowers shall promptly pay such Lender,
upon its demand, any additional amounts necessary to compensate such Lender for
such increased cost or reduced amount receivable. If any Lender becomes entitled
to claim any additional amounts pursuant to this Section 2.20, it shall promptly
notify the Designated Borrower (with a copy to the Administrative Agent) of the
event by reason of which it has become so entitled.
(b) If any Lender shall have determined that the adoption of
or any change in any Requirement of Law regarding capital adequacy or in the
interpretation or application thereof or compliance by such Lender or any
corporation controlling such Lender with any request or directive regarding
capital adequacy (whether or not having the force of law) from any Governmental
Authority made subsequent to the date hereof shall have the effect of reducing
the rate of return on such Lender's or such corporation's capital as a
consequence of its obligations hereunder or under or in respect of any Letter of
Credit to a level below that which such Lender or such corporation could have
achieved but for such adoption, change or compliance (taking into consideration
such Lender's or such corporation's policies with respect to capital adequacy)
by an amount deemed by such Lender to be material, then from time to time, after
submission by such Lender to the Designated Borrower (with a copy to the
Administrative Agent) of a written request therefor, the Designated Borrower
shall pay to such Lender such additional amount or amounts as will compensate
such Lender for such reduction.
(c) If any Lender becomes entitled to claim any additional
amounts pursuant to this subsection, it shall promptly notify the Designated
Borrower (with a copy to the Administrative Agent) of the event by reason of
which it has become so entitled. A certificate as to any additional amounts
payable pursuant to this Section 2.20 submitted by any Lender to the Designated
Borrower (with a copy to the Administrative Agent) shall be conclusive in the
absence of manifest error. The obligations of the Borrowers pursuant to this
Section 2.20 shall survive the termination of this Agreement and the payment of
the Notes and all other amounts payable hereunder.
2.21 Taxes. (a) All payments made by the Borrowers under this
Agreement and the Notes shall be made free and clear of, and without deduction
or withholding for or on account of, any present or future income, stamp or
other taxes, levies, imposts, duties, charges, fees, deductions or withholdings,
now or hereafter imposed, levied, collected, withheld or assessed by any
Governmental Authority, excluding net income taxes and franchise taxes (imposed
in lieu of net income taxes) imposed on the Administrative Agent or any Lender
as a result of a present or former connection between the Administrative Agent
or
<PAGE> 40
34
such Lender and the jurisdiction of the Governmental Authority imposing such
tax or any political subdivision or taxing authority thereof or therein (other
than any such connection arising solely from the Administrative Agent or such
Lender having executed, delivered or performed its obligations or received a
payment under, or enforced, this Agreement or any other Loan Document). If any
such non-excluded taxes, levies, imposts, duties, charges, fees, deductions or
withholdings ("Non-Excluded Taxes") are required to be withheld from any amounts
payable to the Administrative Agent or any Lender hereunder or under the Notes,
the amounts so payable to the Administrative Agent or such Lender shall be
increased to the extent necessary to yield to the Administrative Agent or such
Lender (after payment of all Non-Excluded Taxes) interest or any such other
amounts payable hereunder at the rates or in the amounts specified in this
Agreement and the Notes, provided, however, that the Borrowers shall make
payments net of and after deduction for Non-Excluded Taxes and shall not be
required to increase any such amounts payable to any Lender if, (i) at the time
such Lender becomes a party to this Agreement such Lender fails to establish a
complete exemption from such withholding, or (ii) such Lender fails to comply
with its obligations under subsection 2.21(b) on an ongoing basis. Whenever any
Non-Excluded Taxes are payable by the Borrowers, as promptly as possible
thereafter the Designated Borrower shall send to the Administrative Agent for
its own account or for the account of such Lender, as the case may be, a
certified copy of an original official receipt received by the Borrowers showing
payment thereof. If the Borrowers fail to pay any Non-Excluded Taxes when due
to the appropriate taxing authority or fails to remit to the Administrative
Agent the required receipts or other required documentary evidence, the
Borrowers shall indemnify the Administrative Agent and the Lenders for any
incremental Non-Excluded Taxes and related interest or penalties that may become
payable by the Administrative Agent or any Lender as a result of any such
failure. The agreements in this Section 2.21 shall survive the termination of
this Agreement and the payment of the Notes and all other amounts payable
hereunder.
(b) Each Lender (or Transferee) that is not a citizen or
resident of the United States, a corporation, partnership or other entity
created or organized in or under the laws of the United States, or any estate or
trust that is subject to federal income taxation regardless of the source of its
income (a "Non-U.S. Lender") shall deliver to the Designated Borrower and the
Administrative Agent (or, in the case of a Participant, to the Lender from which
the related participation shall have been purchased) two copies of either U.S.
Internal Revenue Service Form 1001 or Form 4224, or any subsequent versions
thereof or successors thereto or, in the case of a Non-U.S. Lender claiming
exemption from U.S. federal withholding tax under Section 871(h) or 881(c) of
the Code with respect to payments of "portfolio interest", a Form W-8, or any
subsequent versions thereof or successors thereto (and, if such Non-U.S. Lender
delivers a Form W-8 claiming the payments constitute "portfolio interest", an
annual certificate representing that such Non-U.S. Lender is not a "bank" (or
other prohibited recipient, as may be defined in the Code or regulations
promulgated under the Code for purposes of Section 881(c) of the Code, is not a
10-percent shareholder (within the meaning of Section 871(h)(3)(B) of the Code)
of any Borrower and is not a controlled foreign corporation related to the
Borrowers (within the meaning of Section 864(d)(4) of the Code) (such Sections
to include any successor Sections covering similar items)), properly completed
and duly executed by such Non-U.S. Lender claiming complete exemption from, or a
reduced rate of, U.S. federal withholding tax on all payments by the Borrowers
under this Agreement
<PAGE> 41
35
and the other Loan Documents. Such forms shall be delivered by each Non-U.S.
Lender on or before the date it becomes a party to this Agreement (or, in the
case of any Participant, on or before the date such Participant purchases the
related participation). In addition, each Non-U.S. Lender shall deliver such
forms promptly upon the obsolescence or invalidity of any form previously
delivered by such Non-U.S. Lender. Each Non-U.S. Lender shall promptly notify
the Designated Borrower at any time it determines that it is no longer in a
position to provide any previously delivered certificate to the Borrowers (or
any other form of certification adopted by the U.S. taxing authorities for such
purpose). Notwithstanding any other provision of this Section 2.21(b), a
Non-U.S. Lender shall not be required to deliver any form pursuant to this
Section 2.21(b) that such Non-U.S. Lender is not legally able to deliver.
2.22 Indemnity. The Borrowers agree to indemnify each Lender
and to hold each Lender harmless from any loss or expense which such Lender may
sustain or incur as a consequence of (a) default by the Borrowers in making a
borrowing of, conversion into or continuation of Eurodollar Loans after the
Designated Borrower has given a notice requesting the same in accordance with
the provisions of this Agreement, (b) default by the Borrowers in making any
prepayment after the Designated Borrower has given a notice thereof in
accordance with the provisions of this Agreement or (c) the making of a
prepayment of Eurodollar Loans on a day which is not the last day of an Interest
Period with respect thereto. Such indemnification may include an amount equal to
the excess, if any, of (i) the amount of interest which would have accrued on
the amount so prepaid, or not so borrowed, converted or continued, for the
period from the date of such prepayment or of such failure to borrow, convert or
continue to the last day of such Interest Period (or, in the case of a failure
to borrow, convert or continue, the Interest Period that would have commenced on
the date of such failure) in each case at the applicable rate of interest for
such Loans provided for herein (excluding, however, the Applicable Margin
included therein, if any) over (ii) the amount of interest (as reasonably
determined by such Lender) which would have accrued to such Lender on such
amount by placing such amount on deposit for a comparable period with leading
banks in the interbank eurodollar market. A certificate as to any amounts
payable pursuant to this Section 2.22 submitted to the Designated Borrower by
any Lender shall be conclusive in the absence of manifest error. This covenant
shall survive the termination of this Agreement and the payment of the Notes and
all other amounts payable hereunder.
2.23 Change of Lending Office. Each Lender (or Transferee)
agrees that, upon the occurrence of any event giving rise to the operation of
Section 2.19, 2.20(a) or 2.21 with respect to such Lender (or Transferee), it
will, if requested by the Designated Borrower, use reasonable efforts (subject
to overall policy considerations of such Lender (or Transferee)) to designate
another lending office for any Loans affected by such event with the object of
avoiding the consequences of such event; provided, that such designation is made
on terms that, in the sole judgment of such Lender, cause such Lender and its
lending office(s) to suffer no material economic, legal or regulatory
disadvantage, and provided, further, that nothing in this Section 2.23 shall
affect or postpone any of the obligations of any Borrowers or the rights of any
Lender (or Transferee) pursuant to Section 2.19, 2.20(a) or 2.21.
2.24 Right of Contribution. Each Borrower hereby agrees that
to the extent a Borrower shall have paid more than its proportionate share of
any payment made hereunder,
<PAGE> 42
36
such Borrower shall be entitled to seek and receive contribution from and
against any other Borrower hereunder who has not paid its proportionate share of
such payment; provided however such Borrower shall not seek any such
contribution from any other Borrower until all Obligations have been paid in
full and all Commitments of the Lenders hereunder have been terminated. The
provisions of this Section 2.24 shall in no respect limit the obligations and
liabilities of any Borrower to the Administrative Agent and the Lenders, and
each Borrower shall remain liable to the Administrative Agent and the Lenders
for the full amount of its obligations hereunder.
2.25 Swing Line Commitment. Subject to the terms and
conditions hereof, The First National Bank of Boston (in such capacity, the
"Swing Line Lender") agrees to make a portion of the credit otherwise available
to the Borrowers under the Revolving Credit Lenders' Revolving Credit
Commitments from time to time during the Revolving Credit Commitment Period by
making swing line loans ("Swing Line Loans") to the Borrowers in an aggregate
principal amount not to exceed at any one time outstanding the Swing Line
Commitment; provided that (a) the aggregate principal amount of Swing Line Loans
outstanding at any time shall not exceed the Swing Line Commitment then in
effect (notwithstanding that the Swing Line Loans outstanding at any time, when
aggregated with the Swing Line Lender's other outstanding Loans hereunder, may
exceed the Swing Line Commitment then in effect) and (b) the Designated Borrower
shall not request, and the Swing Line Lender shall not make, any Swing Line Loan
if, after giving effect to the making of such Swing Line Loan, the aggregate
amount of the Available Revolving Credit Commitments would be less than zero.
During the Revolving Credit Commitment Period, the Borrowers may use the Swing
Line Commitment by borrowing, repaying and reborrowing, all in accordance with
the terms and conditions hereof. Swing Line Loans shall be Base Rate Loans only.
The Borrower shall repay all outstanding Swing Line Loans on the last day of the
Revolving Credit Commitment Period.
2.26 Procedure for Swing Line Borrowing. Whenever the
Designated Borrower desires that the Swing Line Lender make Swing Line Loans
under Section 2.25 it shall give the Swing Line Lender irrevocable telephonic
notice confirmed promptly in writing (which telephonic notice must be received
by the Swing Line Lender not later than 1:00 P.M., New York City time, on the
proposed Borrowing Date), specifying (a) the amount to be borrowed, (b) the
requested Borrowing Date (which shall be a Business Day during the Revolving
Credit Commitment Period) and (c) the identity of the Borrower or Borrowers to
which the proceeds of the Swing Line Loans should be made available. Each
borrowing under the Swing Line Commitment shall be in an amount equal to
$100,000 or a whole multiple thereof. Not later than 3:00 P.M., New York City
time, on the Borrowing Date specified in the notice in respect of Swing Line
Loans, the Swing Line Lender shall make available to the Administrative Agent at
its office specified in Section 11.2 an amount in immediately available funds
equal to the amount of the Swing Line Loan to be made by the Swing Line Lender.
The Administrative Agent shall make the proceeds of such Swing Line Loan
available to the appropriate Borrower on such Borrowing Date in accordance with
the instructions of the Designated Borrower in like funds as received by the
Administrative Agent.
<PAGE> 43
37
2.27 Refunded Swing Line Loans; Swing Line Loan
Participations. (a) The Swing Line Lender, at any time and from time to time in
its sole and absolute discretion may, on behalf of the Borrowers (which hereby
irrevocably direct the Swing Line Lender to act on their behalf), on one
Business Day's notice given by the Swing Line Lender no later than 10:00 A.M.,
New York City time, request each Revolving Credit Lender to make, and each
Revolving Credit Lender hereby agrees to make, a Revolving Credit Loan, in an
amount equal to such Revolving Credit Lender's Revolving Credit Percentage of
the aggregate amount of the Swing Line Loans (the "Refunded Swing Line Loans")
outstanding on the date of such notice, to repay the Swing Line Lender. Unless
any of the events described in Section 8(f) shall have occurred and be
continuing (in which case the procedures of Section 2.27(c) shall apply), each
Revolving Credit Lender shall make the amount of such Revolving Credit Loan
available to the Administrative Agent at its office set forth in Section 11.2 in
immediately available funds, not later than 10:00 A.M., New York City time, one
Business Day after the date of such notice. The proceeds of such Revolving
Credit Loans shall be immediately applied by the Swing Line Lender to repay the
Refunded Swing Line Loans. Effective on the day such Revolving Credit Loans are
made, the portion of the Swing Line Loans so paid shall no longer be outstanding
as Swing Line Loans and shall be due as Revolving Credit Loans in accordance
with their respective Revolving Credit Percentages. The Borrowers irrevocably
authorize the Swing Line Lender to charge the Borrowers' accounts with the
Administrative Agent (up to the amount available in each such account) to
immediately pay the amount of such Refunded Swing Line Loans to the extent
amounts received from the Revolving Credit Lenders are not sufficient to repay
in full such Refunded Swing Line Loans.
(b) The making of any Swing Line Loan hereunder shall be
subject to the satisfaction of the applicable conditions precedent thereto set
forth in Section 5 (unless otherwise waived in accordance with Section 11.1).
The Swing Line Lender shall notify the Designated Borrower of its election not
to make Swing Line Loans hereunder as a result of the failure to satisfy such
conditions precedent, unless an Event of Default of the type specified in
Section 8(f) shall have occurred and be continuing.
(c) If prior to the time a Revolving Credit Loan would have
otherwise been made pursuant to Section 2.27(a), one of the events described in
Section 8(f) shall have occurred and be continuing, each Revolving Credit Lender
shall, on the date such Revolving Credit Loan was to have been made pursuant to
the notice referred to in Section 2.27(a) (the "Refunding Date"), purchase an
undivided participating interest in an amount equal to (i) its Revolving Credit
Percentage times (ii) the aggregate principal amount of Swing Line Loans then
outstanding which were to have been repaid with such Revolving Credit Loans (the
"Swing Line Participation Amount"). On the Refunding Date, each Revolving Credit
Lender shall transfer to the Swing Line Lender, in immediately available funds,
such Lender's Swing Line Participation Amount and upon receipt thereof the Swing
Line Lender shall deliver to such Lender a Swing Line Loan Participation
Certificate dated the date of the Swing Line Lender's receipt of such funds and
in such Swing Line Participation Amount.
(d) Whenever, at any time after the Swing Line Lender has
received from any Revolving Credit Lender such Lender's Swing Line Participation
Amount, the Swing Line
<PAGE> 44
38
Lender receives any payment on account of the Swing Line Loans, the Swing Line
Lender will distribute to such Lender its Swing Line Participation Amount
(appropriately adjusted, in the case of interest payments, to reflect the period
of time during which such Lender's participating interest was outstanding and
funded and, in the case of principal and interest payments, to reflect such
Lender's pro rata portion of such payment if such payment is not sufficient to
pay the principal of and interest on all Swing Line Loans then due); provided,
however, that in the event that such payment received by the Swing Line Lender
is required to be returned, such Revolving Credit Lender will return to the
Swing Line Lender any portion thereof previously distributed to it by the Swing
Line Lender.
(e) Each Revolving Credit Lender's obligation to make the
Loans referred to in Section 2.27(a) and to purchase participating interests
pursuant to Section 2.27(c) shall be absolute and unconditional and shall not be
affected by any circumstance, including, without limitation, (i) any setoff,
counterclaim, recoupment, defense or other right which such Revolving Credit
Lender or the Borrowers may have against the Swing Line Lender, the Borrowers or
any other Person for any reason whatsoever; (ii) the occurrence or continuance
of a Default or an Event of Default or the failure to satisfy any of the other
conditions specified in Section 5; (iii) any adverse change in the condition
(financial or otherwise) of the Borrowers; (iv) any breach of this Agreement or
any other Loan Document by the Borrowers, any other Loan Party or any other
Revolving Credit Lender; or (v) any other circumstance, happening or event
whatsoever, whether or not similar to any of the foregoing.
SECTION 3. LETTERS OF CREDIT
3.1 L/C Commitment. (a) Subject to the terms and conditions
hereof, the Issuing Lender, in reliance on the agreements of the other Revolving
Credit Lenders set forth in Section 3.4(a), agrees to issue letters of credit
("Letters of Credit") for the account of the Borrowers on any Business Day
during the Revolving Credit Commitment Period in such form as may be approved
from time to time by the Issuing Lender; provided that the Issuing Lender shall
have no obligation to issue any Letter of Credit if, after giving effect to such
issuance, (i) the L/C Obligations would exceed the L/C Commitment or (ii) the
aggregate amount of the aggregate Available Revolving Credit Commitments would
be less than zero. Each Letter of Credit shall (i) be denominated in Dollars,
(ii) be either (x) a standby letter of credit issued to support (I) obligations
of the Borrowers or any of their Subsidiaries, contingent or otherwise, which
finance the working capital and business needs of the Borrowers or their
Subsidiaries or (II) performance obligations of the Borrowers and their
Subsidiaries, in each case, incurred in the ordinary course of business (a
"Standby Letter of Credit"), or (y) a commercial letter of credit in respect of
the purchase of goods or services by the Borrowers or any of their Subsidiaries
in the ordinary course of business (a "Commercial Letter of Credit"), (iii)
expire no later than five Business Days prior to the Revolving Credit
Termination Date and (iv) expire no later than 365 days after its date of
issuance, provided that any Letter of Credit with a 365-day duration may provide
for the renewal thereof at the election of the Designated Borrower (in
accordance with procedures to be established by the Issuing Lender) for
additional 365-day periods (which shall not expire later than the Revolving
Credit Termination Date).
<PAGE> 45
39
(b) Each Letter of Credit shall be subject to the Uniform
Customs and, to the extent not inconsistent therewith, the laws of the State of
New York.
(c) The Issuing Lender shall not at any time be obligated to
issue any Letter of Credit hereunder if such issuance would conflict with, or
cause the Issuing Lender or any L/C Participant to exceed any limits imposed by,
any applicable Requirement of Law.
3.2 Procedure for Issuance of Letter of Credit. The Designated
Borrower may from time to time request that the Issuing Lender issue a Letter of
Credit by delivering to the Issuing Lender at its address for notices specified
herein an Application therefor, completed to the satisfaction of the Issuing
Lender, and such other certificates, documents and other papers and information
as the Issuing Lender may request. Upon receipt of any Application, the Issuing
Lender will process such Application and the certificates, documents and other
papers and information delivered to it in connection therewith in accordance
with its customary procedures and shall promptly issue the Letter of Credit
requested thereby (but in no event shall the Issuing Lender be required to issue
any Letter of Credit earlier than three Business Days after its receipt of the
Application therefor and all such other certificates, documents and other papers
and information relating thereto) by issuing the original of such Letter of
Credit to the beneficiary thereof or as otherwise may be agreed to by the
Issuing Lender and the Designated Borrower. The Issuing Lender shall furnish a
copy of such Letter of Credit to the Designated Borrower promptly following the
issuance thereof. The Issuing Lender shall promptly furnish to the
Administrative Agent, which shall in turn promptly furnish to the Lenders,
notice of the issuance of each Standby Letter of Credit (including the amount
thereof). On each L/C Fee Payment Date, the Issuing Lender shall promptly
furnish to the Administrative Agent, which shall in turn promptly furnish to the
Lenders, notice of the aggregate face amount of the Commercial Letters of Credit
outstanding on such date.
3.3 Fees, Commissions and Other Charges. (a) The Borrowers
jointly and severally agree that they will pay a commission on all outstanding
Standby Letters of Credit at the rate of 3-1/2% per annum of the face amount of
each such Letter of Credit, of which 1/4 of 1% per annum will be a fronting fee
for the account of the Issuing Lender, and the remainder will be shared ratably
among the Revolving Credit Lenders in accordance with their Revolving Credit
Percentage, payable quarterly in arrears on each L/C Fee Payment Date after the
issuance date. The Borrowers jointly and severally agree that they will pay a
commission on all outstanding Commercial Letters of Credit at the rate of 3-1/2%
per annum of the average daily face amount of such Letters of Credit during the
period for which such payment is made, of which 1/4 of 1% per annum will be a
fronting fee for the account of the Issuing Lender, and the remainder will be
shared ratably among the Revolving Credit Lenders in accordance with the
Revolving Credit Percentage, payable quarterly in arrears on each L/C Fee
Payment Date.
(b) In addition to the foregoing fees and commissions, the
Borrowers jointly and severally agree that they shall pay or reimburse the
Issuing Lender for such normal and customary costs and expenses as are incurred
or charged by the Issuing Lender in issuing, negotiating, effecting payment
under, amending or otherwise administering any Letter of Credit.
<PAGE> 46
40
(c) The Administrative Agent shall, promptly following its
receipt thereof, distribute to the Issuing Lender and the L/C Participants all
fees and commissions received by the Administrative Agent for their respective
accounts pursuant to this Section.
3.4 L/C Participations. (a) The Issuing Lender irrevocably
agrees to grant and hereby grants to each L/C Participant, and, to induce the
Issuing Lender to issue Letters of Credit hereunder, each L/C Participant
irrevocably agrees to accept and purchase and hereby accepts and purchases from
the Issuing Lender, on the terms and conditions hereinafter stated, for such L/C
Participant's own account and risk an undivided interest equal to such L/C
Participant's Revolving Credit Percentage in the Issuing Lender's obligations
and rights under each Letter of Credit issued hereunder and the amount of each
draft paid by the Issuing Lender thereunder. Each L/C Participant
unconditionally and irrevocably agrees with the Issuing Lender that, if a draft
is paid under any Letter of Credit for which the Issuing Lender is not
reimbursed in full by the Borrowers in accordance with the terms of this
Agreement, such L/C Participant shall pay to the Issuing Lender upon demand at
the Issuing Lender's address for notices specified herein an amount equal to
such L/C Participant's Revolving Credit Percentage of the amount of such draft,
or any part thereof, which is not so reimbursed.
(b) If any amount required to be paid by any L/C Participant
to the Issuing Lender pursuant to Section 3.4(a) in respect of any unreimbursed
portion of any payment made by the Issuing Lender under any Letter of Credit is
paid to the Issuing Lender within three Business Days after the date such
payment is due, such L/C Participant shall pay to the Issuing Lender on demand
an amount equal to the product of (i) such amount, times (ii) the daily average
Federal Funds Effective Rate during the period from and including the date such
payment is required to the date on which such payment is immediately available
to the Issuing Lender, times (iii) a fraction the numerator of which is the
number of days that elapse during such period and the denominator of which is
360. If any such amount required to be paid by any L/C Participant pursuant to
Section 3.4(a) is not made available to the Issuing Lender by such L/C
Participant within three Business Days after the date such payment is due, the
Issuing Lender shall be entitled to recover from such L/C Participant, on
demand, such amount with interest thereon calculated from such due date at the
rate per annum applicable to Base Rate Loans hereunder. A certificate of the
Issuing Lender submitted to any L/C Participant with respect to any amounts
owing under this Section shall be conclusive in the absence of manifest error.
(c) Whenever, at any time after the Issuing Lender has made
payment under any Letter of Credit and has received from any L/C Participant its
pro rata share of such payment in accordance with Section 3.4(a), the Issuing
Lender receives any payment related to such Letter of Credit (whether directly
from the Designated Borrower or otherwise, including proceeds of collateral
applied thereto by the Issuing Lender), or any payment of interest on account
thereof, the Issuing Lender will distribute to such L/C Participant its pro rata
share thereof; provided, however, that in the event that any such payment
received by the Issuing Lender shall be required to be returned by the Issuing
Lender, such L/C Participant shall return to the Issuing Lender the portion
thereof previously distributed by the Issuing Lender to it.
<PAGE> 47
41
3.5 Reimbursement Obligation of the Borrowers. The Borrowers
jointly and severally agree to reimburse the Issuing Lender on each date on
which the Issuing Lender notifies the Designated Borrower of the date and amount
of a draft presented under any Letter of Credit and paid by the Issuing Lender
for the amount of (a) such draft so paid and (b) any taxes, fees, charges or
other costs or expenses incurred by the Issuing Lender in connection with such
payment. Each such payment shall be made to the Issuing Lender at its address
for notices specified herein in lawful money of the United States and in
immediately available funds. Interest shall be payable on any and all amounts
remaining unpaid by the Borrowers under this Section from the date such amounts
become payable (whether at stated maturity, by acceleration or otherwise) until
payment in full at the rate set forth in Section 2.15(c). Each drawing under any
Letter of Credit shall constitute a request by the Designated Borrower to the
Administrative Agent for a borrowing pursuant to Section 2.6 of Base Rate Loans
(or, at the option of the Administrative Agent and the Swing Line Lender in
their sole discretion, a borrowing pursuant to Section 2.25 of Swing Line Loans)
in the amount of such drawing, the proceeds of such Loans to be applied to
reimburse such drawing. The Borrowing Date with respect to such borrowing shall
be the date of such drawing.
3.6 Obligations Absolute. The Borrowers' obligations under
this Section 3 shall be absolute and unconditional under any and all
circumstances and irrespective of any setoff, counterclaim or defense to payment
which the Borrowers may have or have had against the Issuing Lender, any
beneficiary of a Letter of Credit or any other Person. The Borrowers jointly and
severally also agree with the Issuing Lender that the Issuing Lender shall not
be responsible for, and the Borrowers' Reimbursement Obligations under Section
3.5 shall not be affected by, among other things, the validity or genuineness of
documents or of any endorsements thereon, even though such documents shall in
fact prove to be invalid, fraudulent or forged, or any dispute between or among
any Borrower and any beneficiary of any Letter of Credit or any other party to
which such Letter of Credit may be transferred or any claims whatsoever of any
Borrower against any beneficiary of such Letter of Credit or any such
transferee. The Issuing Lender shall not be liable for any error, omission,
interruption or delay in transmission, dispatch or delivery of any message or
advice, however transmitted, in connection with any Letter of Credit, except for
errors or omissions found by a final and nonappealable decision of a court of
competent jurisdiction to have resulted from the gross negligence or willful
misconduct of the Issuing Lender. The Borrowers jointly and severally agree that
any action taken or omitted by the Issuing Lender under or in connection with
any Letter of Credit or the related drafts or documents, if done in the absence
of gross negligence or willful misconduct and in accordance with the standards
or care specified in the Uniform Commercial Code of the State of New York, shall
be binding on the Borrowers jointly and severally and shall not result in any
liability of the Issuing Lender to the Borrowers.
3.7 Letter of Credit Payments. If any draft shall be presented
for payment under any Letter of Credit, the Issuing Lender shall promptly notify
the Designated Borrower of the date and amount thereof. The responsibility of
the Issuing Lender to the Borrowers in connection with any draft presented for
payment under any Letter of Credit shall, in addition to any payment obligation
expressly provided for in such Letter of Credit, be limited to
<PAGE> 48
42
determining that the documents (including each draft) delivered under such
Letter of Credit in connection with such presentment are substantially in
conformity with such Letter of Credit.
3.8 Applications. To the extent that any provision of any
Application related to any Letter of Credit is inconsistent with the provisions
of this Section 3, the provisions of this Section 3 shall apply.
SECTION 4. REPRESENTATIONS AND WARRANTIES
To induce the Administrative Agent and the Lenders to enter
into this Agreement and to make the Loans and issue or participate in the
Letters of Credit, the Parent and the Borrowers hereby jointly and severally
represent and warrant to the Administrative Agent and each Lender that:
4.1 Financial Condition. (a) The unaudited pro forma combined
balance sheet of the Borrowers as at April 30, 1996 (including the notes
thereto) (the "Pro Forma Balance Sheet"), copies of which have heretofore been
furnished to each Lender, has been prepared giving effect (as if such events had
occurred on such date) to (i) the Recapitalization, (ii) the borrowings under
this Agreement contemplated to be made on the Closing Date and the use of
proceeds thereof, (iii) the incurrence of the Subordinated Debt, (iv) the
issuance of the Preferred Stock, (v) the other transactions contemplated by the
Recapitalization Agreement and (vi) the payment of fees and expenses in
connection with the foregoing. The Pro Forma Balance Sheet has been prepared
based on the best information available to the Borrowers as of the date of
delivery thereof, and presents fairly on a pro forma basis the estimated
combined financial position of the Borrowers as of April 30, 1996, assuming that
the events specified in the preceding sentence had actually occurred at such
date.
(b) The combined balance sheet of the Borrowers as at December
31, 1995 and December 31, 1994 and the related combined statements of income and
of cash flows for the fiscal years ended on such dates, reported on by KPMG Peat
Marwick LLP, copies of which have heretofore been furnished to each Lender, are
complete and correct and present fairly the combined financial condition of the
Borrowers as at such dates, and the combined results of their operations and
their combined cash flows for the fiscal years then ended. The unaudited
combined balance sheet of the Borrowers as at April 30, 1996 and the related
unaudited combined statements of income and of cash flows for the four-month
period ended on such date, certified by a Responsible Officer of the Designated
Borrower, copies of which have heretofore been furnished to each Lender, are
complete and correct and present fairly the combined financial condition of the
Borrowers as at such date, and the combined results of their operations and
their combined cash flows for the four-month period then ended (subject to
normal year-end audit adjustments (including adjustments for inventory
capitalization and depreciation). All such financial statements, including the
related schedules and notes thereto, have been prepared in accordance with GAAP
applied consistently throughout the periods involved (except as approved by such
accountants or Responsible Officer of the Designated Borrower, as the case may
be, and as disclosed therein and except for the absence of
<PAGE> 49
43
adjustments for inventory capitalization and depreciation in the case of the
April 30, 1996 financial statements). None of the Borrowers had, at the date of
the most recent balance sheet referred to above, any undisclosed liabilities,
any material Guarantee Obligation, contingent liability or liability for taxes,
or any long-term lease or unusual forward or long-term commitment, including,
without limitation, any interest rate or foreign currency swap or exchange
transaction, which is not reflected in the foregoing statements or in the notes
thereto and not required to be disclosed by GAAP. During the period from
December 31, 1995 to and including the date hereof there has been no sale,
transfer or other disposition by the Borrowers or any of their combined
Subsidiaries of any material part of their business or property and no purchase
or other acquisition of any business or property (including any Capital Stock of
any other Person) material in relation to the combined financial condition of
the Borrowers at December 31, 1995, other than pursuant to the Recapitalization
Agreement.
4.2 No Change. (a) Since December 31, 1995, there has been no
development or event which has had or could reasonably be expected to have a
Material Adverse Effect, and (b) during the period from December 31, 1995 to and
including the date hereof no dividends or other distributions have been
declared, paid or made upon the Capital Stock of the Parent, the Borrowers or
any Subsidiary nor has any of the Capital Stock of the Parent, the Borrowers or
any Subsidiary been redeemed, retired, purchased or otherwise acquired for value
by the Parent, the Borrowers any or any of their Subsidiaries, other than
pursuant to the Recapitalization Agreement.
4.3 Corporate Existence; Compliance with Law. Each of the
Parent, the Borrowers and their Subsidiaries (a) is duly organized, validly
existing and in good standing under the laws of the jurisdiction of its
organization, (b) has the power and authority, and the legal right, to own and
operate its property, to lease the property it operates as lessee and to conduct
the business in which it is currently engaged, (c) is duly qualified and in good
standing under the laws of each jurisdiction where its ownership, lease or
operation of property or the conduct of its business requires such qualification
and (d) is in compliance with all Requirements of Law except to the extent that
the failure to comply therewith could not, in the aggregate, reasonably be
expected to have a Material Adverse Effect.
4.4 Corporate Power; Authorization; Enforceable Obligations.
Each Loan Party has the power and authority, and the legal right, to make,
deliver and perform each Loan Document to which it is a party and, in the case
of the Borrowers, to borrow hereunder. Each Loan Party has taken all necessary
action to authorize the execution, delivery and performance of the Loan
Documents to which it is a party and, in the case of the Borrowers, to authorize
the borrowings on the terms and conditions of this Agreement and the Notes. No
material consent or authorization of, filing with, notice to or other act by or
in respect of, any Governmental Authority or any other Person is required in
connection with the Recapitalization, the borrowings hereunder or with the
execution, delivery, performance, validity or enforceability of this Agreement
or any of the Loan Documents, except (i) consents, authorizations, filings and
notices described in Schedule 4.4, which consents, authorizations, filings and
notices have been obtained or made and are in full force and effect and (ii) the
filings referred to in Section 4.19(b). Each Loan Document has been duly
<PAGE> 50
44
executed and delivered on behalf of each Loan Party thereto. This Agreement
constitutes, and each other Loan Document upon execution will constitute, a
legal, valid and binding obligation of each Loan Party thereto, enforceable
against each such Loan Party in accordance with its terms, except as
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting the enforcement of
creditors' rights generally and by general equitable principles (whether
enforcement is sought by proceedings in equity or at law).
4.5 No Legal Bar. The execution, delivery and performance of
this Agreement and the other Loan Documents, the issuance of Letters of Credit,
the borrowings hereunder and the use of the proceeds thereof will not violate
any Requirement of Law or Contractual Obligation of the Parent, the Borrowers or
of any of their Subsidiaries and will not result in, or require, the creation or
imposition of any Lien on any of their respective properties or revenues
pursuant to any such Requirement of Law or Contractual Obligation (other than
the Liens created by the Security Documents).
4.6 No Material Litigation. No litigation, investigation or
proceeding of or before any arbitrator or Governmental Authority is pending or,
to the knowledge of the Parent or the Borrowers, threatened by or against the
Parent, the Borrowers or any of their Subsidiaries or against any of its or
their respective properties or revenues (a) with respect to any of the Loan
Documents or any of the transactions contemplated hereby or thereby, or (b)
which could reasonably be expected to have a Material Adverse Effect.
4.7 No Default. Neither the Parent, the Borrowers nor any of
their Subsidiaries is in default under or with respect to any of its Contractual
Obligations in any respect which could reasonably be expected to have a Material
Adverse Effect. No Default or Event of Default has occurred and is continuing.
4.8 Ownership of Property; Liens. Each of the Parent, the
Borrowers and their Subsidiaries has title in fee simple to, or a valid
leasehold interest in, all its real property, and good title to, or a valid
leasehold interest in, all its other property, and none of such property is
subject to any Lien except as permitted by Section 7.3. The Parent, the
Borrowers and their Subsidiaries have title in fee simple to no real property
other than the Mortgaged Property.
4.9 Intellectual Property. The Parent, the Borrowers and each
of their Subsidiaries owns, or is licensed to use, all trademarks, tradenames,
copyrights, technology, know-how and processes necessary for the conduct of its
business as currently conducted, except for those the failure to own or license
which could not reasonably be expected to have a Material Adverse Effect
("Intellectual Property"). No material claim has been asserted and is pending by
any Person challenging or questioning the use of any Intellectual Property or
the validity or effectiveness of any Intellectual Property, nor does the Parent
or any of the Borrowers know of any valid basis for any such claim. The use of
Intellectual Property by the Parent, the Borrowers and their Subsidiaries does
not infringe on the rights of any Person in any material respect.
<PAGE> 51
45
4.10 No Burdensome Restrictions. No Requirement of Law or Contractual
Obligation of the Parent, the Borrowers or any of their Subsidiaries could
reasonably be expected to have a Material Adverse Effect.
4.11 Taxes. Each of the Parent, the Borrowers and their Subsidiaries
has filed or caused to be filed all Federal, state and other material tax
returns which are required to be filed and has paid all taxes shown to be due
and payable on said returns or on any assessments made against it or any of its
property and all other taxes, fees or other charges imposed on it or any of its
property by any Governmental Authority (other than any the amount or validity of
which are currently being contested in good faith by appropriate proceedings and
with respect to which reserves in conformity with GAAP have been provided on the
books of the Borrowers); no tax Lien has been filed, and, to the knowledge of
the Parent and the Borrowers, no claim is being asserted, with respect to any
such tax, fee or other charge.
4.12 Federal Regulations. No part of the proceeds of any Loans will be
used for "purchasing" or "carrying" any "margin stock" within the respective
meanings of each of the quoted terms under Regulation G or Regulation U of the
Board as now and from time to time hereafter in effect or for any purpose which
violates the provisions of the Regulations of the Board. If requested by any
Lender or the Administrative Agent, the Borrowers will furnish to the
Administrative Agent and each Lender a statement to the foregoing effect in
conformity with the requirements of FR Form G-1 or FR Form U-1 referred to in
said Regulation G or Regulation U, as the case may be.
4.13 ERISA. Neither a Reportable Event nor an "accumulated funding
deficiency" (within the meaning of Section 412 of the Code or Section 302 of
ERISA) has occurred during the five-year period prior to the date on which this
representation is made or deemed made with respect to any Plan, and each Plan
has complied in all material respects with the applicable provisions of ERISA
and the Code. No termination of a Single Employer Plan has occurred, and no Lien
in favor of the PBGC or a Plan has arisen, during such five-year period. The
present value of all accrued benefits under each Single Employer Plan (based on
those assumptions used to fund such Plans) did not, as of the last annual
valuation date prior to the date on which this representation is made or deemed
made, exceed the value of the assets of such Plan allocable to such accrued
benefits by a material amount. Neither any Borrower nor any Commonly Controlled
Entity has had a complete or partial withdrawal from any Multiemployer Plan
which has resulted or could reasonably be expected to result in a material
liability under ERISA, and neither any Borrower nor any Commonly Controlled
Entity would become subject to any material liability under ERISA if any
Borrower or any such Commonly Controlled Entity were to withdraw completely from
all Multiemployer Plans as of the valuation date most closely preceding the date
on which this representation is made or deemed made. No such Multiemployer Plan
is in Reorganization or Insolvent. The present value (determined using actuarial
and other assumptions which are reasonable in respect of the benefits provided
and the employees participating) of the liability of the Borrowers and each
Commonly Controlled Entity for post retirement benefits to be provided to their
current and former employees under Plans which are welfare benefit plans (as
defined
<PAGE> 52
46
in Section 3(1) of ERISA) does not, in the aggregate, exceed the assets under
all such Plans allocable to such benefits by an amount in excess of $50,000.
4.14 Investment Company Act; Other Regulations. No Loan Party is an
"investment company", or a company "controlled" by an "investment company",
within the meaning of the Investment Company Act of 1940, as amended. No Loan
Party is subject to regulation under any Federal or State statute or regulation
(other than Regulation X of the Board) which limits its ability to incur
Indebtedness.
4.15 Subsidiaries. The Borrowers listed on Schedule 1.1A constitute all
the direct or indirect Subsidiaries of the Parent.
4.16 Purpose of Loans; Limitations on Use. The proceeds of the Term
Loans shall be used to finance the Recapitalization and to pay related fees and
expenses. The Revolving Credit Loans shall be used to finance the working
capital needs of the Borrowers and their Subsidiaries.
4.17 Environmental Matters.
(a) The Properties do not contain, and have not previously contained,
any Materials of Environmental Concern in amounts or concentrations or
under circumstances which (i) constitute or constituted a violation of, or
(ii) could give rise to liability under, any Environmental Law, except in
either case insofar as such violation or liability, or any aggregation
thereof, could not reasonably be expected to result in the payment of a
Material Environmental Amount.
(b) The Properties and all operations at the Properties are in
material compliance, and have in the last five years been in material
compliance, with all applicable Environmental Laws, and there is no
contamination at, under or about the Properties or violation of any
Environmental Law with respect to the Properties or the business operated
by the Parent, the Borrowers or any of their Subsidiaries (the "Business")
which could reasonably be expected to materially interfere with the
continued operation of the Properties or materially impair the fair
saleable value thereof. Neither the Parent, the Borrowers nor any of their
Subsidiaries has assumed any liability of any other Person under
Environmental Laws.
(c) Neither the Parent, the Borrowers nor any of their Subsidiaries
has received or is aware of any notice of violation, alleged violation,
non-compliance, liability or potential liability regarding environmental
matters or compliance with Environmental Laws with regard to any of the
Properties or the Business, nor does the Parent, the Borrowers or any of
their Subsidiaries have knowledge or reason to believe that any such notice
will be received or is being threatened, except insofar as such notice or
threatened notice, or any aggregation thereof, does not involve a matter or
matters that could reasonably be expected to result in the payment of a
Material Environmental Amount.
<PAGE> 53
47
(d) Materials of Environmental Concern have not been transported or
disposed of from the Properties in violation of, or in a manner or to a
location which could reasonably be expected to give rise to liability
under, any Environmental Law, nor have any Materials of Environmental
Concern been generated, treated, stored or disposed of at, on or under any
of the Properties in violation of, or in a manner that could give rise to
liability under, any applicable Environmental Law, except insofar as any
such violation or liability referred to in this paragraph, or any
aggregation thereof, could not reasonably be expected to result in the
payment of a Material Environmental Amount.
(e) No judicial proceeding or governmental or administrative action is
pending or, to the knowledge of the Parent, the Borrowers or any of their
Subsidiaries, threatened, under any Environmental Law to which the Parent,
the Borrowers or any of their Subsidiaries is or will be named as a party
with respect to the Properties or the Business, nor are there any consent
decrees or other decrees, consent orders, administrative orders or other
orders, or other administrative or judicial requirements outstanding under
any Environmental Law with respect to the Properties or the Business,
except insofar as such proceeding, action, decree, order or other
requirement, or any aggregation thereof, could not reasonably be expected
to result in the payment of a Material Adverse Amount.
(f) There has been no release or threat of release of Materials of
Environmental Concern at or from the Properties, or arising from or related
to the operations of the Parent, the Borrowers or any of their Subsidiaries
in connection with the Properties or otherwise in connection with the
Business, in violation of or in amounts or in a manner that could give rise
to liability under Environmental Laws, except insofar as any such violation
or liability referred to in this paragraph, or any aggregation thereof,
could not reasonably be expected to result in the payment of a Material
Environmental Amount.
4.18 Accuracy of Information. No statement or information contained in
this Agreement, any other Loan Document, the Confidential Information Memorandum
or any other document, certificate or statement furnished to the Administrative
Agent or the Lenders, by or on behalf of any Loan Party for use in connection
with the transactions contemplated by this Agreement or the other Loan
Documents, contained as of the date such statement, information, document or
certificate was so furnished any untrue statement of a material fact or omitted
to state a material fact necessary in order to make the statements contained
herein or therein not misleading. The projections and pro forma financial
information contained in the materials referenced above are based upon good
faith estimates and assumptions believed by management of the Parent, the
Borrowers and their Subsidiaries to be reasonable at the time made, it being
recognized by the Lenders that such financial information as it relates to
future events is not to be viewed as fact and that actual results during the
period or periods covered by such financial information may differ from the
projected results set forth therein by a material amount. There is no fact known
to the Parent, the Borrowers or any of their Subsidiaries that could reasonably
be expected to have a Material Adverse Effect that has not been expressly
disclosed herein, in the other Loan Documents, or in such other documents,
<PAGE> 54
48
certificates and statements furnished to the Administrative Agent and the
Lenders for use in connection with the transactions contemplated hereby and by
the other Loan Documents.
4.19 Security Documents. (a) Each of the Pledge Agreements is effective
to create in favor of the Administrative Agent, for the benefit of the Lenders,
a legal, valid and enforceable security interest in the Pledged Stock described
therein and proceeds thereof and, when the stock certificates representing the
Pledged Stock described therein are delivered to the Administrative Agent, each
such Pledge Agreement shall constitute a fully perfected first priority Lien on,
and security interest in, all right, title and interest of the relevant pledgor
in such Pledged Stock and the proceeds thereof, as security for the Obligations
(as defined in the relevant Pledge Agreement), in each case prior and superior
in right to any other Person.
(b) The Borrowers Security Agreement is effective to create in favor
of the Administrative Agent, for the benefit of the Lenders, a legal, valid and
enforceable security interest in the Collateral described therein and proceeds
thereof, and when financing statements in appropriate form are filed in the
offices specified on Schedule 4.19(b), the Borrowers Security Agreement shall
constitute a fully perfected Lien on, and security interest in, all right, title
and interest of the Loan Parties in such Collateral and the proceeds thereof, as
security for the Obligations (as defined in the Borrowers Security Agreement),
in each case prior and superior in right to any other Person, other than with
respect to Liens expressly permitted by Section 7.3.
(c) Each Mortgage, when executed and delivered by the relevant Loan
Party, shall be effective to create in favor of the Administrative Agent, for
the benefit of the Lenders, a legal, valid and enforceable Lien on the Mortgaged
Property described therein and proceeds thereof, and when each Mortgage is filed
in the office(s) specified on Schedule 4.19(c), each Mortgage shall constitute a
fully perfected Lien on, and security interest in, all right, title and interest
of the Loan Parties in the Mortgaged Property and the proceeds thereof, as
security for the Obligations (as defined in the relevant Mortgage), in each case
prior and superior in right to any other Person, other than with respect to
Liens expressly permitted by Section 7.3.
4.20 Solvency. Each Loan Party is, and after giving effect to the
consummation of the Recapitalization and to the incurrence of all Indebtedness
and obligations being incurred in connection herewith and therewith will be and
will continue to be, taking into account the provisions of Section 2.24,
Solvent.
4.21 Purchase Agreement Representations and Warranties. On the Closing
Date, each of the representatives and warranties of the Borrowers set forth in
Article VI of the Purchase Agreement are true and correct in all material
respects.
SECTION 5. CONDITIONS PRECEDENT
5.1 Conditions to Initial Extension of Credit. The agreement of each
Lender to make the initial extension of credit requested to be made by it is
subject to the satisfaction,
<PAGE> 55
49
prior to or concurrently with the making of such extension of credit on the
Closing Date, of the following conditions precedent:
(a) Loan Documents. The Arranger shall have received (i) this
Agreement, executed and delivered by a duly authorized officer of the
Parent and each of the Borrowers, with a counterpart for each Lender, (ii)
for the account of any Lender requesting Notes in accordance with Section
2.9(e), Notes conforming to the requirements hereof and executed and
delivered by a duly authorized officer of the Borrowers, (iii) each of the
Pledge Agreements, each executed and delivered by a duly authorized officer
of each party thereto, with a counterpart or a conformed copy for each
Lender, (iv) the Borrowers Security Agreement, executed and delivered by a
duly authorized officer of each Borrower, with a counterpart or a conformed
copy for each Lender, (v) (except as provided in subsection 6.12) each of
the Assignments of Insurance, each executed and delivered by a duly
authorized officer of each party thereto, with a counterpart or a conformed
copy for each Lender, and (vi) each Mortgage, executed and delivered by a
duly authorized officer of each party thereto, with a counterpart for each
Lender.
(b) Related Agreements. The Arranger shall have received, in form and
substance satisfactory to it, with a copy for each Lender, true and correct
copies, certified as to authenticity by the Designated Borrower, of (i) the
Recapitalization Agreement and any of the other Recapitalization Documents
reasonably requested by the Arranger (ii) the Management Contracts, (iii)
the Shareholders Agreement, (iv) the Certificate of Designations for each
series of the Preferred Stock, (v) the Registration Rights Agreement (vi)
the Purchase Agreement, (vii) the limited liability company agreement for
the Parent, and (viii) the Subordination Agreement. Except as provided in
subsection 6.12, the Arranger shall have received (in a form reasonably
satisfactory to the Arranger), with a copy for each Lender, true and
correct copies, certified as to authenticity by the Designated Borrower, of
the Insurance Policies (or certificates evidencing the effectiveness of
such Insurance Policies and the material terms thereof) and such other
documents or instruments as may be reasonably requested by the Arranger,
including, without limitation, a copy of any other debt instrument,
security agreement or other material contract to which any Borrower may be
a party.
(c) Recapitalization. On or prior to the Closing Date, the
Recapitalization shall have been consummated for an aggregate purchase
price not exceeding $125,000,000 (which amount may be increased or
decreased in accordance with certain purchase price adjustments described
in section 4.3 of the Recapitalization Agreement, including all fees,
costs, and expenses incurred in connection therewith, pursuant to the
Recapitalization Documents, any conditions precedent set forth in the
Recapitalization Agreement shall have been satisfied or waived, and no
material provision of the Recapitalization Documents shall have been
amended, supplemented, waived or otherwise modified without the prior
written consent of the Arranger.
(d) Capitalization; Capital Structure. The Borrowers shall have
received (i) at least $30,780,000 from the issuance of the Series A
Preferred, (ii) at least $20,000,000
<PAGE> 56
50
from the issuance of the Subordinated Debt pursuant to the Purchase
Agreement and (iii) at least $14,200,000 and at least $20,000,000 from the
issuance of the Series B Preferred and the Series C Preferred,
respectively, to the Individual Shareholders. The capital structure of the
Parent, the Borrowers and each of their Subsidiaries after the
Recapitalization shall be satisfactory to the Arranger and the Lenders in
all respects.
(e) Pro Forma Balance Sheet; Financial Statements. The Lenders shall
have received (i) the Pro Forma Balance Sheet, which Pro Forma Balance
Sheet shall be in form and substance satisfactory to the Lenders and (ii)
satisfactory unaudited interim combined financial statements of the
Borrowers for each fiscal month of the Borrowers ended in the 1996 fiscal
year of the Borrowers as to which such financial statements are available
prior to the Closing Date and such financial statements shall not reflect
any material adverse change in the combined financial condition of the
Borrowers as reflected in the financial statements previously delivered to
the Lenders.
(f) Approvals. All governmental and third party approvals (including
landlords' and other consents) necessary or advisable in connection with
the Recapitalization, the transactions contemplated hereby and the
continuing operations of the Borrowers shall have been obtained and be in
full force and effect, and all applicable waiting periods shall have
expired without any action being taken or threatened by any competent
authority which would restrain, prevent or otherwise impose adverse
conditions on the Recapitalization, the financing thereof, the financing
contemplated hereby or the continuing operations of the Borrowers.
Notwithstanding the foregoing requirement with respect to third party
approvals, the Borrowers shall not be required to have obtained landlords'
waivers in form and substance satisfactory to the Arranger relating to the
Lender's security interest in the Borrower's assets for more than 20% of
the Borrowers' leases on the Closing Date.
(g) Business Plan. The Lenders shall have received a satisfactory
detailed business plan of the Borrowers for fiscal years 1996 - 2002 and a
satisfactory written analysis of the business and prospects of the
Borrowers for the period from the Closing Date through the final maturity
of the Term Loans.
(h) Lien Searches. The Arranger shall have received the results of a
recent lien search in each of the relevant jurisdictions where assets of
the Borrowers are located, and such search shall reveal no liens on any of
the assets of the Borrowers except for liens permitted by Section 7.3 or
liens to be discharged on or prior to the Closing Date pursuant to
documentation satisfactory to the Arranger.
(i) Expenses. The expenses incurred in connection with the
Recapitalization and the financing thereof shall not exceed $7,000,000 in
the aggregate.
(j) Valuation of Inventory. The Lenders shall have received copies of
a valuation, prepared by a firm satisfactory to the Arranger and in form
and substance satisfactory to the Arranger, of the inventory of the
Borrowers.
<PAGE> 57
51
(k) Management. The Lenders shall be satisfied that senior managers
acceptable to them shall be available to manage the Borrowers.
(l) Working Capital. The Lenders shall be satisfied with the
sufficiency of amounts available to the Borrowers pursuant to the aggregate
Revolving Credit Commitments to meet the ongoing working capital needs of
the Borrowers following the Recapitalization and the consummation of the
other transactions contemplated hereby.
(m) Officers. The Lenders shall be satisfied with the results of an
independent background investigation concerning certain key officers,
directors and managers of the Borrowers.
(n) Closing Certificate. The Arranger shall have received, with a
counterpart for each Lender, a certificate of each Loan Party (other than
the Individual Shareholders), dated the Closing Date, substantially in the
form of Exhibit G, with appropriate insertions and attachments, executed by
the President or any Vice President and the Secretary or any Assistant
Secretary of such Loan Party.
(o) Corporate Proceedings of Loan Parties. The Arranger shall have
received, with a counterpart for each Lender, a copy of the resolutions of
the Board of Directors of each Loan Party authorizing (i) the execution,
delivery and performance of the Loan Documents to which it is a party, and
(ii) in the case of the Borrowers, the borrowings contemplated hereunder.
(p) Fees. The Arranger shall have received all fees, expenses and
other consideration required to be paid on or before the Closing Date.
(q) Legal Opinions. The Arranger shall have received, with a
counterpart for each Lender, the following executed legal opinions:
(i) the executed legal opinion of Pepper, Hamilton & Scheetz,
counsel to the Parent, substantially in the form of Exhibit H-1;
(ii) the executed legal opinion of Baker, Donelson, Bearman &
Caldwell, counsel of the Borrowers and the other Loan Parties,
substantially in the form of Exhibit H-2; and
(iii) the executed legal opinion of Simpson Thacher &
Bartlett, in form and substance satisfactory to the Arranger;
Each such legal opinion shall be in form and substance satisfactory to the
Lenders and shall cover such matters incident to the transactions
contemplated by this Agreement as the Arranger may reasonably require.
<PAGE> 58
52
(r) Pledged Stock; Stock Powers. The Arranger shall have received the
certificates representing the shares pledged pursuant to each of the Pledge
Agreements, together with an undated stock power for each such certificate
executed in blank by a duly authorized officer of the pledgor thereof.
(s) Filings, Registrations and Recordings. Each document (including,
without limitation, any Uniform Commercial Code financing statement)
required by the Security Documents or under law or reasonably requested by
the Arranger to be filed, registered or recorded in order to create in
favor of the Arranger, for the benefit of the Lenders, a perfected Lien on
the Collateral described therein, prior and superior in right to any other
Person (other than with respect to Liens expressly permitted by Section
7.3), shall be in proper form for filing, registration or recordation in
each jurisdiction in which the filing, registration or recordation thereof
is so required or requested.
(t) Surveys. The Arranger shall have received, and the title insurance
company issuing the policy referred to in Section 5.1(u) (the "Title
Insurance Company") shall have received, maps or plats of an as-built
survey of the sites of the property covered by each Mortgage certified to
the Administrative Agent and the Title Insurance Company in a manner
satisfactory to them, dated a date satisfactory to the Arranger and the
Title Insurance Company by an independent professional licensed land
surveyor satisfactory to the Arranger and the Title Insurance Company,
which maps or plats and the surveys on which they are based shall be made
in accordance with the Minimum Standard Detail Requirements for Land Title
Surveys jointly established and adopted by the American Land Title
Association and the American Congress on Surveying and Mapping in 1992,
and, without limiting the generality of the foregoing, there shall be
surveyed and shown on such maps, plats or surveys the following: (i) the
locations on such sites of all the buildings, structures and other
improvements and the established building setback lines; (ii) the lines of
streets abutting the sites and width thereof; (iii) all access and other
easements appurtenant to the sites or necessary or desirable to use the
sites; (iv) all roadways, paths, driveways, easements, encroachments and
overhanging projections and similar encumbrances affecting the site,
whether recorded, apparent from a physical inspection of the sites or
otherwise known to the surveyor; (v) any encroachments on any adjoining
property by the building structures and improvements on the sites; and (vi)
if the site is described as being on a filed map, a legend relating the
survey to said map.
(u) Title Insurance Policy. The Arranger shall have received in
respect of each parcel covered by each Mortgage a mortgagee's title policy
(or policies) or marked up unconditional binder for such insurance dated
the Closing Date. Each such policy shall (i) be in an amount satisfactory
to the Arranger; (ii) be issued at ordinary rates; (iii) insure that the
Mortgage insured thereby creates a valid first Lien on such parcel free and
clear of all defects and encumbrances, except such as may be approved by
the Arranger; (iv) name the Administrative Agent for the benefit of the
Lenders as the insured thereunder; (v) be in the form of ALTA Loan Policy -
1992; (vi) contain such endorsements and affirmative coverage as the
Arranger may request and (vii) be
<PAGE> 59
53
issued by title companies satisfactory to the Arranger (including any such
title companies acting as co-insurers or reinsurers, at the option of the
Arranger). The Arranger shall have received evidence satisfactory to it
that all premiums in respect of each such policy, and all charges for
mortgage recording tax, if any, have been paid.
(v) Flood Insurance. If requested by the Arranger, the Arranger shall
have received (i) a policy of flood insurance which (A) covers any parcel
of improved real property which is encumbered by any Mortgage, (B) is
written in an amount not less than the outstanding principal amount of the
indebtedness secured by such Mortgage which is reasonably allocable to such
real property or the maximum limit of coverage made available with respect
to the particular type of property under the National Flood Insurance Act
of 1968, whichever is less, and (C) has a term ending not earlier than the
maturity of the indebtedness secured by such Mortgage and (ii) confirmation
that the Company has received the notice requirement pursuant to Section
208(e)(3) of Regulation H of the Board.
(w) Copies of Documents. The Arranger shall have received a copy of
all recorded documents referred to, or listed as exceptions to title in,
the title policy or policies referred to in Section 5.1(u) and a copy,
certified by such parties as the Arranger may deem appropriate, of all
other documents affecting the property covered by each Mortgage.
(x) Solvency Opinion. The Arranger shall have received, with a copy
for each Lender, an opinion from an independent valuation firm satisfactory
to the Arranger documenting the solvency of the Borrowers after giving
effect to the Recapitalization (including the fair market value of the
Borrower's assets) and the other transactions contemplated hereby.
(y) Termination of Prior Credit Facilities. The Arranger shall have
received evidence satisfactory to it that the Prior Credit Facilities shall
have been terminated and all amounts payable thereunder shall have been
paid in full.
5.2 Conditions to Each Extension of Credit. The agreement of each
Lender to make any extension of credit requested to be made by it on any date
(including, without limitation, its initial extension of credit) is subject to
the satisfaction of the following conditions precedent:
(a) Representations and Warranties. Each of the representations and
warranties made by any Loan Party in or pursuant to the Loan Documents
shall be true and correct in all material respects on and as of such date
as if made on and as of such date.
(b) No Default. No Default or Event of Default shall have occurred and
be continuing on such date or after giving effect to the extensions of
credit requested to be made on such date.
<PAGE> 60
54
(c) Additional Matters. All proceedings, and all documents,
instruments and other legal matters in connection with the transactions
contemplated by this Agreement, the other Loan Documents and the
Recapitalization shall be reasonably satisfactory in form and substance to
the Administrative Agent, and the Administrative Agent shall have received
such other documents and legal opinions in respect of any aspect or
consequence of the transactions contemplated hereby or thereby as it shall
reasonably request.
Each borrowing by and issuance of a Letter of Credit on behalf of the Borrowers
hereunder shall constitute a representation and warranty by the Borrowers as of
the date of such extension of credit that the conditions contained in this
Section 5.2 have been satisfied.
SECTION 6. AFFIRMATIVE COVENANTS
The Parent and the Borrowers hereby jointly and severally agree that,
so long as the Commitments remain in effect, any Note or Letter of Credit
remains outstanding and unpaid or any other amount is owing to any Lender or the
Administrative Agent hereunder, the Parent and the Borrowers shall and shall
cause each of their respective Subsidiaries to:
6.1 Financial Statements. Furnish to each Lender:
(a) as soon as available, but in any event within 120 days after the
end of each fiscal year of the Borrowers, a copy of the combined balance
sheet of the Borrowers and their Subsidiaries as at the end of such year
and the related combined statements of income and retained earnings and of
cash flows for such year, setting forth in each case in comparative form
the figures for the previous year, reported on without a "going concern" or
like qualification or exception, or qualification arising out of the scope
of the audit, by KPMG Peat Marwick LLP or other independent certified
public accountants of nationally recognized standing;
(b) as soon as available, but in any event not later than 45 days
after the end of each of the first three quarterly periods of each fiscal
year of the Borrowers, the unaudited combined balance sheet of the
Borrowers and their Subsidiaries as at the end of such quarter and the
related unaudited combined statements of income and retained earnings and
of cash flows of the Borrowers and their Subsidiaries for such quarter and
the portion of the fiscal year through the end of such quarter, setting
forth in each case in comparative form the figures for the previous year,
certified by a Responsible Officer of the Parent and of the Designated
Borrower as being fairly stated in all material respects (subject to normal
year-end audit adjustments); and
(c) as soon as available, but in any event not later than 45 days
after the end of each month occurring during each fiscal year of the
Borrowers (other than the third, sixth, ninth and twelfth such month), the
unaudited combined balance sheets of the Borrowers and their Subsidiaries
as at the end of such month and the related unaudited combined statements
of income and retained earnings and of cash flows of the
<PAGE> 61
55
Borrowers and their Subsidiaries for such month and the portion of the
fiscal year through the end of such month, setting forth in each case in
comparative form the figures for the previous year;
all such financial statements shall be complete and correct in all material
respects and shall be prepared in reasonable detail and in accordance with GAAP
applied consistently throughout the periods reflected therein and with prior
periods (except for any change in accounting principle in accordance with GAAP
(A) as approved (i) by such accountants (in the case of audited financial
statements) or (ii) by a Responsible Officer of the Designated Borrower (in the
case of unaudited financial statements), (B) as disclosed therein, (C) as
approved in writing by the Required Lenders if such change results in a
significant increase in Combined EBITDA for the periods reflected therein and,
(D) in the case of interim financial statements, subject to normal year-end
adjustments, including adjustments for inventory capitalization and
depreciation).
6.2 Certificates; Other Information. Furnish to each Lender:
(a) concurrently with the delivery of the financial statements
referred to in Section 6.1(a), (i) a certificate of the independent
certified public accountants reporting on such financial statements stating
that in making the examination necessary therefor no knowledge was obtained
of any Default or Event of Default, except as specified in such certificate
and (ii) copies of all reports or written communications providing advice,
recommendations or analysis to the management of the Borrowers from such
independent certified public accountants with regard to their audit of the
financial statements referred to in Section 6.1 or the internal financial
controls and systems of the Borrowers;
(b) concurrently with the delivery of any financial statement pursuant
to Section 6.1, (y) a certificate of a Responsible Officer of each of the
Parent and the Designated Borrower stating that, to the best of each such
Responsible Officer's knowledge, during such period (i) no Subsidiary has
been formed or acquired (or, if any such Subsidiary has been formed or
acquired, the Borrowers have complied with the requirements of Section 6.11
with respect thereto), (ii) neither the Parent, the Borrowers nor any of
their Subsidiaries has changed its name, its principal place of business,
its chief executive office or the location of any material item of tangible
Collateral without complying with the requirements of this Agreement and
the Security Documents with respect thereto and (iii) each Loan Party has
observed or performed all of its covenants and other agreements, and
satisfied every condition, contained in this Agreement and the other Loan
Documents to which it is a party to be observed, performed or satisfied by
it, and that such Responsible Officer has obtained no knowledge of any
Default or Event of Default except as specified in such certificate and (z)
in the case of quarterly or annual financial statements, a certificate
containing all information reasonably necessary for determining compliance
by the Parent, the Borrowers and their Subsidiaries with the provisions of
this Agreement (including but not limited to Sections 2.12 and 7.1) as of
the last day of such fiscal quarter or fiscal year of the Borrowers as the
case may be;
<PAGE> 62
56
(c) as soon as available, and in any event no later than 30 days after
the end of each fiscal year of the Borrowers, a projected combined balance
sheet of the Borrowers as of the end of the following fiscal year, and the
related combined statements of projected cash flow, projected changes in
financial position and projected income for the following fiscal year,
together with an operating budget with respect to the following fiscal
year, and, as soon as available, significant revisions, if any, of such
projections with respect to such fiscal year (the "Projections"), which
Projections shall in each case be accompanied by a certificate of a
Responsible Officer of the Parent stating that such Projections are based
on reasonable estimates, information and assumptions and that such
Responsible Officer has no reason to believe that such Projections are
incorrect or misleading in any material respect;
(d) within 45 days after the end of each month of each fiscal year of
the Parent, a narrative discussion and analysis of the financial condition
and results of operations of the Borrowers for such month and for the
period from the beginning of the then current fiscal year to the end of
such month, as compared to the portion of the Projections covering such
periods and to the comparable periods of the previous year;
(e) within five days after the same are filed, copies of all financial
statements and reports which the Parent or the Borrowers may make to, or
file with, the Securities and Exchange Commission or any successor or
analogous Governmental Authority; and
(f) promptly, such additional financial and other information as any
Lender may from time to time reasonably request.
6.3 Payment of Obligations. Pay, discharge or otherwise satisfy at or
before maturity or before they become delinquent, as the case may be, all its
material obligations of whatever nature, except where the amount or validity
thereof is currently being contested in good faith by appropriate proceedings
and reserves in conformity with GAAP with respect thereto have been provided on
the books of the Parent, the Borrowers or their Subsidiaries, as the case may
be.
6.4 Conduct of Business and Maintenance of Existence, etc. (a)
Continue to engage in business of the same general type as now conducted by it,
(b) preserve, renew and keep in full force and effect its existence and (c) take
all reasonable action to maintain all rights, privileges and franchises
necessary or desirable in the normal conduct of its business, except, in each
case, as otherwise permitted pursuant to Section 7.5 and except, in the case of
clause (c) above, to the extent that failure to do so could not reasonably be
expected to have a Material Adverse Effect; and comply with all Contractual
Obligations and Requirements of Law except to the extent that failure to comply
therewith could not, in the aggregate, reasonably be expected to have a Material
Adverse Effect.
6.5 Maintenance of Property; Insurance. (a) Keep all material property
useful and necessary in its business in good working order and condition,
ordinary wear and tear
<PAGE> 63
57
excepted; (b) maintain with financially sound and
reputable insurance companies insurance on all its property in at least such
amounts and against at least such risks (but including in any event public
liability, product liability and business interruption) as are usually insured
against in the same general area by companies engaged in the same or a similar
business; and (c) furnish to each Lender, upon written request, full information
as to the insurance carried.
6.6 Inspection of Property; Books and Records; Discussions. Keep
proper books of records and account in which full, true and correct entries in
conformity with GAAP and all Requirements of Law shall be made of all dealings
and transactions in relation to its business and activities; and upon reasonable
notice permit representatives of any Lender to visit and inspect any of its
properties and examine and make abstracts from any of its books and records at
any reasonable time and as often as may reasonably be desired and to discuss the
business, operations, properties and financial and other condition of the
Parent, the Borrowers and their Subsidiaries with senior officers of the Parent,
the Borrowers and their Subsidiaries and with its independent certified public
accountants.
6.7 Notices. Promptly give notice to the Administrative Agent of:
(a) the occurrence of any Default or Event of Default;
(b) any (i) default or event of default under any Contractual
Obligation of the Parent, the Borrowers or any of their Subsidiaries or
(ii) litigation, investigation or proceeding which may exist at any time
between the Parent, the Borrowers or any of their Subsidiaries and any
Governmental Authority, which in either case, if not cured or if adversely
determined, as the case may be, could reasonably be expected to have a
Material Adverse Effect;
(c) any litigation or proceeding affecting the Parent, the Borrowers
or any of their Subsidiaries in which the amount involved is $250,000 or
more and not covered by insurance or in which injunctive or similar relief
is sought;
(d) the following events, as soon as possible and in any event within
30 days after the Parent, the Borrowers or any of their Subsidiaries knows
or has reason to know thereof: (i) the occurrence or expected occurrence of
any Reportable Event with respect to any Plan, a failure to make any
required contribution to a Plan, the creation of any Lien in favor of the
PBGC or a Plan or any withdrawal from, or the termination, Reorganization
or Insolvency of, any Multiemployer Plan or (ii) the institution of
proceedings or the taking of any other action by the PBGC or the Borrowers
or any Commonly Controlled Entity or any Multiemployer Plan with respect to
the withdrawal from, or the terminating, Reorganization or Insolvency of,
any Plan; and
(e) any development or event which could reasonably be expected to
have a Material Adverse Effect.
<PAGE> 64
58
Each notice pursuant to this Section 6.7 shall be accompanied by a statement of
a Responsible Officer of the Designated Borrower setting forth details of the
occurrence referred to therein and stating what action the Parent, the relevant
Borrower or the relevant Subsidiary proposes to take with respect thereto.
6.8 Environmental Laws. (a) Comply in all material respects with, and
ensure compliance in all material respects by all tenants and subtenants, if
any, with, all applicable Environmental Laws, and obtain and comply in all
material respects with and maintain, and ensure that all tenants and subtenants
obtain and comply in all material respects with and maintain, any and all
licenses, approvals, notifications, registrations or permits required by
applicable Environmental Laws.
(b) Conduct and complete all investigations, studies, sampling and
testing, and all remedial, removal and other actions required under
Environmental Laws and promptly comply in all material respects with all lawful
orders and directives of all Governmental Authorities regarding Environmental
Laws.
6.9 Interest Rate Protection. In the case of the Borrowers, within 90
days after the Closing Date, enter into Interest Rate Protection Agreements with
one or more of the Lenders providing interest rate protection with respect to at
least $25,000,000 of the Term Loans for a period of at least 24 months at an
interest rate not higher than 3% above the Eurodollar Rate that would be
applicable to a six-month Interest Period commencing on the Closing Date.
6.10 Further Assurances. Upon the request of the Administrative Agent,
promptly perform or cause to be performed any and all acts and execute or cause
to be executed any and all documents (including, without limitation, financing
statements and continuation statements) for filing under the provisions of the
Uniform Commercial Code or any other Requirement of Law which are necessary or
advisable to maintain in favor of the Administrative Agent, for the benefit of
the Lenders, Liens on the Collateral that are duly perfected in accordance with
all applicable Requirements of Law.
6.11 Additional Collateral. (a) With respect to any assets acquired
after the Closing Date by the Parent, the Borrowers or any of their Subsidiaries
that are intended to be subject to the Lien created by any of the Security
Documents but which are not so subject (other than (y) any assets described in
paragraph (b) of this Section and (z) immaterial assets a Lien on which cannot
be perfected by filing UCC-1 financing statements), promptly (and in any event
within 30 days after the acquisition thereof): (i) execute and deliver to the
Administrative Agent such amendments to the relevant Security Documents or such
other documents as the Administrative Agent shall deem necessary or advisable to
grant to the Administrative Agent, for the benefit of the Lenders, a Lien on
such assets, (ii) take all actions necessary or advisable to cause such Lien to
be duly perfected in accordance with all applicable Requirements of Law,
including, without limitation, the filing of financing statements in such
jurisdictions as may be requested by the Administrative Agent, and (iii) if
requested by the Administrative Agent, with respect to any material fee real
property acquired by the Parent, the Borrowers or their Subsidiaries after the
Closing Date, deliver to the
<PAGE> 65
59
Administrative Agent legal opinions relating to the matters described in
clauses (i) and (ii) immediately preceding, which opinions shall be in form
and substance and from counsel reasonably satisfactory to the
Administrative Agent.
(b) With respect to any Person that, subsequent to the Closing Date,
becomes a Subsidiary, promptly upon the request of the Administrative
Agent: (i) execute and deliver to the Administrative Agent, for the benefit
of the Lenders, a new pledge agreement or such amendments to the relevant
Pledge Agreement as the Administrative Agent shall deem necessary or
advisable to grant to the Administrative Agent, for the benefit of the
Lenders, a Lien on the Capital Stock of such Subsidiary which is owned by
the Parent, the Individual Shareholders, the Borrowers or any of their
Subsidiaries, (ii) deliver to the Administrative Agent the certificates
representing such Capital Stock, together with undated stock powers duly
executed and delivered in blank, (iii) cause such new Subsidiary (A) to
become a Borrower party hereto (in the case of a Subsidiary of the Parent)
or a party to a guarantee and a security agreement (in the case of a
Subsidiary of the Borrowers), in each case pursuant to documentation which
is in form and substance satisfactory to the Administrative Agent, and (B)
to take all actions necessary or advisable to cause the Lien created by
such security agreement to be duly perfected in accordance with all
applicable Requirements of Law, including, without limitation, the filing
of financing statements in such jurisdictions as may be requested by the
Administrative Agent and (iv) if requested by the Administrative Agent,
deliver to the Administrative Agent legal opinions relating to the matters
described in clauses (i), (ii) and (iii) immediately preceding, which
opinions shall be in form and substance, and from counsel, reasonably
satisfactory to the Administrative Agent.
6.12 Key Man Life Insurance. Obtain within 30 days after the Closing
Date and maintain at all times thereafter key man life insurance policies
in the amount of $3,000,000 on each of the Management Shareholders; and
upon obtaining such policies, execute and deliver all documents and take
all actions in respect thereof that would be required by subsection 5.1(b)
if such policies were in effect on the Closing Date.
6.13 Store Locations. Maintain leases in accordance with past
practices with respect to all store locations for the Borrowers and their
Subsidiaries.
6.14 Landlord Waivers. Obtain landlords' waivers in form and substance
satisfactory to the Arranger and/or the Administrative Agent relating to
the Lender's security interest in the Borrower's assets for at least 20% of
the leases on the Closing Date, 40% of the leases within 60 days after the
Closing Date, 60% of the leases within 120 days after the Closing Date, 80%
of the leases within 180 days after the Closing Date and 90% of the leases
within one year after the Closing Date and thereafter.
6.15 Purchase Agreement Affirmative Covenants. Comply with Sections
7.01(a) - (o) and 7.03 of the Purchase Agreement, which Sections, together
with all definitions of defined terms used in such Sections, are hereby
incorporated by reference herein (without giving effect to any subsequent
amendment or other modification thereof not consented to by the Required
Lenders) as if such provisions were set forth in full herein.
<PAGE> 66
60
6.16 Termination of Series C Preferred Voting Rights. Within five
Business Days of the Closing Date, cause the Certificate of Designations of
each Borrower to be amended to provide that (i) all voting rights of the
Series C Preferred may be terminated by the Parent at any time during the
continuance of an Event of Default if the Parent has been directed to do so
by the Administrative Agent and (ii) all voting rights of the Series C
Preferred will terminate automatically upon the occurrence of an Event of
Default pursuant to Section 8(f). Upon receipt of a demand by the
Administrative Agent to such effect at any time during the continuance of
an Event of Default, the Parent shall immediately take all actions
necessary to terminate all voting rights of the Series C Preferred.
SECTION 7. NEGATIVE COVENANTS
The Parent and the Borrowers hereby jointly and severally agree that,
so long as the Commitments remain in effect, any Note or Letter of Credit
remains outstanding and unpaid or any other amount is owing to any Lender
or the Administrative Agent hereunder, the Parent and the Borrowers shall
not, and shall not permit any of their respective Subsidiaries to, directly
or indirectly:
7.1 Financial Condition Covenants.
(a) Combined Total Debt Ratio. Permit the Combined Total Debt Ratio of
the Borrowers and their Subsidiaries for any period of four consecutive
fiscal quarters of the Borrowers ending with any fiscal quarter set forth
below to exceed the ratio set forth below opposite such fiscal quarter:
<TABLE>
<CAPTION>
Combined
Fiscal Quarter Total Debt Ratio
---------------------- ----------------------
<S> <C>
Third Quarter 1996 N.A.
Fourth Quarter 1996 4.50 to 1.0
First Quarter 1997 4.50 to 1.0
Second Quarter 1997 4.50 to 1.0
Third Quarter 1997 4.25 to 1.0
Fourth Quarter 1997 3.50 to 1.0
First Quarter 1998 3.50 to 1.0
Second Quarter 1998 3.50 to 1.0
Third Quarter 1998 3.50 to 1.0
Fourth Quarter 1998 2.75 to 1.0
First Quarter 1999 2.75 to 1.0
Second Quarter 1999 2.75 to 1.0
Third Quarter 1999 2.50 to 1.0
Fourth Quarter 1999 2.15 to 1.0
First Quarter 2000 2.15 to 1.0
</TABLE>
<PAGE> 67
61
<TABLE>
<CAPTION>
Combined
Fiscal Quarter Total Debt Ratio
---------------------- ----------------------
<S> <C>
Second Quarter 2000 2.15 to 1.0
Third Quarter 2000 1.90 to 1.0
Fourth Quarter 2000 1.60 to 1.0
First Quarter 2001 1.60 to 1.0
Second Quarter 2001 1.60 to 1.0
Third Quarter 2001 1.35 to 1.0
Fourth Quarter 2001 1.00 to 1.0
First Quarter 2002 1.00 to 1.0
Second Quarter 2002 .75 to 1.0
</TABLE>
(b) Maintenance of Net Worth. Permit Combined Net Worth of the
Borrowers and their Subsidiaries at any time during any fiscal quarter of
the Borrowers set forth below to be less than the amount set forth below
opposite such fiscal quarter:
<TABLE>
<CAPTION>
Fiscal Quarter Net Worth
-------------- ------------
<S> <C>
Third Quarter 1996 $ 63,000,000
Fourth Quarter 1996 65,000,000
First Quarter 1997 65,000,000
Second Quarter 1997 65,000,000
Third Quarter 1997 65,000,000
Fourth Quarter 1997 72,000,000
First Quarter 1998 70,000,000
Second Quarter 1998 70,000,000
Third Quarter 1998 70,000,000
Fourth Quarter 1998 77,000,000
First Quarter 1999 75,000,000
Second Quarter 1999 75,000,000
Third Quarter 1999 75,000,000
Fourth Quarter 1999 85,000,000
First Quarter 2000 83,000,000
Second Quarter 2000 83,000,000
Third Quarter 2000 83,000,000
Fourth Quarter 2000 95,000,000
First Quarter 2001 93,000,000
Second Quarter 2001 93,000,000
Third Quarter 2001 93,000,000
Fourth Quarter 2001 105,000,000
First Quarter 2002 105,000,000
</TABLE>
<PAGE> 68
62
<TABLE>
<CAPTION>
Fiscal Quarter Net Worth
-------------- ------------
<S> <C>
Second Quarter 2002 105,000,000
</TABLE>
(c) Combined Interest Coverage Ratio. Permit the Combined Interest
Coverage Ratio of the Borrowers and their Subsidiaries for any period of
four consecutive fiscal quarters of the Borrowers ending with any fiscal
quarter set forth below to be less than the ratio set forth below opposite
such fiscal quarter:
<TABLE>
<CAPTION>
Combined Interest
Fiscal Quarter Coverage Ratio
---------------------- --------------
<S> <C>
Third Quarter 1996 N.A.
Fourth Quarter 1996 3.75 to 1.0
First Quarter 1997 2.50 to 1.0
Second Quarter 1997 2.20 to 1.0
Third Quarter 1997 2.20 to 1.0
Fourth Quarter 1997 2.40 to 1.0
First Quarter 1998 2.40 to 1.0
Second Quarter 1998 2.40 to 1.0
Third Quarter 1998 2.65 to 1.0
Fourth Quarter 1998 3.00 to 1.0
First Quarter 1999 3.00 to 1.0
Second Quarter 1999 3.00 to 1.0
Third Quarter 1999 3.25 to 1.0
Fourth Quarter 1999 3.75 to 1.0
First Quarter 2000 3.75 to 1.0
Second Quarter 2000 3.75 to 1.0
Third Quarter 2000 4.00 to 1.0
Fourth Quarter 2000 4.75 to 1.0
First Quarter 2001 4.75 to 1.0
Second Quarter 2001 4.75 to 1.0
Third Quarter 2001 5.00 to 1.0
Fourth Quarter 2001 5.75 to 1.0
First Quarter 2002 5.75 to 1.0
Second Quarter 2002 6.00 to 1.0
</TABLE>
(d) Combined Fixed Charge Coverage Ratio. Permit the Combined Fixed
Charge Coverage Ratio of the Borrowers and their Subsidiaries for any
period of four consecutive fiscal quarters of the Borrowers ending with any
fiscal quarter set forth below to be less than the ratio set forth below
opposite such fiscal quarter:
<PAGE> 69
63
<TABLE>
<CAPTION>
Fiscal Quarter Combined Fixed Charge
-------------- Coverage Ratio
---------------------
<S> <C>
Third Quarter 1996 N.A.
Fourth Quarter 1996 1.35 to 1.00
First Quarter 1997 1.00 to 1.00
Second Quarter 1997 1.00 to 1.00
Third Quarter 1997 1.00 to 1.00
Fourth Quarter 1997 1.05 to 1.00
First Quarter 1998 1.00 to 1.00
Second Quarter 1998 1.00 to 1.00
Third Quarter 1998 1.00 to 1.00
Fourth Quarter 1998 1.05 to 1.00
First Quarter 1999 1.00 to 1.00
Second Quarter 1999 1.00 to 1.00
Third Quarter 1999 1.00 to 1.00
Fourth Quarter 1999 1.05 to 1.00
First Quarter 2000 1.00 to 1.00
Second Quarter 2000 1.00 to 1.00
Third Quarter 2000 1.00 to 1.00
Fourth Quarter 2000 1.10 to 1.00
First Quarter 2001 1.00 to 1.00
Second Quarter 2001 1.00 to 1.00
Third Quarter 2001 1.00 to 1.00
Fourth Quarter 2001 0.85 to 1.00
First Quarter 2002 0.85 to 1.00
Second Quarter 2002 0.75 to 1.00
</TABLE>
7.2 Limitation on Indebtedness. Create, incur, assume or suffer to
exist (in each case, to "Incur") any Indebtedness, except:
(a) Indebtedness of the Borrowers under the Loan Documents and the
Subordinated Debt;
(b) Indebtedness of a Borrower to a Borrower or a Wholly Owned
Subsidiary and of a Wholly Owned Subsidiary to a Borrower or any other
Wholly Owned Subsidiary;
(c) Indebtedness of a Borrower or any Subsidiary incurred to finance
the acquisition of fixed or capital assets (whether pursuant to a loan, a
Financing Lease or otherwise) in an aggregate principal amount not
exceeding as to the Borrowers and their Subsidiaries $2,500,000 at any time
outstanding; and
<PAGE> 70
64
(d) Indebtedness outstanding on the date hereof and listed on Schedule
7.2(d).
7.3 Limitation on Liens. Create, incur, assume or suffer to exist any
Lien upon any of its property, assets or revenues, whether now owned or
hereafter acquired, except for:
(a) Liens for taxes not yet due or which are being contested in good
faith by appropriate proceedings, provided that adequate reserves with
respect thereto are maintained on the books of the Parent, the Borrowers or
their Subsidiaries, as the case may be, in conformity with GAAP;
(b) carriers', warehousemen's, mechanics', materialmen's, repairmen's
or other like Liens arising in the ordinary course of business which are
not overdue for a period of more than 60 days or which are being contested
in good faith by appropriate proceedings;
(c) pledges or deposits in connection with workers' compensation,
unemployment insurance and other social security legislation;
(d) deposits to secure the performance of bids, trade contracts (other
than for borrowed money), leases, statutory obligations, surety and appeal
bonds, performance bonds and other obligations of a like nature incurred in
the ordinary course of business;
(e) easements, rights-of-way, restrictions and other similar
encumbrances incurred in the ordinary course of business which, in the
aggregate, are not substantial in amount and which do not in any case
materially detract from the value of the property subject thereto or
materially interfere with the ordinary conduct of the business of the
Parent, the Borrowers or any Subsidiary;
(f) Liens in existence on the date hereof listed on Schedule 7.3(f),
securing Indebtedness permitted by Section 7.2(d), provided that no such
Lien is spread to cover any additional property after the Closing Date and
that the amount of Indebtedness secured thereby is not increased;
(g) Liens securing Indebtedness of a Borrower or any Subsidiary
incurred to finance the acquisition of fixed or capital assets, provided
that (i) such Liens shall be created substantially simultaneously with the
acquisition of such fixed or capital assets, (ii) such Liens do not at any
time encumber any property other than the property financed by such
Indebtedness, (iii) the amount of Indebtedness secured thereby is not
increased and (iv) the proceeds of the Indebtedness secured by any such
Lien shall at no time exceed 100% of the original purchase price of such
property;
(h) Liens created pursuant to the Security Documents; and
<PAGE> 71
65
(i) Liens of landlords arising by operation of law, and Liens of a
lessor under any lease entered into by a Borrower or any Subsidiary in the
ordinary course of its business, to the extent the provisions of such
leases relating to such Liens are standard and customary in the relevant
market.
7.4 Limitation on Guarantee Obligations. Create, incur, assume or
suffer to exist any Guarantee Obligation except:
(a) Guarantee Obligations in existence on the date hereof and listed
on Schedule 7.4(a);
(b) guarantees made in the ordinary course of its business by the
Parent or any Borrower of obligations of any of their respective
Subsidiaries or a Borrower, as the case may be, which obligations are
otherwise permitted under this Agreement;
(c) Guarantee Obligations in respect of Standby Letters of Credit; and
(d) the Guarantee Obligation of the Parent pursuant to Section 10; and
(e) Guarantee Obligations in respect of loans by a third party to an
employee of a Borrower or Subsidiary for the purchase of the Capital Stock
of the Parent in an aggregate amount not to exceed at any one time
outstanding (i) $1,000,000 minus (ii) the aggregate principal amount of any
loans or advances made by the Parent or the Borrowers pursuant to Section
7.9(c)(ii).
7.5 Limitation on Fundamental Changes. Enter into any merger,
consolidation or amalgamation, or liquidate, wind up or dissolve itself (or
suffer any liquidation or dissolution), or convey, sell, lease, assign, transfer
or otherwise dispose of, all or substantially all of its property, business or
assets, or make any material change in its present method of conducting
business, except:
(a) any Wholly Owned Subsidiary of the Parent or Borrower may be
merged or combined with or into any Borrower (provided that such Borrower
shall be the continuing or surviving corporation);
(b) any Wholly Owned Subsidiary or Borrower may sell, lease, transfer
or otherwise dispose of any or all of its assets (upon voluntary
liquidation or otherwise) to any Borrower or any other Wholly Owned
Subsidiary of a Borrower; and
(c) the Recapitalization, and
(d) the Parent may liquidate, wind-up or dissolve itself so long as
(i) at such time no Default or Event of Default shall have occurred and be
continuing, (ii) the Parent has no material assets at the time of such
transaction other than assets subject to the Lien of a Security Document
and (iii) the distribution of such assets in such transaction is made
subject to the Liens of the Security Documents and at the time of
<PAGE> 72
66
such transaction the Borrowers and such recipients enter into such
instruments and take such actions (including delivery to the Administrative
Agent of appropriate legal opinions) as shall be reasonably requested by
the Administrative Agent to ensure and evidence that the Liens of the
Security Documents on such assets are unaffected by such transaction.
7.6 Limitation on Sale of Assets. Convey, sell, lease, assign,
transfer or otherwise dispose of any of its property, business or assets
(including, without limitation, receivables and leasehold interests), whether
now owned or hereafter acquired, or, in the case of any Subsidiary of the Parent
or any Borrower, issue or sell any shares of such Subsidiary's Capital Stock to
any Person, except:
(a) the sale or other disposition of obsolete or worn out property in
the ordinary course of business having a fair market value not to exceed,
in the aggregate, $500,000 in any period of twelve consecutive months;
(b) the sale or other disposition of any property in the ordinary
course of business, provided that (other than inventory) the aggregate book
value of all assets so sold or disposed of in any period of twelve
consecutive months shall not exceed $500,000;
(c) the sale of inventory in the ordinary course of business; and
(d) as permitted by Section 7.5(b).
7.7 Limitation on Restricted Payments. Declare or pay any dividend
(other than dividends payable solely in common stock of the Person making such
dividend) on, or make any payment on account of, or set apart assets for a
sinking or other analogous fund for, the purchase, redemption, defeasance,
retirement or other acquisition of, any shares of any class of Capital Stock of
the Parent, the Borrowers or any Subsidiary or any warrants or options to
purchase any such Capital Stock, whether now or hereafter outstanding, or make
any other distribution in respect thereof, either directly or indirectly,
whether in cash or property or in obligations of the Parent, the Borrowers or
any Subsidiary (collectively, "Restricted Payments"), except:
(a) payments of interest on the Subordinated Debt in accordance with
the Subordination Agreement and the Purchase Agreement;
(b) so long as (i) no Default or Event of Default shall have occurred
and be continuing, (ii) there is Excess Cash Flow for the most recently
ended fiscal year of the Borrowers and (iii) the Combined Management Fee
Ratio for such fiscal year is greater than 3.25 to 1.00 in the case of the
1996 fiscal year, 2.25 to 1.00 in the case of the 1997 fiscal year, 2.75 to
1.00 in the case of the 1998 fiscal year, 3.50 to 1.00 in the case of the
1999 fiscal year, 4.50 to 1.00 in the case of the 2000 fiscal year, and
5.50 to 1.00 in the case of the 2001 and 2002 fiscal years, then the
Borrowers may pay Management Fees to the Individual Shareholders in an
amount not to exceed
<PAGE> 73
67
$1,000,000 per year in the case of the 1996 fiscal year and $1,800,000 per
year otherwise in the aggregate during the thirty-day period after the date
on which the financial statements of the Borrowers referred to in Section
6.1(a) with respect to the fiscal year ending with such fourth fiscal
quarter are delivered to the Lenders; and
(c) so long as no Default or Event of Default shall have occurred and
be continuing, purchases or redemptions of the Capital Stock of the Parent,
the Borrowers or their Subsidiaries held by employees of the Borrowers,
other than the Individual Shareholders, in an aggregate amount not to
exceed $500,000 per year and $1,000,000 in total.
7.8 Limitation on Capital Expenditures. Make or commit to make (by way
of the acquisition of securities of a Person or otherwise) any Capital
Expenditure (excluding any such asset acquired in connection with normal
replacement and maintenance programs properly charged to current operations)
except for expenditures in the ordinary course of business not exceeding, in the
aggregate for the Borrowers and their Subsidiaries during any of the fiscal
years of the Borrowers set forth below, the amount set forth opposite such
fiscal year below:
<TABLE>
<CAPTION>
Fiscal Year Amount
----------- -----------
<S> <C>
Closing Date-FYE 1996 $3,500,000
1997 $5,000,000
1998 $5,500,000
1999 $5,500,000
2000 $6,000,000
2001 $6,500,000
2002 $6,500,000
</TABLE>
provided that not more than 20 new retail store locations on premises owned by
the Borrowers in fee or subject to a long-term lease shall be opened in fiscal
year 1996; not more than 22 new retail store locations on premises owned by the
Borrowers in fee or subject to a long-term lease shall be opened in fiscal year
1997; and not more than 25 new retail store locations on premises owned by the
Borrowers in fee or subject to a long-term lease may be opened in any fiscal
year after 1997.
7.9 Limitation on Investments, Loans and Advances. Make any advance,
loan, extension of credit or capital contribution to, or purchase any stock,
bonds, notes, debentures or other securities of or any assets constituting a
business unit of, or make any other investment in, any Person, except:
(a) extensions of trade credit in the ordinary course of business;
(b) investments in Cash Equivalents;
<PAGE> 74
68
(c) loans and advances to employees of a Borrower or Subsidiary for
(i) travel, entertainment and relocation expenses in the ordinary course of
business in an aggregate amount for the Borrowers and their Subsidiaries
not to exceed $250,000 at any one time outstanding and (ii) the purchase of
the Capital Stock of the Parent in an aggregate principal amount not to
exceed at any one time outstanding (A) $1,000,000 minus (B) the aggregate
principal amount of any loans guaranteed by the Parent or the Borrowers
pursuant to Section 7.4(e); and
(d) investments by any Borrower in any Borrower or a Wholly Owned
Subsidiary and investments by any Wholly Owned Subsidiary in any Borrower
and in other Wholly Owned Subsidiaries.
7.10 Limitation on Optional Payments and Modifications of Debt
Instruments and Preferred Stock, etc. (a) Make any optional payment or
prepayment on or redemption or purchase of any material Indebtedness (other than
the Loans) or preferred stock, including, without limitation, the Subordinated
Debt and the Preferred Stock, (b) amend, modify or change, or consent or agree
to any amendment, modification or change to any of the terms of any such
Indebtedness, including but not limited to the Subordinated Debt (other than any
such amendment, modification or change which would extend the maturity or reduce
the amount of any payment of principal thereof or which would reduce the rate or
extend the date for payment of interest or dividends thereon), (c) amend the
Subordination Agreement, (d) amend, modify or change in any material respect, or
consent or agree to any amendment, modification, or change in any material
respect to the terms of the Preferred Stock or any other capitalization or
organizational documents, except as contemplated by Section 6.4.2 of the amended
and restated charter of the Borrowers as in effect on the Closing Date; (e)
amend, modify or change, the Shareholders Agreement or the Registration Rights
Agreement in a manner that would adversely affect the rights or interests of the
Borrowers, the Administrative Agent or the Lenders or (f) amend, modify, renew
or extend the Management Contracts in a manner which (i) would have the effect
of increasing the compensation due the Management Shareholders in the aggregate
to an amount in excess of $750,000 in any fiscal year or (ii) otherwise would
adversely affect the rights or interests of the Administrative Agent or the
Lenders.
7.11 Limitation on Transactions with Affiliates. Except as set forth
on Schedule 7.11, enter into any transaction, including, without limitation, any
purchase, sale, lease or exchange of property or the rendering of any service,
with any Affiliate (other than the Parent or the Borrowers) unless such
transaction (a) is otherwise permitted under this Agreement, (b) is in the
ordinary course of the Parent's, the Borrowers or such Subsidiary's business,
(c) is upon fair and reasonable terms no less favorable to the Parent, the
Borrowers or such Subsidiary, as the case may be, than it would obtain in a
comparable arm's length transaction with a Person which is not an Affiliate and
(d) is (unless immaterial) disclosed in writing to the Administrative Agent.
7.12 Limitation on Sales and Leasebacks. Enter into any arrangement
with any Person providing for the leasing by the Parent, the Borrowers or any
Subsidiary of real or personal property which has been or is to be sold or
transferred by the Parent, the Borrowers
<PAGE> 75
69
or such Subsidiary to such Person or to any other Person to whom funds have been
or are to be advanced by such Person on the security of such property or rental
obligations of the Parent, the Borrowers or such Subsidiary.
7.13 Limitation on Changes in Fiscal Year. Permit the fiscal year of
the Parent, the Borrowers or any of their respective Subsidiaries to end on a
day other than December 31.
7.14 Limitation on Negative Pledge Clauses. Enter into with any
Person, or suffer to exist, any agreement, other than (a) this Agreement and the
other Loan Documents and the Purchase Agreement or (b) any industrial revenue
bonds, purchase money mortgages or Financing Leases permitted by this Agreement
(in which cases, any prohibition or limitation shall only be effective against
the assets financed thereby) which prohibits or limits the ability of the
Parent, the Borrowers or any of their Subsidiaries to create, incur, assume or
suffer to exist any Lien upon any of its property, assets or revenues, whether
now owned or hereafter acquired.
7.15 Limitation on Lines of Business. Enter into any business, either
directly or through any Subsidiary, except for those businesses in which the
Borrowers and their Subsidiaries are engaged on the date of this Agreement or
which are reasonably related thereto.
7.16 Limitation on Activities of the Parent. In the case of the
Parent, notwithstanding anything to the contrary in this Agreement or any other
Loan Document, (a) conduct, transact or otherwise engage in, or commit to
conduct, transact or otherwise engage in, any business or operations other than
those incidental to its ownership of the Capital Stock of the Borrowers, (b)
incur, create, assume or suffer to exist any Indebtedness or other liabilities
or financial obligations, except (i) nonconsensual obligations imposed by
operation of law, (ii) pursuant to the Loan Documents to which it is a party and
(iii) obligations with respect to its Capital Stock (other than any such
obligations constituting Indebtedness), (c) own, lease, manage or otherwise
operate any properties or assets (including cash (other than cash received in
connection with dividends made by the Borrowers in accordance with Section 7.7
pending application in the manner contemplated by said Section) and cash
equivalents) other than the ownership of shares of Capital Stock of the
Borrowers or (d) create or permit to exist any Subsidiary of the Parent or any
Borrower other than a wholly owned Subsidiary.
7.17 Purchase Agreement Negative Covenants. Fail to comply with
Section 7.02 of the Purchase Agreement, which Section, together with all
definitions of defined terms used in such Section, are hereby incorporated by
reference herein (without giving effect to any subsequent amendment or other
modification thereof not consented to by the Required Lenders) as if such
provisions were set forth in full herein.
<PAGE> 76
70
SECTION 8. EVENTS OF DEFAULT
If any of the following events shall occur and be continuing:
(a) The Borrowers shall fail to pay any principal of any Loan or
Reimbursement Obligation when due in accordance with the terms hereof; or
the Borrowers shall fail to pay any interest on any Loan or Reimbursement
Obligation, or any other amount payable hereunder or under any other Loan
Document, within five days after any such interest or other amount becomes
due in accordance with the terms hereof; or
(b) Any representation or warranty made or deemed made by the Parent,
a Borrower or any other Loan Party herein or in any other Loan Document or
which is contained in any certificate, document or financial or other
statement furnished by it at any time under or in connection with this
Agreement or any such other Loan Document shall prove to have been
incorrect in any material respect on or as of the date made or deemed made;
or
(c) (i) The Parent, a Borrower or any other Loan Party shall default
in the observance or performance of any agreement contained in Section 2.7,
6.1(a), 6.7, 6.9, or 7, Section 5(b) of the Parent Pledge Agreement,
Section 5(b) of the Management Pledge Agreement or Section 4.4 of the
Borrowers Security Agreement or (ii) an Event of Default (as defined in the
Mortgage) shall occur under any Mortgage; or
(d) The Parent, a Borrower or any other Loan Party shall default in
the observance or performance of any other agreement contained in this
Agreement or any other Loan Document (other than as provided in paragraphs
(a) through (c) of this Section), and such default shall continue
unremedied for a period of 30 days after notice to the Parent, Borrower or
other Loan Party, as applicable, from the Administrative Agent or the
Required Lenders; or
(e) The Parent, a Borrower or any Subsidiary shall (i) default in
making any payment of any principal of any Indebtedness (including, without
limitation, any Guarantee Obligation) on the scheduled or original due date
with respect thereto; or (ii) default in making any payment of any interest
on any such Indebtedness beyond the period of grace, if any, provided in
the instrument or agreement under which such Indebtedness was created; or
(iii) default in the observance or performance of any other agreement or
condition relating to any such Indebtedness or contained in any instrument
or agreement evidencing, securing or relating thereto, or any other event
shall occur or condition exist, the effect of which default or other event
or condition is to cause, or to permit the holder or beneficiary of such
Indebtedness (or a trustee or agent on behalf of such holder or
beneficiary) to cause, with the giving of notice if required, such
Indebtedness to become due prior to its stated maturity or (in the case of
any such Indebtedness constituting a Guarantee Obligation) to become
payable; provided, that a default, event or condition described in clause
(i), (ii) or (iii) of this paragraph (e) shall not at any time constitute
an Event of Default under this
<PAGE> 77
71
Agreement unless, at such time, one or more defaults, events or conditions
of the type described in clauses (i), (ii) and (iii) of this paragraph (e)
shall have occurred and be continuing with respect to Indebtedness and/or
Guarantee Obligations of the Parent, the Borrowers and all Subsidiaries the
outstanding principal amount of which exceeds in the aggregate $250,000; or
(f) (i) The Parent, a Borrower or any Subsidiary shall commence any
case, proceeding or other action (A) under any existing or future law of
any jurisdiction, domestic or foreign, relating to bankruptcy, insolvency,
reorganization or relief of debtors, seeking to have an order for relief
entered with respect to it, or seeking to adjudicate it a bankrupt or
insolvent, or seeking reorganization, arrangement, adjustment, winding-up,
liquidation, dissolution, composition or other relief with respect to it or
its debts, or (B) seeking appointment of a receiver, trustee, custodian,
conservator or other similar official for it or for all or any substantial
part of its assets, or the Parent, a Borrower or any Subsidiary shall make
a general assignment for the benefit of its creditors; or (ii) there shall
be commenced against the Parent, a Borrower or any Subsidiary any case,
proceeding or other action of a nature referred to in clause (i) above
which (A) results in the entry of an order for relief or any such
adjudication or appointment or (B) remains undismissed, undischarged or
unbonded for a period of 60 days; or (iii) there shall be commenced against
the Parent, a Borrower or any Subsidiary any case, proceeding or other
action seeking issuance of a warrant of attachment, execution, distraint or
similar process against all or any substantial part of its assets which
results in the entry of an order for any such relief which shall not have
been vacated, discharged, or stayed or bonded pending appeal within 60 days
from the entry thereof; or (iv) the Parent, a Borrower or any Subsidiary
shall take any action in furtherance of, or indicating its consent to,
approval of, or acquiescence in, any of the acts set forth in clause (i),
(ii), or (iii) above; or (v) the Parent, a Borrower or any Subsidiary shall
generally not, or shall be unable to, or shall admit in writing its
inability to, pay its debts as they become due; or
(g) (i) Any Person shall engage in any "prohibited transaction" (as
defined in Section 406 of ERISA or Section 4975 of the Code) involving any
Plan, (ii) any "accumulated funding deficiency" (as defined in Section 302
of ERISA), whether or not waived, shall exist with respect to any Plan or
any Lien in favor of the PBGC or a Plan shall arise on the assets of a
Borrower, a Subsidiary or any Commonly Controlled Entity, (iii) a
Reportable Event shall occur with respect to, or proceedings shall commence
to have a trustee appointed, or a trustee shall be appointed, to administer
or to terminate, any Single Employer Plan, which Reportable Event or
commencement of proceedings or appointment of a trustee is, in the
reasonable opinion of the Required Lenders, likely to result in the
termination of such Plan for purposes of Title IV of ERISA, (iv) any Single
Employer Plan shall terminate for purposes of Title IV of ERISA, (v) a
Borrower, a Subsidiary or any Commonly Controlled Entity shall, or in the
reasonable opinion of the Required Lenders is likely to, incur any
liability in connection with a withdrawal from, or the Insolvency or
Reorganization of, a Multiemployer Plan or (vi) any other event or
condition shall occur or exist with respect to a Plan; and in each case in
clauses (i) through (vi) above, such event or
<PAGE> 78
72
condition, together with all other such events or conditions, if any,
could, in the sole judgment of the Required Lenders, reasonably be expected
to have a Material Adverse Effect; or
(h) One or more judgments or decrees shall be entered against the
Parent, the Borrowers or any of their Subsidiaries involving in the
aggregate a liability (not paid or fully covered by insurance) of $250,000
or more, and all such judgments or decrees shall not have been vacated,
discharged, stayed or bonded pending appeal within 60 days from the entry
thereof; or
(i) Any of the Security Documents shall cease, for any reason, to be
in full force and effect, or any Loan Party or any Affiliate of any Loan
Party shall so assert, or any Lien created by any of the Security Documents
shall cease to be enforceable and of the same effect and priority purported
to be created thereby; or
(j) Section 10 shall cease, for any reason, to be in full force and
effect or the Parent shall so assert; or
(k) (i) The Parent and the Management Shareholders shall cease to have
the power (whether or not exercised) to elect a majority of the directors
of any of the Borrowers, (ii) the Parent shall cease to own and control, of
record and beneficially, directly, 60% of the outstanding Capital Stock of
each Borrower, (iii) the Advent Funds and the Management Shareholders shall
cease to own and control, directly or indirectly, 60% of the outstanding
Capital Stock of each Borrower, (iv) the Advent Funds shall cease to own
and control, of record and beneficially, directly, 55% of the member
interests of the Parent, (v) the Advent Funds shall cease to own and
control, directly or indirectly, 35% of the outstanding Capital Stock of
each Borrower; provided, that (A) each of the foregoing ownership
percentages in respect of the Borrower will be reduced to give effect to
the dilution resulting from the exercise of the Warrants and (B) each of
the foregoing shall be amended by the Administrative Agent and the
Borrowers at the time of any transaction permitted by Section 7.5(d) to
provide for such transaction or (vi) a "Change of Control" as defined in
the Purchase Agreement shall occur and be continuing; or
(l) (i) There shall have occurred any amendment, supplement or other
modification of the Purchase Agreement or the Subordination Agreement,
which in any such case shall not have been consented to in advance in
writing by the Administrative Agent and the Required Lenders, except to the
extent such amendment, supplement or modification is expressly permitted by
Section 7.10 or (ii) the Subordination Agreement shall cease, for any
reason, to be valid or any Loan Party or any of its Subsidiaries shall so
assert in writing; or
(m) There shall have occurred an "Event of Default" as defined in the
Purchase Agreement;
<PAGE> 79
73
then, and in any such event, (A) if such event is an Event of Default
specified in clause (i) or (ii) of paragraph (f) above with respect to the
Parent, a Borrower or any Subsidiary, automatically the Commitments shall
immediately terminate and the Loans hereunder (with accrued interest
thereon) and all other amounts owing under this Agreement and the other
Loan Documents (including, without limitation, all amounts of L/C
Obligations, whether or not the beneficiaries of the then outstanding
Letters of Credit shall have presented the documents required thereunder)
shall immediately become due and payable, and (B) if such event is any
other Event of Default, either or both of the following actions may be
taken: (i) with the consent of the Required Lenders, the Administrative
Agent may, or upon the request of the Required Lenders, the Administrative
Agent shall, by notice to the Designated Borrower declare the Commitments
to be terminated forthwith, whereupon the Commitments shall immediately
terminate; and (ii) with the consent of the Required Lenders, the
Administrative Agent may, or upon the request of the Required Lenders, the
Administrative Agent shall, by notice to the Designated Borrower, declare
the Loans hereunder (with accrued interest thereon) and all other amounts
owing under this Agreement and the other Loan Documents (including, without
limitation, all amounts of L/C Obligations, whether or not the
beneficiaries of the then outstanding Letters of Credit shall have
presented the documents required thereunder) to be due and payable
forthwith, whereupon the same shall immediately become due and payable.
With respect to all Letters of Credit with respect to which presentment for
honor shall not have occurred at the time of an acceleration pursuant to
this paragraph, the Borrowers shall at such time deposit in a cash
collateral account opened by the Administrative Agent an amount equal to
the aggregate then undrawn and unexpired amount of such Letters of Credit.
Amounts held in such cash collateral account shall be applied by the
Administrative Agent to the payment of drafts drawn under such Letters of
Credit, and the unused portion thereof after all such Letters of Credit
shall have expired or been fully drawn upon, if any, shall be applied to
repay other obligations of the Borrowers hereunder and under the other Loan
Documents. After all such Letters of Credit shall have expired or been
fully drawn upon, all Reimbursement Obligations shall have been satisfied
and all other obligations of the Borrowers hereunder and under the other
Loan Documents shall have been paid in full, the balance, if any, in such
cash collateral account shall be returned to the Borrowers (or such other
Person as may be lawfully entitled thereto). Except as expressly provided
above in this Section, presentment, demand, protest and all other notices
of any kind are hereby expressly waived.
SECTION 9. THE ADMINISTRATIVE AGENT
9.1 Appointment. Each Lender hereby irrevocably designates and appoints the
Administrative Agent as the agent of such Lender under this Agreement and
the other Loan Documents, and each Lender irrevocably authorizes the
Administrative Agent, in such capacity, to take such action on its behalf
under the provisions of this Agreement and the other Loan Documents and to
exercise such powers and perform such duties as are expressly delegated to
the Administrative Agent by the terms of this Agreement and the other Loan
Documents, together with such other powers as are reasonably incidental
thereto. Notwithstanding any provision to the contrary elsewhere in this
Agreement, the Administrative Agent shall not have any duties or
responsibilities, except those expressly set
<PAGE> 80
74
forth herein, or any fiduciary relationship with any Lender, and no implied
covenants, functions, responsibilities, duties, obligations or liabilities
shall be read into this Agreement or any other Loan Document or otherwise
exist against the Administrative Agent.
9.2 Delegation of Duties. The Administrative Agent may execute any of
its duties under this Agreement and the other Loan Documents by or through
agents or attorneys-in-fact and shall be entitled to advice of counsel
concerning all matters pertaining to such duties. The Administrative Agent
shall not be responsible for the negligence or misconduct of any agents or
attorneys in-fact selected by it with reasonable care.
9.3 Exculpatory Provisions. Neither the Administrative Agent nor any
of its officers, directors, employees, agents, attorneys-in-fact or
Affiliates shall be (i) liable for any action lawfully taken or omitted to
be taken by it or such Person under or in connection with this Agreement or
any other Loan Document (except to the extent that any of the foregoing are
found by a final and nonappealable decision of a court of competent
jurisdiction to have resulted from its or such Person's own gross
negligence or willful misconduct) or (ii) responsible in any manner to any
of the Lenders for any recitals, statements, representations or warranties
made by any Loan Party or any officer thereof contained in this Agreement
or any other Loan Document or in any certificate, report, statement or
other document referred to or provided for in, or received by the
Administrative Agent under or in connection with, this Agreement or any
other Loan Document or for the value, validity, effectiveness, genuineness,
enforceability or sufficiency of this Agreement or the Notes or any other
Loan Document or for any failure of any Loan Party a party thereto to
perform its obligations hereunder or thereunder. The Administrative Agent
shall not be under any obligation to any Lender to ascertain or to inquire
as to the observance or performance of any of the agreements contained in,
or conditions of, this Agreement or any other Loan Document, or to inspect
the properties, books or records of any Loan Party. The Administrative
Agent shall not be responsible for any actions or approvals taken or
granted by the Arranger.
9.4 Reliance by Administrative Agent. The Administrative Agent shall
be entitled to rely, and shall be fully protected in relying, upon any
Note, writing, resolution, notice, consent, certificate, affidavit, letter,
telecopy, telex or teletype message, statement, order or other document or
conversation believed by it to be genuine and correct and to have been
signed, sent or made by the proper Person or Persons and upon advice and
statements of legal counsel (including, without limitation, counsel to the
Parent or the Borrowers), independent accountants and other experts
selected by the Administrative Agent. The Administrative Agent may deem and
treat the payee of any Note as the owner thereof for all purposes unless a
written notice of assignment, negotiation or transfer thereof shall have
been filed with the Administrative Agent. The Administrative Agent shall be
fully justified in failing or refusing to take any action under this
Agreement or any other Loan Document unless it shall first receive such
advice or concurrence of the Required Lenders (or, if so specified by this
Agreement, all Lenders) as it deems appropriate or it shall first be
indemnified to its satisfaction by the Lenders against any and all
liability and expense which may be incurred by it by reason of taking or
continuing to take any such action. The Administrative Agent shall in all
cases be fully protected in acting, or in refraining from acting, under
this Agreement and the other Loan Documents in accordance with a request of
<PAGE> 81
75
the Required Lenders (or, if so specified by this Agreement, all Lenders),
and such request and any action taken or failure to act pursuant thereto
shall be binding upon all the Lenders and all future holders of the Notes.
9.5 Notice of Default. The Administrative Agent shall not be deemed to
have knowledge or notice of the occurrence of any Default or Event of
Default hereunder unless the Administrative Agent has received written
notice from a Lender, the Parent or the Borrowers referring to this
Agreement, describing such Default or Event of Default and stating that
such notice is a "notice of default". In the event that the Administrative
Agent receives such a notice, the Administrative Agent shall give notice
thereof to the Lenders. The Administrative Agent shall take such action
with respect to such Default or Event of Default as shall be reasonably
directed by the Required Lenders (or, if so specified by this Agreement,
all Lenders); provided that unless and until the Administrative Agent shall
have received such directions, the Administrative Agent may (but shall not
be obligated to) take such action, or refrain from taking such action, with
respect to such Default or Event of Default as it shall deem advisable in
the best interests of the Lenders.
9.6 Non-Reliance on Administrative Agent and Other Lenders. Each
Lender expressly acknowledges that neither the Administrative Agent nor any
of its officers, directors, employees, agents, attorneys-in-fact or
Affiliates has made any representations or warranties to it and that no act
by the Administrative Agent hereinafter taken, including any review of the
affairs of a Loan Party or any Affiliate of a Loan Party, shall be deemed
to constitute any representation or warranty by the Administrative Agent to
any Lender. Each Lender represents to the Administrative Agent that it has,
independently and without reliance upon the Administrative Agent or any
other Lender, and based on such documents and information as it has deemed
appropriate, made its own appraisal of and investigation into the business,
operations, property, financial and other condition and creditworthiness of
the Loan Parties and their Affiliates and made its own decision to make its
Loans hereunder and enter into this Agreement. Each Lender also represents
that it will, independently and without reliance upon the Administrative
Agent or any other Lender, and based on such documents and information as
it shall deem appropriate at the time, continue to make its own credit
analysis, appraisals and decisions in taking or not taking action under
this Agreement and the other Loan Documents, and to make such investigation
as it deems necessary to inform itself as to the business, operations,
property, financial and other condition and creditworthiness of the Loan
Parties and their Affiliates. Except for notices, reports and other
documents expressly required to be furnished to the Lenders by the
Administrative Agent hereunder, the Administrative Agent shall not have any
duty or responsibility to provide any Lender with any credit or other
information concerning the business, operations, property, condition
(financial or otherwise), prospects or creditworthiness of any Loan Party
or any Affiliate of a Loan Party which may come into the possession of the
Administrative Agent or any of its officers, directors, employees, agents,
attorneys-in-fact or Affiliates.
9.7 Indemnification. The Lenders agree to indemnify the Administrative
Agent in its capacity as such (to the extent not reimbursed by the Parent
or the Borrowers and without limiting the obligation of the Parent or the
Borrowers to do so), ratably according to their respective Revolving Credit
Percentages, Tranche A Term Loan Percentages and
<PAGE> 82
76
Tranche B Term Loan Percentages in effect on the date on which
indemnification is sought under this Section 9.7, from and against any and
all liabilities, obligations, losses, damages, penalties, actions,
judgments, suits, costs, expenses or disbursements of any kind whatsoever
which may at any time (including, without limitation, at any time following
the payment of the Notes) be imposed on, incurred by or asserted against
the Administrative Agent in any way relating to or arising out of, the
Commitments, this Agreement, any of the other Loan Documents or any
documents contemplated by or referred to herein or therein or the
transactions contemplated hereby or thereby or any action taken or omitted
by the Administrative Agent under or in connection with any of the
foregoing; provided that no Lender shall be liable for the payment of any
portion of such liabilities, obligations, losses, damages, penalties,
actions, judgments, suits, costs, expenses or disbursements which are found
by a final and nonappealable decision of a court of competent jurisdiction
to have resulted from the Administrative Agent's gross negligence or
willful misconduct. The agreements in this Section 9.7 shall survive the
payment of the Notes and all other amounts payable hereunder.
9.8 Administrative Agent in Its Individual Capacity. The
Administrative Agent and its Affiliates may make loans to, accept deposits
from and generally engage in any kind of business with any Loan Party as
though the Administrative Agent were not the Administrative Agent hereunder
and under the other Loan Documents. With respect to its Loans made or
renewed by it and any Note issued to it and with respect to any Letter of
Credit issued or participated in by it, the Administrative Agent shall have
the same rights and powers under this Agreement and the other Loan
Documents as any Lender and may exercise the same as though it were not the
Administrative Agent, and the terms "Lender" and "Lenders" shall include
the Administrative Agent in its individual capacity.
9.9 Successor Administrative Agent. The Administrative Agent may
resign as Administrative Agent upon 10 days' notice to the Lenders. If the
Administrative Agent shall resign as Administrative Agent under this
Agreement and the other Loan Documents, then the Required Lenders shall
appoint from among the Lenders a successor agent for the Lenders, which
successor agent shall have been approved by the Parent and the Borrowers
(which approval shall not be unreasonably withheld or delayed), whereupon
such successor agent shall succeed to the rights, powers and duties of the
Administrative Agent hereunder. Effective upon such apportionment and
approval, the term "Administrative Agent" shall mean such successor agent
and the former Administrative Agent's rights, powers and duties as
Administrative Agent shall be terminated, without any other or further act
or deed on the part of such former Administrative Agent or any of the
parties to this Agreement or any holders of the Notes. After any retiring
Administrative Agent's resignation as Administrative Agent, the provisions
of this Section 9 shall inure to its benefit as to any actions taken or
omitted to be taken by it while it was Administrative Agent under this
Agreement and the other Loan Documents. The Required Lenders, with the
consent of the Designated Borrower, may replace the Administrative Agent,
provided, however, that if a Default or an Event of Default shall occur and
be continuing the consent of the Designated Borrower shall not be required.
9.10 The Arranger. The Arranger, in its capacity as such,
shall not have any duties or responsibilities hereunder or under any Loan
Document nor any fiduciary
<PAGE> 83
77
relationship with any Lender, and no implied covenants, functions,
responsibilities duties, obligations or liabilities shall be read into this
Agreement or otherwise exist against the Arranger in its capacity as such.
SECTION 10. GUARANTEE
10.1 Guarantee. To induce the Administrative Agent and the Lenders to
execute and deliver this Agreement and to make or maintain the Loans
hereunder, and in consideration thereof, the Parent hereby unconditionally
and irrevocably guarantees to the Administrative Agent, for the ratable
benefit of the Lenders, the prompt and complete payment and performance by
the Borrowers when due (whether at stated maturity, by acceleration or
otherwise) of the Obligations, and the Parent further agrees to pay any and
all expenses (including, without limitation, all reasonable fees, charges
and disbursements of counsel) which may be paid or incurred by the
Administrative Agent or by the Lenders in enforcing, or obtaining advice of
counsel in respect of, any of their rights under the guarantee contained in
this Section 10. The guarantee contained in this Section 10, subject to
Section 10.5, shall remain in full force and effect until the Obligations
are paid in full, the Revolving Credit Commitments are terminated and no
Letters of Credit are outstanding, notwithstanding that from time to time
prior thereto the Borrowers may be free from any Obligations.
10.2 No Subrogation, Contribution, Reimbursement or Indemnity.
Notwithstanding any payment or payments made by the Parent hereunder or any
set-off or application of funds of the Parent by any Lender, the Parent
shall not be entitled to be subrogated to any of the rights of the
Administrative Agent or any Lender against the Borrowers or any collateral
security or guarantee or right of offset held by any Lender for the payment
of the Obligations, nor shall the Parent seek or be entitled to seek any
contribution or reimbursement from the Borrowers in respect of payments
made by the Parent hereunder, until all amounts owing to the Administrative
Agent and the Lenders by the Borrowers on account of the Obligations are
paid in full, no Letters of Credit are outstanding and the Revolving Credit
Commitments are terminated. If any amount shall be paid to the Parent on
account of such subrogation rights at any time when all of the Obligations
shall not have been paid in full, any Letter of Credit shall be outstanding
or the Revolving Credit Commitments shall not have been terminated, such
amount shall be held by the Parent in trust for the Administrative Agent
and the Lenders, segregated from other funds of the Parent, and shall,
forthwith upon receipt by the Parent, be turned over to the Administrative
Agent in the exact form received by the Parent (duly indorsed by the Parent
to the Administrative Agent, if required), to be applied against the
Obligations, whether matured or unmatured, in such order as the
Administrative Agent may determine. The Parent hereby further irrevocably
waives all contractual, common law, statutory and other rights of
reimbursement, contribution, exoneration or indemnity (or any similar
right) from or against the Borrowers or any other Person which may have
arisen in connection with the guarantee contained in this Section 10.
10.3 Amendments, etc. with respect to the Obligations. The Parent
shall remain obligated under this Section 10 notwithstanding that, without
any reservation of rights against the Parent, and without notice to or
further assent by the Parent, any demand for
<PAGE> 84
78
payment of or reduction in the principal amount of any of the Obligations
made by the Administrative Agent or any Lender may be rescinded by the
Administrative Agent or such Lender, and any of the Obligations continued,
and the Obligations, or the liability of any other party upon or for any
part thereof, or any collateral security or guarantee therefor or right of
offset with respect thereto, may, from time to time, in whole or in part,
be renewed, extended, amended, modified, accelerated, compromised, waived,
surrendered or released by the Administrative Agent or any Lender, and this
Agreement, any other Loan Document, and any other documents executed and
delivered in connection therewith may be amended, modified, supplemented or
terminated, in whole or in part, as the Lenders (or the Required Lenders,
as the case may be) may deem advisable from time to time, and any
collateral security, guarantee or right of offset at any time held by the
Administrative Agent or any Lender for the payment of the Obligations may
be sold, exchanged, waived, surrendered or released. Neither the
Administrative Agent nor any Lender shall have any obligation to protect,
secure, perfect or insure any Lien at any time held by it as security for
the Obligations or for the guarantee contained in this Section 10 or any
property subject thereto.
10.4 Guarantee Absolute and Unconditional. The Parent waives any and
all notice of the creation, renewal, extension or accrual of any of the
Obligations and notice of or proof of reliance by the Administrative Agent
or any Lender upon the guarantee contained in this Section 10 or acceptance
of the guarantee contained in this Section 10; the Obligations, and any of
them, shall conclusively be deemed to have been created, contracted or
incurred, or renewed, extended, amended or waived, in reliance upon the
guarantee contained in this Section 10; and all dealings between any
Borrower or the Parent, on the one hand, and the Administrative Agent and
the Lenders, on the other, shall likewise be conclusively presumed to have
been had or consummated in reliance upon the guarantee contained in this
Section 10. The Parent waives diligence, presentment, protest, demand for
payment and notice of default or nonpayment to or upon the Borrowers or the
Parent with respect to the Obligations. The guarantee contained in this
Section 10 shall be construed as a continuing, absolute and unconditional
guarantee of payment without regard to (a) the validity or enforceability
of this Agreement or any other Loan Document, any of the Obligations or any
collateral security therefor or guarantee or right of offset with respect
thereto at any time or from time to time held by the Administrative Agent
or any Lender, (b) any defense, setoff or counterclaim (other than a
defense of payment or performance) which may at any time be available to or
be asserted by any Borrower against the Administrative Agent or any Lender,
or (c) any other circumstance whatsoever (with or without notice to or
knowledge of any Borrower or the Parent) which constitutes, or might be
construed to constitute, an equitable or legal discharge of any Borrower
for the Obligations, or of the Parent under the guarantee contained in this
Section 10, in bankruptcy or in any other instance. When the Administrative
Agent or any Lender is pursuing its rights and remedies under this Section
10 against the Parent, the Administrative Agent or any Lender may, but
shall be under no obligation to, pursue such rights and remedies as it may
have against any Borrower or any other Person or against any collateral
security or guarantee for the Obligations or any right of offset with
respect thereto, and any failure by the Administrative Agent or any Lender
to pursue such other rights or remedies or to collect any payments from any
Borrower or any such other Person or to realize upon any such collateral
security or guarantee or to exercise any such right of offset, or any
release of the Borrowers or any such other Person or of any such collateral
security, guarantee
<PAGE> 85
79
or right of offset, shall not relieve the Parent of any liability under
this Section 10, and shall not impair or affect the rights and remedies,
whether express, implied or available as a matter of law, of the
Administrative Agent and the Lenders against the Parent.
10.5 Reinstatement. The guarantee contained in this Section 10 shall
continue to be effective, or be reinstated, as the case may be, if at any
time payment, or any part thereof, of any of the Obligations is rescinded
or must otherwise be restored or returned by the Administrative Agent or
any Lender upon the insolvency, bankruptcy, dissolution, liquidation or
reorganization of any Borrower or upon or as a result of the appointment of
a receiver, intervenor or conservator of, or trustee or similar officer
for, any Borrower or any substantial part of its property, or otherwise,
all as though such payments had not been made.
10.6 Payments. The Parent hereby agrees that any payments in respect
of the Obligations pursuant to this Section 10 will be paid to the
Administrative Agent without setoff or counterclaim in Dollars at the
office of the Administrative Agent specified in Section 11.2.
SECTION 11. MISCELLANEOUS
11.1 Amendments and Waivers. Neither this Agreement, any other Loan
Document, nor any terms hereof or thereof may be amended, supplemented or
modified except in accordance with the provisions of this Section 11.1. The
Required Lenders and each Loan Party to the relevant Loan Documents may,
or, with the written consent of the Required Lenders, the Administrative
Agent and each Loan Party to the relevant Loan Document may, from time to
time, (a) enter into written amendments, supplements or modifications
hereto and to the other Loan Documents for the purpose of adding any
provisions to this Agreement or the other Loan Documents or changing in any
manner the rights of the Lenders or of the Loan Parties hereunder or
thereunder or (b) waive, on such terms and conditions as the Required
Lenders or the Administrative Agent, as the case may be, may specify in
such instrument, any of the requirements of this Agreement or the other
Loan Documents or any Default or Event of Default and its consequences;
provided, however, that no such waiver and no such amendment, supplement or
modification shall (i) forgive the principal amount or extend the final
scheduled date of maturity of any Note, or reduce the stated rate of any
interest, fee or letter of credit commission payable hereunder or extend
the scheduled date of any payment thereof or increase the amount or extend
the expiration date of any Lender's Revolving Credit Commitment, or make
any change in the application of any prepayment of the Loans specified in
the first sentence of Section 2.12(d) or in Section 2.18(a), in each case
without the consent of each Lender directly affected thereby, (ii) extend
the scheduled date of any amortization payment in respect of the Tranche A
Term Loans referred to in Section 2.9 without the consent of each Lender
affected thereby or extend the scheduled date of any amortization payment
in respect of the Tranche B Term Loans referred to in Section 2.9 without
the consent of each Lender affected thereby, (iii) amend, modify or waive
any provision of this Section 11.1 or reduce any percentage specified in
the definition of Required Lenders, or consent to the assignment or
transfer by any Loan Party of any of its rights and obligations under this
Agreement and the other Loan Documents or release all or a
<PAGE> 86
80
substantial portion of the Collateral (other than in connection with any
sale or other disposition of assets permitted by Section 7.6) or any
guarantee of the Obligations, in each case without the written consent of
all the Lenders, (iv) amend, modify or waive any provision of Section 9
without the written consent of the Administrative Agent, (v) amend, modify
or waive any provision of Section 3 without the written consent of the
Issuing Lender, (vi) amend, modify or waive any provision of Section 2.25,
2.26, or 2.27 without the written consent of the Swing Line Lender or (vii)
amend, modify or waive any provision of Section 2.7 without the written
consent of (A) the holders of 85% or more of the aggregate Revolving Credit
Commitments, or, if the Revolving Credit Commitments have been terminated,
the aggregate outstanding Revolving Extensions of Credit and (B) the
Required Lenders. Any such waiver and any such amendment, supplement or
modification shall apply equally to each of the Lenders and shall be
binding upon the Loan Parties, the Lenders, the Administrative Agent and
all future holders of the Notes. In the case of any waiver, the Loan
Parties, the Lenders and the Administrative Agent shall be restored to
their former position and rights hereunder and under the other Loan
Documents, and any Default or Event of Default waived shall be deemed to be
cured and not continuing; but no such waiver shall extend to any subsequent
or other Default or Event of Default, or impair any right consequent
thereon.
11.2 Notices. All notices, requests and demands to or upon the
respective parties hereto to be effective shall be in writing (including by
telecopy), and, unless otherwise expressly provided herein, shall be deemed
to have been duly given or made when delivered, or three Business Days
after being deposited in the mail, postage prepaid, or, in the case of
telecopy notice, when received, addressed as follows in the case of the
Parent, the Designated Borrower and the Administrative Agent, and as set
forth in Schedule 1.1B in the case of the other parties hereto, or to such
other address as may be hereafter notified by the respective parties hereto
and any future holders of the Notes:
The Parent: Kirklands Holdings L.L.C.
Advent International Corporation
101 Federal Street
Boston, Massachusetts 02110
Attention: David M. Mussafer
Telecopy: (617) 951-0566
Telephone: (617) 951-9469
<PAGE> 87
81
The Designated
Borrower: Kirkland's, Inc.
805 North Parkway
Jackson, Tennessee 38305
Attention: Carl Kirkland
Telecopy: (901) 664-9345
Telephone: (901) 668-2444
with a copy to:
Baker, Donelson, Bearman & Caldwell
Tennessee Building
165 Madison Avenue, 20th Floor
Memphis, TN 38103
Attention: Robert Walker, Esq.
Telecopy: (901) 577-2303
Telephone: (901) 577-2719
and
Pepper, Hamelton & Scheetz
3000 Two Logan Square
18th and Arch Streets
Philadelphia, PA 19103
Attention: Cary S. Levinson, Esq.
Telecopy: (215) 981-4750
Telephone: (215) 981-4000
The Administrative
Agent: The First National Bank of Boston
100 Federal Street
Boston, Massachusetts 02110
Attention: Dan Corcoran
Telecopy: (617) 434 8102
Telephone: (617) 434-2251
provided that any notice, request or demand to or upon the Administrative
Agent or the Lenders pursuant to Section 2.2, 2.4, 2.6, 2.10, 2.11, 2.13 or
2.26 shall not be effective until received. Any notice or delivery to or
from or consent required of the Borrowers hereunder or pursuant to any
other Loan Document may be made to or by the Designated Borrower on behalf
of the Borrowers.
<PAGE> 88
82
11.3 No Waiver; Cumulative Remedies. No failure to exercise and no
delay in exercising, on the part of the Administrative Agent or any Lender,
any right, remedy, power or privilege hereunder or under the other Loan
Documents shall operate as a waiver thereof; nor shall any single or
partial exercise of any right, remedy, power or privilege hereunder
preclude any other or further exercise thereof or the exercise of any other
right, remedy, power or privilege. The rights, remedies, powers and
privileges herein provided are cumulative and not exclusive of any rights,
remedies, powers and privileges provided by law.
11.4 Survival. All representations and warranties made hereunder, in
the other Loan Documents and in any document, certificate or statement
delivered pursuant hereto or in connection herewith shall survive the
execution and delivery of this Agreement and the Notes and the making of
the Loans hereunder.
11.5 Payment of Expenses and Taxes. The Borrowers jointly and
severally agree (a) to pay or reimburse the Administrative Agent for all
its reasonable out-of-pocket costs and expenses incurred in connection with
the development, preparation and execution of, and any amendment,
supplement or modification to, this Agreement and the other Loan Documents
and any other documents prepared in connection herewith or therewith, and
the consummation and administration of the transactions contemplated hereby
and thereby, including, without limitation, the reasonable fees and
disbursements of counsel to the Administrative Agent, (b) to pay or
reimburse each Lender and the Administrative Agent for all its costs and
expenses incurred in connection with the enforcement or preservation of any
rights under this Agreement, the other Loan Documents and any such other
documents, including, without limitation, the fees and disbursements of
counsel (including the allocated fees and expenses of in-house counsel) to
each Lender and counsel to the Administrative Agent, (c) to pay, indemnify,
and hold each Lender and the Administrative Agent harmless from, any and
all recording and filing fees and any and all liabilities with respect to,
or resulting from any delay in paying, stamp, excise and other taxes, if
any, which may be payable or determined to be payable in connection with
the execution and delivery of, or consummation or administration of any of
the transactions contemplated by, or any amendment, supplement or
modification of, or any waiver or consent under or in respect of, this
Agreement, the other Loan Documents and any such other documents, and (d)
to pay, indemnify, and hold each Lender and the Administrative Agent and
their respective officers, directors, trustees, employees, affiliates,
agents and controlling persons (each, an "indemnitee") harmless from and
against any and all other liabilities, obligations, losses, damages,
penalties, actions, judgments, suits, costs, expenses or disbursements of
any kind or nature whatsoever with respect to the execution, delivery,
enforcement, performance and administration of this Agreement, the other
Loan Documents and any such other documents, including, without limitation,
any of the foregoing relating to the use of proceeds of the Loans or the
violation of, noncompliance with or liability under, any Environmental Law
applicable to the operations of the Parent, the Borrowers any of their
Subsidiaries or any of the Properties (all the foregoing in this clause
(d), collectively, the "indemnified liabilities"), provided, that the
Borrowers shall have no obligation hereunder to any indemnitee with respect
to indemnified liabilities to the extent such indemnified liabilities are
found by a final and nonappealable decision of a court of competent
jurisdiction to have resulted from the gross negligence or willful
misconduct of such indemnitee. The agreements in this Section
<PAGE> 89
83
11.5 shall survive repayment of the Notes and all other amounts
payable hereunder and the termination of the Commitments and, in the case
of any Lender that may assign any interest in its Commitments, Loans or
Letter of Credit Interest hereunder, shall survive the making of such
assignment, notwithstanding that such assigning Lender may cease to be a
"Lender" hereunder.
11.6 Successors and Assigns; Participations and Assignments. (a) This
Agreement shall be binding upon and inure to the benefit of the Parent, the
Borrowers, the Lenders, the Administrative Agent, all future holders of the
Notes and their respective successors and assigns, except that neither the
Parent nor the Borrowers may assign or transfer any of its rights or
obligations under this Agreement without the prior written consent of each
Lender.
(b) Any Lender may, without the consent of the Borrowers, in the
ordinary course of its business and in accordance with applicable law, at
any time sell to one or more banks, financial institutions or funds that
regularly invest in loans and/or loan participations or, with the consent
of the Borrowers and the Administrative Agent (which, in each case, shall
not be unreasonably withheld or delayed), any other entities (each, a
"Participant") participating interests in any Loan owing to such Lender,
any Note held by such Lender, any Commitment of such Lender or any other
interest of such Lender hereunder and under the other Loan Documents. In
the event of any such sale by a Lender of a participating interest to a
Participant, such Lender's obligations under this Agreement to the other
parties to this Agreement shall remain unchanged, such Lender shall remain
solely responsible for the performance thereof, such Lender shall remain
the holder of any such Note for all purposes under this Agreement and the
other Loan Documents, and the Borrowers and the Administrative Agent shall
continue to deal solely and directly with such Lender in connection with
such Lender's rights and obligations under this Agreement and the other
Loan Documents. In no event shall any Participant under any such
participation have any right to approve any amendment or waiver of any
provision of any Loan Document, or any consent to any departure by any Loan
Party therefrom, except to the extent that such amendment, waiver or
consent would reduce the principal of, or interest on, the Notes or any
fees payable hereunder, postpone the date of the final maturity of the
Notes, consent to the assignment or transfer by any Borrower of any of its
rights and obligations under this Agreement and the other Loan Documents,
release all or a substantial portion of the Collateral (other than in
connection with any sale or other disposition of assets permitted by
Section 7.6) or any guarantee of the Obligations, in each case to the
extent subject to such participation. The Borrowers agree that if amounts
outstanding under this Agreement and the Notes are due or unpaid, or shall
have been declared or shall have become due and payable upon the occurrence
of an Event of Default, each Participant shall, to the maximum extent
permitted by applicable law, be deemed to have the right of setoff in
respect of its participating interest in amounts owing under this Agreement
and any Note to the same extent as if the amount of its participating
interest were owing directly to it as a Lender under this Agreement or any
Note, provided that, in purchasing such participating interest, such
Participant shall be deemed to have agreed to share with the Lenders the
proceeds thereof as provided in Section 11.7(a) as fully as if it were a
Lender hereunder. The Borrowers also agree that each Participant shall be
entitled to the benefits of Sections 2.20, 2.21 and 2.22
<PAGE> 90
84
with respect to its participation in the Commitments and the Loans
outstanding from time to time as if it was a Lender; provided that, in the
case of Section 2.21, such Participant shall have complied with the
requirements of said Section and provided, further, that no Participant
shall be entitled to receive any greater amount pursuant to any such
Section than the transferor Lender would have been entitled to receive in
respect of the amount of the participation transferred by such transferor
Lender to such Participant had no such transfer occurred.
(c) Any Lender may, in the ordinary course of its business and in
accordance with applicable law, at any time and from time to time assign to
any Lender or any affiliate thereof or, with the consent of the Designated
Borrower and the Administrative Agent (which, in each case, shall not be
unreasonably withheld or delayed) (provided that no such consent need be
obtained by Lehman Commercial Paper Inc. for a period of 120 days following
the Closing Date), to an additional bank, financial institution or other
entity (an "Assignee") all or any part of its rights and obligations under
this Agreement, the Letters of Credit and the Notes pursuant to an
Assignment and Acceptance, substantially in the form of Exhibit D, executed
by such Assignee, such assigning Lender (and, in the case of an Assignee
that is not then a Lender or an affiliate thereof, by the Designated
Borrower and the Administrative Agent) and delivered to the Administrative
Agent for its acceptance and recording in the Register; provided that no
such assignment to an Assignee (other than any Lender or any affiliate
thereof) shall be in an aggregate principal amount of less than $2,000,000
(other than in the case of an assignment of all of a Lender's interests
under this Agreement and the Notes). Such assignment need not be ratable as
among any Tranche A Term Loan Commitments and/or Tranche A Term Loans,
Tranche B Term Loan Commitments and/or Tranche B Term Loans and Revolving
Credit Commitments and/or Revolving Credit Loans of the assigning Lender.
Upon such execution, delivery, acceptance and recording, from and after the
effective date determined pursuant to such Assignment and Acceptance, (x)
the Assignee thereunder shall be a party hereto and, to the extent provided
in such Assignment and Acceptance, have the rights and obligations of a
Lender hereunder with a Commitment as set forth therein, and (y) the
assigning Lender thereunder shall, to the extent provided in such
Assignment and Acceptance, be released from its obligations under this
Agreement (and, in the case of an Assignment and Acceptance covering all or
the remaining portion of an assigning Lender's rights and obligations under
this Agreement, such assigning Lender shall cease to be a party hereto).
Notwithstanding any provision of this paragraph (c) and paragraph (g) of
this Section 11.6, the consent of the Designated Borrower shall not be
required, and, unless requested by the Assignee and/or the assigning
Lender, new Notes shall not be required to be executed and delivered by the
Borrowers, for any assignment which occurs at any time when any of the
events described in Section 8(f) shall have occurred and be continuing.
(d) Any Non-U.S. Lender that could become completely exempt from
withholding of any tax, assessment or other charge or levy imposed by or on
behalf of the United States or any taxing authority thereof ("U.S. Taxes")
in respect of payment of any Obligations due to such Non-U.S. Lender under
this Agreement if the Obligations were in registered form for U.S. federal
income tax purposes may request the Borrowers (through the Administrative
Agent), and the Borrowers agree thereupon, to exchange any promissory
<PAGE> 91
85
note(s) evidencing such Obligations for promissory note(s) registered as
provided in paragraph (f) below and substantially in the form of Exhibit
I-1 (in the case of Obligations in respect of Tranche A Term Loans),
Exhibit I-2 (in the case of Obligations in respect of Tranche B Term
Loans), or Exhibit I-3 (in the case of Obligations in respect of Revolving
Credit Loans) (each, an "Alternative Note"). Alternative Notes may not be
exchanged for promissory notes that are not Alternative Notes.
(e) Each Non-U.S. Lender that holds Alternative Note(s) (an
"Alternative Noteholder") (or, if such Alternative Noteholder is not the
beneficial owner thereof, such beneficial owner) shall deliver to the
Borrowers prior to or at the time such Non-U.S. Lender becomes an
Alternative Noteholder each of the forms and certifications required by
Section 2.21(b).
(f) An Alternative Note and the Obligation(s) evidenced thereby may be
assigned or otherwise transferred in whole or in part only by registration
of such assignment or transfer of such Alternative Note and the
Obligation(s) evidenced thereby on the Register (and each Alternative Note
shall expressly so provide). Any assignment or transfer of all or part of
such Obligation(s) and the Alternative Note(s) evidencing the same shall be
registered on the Register only upon surrender for registration of
assignment or transfer of the Alternative Note(s) evidencing such
Obligation(s), duly endorsed by (or accompanied by a written instrument of
assignment or transfer duly executed by) the Alternative Noteholder
thereof, and thereupon one or more new Alternative Note(s) in the same
aggregate principal amount shall be issued to the designated Assignee(s).
No assignment of an Alternative Note and the Obligation(s) evidenced
thereby shall be effective unless it has been recorded in the Register as
provided in this Section 11.6(f).
(g) The Administrative Agent shall maintain at its address referred to
in Section 11.2 a copy of each Assignment and Acceptance delivered to it
and a register (the "Register") for the recordation of the names and
addresses of the Lenders (including Alternative Noteholders) and the
Commitment of, and principal amount of the Loans owing to, each Lender from
time to time. The entries in the Register shall be conclusive, in the
absence of manifest error, and the Borrowers, the Administrative Agent and
the Lenders shall treat each Person whose name is recorded in the Register
as the owner of the Loan recorded therein for all purposes of this
Agreement. The Register shall be available for inspection by the Borrowers
or any Lender at any reasonable time and from time to time upon reasonable
prior notice.
(h) Upon its receipt of an Assignment and Acceptance executed by an
assigning Lender and an Assignee (and, in the case of an Assignee that is
not then a Lender or an affiliate thereof, by the Designated Borrower and
the Administrative Agent) together with payment to the Administrative Agent
of a registration and processing fee of $2,000 (except that no such
registration and processing fee shall be payable (y) by Lehman Commercial
Paper Inc. for a period of 120 days following the Closing Date or (z) in
the case of an Assignee which is already a Lender or is an affiliate of a
Lender), the Administrative Agent shall (i) promptly accept such Assignment
and Acceptance and (ii) on the effective date determined pursuant thereto
record the information contained therein in the Register and
<PAGE> 92
86
give notice of such acceptance and recordation to the Lenders and the
Designated Borrower. On or prior to such effective date, the Borrowers, at
their own expense, shall execute and deliver to the Administrative Agent
(in exchange for the Revolving Credit Note, Tranche A Term Note and/or
Tranche B Term Note, as the case may be, of the assigning Lender) a new
Revolving Credit Note, Tranche A Term Note and/or Tranche B Term Note, as
the case may be, to the order of such Assignee (or, in the case of any
Alternative Note, payable to such Assignee or its registered assigns) in an
amount equal to the Revolving Credit Commitment, Tranche A Loan and/or
Tranche B Loan, as the case may be, assumed by it pursuant to such
Assignment and Acceptance and, if the assigning Lender has retained a
Revolving Credit Commitment, Tranche A Loan and/or Tranche B Loan, as the
case may be, a new Revolving Credit Note, Tranche A Term Note and/or
Tranche B Term Note, as the case may be, to the order of the assigning
Lender (or, in the case of any Alternative Note, payable to such assigning
Lender or its registered assigns) in an amount equal to the Revolving
Credit Commitment, Tranche A Loan and/or Tranche B Loan, as the case may
be, retained by it hereunder. Such new Notes shall be dated the Closing
Date and shall otherwise be in the form of the Note replaced thereby.
(i) Each of the Parent and the Borrowers authorizes each Lender to
disclose to any Participant or Assignee (each, a "Transferee") and any
prospective Transferee any and all financial information in such Lender's
possession concerning the Parent, the Borrowers and their respective
Affiliates which has been delivered to such Lender by or on behalf of the
Parent or the Borrowers pursuant to this Agreement or which has been
delivered to such Lender by or on behalf of the Parent or the Borrowers in
connection with such Lender's credit evaluation of the Parent, the
Borrowers and their respective Affiliates prior to becoming a party to this
Agreement.
(j) Nothing herein shall prohibit or restrict any Lender from (i)
pledging or assigning any Note to any Federal Reserve Bank in accordance
with applicable law or (ii) with the prior consent of the Administrative
Agent and the Borrowers (which, in each case, shall not be unreasonably
withheld or delayed), pledging its rights in connection with any Loan or
Note to any other Person.
11.7 Adjustments; Set-off. (a) If any Lender (a "Benefitted Lender")
shall at any time receive any payment of all or part of its Loans or the
Reimbursement Obligations owing to it, or interest thereon, or receive any
collateral in respect thereof (whether voluntarily or involuntarily, by
set-off, pursuant to events or proceedings of the nature referred to in
Section 8(f), or otherwise), in a greater proportion than any such payment
to or collateral received by any other Lender, if any, in respect of such
other Lender's Loans or the Reimbursement Obligations owing to such other
Lender, or interest thereon, such Benefitted Lender shall purchase for cash
from the other Lenders a participating (or, at the option of such Lender, a
direct) interest in such portion of each such other Lender's Loan and/or of
the Reimbursement Obligations owing to each such other Lender, or shall
provide such other Lenders with the benefits of any such collateral, or the
proceeds thereof, as shall be necessary to cause such Benefitted Lender to
share the excess payment or benefits of such collateral or proceeds ratably
with each of the Lenders; provided, however, that if all or any portion of
such excess payment or benefits is thereafter recovered from such
Benefitted Lender, such
<PAGE> 93
87
purchase shall be rescinded, and the purchase price and benefits returned,
to the extent of such recovery, but without interest.
(b) In addition to any rights and remedies of the Lenders provided by
law, each Lender shall have the right, without prior notice to the Parent
or the Borrowers, any such notice being expressly waived by the Parent and
the Borrowers to the extent permitted by applicable law, upon any amount
becoming due and payable by the Parent or the Borrowers hereunder or under
the Notes (whether at the stated maturity, by acceleration or otherwise) to
set off and appropriate and apply against such amount any and all deposits
(general or special, time or demand, provisional or final), in any
currency, and any other credits, indebtedness or claims, in any currency,
in each case whether direct or indirect, absolute or contingent, matured or
unmatured, at any time held or owing by such Lender or any branch or agency
thereof to or for the credit or the account of the Parent or the Borrowers.
Each Lender agrees promptly to notify the Parent, the Designated Borrower
and the Administrative Agent after any such setoff and application made by
such Lender, provided that the failure to give such notice shall not affect
the validity of such setoff and application.
11.8 Counterparts. This Agreement may be executed by one or more of
the parties to this Agreement on any number of separate counterparts
(including by telecopy), and all of said counterparts taken together shall
be deemed to constitute one and the same instrument. A set of the copies of
this Agreement signed by all the parties shall be lodged with the Borrowers
and the Administrative Agent.
11.9 Severability. Any provision of this Agreement which is prohibited
or unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
11.10 Integration. This Agreement and the other Loan Documents
represent the agreement of the Parent, the Borrowers, the Administrative
Agent and the Lenders with respect to the subject matter hereof, and there
are no promises, undertakings, representations or warranties by the
Administrative Agent or any Lender relative to subject matter hereof not
expressly set forth or referred to herein or in the other Loan Documents.
11.11 GOVERNING LAW. THIS AGREEMENT AND THE NOTES AND THE RIGHTS AND
OBLIGATIONS OF THE PARTIES UNDER THIS AGREEMENT AND THE NOTES SHALL BE
GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF
THE STATE OF NEW YORK.
11.12 Submission To Jurisdiction; Waivers. Each of the Parent and the
Borrowers hereby irrevocably and unconditionally:
(a) submits for itself and its property in any legal action or
proceeding relating to this Agreement and the other Loan Documents to which
it is a party, or for
<PAGE> 94
88
recognition and enforcement of any judgment in respect thereof, to the
non-exclusive general jurisdiction of the Courts of the State of New York,
the courts of the United States for the Southern District of New York and
the courts of the Commonwealth of Massachusetts and the courts of the
United States for the District of Massachusetts, and appellate courts from
any thereof;
(b) consents that any such action or proceeding may be brought in such
courts and waives any objection that it may now or hereafter have to the
venue of any such action or proceeding in any such court or that such
action or proceeding was brought in an inconvenient court and agrees not to
plead or claim the same;
(c) agrees that service of process in any such action or proceeding
may be effected by mailing a copy thereof by registered or certified mail
(or any substantially similar form of mail), postage prepaid, to the Parent
or the Borrowers, as the case may be at its address set forth in Section
11.2 or at such other address of which the Administrative Agent shall have
been notified pursuant thereto;
(d) agrees that nothing herein shall affect the right to effect
service of process in any other manner permitted by law or shall limit the
right to sue in any other jurisdiction; and
(e) waives, to the maximum extent not prohibited by law, any right it
may have to claim or recover in any legal action or proceeding referred to
in this Section 11.12 any special, exemplary, punitive or consequential
damages.
11.13 Acknowledgements. Each of the Parent and the Borrowers hereby
acknowledges that:
(a) it has been advised by counsel in the negotiation, execution and
delivery of this Agreement and the other Loan Documents;
(b) neither the Administrative Agent nor any Lender has any fiduciary
relationship with or duty to the Parent or any Borrower arising out of or
in connection with this Agreement or any of the other Loan Documents, and
the relationship between Administrative Agent and Lenders, on one hand, and
the Parent and the Borrowers, on the other hand, in connection herewith or
therewith is solely that of debtor and creditor; and
(c) no joint venture is created hereby or by the other Loan Documents
or otherwise exists by virtue of the transactions contemplated hereby among
the Lenders or among the Parent, the Borrowers and the Lenders.
11.14 WAIVERS OF JURY TRIAL. THE PARENT, THE BORROWERS, THE
ADMINISTRATIVE AGENT AND THE LENDERS HEREBY IRREVOCABLY AND UNCONDITIONALLY
WAIVE TRIAL BY JURY IN ANY
<PAGE> 95
89
LEGAL ACTION OR PROCEEDING RELATING TO THIS AGREEMENT OR ANY OTHER LOAN
DOCUMENT AND FOR ANY COUNTERCLAIM THEREIN.
11.15 Confidentiality. Each of the Administrative Agent and each
Lender agrees to keep confidential all non-public information provided to
it by any Loan Party pursuant to this Agreement that is designated by such
Loan Party as confidential; provided that nothing herein shall prevent the
Administrative Agent or any Lender from disclosing any such information (a)
to the Administrative Agent, any other Lender or any affiliate of any
Lender, (b) to any Transferee or prospective Transferee which agrees to
comply with the provisions of this Section 11.15, (c) to the employees,
directors, agents, attorneys, accountants and other professional advisors
of such Lender or its affiliates, (d) upon the request or demand of any
Governmental Authority having jurisdiction over the Administrative Agent or
such Lender, (e) in response to any order of any court or other
Governmental Authority or as may otherwise be required pursuant to any
Requirement of Law, (f) if requested or required to do so in connection
with any litigation or similar proceeding, (g) which has been publicly
disclosed other than in breach of this Section 11.15, or (h) in connection
with the exercise of any remedy hereunder or under any other Loan Document.
11.16 Reliance on Representations and Actions of Designated Borrower.
The Borrowers hereby appoint the Designated Borrower as the Borrowers'
agent to execute, deliver and perform, on behalf of the Borrowers, any and
all notices, certificates, documents and actions to be executed, delivered
or performed hereunder or under any of the other Loan Documents, and the
Borrowers hereby agree that the Administrative Agent and the Lenders may
rely upon any representation, warranty, certificate, notice, document or
telephone request which purports to be executed or made or which the
Administrative Agent or the Lenders in good faith believe to have been
executed or made by the Designated Borrower or any of its executive
officers, and the Borrowers hereby further, jointly and severally, agree to
indemnify and hold the Administrative Agent and the Lenders harmless for
any action, including the making of Loans hereunder, and any loss or
expense, taken or incurred by any of them as a result of their good faith
reliance upon any such representation, warranty, certificate, notice,
document or telephone request.
<PAGE> 96
90
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed and delivered by their proper and duly authorized
officers as of the day and year first above written.
KIRKLANDS HOLDINGS L.L.C.
By: /s/ David M. Mussafer
------------------------------------
Title: President
KIRKLAND'S, INC.
KIRKLAND'S OF CAROLINA, INC.
KIRKLAND'S OF CHARLOTTE, EASTLAND MALL, INC.
KIRKLAND'S OF TENNESSEE, INC.
K. C. CORP. INC.
KIRKLAND'S OF GREENSBORO, FOUR SEASONS MALL, INC.
KIRKLAND'S OF FAYETTEVILLE, CROSS CREEK MALL, INC.
KIRKLAND'S OF WILMINGTON, INDEPENDENCE MALL, INC.
KIRKLAND'S III, JACKSON-METRO CENTER, INC.
KIRKLAND'S OF MEMPHIS, TENNESSEE, LAURELWOOD
SHOPPING CENTER, INC.
KIRKLAND'S OF RIDGELAND, MISSISSIPPI, NORTHPARK
MALL, INC.
KIRKLAND'S OF KNOXVILLE, EAST TOWNE MALL, INC.
KIRKLAND'S OF HUNTSVILLE, MADISON SQUARE MALL, INC.
KIRKLAND'S OF VALLEY VIEW MALL, ROANOKE, VA, INC.
KIRKLAND'S OF NASHVILLE, HICKORY HOLLOW MALL, INC.
KIRKLAND'S OF BIRMINGHAM, RIVERCHASE GALLERIA, INC.
KIRKLAND'S OF BRIARCLIFFE MALL, MYRTLE BEACH, SOUTH
CAROLINA, INC.
KIRKLAND'S OF PECANLAND MALL, MONROE, LA, INC.
KIRKLAND'S OF TOWNE CENTER AT COBB, ATLANTA, GA, INC.
KIRKLAND'S OF GWINNETT PLACE, ATLANTA, GA, INC.
KIRKLAND'S OF RIVERGATE MALL, NASHVILLE, TN, INC.
KIRKLAND'S OF PEACHTREE MALL, COLUMBUS, GA, INC.
KIRKLAND'S OF CUMBERLAND MALL, ATLANTA, GA, INC.
KIRKLAND'S OF HAMILTON PLACE MALL, CHATTANOOGA,
TN, INC.
KIRKLAND'S OF HOUSTON GALLERIA, HOUSTON, TX, INC.
KIRKLAND'S OF MALL OF MEMPHIS, MEMPHIS, TN, INC.
KIRKLAND'S OF WOODLAND HILLS MALL, TULSA, OK, INC.
KIRKLAND'S OF DAYTON MALL, DAYTON, OH, INC.
KIRKLAND'S OF OXMOOR CENTER, LOUISVILLE, KY, INC.
<PAGE> 97
91
KIRKLAND'S OF SOUTH SQUARE MALL, DURHAM, NC, INC.
KIRKLAND'S OF VALLEY VIEW CENTER, DALLAS, TX, INC.
KIRKLAND'S OF CHESTERFIELD TOWNE CENTER, RICHMOND,
VA, INC.
KIRKLAND'S OF PARK PLAZA, LITTLE ROCK, AR, INC.
KIRKLAND'S OF MONTGOMERY MALL, MONTGOMERY, AL,
INC.
KIRKLAND'S OF SOUTHLAKE MALL, ATLANTA, GA, INC.
KIRKLAND'S OF SOUTHPARK MALL, RICHMOND, VA, INC.
KIRKLAND'S OF EASTLAND MALL, EVANSVILLE, IN, INC.
KIRKLAND'S OF FAYETTE MALL, LEXINGTON, KY, INC.
KIRKLAND'S OF HICKORY RIDGE MALL, MEMPHIS, TN, INC.
KIRKLAND'S OF REGENCY SQUARE MALL, JACKSONVILLE,
FL, INC.
KIRKLAND'S OF MCCAIN MALL, LITTLE ROCK, AR, INC.
KIRKLAND'S OF RIVER RIDGE MALL, LYNCHBURG, VA, INC.
KIRKLAND'S OF BEL AIR MALL, MOBILE, AL, INC.
KIRKLAND'S OF THE MALL AT BARNES CROSSING, TUPELO,
MS, INC.
KIRKLAND'S OF CORTANA MALL, BATON ROUGE, LA, INC.
KIRKLAND'S OF BELLEVUE CENTER, NASHVILLE, TN, INC.
KIRKLAND'S OF TRI-COUNTY MALL, CINCINNATI, OH, INC.
KIRKLAND'S OF THE MALL OF THE AVENUES,
JACKSONVILLE, FL, INC.
KIRKLAND'S OF EASTWOOD MALL, BIRMINGHAM, AL, INC.
KIRKLAND'S OF LAKESIDE MALL, NEW ORLEANS, LA, INC.
KIRKLAND'S OF CAROLINA PLACE, CHARLOTTE, N.C., INC.
KIRKLAND'S OF CARY VILLAGE MALL, RALEIGH, N.C., INC.
KIRKLAND'S OF COOL SPRINGS GALLERIA, NASHVILLE, TN,
INC.
KIRKLAND'S OF KENWOOD TOWNE CENTRE, CINCINNATI,
OH, INC.
KIRKLAND'S OF ST. LOUIS GALLERIA, ST. LOUIS, MO, INC.
KIRKLAND'S OF WIREGRASS COMMONS MALL, DOTHAN, AL,
INC.
KIRKLAND'S OF REGENCY MALL, RICHMOND, VA, INC.
KIRKLAND'S OF FLORENCE, FLORENCE, KY, INC.
KIRKLAND'S OF ACADIANA MALL, LAFAYETTE, LA, INC.
KIRKLAND'S OF PADRE STAPLES MALL, CORPUS CHRISTI, TX,
INC.
KIRKLAND'S OF BELDEN VILLAGE, CANTON, OH, INC.
KIRKLAND'S OF WEST OAKS MALL, HOUSTON, TX, INC.
KIRKLAND'S OF CHARLESTON TOWN CENTER, CHARLESTON,
W. VA, INC.
KIRKLAND'S OF CRESTWOOD PLAZA, ST. LOUIS, MO, INC.
KIRKLAND'S OF WHITE MARSH MALL, BALTIMORE, MD, INC.
<PAGE> 98
92
KIRKLAND'S OF COLLIN CREEK MALL, DALLAS, TX, INC.
KIRKLAND'S OF BAYBROOK MALL, HOUSTON, TX, INC.
KIRKLAND'S OF GOVERNOR'S SQUARE MALL, TALLAHASSEE,
FL, INC.
KIRKLAND'S OF BARTON CREEK MALL, AUSTIN, TX, INC.
KIRKLAND'S OF HIGHLAND MALL, AUSTIN, TX, INC.
KIRKLAND'S OF BATTLEFIELD MALL, SPRINGFIELD, MO, INC.
KIRKLAND'S OF PENN SQUARE MALL, OKLAHOMA CITY, OK,
INC.
KIRKLAND'S OF OAK PARK MALL, KANSAS CITY, KS, INC.
KIRKLAND'S OF MALL ST. VINCENT, SHREVEPORT, LA, INC.
KIRKLAND'S OF OWINGS MILLS MALL, BALTIMORE, MD, INC.
KIRKLAND'S OF OAKWOOD CENTER, NEW ORLEANS, LA, INC.
KIRKLAND'S OF THE MALL AT JOHNSON CITY, JOHNSON
CITY, TN, INC.
KIRKLAND'S OF GLENBROOK MALL, FT. WAYNE, IN, INC.
KIRKLAND'S OF NORTH POINTE MALL, ATLANTA, GA, INC.
KIRKLAND'S OF NORTHPARK MALL, JOPLIN, MO, INC.
KIRKLAND'S OF ORLANDO FASHION SQUARE, ORLANDO, FL,
INC.
KIRKLAND'S OF THE MALL AT FAIRFIELD COMMONS,
DAYTON, OH, INC.
KIRKLAND'S OF ST. CHARLES TOWNE CENTER, WALDORF,
MD INC.
KIRKLAND'S OF REGENCY MALL, FLORENCE, AL, INC.
KIRKLAND'S OF SOUTH PLAINS MALL, LUBBOCK, TX, INC.
KIRKLAND'S OF THE PARKS AT ARLINGTON, FT. WORTH, TX,
INC.
KIRKLAND'S OF PARMA TOWN MALL, CLEVELAND, OH, INC.
KIRKLAND'S OF ST. CLAIR SQUARE, ST. LOUIS, MO, INC.
KIRKLAND'S OF TURTLE CREEK MALL, HATTIESBURG, MS,
INC.
KIRKLAND'S OF THE WOODLANDS, HOUSTON, TX, INC.
KIRKLAND'S OF BRANDON TOWN CENTER, TAMPA, FL, INC.
KIRKLAND'S OF MEMORIAL CITY MALL, HOUSTON, TX, INC.
KIRKLAND'S OF UNIVERSITY MALL, TUSCALOOSA, AL, INC.
KIRKLAND'S OF SANTA ROSA MALL, FORT WALTON, FL, INC.
KIRKLAND'S OF PANAMA CITY MALL, PANAMA CITY, FL,
INC.
KIRKLAND'S OF TOWN EAST MALL, MESQUITE, TX, INC.
KIRKLAND'S OF KENTUCKY OAKS MALL, PADUCAH, KY, INC.
KIRKLAND'S OF CRABTREE VALLEY MALL, RALEIGH, N.C.,
INC.
KIRKLAND'S OF OAK HOLLOW MALL, HIGH POINT, N.C., INC.
KIRKLAND'S OF FOX VALLEY MALL, CHICAGO, IL, INC.
KIRKLAND'S OF HAWTHORNE MALL, CHICAGO, IL, INC.
<PAGE> 99
93
KIRKLAND'S OF STRATFORD SQUARE, CHICAGO, IL, INC.
KIRKLAND'S OF ORLAND SQUARE, CHICAGO, IL, INC.
KIRKLAND'S OF COASTLAND MALL, NAPLES, FL, INC.
KIRKLAND'S OF EDGEWATER MALL, BILOXI, MS, INC.
KIRKLAND'S OF TOWN CENTER PLAZA, KANSAS CITY, KS,
INC.
KIRKLAND'S OF CASTLETON SQUARE, INDIANAPOLIS, IN.,
INC.
KIRKLAND'S OF CORDOVA MALL, PENSACOLA, FL, INC.
KIRKLAND'S OF UNIVERSITY PARK, SOUTH BEND, IN, INC.
KIRKLAND'S OF WESTGATE MALL, AMARILLO, TX, INC.
KIRKLAND'S OF WESTGATE MALL, SPARTANBURG, SC, INC.
KIRKLAND'S OF MERIDIAN MALL, LANSING, MI, INC.
KIRKLAND'S OF COTTONWOOD MALL, ALBUQUERQUE, NM,
INC.
KIRKLAND'S OF UNIVERSITY MALL, TAMPA, FL, INC.
ATTEST:
By: /s/ Robert Alderson By: /s/ Carl Kirkland
--------------------- ---------------------
Title: Vice President Title: President
and Secretary
<PAGE> 100
94
LEHMAN COMMERCIAL PAPER INC., as Arranger and as a Lender
By: /s/ Dennis J. Dee
------------------------------------------
Title: Authorized Signatory
THE FIRST NATIONAL BANK OF BOSTON,
as Administrative Agent and as a Lender
By: /s/ Daniel P. Corcoran
------------------------------------------
Title: Vice President
FIRST AMERICAN NATIONAL BANK
By: /s/ Mariah G. Lundberg
------------------------------------------
Title: Assistant Vice President
HIBERNIA NATIONAL BANK
By: /s/ Troy J. Villafarra
------------------------------------------
Title: Vice President
<PAGE> 101
95
MITSUI LEASING (U.S.A.) INC.
By: /s/ R. Wayne Hutton
------------------------------------------
Title: Vice President
PRIME INCOME TRUST
By: /s/ Rafael Scolari
------------------------------------------
Title: V.P. Portfolio Manager
CRESCENT/MACH I PARTNERS, L.P.
by: TCW Asset Management Company
Its Investment Manager
By: /s/ Justin L. Driscoll
------------------------------------------
Title: Vice President
UNION PLANTERS BANK OF
JACKSON, N.A.
By: /s/ Frank Hudacek
------------------------------------------
Title: Vice President
VOLUNTEER BANK OF
JACKSON, TENNESSEE
By: /s/ James N. Craft
------------------------------------------
Title: Executive Vice President
<PAGE> 102
SCHEDULE 1.1A TO CREDIT AGREEMENT
---------------------------------
SCHEDULE OF BORROWERS
<TABLE>
<CAPTION>
<S> <C>
Kirkland's, Inc.
101 Kirkland's of Carolina, Inc.
102 Kirkland's of Charlotte, Eastland Mall, Inc.
103 Kirkland's of Tennessee, Inc.
104 K. C. Corp. Inc.
107 Kirkland's of Greensboro, Four Seasons Mall, Inc.
109 Kirkland's of Fayetteville, Cross Creek Mall, Inc.
110 Kirkland's of Wilmington, Independence Mall, Inc.
111 Kirkland's III, Jackson-Metro Center, Inc.
114 Kirkland's of Memphis, Tennessee, Laurelwood Shopping Center, Inc.
115 Kirkland's of Ridgeland, Mississippi, Northpark Mall, Inc.
116 Kirkland's of Knoxville, East Towne Mall, Inc.
117 Kirkland's of Huntsville, Madison Square Mall, Inc.
118 Kirkland's of Valley View Mall, Roanoke, VA, Inc.
119 Kirkland's of Nashville, Hickory Hollow Mall, Inc.
120 Kirkland's of Birmingham, Riverchase Galleria, Inc.
122 Kirkland's of BriarCliffe Mall, Myrtle Beach, South Carolina, Inc.
123 Kirkland's of Pecanland Mall, Monroe, LA, Inc.
125 Kirkland's of Towne Center at Cobb, Atlanta, GA, Inc.
126 Kirkland's of Gwinnett Place, Atlanta, GA, Inc.
127 Kirkland's of Rivergate Mall, Nashville, TN, Inc.
128 Kirkland's of Peachtree Mall, Columbus, GA, Inc.
129 Kirkland's of Cumberland Mall, Atlanta, GA, Inc.
130 Kirkland's of Hamilton Place Mall, Chattanooga, TN, Inc.
131 Kirkland's of Houston Galleria, Houston, TX, Inc.
132 Kirkland's of Mall of Memphis, Memphis, TN, Inc.
134 Kirkland's of Woodland Hills Mall, Tulsa, OK, Inc.
135 Kirkland's of Dayton Mall, Dayton, OH, Inc.
136 Kirkland's of Oxmoor Center, Louisville, KY, Inc.
137 Kirkland's of South Square Mall, Durham, NC, Inc.
138 Kirkland's of Valley View Center, Dallas, TX, Inc.
139 Kirkland's of Chesterfield Towne Center, Richmond, VA, Inc.
140 Kirkland's of Park Plaza, Little Rock, AR, Inc.
141 Kirkland's of Montgomery Mall, Montgomery, AL, Inc.
142 Kirkland's of Southlake Mall, Atlanta, GA, Inc.
143 Kirkland's of Southpark Mall, Richmond, VA, Inc.
144 Kirkland's of Eastland Mall, Evansville, IN, Inc.
145 Kirkland's of Fayette Mall, Lexington, KY, Inc.
146 Kirkland's of Hickory Ridge Mall, Memphis, TN, Inc.
148 Kirkland's of Regency Square Mall, Jacksonville, FL, Inc.
149 Kirkland's of McCain Mall, Little Rock, AR, Inc.
150 Kirkland's of River Ridge Mall, Lynchburg, VA, Inc.
</TABLE>
<PAGE> 103
<TABLE>
<CAPTION>
<S> <C>
151 Kirkland's of Bel Air Mall, Mobile, AL, Inc.
152 Kirkland's of The Mall at Barnes Crossing, Tupelo, MS, Inc.
153 Kirkland's of Cortana Mall, Baton Rouge, LA, Inc.
154 Kirkland's of Bellevue Center, Nashville, TN, Inc.
155 Kirkland's of Tri-County Mall, Cincinnati, OH, Inc.
156 Kirkland's of The Mall of the Avenues, Jacksonville, FL, Inc.
157 Kirkland's of Eastwood Mall, Birmingham, AL, Inc.
158 Kirkland's of Lakeside Mall, New Orleans, LA, Inc.
159 Kirkland's of Carolina Place, Charlotte, N.C., Inc.
160 Kirkland's of Cary Village Mall, Raleigh, N.C., Inc.
161 Kirkland's of Cool Springs Galleria, Nashville, TN, Inc.
162 Kirkland's of Kenwood Towne Centre, Cincinnati, OH, Inc.
163 Kirkland's of St. Louis Galleria, St. Louis, MO, Inc.
164 Kirkland's of Wiregrass Commons Mall, Dothan, AL, Inc.
165 Kirkland's of Regency Mall, Richmond, VA, Inc.
166 Kirkland's of Florence, Florence, KY, Inc.
167 Kirkland's of Acadiana Mall, Lafayette, LA, Inc.
168 Kirkland's of Padre Staples Mall, Corpus Christi, TX, Inc.
169 Kirkland's of Belden Village, Canton, OH, Inc.
170 Kirkland's of West Oaks Mall, Houston, TX, Inc.
171 Kirkland's of Charleston Town Center, Charleston, W. VA, Inc.
172 Kirkland's of Crestwood Plaza, St. Louis, MO, Inc.
173 Kirkland's of White Marsh Mall, Baltimore, MD, Inc.
174 Kirkland's of Collin Creek Mall, Dallas, TX, Inc.
175 Kirkland's of Baybrook Mall, Houston, TX, Inc.
176 Kirkland's of Governor's Square Mall, Tallahassee, FL, Inc.
178 Kirkland's of Barton Creek Mall, Austin, TX, Inc.
179 Kirkland's of Highland Mall, Austin, TX, Inc.
180 Kirkland's of Battlefield Mall, Springfield, MO, Inc.
181 Kirkland's of Penn Square Mall, Oklahoma City, OK, Inc.
182 Kirkland's of Oak Park Mall, Kansas City, KS, Inc.
183 Kirkland's of Mall St. Vincent, Shreveport, LA, Inc.
184 Kirkland's of Owings Mills Mall, Baltimore, MD, Inc.
185 Kirkland's of Oakwood Center, New Orleans, LA, Inc.
186 Kirkland's of The Mall at Johnson City, Johnson City, TN, Inc.
187 Kirkland's of Glenbrook Mall, Ft. Wayne, IN, Inc.
188 Kirkland's of North Pointe Mall, Atlanta, GA, Inc.
189 Kirkland's of Northpark Mall, Joplin, MO, Inc.
190 Kirkland's of Orlando Fashion Square, Orlando, FL, Inc.
191 Kirkland's of The Mall at Fairfield Commons, Dayton, OH, Inc.
192 Kirkland's of St. Charles Towne Center, Waldorf, MD, Inc.
193 Kirkland's of Regency Mall, Florence, AL, Inc.
194 Kirkland's of South Plains Mall, Lubbock, TX, Inc.
195 Kirkland's of The Parks at Arlington, Ft. Worth, TX, Inc.
196 Kirkland's of Parma Town Mall, Cleveland, OH, Inc.
197 Kirkland's of St. Clair Square, St. Louis, MO, Inc.
198 Kirkland's of Turtle Creek Mall, Hattiesburg, MS, Inc.
</TABLE>
<PAGE> 104
<TABLE>
<CAPTION>
<S> <C>
199 Kirkland's of The Woodlands, Houston, TX, Inc.
200 Kirkland's of Brandon Town Center, Tampa, FL, Inc.
201 Kirkland's of Memorial City Mall, Houston, TX, Inc.
202 Kirkland's of University Mall, Tuscaloosa, AL, Inc.
203 Kirkland's of Santa Rosa Mall, Fort Walton, FL, Inc.
204 Kirkland's of Panama City Mall, Panama City, FL, Inc.
205 Kirkland's of Town East Mall, Mesquite, TX, Inc.
206 Kirkland's of Kentucky Oaks Mall, Paducah, KY, Inc.
207 Kirkland's of Crabtree Valley Mall, Raleigh, N.C., Inc.
208 Kirkland's of Oak Hollow Mall, High Point, N.C., Inc.
209 Kirkland's of Fox Valley Mall, Chicago, IL, Inc.
210 Kirkland's of Hawthorne Mall, Chicago, IL, Inc.
211 Kirkland's of Stratford Square, Chicago, IL, Inc.
212 Kirkland's of Orland Square, Chicago, IL, Inc.
214 Kirkland's of Coastland Mall, Naples, FL, Inc.
215 Kirkland's of Edgewater Mall, Biloxi, MS, Inc.
216 Kirkland's of Town Center Plaza, Kansas City, KS, Inc.
217 Kirkland's of Castleton Square, Indianapolis, IN., Inc.
218 Kirkland's of Cordova Mall, Pensacola, FL, Inc.
219 Kirkland's of University Park, South Bend, IN, Inc.
220 Kirkland's of Westgate Mall, Amarillo, TX, Inc.
221 Kirkland's of Westgate Mall, Spartanburg, SC, Inc.
222 Kirkland's of Meridian Mall, Lansing, MI, Inc.
223 Kirkland's of Cottonwood Mall, Albuquerque, NM, Inc.
224 Kirkland's of University Mall, Tampa, FL, Inc.
</TABLE>
<PAGE> 105
<TABLE>
<CAPTION>
Schedule 1.1B
COMMITMENTS; LENDING OFFICES AND ADDRESSES
REVOLVING CREDIT TRANCHE A TERM TRANCHE B TERM
LENDER AND ADDRESS COMMITMENT LOAN COMMITMENT LOAN COMMITMENT TOTAL COMMITMENT
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
LEHMAN COMMERCIAL PAPER INC. $19,000,000 $19,000,000
3 World Financial Center
14th Floor
New York, NY 10285
Tel: (212) 526-4059
Fax: (212) 528-0819
Contact: Dennis Dee
FIRST NATIONAL BANK OF BOSTON $5,000,000 $5,000,000 $10,000,000
100 Federal Street
MS 01-07-05
Boston, MA 02110
Tel: (617) 434-2251
Fax: (617) 434-8102
Contact: Dan Corcoran
PRIME INCOME TRUST $10,000,000 $10,000,000
2 World Trade Center
72nd Floor
New York, NY 10048
Tel: (212) 392-5686
Fax: (212) 392-5345
Contact: Raphael Scolari
HIBERNIA NATIONAL BANK $5,000,000 $5,000,000 $10,000,000
P.O. Box 61540
313 Carondelet Street
New Orleans, LA 70130
Tel: (504) 533-2738
Fax: (504) 533-5344
Contact: Troy Villafarra
</TABLE>
<PAGE> 106
<TABLE>
<CAPTION>
REVOLVING CREDIT TRANCHE A TERM TRANCHE B TERM
LENDER AND ADDRESS COMMITMENT LOAN COMMITMENT LOAN COMMITMENT TOTAL COMMITMENT
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FIRST AMERICAN NATIONAL BANK $2,500,000 $2,500,000 $5,000,000
6000 Poplar Avenue
Suite 300
Memphis, TN 38119
Tel: (901) 762-5672
Fax: (901) 762-5665
Contact: Mariah Lundberg
MITSAL LEASING (U.S.A.) INC. $2,500,000 $2,500,000 $5,000,000
200 Park Avenue
Suite 3214
New York, NY 10166
Tel: (212) 557-9444
Fax: (212) 490-1684
Contact: Wayne Hutton
UNION PLANTERS BANK OF JACKSON, $2,500,000 $2,500,000 $5,000,000
TENNESSEE
118 North Liberty
Jackson, TN 38301
Tel: (901) 442-9604
Fax: (901) 422-9661
Contact: Frank Hudacek
VOLUNTEER BANK OF JACKSON, $2,500,000 $2,500,000 $5,000,000
TENNESSEE
301 East Main Street
Jackson, TN 38301
Tel: (901) 422-9288
Fax: (901) 422-9396
Contact: Joanna Butler
</TABLE>
<PAGE> 107
<TABLE>
<CAPTION>
REVOLVING CREDIT TRANCHE A TERM TRANCHE B TERM
LENDER AND ADDRESS COMMITMENT LOAN COMMITMENT LOAN COMMITMENT TOTAL COMMITMENT
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
TCW ASSET MANAGEMENT COMPANY $3,000,000 $3,000,000
200 Park Avenue
Suite 2200
New York, NY 10166-0288
Tel: (212) 297-4000
Fax: (212) 297-4159
Contact: Justin Driscoll/Mark L. Gold
with copies to:
Crescent/Mach I Partners, L.P.
c/o State Street Bank & Trust Co.
Two International Place
Boston, MA 02110
Tel: (617) 664-5482
Fax: (617) 664-5366
Contact: Jackie Sweeny
wire payments should be sent to:
State Street Bank and Trust Co., Boston
ABA: 011-00-0028
A/C#: 9900-126-5
Re: Crescent/Mach I
Ref: (loan name)
Agent Bank I.D.#: 987
Institutional I.D.#: 93548
Tax I.D.#: 95-431-9954
Tel: (617) 664-5629
Contact: Steven Savage
</TABLE>
<PAGE> 108
SCHEDULE 1.1C TO CREDIT AGREEMENT
MORTGAGED PROPERTY
The Mortgaged Property was conveyed to Kirkland's Consolidated, Inc.
(predecessor by name change to Kirkland's, Inc.) pursuant to two (2) Warranty
Deeds. The Mortgaged Property consists of approximately 2.698 acres and is
generally known as 805 North Parkway, in Jackson, Tennessee. The Mortgaged
Property is more particularly described on the attached pages.
<PAGE> 109
Description of Mortgaged Property
[Description Illegible]
<PAGE> 110
Schedule 1.1D
TRANCHE A TERM LOAN AMORTIZATION SCHEDULE
<TABLE>
<CAPTION>
Quarter Principal Amount
- ------- ----------------
<S> <C>
September 30, 1996 $ 250,000.00
December 31, 1996 500,000.00
March 31, 1997 250,000.00
June 30, 1997 250,000.00
September 30, 1997 500,000.00
December 31, 1997 1,500,000.00
March 31, 1998 500,000.00
June 30, 1998 500,000.00
September 30, 1998 666,666.67
December 31, 1998 2,250,000.00
March 31, 1999 666,666.67
June 30, 1999 666,666.67
September 30, 1999 833,333.33
December 31, 1999 3,000,000.00
March 31, 2000 833,333.33
June 30, 2000 833,333.33
September 30, 2000 833,333.33
December 31, 2000 3,500,000.00
March 31, 2001 833,333,33
June 30, 2001 833,333.34
</TABLE>
<PAGE> 111
Schedule 1.1E
TRANCHE B TERM LOAN AMORTIZATION SCHEDULE
<TABLE>
<CAPTION>
Quarter Principal Amount
- ------- ----------------
<S> <C>
September 30, 1996 $78,250.00
December 31, 1996 78,250.00
March 31, 1997 78,250.00
June 30, 1997 78,250.00
September 30, 1997 78,250.00
December 31, 1997 78,250.00
March 31, 1998 78,250.00
June 30, 1998 78,250.00
September 30, 1998 78,250.00
December 31, 1998 78,250.00
March 31, 1999 78,250.00
June 30, 1999 78,250.00
September 30, 1999 78,250.00
December 31, 1999 78,250.00
March 31, 2000 78,250.00
June 30, 2000 78,250.00
September 30, 2000 78,250.00
December 31, 2000 78,250.00
March 31, 2001 78,250.00
June 30, 2001 78,250.00
September 30, 2001 4,955,833.33
December 31, 2001 15,567,500.00
March 31, 2002 4,955,833.33
June 30, 2002 4,955,833.34
</TABLE>
<PAGE> 112
SCHEDULE 4.4 TO CREDIT AGREEMENT
CONSENTS, AUTHORIZATIONS, FILINGS AND NOTICES
1. Lenders have requested that the Borrowers notify the lessor for each
Lease (as defined in the Recapitalization Agreement) of mall or shopping center
space of the proposed financing. Borrowers must obtain from at least 20% of
such lessors a waiver of the lessor's rights with respect to inventory,
fixtures, equipment, and personalty owned by the applicable Borrower and
located on the leased premises. The waivers are to be in a form satisfactory to
Arranger, the Borrowers, Parent, and the applicable lessor.
<PAGE> 113
SCHEDULE 4.19(b) TO CREDIT AGREEMENT
UCC FILING JURISDICTIONS
See attached.
<PAGE> 114
KIRKLAND AFFILIATES
<TABLE>
<CAPTION>
STORE COUNTY TO BE
NO. NAME OF ENTITY STATE TO BE SEARCHED SEARCHED/ZIP CODE
- ------------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
104 K. C. Corp, Inc. Tennessee Knox 37919
111 Kirkland's III, Jackson-Metro Center, Inc. Mississippi Hinds 39209
167 Kirkland's of Acadiana Mall, Lafayette, LA, Inc. Louisiana Lafayette 70503
178 Kirkland's of Barton Creek Mall, Austin, TX, Inc. Texas Travis 78746
180 Kirkland's of Battlefield Mall, Springfield, MO, Inc. Missouri Greene 65804
175 Kirkland's of Baybrook Mall, Houston, TX, Inc. Texas Galveston 77546
151 Kirkland's of Bel Air Mall, Mobile, AL, Inc. Alabama Mobile 36606
169 Kirkland's of Belden Village, Canton, OH, Inc. Ohio Stark 44718
154 Kirkland's of Bellevue Center, Nashville, TN, Inc. Tennessee Davidson 37221-1749
120 Kirkland's of Birmingham, Riverchase Galleria, Inc. Alabama Jefferson 35244
200 Kirkland's of Brandon Town Center, Tampa, FL, Inc. Florida Hillsborough 33511
122 Kirkland's of Briarcliffe Mall, Myrtle Beach, SC, Inc. South Carolina Horry 29572
101 Kirkland's of Carolina, Inc. North Carolina Mecklenburg 28211
159 Kirkland's of Carolina Place, Charlotte, NC, Inc. North Carolina Mecklenburg 28134
160 Kirkland's of Cary Village Mall, Raleigh, NC, Inc. North Carolina Wake 27511
</TABLE>
<PAGE> 115
KIRKLAND AFFILIATES
<TABLE>
<CAPTION>
STORE COUNTY TO BE
NO. NAME OF ENTITY STATE TO BE SEARCHED SEARCHED/ZIP CODE
- ------------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
217 Kirkland's of Castleton Square, Indianapolis, IN, Inc. Indiana Marion 46250
171 Kirkland's of Charleston Towne Center, Charleston, W.
VA, Inc. West Virginia Kanawha 25389
102 Kirkland's of Charlotte, Eastland Mall, Inc. North Carolina Mecklenburg 28212
121 Kirkland's of Chattanooga, Eastgate Center Mall, Inc. Tennessee Hamilton 37411
139 Kirkland's of Chesterfield Towne Center, Richmond, VA,
Inc. Virginia Chesterfield/Ind. City 23235
214 Kirkland's of Coastland Mall, Naples, FL, Inc. Florida Collier 33940
174 Kirkland's of Collin Creek Mall, Dallas, TX, Inc. Texas Collin 75075
161 Kirkland's of CoolSprings Galleria, Nashville, TN, Inc. Tennessee Williamson 37064
218 Kirkland's of Cordova Mall, Pensacola, FL, Inc.
153 Kirkland's of Cortana Mall, Baton Rouge, LA, Inc. Louisiana E. Baton Rouge 70816
223 Kirkland's of Cottonwood Mall, Albuquerque, NM, Inc.
207 Kirkland's of Crabtree Valley Mall, Raleigh, NC, Inc. North Carolina Wake 27612
172 Kirkland's of Crestwood Plaza, St. Louis, MO, Inc. Missouri St. Louis 63126
129 Kirkland's of Cumberland Mall, Atlanta, GA, Inc. Georgia Fulton 30339
</TABLE>
<PAGE> 116
KIRKLAND AFFILIATES
<TABLE>
<CAPTION>
STORE COUNTY TO BE
NO. NAME OF ENTITY STATE TO BE SEARCHED SEARCHED/ZIP CODE
- ------------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
135 Kirkland's of Dayton Mall, Dayton, OH, Inc. Ohio Montgomery 45459
144 Kirkland's of Eastland Mall, Evansville, IN, Inc. Indiana Vanderburgh 47715
157 Kirkland's of Eastwood Mall, Birmingham, AL, Inc. Alabama Jefferson 35210
215 Kirkland's of Edgewater Mall, Biloxi, MS, Inc. Mississippi Harrison 39531
145 Kirkland's of Fayette Mall, Lexington, KY, Inc. Kentucky Fayette 40503
109 Kirkland's of Fayetteville, Cross Creek Mall, Inc. North Carolina Cumberland 28303
166 Kirkland's of Florence, Florence, KY, Inc. Kentucky Boone 41042
209 Kirkland's of Fox Valley Mall, Chicago, IL, Inc. Illinois DuPage 60504
187 Kirkland's of Glenbrook Mall, Ft. Wayne, IN, Inc. Indiana Allen 46805
176 Kirkland's of Governor's Square, Tallahassee, FL, Inc. Florida Leon 32301
107 Kirkland's of Greensboro, Four Seasons Mall, Inc. North Carolina Guilford 27407
126 Kirkland's of Gwinnett Place, Duluth, GA, Inc. Georgia Gwinett 30136
130 Kirkland's of Hamilton Place Mall, Chattanooga, TN, Inc. Tennessee Hamilton 37421
210 Kirkland's of Hawthorne Mall, Chicago, IL, Inc. Illinois Lake 60061
146 Kirkland's of Hickory Ridge Mall, Memphis, TN, Inc. Tennessee Shelby 38115
179 Kirkland's of Highland Mall, Austin, TX, Inc. Texas Travis 78746
</TABLE>
<PAGE> 117
KIRKLAND AFFILIATES
-------------------------
<TABLE>
<CAPTION>
STORE STATE TO BE COUNTY TO BE
NO. NAME OF ENTITY SEARCHED SEARCHED/ZIP CODE
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------
131 Kirkland's of Houston Galleria, Houston, TX, Inc. Texas Harris 77056
117 Kirkland's of Huntsville, Madison Square Mall, Inc. Alabama Madison 35806
206 Kirkland's of Kentucky Oaks Mall, Paducah, KY, Inc. Kentucky McCracken 42001
162 Kirkland's of Kenwood Town Center, Cincinnati, OH, Inc. Ohio Hamilton 45236
116 Kirkland's of Knoxville, East Towne Mall, Inc. Tennessee Knox 37924
158 Kirkland's of Lakeside Mall, New Orleans, LA, Inc. Louisiana Jefferson 70002
132 Kirkland's of Mall of Memphis, Memphis, TN, Inc. Tennessee Shelby 38118
183 Kirkland's of Mall St. Vincent, Shreveport, LA, Inc. Louisiana Caddo 71104
149 Kirkland's of McCain Mall, Little Rock, AR, Inc. Arkansas Pulaski 72116
201 Kirkland's of Memorial City Mall, Houston, TX, Inc. Texas Harris 77024
114 Kirkland's of Memphis, TN, Laurelwood Shopping Center, Inc. Tennessee Shelby 38117
222 Kirkland's of Meridian Mall, Lansing, MI, Inc. Michigan Ingham 48864
141 Kirkland's of Montgomery Mall, Montgomery, AL, Inc. Alabama Montgomery 36116
119 Kirkland's of Nashville, Hickory Hollow Mall, Inc. Tennessee Davidson 37013
188 Kirkland's of North Pointe Mall, Atlanta, GA, Inc. Georgia Fulton 30202
</TABLE>
<PAGE> 118
KIRKLAND AFFILIATES
-------------------------
<TABLE>
<CAPTION>
STORE STATE TO BE COUNTY TO BE
NO. NAME OF ENTITY SEARCHED SEARCHED/ZIP CODE
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------
189 Kirkland's of Northpark Mall, Joplin, MO, Inc. Missouri Jasper 64801
208 Kirkland's of Oak Hollow Mall, High Point, NC, Inc. North Carolina Guilford 27262
182 Kirkland's of Oak Park Mall, Kansas City, KS, Inc. Kansas Johnson 66214
185 Kirkland's of Oakwood Center, New Orleans, LA, Inc. Louisiana Jefferson 70053
212 Kirkland's of Orland Square, Chicago, IL, Inc. Illinois Cook 60462
190 Kirkland's of Orlando Fashion Square, Orlando, FL, Inc. Florida Orange 32803
184 Kirkland's of Owings Mills Mall, Baltimore, MD, Inc. Maryland Baltimore 21117
136 Kirkland's of Oxmoor Center, Louisville, KY, Inc. Kentucky Jefferson 40222
168 Kirkland's of Padre Staples Mall, Corpus Christi, TX, Inc. Texas Nueces 78411
204 Kirkland's of Panama City Mall, Panama City, FL, Inc. Florida Bay 32405
140 Kirkland's of Park Plaza, Little Rock, AR, Inc. Arkansas Pulaski 72205
196 Kirkland's of Parma Town Mall, Cleveland, OH, Inc. Ohio Cuyahoga 44129
128 Kirkland's of Peachtree Mall, Columbus, GA, Inc. Georgia Muscogee 31909
123 Kirkland's of Pecanland Mall, Monroe, LA, Inc. Louisiana Ovachita 71203
181 Kirkland's of Penn Square Mall, Oklahoma City, OK, Inc. Oklahoma Oklahoma 73118
193 Kirkland's of Regency Mall, Florence, AL, Inc. Alabama Lauderdale 35630
</TABLE>
<PAGE> 119
KIRKLAND AFFILIATES
-------------------------
<TABLE>
<CAPTION>
STORE STATE TO BE COUNTY TO BE
NO. NAME OF ENTITY SEARCHED SEARCHED/ZIP CODE
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------
165 Kirkland's of Regency Mall, Richmond, VA, Inc. Virginia Henrico/Ind. City 23229
148 Kirkland's of Regency Square Mall, Jacksonville, FL, Inc. Florida Duval 32225
115 Kirkland's of Ridgeland, MS, Northpark Mall, Inc. Mississippi Madison 39157
150 Kirkland's of River Ridge Mall, Lynchburg, VA, Inc. Virginia Ind. City/Lynchburg 24502
127 Kirkland's of Rivergate Mall, Nashville, TN, Inc. Tennessee Davidson 37072
163 Kirkland's of Saint Louis Galleria, St. Louis, MO, Inc. Missouri St. Louis 63117
203 Kirkland's of Santa Rosa Mall, Fort Walton, FL, Inc. Florida Okaloosa 32569
194 Kirkland's of South Plains Mall, Lubbock, TX, Inc. Texas Lubbock 79414
137 Kirkland's of South Square Mall, Durham, NC, Inc. North Carolina Durham 27707
142 Kirkland's of Southlake Mall, Atlanta, GA, Inc. Georgia Clayton 30260
143 Kirkland's of Southpark Mall, Richmond, VA, Inc. Virginia Colonial City Heights 23834
192 Kirkland's of St. Charles Towne Center, Waldorf, MD Inc. Maryland Charles 20603
197 Kirkland's of St. Clair Square, St. Louis, MO, Inc. Missouri St. Clair 62208
211 Kirkland's of Stratford Square, Chicago, IL, Inc. Illinois DuPage 60108
103 Kirkland's of Tennessee, Inc. Tennessee Madison 38305
</TABLE>
<PAGE> 120
KIRKLAND AFFILIATES
------------------------
<TABLE>
<CAPTION>
STORE STATE TO BE COUNTY TO BE
NO. NAME OF ENTITY SEARCHED SEARCHED/ZIP CODE
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
152 Kirkland's of The Mall at Barnes Crossing, Tupelo, MS, Inc. Mississippi Lee 38801
191 Kirkland's of The Mall at Fairfield Commons, Dayton, OH, Inc. Ohio Montgomery 45401
186 Kirkland's of The Mall at Johnson City, Johnson City, TN, Inc. Tennessee Washington 37601
156 Kirkland's of The Mall of the Avenues, Jacksonville, FL, Inc. Florida Duval 32256
195 Kirkland's of The Parks at Arlington, Ft. Worth, TX, Inc. Texas Tarrant 76015
199 Kirkland's of The Woodlands, Houston, TX, Inc. Texas Montgomery 77380
216 Kirkland's of Town Center Plaza, Kansas City, KS, Inc. Kansas Johnson 66211
205 Kirkland's of Town East Mall, Mesquite, TX, Inc. Texas Dallas 75150
125 Kirkland's of Towne Center at Cobb, Kennesaw, GA, Inc. Georgia Cobb 30144
155 Kirkland's of Tri-County Mall, Cincinnati, OH, Inc. Ohio Hamilton 45246
198 Kirkland's of Turtle Creek Mall, Hattiesburg, MS, Inc. Mississippi Forrest 39402
224 Kirkland's of University Mall, Tampa, FL, Inc. Florida Hillsborough 33612
202 Kirkland's of University Mall, Tuscaloosa, AL, Inc. Alabama Tuscaloosa 35405
</TABLE>
-7-
<PAGE> 121
KIRKLAND AFFILIATES
-------------------------
<TABLE>
<CAPTION>
STORE STATE TO BE COUNTY TO BE
NO. NAME OF ENTITY SEARCHED SEARCHED/ZIP CODE
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------
219 Kirkland's of University Park South Bend, IN, Inc. Indiana St. Joseph 46545
138 Kirkland's of Valley View Center, Dallas, TX, Inc. Texas Dallas 75240
118 Kirkland's of Valley View Mall, Roanoke, VA, Inc. Virginia Roanoke/Ind. City 24012
221 Kirkland's of Westgate Mall, Amarillo, TX, Inc. Texas Potter 79160
220 Kirkland's of Westgate Mall, Spartanburg, SC, Inc. South Carolina Spartanburg 29301
170 Kirkland's of West Oaks Mall, Houston, TX, Inc. Texas Harris 77082
173 Kirkland's of White Marsh Mall, Baltimore, MD, Inc. Maryland Baltimore City/Ind. City 21236
110 Kirkland's of Wilmington, Independence Mall, Inc. North Carolina New Hanover 28403
164 Kirkland's of Wiregrass Commons Mall, Dothan, AL, Inc. Alabama Houston 36303
134 Kirkland's of Woodland Hills Mall, Tulsa, OK, Inc. Oklahoma Tulsa 74133
Kirkland's Inc. Tennessee Madison 38305
</TABLE>
-8-
<PAGE> 122
Schedule 4.19(c) to Credit Agreement
Mortgage Filing Jurisdiction
1. Mortgage filed in Madison County, Tennessee
<PAGE> 123
SCHEDULE 5.1(y)
PRIOR CREDIT FACILITIES
The following list sets forth the pay-off amounts for each of the Former
Lenders (as defined in the Recapitalization Agreement):
Former Lender Pay-Off Amount
- ------------- --------------
Bank of Sharon $ 254,518
First American Bank $3,473,828
First Citizens Bank $ 511,520
First State Bank of Kenton $ 932,838
First Union National Bank $2,187,484
National Canada Finance Corp. $ 950,706
Union Planters Bank $3,308,473
Volunteer Bank $2,164,537
<PAGE> 124
SCHEDULE 7.2(d) TO CREDIT AGREEMENT
EXISTING INDEBTEDNESS
1. Cash Register Loans. Master Promissory Note dated November 14,
1994 by and among First American National Bank and the Borrowers
referred to by store numbers 103, 104, 111, 115-118, 123,
125-132, 134-139, 142-144, 148-150, 154-157, 159, 162-166, 168,
170, 172-174, 176, 178-180, 182-185, 187, 188, 190-199 and 201,
in the original principal amount of $1,000,000. The obligations
evidenced by the Note are secured by a security interest in
certain cash register/sales recording equipment of the various
Borrowers as provided in those certain Security Agreements dated
November 14, 1994. The proceeds from this loan were used by the
various Borrowers to purchase such cash registers. Attached is a
schedule of the cash register loans.
2. Capital Leases. See attached.
3. Guarantees Obligations. Kirkland's, Inc. is the guarantor on
certain of the Leases (as defined in the Recapitalization
Agreement). The Individual Shareholders are also guarantors on
certain of the Leases.
<PAGE> 125
Cash Register Loans
[Chart Illegible]
<PAGE> 126
Capital Leases
[Illegible]
<PAGE> 127
SCHEDULE 7.3(f) TO CREDIT AGREEMENT
EXISTING LIENS
1. CASH REGISTER LOANS. The cash register loans identified in Schedule
7.2(d).
2. CAPITAL LEASES. The Capital Leases identified in Schedule 7.2(d).
<PAGE> 128
SCHEDULE 7.4(a) TO CREDIT AGREEMENT
EXISTING GUARANTEE OBLIGATIONS
SEE SCHEDULE 7.2(d).
<PAGE> 129
SCHEDULE 7.11 TO CREDIT AGREEMENT
TRANSACTIONS WITH AFFILIATES
1. Inventory is purchased in the ordinary course of business from CBK,
Ltd., which is owned by Robert Kirkland. Purchases approximated $3,270,000 and
$1,941,000 for the years ended December 31, 1995 and 1994, respectively.
2. The Borrowers rent aircraft from Kirkland Aviation, Inc., a corporation
owned by Carl Kirkland and Alderson Aviation, Inc., a corporation controlled by
Robert Alderson. The Borrowers paid to Kirkland Aviation, Inc. approximately
$59,000 and $35,000 for the years ended December 31, 1995 and 1994,
respectively.
3. Management Contracts between Borrowers and each of Carl Kirkland,
Robert Alderson and Bruce Moore, each dated June 12, 1996.
4. Consulting Agreement between Borrowers and Robert Kirkland, dated June
12, 1996.
5. The Borrowers agreed to pay Advent International Corporation ("Advent")
$1,000,000 in consideration for services which have been provided by Advent to
the Borrowers in connection with the structuring of the transactions
contemplated by the Recapitalization Agreement.
<PAGE> 130
- --------------------------------------------------------------------------
FIRST AMENDMENT TO
CREDIT AGREEMENT
Among
KIRKLAND HOLDINGS L.L.C.,
THE BORROWERS SPECIFIED HEREIN,
THE LENDERS PARTY HERETO,
THE FIRST NATIONAL BANK OF BOSTON,
AS ADMINISTRATIVE AGENT
and
LEHMAN COMMERCIAL PAPER, INC.,
AS ARRANGER
Dated as of December 5, 1996
- --------------------------------------------------------------------------
<PAGE> 131
FIRST AMENDMENT TO CREDIT AGREEMENT
This FIRST AMENDMENT TO CREDIT AGREEMENT is dated as of December 5, 1996 by
and among KIRKLAND'S HOLDINGS L.L.C., a Delaware limited liability company (the
"Parent"), the entities listed on Schedule 1.1A of that certain Credit Agreement
referred to below (the "Borrowers"), THE FIRST NATIONAL BANK OF BOSTON (the
"Administrative Agent"), LEHMAN COMMERCIAL PAPER, INC., (the "Arranger") and the
several banks and financial institutions which are Lenders under the Credit
Agreement (the "Lenders").
Recitals
The Parent, the Borrowers, the Administrative Agent, the Arranger and the
Lenders are party to a Credit Agreement dated as of June 12, 1996 (the "Credit
Agreement"). Capitalized terms used herein and not otherwise defined shall have
the meanings set forth in the Credit Agreement. The Parent and the Borrowers
desire to amend the Credit Agreement in certain respects to be relieved of
certain obligations to obtain landlord consents, to postpone the time for
delivery of key-man life insurance required thereunder and to provide for the
joinder of all Subsidiaries to the Credit Agreement as borrowers. The
Administrative Agent, the Arranger and the Lenders are willing to agree to such
amendments on the terms set forth herein.
NOW, THEREFORE, in consideration of the premises contained herein and for
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto agree as follows:
Section 1. Release of Requirement of Landlord Waivers. Section 6 of the
Credit Agreement is hereby amended by deleting Section 6.14 thereof in its
entirety.
Section 2. Key Man Life Insurance. Section 6 of the Credit Agreement is
hereby further amended by deleting Section 6.12 thereof in its entirety and
substituting therefor the following:
"6.12 Key Man Life Insurance. Obtain by December 31, 1996 and
maintain at all times thereafter key man life insurance
policies in the amount of $3,000,000 on each of the Management
Shareholders; and upon obtaining such policies, execute and
deliver all documents and take all actions in respect thereof
that would be required by subsection 5.1(b) if such policies
were in effect on the Closing Date."
<PAGE> 132
Section 3. Subsidiaries. Section 4 of the Credit Agreement is hereby
amended by deleting Section 4.15 in its entirety and substituting therefor the
following:
"4.15 Subsidiaries. The Borrowers listed on Schedule 1.1A, as
the same may be amended from time to time with consent of the
Administrative Agent, constitute all of the direct and indirect
Subsidiaries of the Parent."
Section 4. Joinder of Subsidiaries. Section 6.11(b) of the Credit
Agreement is hereby amended by deleting clause (iii)(A) thereof in its entirety
and substituting therefor the following:
"(A) to become a Borrower party hereto or, with consent of the
Administrative Agent, a party to a guaranty and a security
agreement, in each case pursuant to documentation which is in form
and substance satisfactory to the Administrative Agent, and"
Section 5. Change of Control. Section 8(k) of the Credit Agreement is
hereby amended by deleting clause (i) thereof and substituting therefor the
following:
"(i) The Parent and the Management Shareholders shall cease to
have the power (whether or not exercised) to elect a majority of
the directors of any of the Borrowers which is a direct Subsidiary
of the Parent, or the Designated Borrower shall cease to have the
power (whether or not exercised) to elect all of the directors of
any of the Borrowers which is an indirect Subsidiary of the
Parent,"
Section 6. Representations and Warranties: No Default. The Parent and
the Borrowers hereby confirm to the Bank the representations and warranties of
the Parent and the Borrowers set forth in Section 4 of the Credit Agreement (as
amended hereby) as of the date hereof, as if set forth herein in full. The
Parent and the Borrowers hereby certify that, after giving effect to this First
Amendment to Credit Agreement, no Default exists under the Credit Agreement.
Section 7. Miscellaneous The Parent and the Borrowers agree, jointly
and severally, to pay on demand all the Administrative Agent's reasonable
expenses in preparing, executing and delivering this First Amendment to Credit
Agreement, and all related instruments and documents, including, without
limitation, the reasonable fees and out-of-pocket expenses of the
Administrative Agent's special counsel, Goodwin, Procter &
2
<PAGE> 133
Hoar LLP. This First Amendment to Credit Agreement shall be considered a Loan
Document and shall be governed by and construed and enforced under the laws of
the State of New York.
IN WITNESS WHEREOF, the parties hereto have caused this First Amendment
to Credit Agreement to be duly executed as an instrument under seal as of the
date first written above.
KIRKLANDS HOLDINGS LLC
By: /s/ David Mussafer
------------------------------
Name: David Mussafer
Title:
KIRKLAND'S INC.
KIRKLAND'S OF CAROLINA, INC.
KIRKLAND'S OF CHARLOTTE, EASTLAND MALL, INC.
KIRKLAND'S OF TENNESSEE, INC.
K.C. CORP. INC.
KIRKLAND'S OF GREENSBORO, FOUR SEASONS MALL, INC.
KIRKLAND'S OF FAYETTEVILLE, CROSS CREEK MALL, INC.
KIRKLAND'S OF WILMINGTON, INDEPENDENCE MALL, INC.
KIRKLAND'S III, JACKSON-METRO CENTER, INC.
KIRKLAND'S OF MEMPHIS, TENNESSEE, LAURELWOOD SHOPPING CENTER, INC.
KIRKLAND'S OF RIDGELAND, MISSISSIPPI, NORTHPARK MALL, INC.
KIRKLAND'S KNOXVILLE, EAST TOWNE MALL, INC.
KIRKLAND'S HUNTSVILLE, MADISON SQUARE MALL, INC.
KIRKLAND'S OF VALLEY VIEW MALL, ROANOKE, VA, INC.
KIRKLAND'S OF BIRMINGHAM, RIVERCHASE GALLERIA, INC.
KIRKLAND'S NASHVILLE, HICKORY HOLLOW MALL, INC.
KIRKLAND'S OF BRIARCLIFFE MALL, MYRTLE BEACH, SOUTH CAROLINA, INC.
KIRKLAND'S OF PECANLAND MALL, MONROE, LA, INC.
KIRKLAND'S OF TOWNE CENTER AT COBB, ATLANTA GA, INC.
KIRKLAND'S OF GWINNETT PLACE, MONROE, LA, INC.
KIRKLAND'S OF RIVERGATE MALL, NASHVILLE, TN, INC.
KIRKLAND'S OF PEACHTREE MALL, COLUMBUS, GA, INC.
KIRKLAND'S OF CUMBERLAND MALL, ATLANTA, GA, INC.
3
<PAGE> 134
KIRKLAND'S OF HAMILTON PLACE MALL, CHATTANOOGA, TN, INC.
KIRKLAND'S OF HOUSTON GALLERIA, HOUSTON, TX, INC.
KIRKLAND'S OF MALL OF MEMPHIS, MEMPHIS, TN, INC.
KIRKLAND'S OF WOODLAND HILLS MALL, TULSA, OK, INC.
KIRKLAND'S OF DAYTON MALL, DAYTON, OH, INC.
KIRKLAND'S OF OXMOOR CENTER, LOUISVILLE, KY, INC.
KIRKLAND'S OF SOUTH SQUARE MALL, DURHAM, NC, INC.
KIRKLAND'S OF VALLEY VIEW CENTER, DALLAS, TX, INC.
KIRKLAND'S OF CHESTERFIELD TOWNE CENTER, RICHMOND, VA, INC.
KIRKLAND'S OF PARK PLAZA, LITTLE ROCK, AR, INC.
KIRKLAND'S OF MONTGOMERY MALL, MONTGOMERY, AL, INC.
KIRKLAND'S OF SOUTHLAKE MALL, ATLANTA, GA, INC.
KIRKLAND'S OF SOUTHPARK MALL, RICHMOND, VA, INC.
KIRKLAND'S OF EASTLAND MALL, EVANSVILLE, INC, INC.
KIRKLAND'S OF FAYETTE MALL, LEXINGTON, KY, INC.
KIRKLAND'S OF HICKORY RIDGE MALL, MEMPHIS, TN, INC.
KIRKLAND'S OF REGENCY SQUARE MALL, JACKSONVILLE, FL, INC.
KIRKLAND'S OF MCCAIN MALL, LITTLE ROCK, AR, INC.
KIRKLAND'S OF RIVER RIDGE MALL, LYNCHBURG, VA, INC.
KIRKLAND'S OF BEL AIR MALL, MOBILE, AL, INC.
KIRKLAND'S OF THE MALL AT BARNES CROSSING, TUPELO, MS, INC.
KIRKLAND'S OF CORTANA MALL, BATON ROUGE, LA, INC.
KIRKLAND'S OF BELLEVUE CENTER, NASHVILLE, TN, INC.
KIRKLAND'S OF TRI-COUNTY MALL, CINCINNATI, OH, INC.
KIRKLAND'S OF THE MALL OF THE AVENUES, JACKSONVILLE, FL, INC.
KIRKLAND'S OF EASTWOOD MALL, BIRMINGHAM, AL, INC.
KIRKLAND'S OF LAKESIDE MALL, NEW ORLEANS, LA, INC.
KIRKLAND'S OF CAROLINA PLACE, CHARLOTTE, N.C., INC.
KIRKLAND'S OF CARY VILLAGE MALL, RALEIGH, N.C., INC.
KIRKLAND'S OF COOL SPRINGS GALLERIA, NASHVILLE, TN, INC.
KIRKLAND'S OF KENWOOD TOWNE CENTRE, CINCINNATI, OH, INC.
KIRKLAND'S OF ST. LOUIS GALLERIA, ST. LOUIS, MO, INC.
KIRKLAND'S OF WIREGRASS COMMONS MALL, DOTHAN, AL, INC.
KIRKLAND'S OF REGENCY MALL, RICHMOND, VA, INC.
KIRKLAND'S OF FLORENCE, FLORENCE, KY, INC.
KIRKLAND'S OF ACADIANA MALL, LAFAYETTE, LA, INC.
KIRKLAND'S OF PADRE STAPLES MALL, CORPUS CHRISTI, TX, INC.
4
<PAGE> 135
KIRKLAND'S OF BELDEN VILLAGE, CANTON, OH, INC.
KIRKLAND'S OF WEST OAKS MALL, HOUSTON, TX, INC.
KIRKLAND'S OF CHARLESTON TOWN CENTER, CHARLESTON, W. VA, INC.
KIRKLAND'S OF CRESTWOOD PLAZA, ST. LOUIS, MO, INC.
KIRKLAND'S OF WHITE MARSH MALL, BALTIMORE, MD, INC.
KIRKLAND'S OF COLLIN CREEK MALL, DALLAS, TX, INC.
KIRKLAND'S OF BAYBROOK MALL, HOUSTON, TX, INC.
KIRKLAND'S OF GOVERNOR'S SQUARE MALL, TALLAHASSEE, FL, INC.
KIRKLAND'S OF BARTON CREEK MALL, AUSTIN, TX, INC.
KIRKLAND'S OF HIGHLAND MALL, AUSTIN, TX, INC.
KIRKLAND'S OF BATTLEFIELD MALL, SPRINGFIELD, MO, INC.
KIRKLAND'S OF PENN SQUARE MALL, OKLAHOMA CITY, OK, INC.
KIRKLAND'S OF MALL ST. VICENT, SHREVEPORT, LA, INC.
KIRKLAND'S OF OWINGS MILLS MALL, BALTIMORE, MD, INC.
KIRKLAND'S OF OAKWOOD CENTER, NEW ORLEANS, LA, INC.
KIRKLAND'S OF THE MALL AT JOHNSON CITY, JOHNSON CITY, TN, INC.
KIRKLAND'S OF GLENNBROOK MALL, FT. WAYNE, IN, INC.
KIRKLAND'S OF NORTH POINTE MALL, ATLANTA, GA, INC.
KIRKLAND'S OF NORTHPARK MALL, JOPLIN, MO, INC.
KIRKLAND'S OF ORLANDO FASHION SQUARE, ORLANDO, FL, INC.
KIRKLAND'S OF THE MALL AT FAIRFIELD COMMONS, DAYTON, OH, INC.
KIRKLAND'S OF ST. CHARLES TOWNE CENTER, WALDORF, MD, INC.
KIRKLAND'S OF REGENCY MALL, FLORENCE, AL, INC.
KIRKLAND'S OF SOUTH PLAINS MALL, LUBBOCK, TX, INC.
KIRKLAND'S OF THE PARKS AT ARLINGTON, FT. WORTH, TX, INC.
KIRKLAND'S OF PARMA TOWN MALL, CLEVELAND, OH, INC.
KIRKLAND'S OF ST. CLAIR SQUARE, ST. LOUIS, MO, INC.
KIRKLAND'S OF TURTLE CREEK MALL, HATTIESBURG, MS, INC.
KIRKLAND'S OF THE WOODLANDS, HOUSTON, TX, INC.
KIRKLAND'S OF BRANDON TOWN CENTER, TAMPA, FL, INC.
KIRKLAND'S OF MEMORIAL CITY MALL, HOUSTON, TX, INC.
KIRKLAND'S OF UNIVERSITY MALL, TUSCALOOSA, AL, INC.
KIRKLAND'S OF SANTA ROSA MALL, FORT WALTON, FL, INC.
KIRKLAND'S OF PANAMA CITY MALL, PANAMA CITY, FL, INC.
KIRKLAND'S OF TOWN EAST MALL, MESQUITE, TX, INC.
KIRKLAND'S OF KENTUCKY OAKS MALL, PADUCAH, KY, INC.
5
<PAGE> 136
KIRKLAND'S OF CRABTREE VALLEY MALL, RALEIGH, N.C., INC.
KIRKLAND'S OF OAK HOLLOW MALL, HIGH POINT, N.C., INC.
KIRKLAND'S OF FOX VALLEY MALL, CHICAGO, IL, INC.
KIRKLAND'S OF HAWTHRONE MALL, CHICAGO, IL, INC.
KIRKLAND'S OF STRAFTFORD SQUARE, CHICAGO, IL, INC.
KIRKLAND'S OF ORLAND SQUARE, CHICAGO, IL, INC.
KIRKLAND'S OF COASTLAND MALL, NAPLES, FL, INC.
KIRKLAND'S OF EDGEWATER MALL, BILOXI, MS, INC.
KIRKLAND'S OF TOWN CENTER PLAZA, KANSAS CITY, KS, INC.
KIRKLAND'S OF CASTLETON SQUARE, INDIANAPOLIS, IN, INC.
KIRKLAND'S OF CORDOVA MALL, PENSACOLA, FL, INC.
KIRKLAND'S OF UNIVERSITY PARK, SOUTH BEND IN, INC.
KIRKLAND'S OF WESTGATE MALL, AMARILLO, TX, INC.
KIRKLAND'S OF WESTGATE MALL, SPARTANBURG, SC, INC.
KIRKLAND'S OF MERIDIAN MALL, LANSING, MI, INC.
KIRKLAND'S OF COTTONWOOD MALL, ALBUQUERQUE, NM, INC.
KIRKLAND'S OF UNIVERSITY MALL, TAMPA, FL, INC.
ATTEST:
By:/s/ Robert E. Alderson By:/s/ Carl Kirkland
------------------------ -----------------------
Name: Name:
Title: Title:
LEHMAN COMMERCIAL PAPER INC.
By:/s/ Michelle Swanson
------------------------
Name: Michelle Swanson
Title: Authorized Signatory
6
<PAGE> 137
THE FIRST NATIONAL BANK OF BOSTON
By: /s/ Daniel P. Corcoran
______________________________
Name: Daniel P. Corcoran, Jr.
Title: Vice President
FIRST AMERICAN NATIONAL BANK
By: /s/ Mariah G. Lunderberg
______________________________
Name: Mariah G. Lunderberg
Title: Assistant Vice President
HIBERNIA NATIONAL BANK
By: /s/ Troy J. Villafarra
______________________________
Name: Troy J. Villafarra
Title: Vice President
MITSUI LEASING (U.S.A.) INC.
By: /s/ R. Wayne Hutton
______________________________
Name: R. Wayne Hutton
Title: Senior Vice President
PRIME INCOME TRUST
By: ______________________________
Name:
Title:
7
<PAGE> 138
CRESCENT/MACH I PARTNERS, L.P.
By: TCW Asset Management Company
Its Investment Manager
By: _______________________________
Name:
Title:
UNION PLANTERS BANK OF JACKSON, N.A.
By: /s/ Frank Hudacek
______________________________
Name: Frank Hudacek
Title: Vice President
VOLUNTEER BANK OF JACKSON, TENNESSEE
By: /s/ James N. Craft
______________________________
Name: James N. Craft
Title: Executive Vice President
VAN KAMPEN AMERICAN CAPITAL PRIME
RATE INCOME TRUST
By: /s/ Jeffrey W. Maillet
______________________________
Name: Jeffrey W. Maillet
Title: Senior Vice President & Director
143110.d1
11/12/96
8
<PAGE> 139
- -------------------------------------------------------------------------------
SECOND AMENDMENT TO
CREDIT AGREEMENT
Dated as of May 2, 1997
Among
Kirkland Holdings L.L.C.
and
The Borrowers Specified Herein,
the Borrowers
and
The Several Lenders Party Hereto,
the Lenders
and
BankBoston, N.A., as Administrative Agent,
the Agent
- -------------------------------------------------------------------------------
<PAGE> 140
SECOND AMENDMENT TO CREDIT AGREEMENT
This SECOND AMENDMENT TO CREDIT AGREEMENT is entered into as of May 2,
1997, by and among KIRKLAND HOLDINGS L.L.C., a Delaware limited liability
company (the "Parent"), the Borrowers specified herein (the "Borrowers"), the
Lenders party hereto (the "Lenders") and BANKBOSTON, N.A. (f/k/a The First
National Bank of Boston), as Administrative Agent (the "Agent") under the
Credit Agreement referred to below.
Recitals
The Parent, the Borrowers, the Lenders and the Agent are parties to a
Credit Agreement dated as of June 12, 1996 (as amended the "Credit Agreement").
The Parent and the Borrowers have requested that the Lenders (a) waive the
prepayment of the Term Loans required to be made under Section 2.12(c) of the
Credit Agreement from Excess Cash Flow for their fiscal year ended December 31,
1996, (b) waive the Borrower's premature payment of certain Management Fees and
(c) provide additional availability under the revolving credit facility during
the period from September 5, through December 5, 1997. The Lenders are willing
to amend the Credit Agreement to provide for such waiver and additional
revolving credit availability on the terms and conditions set forth herein. All
capitalized terms used herein and not otherwise defined shall have the meanings
set forth in the Credit Agreement.
NOW, THEREFORE, subject to the satisfaction of the conditions to
effectiveness specified in Section 5, the Parent, the Borrowers, the Lenders
and the Agent hereby agree as follows:
Section 1. Waiver of Excess Cash Flow Prepayment. The Lenders and the
Agent hereby waive the prepayment required under Section 2.12(c) of the Credit
Agreement with respect to the Excess Cash Flow for the fiscal year ending
December 31, 1996; provided, however, that this waiver shall not be deemed to
modify or amend any provisions of said Section 2.12(c) with respect to required
prepayments from Excess Cash Flow for future fiscal years.
Section 2. Waiver of Premature Payment of Management Fees. The Lenders
and the Agent hereby waive the Event of Default outstanding under the Credit
Agreement resulting from the Borrowers' payment of Management Fees to the
Management Shareholders prior to delivery to the Lenders of the Borrowers'
financial statements for their fiscal year ending December 31, 1996. The
Lenders and the Agent hereby consent to the payment to Robert Kirkland, in
connection with amendment of the Consulting Agreement, of an amount not be
exceed $8,500.
Section 3. Amendment of Schedules. Schedule 1.1A to the Credit
Agreement is hereby amended by adding at the end of said Schedule the
information contained on the Amendment to Schedule 1.1A attached hereto.
Schedule 1.1B to the Credit Agreement is hereby deleted in its entirety and the
new Schedule 1.1B attached hereto is substituted therefor.
<PAGE> 141
Section 4. Amendment and Extension Fee. The Borrowers, jointly and
severally, agree to pay to the Agent, for the account of the Lenders in
proportion to the (a) Revolving Credit Commitments of the Revolving Credit
Lenders and (b) the principal amount of the Obligations owing to each Term Loan
Lender, an amendment and extension fee of $76,000, which shall be due and
payable and deemed earned in full by the Lenders upon execution and delivery of
this Second Amendment. The Lenders hereby agree that the amendment and
extension fee shall be deducted from Combined Interest Expense for purposes of
determining the Combined Management Fee Ratio for the Borrower's current fiscal
year.
Section 5. Effectiveness; Conditions to Effectiveness. This Second
Amendment to Credit Agreement shall become effective as of the date hereof upon
execution hereof by the Parent, the Borrowers, the Lenders and the Agent and
satisfaction of the following conditions:
(a) Officers' Certificate. The Borrowers shall have delivered to
the Agent an Officers' Certificate in the form of Exhibit A hereto.
(b) Opinion of Counsel. The Borrowers shall have delivered to
the Agent an opinion of Baker, Donelson, Bearman & Caldwell, counsel to
the Borrowers, and an opinion from Pepper, Hamilton & Scheetz, counsel to
Parent and special counsel to the Borrowers, in form and substance
satisfactory to the Bank.
(c) Fee. The Borrowers shall have paid the fee referred to in
Section 4 above.
(d) Acknowledgment of Subordination. Carl Kirkland, Bruce
Moore, Robert Alderson, and Robert Kirkland shall have executed and
delivered to the Agent the Acknowledgments of Subordination in the form of
Exhibit B hereto.
Section 6. Representations and Warranties; No Default. The Borrowers
hereby confirm to the Agent and the Lenders, the representations and warranties
of the Borrowers set forth in Section 4 of the Credit Agreement (as amended
hereby) as of the date hereof, as if set forth herein in full. The Borrowers
hereby certify that, after giving effect hereto, no Default exists under the
Credit Agreement.
Section 7. Miscellaneous. The Borrowers agree to pay on demand all the
Agent's reasonable expenses in preparing, executing and delivering this Second
Amendment to Credit Agreement, and all related instruments and documents,
including, without limitation, the reasonable fees and out-of-pocket expenses
of the Agent's special counsel, Goodwin, Procter & Hoar LLP. This Second
Amendment to Credit Agreement shall be a Loan Document and shall be governed by
and construed and enforced under the laws of the State of New York.
2
<PAGE> 142
IN WITNESS WHEREOF, the Parent, the Borrowers, the Lenders and the Agent
have caused this Second Amendment to Credit Agreement to be executed by their
duly authorized officers as of the date first set forth above.
KIRKLAND HOLDINGS L.L.C.
By: /s/ David Mussafer
------------------------------
Name: David Mussafer
Title: President
THE BORROWERS
KIRKLAND'S, INC.
KIRKLAND'S OF CAROLINA, INC.
KIRKLAND'S OF CHARLOTTE, EASTLAND MALL, INC.
KIRKLAND'S OF TENNESSEE, INC.
K.C. CORP. INC.
KIRKLAND'S OF GREENSBORO, FOUR SEASONS MALL, INC.
KIRKLAND'S OF FAYETTEVILLE, CROSS CREEK MALL, INC.
KIRKLAND'S OF WILMINGTON, INDEPENDENCE MALL, INC.
KIRKLAND'S III, JACKSON-METRO CENTER, INC.
KIRKLAND'S OF MEMPHIS, TENNESSEE, LAURELWOOD
SHOPPING CENTER, INC.
KIRKLAND'S OF RIDGELAND, MISSISSIPPI, NORTHPARK
MALL, INC.
KIRKLAND'S OF KNOXVILLE, EAST TOWNE MALL, INC.
KIRKLAND'S OF HUNTSVILLE, MADISON SQUARE MALL, INC.
KIRKLAND'S OF VALLEY VIEW MALL, ROANOKE, VA, INC.
KIRKLAND'S OF NASHVILLE, HICKORY HOLLOW MALL, INC.
KIRKLAND'S OF BIRMINGHAM, RIVERCHASE GALLERIA, INC.
KIRKLAND'S OF BRIARCLIFFE MALL, MYRTLE BEACH,
SOUTH CAROLINA, INC.
KIRKLAND'S OF PEACANLAND MALL, MONROE, LA. INC.
KIRKLAND'S OF TOWNE CENTER AT COBB, ATLANTA, GA,
INC.
KIRKLAND'S OF GWINNETT PLACE, ATLANTA, GA, INC.
KIRKLAND'S OF RIVERGATE MALL, NASHVILLE, TN, INC.
KIRKLAND'S OF PEACHTREE MALL, COLUMBUS, GA, INC.
KIRKLAND'S OF CUMBERLAND MALL, ATLANTA, GA, INC.
KIRKLAND'S OF HAMILTON PLACE MALL, CHATTANOOGA,
TN, INC.
KIRKLAND'S OF HOUSTON GALLERIA, HOUSTON, TX, INC.
KIRKLAND'S OF MALL OF MEMPHIS, MEMPHIS, TN, INC.
3
<PAGE> 143
KIRKLAND'S OF WOODLAND HILLS MALL, TULSA, OK, INC.
KIRKLAND'S OF DAYTON MALL, DAYTON, OH, INC.
KIRKLAND'S OF OXMOOR CENTER, LOUISVILLE, KY, INC.
KIRKLAND'S OF SOUTH SQUARE MALL, DURHAM, NC, INC.
KIRKLAND'S OF VALLEY VIEW CENTER, DALLAS, TX, INC.
KIRKLAND'S OF CHESTERFIELD TOWNE CENTER, RICHMOND, VA, INC.
KIRKLAND'S OF PARK PLAZA, LITTLE ROCK, AR, INC.
KIRKLAND'S OF MONTGOMERY MALL, MONTGOMERY, AL, INC.
KIRKLAND'S OF SOUTHLAKE MALL, ATLANTA, GA, INC.
KIRKLAND'S OF SOUTHPARK MALL, RICHMOND, VA, INC.
KIRKLAND'S OF EASTLAND MALL, EVANSVILLE, IN, INC.
KIRKLAND'S OF FAYETTE MALL, LEXINGTON, KY, INC.
KIRKLAND'S OF HICKORY RIDGE MALL, MEMPHIS, TN, INC.
KIRKLAND'S OF REGENCY SQUARE MALL, JACKSONVILLE, FL, INC.
KIRKLAND'S OF MCCAIN MALL, LITTLE ROCK, AR, INC.
KIRKLAND'S OF RIVER RIDGE MALL, LYNCHBURG, VA, INC.
KIRKLAND'S OF BEL AIR MALL, MOBILE, AL, INC.
KIRKLAND'S OF THE MALL AT BARNES CROSSING, TUPELO, MS, INC.
KIRKLAND'S OF CORTANA MALL, BATON ROUGE, LA, INC.
KIRKLAND'S OF BELLEVUE CENTER, NASHVILLE, TN, INC.
KIRKLAND'S OF TRI-COUNTY MALL, CINCINNATI, OH, INC.
KIRKLAND'S OF THE MALL OF THE AVENUES, JACKSONVILLE, FL, INC.
KIRKLAND'S OF EASTWOOD MALL, BIRMINGHAM, AL, INC.
KIRKLAND'S OF LAKESIDE MALL, NEW ORLEANS, LA, INC.
KIRKLAND'S OF CAROLINA PLACE, CHARLOTTE, N.C., INC.
KIRKLAND'S OF CARY VILLAGE MALL, RALEIGH, N.C., INC.
KIRKLAND'S OF COOL SPRINGS GALLERIA, NASHVILLE, TN, INC.
KIRKLAND'S OF KENWOOD TOWNE CENTRE, CINCINNATI, OH, INC.
KIRKLAND'S OF ST. LOUIS GALLERIA, ST. LOUIS, MO, INC.
KIRKLAND'S OF WIREGRASS COMMONS MALL, DOTHAN, AL, INC.
KIRKLAND'S OF REGENCY MALL, RICHMOND, VA, INC.
KIRKLAND'S OF FLORENCE, FLORENCE, KY, INC.
KIRKLAND'S OF ACADIANA MALL, LAFAYETTE, LA, INC.
KIRKLAND'S OF PADRE STAPLES MALL, CORPUS CHRISTI, TX, INC.
KIRKLAND'S OF BELDEN VILLAGE, CANTON, OH, INC.
4
<PAGE> 144
KIRKLAND'S OF WEST OAKS MALL, HOUSTON, TX, INC.
KIRKLAND'S OF CHARLESTON TOWN CENTER, CHARLESTON, W. VA, INC.
KIRKLAND'S OF CRESTWOOD PLAZA, ST. LOUIS, MO, INC.
KIRKLAND'S OF WHITE MARSH MALL, BALTIMORE, MD, INC.
KIRKLAND'S OF COLLIN CREEK MALL, DALLAS, TX, INC.
KIRKLAND'S OF BAYBROOK MALL, HOUSTON, TX, INC.
KIRKLAND'S OF GOVERNOR'S SQUARE MALL, TALLAHASSEE, FL, INC.
KIRKLAND'S OF BARTON CREEK MALL, AUSTIN, TX, INC.
KIRKLAND'S OF HIGHLAND MALL, AUSTIN, TX, INC.
KIRKLAND'S OF BATTLEFIELD MALL, SPRINGFIELD, MO, INC.
KIRKLAND'S OF PENN SQUARE MALL, OKLAHOMA CITY, OK, INC.
KIRKLAND'S OF OAK PARK MALL, KANSAS CITY, KS, INC.
KIRKLAND'S OF MALL ST. VINCENT, SHREVEPORT, LA, INC.
KIRKLAND'S OF OWINGS MILLS MALL, BALTIMORE, MD, INC.
KIRKLAND'S OF OAKWOOD CENTER, NEW ORLEANS, LA, INC.
KIRKLAND'S OF THE MALL AT JOHNSON CITY, JOHNSON CITY, TN, INC.
KIRKLAND'S OF GLENBROOK MALL, FT. WAYNE, IN, INC.
KIRKLAND'S OF NORTH POINTE MALL, ATLANTA, GA, INC.
KIRKLAND'S OF NORTHPARK MALL, JOPLIN, MO, INC.
KIRKLAND'S OF ORLANDO FASHION SQUARE, ORLANDO, FL, INC.
KIRKLAND'S OF THE MALL AT FAIRFIELD COMMONS, DAYTON, OH, INC.
KIRKLAND'S OF ST. CHARLES TOWNE CENTER, WALDORF, MD, INC.
KIRKLAND'S OF REGENCY MALL, FLORENCE, AL, INC.
KIRKLAND'S OF SOUTH PLAINS MALL, LUBBOCK, TX, INC.
KIRKLAND'S OF THE PARKS AT ARLINGTON, FT. WORTH, TX, INC.
KIRKLAND'S OF PARMA TOWN MALL, CLEVELAND, OH, INC.
KIRKLAND'S OF ST. CLAIR SQUARE, ST. LOUIS, MO, INC.
KIRKLAND'S OF TURTLE CREEK MALL, HATTIESBURG, MS, INC.
KIRKLAND'S OF THE WOODLANDS, HOUSTON, TX, INC.
KIRKLAND'S OF BRANDON TOWN CENTER, TAMPA, FL, INC.
KIRKLAND'S OF MEMORIAL CITY MALL, HOUSTON, TX, INC.
KIRKLAND'S OF UNIVERSITY MALL, TUSCALOOSA, AL, INC.
KIRKLAND'S OF SANTA ROSA MALL, FORT WALTON, FL, INC.
5
<PAGE> 145
KIRKLAND'S OF PANAMA CITY MALL, PANAMA CITY, FL, INC.
KIRKLAND'S OF TOWN EAST MALL, MESQUITE, TX, INC.
KIRKLAND'S OF KENTUCKY OAKS MALL, PADUCAH, KY, INC.
KIRKLAND'S OF CRABTREE VALLEY MALL, RALEIGH, N.C., INC.
KIRKLAND'S OF OAK HOLLOW MALL, HIGH POINT, N.C., INC.
KIRKLAND'S OF FOX VALLEY MALL, CHICAGO, IL, INC.
KIRKLAND'S OF HAWTHORNE MALL, CHICAGO, IL, INC.
KIRKLAND'S OF STRATFORD SQUARE, CHICAGO, IL, INC.
KIRKLAND'S OF ORLAND SQUARE, CHICAGO, IL, INC.
KIRKLAND'S OF COASTLAND MALL, NAPLES, FL, INC.
KIRKLAND'S OF EDGEWATER MALL, BILOXI, MS, INC.
KIRKLAND'S OF TOWN CENTER PLAZA, KANSAS CITY, KS, INC.
KIRKLAND'S OF CASTLETON SQUARE, INDIANAPOLIS, IN, INC.
KIRKLAND'S OF CORDOVA MALL, PENSACOLA, FL, INC.
KIRKLAND'S OF UNIVERSITY PARK, SOUTH BEND, IN, INC.
KIRKLAND'S OF WESTGATE MALL, AMARILLO, TX, INC.
KIRKLAND'S OF WESTGATE MALL, SPARTANBURG, SC, INC.
KIRKLAND'S OF MERIDIAN MALL, LANSING, MI, INC.
KIRKLAND'S OF COTTONWOOD MALL, ALBUQUERQUE, NM, INC.
KIRKLAND'S OF UNIVERSITY MALL, TAMPA, FL, INC.
KIRKLAND'S OF NORTHWEST ARKANSAS MALL, FAYETTEVILLE, AR, INC.
KIRKLAND'S OF INDIAN RIVER MALL, VERO BEACH, FL, INC.
KIRKLAND'S OF TYRONE SQUARE, ST. PETERSBURG, FL, INC.
KIRKLAND'S OF NORTHGATE MALL, CINCINNATI, OH, INC.
KIRKLAND'S OF WEST OAKS MALL, ORLANDO, FL, INC.
KIRKLAND'S OF PARK CITY CENTER, LANCASTER, PA, INC.
KIRKLAND'S OF PERIMETER MALL, ATLANTA, GA, INC.
KIRKLAND'S OF WOLFCHASE GALLERIA, MEMPHIS, TN, INC.
KIRKLAND'S OF NORTHPARK MALL, DAVENPORT, IA, INC.
KIRKLAND'S OF LINDALE MALL, CEDAR RAPIDS, IA, INC.
KIRKLAND'S OF CORONADO MALL, ALBUQUERQUE, NM, INC.
KIRKLAND'S OF WILLOWBROOK MALL, HOUSTON, TX, INC.
By: /s/ Robert E. Alderson
- --------------------------
Name: Robert E. Alderson
Title: Vice President/Secretary
6
<PAGE> 146
BANKBOSTON, N.A.,
as Administrative Agent and as a Lender
By: /s/ Daniel P. Corcoran, Jr.
-----------------------------------
Name: Daniel P. Corcoran, Jr.
Title: Director
LEHMAN COMMERCIAL PAPER INC.
By: /s/ Michele Swanson
-----------------------------------
Name: Michele Swanson
Title: Authorized Signatory
HIBERNIA NATIONAL BANK
By: /s/ Troy J. Villafarra
-----------------------------------
Name: Troy J. Villafarra
Title: Vice President
FIRST AMERICAN NATIONAL BANK
By: /s/ Mariah G. Lundberg
-----------------------------------
Name: Mariah G. Lundberg
Title: Assistant Vice President
MITSUI LEASING (U.S.A.) INC.
By: /s/ R. Wayne Hutton
-----------------------------------
Name: R. Wayne Hutton
Title: Senior Vice President
UNION PLANTERS BANK OF JACKSON, TENNESSEE
By: /s/ Frank Hudacek, VP
-----------------------------------
Name: Frank Hudacek
Title: Vice President
7
<PAGE> 147
VOLUNTEER BANK OF JACKSON, TENNESSEE
By: /s/ James N. Craft
--------------------------------------
Name: James N. Craft
Title: Executive Vice President
CRESCENT/MACH I PARTNERS, L.P.
By: TCW Asset Management Company
Its Investment Manager
By: Justin Driscoll
--------------------------------------
Name: Justin Driscoll
Title: Vice President
INDOSUEZ CAPITAL FUNDING II, LTD.
By Indosuez Capital as Portfolio Advisor
By: /s/ Francoise Berthelot
--------------------------------------
Name: FRANCOISE BERTHELOT
Title: VICE PRESIDENT
VAN KAMPEN AMERICAN CAPITAL PRIME RATE INCOME
TRUST
By: [Illegible Signature]
--------------------------------------
Name:
Title:
The ING CAPITAL Senior Secured High
Income Fund, L.P.
By: ING CAPITAL ADVISORS, INC. AS INVESTMENT ADVISOR
By: /s/ Michael P. McAdams
--------------------------------------
Name: MICHAEL P. MCADAMS
Title: MANAGING DIRECTOR
8
<PAGE> 148
Amendment of Schedule 1.1A
1. Additional Borrowers. The following additional Borrowers have been
added to the Credit Agreement:
Kirkland's of Northwest Arkansas Mall, Fayetteville, AR, Inc.
Kirkland's of Indian River Mall, Vero Beach, FL, Inc.
Kirkland's of Tyrone Square, St. Petersburg, FL, Inc.
Kirkland's of Northgate Mall, Cincinnati, OH, Inc.
Kirkland's of West Oaks Mall, Orlando, FL, Inc.
Kirkland's of Park City Center, Lancaster, PA, Inc.
Kirkland's of Perimeter Mall, Atlanta, GA, Inc.
Kirkland's of Wolfchase Galleria, Memphis, TN, Inc.
Kirkland's of Northpark Mall, Davenport, IA, Inc.
Kirkland's of Lindale Mall, Cedar Rapids, IA, Inc.
Kirkland's of Coronado Mall, Albuquerque, NM, Inc.
Kirkland's of Willowbrook Mall, Houston TX, Inc.
2. Additional Subsidiaries. The following Persons are additional
Subsidiaries of the Parent, which have been formed in anticipation of the
opening of new stores but which have not yet commenced any operations. Section
4.14 of the Credit Agreement shall be modified to include reference to these
Persons as additional Subsidiaries of the Parent:
Kirkland's of Honey Creek Mall, Terre Haute, IN, Inc.
Kirkland's of Southpark Mall, Moline, IL, Inc.
Kirkland's of Valley West Mall, Des Moines, IA, Inc.
Kirkland's of Greenbrier Mall, Chesapeake, VA, Inc.
Kirkland's of Cielo Vista Mall, El Paso, TX, Inc.
Kirkland's of Tuttle Crossing, Columbus, OH, Inc.
Kirkland's of Leigh Mall, Columbus, MS, Inc.
Kirkland's of North Shore Square, Slidell, LA, Inc.
Kirkland's of Post Oak Mall, College Station, TX, Inc.
Kirkland's of Bonita Lakes Mall, Meridian, MS, Inc.
Kirkland's of Huntington Mall, Huntington, WV, Inc.
Kirkland's of Mall of Louisiana, Baton Rouge, LA, Inc.
Kirkland's of Mill Creek Mall, Erie, PA, Inc.
Kirkland's of Volusia Mall, Daytona Beach, FL, Inc.
Kirkland's of Gateway Mall, Lincoln, NB, Inc.
9
<PAGE> 149
Schedule 1.1B
Commitments; Lending Offices and Addresses
<TABLE>
<CAPTION>
REVOLVING CREDIT TRANCHE A TERM TRANCHE B TERM
LENDER AND ADDRESS COMMITMENT LOAN COMMITMENT(1) LOAN COMMITMENT(2) TOTAL COMMITMENT
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
LEHMAN COMMERCIAL PAPER INC. $5,372,843.75 $5,372,843.75
3 WORLD FINANCIAL CENTER
14th Floor
New York, NY 10285
Tel: (212) 526-4059
Fax: (212) 528-0819
Contact: Dennis Dee
- ----------------------------------------------------------------------------------------------------------------------------
BANKBOSTON, N.A. $5,000,000* $4,812,500 $9,812,500*
100 Federal Street
MS 01-07-05 *($6,250,000 for *($11,062,500 for
Boston, MA 02110 period 9/5/97 period 9/5/97
Tel: (617) 434-2251 through 12/5/97) through 12/5/97)
Fax: (617) 434-8102
Contact: Dan Corcoran
- ----------------------------------------------------------------------------------------------------------------------------
HIBERNIA NATIONAL BANK $5,000,000* $4,812,500 $9,812,500*
P.O. Box 61540
313 Carondelet Street *($6,250,000 for *($11,062,500 for
New Orleans, LA 70130 period 9/5/97 period 9/5/97
Tel: (504) 533-2738 through 12/5/97) through 12/5/97)
Fax: (504) 533-5344
Contact: Troy Villafarra
</TABLE>
(1) Tranche A Term Loan Commitment reflects first two scheduled payments made
by Borrowers of $250,000 and $500,000.
(2) Tranche B Term Loan Commitment reflects first two scheduled payments made
by Borrowers of $78,250 each.
<PAGE> 150
<TABLE>
<CAPTION>
=================================================================================================================================
REVOLVING CREDIT TRANCHE A TERM TRANCHE B TERM
LENDER AND ADDRESS COMMITMENT LOAN COMMITMENT LOAN COMMITMENT TOTAL COMMITMENT
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
First American National Bank $2,500,000* $2,406,250 $4,906,250*
6000 Poplar Avenue
Suite 300 *($3,125,000 for *($5,531,250 for
Memphis, TN 38119 period 9/5/97 through period 9/5/97 through
Tel: (901) 762-5672 12/5/97) 12/5/97)
Fax: (901) 762-5665
Contact: Mariah Lundberg
- ---------------------------------------------------------------------------------------------------------------------------------
Mitsui Leasing (U.S.A.) Inc. $2,500,000* $2,406,250 $4,906,250*
200 Park Avenue
Suite 3214 *($3,125,000 for *($5,531,250 for
New York, NY 10166 period 9/5/97 through period 9/5/97 through
Tel: (212) 883-3062 12/5/97) 12/5/97)
Fax: (212) 490-1684
Contact: Wayne Hutton
- ---------------------------------------------------------------------------------------------------------------------------------
Union Planters Bank of Jackson, $2,500,000* $2,406,250 $4,906,250*
Tennessee
118 North Liberty *($3,125,000 for *($5,531,250 for
Jackson, TN 38301 period 9/5/97 through period 9/5/97 through
Tel: (901) 422-9604 12/5/97) 12/5/97)
Fax: (901) 422-9661
Contact: Frank Hudacek
- ---------------------------------------------------------------------------------------------------------------------------------
Volunteer Bank of Jackson, Tennessee $2,500,000* $2,406,250 $4,906,250*
301 East Main Street
Jackson, TN 38301 *($3,125,000 for *($5,531,250 for
Tel: (901) 422-9288 period 9/5/97 through period 9/5/97 through
Fax: (901) 422-9396 12/5/97) 12/5/97)
Contact: James N. Craft
=================================================================================================================================
</TABLE>
<PAGE> 151
<TABLE>
<CAPTION>
REVOLVING CREDIT TRANCHE A TERM TRANCHE B TERM
LENDER AND ADDRESS COMMITMENT LOAN COMMITMENT LOAN COMMITMENT TOTAL COMMITMENT
- ------------------ ---------------- --------------- --------------- ----------------
<S> <C> <C> <C> <C>
TCW ASSET MANAGEMENT COMPANY $2,985,328.13 $2,985,328.13
200 Park Avenue
Suite 2200
New York, NY 10166-0288
Tel: (212) 297-4000
Fax: (212) 297-4159
Contact: Justin Driscoll
Mark L. Gold
with copies to:
Crescent/Mach I Partners, L.P.
c/o State Street Bank & Trust Co.
Two International Place
Boston, MA 02110
Tel: (617)664-5482
Fax: (617)664-5366
Contact: Jackie Sweeny
wire payments should be sent to:
State Street Bank and Trust Co., Boston
ABA: 011-00-0028
A/C#: 9900-126-5
Re: Crescent/Mach I
Ref: (loan name)
Agent Bank I.D.#: 987
Institutional I.D.#: 93548
Tax I.D.#: 95-431-9954
Tel: (617) 664-5629
Contact: Steven Savage
</TABLE>
<PAGE> 152
<TABLE>
<CAPTION>
=================================================================================================================
REVOLVING CREDIT TRANCHE A TERM TRANCHE B TERM
LENDER AND ADDRESS COMMITMENT LOAN COMMITMENT LOAN COMMITMENT TOTAL COMMITMENT
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Indosuez Capital Funding II, Ltd. $7,500,000 $7,500,000
Post Office Box 309
Ugland House
South Church Street
Georgetown, Grand Cayman
Cayman Islands, British West Indies
Contact: Isabelle Pradel
with copies to:
Indosuez Capital
1211 Avenue of the Americas
Seventh Floor
New York, NY 10036-8701
Tel: (212) 278-2213
Fax: (212) 278-2254
Contact: Francoise Berthelot
- -----------------------------------------------------------------------------------------------------------------
Van Kampen American Capital $5,985,328.13 $5,985,328.13
Prime Rate Income Trust
One Parkview Plaza
Oakbrook Terrace, IL 60181
Tel: (630) 684-6438
Fax: (630) 684-6740
Contact: Jeffrey W. Maillet
- -----------------------------------------------------------------------------------------------------------------
ING Capital Advisors $10,000,000 $10,000,000
333 South Grand Avenue, Suite 4250
Los Angeles, CA 90071
Tel: (213) 346-3979
Fax: (213) 346-3995
Contact: Greg Masuda
=================================================================================================================
</TABLE>
DOCSC\502261.2
<PAGE> 153
Schedule 1.1B
COMMITMENTS; LENDING OFFICES AND ADDRESSES
<TABLE>
<CAPTION>
REVOLVING CREDIT TRANCHE A TERM TRANCHE B TERM
LENDER AND ADDRESS COMMITMENT LOAN COMMITMENT(1) LOAN COMMITMENT(2) TOTAL COMMITMENT
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
LEHMAN COMMERCIAL PAPER INC. $5,372,843.75 $5,372,843.75
3 World Financial Center
14th Floor
New York, NY 10285
Tel: (212) 526-4059
Fax: (212) 528-0819
Contact: Dennis Dee
- ---------------------------------------------------------------------------------------------------------------------------
BANKBOSTON, N.A. $5,000,000* $4,812,500 $9,812,500*
100 Federal Street
MS 01-07-05 *($6,250,000 for *(11,062,500 for
Boston, MA 02110 period 9/5/97 period 9/5/97
Tel: (617) 434-2251 through 12/5/97) through 12/5/97)
Fax: (617) 434-8102
Contact: Dan Corcoran
- ---------------------------------------------------------------------------------------------------------------------------
HIBERNIA NATIONAL BANK $5,000,000* $4,812,500 $9,812,500*
P.O. Box 61540
313 Carondelet Street *($6,250,000 for *(11,062,500 for
New Orleans, LA 70130 period 9/5/97 period 9/5/97
Tel: (504) 533-2738 through 12/5/97) through 12/5/97)
Fax: (504) 533-5344
Contact: Troy Villafarra
- ---------------------------------------------------------------------------------------------------------------------------
(1) Tranche A Term Loan Commitment reflects first two scheduled payments made by Borrowers of $250,000 and $500,000.
(2) Tranche B Term Loan Commitment reflects first two scheduled payments made by Borrowers of $78,250 each.
</TABLE>
<PAGE> 154
<TABLE>
<CAPTION>
===================================================================================================================================
REVOLVING CREDIT TRANCHE A TERM TRANCHE B TERM
LENDER AND ADDRESS COMMITMENT LOAN COMMITMENT LOAN COMMITMENT TOTAL COMMITMENT
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FIRST AMERICAN NATIONAL BANK $2,500,000* $2,406,250 $4,906,250*
6000 Poplar Avenue
Suite 300 *($3,125,000 for *($5,531,250 for
Memphis, TN 38119 period 9/5/97 through period 9/5/97 through
Tel: (901) 762-5672 12/5/97) 12/5/97)
Fax: (901) 762-5665
Contact: Mariah Lundberg
- -----------------------------------------------------------------------------------------------------------------------------------
MITSUI LEASING (U.S.A.) INC. $2,500,000* $2,406,250 $4,906,250*
200 Park Avenue
Suite 3214 *($3,125,000 for *($5,531,250 for
New York, NY 10166 period 9/5/97 through period 9/5/97 through
Tel: (212) 883-3062 12/5/97) 12/5/97)
Fax: (212) 490-1684
Contact: Wayne Hutton
- -----------------------------------------------------------------------------------------------------------------------------------
UNION PLANTERS BANK OF JACKSON, $2,500,000* $2,406,250 $4,906,250*
TENNESSEE
118 North Liberty *($3,125,000 for *($5,531,250 for
Jackson, TN 38301 period 9/5/97 through period 9/5/97 through
Tel: (901) 422-9604 12/5/97) 12/5/97)
Fax: (901) 422-9661
Contact: Frank Hudacek
- -----------------------------------------------------------------------------------------------------------------------------------
VOLUNTEER BANK OF JACKSON, TENNESSEE $2,500,000* $2,406,250 $4,906,250*
301 East Main Street
Jackson, TN 38301 *($3,125,000 for *($5,531,250 for
Tel: (901) 422-9288 period 9/5/97 through period 9/5/97 through
Fax: (901) 422-9396 12/5/97) 12/5/97)
Contact: James N. Craft
===================================================================================================================================
</TABLE>
<PAGE> 155
<TABLE>
<CAPTION>
===================================================================================================================================
REVOLVING CREDIT TRANCHE A TERM TRANCHE B TERM
LENDER AND ADDRESS COMMITMENT LOAN COMMITMENT LOAN COMMITMENT TOTAL COMMITMENT
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
TCW ASSET MANAGEMENT COMPANY $2,985,328.13 $2,985,328.13
200 Park Avenue
Suite 2200
New York, NY 10166-0288
Tel: (212) 297-4000
Fax: (212) 297-4159
Contact: Justin Driscoll
Mark L. Gold
with copies to:
Crescent/Mach I Partners, L.P.
c/o State Street Bank & Trust Co.
Two International Place
Boston, MA 02110
Tel: (617) 664-5482
Fax: (617) 664-5366
Contact: Jackie Sweeny
wire payments should be sent to:
State Street Bank and Trust Co., Boston
ABA: 011-00-0028
A/C#: 9900-126-5
Re: Crescent/Mach 1
Ref: (loan name)
Agent Bank I.D.#: 987
Institutional I.D.#: 93548
Tax I.D.#: 95-431-9954
Tel: (617)664-5629
Contact: Steven Savage
===================================================================================================================================
</TABLE>
<PAGE> 156
<TABLE>
<CAPTION>
===================================================================================================================================
REVOLVING CREDIT TRANCHE A TERM TRANCHE B TERM
LENDER AND ADDRESS COMMITMENT LOAN COMMITMENT LOAN COMMITMENT TOTAL COMMITMENT
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INDOSUEZ CAPITAL FUNDING II, LTD. $7,500,000 $7,500,000
Post Office Box 309
Ugland House
South Church Street
Georgetown, Grand Cayman
Cayman Islands, British West Indies
Contact: Isabelle Pradel
with copies to:
Indosuez Capital
1211 Avenue of the Americas
Seventh Floor
New York, NY 10036-8701
Tel: (212) 278-2213
Fax: (212) 278-2254
Contact: Francoise Berthelot
- -----------------------------------------------------------------------------------------------------------------------------------
VAN KAMPEN AMERICAN CAPITAL $5,985,328.13 $5,985,328.13
PRIME RATE INCOME TRUST
One Parkview Plaza
Oakbrook Terrace, IL 60181
Tel: (630) 684-6438
Fax: (630) 684-6740
Contact: Jeffrey W. Maillet
- -----------------------------------------------------------------------------------------------------------------------------------
ING CAPITAL ADVISORS $10,000,000 $10,000,000
333 South Grand Avenue, Suite 4250
Los Angeles, CA 90071
Tel: (213) 346-3979
Fax: (213) 346-3995
Contact: Greg Masuda
===================================================================================================================================
</TABLE>
<PAGE> 157
- -----------------------------------------------------------------------------
THIRD AMENDMENT TO
CREDIT AGREEMENT
Dated as of January 5, 1998
Among
Kirkland Holdings L.L.C.
and
The Borrowers Specified Herein,
the Borrowers
and
The Several Lenders Party Hereto,
the Lenders
and
BankBoston, N.A., as Administrative Agent,
the Agent
- -----------------------------------------------------------------------------
<PAGE> 158
THIRD AMENDMENT TO CREDIT AGREEMENT
This THIRD AMENDMENT TO CREDIT AGREEMENT is entered into as of January 5,
1998, by and among KIRKLAND HOLDINGS L.L.C., a Delaware limited liability
company (the "Parent"), the Borrowers specified herein (the "Borrowers"), the
Lenders party hereto (the "Lenders") and BANKBOSTON, N.A. (f/k/a The First
National Bank of Boston), as Administrative Agent (the "Agent") under the Credit
Agreement referred to below.
Recitals
The Parent, the Borrowers, the Lenders and the Agent are parties to a
Credit Agreement dated as of June 12, 1996 (as amended, the "Credit Agreement").
All capitalized terms used herein and not otherwise defined shall have the
meanings set forth in the Credit Agreement. The Parent and the Borrowers have
requested that the Lenders (a) waive the restrictions under Sections 7.7, 7.10
and 7.11 of the Credit Agreement to permit the redemption by the Borrowers from
Bruce Moore pursuant to and in accordance with the Redemption Agreement dated
December __, 1997 by and among Bruce Moore, Kirkland's, Inc. and the other
corporations party thereto (the "Moore Redemption Agreement") of all of his
stock of the Borrowers and as set forth on Schedule 1 hereto (the "Redeemed
Moore Stock") representing not more than seven million one hundred forty-seven
thousand five hundred sixty-six dollars ($7,147,566) aggregate value (the "Moore
Redemption"), and (b) provide an additional seven million dollars ($7,000,000)
under the Tranche B Term Loan facility, the proceeds of which are to be used for
the Moore Redemption. The Lenders are willing to amend the Credit Agreement to
provide for such waiver and additional Tranche B Term Loans on the terms and
conditions set forth herein.
NOW, THEREFORE, subject to the satisfaction of the conditions to
effectiveness specified in Section 4, the Parent, the Borrowers, the Lenders and
the Agent hereby agree as follows:
Section 1. Waiver. The Lenders and the Agent hereby waive (a) the
limitation on Restricted Payments under Section 7.7 of the Credit Agreement, (b)
the limitation on optional payments and modifications of debt instruments and
preferred stock, etc. under Section 7.10 of the Credit Agreement and (c) the
limitation on transactions with affiliates under Section 7.11 of the Credit
Agreement to the extent required to permit the Moore Redemption and the payment
to Bruce Moore, in connection with the Moore Redemption and pursuant to and in
accordance with the Moore Redemption Agreement, of an amount not to exceed seven
million one hundred forty-seven thousand five hundred sixty-six dollars
($7,147,566). Additionally, the Lenders and the Agent hereby release Bruce Moore
as a Pledgor under the Management Pledge Agreement and the New Management Pledge
Agreement and the Agent will return the certificates representing the Redeemed
Moore Stock to the Borrowers. The Parent and the Borrowers hereby acknowledge
that pursuant to Section 7.6 of the Credit Agreement, the Parent, the Borrowers
and their respective Subsidiaries may not, directly or indirectly, issue,
<PAGE> 159
convey, sell, lease, assign, transfer or otherwise dispose of the Redeemed Moore
Stock redeemed pursuant to the Moore Redemption.
Section 2. Amendment of Schedules. Schedule 1.1A to the Credit Agreement is
hereby amended by adding at the end of said Schedule the information contained
on the Amendment to Schedule 1.1A attached hereto. Schedules 1.1B and 1.1E to
the Credit Agreement are hereby deleted in their entirety and the new Schedules
1.1B and 1.1E attached hereto are substituted therefor.
Section 3. Amendment of Capital Expenditures Covenant. Section 7.8 of the
Credit Agreement is hereby amended by deleting the number "$5,000,000" appearing
in the second line of the chart for Fiscal Year 1997 and substituting therefor
the number "$5,800,000".
Section 4. Effectiveness: Conditions to Effectiveness. This Third Amendment
to Credit Agreement shall become effective as of January 7, 1998 upon execution
hereof by the Parent, the Borrowers, the Lenders and the Agent and satisfaction
of the following conditions:
(a) Officers' Certificate. The Borrowers shall have delivered to
the Agent an Officers' Certificate in the form of Exhibit A hereto.
(b) Opinion of Counsel. The Borrowers shall have delivered to the
Agent an opinion of Baker, Donelson, Bearman & Caldwell, counsel to the
Borrowers, and an opinion from Pepper, Hamilton & Scheetz, counsel to
Parent and special counsel to the Borrowers, in form and substance
satisfactory to the Agent.
(c) Financials. The Borrowers shall have delivered to the Agent,
and the Lenders shall have reviewed and approved, the following financial
information, in form and substance satisfactory to the Lenders:
(i) Unaudited financial information required under Sections
6.1(c) and 6.2(d) of the Credit Agreement for November 1997.
(ii) Unaudited, internally prepared, pro forma financial
information for fiscal year 1997 consisting of the combined balance
sheet and income statement of the Borrowers and their Subsidiaries.
Such pro forma financial information to contain actual results through
December 23, 1997 and projected results from December 24, 1997 through
December 31, 1997.
(iii) Analysis for fiscal year 1997, pro forma for actual
results through December 23, 1997 and projected results from December
24, 1997 through December 31, 1997, showing each Loan Party has
observed or performed all of its covenants and other agreements, and
satisfied every condition, contained in the Credit Agreement and the
other Loan
2
<PAGE> 160
Documents to which it is a party to be observed, performed or
satisfied by it, including showing all calculations in determining
compliance with each covenant.
(d) Consent of Subordinated Debt Holders. The Borrowers shall have
delivered to the Agent evidence of the consent of the Subordinated Debt
Holders to this Third Amendment to the Credit Agreement, including the
$7,000,000 increase of the Trance B Term Loan in form and substance
satisfactory to the Agent.
(e) Moore Redemption. All conditions precedent to the consummation of
the Moore Redemption, except for payment of the redemption price, shall
have been satisfied without waiver.
(f) Moore Redemption Agreement. The Borrowers shall have delivered to
the Agent a certified copy of the Moore Redemption Agreement evidencing the
Moore Redemption as duly executed by all the parties thereto, which Moore
Redemption Agreement shall be on terms and conditions acceptable to the
Agent.
(g) Amendment to Management Pledge Agreement and New Management Pledge
Agreement. The Borrowers shall have delivered to the Agent an amendment to
the Management Pledge Agreement and the New Management Pledge Agreement,
dated as of January 5, 1998, in the form of Exhibit B hereto.
Section 5. Representations and Warranties; No Default. The Borrowers hereby
confirm to the Agent and the Lenders, the representations and warranties of the
Borrowers set forth in Section 4 of the Credit Agreement (as amended) as of the
date hereof, as if set forth herein in full. The Borrowers hereby certify that,
after giving effect hereto, no Default exists under the Credit Agreement.
Section 6. Miscellaneous. The Borrowers agree to pay on demand all the
Agent's reasonable expenses in preparing, executing and delivering this Third
Amendment to Credit Agreement, and all related instruments and documents,
including, without limitation, the reasonable fees and out-of-pocket expenses of
the Agent's special counsel, Goodwin, Procter & Hoar LLP. This Third Amendment
to Credit Agreement shall be a Loan Document and shall be governed by and
construed and enforced under the laws of the State of New York.
3
<PAGE> 161
IN WITNESS WHEREOF, the Parent, the Borrowers, the Lenders and Agent have
caused this Third Amendment to Credit Agreement to be executed by their duly
authorized officers as of the date first set forth above.
KIRKLAND HOLDINGS L.L.C.
By: /s/ David Mussafer
---------------------------
Name: David Mussafer
Title: President
THE BORROWERS
-------------
KIRKLAND'S, INC.
KIRKLAND'S OF CAROLINA, INC.
KIRKLAND'S OF CHARLOTTE, EASTLAND MALL, INC.
KIRKLAND'S OF TENNESSEE, INC.
K.C. CORP, INC.
KIRKLAND'S OF GREENSBORO, FOUR SEASONS MALL, INC.
KIRKLAND'S OF FAYETTEVILLE, CROSS CREEK MALL, INC.
KIRKLAND'S OF WILMINGTON, INDEPENDENCE MALL, INC.
KIRKLAND'S III, JACKSON-METRO CENTER, INC.
KIRKLAND'S OF MEMPHIS, TENNESSEE, LAURELWOOD
SHOPPING CENTER, INC.
KIRKLAND'S OF RIDGELAND, MISSISSIPPI, NORTHPARK
MALL, INC.
KIRKLAND'S OF KNOXVILLE, EAST TOWNE MALL, INC.
KIRKLAND'S OF HUNTSVILLE, MADISON SQUARE MALL, INC.
KIRKLAND'S OF VALLEY VIEW MALL, ROANOKE, VA, INC.
KIRKLAND'S OF NASHVILLE, HICKORY HOLLOW MALL, INC.
KIRKLAND'S OF BIRMINGHAM, RIVERCHASE GALLERIA, INC.
KIRKLAND'S OF BRIARCLIFFE MALL, MYRTLE BEACH,
SOUTH CAROLINA, INC.
KIRKLAND'S OF PEACANLAND MALL, MONROE, LA, INC.
KIRKLAND'S OF TOWNE CENTER AT COBB, ATLANTA, GA, INC.
KIRKLAND'S OF GWINNETT PLACE, ATLANTA, GA, INC.
KIRKLAND'S OF RIVERGATE MALL, NASHVILLE, TN, INC.
KIRKLAND'S OF PEACHTREE MALL, COLUMBUS, GA, INC.
KIRKLAND'S OF CUMBERLAND MALL, ATLANTA, GA, INC.
KIRKLAND'S OF HAMILTON PLACE MALL, CHATTANOOGA,
TN, INC.
KIRKLAND'S OF HOUSTON GALLERIA, HOUSTON, TX, INC.
KIRKLAND'S OF MALL OF MEMPHIS, MEMPHIS, TN, INC.
4
<PAGE> 162
KIRKLAND'S OF WOODLAND HILLS MALL, TULSA, OK, INC.
KIRKLAND'S OF DAYTON MALL, DAYTON, OH, INC.
KIRKLAND'S OF OXMOOR CENTER, LOUISVILLE, KY, INC.
KIRKLAND'S OF SOUTH SQUARE MALL, DURHAM, NC, INC.
KIRKLAND'S OF VALLEY VIEW CENTER, DALLAS, TX, INC.
KIRKLAND'S OF CHESTERFIELD TOWNE CENTER,
RICHMOND, VA, INC.
KIRKLAND'S OF PARK PLAZA, LITTLE ROCK, AR, INC.
KIRKLAND'S OF MONTGOMERY MALL, MONTGOMERY, AL, INC.
KIRKLAND'S OF SOUTHLAKE MALL, ATLANTA, GA, INC.
KIRKLAND'S OF SOUTHPARK MALL, RICHMOND, VA, INC.
KIRKLAND'S OF EASTLAND MALL, EVANSVILLE, IN, INC.
KIRKLAND'S OF FAYETTE MALL, LEXINGTON, KY, INC.
KIRKLAND'S OF HICKORY RIDGE MALL, MEMPHIS, TN, INC.
KIRKLAND'S OF REGENCY SQUARE MALL, JACKSONVILLE,
FL, INC.
KIRKLAND'S OF MCCAIN MALL, LITTLE ROCK, AR, INC.
KIRKLAND'S OF RIVER RIDGE MALL, LYNCHBURG, VA, INC.
KIRKLAND'S OF BEL AIR MALL, MOBILE, AL, INC.
KIRKLAND'S OF THE MALL AT BARNES CROSSING, TUPELO,
MS, INC.
KIRKLAND'S OF CORTANA MALL, BATON ROUGE, LA, INC.
KIRKLAND'S OF BELLEVUE CENTER, NASHVILLE, IN, INC.
KIRKLAND'S OF TRI-COUNTY MALL, CINCINNATI, OH, INC.
KIRKLAND'S OF THE MALL OF THE ANENUES,
JACKSONVILLE, FL, INC.
KIRKLAND'S OF EASTWOOD MALL, BIRMINGHAM, AL, INC.
KIRKLAND'S OF LAKESIDE MALL, NEW ORLEANS, LA, INC.
KIRKLAND'S OF CAROLINA PLACE, CHARLOTTE, N.C., INC.
KIRKLAND'S OF CARY VILLAGE MALL, RALEIGH, N.C., INC.
KIRKLAND'S OF COOL SPRINGS GALLERIA, NASHVILLE, TN,
INC.
KIRKLAND'S OF KENWOOD TOWNE CENTRE, CINCINNATI,
OH, INC.
KIRKLAND'S OF ST. LOUIS GALLERIA, ST. LOUIS, MO, INC.
KIRKLAND'S OF WIREGRASS COMMONS MALL, DOTHAN, AL,
INC.
KIRKLAND'S OF REGENCY MALL, RICHMOND, VA, INC.
KIRKLAND'S OF FLORENCE, FLORENCE, KY, INC.
KIRKLAND'S OF ACADIANA MALL, LAFAYETTE, LA, INC.
KIRKLAND'S OF PADRE STAPLES MALL, CORPUS CHRISTI, TX,
INC.
KIRKLAND'S OF BELDEN VILLAGE, CANTON, OH, INC.
5
<PAGE> 163
KIRKLAND'S OF WEST OAKS MALL, HOUSTON, TX, INC.
KIRKLAND'S OF CHARLESTON TOWN CENTER, CHARLESTON,
W. VA, INC.
KIRKLAND'S OF CRESTWOOD PLAZA, ST. LOUIS, MO, INC.
KIRKLAND'S OF WHITE MARSH MALL, BALTIMORE, MD, INC.
KIRKLAND'S OF COLLIN CREEK MALL, DALLAS, TX, INC.
KIRKLAND'S OF BAYBROOK MALL, HOUSTON, TX, INC.
KIRKLAND'S OF GOVERNOR'S SQUARE MALL, TALLAHASSEE,
FL, INC.
KIRKLAND'S OF BARTON CREEK MALL, AUSTIN, TX, INC.
KIRKLAND'S OF HIGHLAND MALL, AUSTIN, TX, INC.
KIRKLAND'S OF BATTLEFIELD MALL, SPRINGFIELD, MO, INC.
KIRKLAND'S OF PENN SQUARE MALL, OKLAHOMA CITY, OK,
INC.
KIRKLAND'S OF OAK PARK MALL, KANSAS CITY, KS, INC.
KIRKLAND'S OF MALL ST. VINCENT, SHREVEPORT, LA, INC.
KIRKLAND'S OF OWINGS MILLS MALL, BALTIMORE, MD, INC.
KIRKLAND'S OF OAKWOOD CENTER, NEW ORLEANS, LA,
INC.
KIRKLAND'S OF THE MALL AT JOHNSON CITY, JOHNSON
CITY, TN, INC.
KIRKLAND'S OF GLENBROOK MALL, FT. WAYNE, IN, INC.
KIRKLAND'S OF NORTH POINTE MALL, ATLANTA, GA, INC.
KIRKLAND'S OF NORTHPARK MALL, JOPLIN, MO, INC.
KIRKLAND'S OF ORLANDO FASHION SQUARE, ORLANDO, FL,
INC.
KIRKLAND'S OF THE MALL AT FAIRFIELD COMMONS,
DAYTON, OH, INC.
KIRKLAND'S OF ST. CHARLES TOWNE CENTER, WALFDORF,
MD, INC.
KIRKLAND'S OF REGENCY MALL, FLORENCE, AL, INC.
KIRKLAND'S OF SOUTH PLAINS MALL, LUBOCK, TX, INC.
KIRKLAND'S OF THE PARKS AT ARLINGTON, FT. WORTH, TX,
INC.
KIRKLAND'S OF PARMA TOWN MALL, CLEVELAND, OH, INC.
KIRKLAND'S OF ST. CLAIR SQUARE, ST. LOUIS, MO, INC.
KIRKLAND'S OF TURTLE CREEK MALL, HATTIESBURG, MS,
INC.
KIRKLAND'S OF THE WOODLANDS, HOUSTON, TX, INC.
KIRKLAND'S OF BRANDON TOWN CENTER, TAMPA, FL, INC.
KIRKLAND'S OF MEMORIAL CITY MALL, HOUSTON, TX, INC.
KIRKLAND'S OF UNIVERSITY MALL, TUSCALOOSA, AL, INC.
KIRKLAND'S OF SANTA ROSA MALL, FORT WALTON, FL, INC.
6
<PAGE> 164
KIRKLAND'S OF PANAMA CITY MALL, PANAMA CITY, FL, INC.
KIRKLAND'S OF TOWN EAST MALL, MESQUITE, TX, INC.
KIRKLAND'S OF KENTUCKY OAKS MALL, PADUCAH, KY, INC.
KIRKLAND'S OF CRABTREE VALLEY MALL, RALEIGH, N.C., INC.
KIRKLAND'S OF OAK HOLLOW MALL, HIGH POINT, N.C., INC.
KIRKLAND'S OF FOX VALLEY MALL, CHICAGO, IL, INC.
KIRKLAND'S OF HAWTHORNE MALL, CHICAGO, IL, INC.
KIRKLAND'S OF STRATFORD SQUARE, CHICAGO, IL, INC.
KIRKLAND'S OF ORLAND SQUARE, CHICAGO, IL, INC.
KIRKLAND'S OF COASTLAND MALL, NAPLES, FL, INC.
KIRKLAND'S OF EDGEWATER MALL, BILOXI, MS, INC.
KIRKLAND'S OF TOWN CENTER PLAZA, KANSAS CITY, KS, INC.
KIRKLAND'S OF CASTLETON SQUARE, INDIANAPOLIS, IN., INC.
KIRKLAND'S OF CORDOVA MALL, PENSACOLA, FL, INC.
KIRKLAND'S OF UNIVERSITY PARK, SOUTH BEND, IN, INC.
KIRKLAND'S OF WESTGATE MALL, AMARILLO, TX, INC.
KIRKLAND'S OF WESTGATE MALL, SPARTANBURG, SC, INC.
KIRKLAND'S OF MERIDIAN MALL, LANSING, MI, INC.
KIRKLAND'S OF COTTONWOOD MALL, ALBUQUERQUE, NM, INC.
KIRKLAND'S OF UNIVERSITY MALL, TAMPA, FL, INC.
KIRKLAND'S OF NORTHWEST ARKANSAS MALL, FAYETTEVILLE, AR, INC.
KIRKLAND'S OF INDIAN RIVER MALL, VERO BEACH, FL, INC.
KIRKLAND'S OF TYRONE SQUARE, ST. PETERSBURG, FL, INC.
KIRKLAND'S OF NORTHGATE MALL, CINCINNATI, OH, INC.
KIRKLAND'S OF WEST OAKS MALL, ORLANDO, FL, INC.
KIRKLAND'S OF PARK CITY CENTER, LANCASTER, PA, INC.
KIRKLAND'S OF PERIMETER MALL, ATLANTA, GA, INC.
KIRKLAND'S OF WOLFCHASE GALLERIA, MEMPHIS, TN, INC.
KIRKLAND'S OF NORTHPARK MALL, DAVENPORT, IA, INC.
KIRKLAND'S OF LINDALE MALL, CEDAR RAPIDS, IA, INC.
KIRKLAND'S OF CORONADO MALL, ALBUQUERQUE, NM, INC.
KIRKLAND'S OF WILLOWBROOK MALL, HOUSTON, TX, INC.
KIRKLAND'S OF HONEY CREEK MALL, TERRE HAUTE, IN, INC.
KIRKLAND'S OF SOUTHPARK MALL, MOLINE, IL, INC.
KIRKLAND'S OF VALLEY WEST MALL, DES MOINES, IA, INC.
KIRKLAND'S OF GREENBRIER MALL, CHESAPEAKE, VA, INC.
7
<PAGE> 165
KIRKLAND'S OF CIELO VISTA MALL, EL PASO, TX, INC.
KIRKLAND'S OF TUTTLE CROSSING, COLUMBUS, OH, INC.
KIRKLAND'S OF LEIGH MALL, COLUMBUS, MS, INC.
KIRKLAND'S OF NORTH SHORE SQUARE, SLIDELL, LA, INC.
KIRKLAND'S OF POST OAK MALL, COLLEGE STATION, TX, INC.
KIRKLAND'S OF BONITA LAKES MALL, MERIDIAN, MS, INC.
KIRKLAND'S OF HUNTINGTON MALL, HUNTINGTON, WV, INC.
KIRKLAND'S OF MALL OF LOUISIANA, BATON ROUGE, LA, INC.
KIRKLAND'S OF MILL CREEK MALL, ERIE, PA, INC.
KIRKLAND'S OF VOLUSIA MALL, DAYTONA BEACH, FL, INC.
KIRKLAND'S OF GATEWAY MALL, LINCOLN, NE, INC.
KIRKLAND'S OF GRAPEVINE MILLS, GRAPEVINE, TX, INC.
By: /s/ R. E. Alderson
---------------------------------------
Name: R. E. Alderson
Title: VP/Sec
BANKBOSTON, N.A.,
as Administrative Agent and as a Lender
By: /s/ Christopher S. Allen
---------------------------------------
Name: Christopher S. Allen
Title: Director
LEHMAN COMMERCIAL PAPER INC.
By: /s/ Michele Swanson
---------------------------------------
Name: Michele Swanson
Title: Authorized Signatory
HIBERNIA NATIONAL BANK
By: /s/ Troy J. Villafarra
---------------------------------------
Name: Troy J. Villafarra
Title: Vice President
8
<PAGE> 166
FIRST AMERICAN NATIONAL BANK
By: /s/ John W. Teasley
---------------------------------------
Name: John W. Teasley
Title: Assistant Vice President
MITSUI LEASING CAPITAL CORPORATION
By: /s/ R. Wayne Hutton
---------------------------------------
Name: R. Wayne Hutton
Title: Senior Vice President
UNION PLANTERS BANK OF JACKSON, TENNESSEE
By: /s/ Frank Hudacek
---------------------------------------
Name: Frank Hudacek
Title: Vice President
VOLUNTEER BANK OF JACKSON, TENNESSEE
By:
---------------------------------------
Name:
Title:
CRESCENT/MACH I PARTNERS, L.P.
By: TCW Asset Management Company
Its Investment Manager
By:
---------------------------------------
Name:
Title:
INDOSUEZ CAPITAL FUNDING II, LTD.
By:
---------------------------------------
Name:
Title:
9
<PAGE> 167
HIBERNIA NATIONAL BANK
By:
------------------------------
Name:
Title:
FIRST AMERICAN NATIONAL BANK
By:
------------------------------
Name:
Title:
MITSUI LEASING CAPITAL CORPORATION
By:
------------------------------
Name:
Title:
UNION PLANTERS BANK OF JACKSON, TENNESSEE
By:
------------------------------
Name:
Title:
VOLUNTEER BANK OF JACKSON, TENNESSEE
By: /s/ James N. Craft
------------------------------
Name: James N. Craft
Title: Executive Vice President
CRESCENT/MACH I PARTNERS, L.P.
By: TCW Asset Management Company
Its Investment Manager
By: /s/ Justin L. Driscoll
------------------------------
Name: Justin L. Driscoll
Title: Senior Vice President
10
<PAGE> 168
FIRST AMERICAN NATIONAL BANK
By: ______________________________
Name:
Title:
MITSUI LEASING CAPITAL CORPORATION
By: ______________________________
Name:
Title:
UNION PLANTERS BANK OF JACKSON, TENNESSEE
By: ______________________________
Name:
Title:
VOLUNTEER BANK OF JACKSON, TENNESSEE
By: ______________________________
Name:
Title:
CRESCENT/MACH I PARTNERS, L.P.
By: TCW Asset Management Company
Its Investment Manager
By:______________________________
Name:
Title:
INDOSUEZ CAPITAL FUNDING II, LTD.
By: /s/ Francoise Berthelot
______________________________
Name: Francoise Berthelot
Title: Vice President
11
<PAGE> 169
VAN KAMPEN AMERICAN CAPITAL PRIME RATE INCOME TRUST
By: /s/ Jeffrey W. Maillet
______________________________
Name: Jeffrey W. Maillet
Title: Senior Vice President & Director
12
<PAGE> 170
SCHEDULE 1
SHARES OF STOCK
<TABLE>
<CAPTION>
- ------------------------------------------------------
Corporation Shares Class of Stock Certificate
- ------------------------------------------------------
<S> <C> <C> <C>
Group A and 7,250 Common 4
B Companies (Voting)
- ------------------------------------------------------
650 Common 1
(Non-Voting)
---------------------------------------
7,900 Class B 3
Preferred
---------------------------------------
2,878 Class C 3
Preferred
- ------------------------------------------------------
Group C 7,900 Common 1
Companies (Non-Voting)
- ------------------------------------------------------
3,000 Class B 3
Preferred
(Voting)
---------------------------------------
4,900 Class B 1
Preferred
(Non-Voting)
- ------------------------------------------------------
Group D 7,900 Common 4
Companies (Voting)
---------------------------------------
7,900 Class B 3
Preferred
- ------------------------------------------------------
Group E 79 Common 4
Companies
- ------------------------------------------------------
</TABLE>
The listing of Group A, B, C, D, and E Companies begins on the next page
(Schedule 1-2).
Schedule 1-1
<PAGE> 171
A
Kirkland's, Inc.
Kirkland's of Pecanland Mall, Monroe, LA, Inc.
Kirkland's of Town Center at Cobb, Atlanta, GA, Inc.
Kirkland's of Gwinnett Place, Atlanta, GA, Inc.
Kirkland's of Peachtree Mall, Columbus, GA, Inc.
Kirkland's of Cumberland Mall, Atlanta, GA, Inc.
Kirkland's of Hamilton Place Mall, Chattanooga, TN, Inc.
Kirkland's of Houston Galleria, Houston, TX, Inc.
Kirkland's of Mall of Memphis, Memphis, TN, Inc.
Kirkland's of Woodland Hills Mall, Tulsa, OK, Inc.
Kirkland's of Dayton Mall, Dayton, OH, Inc.
Kirkland's of Oxmoor Center, Louisville, KY, Inc.
Kirkland's of South Square Mall, Durham, NC, Inc.
Kirkland's of Valley View Center, Dallas, TX, Inc.
Kirkland's of Chesterfield Towne Center, Richmond, VA, Inc.
Kirkland's of Park Plaza Mall, Little Rock, AR, Inc.
Kirkland's of Montgomery Mall, Montgomery, AL, Inc.
Kirkland's of Southlake Mall, Atlanta, GA, Inc.
Kirkland's of Southpark Mall, Richmond, VA, Inc.
Kirkland's of Eastland Mall, Evansville, IN, Inc.
Kirkland's of Fayette Mall, Lexington, KY, Inc.
Kirkland's of Hickory Ridge Mall, Memphis, TN, Inc.
Kirkland's of Regency Square Mall, Jacksonville, FL, Inc.
Kirkland's of McCain Mall, Little Rock, AR, Inc.
Kirkland's of River Ridge Mall, Lynchburg, VA, Inc.
Kirkland's of Bel Air Mall, Mobile, AL, Inc.
Kirkland's of The Mall at Barnes Crossing, Tupelo, MS, Inc.
Kirkland's of Cortana Mall, Baton Rouge, LA, Inc.
Kirkland's of Bellevue Center, Nashville, TN, Inc.
Kirkland's of Tri-County Mall, Cincinnati, OH, Inc.
Kirkland's of The Mall of the Avenues, Jacksonville, FL, Inc.
Kirkland's of Eastwood Mall, Birmingham, AL, Inc.
Kirkland's of Lakeside Mall, New Orleans, LA, Inc.
Kirkland's of Carolina Place, Charlotte, N.C., Inc.
Kirkland's of Cary Village Mall, Raleigh, N.C., Inc.
Kirkland's of Cool Springs Galleria, Nashville, TN, Inc.
Kirkland's of Kenwood Towne Centre, Cincinnati, OH, Inc.
Kirkland's of St. Louis Galleria, St. Louis, MO, Inc.
Kirkland's of Wiregrass Commons Mall, Dothan, AL, Inc.
Kirkland's of Regency Mall, Richmond, VA, Inc.
Kirkland's of Florence Mall, Florence, KY, Inc.
Kirkland's of Acadiana Mall, Lafayette, LA, Inc.
Kirkland's of Padre Staples Mall, Corpus Christi, TX, Inc.
Kirkland's of Belden Village, Canton, OH, Inc.
Kirkland's of West Oaks Mall, Houston, TX, Inc.
Kirkland's of Charleston Town Center, Charleston, W. VA. Inc.
Kirkland's of Crestwood Plaza, St. Louis, MO, Inc.
Kirkland's of White Marsh Mall, Baltimore, MD, Inc.
Kirkland's of Collin Creek Mall, Dallas, TX, Inc.
Schedule 1-2
<PAGE> 172
Kirkland's of Baybrook Mall, Houston, TX, Inc.
Kirkland's of Governor's Square Mall, Tallahassee, FL, Inc.
Kirkland's of Barton Creek Mall, Austin, TX, Inc.
Kirkland's of Highland Mall, Austin, TX, Inc.
Kirkland's of Battlefield Mall, Springfield, MO, Inc.
Kirkland's of Penn Square Mall, Oklahoma City, OK, Inc.
Kirkland's of Oak Park Mall, Kansas City, KS, Inc.
Kirkland's of Mall St. Vincent, Shreveport, LA, Inc.
Kirkland's of Owings Mills Mall, Baltimore, MD, Inc.
Kirkland's of Oakwood Center, New Orleans, LA, Inc.
Kirkland's of The Mall at Johnson City, Johnson City, TN, Inc.
Kirkland's of Glenbrook Mall, Ft. Wayne, IN, Inc.
Kirkland's of North Pointe Mall, Atlanta, GA, Inc.
Kirkland's of Northpark Mall, Joplin, MO, Inc.
Kirkland's of Orlando Fashion Square, Orlando, FL, Inc.
Kirkland's of The Mall at Fairfield Commons, Dayton, OH, Inc.
Kirkland's of St. Charles Towne Center, Waldorf, MD, Inc.
Kirkland's of Regency Mall, Florence, AL, Inc.
Kirkland's of South Plains Mall, Lubbock, TX, Inc.
Kirkland's of The Parks at Arlington, Ft. Worth, TX, Inc.
Kirkland's of Parma Town Mall, Cleveland, OH, Inc.
Kirkland's of St. Clair Square, St. Louis, MO, Inc.
Kirkland's of Turtle Creek Mall, Hattiesburg, MS, Inc.
Kirkland's of The Woodlands, Houston, TX, Inc.
Kirkland's of Brandon Town Center, Tampa, FL, Inc.
Kirkland's of Memorial City Mall, Houston, TX, Inc.
Kirkland's of University Mall, Tuscaloosa, AL, Inc.
Kirkland's of Santa Rosa Mall, Fort Walton, FL, Inc.
Kirkland's of Panama City Mall, Panama City, FL, Inc.
B
Kirkland's of Town East Mall, Mesquite, TX, Inc.
Kirkland's of Kentucky Oaks Mall, Paducah, KY, Inc.
Kirkland's of Crabtree Valley Mall, Raleigh, N.C., Inc.
Kirkland's of Oak Hollow Mall, Highpoint, N.C., Inc.
Kirkland's of Fox Valley Mall, Chicago, IL, Inc.
Kirkland's of Hawthorne Mall, Chicago, IL, Inc.
Kirkland's of Stratford Square, Chicago, IL, Inc.
Kirkland's of Orland Square, Chicago, IL, Inc.
Kirkland's of Coastland Mall, Naples, FL, Inc.
C
Kirkland's of Carolina, Inc.
Kirkland's of Charlotte, Eastland Mall, Inc.
Kirkland's of Tennessee, Inc.
K. C. Corp., Inc.
Kirkland's of Greensboro, Four Seasons Mall, Inc.
Schedule 1-3
<PAGE> 173
Kirkland's of Fayetteville, Cross Creek Mall, Inc.
Kirkland's of Wilmington, Independence Mall, Inc.
Kirkland's III, Jackson-Metro Center, Inc.
Kirkland's of Memphis, Tennessee, Laurelwood Shopping Center, Inc.
Kirkland's of Ridgeland, Mississippi, Northpark Mall, Inc.
Kirkland's of Knoxville, East Towne Mall, Inc.
Kirkland's of Huntsville, Madison Square Mall, Inc.
Kirkland's of Valley View Mall, Roanoke, VA, Inc.
Kirkland's of Nashville, Hickory Hollow Mall, Inc.
Kirkland's of Birmingham, Riverchase Galleria, Inc.
Kirkland's of Briar Cliffe Mall, Myrtle Beach, South Carolina, Inc.
Kirkland's of Rivergate Mall, Nashville, TN, Inc.
D
Kirkland's of Edgewater Mall, Biloxi, MS, Inc.
Kirkland's of Town Center Plaza, Kansas City, KS, Inc.
Kirkland's of Castleton Square, Indianapolis, IN, Inc.
Kirkland's of Cordova Mall, Pensacola, FL, Inc.
Kirkland's of University Park, South Bend, IN, Inc.
Kirkland's of Westgate Mall, Spartanburg, SC, Inc.
Kirkland's of Westgate Mall, Amarillo, TX, Inc.
Kirkland's of Meridian Mall, Lansing, MI,
Kirkland's of Cottonwood Mall, Albuquerque, NM, Inc.
Kirkland's of University Mall, Tampa, FL, Inc.
E
Kirkland's of Northwest Arkansas Mall, Fayetteville, Ar, Inc.
Kirkland's of Indian River Mall, Vero Beach, Fl, Inc.
Kirkland's of Tyrone Square, St. Petersburg, Fl, Inc.
Kirkland's of Northgate Mall, Cincinnati, Oh, Inc.
Kirkland's of West Oaks Mall, Orlando, Fl, Inc.
Kirkland's of Park City Center, Lancaster, Pa, Inc.
Kirkland's of Northpark Mall, Davenport, Ia, Inc.
Kirkland's of Perimeter Mall, Atlanta, Ga, Inc.
Kirkland's of Wolfchase Galleria, Memphis, Tn, Inc.
Kirkland's of Lindale Mall, Cedar Rapids, Ia, Inc.
Kirkland's of Coronado Mall, Albuquerque, Nm, Inc.
Kirkland's of Willowbrook Mall, Houston, Tx, Inc.
Schedule 1 - 4
<PAGE> 174
Amendment of Schedule 1.1A
1. Additional Borrowers. The following additional Borrowers have been
added to the Credit Agreement:
Kirkland's of Honey Creek Mall, Terre Haute, IN, Inc.
Kirkland's of Southpark Mall, Moline, IL, Inc.
Kirkland's of Valley West Mall, Des Moines, IA, Inc.
Kirkland's of Greenbrier Mall, Chesapeake, VA, Inc.
Kirkland's of Cielo Vista Mall, El Paso, TX, Inc.
Kirkland's of Tuttle Crossing, Columbus, OH, Inc.
Kirkland's of Leigh Mall, Columbus, MS, Inc.
Kirkland's of North Shore Square, Slidell, LA, Inc.
Kirkland's of Post Oak Mall, College Station, TX, Inc.
Kirkland's of Bonita Lakes Mall, Meridian, MS, Inc.
Kirkland's of Huntington Mall, Huntington, WV, Inc.
Kirkland's of Mall of Louisiana, Baton Rouge, LA, Inc.
Kirkland's of Mill Creek Mall, Erie, PA, Inc.
Kirkland's of Volusia Mall, Daytona Beach, FL, Inc.
Kirkland's of Gateway Mall, Lincoln, NE, Inc.
Kirkland's of Grapevine Mills, Grapevine, TX, Inc.
2. Additional Subsidiaries. The following Persons are additional
Subsidiaries of the Parent, which have been formed in anticipation of the
opening of new stores but which have not yet commenced any operations. Section
4.14 of the Credit Agreement shall be modified to include reference to these
Persons as additional Subsidiaries of the Parent:
Kirkland's of Southland Mall, Houma, LA, Inc.
Kirkland's of First Colony Mall, Houston, TX, Inc.
Kirkland's of Oviedo Marketplace, Orlando, FL, Inc.
Kirkland's of Coral Springs, Coral Springs, FL, Inc.
11
<PAGE> 175
Schedule 1.1B
<TABLE>
<CAPTION>
Commitments; Lending Offices and Addresses
REVOLVING CREDIT TRANCHE A TERM TRANCHE B TERM
LENDER AND ADDRESS COMMITMENT LOAN COMMITMENT(1) LOAN COMMITMENT(2) TOTAL COMMITMENT
- ------------------ ---------------- ------------------ ------------------ ----------------
<S> <C> <C> <C> <C>
LEHMAN COMMERCIAL PAPER INC. $22,259,515.27 $22,259,515.27
3 World Financial Center
14th Floor
New York, NY 10285
Tel: (212) 526-4059
Fax: (212) 528-0819
Contact: Bill Gates
BANKBOSTON, N.A. $5,000,000 $4,562,500 $9,562,500
100 Federal Street
MS 01-07-05
Boston, MA 02110
Tel: (617) 434-2493
Fax: (617) 434-8102
Contact: Christopher S. Allen
HIBERNIA NATIONAL BANK $5,000,000 $4,562,500 $9,562,500
P.O. Box 61540
313 Carondelet Street
New Orleans, LA 70130
Tel: (504) 533-2738
Fax: (504) 533-5344
Contact: Troy Villafarra
- --------------------------
(1) Tranche A Term Loan Commitment reflects first five scheduled payments made by Borrowers of $250,000, $500,000, $250,000,
$250,000 and $500,000.
(2) Tranche B Term Loan Commitment reflects first five scheduled payments made by Borrowers of $78,250 each.
</TABLE>
<PAGE> 176
<TABLE>
<CAPTION>
REVOLVING CREDIT TRANCHE A TERM TRANCHE B TERM
LENDER AND ADDRESS COMMITMENT LOAN COMMITMENT LOAN COMMITMENT TOTAL COMMITMENT
<S> <C> <C> <C> <C>
FIRST AMERICAN NATIONAL BANK $2,500,000 $2,281,250 $4,781,250
6000 Poplar Avenue
Suite 300
Memphis, TN 38119
Tel: (901) 762-5684
Fax: (901) 762-5665
Contact: John Teasley
MITSUI LEASING CAPITAL CORPORATION $2,500,000 $2,281,250 $4,781,250
200 Park Avenue
Suite 3214
New York, NY 10166
Tel: (212) 883-3062
Fax: (212) 490-1684
Contact: Wayne Hutton
UNION PLANTERS BANK OF JACKSON, $2,500,000 $2,281,250 $4,781,250
TENNESSEE
118 North Liberty
Jackson, TN 38301
Tel: (901) 422-9604
Fax: (901) 422-9661
Contact: Frank Hudacek
VOLUNTEER BANK OF JACKSON, $2,500,000 $2,281,250 $4,781,250
TENNESSEE
301 East Main Street
Jackson, TN 38301
Tel: (901) 422-9288
Fax: (901) 422-9396
Contact: James N. Craft
</TABLE>
<PAGE> 177
<TABLE>
<CAPTION>
REVOLVING CREDIT TRANCHE A TERM TRANCHE B TERM
LENDER AND ADDRESS COMMITMENT LOAN COMMITMENT LOAN COMMITMENT TOTAL COMMITMENT
- ------------------ ---------------- --------------- --------------- ----------------
<S> <C> <C> <C> <C>
TCW ASSET MANAGEMENT COMPANY $2,963,320.31 $2,963,320.31
200 Park Avenue
Suite 2200
New York, NY 10166-0288
Tel: (212) 297-4000
Fax: (212) 297-4159
Contact: Justin Driscoll
Mark L. Gold
with copies to:
Crescent/Mach I Partners, L.P.
c/o State Street Bank & Trust Co.
Two International Place
Boston, MA 02110
Tel: (617) 664-5482
Fax: (617) 664-5366
Contact: Jackie Sweeny
wire payments should be sent to:
State Street Bank and Trust Co.,
Boston
ABA: 011-00-0028
A/C#: 9900-126-5
Re: Crescent/Mach I
Ref: (loan name)
Agent Bank I.D.#: 987
Institutional I.D.#: 93548
Tax I.D.#: 95-431-9954
Tel: (617) 664-5629
Contact: Steven Savage
</TABLE>
<PAGE> 178
<TABLE>
<CAPTION>
REVOLVING CREDIT TRANCHE A TERM TRANCHE B TERM
LENDER AND ADDRESS COMMITMENT LOAN COMMITMENT LOAN COMMITMENT TOTAL COMMITMENT
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INDOSUEZ CAPITAL FUNDING II, LTD. $7,444,710.08 $7,444,710.08
Post Office Box 309
Ugland House
South Church Street
Georgetown, Grand Cayman
Cayman Islands, British West Indies
Contact: Isabelle Pradel
with copies to:
Indosuez Capital
1211 Avenue of the Americas
Seventh Floor
New York, NY 10036-8701
Tel: (212) 278-2213
Fax: (212) 278-2254
Contact: Francoise Berthelot
- ----------------------------------------------------------------------------------------------------------------------------------
VAN KAMPEN AMERICAN CAPITAL $5,941,204.37 $5,941,204.37
PRIME RATE INCOME TRUST
One Parkview Plaza
Oakbrook Terrace, IL 60181
Tel: (630) 684-6438
Fax: (630) 684-6740
Contact: Davin Pierce
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 179
Schedule 1.1E
TRANCHE B TERM LOAN AMORTIZATION SCHEDULE
<TABLE>
<CAPTION>
Quarter Principal Amount
- ------- ----------------
<S> <C>
September 30, 1996 78,250.00
December 31, 1996 78,250.00
March 31, 1997 78,250.00
June 30, 1997 78,250.00
September 30, 1997 78,250.00
December 31, 1997 78,250.00
March 31, 1998 95,622.07
June 30, 1998 95,622,07
September 30, 1998 95,622.07
December 31, 1998 95,622.07
March 31, 1999 95,622.07
June 30, 1999 95,622.07
September 30, 1999 95,622.07
December 31, 1999 95,622.07
March 31, 2000 95,622.07
June 30, 2000 95,622.07
September 30, 2000 95,622.07
December 31, 2000 95,622.07
March 31, 2001 95,622.07
June 30, 2001 95,622.07
September 30, 2001 6,056,064.32
December 31, 2001 19,023,598.06
March 31, 2002 6,056,064.32
June 30, 2002 6,056,064.32
</TABLE>
<PAGE> 1
Exhibit 10.7
EMPLOYMENT AGREEMENT
THIS AGREEMENT (the "Agreement"), made as of the 2nd day of February,
1998, by and between KIRKLAND'S, INC., a Tennessee corporation, (the "Company"),
and REYNOLDS C. FAULKNER ("Executive").
Executive is an individual who, by education, training and experience,
is skilled in matters of corporate finance, accounting and administration. The
Company desires to employ Executive as its Senior Vice President and Chief
Financial Officer and thereby gain the benefit of Executive's knowledge and
experience, and Executive desires to accept such employment pursuant to the
terms of this Agreement.
NOW THEREFORE, in consideration of these premises and the mutual
promises contained herein, and intending to be legally bound hereby, the parties
agree as follows:
SECTION 1. Definitions.
1.1. "Affiliate" of a Person means any Person which, directly or
indirectly, controls, is controlled by, or is under common control with such
Person. The term "control" (including, with correlative meaning, the terms
"controlled by" and "under common control with"), as used with respect to any
Person, shall mean the possession, directly or indirectly, of the power to elect
a majority of the board of directors (or other governing body) or to direct or
cause the direction of the management and policies of such Person, whether
through the ownership of voting securities, by contract or otherwise. In any
event and without limiting the generality of the foregoing, any Person owning
10% or more of the voting securities of another Person shall be deemed to
control that Person.
1.2. "Board" means the Board of Directors of the Company.
1.3. "Cause" means the occurrence of any of the following material
violations, as determined in good faith by the Board: (i) Executive's failure,
refusal or inability (other than due to mental or physical disability) to
perform, in any material respect, his duties to the Company, which failure
continues for more than fifteen (15) days after written notice thereof from the
Company, (ii) alcohol abuse or use of controlled drugs (other than in accordance
with a physician's prescription), (iii) illegal conduct or gross misconduct of
Executive which is materially and demonstrably injurious to the Company, its
affiliates or subsidiaries including, without limitation, fraud, embezzlement,
theft or proven dishonesty in the course of his employment, (iv) conviction of a
misdemeanor involving moral turpitude or a felony, or (v) the entry of a plea of
guilty or nolo contendere to a misdemeanor involving moral turpitude or a
felony.
1.4. "Competing Business" means any business primarily engaged in the
retail sale of specialty gifts, decorative accessories or home furnishings, or
any Significant Supplier.
<PAGE> 2
1.5. "Financial Advisory Services" means financial advisory services
other than consulting or advisory services regarding wholesale or retail
purchasing, store location planning, store or display configuration, inventory
control or purchase tracking systems or retail marketing strategy.
1.6. "Good Reason" means that any of the following has occurred with
respect to the Executive:
(a) the assignment to Executive of any duties inconsistent in
any respect with Executive's position (including status, offices, titles and
reporting requirements), authority, duties or responsibilities as contemplated
by Section 2 of this Employment Agreement, or any other action by the Company
which results in a material diminution in such position, authority, duties or
responsibilities, excluding for this purpose an isolated, insubstantial and
inadvertent action not taken in bad faith and which is remedied by the Company
promptly after receipt of notice thereof given by Executive;
(b) a reduction by the Company in Executive's Annual Salary;
provided, however, that if the salaries of substantially all of the Company's
senior executive officers (including the Company's President and CEO) are
contemporaneously and proportionately reduced, a reduction in the Executive's
Annual Salary to an amount not less than $225,000 will not constitute "Good
Reason" hereunder;
(c) the failure by the Company, without Executive's consent,
to pay to him any portion of his current compensation, except pursuant to a
compensation deferral elected by Executive, or to pay to Executive any portion
of an installment of deferred compensation under any deferred compensation
program of the Company within thirty days of the date such compensation is due;
other than an isolated, insubstantial and inadvertent failure not occurring in
bad faith and which is remedied by the Company promptly after receipt of notice
thereof given by Executive;
(d) a material diminution in the 401(k), medical, health and
life insurance benefits, if any, enjoyed by Executive under the Company's plans
or arrangements as of the date hereof, except as required by law, or the failure
by the Company to provide Executive with a minimum of three (3) weeks of paid
vacation days annually;
(e) the relocation of the Company's principal executive
offices to a location more than 35 miles from the location of such offices on
the Effective Date, or the Company's requiring Executive to be based anywhere
other than the Company's principal executive offices, except for required travel
on the Company's business; or
(f) the failure of the Company to obtain a satisfactory
agreement from any successor to assume and agree to perform this Agreement.
-2-
<PAGE> 3
1.7. "Intellectual Property" means (a) all inventions (whether
patentable or unpatentable and whether or not reduced to practice), all
improvements thereto, and all patents, (b) all trademarks, service marks, trade
dress, logos, trade names, fictitious names, brand names, brand marks and
corporate names, together with all translations, adaptations, derivations, and
combinations thereof and including all goodwill associated therewith, and all
applications, registrations, and renewals in connection therewith, (c) all
copyrightable works, all copyrights, and all applications, registrations, and
renewals in connection therewith, (d) all mask works and all applications,
registrations, and renewals in connection therewith, (e) all trade secrets and
confidential business information (including ideas, research and development,
know-how, formulas, compositions, manufacturing and production processes and
techniques, technical data, designs, drawings, specifications, customer and
supplier lists, pricing and cost information, and business and marketing plans
and proposals), (f) all computer software (including data, source codes and
related documentation), (g) all other proprietary rights, (h) all copies and
tangible embodiments thereof (in whatever form or medium), or similar intangible
personal property created by, created for, or otherwise belonging to the
Company.
1.8. "Option Agreement" means the option agreement between Executive
and the Company dated as of February 2, 1998.
1.9. "Person" means an individual, a sole proprietorship, a
corporation, a partnership, a joint venture, an association, a trust, or any
other entity or organization, including a government or a political subdivision,
agency or instrumentality thereof.
1.10. "Proprietary Information" means confidential, proprietary,
business and technical information or trade secrets of the Company or of any
subsidiary or Affiliate of the Company.
1.11. "Restrictive Covenants" means the provisions contained in Section
5.1 of this Agreement.
1.12. "Significant Supplier" means, as of a given date, a supplier of
specialty gifts, decorative accessories or home furnishings whose aggregate
sales to the Company, its affiliates or subsidiaries during the three (3) year
period immediately preceding that given date exceeded $400,000.
1.13. "Term" means the period beginning on the date hereof and ending
on the earlier of: (i) the third anniversary of the date hereof, or (ii) the
date that Executive's employment by the Company is terminated.
SECTION 2. Duration of Agreement; Duties. Executive will be employed as the
Company's Chief Financial Officer. Executive's employment by the Company may be
terminated by the Company at any time; provided, however, that during the Term,
the terms and conditions of Executive's employment by the Company shall be as
herein set forth. Executive will report to the President and the CEO of the
Company. Executive will render his services hereunder to the
-3-
<PAGE> 4
Company and its Affiliates and shall use his best efforts, judgment and energy
in the performance of the duties assigned to him. During the Term, Executive
will devote substantially all of his business time and services to the Company
to perform such duties as may be customarily incident to his position and as may
reasonably be assigned from time to time by the Board. During the Term,
Executive will not serve as a director of any other corporation without the
prior consent of the Company.
SECTION 3. Compensation and Benefits.
3.1. Annual Salary. Executive hereby agrees to accept, as
compensation for all services rendered by Executive in any capacity hereunder
and for the Restrictive Covenants made by Executive in Section 5 hereof, an
initial base salary at an annual rate of $225,000 (as the same may hereafter be
increased, the "Annual Salary") commencing on the date hereof and continuing
until expiration or termination of the Term. The Annual Salary shall be
inclusive of all applicable income, social security and other taxes and charges
which are required by law to be withheld by the Company, and which shall be
withheld and paid in accordance with the Company's normal payroll practices for
its similarly situated employees from time to time then in effect.
3.1. Signing Bonus. Within six months of the date hereof, the
Company shall pay Executive a signing bonus in an amount equal to $100,000.
3.2. Annual Bonus. To the extent determined by the Board, in
its absolute discretion, Executive will be eligible to receive a bonus of up to
$100,000 per annum with respect to each fiscal year of the Company during the
Term, commencing with the fiscal year ending December 31, 1998.
3.3. Benefits. Executive will be entitled to the benefits
provided on Schedule I hereto. In addition, Executive will be entitled to
receive the same benefits enjoyed by other executive officers of the Company
from time to time (as determined by the Board in good faith, in its absolute
discretion), which benefits, as of this date, include the benefits set forth on
Schedule II hereto. For purposes of this Agreement, "Benefits" means the
benefits contemplated by this Section 3.3.
SECTION 4. Payment of Expenses. The Company will pay all reasonable and
necessary expenses incurred by Executive in the performance of his duties
hereunder, in accordance with the Company's standard practices and policies
regarding the payment or reimbursement of expenses.
SECTION 5. Non-Compete; Confidentiality; Non-Solicitation.
5.1. Restrictive Covenants.
-4-
<PAGE> 5
(a) Non-Compete. Executive shall not, during the Term and for
a period of three (3) years thereafter (the "Restricted Period"), in the United
States do any of the following, directly or indirectly, without the prior
written consent of the Company (except in Executive's capacity as an employee of
the Company, and in the best interests of the Company):
(i) engage or participate in any Competing Business;
(ii) become interested in (as owner, stockholder,
lender, partner, co-venturer, director, officer, employee, agent or consultant)
any person, firm, corporation, association or other entity engaged in any
Competing Business;
(iii) arrange or facilitate the solicitation by a
Competing Business of any Significant Supplier;
(iv) influence or attempt to influence any supplier,
customer or potential customer of the Company to terminate or modify any written
or oral agreement or course of dealing with the Company; or
(v) influence or attempt to influence any Person to
either (1) terminate or modify any employment, consulting, agency,
distributorship or other arrangement with the Company, or (2) employ, or arrange
to have any other Person or entity employ, any Person who has been employed by
the Company as an employee, agent or distributor of the Company at any time
during the Restricted Period.
Notwithstanding the foregoing, Executive may provide investment banking or other
Financial Advisory Services to a Competing Business and may hold less than five
percent (5%) of the outstanding securities of any class of any publicly-traded
securities of any company.
(b) Confidentiality. Executive recognizes and acknowledges
that the Proprietary Information is a valuable, special and unique asset of the
business of the Company. As a result, both during the Term and five (5) years
thereafter, Executive shall not, without the prior written consent of the
Company, for any reason either directly or indirectly divulge to any third-party
or use for his own benefit, or for any purpose other than the exclusive benefit
of the Company, any Proprietary Information revealed, obtained or developed in
the course of his employment by the Company. Such Proprietary Information shall
include, but shall not be limited to, the intangible personal property described
in Section 5.1(c), any information relating to business plans or studies,
business procedures, costs, finances, marketing data, methods, the identities of
customers, contractors and suppliers and prospective customers, contractors and
suppliers, the terms of contracts and agreements with customers, contractors and
suppliers, the Company's relationship with actual and prospective customers,
contractors and suppliers, and the Company's course of dealing with, any such
actual or prospective customers, contractors and suppliers, personnel
information, customer and vendor credit information, and any other materials
that have not been made available to the general public, information, pricing
-5-
<PAGE> 6
information, marketing methods and plans, identities of customers and suppliers,
the Company's relationship with actual or potential customers and the needs and
requirements of any such actual or potential customers, and any other
confidential information relating to the business of the Company; provided,
however, that nothing herein contained shall restrict Executive's ability to
make such disclosures during the Term as may be necessary or appropriate to the
effective and efficient discharge of his duties as an employee hereunder or as
such disclosures may be required by law; and further provided, that nothing
herein contained shall restrict Executive from divulging or using for his own
benefit or for any other purpose any Proprietary Information which is publicly
available, so long as such information did not become available to the public as
a direct or indirect result of Executive's breach of this Section 5.1(b). In the
event that Executive or any of its representatives becomes legally compelled to
disclose any of the Proprietary Information, Executive will provide the Company
with prompt written notice so that the Company may seek a protective order or
other appropriate remedy. Failure by the Company to mark any of the Proprietary
Information as confidential or proprietary shall not affect its status as
Proprietary Information under the terms of this Agreement.
(c) Property. All right, title and interest in and to
Proprietary Information shall be and remain the sole and exclusive property of
the Company. During the Term, Executive shall not remove from the Company's
offices or premises any documents, records, notebooks, files, correspondence,
reports, memoranda or similar materials of or containing Proprietary
Information, or other materials or property of any kind belonging to the Company
unless necessary or appropriate (as reasonably determined by Executive) in
accordance with Executive's duties and responsibilities to the Company and, in
the event that such materials or property are removed, all of the foregoing
shall be returned to their proper files or places of safekeeping as promptly as
possible after the removal shall serve its specific purpose. Executive shall not
make, retain, remove and/or distribute any copies of any of the foregoing for
any reason whatsoever except as may be necessary in the discharge of his
assigned duties and shall not divulge to any third person the nature of and/or
contents of any of the foregoing or of any other oral or written information to
which he may have access or with which for any reason he may become familiar,
except as disclosure shall be necessary or appropriate (as reasonably determined
by Executive) in the performance of his duties; and upon the termination of his
employment with the Company, he shall leave with or return to the Company all
originals and copies of the foregoing then in his possession, whether prepared
by Executive or by others.
5.2. Rights and Remedies Upon Breach.
(a) Specific Enforcement. Executive acknowledges that the
Restrictive Covenants are reasonable and necessary to protect the legitimate
interests of the Company and its Affiliates and that the Company would not have
entered into this Agreement in the absence of such restrictions. Executive also
acknowledges that any breach by him of the Restrictive Covenants will cause
continuing and irreparable injury to the Company for which monetary damages
would not be an adequate remedy. Executive shall not, in any action or
proceeding to enforce any of the provisions of this Agreement, assert the claim
or defense that such an adequate
-6-
<PAGE> 7
remedy at law exists. In the event of such breach by Executive, the Company
shall have the right to enforce the Restrictive Covenants by seeking injunctive
or other relief in any court and this Agreement shall not in any way limit
remedies of law or in equity otherwise available to the Company. If an action at
law or in equity is necessary to enforce or interpret the terms of this
agreement, the prevailing party shall be entitled to recover, in addition to any
other relief, reasonable attorneys' fees, costs and disbursements.
(b) Extension of Restrictive Period. In the event that
Executive breaches any of the Restrictive Covenants contained in Section 5.1(a),
then the Restricted Period shall be extended for a period of time equal to the
period of time that Executive is in breach of such restriction.
(c) Accounting. If Executive is determined by any court,
arbitrator, mediator or other adjudicative body to have breached any of the
Restrictive Covenants, the Company will have the right and remedy to require
Executive to account for and pay over to the Company all compensation, profits,
monies, accruals, increments or other benefits derived or received by Executive
as the result of any action constituting a breach of the Restrictive Covenants.
This right and remedy will be in addition to, and not in lieu of, any other
rights and remedies available to the Company under law or in equity.
5.3. Judicial Modification. If any court determines that any of the
Restrictive Covenants, or any part thereof, is unenforceable because of the
duration or geographical scope of such provision, such court shall have the
power to modify such provision and, in its modified form, such provision shall
then be enforceable.
5.4. Disclosure of Restrictive Covenants. Executive agrees to disclose
the existence and terms of the restrictive covenants set forth in this Section 5
to any employer that Executive may work for after the termination of Executive's
employment at the Company.
5.5. Acknowledgments. Executive acknowledges that the Restrictive
Covenants contained in Section 5.1(a) are included herein in order to induce the
Company to employ Executive pursuant to the other terms of this Agreement.
Executive further acknowledges that the duration and geographic scope of Section
5.1(a) are reasonable given the nature of this Agreement.
5.6. Enforceability in Jurisdictions. If a court of any jurisdiction
holds the Restrictive Covenants unenforceable by reason of their breadth or
scope or otherwise, it is the intention of the parties hereto that such
determination not bar or in any way affect the right of the Company to the
relief provided above in the courts of any other jurisdiction within the
geographical scope of such Restrictive Covenants.
SECTION 6. Termination. Executive's employment hereunder may be terminated by
the Company or Executive at any time. Upon termination, Executive shall be
entitled only to such
-7-
<PAGE> 8
compensation and benefits as described in this Section 6. In the event of any
termination, the Company and Executive will have such rights and remedies as may
be available to either of them under this Agreement, at law, in equity or
otherwise, for any breach by the other of this Agreement.
6.1. Termination Without Cause or For Good Reason. If Executive's
employment by the Company is terminated by the Company without Cause or by
Executive for Good Reason prior to the third anniversary of the date hereof, the
Executive shall be entitled to payment of (i) all accrued and unpaid Annual
Salary and Benefits through the date of such termination, (ii) a lump sum amount
equal to the present value of (determined by applying the highest interest rate
then in effect under any credit agreement to which the Company is a party)
twelve (12) months of his Annual Salary, and (iii) a pro-rated annual bonus
(determined by the Board in good faith, in its absolute discretion) based on the
portion of the year during which Executive was employed by the Company. All
Annual Salary and other Benefits shall cease at the time of such termination,
subject to the terms of any benefits or compensation plan then in force and
applicable to Executive, and the Company shall have no further liability or
obligation by reason of such termination; provided, however, that this paragraph
will not affect stock options granted to Executive by the Company, the terms of
which are governed by the Option Agreement.
6.2. Any Other Termination. If Executive's employment by the Company is
terminated for any reason other than as set forth in Section 6.1, the Company's
obligation to Executive (or, in the case of Executive's death, to Executive's
estate) will be limited solely to the payment of accrued and unpaid Annual
Salary and Benefits through the date of such termination. All Annual Salary and
Benefits will cease at the time of such termination, subject to the terms of any
benefits or compensation plans then in force and applicable to Executive, and
the Company shall have no further liability or obligation hereunder by reason of
such termination; provided, however, that this paragraph will not affect stock
options granted to Executive by the Company, the terms of which are governed by
the Option Agreement.
SECTION 7. Other Agreements. Executive represents, warrants and, where
applicable, covenants to the Company that:
(a) there are no restrictions, agreements or understandings
whatsoever to which Executive is a party which would prevent or make unlawful
Executive's execution of this Agreement or Executive's employment hereunder, or
which is or would be inconsistent or in conflict with this Agreement or
Executive's employment hereunder, or would prevent, limit or impair in any way
the performance by Executive of his obligations hereunder;
(b) Executive's execution of this Agreement and Executive's
employment hereunder shall not constitute a breach of any contract, agreement or
understanding, oral or written, to which Executive is a party or by which
Executive is bound; and
-8-
<PAGE> 9
(c) Executive is free to execute this Agreement and to be
employed by the Company as an employee pursuant to the provisions set forth
herein.
(d) Executive shall disclose the existence and terms of this
Agreement to any employer that the Executive may work for during the Restricted
Period.
SECTION 8. Successors and Assigns. This Agreement shall inure to the benefit of
and be binding upon the Company and Executive and their respective successors,
executors, administrators, heirs and/or permitted assigns; provided, however,
that neither Executive nor the Company may make any assignments of this
Agreement or any interest herein, by operation of law or otherwise, without the
prior written consent of the other party, except that, without such consent, the
Company may assign this Agreement to any successor to all or substantially all
of its assets and business by means of liquidation, dissolution, merger,
consolidation, transfer of assets, or otherwise.
SECTION 9. Notice. Any notice or communication required or permitted under this
Agreement shall be made in writing and (a) sent by overnight courier, (b) mailed
by certified or registered mail, return receipt requested or (c) sent by
telecopier, addressed as follows:
If to Executive:
Mr. Reynolds C. Faulkner
c/o Kirkland's, Inc.
805 N. Parkway
P.O. Box 7222
Jackson, Tennessee 38308-7222
Fax: (901) 664-9345
-9-
<PAGE> 10
If to Company:
Kirkland's, Inc.
805 N. Parkway
P.O. Box 7222
Jackson, Tennessee 38308-7222
Fax: (901) 664-9345
Attn: Robert Alderson, Esquire
and to:
Mr. David Mussafer
Advent International Corporation
101 Federal Street
Boston, Massachusetts 21110
Fax: (617) 443-0322
with a copy to:
Julia D. Corelli, Esquire
Pepper Hamilton LLP
3000 Two Logan Square
18th & Arch Streets
Philadelphia, Pennsylvania 19103
Fax: (215) 981-4750
or to such other address as either party may from time to time duly specify by
notice given to the other party in the manner specified above.
SECTION 10. Entire Agreement; Amendments. This Agreement and the Option
Agreement contain the entire agreement and understanding of the parties hereto
relating to the subject matter hereof, and merges and supersedes all prior and
contemporaneous discussions, agreements and understandings of every nature
relating to the employment of Executive with the Company. This Agreement may not
be changed or modified, except by an Agreement in writing signed by each of the
parties hereto.
SECTION 11. Waiver. Any waiver by either party of any breach of any term or
condition in this Agreement shall not operate as a waiver of any other breach of
such term or condition or of any other term or condition, not shall any failure
to enforce any provision hereof operate as a waiver of such provision or of any
other provision hereof or constitute or be deemed a waiver or release of any
other rights, in law or in equity.
-10-
<PAGE> 11
SECTION 12. Governing Law. This Agreement shall be governed by, and enforced in
accordance with, the laws of the State of Tennessee without regard to the
application of the principals of conflicts or choice of laws.
SECTION 13. Survival of Provisions. The provisions of this Agreement set forth
in Sections 4 through 8 and, 10 through 15 hereof shall survive the termination
of Executive's employment hereunder.
SECTION 14. Severability. Whenever possible, each provision of this Agreement
will be interpreted in such manner as to be effective and valid under applicable
law, but if any provision of this Agreement is held to be invalid, illegal or
unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability will not affect
any other provision or the effectiveness or validity of any provision in any
other jurisdiction, and this Agreement will be reformed, construed and enforced
in such jurisdiction as if such invalid, illegal or unenforceable provision had
never been contained herein.
SECTION 15. Section Headings. The section headings in this Agreement are for
convenience only; they form no part of this Agreement and shall not affect its
interpretation.
SECTION 16. Counterparts and Facsimiles. This Agreement may be executed,
including execution by facsimile signature, in one or more counterparts, each of
which shall be deemed an original, and all of which together shall be deemed to
be one and the same instrument.
IN WITNESS WHEREOF, the Company has caused this Agreement to
be executed by its duly authorized officers, and Executive has executed this
Agreement, on July 15, 1998, effective as of the date first above written.
KIRKLAND'S, INC.
By: /s/ Carl Kirkland
----------------------------
Title: Chief Executive Officer
EXECUTIVE
/s/ Reynolds C. Faulkner
----------------------------
-11-
<PAGE> 12
KIRKLAND'S, INC.
REYNOLDS C. FAULKNER EMPLOYMENT AGREEMENT
SCHEDULE I
ADDITIONAL BENEFITS
1. Life Insurance. A life insurance policy (in addition to life insurance
benefits generally provided or available to other employees of the Company) with
a face amount of $500,000 with the beneficiary to be designated by Executive and
issued on the basis of being paid up at age 65. The policy will (a) contain a
waiver of premium in the event of disability (to the extent available at
commercially reasonable rates), and (b) permit (upon termination of employment
with the Company) the transfer of ownership of such policy to Executive, such
transfer to be with all benefits, values and other ownership rights incident
thereto at the time of such transfer, without cost to Executive, who may
thereafter continue coverage under such policy at his own cost.
2. Relocation Expenses. Reasonable and necessary moving expenses, as follows:
a. Agent's commissions on sale of existing home, if any; provided,
however, that Executive will engage in independent efforts to sell his
existing home for a period of at least one (1) month prior to engaging
an agent for that purpose.
b. Attorney's fees incurred in the sale of Executive's existing home.
c. Airfare for two (2) trips from Atlanta for Executive's wife to shop
for a home in Tennessee.
d. Payment of moving company fees incurred in the transport of
Executive's personal belongings to Tennessee.
3. Car Allowance. $600 per month.
4. Commuting Expenses. Airfare, lodging, telephone, and other reasonable and
necessary commuting expenses incurred by Executive prior to relocating to
Tennessee; provided, however, that such commuting expenses will be paid only
through June, 1998.
5. Legal Fees. Reasonable and necessary legal fees and costs incurred in the
review and negotiation of this contract; provided, however, that if such fees
and costs exceed $2500, Executive will receive $2500, plus one-half of the
amount of such fees and costs in excess of $2500.
-12-
<PAGE> 13
KIRKLAND'S, INC.
REYNOLDS C. FAULKNER EMPLOYMENT AGREEMENT
SCHEDULE II
BASIC BENEFITS AS OF FEBRUARY 1998
1. Group health insurance (partially subsidized by the Company).
2. 401(k) plan participation, after completion of one (1) year of service.
3. Three weeks of paid vacation annually.
-13-
<PAGE> 1
EXHIBIT 10.15
EXECUTION
STOCK OPTION AGREEMENT UNDER THE
KIRKLAND'S, INC. 1996 EXECUTIVE INCENTIVE
AND NON-QUALIFIED STOCK OPTION PLAN
THIS STOCK OPTION AGREEMENT ("Agreement") is made and entered into
as of this llth day of June, 1996, by and among KIRKLAND'S, INC. ("Kirkland's"),
each of the other undersigned corporations (such corporations, together with
Kirkland's, being herein referred to individually as the "Company" and
collectively as the "Companies"), and CARL KIRKLAND (the "Optionee").
W I T N E S S E T H:
WHEREAS, the Companies have agreed to grant to the Optionee options
to purchase shares of the Companies, voting common stock, each with a par value
$0.01 (the "Common Stock"), subject to the terms of this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and
obligations contained herein, and intending to be legally bound, the parties,
subject to the terms and conditions set forth herein, agree as follows:
1. Grant of Option. Subject to the terms and conditions set forth
herein, the Companies grant to the Optionee an option (the "Option") to purchase
Units equal to an aggregate of two percent (2%) of the Common Stock of each of
the Companies (the "Shares"). Based on the capitalization of each of the
Companies as of the date hereof, Units representing two percent (2%) of the
fully diluted outstanding Common Stock of each Company is represented by 2,381
shares of Common Stock in each Company.
2. Nature of the Option. The Option is intended to be an "incentive
stock option," as that term is described by Section 422 of the Internal Revenue
Code of 1986, as amended.
3. Exercise Price. The exercise price shall be forty-five cents
($0.45) per Unit. Payment of the aggregate exercise price shall entitle the
Optionee to receive the Aggregate Number of shares of Common Stock in each
of the Companies. The aggregate exercise price shall be allocated among the
Companies according to their Percentage Values.
4. Exercise of Option. The Option shall be exercisable during its
term only in accordance with the terms and provisions of this Agreement as
follows:
(a) Right to Exercise. The Option shall vest and be
exercisable as follows:
<PAGE> 2
(1) The Option shall become 100% vested 24 hours prior
to the closing of an Asset Sale, Public offering, or Stock Sale, Provided that
such vesting shall occur only if optionee shall have been employed by the
Companies at anytime within the three (3) month period prior to such event, or,
if within the twelve (12) months prior to such event, optionee shall have died
or become disabled while employed by the Companies. If not exercised at or in
connection with such closing of the Asset Sale, Public Offering or Stock Sale,
the Option shall terminate immediately following such closing; provided that if
all Shareholders do not sell their Common Stock in the Public Offering or Stock
Sale, the Option will remain exercisable in accordance with the terms of the
Option Plan.
(2) The Option shall be exercisable in whole and not in
part.
(3) The Option may be terminated at any time by
agreement between the Optionee and the Companies.
(4) The Option shall terminate upon the closing of an
initial public offering of Common Stock that does not qualify as a Public
Offering as defined herein.
(b) Method of Exercise. The Option shall be exercisable by
written notice which shall state the election to exercise the Option, the number
of Shares in respect of which this option is being exercised and such other
representations and agreements as to the Optionees investment intent with
respect to such interest as may be required by the Companies hereunder. Such
written notice shall be signed by the Optionee and shall be delivered in person
or by certified mail to the Chairman of the Board or such other person as may be
designated by the Board. The written notice shall be accompanied by payment of
the purchase price. Payment of the purchase price shall be by check or such
other consideration or method of payment as may be authorized by the Board.
(c) Restrictions on Exercise. The option may not be exercised
if the issuance of Shares upon such exercise 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 Companies may require the optionee
to enter into a Stock Purchase Agreement and to make any representation and
warranty to the Companies as may be required by or advisable under any
applicable law or regulation or as may be reasonably requested by the Board.
(d) Shareholders Agreement. The shares of Common Stock
purchased upon exercise of the Option shall be subject to the terms and
conditions of the Shareholders Agreement.
-2-
<PAGE> 3
5. Anti-Dilution Adjustments to Aggregate Number. Under certain
conditions, the Aggregate Number is subject to adjustment as set forth herein.
The Aggregate Number shall be subject to adjustment from time to time as follows
and thereafter as adjusted shall be deemed to be the Aggregate Number hereunder.
(a) In case at any time or from time to time any of the
Companies shall:
(1) take a record of the holders of its Common Stock for
the purpose of entitling them to receive a dividend payable in, or other
distribution of, Common Stock;
(2) subdivide its outstanding shares of Common Stock
into a larger number of shares of Common Stock; or
(3) combine its outstanding shares of Common Stock into
a smaller number of shares of Common Stock;
then the Aggregate Number in effect immediately prior thereto shall be adjusted
so that the Optionee shall thereafter be entitled to receive, upon exercise of
the Option, the number of shares of Common Stock that such holder would have
been entitled to receive after the occurrence of such event had the option been
exercised immediately prior to the occurrence of such event.
(b) In case at any time or from time to time any of the
Companies shall take a record of the holders of its Common Stock for the purpose
of entitling them to receive any dividend or other distribution (collectively, a
"Distribution") of:
(4) cash (other than dividends payable out of earnings
or any surplus legally available for the payment of dividends under the laws of
the states of incorporation of the Companies),
(5) any evidences of its indebtedness, any shares of its
capital stock (other than additional shares of Common Stock or Convertible
Securities) or any other securities or property of any nature whatsoever (other
than cash), or
(6) any options or warrants or other rights to subscribe
for or purchase any of the following: any evidences of its indebtedness (other
than Convertible Securities), any shares of its capital stock (other than
additional shares of Common Stock or Convertible Securities) or any other
securities or property of any nature whatsoever,
then the Optionee shall be entitled to receive upon the exercise of the Option
at any time on or after the taking of such record the number of shares of Common
Stock to be received upon exercise of the Option determined as stated herein
and, in addition and without further payment,
-3-
<PAGE> 4
the cash, stock, securities, other property, options, warrants and/or other
rights to which the optionee would have been entitled by way of the Distribution
and subsequent dividends and distributions if such holder (x) had exercised the
Option immediately prior to such Distribution, and (y) had retained the
Distribution in respect of the Common Stock and all subsequent dividends and
distributions of any nature whatsoever in respect of any stock or securities
paid as dividends and distributions and originating directly or indirectly from
such Common Stock. A reclassification of the Common Stock into shares of Common
Stock and shares of any other class of stock shall be deemed a distribution by
the Companies to the holders of the Common Stock of such shares of such other
class of stock within the meaning of this paragraph (b) and, if the outstanding
shares of Common Stock shall be changed into a larger or smaller number of
shares of Common Stock as a part of such reclassification, such event shall be
deemed a subdivision or combination, as the case may be, of the outstanding
shares of Common Stock within the meaning of paragraph (a) of this Section 5.
(c) In case at any time or from time to time prior to a public
offering of Common Stock, any of the Companies shall (except as hereinafter
provided) issue or sell any additional shares of Common Stock at a price per
share which is less than the Fair Market Value Per Share, then the Aggregate
Number in effect immediately prior thereto shall be adjusted immediately so that
the Aggregate Number thereafter shall be an amount equal to the product of (x)
the percentage represented by the fraction, the numerator of which is such
Aggregate Number in effect immediately prior to such issuance or sale and the
denominator of which is the total outstanding shares of Fully Diluted Common
Stock (as calculated immediately before such issuance or sale) and (y) the total
number of shares of Fully Diluted Common Stock (as calculated immediately after
such issuance or sale). The provisions of this paragraph (c) shall not apply to
any issuance of additional shares of Common Stock for which an adjustment is
provided under Section 5(a). No adjustment of the Aggregate Number shall be made
under this Section 5(c) upon the issuance of any additional shares of Common
Stock which are issued pursuant to the exercise of any options or Warrants, or
upon exercise of any warrants or other subscription or purchase rights if an
adjustment shall previously have been made (or if no adjustment shall have been
required) upon issuance of such warrants or other rights pursuant to Section
5(d).
(d) In case at any time or from time to time prior to an
initial public offering of Common Stock, the Companies shall (except as
hereinafter provided) take a record of the holders of its Common Stock for the
purpose of entitling them to receive a distribution of, or shall in any manner
issue or sell, any warrants or other rights to subscribe for or purchase (x) any
shares of Common Stock or (y) any Convertible Securities, whether or not the
rights to subscribe, purchase, exchange or convert thereunder are immediately
exercisable, at a purchase price per share of Common Stock which is less than
the Fair Market Value Per Share, then the Aggregate Number in effect immediately
prior thereto shall be adjusted immediately so that the Aggregate Number
thereafter shall be an amount equal to the product of (x) the percentage
represented by the fraction, the numerator of which is such Aggregate Number in
effect immediately prior to such distribution, issuance or sale and the
denominator of which is the total outstanding shares of Fully Diluted Common
Stock (as calculated immediately before such distribution, issuance or
-4-
<PAGE> 5
sale) and (y) the total number of shares of Fully Diluted Common Stock
outstanding (as calculated immediately after such issuance or sale).
(e) In case at any time or from time to time prior to an
initial public offering of Common Stock, the Companies shall take a record of
the holders of its Common Stock for the purpose of entitling them to receive a
distribution of, or shall in any manner issue or sell, Convertible Securities,
whether or not the rights to exchange or convert thereunder are immediately
exercisable, at an exercise price per share of Common Stock which is less than
the Fair Market Value Per Share, then the Aggregate Number in effect immediately
prior thereto shall be adjusted immediately so that the Aggregate Number
thereafter shall be an amount equal to the product of (x) the percentage
represented by the fraction, the numerator of which is such Aggregate Number in
effect prior to such issuance or sale and the denominator of which is the total
outstanding shares of Fully Diluted Common Stock (as calculated immediately
before such issuance or sale) and (y) the total number of shares of Fully
Diluted Common Stock outstanding (as calculated immediately after such issuance
or sale). No adjustment of the Aggregate Number shall be made under this Section
5(e) upon the issuance of any Convertible Securities which are issued pursuant
to the exercise of any warrants or other subscription or purchase rights if an
adjustment shall previously have been made or if no such adjustment shall have
been required upon the issuance of such warrants or other rights pursuant to
Section 5(e).
(f) Upon the expiration or termination of any of the Warrants,
the Aggregate Number in effect prior to the expiration or termination of any
such Warrants shall be adjusted immediately so that the Aggregate Number in
effect immediately after such expiration or termination shall be an amount equal
to the product of (x) the percentage represented by the fraction, the numerator
of which is such Aggregate Number in effect prior to such expiration or
termination and the denominator of which is the total outstanding shares of
Fully Diluted Common Stock (as calculated immediately before such expiration or
termination) and (y) the total number of shares of Fully Diluted Common Stock
outstanding (as calculated immediately after such expiration or termination).
(g) The following provisions shall be applicable to the making
of adjustments of the Aggregate Number hereinbefore provided for in this Section
5:
(7) The sale or other disposition of any issued shares
of Common Stock owned or held by or for the account of the Companies (also
referred to as treasury stock) shall be deemed an issuance thereof for purposes
of this Section 5.
(8) The adjustments required by the preceding paragraphs
of this Section 5 shall be made whenever and, as often as any specified event
requiring an adjustment shall occur, except as expressly provided herein. For
purpose of any adjustment, any specified event shall be deemed to have occurred
at the close of business on the date of its occurrence.
-5-
<PAGE> 6
(9) In computing adjustments under this Section 5,
fractional interests in Common Stock shall be taken into account to the nearest
one-thousandth (.001) of a share and shall be aggregated until they equal one
whole share.
(10) If any of the Companies shall take a record of the
holders of the Common Stock for the purpose of entitling them to receive a
dividend, distribution, warrant or subscription or purchase rights under
Sections 5(a) through 5(e) hereof, but abandon its plan to pay or deliver such
dividend, distribution, warrants, subscription or purchase rights, then no
adjustment shall be required by reason of the taking of such record and any such
adjustment previously made in respect thereof shall be rescinded and annulled.
(11) Notwithstanding anything herein to the contrary, no
adjustment shall be made to the Aggregate Number as a result of the issuance of
(A) options similar to the Option granted pursuant to similar option agreements
dated the date hereof among the Companies and other management shareholders of
the Companies, or (B) shares of Common Stock issued upon exercise of such other
similar options, or (C) shares of Common Stock issued upon conversion of the
Warrants.
(12) Upon the expiration or termination of any of the
warrants or other rights or options referred to in Section 5(d) above or the
Convertible Securities referred to in Section 5(e) above, the Aggregate Number
after the expiration or termination of any such warrants, rights, options or
Convertible Securities, the issuance of which caused an adjustment to the
Aggregate Number, shall be readjusted to such Aggregate Number as would have
been obtained had the adjustment made upon the issuance of such warrants,
rights, options or Convertible Securities, been made upon the basis of the
issuance of only the number of shares of Common Stock actually issued upon the
exercise of such warrants, options or rights, upon the conversion or exchange of
such securities or upon the exercise of the options or rights related to such
securities and subsequent conversion or exchange thereof.
(13) For purposes of Sections 5(c), (d) and (e) hereof,
the date as of which the applicable Fair Market Value Per Share shall be
computed shall be the date of actual issuance of such additional shares of
Common Stock, warrants or Convertible Securities, as applicable.
(14) The consideration for any additional shares of
Common Stock issuable pursuant to any options, warrants or other rights to
subscribe for or purchase the same shall be the consideration received or
receivable by the Companies for issuing such options, warrants or other rights,
plus the additional consideration payable to the Companies upon the exercise of
such options, warrants or other rights. The consideration for any additional
shares of Common Stock issuable pursuant to the terms of any Convertible
Securities shall be the consideration received or receivable by the Companies
for issuing any options, warrants or other rights to subscribe for or purchase
such Convertible Securities, plus the consideration paid or payable to the
Companies in respect of the subscription for or purchase of such Convertible
-6-
<PAGE> 7
Securities, plus the additional consideration, if any, payable to the Companies
upon the exercise of the right of conversion, exercise or exchange of such
Convertible Securities. In case of the issuance at any time of any additional
shares of Common Stock or Convertible Securities in payment or satisfaction of
any dividend upon any class of stock other than Common Stock, the Companies
shall be deemed to have received for such additional shares of Common Stock or
Convertible Securities a consideration equal to the amount of such dividend so
paid or satisfied.
(h) If any event occurs as to which the other provisions of
this Section 5 are not strictly applicable but the lack of any provision for the
exercise of the rights of a holder of Options would not fairly protect the
purchase rights of such holder in accordance with the essential intent and
principles of such provisions, or, if strictly applicable, would not fairly
protect the conversion rights of such holder in accordance with the essential
intent and principles of such provisions, then the Companies shall appoint a
firm of independent certified public accountants in the United States (which may
be the regular auditors of the Companies) of recognized national standing in the
United States, which shall give their opinion as to the adjustments, if any,
necessary to preserve, without dilution, on a basis consistent with the
essential intent and principles established in the other provisions of this
Section 5, the exercise rights of the optionee. Upon receipt of such opinion,
the Companies shall forthwith make the adjustments described therein.
(i) Within forty-five (45) days after the end of each fiscal
quarter during which an event - occurred that resulted in an adjustment pursuant
to this Section 5, and at any time upon the request of the optionee, the
Companies shall cause to be promptly mailed to the Optionee by first-class mail,
postage prepaid, notice of each adjustment or adjustments to the Aggregate
Number effected since the date of the last such notice and a certificate of
Kirkland's Chief Financial Officer or, in the case of any such notice delivered
within forty-five (45) days after the end of a fiscal year, a firm of
independent public accountants in the United States selected by the Companies
(who may be the regular accountants employed by the Companies), in each case,
setting forth the Aggregate Number after such adjustment, a brief statement of
the facts requiring such adjustment and the computation by which such adjustment
was made. The fees and expenses of such accountants shall be paid by the
Companies.
(j) The occurrence of a single event shall not trigger an
adjustment of the Aggregate Number under more than one paragraph of this Section
5.
(k) The expiration or other termination of any of the Warrants
shall trigger an adjustment to the Aggregate Number so that the Aggregate Number
after such adjustment is the same as it would have been had the initial
Aggregate Number set forth in Section 1 hereof been calculated without taking
such expired or terminated Warrants into account.
-7-
<PAGE> 8
(l) No adjustment shall be made to the Aggregate Number upon
issuance of Employee Options, Warrants or Contingent Warrants, or the issuance
of Common Stock upon exercise thereof.
(m) Notwithstanding any provision to the contrary herein, any
combination or consolidation of the Companies or any transfer of shares
permitted under Section 2 of the Stockholders Agreement, in either case, which
does not materially alter the aggregate ultimate ownership of the Companies
shall. not constitute an Asset Sale or Stock Sale as defined in Section 9
hereof. In the event of any such combination or consolidation, this Option shall
be exercisable into the same number of shares of Common Stock of such combined
or consolidated Company as the number of shares of Common Stock of each of the
Companies into which it was exercisable immediately prior to such combination or
consolidation.
6. Investment Representations. Unless the Shares have been
registered under the Act, in connection with the acquisition of this option, the
optionee represents and warrants as follows:
(a) The Optionee is acquiring this Option, and upon exercise
of this option, he will be acquiring the Shares for investment for his own
account, not as a nominee or agent, and not with a view to, or for resale in
connection with, any distribution thereof, except as may be specifically
contemplated and disclosed in the context of the Asset Sale, Public Offering or
Stock Sale which triggers exercisability of the Option.
(b) The Optionee has a preexisting business or personal
relationship with the Companies and by reason of his business or financial
experience, has, and could reasonably be assumed to have, the capacity to
protect his interests in connection with the acquisition of this Option and the
Shares.
7. Non-Transferability of Option. This Option may not be sold,
pledged (except pursuant to the Management Pledge Agreement executed by Optionee
in favor of The First National Bank of Boston, as Administrative Agent and dated
on or about the date hereof), 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, and may be
exercised during the lifetime of the optionee only by such Optionee or, in the
event of his disability by his personal representative. Subject to the
foregoing, the terms of this option shall be binding upon the executors,
administrators, heirs, successors and assigns of the Optionee.
8. Ability to Restructure. The existence of the Option shall not
affect in any way the right or power of the Companies or their Shareholders to
make or authorize any or all adjustments, recapitalizations, organizations or
other changes in the Companies, capital structure or its business, or any merger
or consolidation of the Companies, or any issue of bonds, debentures, preferred
or prior preference stock ahead of or affecting the Common Stock or the rights
thereof, or dissolution or liquidation of the Companies, or any sale or transfer
of all or any
-8-
<PAGE> 9
part of its assets or business, or any other corporate act or proceeding whether
of a similar character or otherwise.
9. Definitions. Terms not otherwise defined in this Agreement shall
have the following respective meanings:
(a) "Act" means the Securities Act of 1933, as amended.
(b) "Aggregate Number" means the number of shares of Common
Stock issuable by each of the Companies upon exercise of the Option (whether or
not then vested), as such number may be adjusted from time to time pursuant to
Section 5 hereof. The initial Aggregate Number is the number of shares
identified in Section 1 hereof.
(c) "Asset Sale" means the sale of all or a majority in value
of the Companies, assets and the subsequent liquidation or dissolution of the
Companies, if as a result of such events, the Shareholders shall have realized a
Rate of Return of at least thirty-five (35%) percent on their Equity, after
taking into account the amount and timing of all capital contributions (and
distributions) to (from) the Companies by (to) the Shareholders.
(d) "Board" means the Board of Directors of Kirkland's.
(e) "Contingent Warrants" means warrants for up to three and
one-half percent (3.5%) of the Common Stock issued to the holders of the
Mezzanine Debt (as defined in the Recapitalization Agreement) and exercisable
only if certain conditions (as set forth therein) occur.
(f) "Convertible Securities" means securities convertible into
or exchangeable for shares of Common Stock.
(g) "Employee Options" means options to purchase Common Stock
granted pursuant to the Option Plan.
(h) "Equity" means all initial capital contributed to the
Companies by the Shareholders as of the date hereof, including in the form of
continuing ownership, as well as subsequent capital contributions by the
Shareholders. For all purposes hereof (i) the Equity shall be considered to have
a value of Forty-Five Million Dollars ($45,000,000) as of the date hereof, (ii)
shares of capital stock shall be valued without regard to voting rights, and
(iii) Class C Preferred Stock shall not be considered Equity.
(i) "Fair Market Value Per Share" means the fair market value
per share of Common Stock (which shall be determined without regard to voting
rights) as determined by the Board or the Option Committee of the Board.
-9-
<PAGE> 10
(j) "Fully Diluted Common Stock" means shares of Common Stock
assuming exercise of the Management Options and all of the Warrants, and
conversion, exercise or exchange of all other securities then outstanding and
convertible, exercisable or exchangeable into shares of Common Stock.
(k) "Option Plan" shall mean the Kirkland's Inc. 1996
Executive Incentive and Non-Qualified Stock Option Plan.
(l) "Management Letter" means that certain letter agreement
among Optionee and the Companies dated the date hereof and relating to
employment of Optionee by the Companies.
(m) "Management Options" means this option and all similar
options granted to the other Management Shareholders (as such term is defined in
the Recapitalization Agreement).
(n) "Percentage Value" means the value of a Company expressed
as a percentage of the aggregate values of all of the Companies. The Percentage
Values shall be those set forth on Schedule 1P to the Recapitalization
Agreement.
(o) "Person" shall mean an individual, a sole proprietorship,
a corporation, a partnership, a joint venture, an association, a trust, or any
other entity or organization, including a government or a political subdivision,
agency or instrumentality thereof.
(p) "Public Offering" means the sale of shares of the
Companies' capital stock in a registered underwritten public offering, if the
Shareholders then realize (or are treated as realizing pursuant to the
definition of "Rate of Return") a Rate of Return of at least thirty-five percent
(35%) on their Equity, after taking into account the amount and timing of all
capital contributions (and distributions) to (from) the Companies by (to) the
Shareholders.
(q) "Rate of Return" shall mean the internal rate of return
for the investment by the Shareholders in the Equity. Rate of Return shall be
calculated based on the following: (i) in the context of an Asset Sale, the
distributions to the Shareholders resulting from the Asset Sale; (ii) in the
context of a Public offering, the amount that would be realized by the
Shareholders if all Shareholders then sold their Common Stock and Class A
Preferred Stock and Class B Preferred Stock and realized (A) for their Common
Stock the price per share at which Common Stock is sold in the Public Offering
(before commissions but after other transaction expenses), and (B) for their
Class A Preferred Stock or Class B Preferred Stock, its aggregate stated value
plus all accrued and unpaid dividends; and (iii) in the context of a Stock Sale,
the amount actually realized by the Shareholders in the Stock Sale, or the
amount that would be realized if (A) all-Shareholders were selling Common Stock
at the same price per share of Common Stock as the selling Shareholders realize
in the Stock Sale (before commissions but
-10-
<PAGE> 11
after other transaction expenses), and (B) all Shareholders were selling Class A
Preferred Stock and Class B Preferred Stock for its aggregate stated value plus
all accrued and unpaid dividends.
(r) "Recapitalization Agreement" means the Recapitalization
Agreement among the Companies, Kirkland Holdings L.L.C., the Optionee and the
other management shareholders of the Companies dated the date hereof.
(s) "Shareholders" means the holders of Common Stock from time
to time outstanding.
(t) "Shareholders Agreement" means that certain Shareholders
Agreement dated the date hereof among the Companies, the holders of their
Capital Stock and the holders of warrants for their Common Stock.
(u) "Stock Sale" means the acquisition of more than fifty
percent (50%) of the outstanding shares of common stock of Companies
representing a majority of the Percentage Values by a Person or group of Persons
(other than non-cash sales or exchanges of Common Stock among the Shareholders
of the Companies), if as a result of such event, the Shareholders would have
realized (or be treated as having realized pursuant to the definition of "Rate
of Return") a Rate of Return of at least thirty-five (35%) percent on their
Equity, after taking into account the amount and timing of all capital
contributions (and distributions) to (from) the Companies by (to) the
Shareholders.
(v) "Unit" shall mean one share of Common Stock in each of the
Companies.
(w) "Warrants" means the warrants for ten percent (10%) of the
Common Stock issued to the holders of the Mezzanine Debt (as defined in the
Recapitalization Agreement) on the date hereof.
10. Governing Law. This Agreement shall be governed by and construed
in accordance with the internal laws of the State of Tennessee.
11. Entire Agreement. This Agreement, together with .the Management
Letter and the Recapitalization Agreement, and the other exhibits attached
thereto or hereto, represents the entire agreement between the parties.
12. Amendment. This Agreement may only be amended by a writing
signed by each of the parties hereto.
13. Notice. Any notice or communication required or permitted under
this Agreement shall be made in writing and (i) sent by overnight courier, (ii)
mailed by certified or registered mail, return receipt requested or (iii) sent
by telecopier, addressed to the addresses of
-11-
<PAGE> 12
the parties set forth herein (and, in the case of any of the Companies, with a
copy to Pepper, Hamilton:& Scheetz, 3000 Two Logan Square, 18th and Arch
Streets, Philadelphia, PA 19103, Attention: Cary S. Levinson, Esquire); or to
such other address as either party may from time to time duly specify by notice
given to the other party in the manner specified above.
14. Waiver. Any waiver by either party of a breach of any provision
of this Agreement shall not operate as or be construed to be a waiver of any
other breach of such provision' or of any breach of any other provision of this
Agreement. The failure of a party to insist upon strict adherence to any term of
this Agreement on one or more occasions shall not be considered a waiver or
deprive that party of the right thereafter to insist upon strict adherence to
that term or any other term of this Agreement. Any waiver must be in writing.
IN WITNESS WHEREOF, the Companies have caused this instrument to be
executed by their duly authorized representative, and the Optionee has hereunto
affixed his hand and seal, the day and year first above written.
/s/ Carl Kirkland
CARL KIRKLAND
ATTEST KIRKLAND'S, INC.
By: /s/ Robert Alderson By: /s/ Carl Kirkland
---------------------------------- ----------------------------------
Title: Vice President & Secretary Title: President
-12-
<PAGE> 13
# Corporate Name
- - --------------
101 Kirkland's of Carolina, Inc.
102 Kirkland's of Charlotte, Eastland Mall, Inc.
103 Kirkland's of Tennessee, Inc.
104 K. C. Corp. Inc.
107 Kirkland's of Greensboro, Four Seasons Mall, Inc.
109 Kirkland's of Fayetteville, Cross Creek Mall, Inc.
110 Kirkland's of Wilmington, Independence Mall, Inc.
111 Kirkland's III, Jackson-Metro Center, Inc.
114 Kirkland's of Memphis, Tennessee, Laurelwood Shopping Center, Inc.
115 Kirkland's of Ridgeland, Mississippi, Northpark Mall, Inc.
116 Kirkland's of Knoxville, East Towne Mall, Inc.
117 Kirkland's of Huntsville, Madison Square Mall, Inc.
118 Kirkland's of Valley View Mall, Roanoke, VA, Inc.
119 Kirkland's of Nashville, Hickory Hollow Mall, Inc.
120 Kirkland's of Birmingham, Riverchase Galleria, Inc.
122 Kirkland's of BriarCliffe Mall, Myrtle Beach, South Carolina, Inc.
123 Kirkland's of Pecanland Mall, Monroe, LA, Inc.
125 Kirkland's of Towne Center at Cobb, Atlanta, GA, Inc.
126 Kirkland's of Gwinnett Place, Atlanta, GA, Inc.
127 Kirkland's of Rivergate Mall, Nashville, TN, Inc.
128 Kirkland's of Peachtree Mall, Columbus, GA, Inc.
129 Kirkland's of Cumberland Mall, Atlanta, GA, Inc.
130 Kirkland's of Hamilton Place Mall, Chattanooga, TN, Inc.
131 Kirkland's of Houston Galleria, Houston, TX, Inc.
132 Kirkland's of Mall of Memphis, Memphis, TN, Inc.
134 Kirkland's of Woodland Hills Mall, Tulsa, OK, Inc.
135 Kirkland's of Dayton Mall, Dayton, OH, Inc.
136 Kirkland's of Oxmoor Center, Louisville, KY, Inc.
137 Kirkland's of South Square Mall, Durham, NC, Inc.
138 Kirkland's of Valley View Center, Dallas, TX, Inc.
139 Kirkland's of Chesterfield Towne Center, Richmond, VA, Inc.
140 Kirkland's of Park Plaza, Little Rock, AR, Inc.
141 Kirkland's of Montgomery Mall, Montgomery, AL, Inc.
142 Kirkland's of Southlake Mall, Atlanta, GA, Inc.
143 Kirkland's of Southpark Mall, Richmond, VA, Inc.
144 Kirkland's of Eastland Mall, Evansville, IN, Inc.
145 Kirkland's of Fayette Mall, Lexington, KY, Inc.
146 Kirkland's of Hickory Ridge Mall, Memphis, TN, Inc.
148 Kirkland's of Regency Square Mall, Jacksonville, FL, Inc.
149 Kirkland's of McCain Mall, Little Rock, AR, Inc.
150 Kirkland's of River Ridge Mall, Lynchburg, VA, Inc.
-13-
<PAGE> 14
151 Kirkland's of Bel Air Mall, Mobile, AL, Inc.
152 Kirkland's of The Mall at Barnes Crossing, Tupelo, MS, Inc.
153 Kirkland's of Cortana Mall, Baton Rouge, LA, Inc.
154 Kirkland's of Bellevue Center, Nashville, TN, Inc.
155 Kirkland's of Tri-County Mall, Cincinnati, OH, Inc.
156 Kirkland's of The Mall of the Avenues, Jacksonville, FL, Inc.
157 Kirkland's of Eastwood Mall, Birmingham, AL, Inc.
158 Kirkland's of Lakeside Mall, New Orleans, LA, Inc.
159 Kirkland's of Carolina Place, Charlotte, N.C., Inc.
160 Kirkland's of Cary Village Mall, Raleigh, N.C., Inc.
161 Kirkland's of Cool Springs Galleria, Nashville, TN, Inc.
162 Kirkland's of Kenwood Towne Centre, Cincinnati, OH, Inc.
163 Kirkland's of St. Louis Galleria, St. Louis, MO, Inc.
164 Kirkland's of Wiregrass Commons Mall, Dothan, AL, Inc.
165 Kirkland's of Regency Mall, Richmond, VA, Inc.'
166 Kirkland's of Florence, Florence, KY, Inc.
167 Kirkland's of Acadiana Mall, Lafayette, LA, Inc.
168 Kirkland's of Padre Staples Mall, Corpus Christi, TX, Inc.
169 Kirkland's of Belden Village, Canton, OH, Inc.
170 Kirkland's of West Oaks Mall, Houston, TX, Inc.
171 Kirkland's of Charleston Town Center, Charleston, W.
172 Kirkland's of Crestwood Plaza, St. Louis, MO, Inc.
173 Kirkland's of White Marsh Mall, Baltimore, MD, Inc.
174 Kirkland's of Collin Creek Mall, Dallas, TX, Inc.
175 Kirkland's of Baybrook Mall, Houston, TX, Inc.
176 Kirkland's of Governor's Square Mall, Tallahassee, FL, Inc.
178 Kirkland's of Barton Creek Mall, Austin, TX, 'Inc.
179 Kirkland's of Highland Mall, Austin, TX, Inc.
180 Kirkland's of Battlefield Mall, Springfield, MO, Inc.
181 Kirkland's of Penn Square Mall, Oklahoma City,, OK, Inc.
182 Kirkland's of Oak Park Mall, Kansas City, KS, Inc.
183 Kirkland's of Mall St. Vincent, Shreveport, LA, Inc.
184 Kirkland's of Owings Mills Mall, Baltimore, MD, Inc.
185 Kirkland's of Oakwood Center, New Orleans, LA, Inc.
186 Kirkland's of The Mall at Johnson City, Johnson City, TN, Inc.
187 Kirkland's of Glenbrook Mall, Ft. Wayne, IN, Inc.
188 Kirkland's of North Pointe Mall, Atlanta, GA, Inc.
189 Kirkland's of Northpark Mall, Joplin, MO, Inc.
190 Kirkland's of Orlando Fashion Square, Orlando, FL, Inc.
191 Kirkland's of The Mall at Fairfield Commons, Dayton, OH, Inc.
192 Kirkland's of St. Charles Towne Center, Waldorf, MD Inc.
193 Kirkland's of Regency Mall, Florence, AL, Inc.
194 Kirkland's of South Plains Mall, Lubbock, TX, Inc.
-14-
<PAGE> 15
195 Kirkland's of The Parks at Arlington, Ft. Worth, TX, Inc.
196 Kirkland's of Parma Town Mall, Cleveland, OH, Inc.
197 Kirkland's of St. Clair Square, St. Louis, MO, Inc.
198 Kirkland's of Turtle Creek Mall, Hattiesburg, MS, Inc.
199 Kirkland's of The Woodlands, Houston, TX, Inc.
200 Kirkland's of Brandon Town Center, Tampa, FL, Inc.
201 Kirkland's of Memorial City Mall, Houston, TX, Inc.
202 Kirkland's of University Mall, Tuscaloosa, AL, Inc.
203 Kirkland's of Santa Rosa Mall, Fort Walton, FL, Inc.
204 Kirkland's of Panama City Mall, Panama City, FL, Inc.
205 Kirkland's of Town East Mall, Mesquite, TX, Inc.
206 Kirkland's of Kentucky Oaks Mall, Paducah, KY, Inc.
207 Kirkland's of Crabtree Valley Mall, Raleigh, N.C., Inc.
208 Kirkland's of Oak Hollow Mall, High Point, N.C., Inc.
209 Kirkland's of Fox Valley Mall, Chicago, IL, Inc.
210 Kirkland's of Hawthorne Mall, Chicago, IL, Inc.
211 Kirkland's of Stratford Square, Chicago, IL, Inc.
212 Kirkland's of Orland Square, Chicago, IL, Inc.
214 Kirkland's of Coastland Mall, Naples, FL, Inc.
215 Kirkland's of Edgewater Mall, Biloxi, MS, Inc.
216 Kirkland's of Town Center Plaza, Kansas City, KS, Inc.
217 Kirkland's of Castleton Square, Indianapolis, IN., Inc.
218 Kirkland's of Cordova Mall, Pensacola, FL, Inc.
219 Kirkland's of University Park, South Bend, IN, Inc.
220 Kirkland's of Westgate Mall, Amarillo, TX, Inc.
221 Kirkland's of Westgate Mall, Spartanburg, SC, Inc.
222 Kirkland's of Meridian Mall, Lansing, MI, Inc.
223 Kirkland's of Cottonwood Mall, Albuquerque, NM, Inc.
224 Kirkland's of University Mall, Tampa, FL, Inc.
By: /s/ Carl Kirkland
-------------------------------
Title: President
ATTEST:
By: /s/ Robert Alderson
-------------------------------
Title: Vice President & Secretary
-15-
<PAGE> 1
Exhibit 10.16
STOCK OPTION AGREEMENT
UNDER THE KIRKLAND'S, INC. 1996 EXECUTIVE
INCENTIVE AND NON-QUALIFIED STOCK OPTION PLAN
KIRKLAND'S, INC., a Tennessee corporation, and the affiliates set forth
on Schedule A hereto (collectively the "Company") hereby grant to REYNOLDS C.
FAULKNER (the "Optionee") the option to purchase two thousand two hundred
eighty-three (2,283) shares of common stock in Kirkland's, Inc. and each of the
corporations set forth on Schedule A (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. 1996 Executive Incentive and Non-Qualified
Stock Option Plan (the "Plan") applicable to incentive stock options, which
terms and provisions are incorporated herein by this reference. Unless the
context herein requires otherwise, the terms defined in the Plan shall have the
same meanings herein.
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.
2. DATE OF GRANT; TERM OF OPTION. This Option is granted as of the 2nd
day of February, 1998, and it may not be exercised later than the date that is
ten (10) years after date of grant, subject to earlier termination, as provided
in the Plan.
3. OPTION EXERCISE PRICE. The total cost to the Optionee to purchase,
pursuant to this Agreement, one share of common stock in Kirkland's, Inc. and
each of the corporations set forth on Schedule A (a "Share") is $285.65.
4. EXERCISE OF OPTION. During its term, the Option is fully vested and
immediately exercisable in accordance with the terms and provisions of the Plan
and this Option Agreement.
(A) EXPIRATION OF OPTION AFTER TERMINATION OF EMPLOYMENT.
Except as set forth in Section 6, the Option will expire immediately upon
termination of the Optionee's employment with the Company.
(B) METHOD OF EXERCISE. The Optionee may exercise the Option
by providing written notice stating the election to exercise this Option, and
making such representations and agreements as to the Optionee's investment
intent with respect to the Shares underlying the Option and to be purchased as
may be required by the Company hereunder or pursuant to the provisions of the
Plan. Such written notice shall be signed by the Optionee and shall be delivered
in person or by certified mail to the Secretary of the Company or such other
person as may be designated by the Company. The written notice shall be
accompanied by payment of the purchase price, by check or such other
consideration and method of payment as may be
<PAGE> 2
authorized by the Board pursuant to the Plan. The certificate(s) for the Shares
as to which the Option shall be exercised shall be registered in the name of the
Optionee and shall be legended as required under the Plan, this Agreement, the
shareholders agreement made as of June 12, 1996 among Kirkland's, Inc., its
affiliated companies and their shareholders (the "Shareholders Agreement")
and/or applicable law.
(C) PARTIAL EXERCISE. The Option may be exercised in whole or
in part; provided, however, that any exercise may apply only with respect to an
equal number of shares in each of the corporations listed on Schedule A.
(D) RESTRICTIONS ON EXERCISE. This Option may not be exercised
if the issuance of the Shares upon such exercise would constitute a violation of
any applicable federal or state securities laws or other laws or regulations.
(E) SHARES RECEIVED. Pursuant to Section 1 of the Plan, upon
exercise of the Option in accordance with this Agreement, Optionee shall receive
an equal number of shares in each of the companies listed on Schedule A.
5. INVESTMENT REPRESENTATIONS. Unless the issuance of the Shares to the
Optionee upon exercise of this Option has been registered under the Securities
Act of 1933, in connection with the acquisition of this Option, the Optionee
represents and warrants as follows:
(A) The Optionee is acquiring this Option, and upon exercise
of this Option, he will be acquiring the Shares, for investment for his own
account, not as a nominee or agent, and not with a view to, or for resale in
connection with, any distribution thereof.
(B) The Optionee has a preexisting business or personal
relationship with the Company or one of its directors, officers or controlling
persons and by reason of his business or financial experience, has, and could be
reasonably assumed to have, the capacity to protect his interests in connection
with the acquisition of this Option and the Shares.
Except as otherwise provided by the Board or unless the issuance of the Shares
to the Optionee upon exercise of this Option has been registered under the
Securities Act of 1933, as a condition of exercise of an Option and issuance of
Shares pursuant to such exercise, the Optionee shall be required to execute
further investment representations as provided in the Shareholders Agreement.
- 2 -
<PAGE> 3
6. TERMINATION.
(A) GENERALLY. If the Optionee ceases to serve the Company for
any reason other than death or Disability, this Option may be exercised any time
within ninety (90) days after the date of such termination with respect to any
of the Shares which, if purchased upon exercise of this Option, would not be
subject to repurchase by the Company hereunder as of the date of such
termination. To the extent that any Shares, if purchased upon exercise of this
Option after such termination, would be subject to repurchase by the Company
hereunder as of the date of termination, or to the extent the Option is not
exercised within the time specified herein, this Option shall terminate solely
as to the extent and amount of such Shares as would have been subject to
repurchase or as to which the Option was not exercised within such specified
time, as the case may be. Notwithstanding the foregoing, this Option shall not
be exercisable after the expiration of the term set forth in Section 2 hereof.
(B) DEATH OR DISABILITY. If the Optionee ceases to serve the
Company due to death or Disability, this Option may be exercised at any time
within one (1) year after the date of death or termination of employment due to
Disability. In the case of death, this Option may be exercised by the Optionee's
estate or by a person who acquired the right to exercise this Option by bequest
or inheritance. In the case of Disability, this Option may be exercised by the
Optionee or his legal guardian or representative; provided, however, that if the
disabled Optionee commences any employment or engagement (including, but not
limited to, full or part-time employment or independent consulting work) during
the aforementioned one (1) year period with or by a competitor of the Company
(as determined solely in the judgment of the Board) this Option shall terminate
immediately and automatically. To the extent that the Option is not exercised
within the time specified herein, this Option shall terminate. Notwithstanding
the foregoing, this Option shall not be exercisable after the expiration of the
term set forth in Section 2 hereof.
7. NONTRANSFERABILITY OF OPTION. This 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, and may be exercised during the lifetime of the
Optionee only by such Optionee. Subject to the foregoing and the terms of the
Plan, the terms of this Option shall be binding upon the executors,
administrators, heirs, successors and assigns of the Optionee.
8. CONTINUATION OF EMPLOYMENT OR ENGAGEMENT. Neither the Plan nor this
Option shall confer upon any Optionee any right to continue in the service of
the Company or any of its Subsidiaries or limit, in any respect, the right of
the Company to discharge the Optionee at any time, with or without cause and
with or without notice.
- 3 -
<PAGE> 4
9. COMPANY'S REPURCHASE RIGHTS. The Company will have the right to
repurchase any of the Shares (but not the Option) on any given day at their Fair
Market Value on that date; provided, however, the Company's repurchase right
will lapse as follows:
(A) The Company's repurchase right will lapse with respect to
476 Shares on February 1, 1999 if the Optionee is continuously employed by the
Company through that date;
(B) The Company's repurchase right will lapse with respect to
an additional 476 Shares on February 1, 2000 if the Optionee is continuously
employed by the Company through that date;
(C) The Company's repurchase right will lapse with respect to
an additional 476 Shares on February 1, 2001 if the Optionee is continuously
employed by the Company through that date;
(D) The Company's repurchase right will lapse with respect to
an additional 285 Shares on February 1, 2002 if the Optionee is continuously
employed by the Company through that date;
(E) The Company's repurchase right will lapse with respect to
an additional 285 Shares on February 1, 2003 if the Optionee is continuously
employed by the Company through that date; and
(F) The Company's repurchase right will lapse with respect to
all remaining Shares on February 1, 2004 if the Optionee is continuously
employed by the Company through that date.
The Optionee may not transfer (whether by sale, gift or otherwise), pledge or
encumber or in any way dispose of any Share or any right or interest therein to
any party other than the Company while that Share remains subject to repurchase
by the Company. Any such attempt to transfer any of the Shares while still
subject to repurchase by the Company will be null and void.
For purposes of this Agreement, "Fair Market Value" means: (i)
If the Common Stock is listed on a national securities exchange or traded on the
Nasdaq National Market, the average of the closing prices for a share of Common
Stock on such exchange or on the Nasdaq National Market, as reported in The Wall
Street Journal, for the last five days in which shares of Common Stock were
actually traded immediately prior to the date of the Company's notice of
exercise of its repurchase right; (ii) if the Company's common stock is quoted
on the Nasdaq Small Cap Market, or otherwise reported by the Nasdaq Stock
Market, the average of the last bid and asked prices, as reported in The Wall
Street Journal, for a share of Common Stock on the
- 4 -
<PAGE> 5
five days in which shares of Common Stock were actually traded immediately prior
to the date of the Company's notice of exercise of its repurchase right; or
(iii) if the Common Stock is not traded or quoted as provided in clauses (i) or
(ii) above, the amount determined by an independent, third party appraiser
experienced in the valuation of similar businesses and selected by mutual
agreement of the Company and the Optionee.
10. ACCELERATED LAPSE OF REPURCHASE RIGHTS.
(A) Notwithstanding any other provision of this Agreement, the
Company's repurchase right will lapse with respect to all the Shares if the
Optionee dies while employed by the Company.
(B) Notwithstanding any other provision of this Agreement, the
Company's repurchase right will lapse with respect to all the Shares if the
Optionee suffers a Disability that results in the termination of his employment
with the Company.
(C) Notwithstanding any other provision of this Agreement, if
an initial public offering of the common stock of Kirkland's, Inc. occurs and
the Optionee's employment is thereafter terminated by the Company without Cause
(as that term is defined in the Employment Agreement between the Company and
Optionee dated February 2, 1998 (the "Employment Agreement")) or by the Optionee
for Good Reason (as that term is defined in the Employment Agreement), in
addition to the Shares no longer subject to repurchase by the Company pursuant
to Section 9, the Company's repurchase right will lapse with respect an
additional number of Shares equal to twenty five percent (25%) of any Shares
which, immediately prior to such termination, remained subject to repurchase by
the Company.
(D) Notwithstanding any other provision of this Agreement
other than Section 10(e), if a Change of Control or Sale of the Company occurs
after an initial public offering of the common stock of Kirkland's, Inc., the
Company's repurchase right will remain applicable only to the lesser of: (1)
570.75 Shares, or (2) the number of Shares with respect to which the Company's
repurchase right shall not have already lapsed in accordance with Section 9.
Thereafter, the Company's repurchase right shall continue to lapse in accordance
with Section 9 as if the acceleration provisions of this Section did not apply.
(E) Notwithstanding any other provision of this Agreement, if
a Change of Control or Sale of the Company occurs after an initial public
offering of the common stock of Kirkland's, Inc. and prior to February 2, 2001
and if the Kirkland's Stock Price on the date of such Change of Control or Sale
of the Company exceeds:
- 5 -
<PAGE> 6
(1) 175% of the IPO Price, than the Company's
repurchase rights will remain applicable only with respect to 380.5 Shares.
Thereafter, the Company's repurchase right shall continue to lapse in accordance
with Section 9 as if the acceleration provisions of this Section did not apply.
(2) 200% of the IPO Price, then the Company's
repurchase rights will remain applicable only with respect to 190.25 Shares.
Thereafter, the Company's repurchase right shall continue to lapse in accordance
with Section 9 as if the acceleration provisions of this Section did not apply.
(3) 225% of the IPO Price, then the Company's
repurchase rights will no longer be applicable to any of the Shares.
For purposes of this Section 10(e), "Kirkland's Stock Price"
means, as of a given date, the average closing price per share of Common Stock
for the ten (10) trading days immediately preceding such date; provided,
however, in the case of a Sale of the Company, "Kirkland's Stock Price" means
the price per share of Common Stock paid or payable to holders of such shares in
the transaction constituting the Sale of the Company.
For purposes of this Section 10(e), "IPO Price" means the
initial offering price set forth on the cover page of the final prospectus for
the initial public offering of the common stock of Kirkland's (as adjusted for
any merger, reclassification, recapitalization, stock split, dividend, or other
similar change occurring after the date of such offering).
11. ESCROW OF SHARES.
(A) Upon issuance of Shares pursuant to the exercise of the
Option, stock certificates evidencing the Shares will be delivered by the
Company to, and will be held in escrow by, the Secretary of the Company or his
designee (the "Escrow Holder") until such Shares (or portion thereof) cease to
be subject to repurchase by the Company, at which time, the Escrow Holder will
deliver stock certificates to the Optionee for such Shares (or portion thereof).
(B) The Escrow Holder is hereby directed to permit transfer of
the Shares only in accordance with this Agreement or instructions signed by both
parties. In the event further instructions are reasonably desired by the Escrow
Holder, he shall be entitled to rely upon directions executed by a majority of
the Company's Board of Directors. The Escrow Holder shall have no liability for
any act or omissions hereunder while acting in good faith in the exercise of his
own judgment.
- 6 -
<PAGE> 7
(C) Subject to the terms hereof, the Optionee shall have all
the rights of a stockholder with respect to such Shares while they are held in
escrow, including without limitation, the right to vote the Shares and receive
any cash dividends declared thereon. If, while any of the Shares remain subject
to repurchase, there is (i) any stock dividend, stock split or other change in
the Shares, or (ii) any merger, consolidation or sale of all or substantially
all of the assets or other acquisition of the Company, any and all new,
substituted or additional securities to which the Optionee is entitled by reason
of his ownership of the Shares that are subject to repurchase shall be
immediately subject to this escrow, deposited with the Escrow Holder and
included thereafter as "Shares" for purpose of this Agreement and the Company's
repurchase option.
12. PROCEDURE FOR REPURCHASE. The Company may exercise its right to
repurchase Shares from time to time with respect to any Shares as to which the
Company's repurchase right has not lapsed in accordance with the terms of this
Agreement. The Company may exercise its repurchase right by sending written
notice to the Optionee and the Escrow Holder specifying the number of Shares
which the Company elects to repurchase, the Fair Market Value of such Shares (if
then capable of determination) and the closing date for the repurchase (if then
capable of determination).
If the Company exercises its right to repurchase any of the
Shares, the closing of such transaction take place at the Company's principal
executive offices at 10:00 am EST on the later of: (i) the tenth day after
written notice of the intention to exercise that right is delivered to the
Optionee, or (ii) the tenth day following the date on which the Fair Market
Value can be determined (or, in either case, such other date, time and location
as mutually agreed by the parties). At the closing, the Escrow Holder will
deliver the stock certificate(s) evidencing the repurchased Shares to the
Company, and upon such delivery, full right, title and interest in the Shares
represented by such stock certificates shall pass to the Company. At the
closing, the Company will deliver to the Optionee payment for the repurchased
Shares in the form of a note payable on the later of: (x) three years from the
date of the closing, or (y) February 1, 2006. Such note will bear fixed interest
at a rate equal the prime rate of interest published in The Wall Street Journal
as of the date of closing, plus one (1) percent.
13. LEGENDS ON SHARE CERTIFICATES. Until Shares cease to be subject to
repurchase by the Company, each certificate evidencing any of the Shares shall
bear a legend in substantially the following form:
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO AND
RESTRICTED BY THE TERMS OF A SHAREHOLDERS AGREEMENT DATED AS
OF JUNE 12,
- 7 -
<PAGE> 8
1996, AS AMENDED,(1) AND A STOCK OPTION AGREEMENT DATED AS OF
FEBRUARY 2, 1998, COPIES OF WHICH WILL BE FURNISHED BY
KIRKLAND'S, INC. UPON WRITTEN REQUEST AND WITHOUT CHARGE, AND
ALL THE PROVISIONS OF WHICH ARE INCORPORATED BY REFERENCE IN
THIS CERTIFICATE.
14. SPECIFIC PERFORMANCE. Because of the unique character of the
Shares, the Company will be irreparably damaged if this Agreement is not
specifically enforced. Should any dispute arise concerning the sale or
disposition of the Shares, an injunction may be issued restraining any sale or
disposition pending the resolution of such controversy. In the event of any
controversy concerning the right or obligation to purchase or sell any of the
Shares, such right or obligation shall be enforceable in a court of equity by a
decree of specific performance. Such remedy shall be cumulative and not
exclusive, and shall be in addition to any other remedy which the Company or the
other shareholders of the Company may have.
15. WITHHOLDING. The Company reserves the right to withhold, in
accordance with any applicable laws, from any consideration payable to Optionee
any taxes required to be withheld by federal, state or local law as a result of
the grant or exercise of this Option or the sale or other disposition of the
Shares issued upon exercise of this Option. If the amount of any consideration
payable to the Optionee is insufficient to pay such taxes or if no consideration
is payable to the Optionee, upon the request of the Company, the Optionee (or
such other person entitled to exercise the Option pursuant to Section 6 hereof)
shall pay to the Company an amount sufficient for the Company to satisfy any
federal, state or local tax withholding requirements it may incur, as a result
of the grant or exercise of this Option or the sale or other disposition of the
Shares issued upon the exercise of this Option.
16. THE PLAN. This Option is subject to, and the Company and the
Optionee agree to be bound by, all of the terms and conditions of the Plan as
such Plan may be amended from time to time in accordance with the terms thereof,
provided that no such amendment shall deprive the Optionee, without his consent,
of this Option or any rights hereunder. Pursuant to the Plan, the Board or the
Option Committee of the Board is authorized to adopt rules and regulations not
inconsistent with the Plan as it shall deem appropriate and proper. A copy of
the Plan in its present form is available for inspection during business hours
by the Optionee or the persons entitled to exercise this Option at the Company's
principal office.
- --------
(1) In the event the Stockholders Agreement is terminated for any
reason, the legend required by this Section need not thereafter reference the
Stockholders Agreement.
-8-
<PAGE> 9
17. ADMINISTRATION. The Option and the Plan shall be administered by
Kirkland's, Inc. on behalf of each corporation with respect to which the Option
is granted hereunder.
18. EARLY DISPOSITION OF STOCK. Subject to any limitations on the
disposition of Shares acquired pursuant to this Option, Optionee hereby agrees
that if Optionee disposes of any such Shares within one (1) year after such
Shares were transferred to Optionee or two (2) years after the date as of which
this Option was granted, Optionee will notify the Company in writing within
thirty (30) days after the date of such disposition.
19. ENTIRE AGREEMENT. This Agreement, together with the Plan and the
other exhibits attached thereto or hereto, represents the entire agreement
between the parties with respect to the Option.
20. GOVERNING LAW. This Agreement shall be construed in accordance with
the laws of the State of Tennessee, without regard to the application of the
principles of conflicts of laws.
21. AMENDMENT. Subject to the provisions of the Plan, this Agreement
may only be amended by a writing signed by each of the parties hereto.
Notwithstanding the foregoing, Schedule A to this Agreement may be amended from
time to time by Kirkland's, Inc. without the consent of the Optionee to add or
delete companies subject to the option; provided, however, that any such
deletion will not have a material adverse effect on the economic interests of
the Optionee hereunder.
22. EFFECT OF COMBINATION OF AFFILIATED COMPANIES. Notwithstanding any
other provision of this Agreement or the Plan, if all the stock of the affiliate
companies listed on Schedule A is acquired by Kirkland's, Inc., then this Option
will apply only with respect to shares of common stock of Kirkland's, Inc. and
any references herein to "Shares" will be construed as a reference to only
shares of common stock of Kirkland's, Inc.
IN WITNESS WHEREOF, this Agreement has been executed by the parties on
July 15, 1998, effective as of the 2nd day of February, 1998.
COMPANY
By: /s/ Carl Kirkland
---------------------------------
Title: Chief Executive Officer
---------------------------------
-9-
<PAGE> 10
OPTIONEE
/s/ Reynolds C. Faulkner
----------------------------------
Signature
Reynolds C. Faulkner
----------------------------------
Printed Name
- 10 -
<PAGE> 11
SCHEDULE A - COMPANIES SUBJECT TO OPTION
# Corporate Name
- - --------------
101 Kirkland's of Carolina, Inc.
102 Kirkland's of Charlotte, Eastland Mall, Inc.
103 Kirkland's of Tennessee, Inc.
104 K.C. Corp., Inc.
107 Kirkland's of Greensboro, Four Seasons Mall, Inc.
109 Kirkland's of Fayetteville, Cross Creek Mall, Inc.
110 Kirkland's of Wilmington, Independence Mall, Inc.
111 Kirkland's III, Jackson-Metro Center, Inc.
114 Kirkland's of Memphis, Tennessee, Laurelwood Shopping Center, Inc.
115 Kirkland's of Ridgeland, Mississippi, Northpark Mall, Inc.
116 Kirkland's of Knoxville, East Towne Mall, Inc.
117 Kirkland's of Huntsville, Madison Square Mall, Inc.
118 Kirkland's of Valley View Mall, Roanoke, VA, Inc.
119 Kirkland's of Nashville, Hickory Hollow Mall, Inc.
120 Kirkland's of Birmingham, Riverchase Galleria, Inc.
122 Kirkland's of Briar Cliffe Mall, Myrtle Beach, South Carolina, Inc.
123 Kirkland's of Pecanland Mall, Monroe, LA, Inc.
125 Kirkland's of Town Center at Cobb, Atlanta, GA, Inc.
126 Kirkland's of Gwinnett Place, Atlanta, GA, Inc.
127 Kirkland's of Rivergate Mall, Nashville, TN, Inc.
128 Kirkland's of Peachtree Mall, Columbus, GA, Inc.
129 Kirkland's of Cumberland Mall, Atlanta, GA, Inc.
130 Kirkland's of Hamilton Place Mall, Chattanooga, TN, Inc.
131 Kirkland's of Houston Galleria, Houston, TX, Inc.
132 Kirkland's of Mall of Memphis, Memphis, TN, Inc.
134 Kirkland's of Woodland Hills Mall, Tulsa, OK, Inc.
135 Kirkland's of Dayton Mall, Dayton, OH, Inc.
136 Kirkland's of Oxmoor Center, Louisville, KY, Inc.
137 Kirkland's of South Square Mall, Durham, NC, Inc.
138 Kirkland's of Valley View Center, Dallas, TX, Inc.
139 Kirkland's of Chesterfield Towne Center, Richmond, VA, Inc.
140 Kirkland's of Park Plaza Mall, Little Rock, AR, Inc.
141 Kirkland's of Montgomery Mall, Montgomery, AL, Inc.
142 Kirkland's of Southlake Mall, Atlanta, GA, Inc.
143 Kirkland's of Southpark Mall, Richmond, VA, Inc.
144 Kirkland's of Eastland Mall, Evansville, IN, Inc.
145 Kirkland's of Fayette Mall, Lexington, KY, Inc.
146 Kirkland's of Hickory Ridge Mall, Memphis, TN, Inc.
148 Kirkland's of Regency Square Mall, Jacksonville, FL, Inc.
149 Kirkland's of McCain Mall, Little Rock, AR, Inc.
150 Kirkland's of River Ridge Mall, Lynchburg, VA, Inc.
151 Kirkland's of Bel Air Mall, Mobile, AL, Inc.
152 Kirkland's of The Mall at Barnes Crossing, Tupelo, MS, Inc.
153 Kirkland's of Cortana Mall, Baton Rouge, LA, Inc.
- 11 -
<PAGE> 12
154 Kirkland's of Bellevue Center, Nashville, TN, Inc.
155 Kirkland's of Tri-County Mall, Cincinnati, OH, Inc.
156 Kirkland's of The Mall of the Avenues, Jacksonville, FL, Inc.
157 Kirkland's of Eastwood Mall, Birmingham, AL, Inc.
158 Kirkland's of Lakeside Mall, New Orleans, LA, Inc.
159 Kirkland's of Carolina Place, Charlotte, N.C., Inc.
160 Kirkland's of Cary Village Mall, Raleigh, N.C., Inc.
161 Kirkland's of Cool Springs Galleria, Nashville, TN, Inc.
162 Kirkland's of Kenwood Towne Centre, Cincinnati, OH, Inc.
163 Kirkland's of St. Louis Galleria, St. Louis, MO, Inc.
164 Kirkland's of Wiregrass Commons Mall, Dothan, AL, Inc.
165 Kirkland's of Regency Mall, Richmond, VA, Inc.
166 Kirkland's of Florence Mall, Florence, KY, Inc.
167 Kirkland's of Acadiana Mall, Lafayette, LA., Inc.
168 Kirkland's of Padre Staples Mall, Corpus Christi, TX, Inc.
169 Kirkland's of Belden Village, Canton, OH, Inc.
170 Kirkland's of West Oaks Mall, Houston, TX, Inc.
171 Kirkland's of Charleston Town Center, Charleston, W. VA, Inc.
172 Kirkland's of Crestwood Plaza, St. Louis, MO, Inc.
173 Kirkland's of White Marsh Mall, Baltimore, MD, Inc.
174 Kirkland's of Collin Creek Mall, Dallas, TX, Inc.
175 Kirkland's of Baybrook Mall, Houston, TX, Inc.
176 Kirkland's of Governor's Square Mall, Tallahassee, FL, Inc.
178 Kirkland's of Barton Creek Mall, Austin, TX, Inc.
179 Kirkland's of Highland Mall, Austin, TX, Inc.
180 Kirkland's of Battlefield Mall, Springfield, MO, Inc.
181 Kirkland's of Penn Square Mall, Oklahoma City, OK, Inc.
182 Kirkland's of Oak Park Mall, Kansas City, KS, Inc.
183 Kirkland's of Mall St. Vincent, Shreveport, LA, Inc.
184 Kirkland's of Owings Mills Mall, Baltimore, MD, Inc.
185 Kirkland's of Oakwood Center, New Orleans, LA, Inc.
186 Kirkland's of The Mall at Johnson City, Johnson City, TN, Inc.
187 Kirkland's of Glenbrook Mall, Ft. Wayne, IN, Inc.
188 Kirkland's of North Pointe Mall, Atlanta, GA, Inc.
189 Kirkland's Northpark Mall, Joplin, MO, Inc.
190 Kirkland's of Orlando Fashion Square, Orlando, FL, Inc.
191 Kirkland's of The Mall at Fairfield Commons, Dayton, OH, Inc.
192 Kirkland's of St. Charles Towne Center, Waldorf, MD, Inc.
193 Kirkland's of Regency Mall, Florence, AL, Inc.
194 Kirkland's of South Plains Mall, Lubbock, TX, Inc.
195 Kirkland's of The Parks at Arlington, Ft. Worth, TX, Inc.
196 Kirkland's of Parma Town Mall, Cleveland, OH, Inc.
197 Kirkland's of St. Clair Square, St. Louis, MO, Inc.
198 Kirkland's of Turtle Creek Mall, Hattiesburg, MS, Inc.
199 Kirkland's of the Woodlands, Houston, TX, Inc.
200 Kirkland's of Brandon Town Center, Tampa, FL, Inc.
201 Kirkland's of Memorial City Mall, Houston, TX, Inc.
202 Kirkland's of University Mall, Tuscaloosa, AL, Inc.
203 Kirkland's of Santa Rosa Mall, Fort Walton, FL, Inc.
- 12 -
<PAGE> 13
204 Kirkland's of Panama City Mall, Panama City, FL, Inc.
205 Kirkland's of Town East Mall, Mesquite, TX, Inc.
206 Kirkland's of Kentucky Oaks Mall, Paducah, KY, Inc.
207 Kirkland's of Crabtree Valley Mall, Raleigh, N.C., Inc.
208 Kirkland's of Oak Hollow Mall, High Point, N.C., Inc.
209 Kirkland's of Fox Valley Mall, Chicago, IL, Inc.
210 Kirkland's of Hawthorne Mall, Chicago, IL, Inc.
211 Kirkland's of Stratford Square, Chicago, IL, Inc.
212 Kirkland's of Orland Square, Chicago, IL, Inc.
214 Kirkland's of Coastland Mall, Naples, FL, Inc.
215 Kirkland's of Edgewater Mall, Biloxi, MS., Inc.
216 Kirkland's of Town Center Plaza, Kansas City, KS, Inc.
217 Kirkland's of Castleton Square, Indianapolis, IN., Inc.
218 Kirkland's of Cordova Mall, Pensacola, FL, Inc.
219 Kirkland's of University Park, South Bend, IN, Inc.
220 Kirkland's of Westgate Mall, Spartanburg, SC, Inc.
221 Kirkland's of Westgate Mall, Amarillo, TX, Inc.
222 Kirkland's of Meridian Mall, Lansing, MI, Inc.
223 Kirkland's of Cottonwood Mall, Albuquerque, NM, Inc.
224 Kirkland's of University Mall, Tampa, FL, Inc.
225 Kirkland's of Northgate Mall, Cincinnati, OH, Inc.
226 Kirkland's of West Oaks Mall, Orlando, FL, Inc.
227 Kirkland's of Park City Center, Lancaster, PA, Inc.
228 Kirkland's of Northpark Mall, Davenport, IA, Inc.
229 Kirkland's of Perimeter Mall, Atlanta, GA, Inc.
230 Kirkland's of Tyrone Square, St. Petersburg, FL, Inc.
231 Kirkland's of Indian River Mall, Vero Beach, FL, Inc.
232 Kirkland's of Northwest Arkansas Mall, Fayetteville, AR, Inc.
233 Kirkland's of Wolfchase Galleria, Memphis, TN, Inc.
234 Kirkland's of Lindale Mall, Cedar Rapids, IA, Inc.
235 Kirkland's of Coronado Mall, Albuquerque, NM, Inc.
236 Kirkland's of Willowbrook Mall, Houston, TX, Inc.
237 Kirkland's of Honey Creek Mall, Terre Haute, IN, Inc.
238 Kirkland's of Southpark Mall, Moline, IL, Inc.
Kirkland's of Valley West Mall, Des Moines, IA, Inc.
Kirkland's of Greenbrier Mall, Chesapeake, VA, Inc.
Kirkland's of Cielo Vista Mall, El Paso, TX, Inc.
Kirkland's of Tuttle Crossing, Columbus, OH, Inc.
Kirkland's of Leigh Mall, Columbus, MS, Inc.
Kirkland's of North Shore Square, Slidell, LA, Inc.
Kirkland's of Post Oak Mall, College Station, TX, Inc.
Kirkland's of Bonita Lakes Mall, Meridian, MS, Inc.
Kirkland's of Huntington Mall, Huntington, WV, Inc.
Kirkland's of Mall of Louisiana, Baton Rouge, LA, Inc.
Kirkland's of Millcreek Mall, Erie, PA, Inc.
Kirkland's of Volusia Mall, Daytona Beach, FL, Inc.
Kirkland's of Gateway Mall, Lincoln, NE, Inc.
- 13 -
<PAGE> 14
COUNTERPART
THIS INSTRUMENT forms part of the Registration Rights Agreement made as
of the 12th day of June, 1996 among Kirkland's, Inc., its affiliated companies
and their shareholders (as amended from time to time, the "Agreement"), which
Agreement permits execution by counterpart. The undersigned hereby acknowledges
having received a copy of the Agreement (which is annexed hereto) and having
read the Agreement in its entirety, and for good and valuable consideration,
receipt and sufficiency of which is hereby acknowledged, hereby agrees that the
terms and conditions of the Agreement shall be binding upon the undersigned as a
Shareholder of Kirkland's, Inc. and its affiliated companies (as the term
"Shareholder" is defined in the Agreement) and such terms and conditions shall
inure to the benefit of and be binding upon the undersigned and its successors
and permitted assigns.
IN WITNESS WHEREOF, the undersigned has executed this instrument as of
this 15th day of July, 1998.
/s/ Reynolds C. Faulkner
---------------------------------------
Signature of Optionee
Reynolds C. Faulkner
---------------------------------------
Printed Name of Optionee
- 14 -
<PAGE> 15
COUNTERPART
THIS INSTRUMENT forms part of the Shareholders Agreement made
as of the 12th day of June, 1996 among Kirkland's, Inc., its affiliated
companies and their shareholders (as amended from time to time, the
"Agreement"), which Agreement permits execution by counterpart. The undersigned
hereby acknowledges having received a copy of the Agreement (which is annexed
hereto) and having read the Agreement in its entirety, and for good and valuable
consideration, receipt and sufficiency of which is hereby acknowledged, hereby
agrees that the terms and conditions of the Agreement shall be binding upon the
undersigned as a Shareholder of Kirkland's, Inc. and its affiliated companies
(as the term "Shareholder" is defined in the Agreement) and such terms and
conditions shall inure to the benefit of and be binding upon the undersigned and
its successors and permitted assigns.
IN WITNESS WHEREOF, the undersigned has executed this instrument as of
this 15th day of July, 1998.
/s/ Reynolds C. Faulkner
---------------------------------------
Signature of Optionee
Reynolds C. Faulkner
---------------------------------------
Printed Name of Optionee
- 15 -
<PAGE> 16
ACKNOWLEDGMENT OF
REVIEW OF PLAN DOCUMENT
The Optionee acknowledges receipt of a copy of the Plan, a copy of
which is attached hereto, and represents that he has read and is familiar with
the terms and provisions thereof, and hereby accepts this Option subject to all
of the terms and provisions thereof. The Optionee hereby agrees to accept as
binding, conclusive and final all decisions or interpretations of the Board of
Directors or the Committee upon any questions arising under the Plan.
Date: July 15, 1998 /s/ Reynolds C. Faulkner
-------------------------- ---------------------------------------
Signature of Optionee
Reynolds C. Faulkner
---------------------------------------
Printed Name of Optionee
c/o Kirkland's, Inc.
805 N. Parkway
---------------------------------------
Address
Jackson, TN 38305
---------------------------------------
City, State, Zip
THIS OPTION AND THE SECURITIES WHICH MAY BE PURCHASED UPON EXERCISE OF
THIS OPTION HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, AND HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN
CONNECTION WITH, THE SALE, TRANSFER OR DISTRIBUTION THEREOF. NO SUCH SALE,
TRANSFER OR DISTRIBUTION MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION
STATEMENT RELATING THERETO OR A SATISFACTORY OPINION OF COUNSEL SATISFACTORY TO
THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.
THE SHARES WHICH MAY BE PURCHASED UPON EXERCISE OF THIS OPTION MAY BE
TRANSFERRED ONLY IN ACCORDANCE WITH THE TERMS OF A STOCK PURCHASE AGREEMENT TO
BE ENTERED INTO BETWEEN THE HOLDER OF THIS OPTION AND THE COMPANY UPON EXERCISE
OF THIS OPTION, A COPY OF WHICH AGREEMENT IS ON FILE WITH THE SECRETARY OF THE
COMPANY.
- 16 -
<PAGE> 1
EXHIBIT 10.17
AMENDMENT TO EMPLOYMENT AGREEMENT
WHEREAS, Kirkland's, Inc. (the "Employer") and Steven J. Collins
("Employee") entered into an employment agreement effective as of February 1,
1997 (the "Agreement"); and
WHEREAS, Employee's title has been revised since the execution of the
Agreement; and
WHEREAS, the Agreement makes certain assumptions regarding the future
capitalization of the Employer, which assumptions did not prove accurate; and
WHEREAS, the Employer and Employee now desire to amend the Agreement to
reflect Employee's revised title and to reflect the correct capitalization of
the Employer.
NOW THEREFORE, the Agreement is hereby amended as follows:
1. Effective as of February 2, 1998, the first Recital is amended to
state: "Employer desires to continue to employ Employee as its Director of
Finance ("Director of Finance")."
2. Effective as of February 2, 1998, each reference within the
Agreement to the term "CFO" is replaced with a reference to the term "Director
of Finance."
3. Effective as of June 27, 1997, footnote 1 is deleted.
4. Effective as of June 27, 1997, Sections 4(c), 4(d) and 4(e) are
deleted in their entirety and replaced with the following:
(c) stock options to purchase 230 shares of the Employer's common stock at
$95.00 per share, subject to the terms of the Stock Option Agreement under
the Kirkland's, Inc. 1996 Executive Incentive and Non-Qualified Stock
Option Plan dated June 27, 1997 between the Employer, certain affiliated
companies and Employee.
5. Effective January 1, 1998, the annual base salary was changed from
$75,000 to $87,000.
THE AGREEMENT, as amended by the foregoing changes, is hereby ratified and
confirmed in all respects.
IN WITNESS WHEREOF, the parties have executed this Amendment on July 8,
1998, effective as of the dates above set forth.
STEVEN J. COLLINS KIRKLAND'S, INC.
/s/ Steven J. Collins By: /s/ Robert E. Alderson
- ---------------------------- ----------------------------
Date: July 8, 1998 Title: President
Date: July 8, 1998
<PAGE> 1
Exhibit 16
[KPMG PEAT MARWICK LLP LETTERHEAD]
July 9, 1998
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Gentlemen:
We have read the statements made by Kirkland's, Inc. in the section captioned
"Information Concerning Independent Public Accountants" in Amendment No. 1 to
the Form S-1 of Kirkland's, Inc. being filed with the Securities and Exchange
Commission on or about the date hereof. We agree with the statements concerning
our Firm in such captioned section.
Very truly yours,
/s/ KPMG Peat Marwick LLP
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT
<TABLE>
<CAPTION>
STATE OR OTHER
JURISDICTION OF OTHER NAMES UNDER
CORPORATION OR WHICH SUBSIDIARY DOES
NAME OF SUBSIDIARY ORGANIZATION BUSINESS
<S> <C> <C>
Kirkland's of Pecanland Mall, Monroe, LA, Inc. Tennessee
Kirkland's of Town Center at Cobb, Kennesaw, GA, Tennessee
Inc.
Kirkland's of Gwinnett Place, Duluth, GA, Inc. Tennessee
Kirkland's of Peachtree Mall, Columbus, GA, Inc. Tennessee
Kirkland's of Cumberland Mall, Atlanta, A, Inc. Tennessee
Kirkland's of Hamilton Place Mall, Chattanooga, Tennessee
TN, Inc.
Kirkland's of Houston Galleria, Houston, TX, Inc. Tennessee
Kirkland's of Mall of Memphis, Memphis, TN, Inc. Tennessee
Kirkland's of Woodland Hills Mall, Tulsa, OK, Inc. Tennessee
Kirkland's of Oxmoor Center, Louisville, KY, Inc. Tennessee
Kirkland's of South Square Mall, Durham, NC, Inc. Tennessee
Kirkland's of Valley View Center, Dallas, TX, Inc. Tennessee
Kirkland's of Chesterfield Towne Center, Tennessee
Richmond, VA, Inc.
Kirkland's of Park Plaza Mall, Little Rock, AR, Tennessee
Inc.
Kirkland's of Montgomery Mall, Montgomery, AL, Tennessee
Inc.
Kirkland's of Southlake Mall, Atlanta, GA, Inc. Tennessee
Kirkland's of Southpark Mall, Richmond, VA, Inc. Tennessee
Kirkland's of Eastland Mall, Evansville, IN, Inc. Tennessee
Kirkland's of Fayette Mall, Lexington, KY, Inc. Tennessee
Kirkland's of Hickory Ridge Mall, Memphis, TN, Tennessee
Inc.
Kirkland's of Regency Square Mall, Jacksonville, Tennessee
FL, Inc.
Kirkland's of McCain Mall, Little Rock, AR, Inc. Tennessee
Kirkland's of River Ridge Mall, Lynchburg, VA, Tennessee
Inc.
Kirkland's of Bel Air Mall, Mobile, AL, Inc. Tennessee
Kirkland's of The Mall at Barnes Crossing, Tupelo, Tennessee
MS, Inc.
Kirkland's of Cortana Mall, Baton Rouge, LA, Inc. Tennessee
Kirkland's of Bellevue Center, Nashville, TN, Inc. Tennessee
</TABLE>
<PAGE> 2
<TABLE>
<CAPTION>
STATE OR OTHER
JURISDICTION OF OTHER NAMES UNDER
CORPORATION OR WHICH SUBSIDIARY DOES
NAME OF SUBSIDIARY ORGANIZATION BUSINESS
<S> <C> <C>
Kirkland's of Tri-County Mall, Cincinnati, OH, Inc. Tennessee
Kirkland's of The Mall of the Avenues, Tennessee
Jacksonville, FL, Inc.
Kirkland's of Eastwood Mall, Birmingham, AL, Tennessee
Inc.
Kirkland's of Lakeside Mall, New Orleans, LA, Tennessee
Inc.
Kirkland's of Carolina Place, Charlotte, NC, Inc. Tennessee
Kirkland's of Cary Village Mall, Raleigh, NC, Inc. Tennessee
Kirkland's of Cool Springs Galleria, Nashville, TN, Tennessee
Inc.
Kirkland's of Kenwood Towne Centre, Cincinnati, Tennessee
OH, Inc.
Kirkland's of St. Louis Galleria, St. Louis, MO, Tennessee
Inc.
Kirkland's of Wiregrass Commons Mall, Dothan, Tennessee
AL, Inc.
Kirkland's of Regency Mall, Richmond, VA, Inc. Tennessee
Kirkland's of Florence Mall, Florence, KY, Inc. Tennessee
Kirkland's of Acadiana Mall, Lafayette, LA, Inc. Tennessee
Kirkland's of Padre Staples Mall, Corpus Christi, Tennessee
TX, Inc.
Kirkland's of Belden Village, Canton, OH, Inc. Tennessee
Kirkland's of West Oaks Mall, Houston, TX, Inc. Tennessee
Kirkland's of Charleston Town Center, Charleston, Tennessee
W. VA, Inc.
Kirkland's of Crestwood Plaza, St. Louis, MO, Inc. Tennessee
Kirkland's of White Marsh Mall, Baltimore, MD, Tennessee
Inc.
Kirkland's of Collin Creek Mall, Dallas, TX, Inc. Tennessee
Kirkland's of Baybrook Mall, Houston, TX, Inc. Tennessee
Kirkland's of Governor's Square Mall, Tallahassee, Tennessee
FL, Inc.
Kirkland's of Barton Creek Mall, Austin, TX, Inc. Tennessee
Kirkland's of Highland Mall, Austin, TX, Inc. Tennessee
Kirkland's of Battlefield Mall, Springfield, MO, Tennessee
Inc.
Kirkland's of Penn Square Mall, Oklahoma City, Tennessee
OK, Inc.
Kirkland's of Oak Park Mall, Kansas City, KS, Inc. Tennessee
Kirkland's of Mall St. Vincent, Shreveport, LA, Tennessee
Inc.
Kirkland's of Owings Mills Mall, Baltimore, MD, Tennessee
Inc.
Kirkland's Walden Galleria, Buffalo, NY, Inc.
store scheduled to open 10/98
</TABLE>
-2-
<PAGE> 3
<TABLE>
<CAPTION>
STATE OR OTHER
JURISDICTION OF OTHER NAMES UNDER
CORPORATION OR WHICH SUBSIDIARY DOES
NAME OF SUBSIDIARY ORGANIZATION BUSINESS
<S> <C> <C>
Kirkland's of Oakwood Center, New Orleans, LA, Tennessee
Inc.
Kirkland's of The Mall at Johnson City, Johnson Tennessee
City, TN, Inc.
Kirkland's of Glenbrook Mall, Ft. Wayne, IN, Inc. Tennessee
Kirkland's of North Pointe Mall, Atlanta, GA, Inc. Tennessee
Kirkland's of Northpark Mall, Joplin, MO, Inc. Tennessee
Kirkland's of Orlando Fashion Square, Orlando, Tennessee
FL, Inc.
Kirkland's of The Mall at Fairfield Commons, Tennessee
Dayton, OH, Inc.
Kirkland's of St. Charles Towne Center, Waldorf, Tennessee
MD, Inc.
Kirkland's of Regency Mall, Florence, AL, Inc. Tennessee
Kirkland's of South Plains Mall, Lubbock, TX, Inc. Tennessee
Kirkland's of The Parks at Arlington, Ft. Worth, Tennessee
TX, Inc.
Kirkland's of Parma Town Mall, Cleveland, OH, Tennessee
Inc.
Kirkland's of St. Clair Square, St. Louis, MO, Inc. Tennessee
Kirkland's of Turtle Creek Mall, Hattiesburg, MS, Tennessee
Inc.
Kirkland's of The Woodlands, Houston, TX, Inc. Tennessee
Kirkland's of Brandon Town Center, Tampa, FL, Tennessee
Inc.
Kirkland's of Memorial City Mall, Houston, TX, Tennessee
Inc.
Kirkland's of University Mall, Tuscaloosa, AL, Inc. Tennessee
Kirkland's of Santa Rosa Mall, Fort Walton, FL, Tennessee
Inc.
Kirkland's of Panama City Mall, Panama City, FL, Tennessee
Inc.
Kirkland's of Town East Mall, Mesquite, TX, Inc. Tennessee
Kirkland's of Kentucky Oaks Mall, Paducah, KY, Tennessee
Inc.
Kirkland's of Crabtree Valley Mall, Raleigh, NC, Tennessee
Inc.
Kirkland's of Oak Hollow Mall, Highpoint, NC, Tennessee
Inc.
Kirkland's of Fox Valley Mall, Chicago, IL, Inc. Tennessee
Kirkland's of Hawthorne Mall, Chicago, IL, Inc. Tennessee
Kirkland's of Stratford Square, Chicago, IL, Inc. Tennessee
Kirkland's of Orland Square, Chicago, IL, Inc., Tennessee
Kirkland's of Coastland Mall, Naples, FL, Inc. Tennessee
</TABLE>
-3-
<PAGE> 4
<TABLE>
<CAPTION>
STATE OR OTHER
JURISDICTION OF OTHER NAMES UNDER
CORPORATION OR WHICH SUBSIDIARY DOES
NAME OF SUBSIDIARY ORGANIZATION BUSINESS
<S> <C> <C>
Kirkland's of Carolina, Inc. Tennessee
Kirkland's of Charlotte, Eastland Mall, Inc. Tennessee
Kirkland's of Tennessee, Inc. Tennessee
K.C. Corp., Inc. Tennessee
Kirkland's of Greensboro, Four Seasons Mall, Inc. Tennessee
Kirkland's of Fayetteville, Cross Creek Mall, Inc. Tennessee
Kirkland's of Wilmington, Independence Mall, Inc. Tennessee
Kirkland's III, Jackson-Metro Center, Inc. Tennessee
Kirkland's of Memphis, TN, Laurelwood Shopping Tennessee
Center, Inc.
Kirkland's of Ridgeland, MS, Northpark Mall, Inc. Tennessee
Kirkland's of Knoxville, East Towne Mall, Inc. Tennessee
Kirkland's of Huntsville, Madison Square Mall, Tennessee
Inc.
Kirkland's of Valley View Mall, Roanoke, VA, Inc. Tennessee
Kirkland's of Nashville, Hickory Hollow Mall, Inc. Tennessee
Kirkland's of Birmingham, Riverchase Galleria, Tennessee
Inc.
Kirkland's of Briar Cliffe Mall, Myrtle Beach, Tennessee
South Carolina, Inc.
Kirkland's of Rivergate Mall, Nashville, TN, Inc. Tennessee
Kirkland's of Edgewater Mall, Biloxi, MS, Inc. Tennessee
Kirkland's of Town Center Plaza, Kansas City, KS, Tennessee
Inc.
Kirkland's of Castleton Square, Indianapolis, IN, Tennessee
Inc.
Kirkland's of Cordova Mall, Pensacola, FL, Inc. Tennessee
Kirkland's of University Park, South Bend, IN, Inc. Tennessee
Kirkland's of Westgate mall, Amarillo, TX, Inc. Tennessee
Kirkland's of Meridian Mall, Lansing, MI Tennessee
Kirkland's of Cottonwood Mall, Albuquerque, NM, Tennessee
Inc.
Kirkland's of University Mall, Tampa, FL, Inc. Tennessee
Kirkland's of Northwest Arkansas Mall, Tennessee
Fayetteville, AR, Inc.
Kirkland's of Indian River Mall, Vero Beach, FL, Tennessee
Inc.
Kirkland's of Tyrone Square, St. Petersburg, FL, Tennessee
Inc.
Kirkland's of Northgate Mall, Cincinnati, OH, Inc. Tennessee
Kirkland's of West Oaks Mall, Orlando, FL, Inc. Tennessee
Kirkland's of Park City Center, Lancaster, PA, Inc. Tennessee
</TABLE>
-4-
<PAGE> 5
<TABLE>
<CAPTION>
STATE OR OTHER
JURISDICTION OF OTHER NAMES UNDER
CORPORATION OR WHICH SUBSIDIARY DOES
NAME OF SUBSIDIARY ORGANIZATION BUSINESS
<S> <C> <C>
Kirkland's of Northpark Mall, Davenport, IA, Inc. Tennessee
Kirkland's of Perimeter Mall, Atlanta, GA, Inc. Tennessee
Kirkland's of Wolfchase Galleria, Memphis, TN, Tennessee
Inc.
Kirkland's of Lindale Mall, Cedar Rapids, IA, Inc. Tennessee
Kirkland's of Coronado Mall, Albuquerque, NM, Tennessee
Inc.
Kirkland's of Willowbrook Mall, Houston, TX, Inc. Tennessee
Kirkland's of Westgate Mall, Spartanburg, SC, Inc. Tennessee
Kirkland's of Honey Creek Mall, Terre Haute, IN, Inc. Tennessee
Kirkland's of Southpark Mal, Moline, IL, Inc. Tennessee
Kirkland's of Cielo Vista Mall, El Paso, TX, Inc. Tennessee
Kirkland's of Greenbrier Mall, Houston, TX, Inc. Tennessee
Kirkland's of Volusia Mall, Daytona Beach, FL, Inc. Tennessee
Kirkland's of Tuttle Crossing, Columbus, OH, Inc. Tennessee
Kirkland's of Leigh Mall, Columbus, OH, Inc. Tennessee
Kirkland's of Gateway Mall, Lincoln, NE, Inc. Tennessee
Kirkland's of North Shore Square, Slidell, LA, Inc. Tennessee
Kirkland's of Valley West Mall, Des Moines, IA, Inc. Tennessee
Kirkland's of Bonita Lakes Mall, Meridian, MS, Inc. Tennessee
Kirkland's of Huntington Mall, Huntington, WV, Inc. Tennessee
Kirkland's of Mall of Louisiana, Baton Rouge, LA, Inc. Tennessee
Kirkland's of Millcreek Mall, Erie, PA, Inc. Tennessee
Kirkland's of Southland Mall, Houma, LA, Inc. Tennessee
Kirkland's of First Colony Mall, Houston, TX, Inc. Tennessee
Kirkland's of Coral Ridge Mall, Coralville, LA, Inc. Tennessee
</TABLE>
-5-
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated February 13, 1998,
except as to Note 8 which is as of April 27, 1998, relating to the financial
statements of Kirkland's, Inc. and Affiliates, which appears in such
Prospectus. We also consent to the references to us under the headings
"Experts" and "Selected Financial Data" in such Prospectus. However, it should
be noted that PricewaterhouseCoopers LLP has not prepared or certified such
"Selected Financial Data."
/s/ PricewaterhouseCoopers LLP
PRICEWATERHOUSECOOPERS LLP
Memphis, Tennessee
July 13, 1998
<PAGE> 1
Exhibit 23.2
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Kirkland's Inc., and Affiliates:
We consent to the use of our report included herein and to the reference to our
firm under the headings "Experts" and "Selected Combined Financial Data" in the
Prospectus.
/s/ KPMG Peat Marwick LLP
--------------------------
KPMG Peat Marwick LLP
Memphis, Tennessee
July 13, 1998
