KIRKLANDS INC, S-1/A, 1998-11-10

KIRKLANDS INC
S-1/A, 1998-11-10
RETAIL STORES, NEC

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 10, 1998

REGISTRATION NO. 333-51517
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------

AMENDMENT NO. 2

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.
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<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 November 10, 1998

PROSPECTUS

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 10.
---------------------------

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>
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UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
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<S> <C> <C> <C>
Per Share................................. $ $ $
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Total(3).................................. $ $ $
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</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 195 permanent stores in 27 states under
either the Kirkland's or Briar Patch name. The Company operates ten temporary
stores in selected markets. 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 permanent
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 and Briar Patch 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-12 GEORGIA-17 KENTUCKY-6 MISSOURI-4 OHIO-10 TEXAS-22
Auburn Albany Bowling Green St. Louis(2) Akron Houston(7)
Birmingham(2) Athens Louisville(2) Springfield Dayton Dallas(5)
Decatur Atlanta(6) Lexington Joplin Cincinnati(3) Corpus
Gadsden Augusta Florence Canton Christi
Huntsville Columbus Paducah NEBRASKA-1 Cleveland Austin(3)
Montgomery Macon(2) Lincoln Dublin Lubbock
Mobile Rome LOUISIANA-11 Youngstown(2) Amarillo
Dothan Savannah(3) Monroe NEW MEXICO-2 El Paso
Florence Valdosta Baton Rouge(2) Albuquerque(2) OKLAHOMA-2 Midland
Prattville New Orleans(2) Tulsa San Antonio
Tuscaloosa ILLINOIS-6 Kenner NEW YORK-1 Oklahoma City Waco
Chicago(4) Lafayette West Nyack
ARKANSAS-3 Moline Lake Charles PENNSYLVANIA-3 VIRGINIA-9
Little Rock(2) St. Louis Shreveport NORTH Altoona Charlottesville
Fayetteville Slidell CAROLINA-12 Lancaster Roanoke
IOWA-4 Houma Charlotte(2) Erie Richmond(3)
FLORIDA-26 Davenport Durham Lynchburg
Altamonte Cedar Rapids MARYLAND-2 Greensboro SOUTH Chesapeake
Springs Des Moines Baltimore Hickory CAROLINA-10 Newport
Clearwater Iowa City Waldorf Fayetteville Anderson News
Coral Springs Wilmington Charleston(2) Winchester
Daytona Beach INDIANA-6 MICHIGAN-1 Durham Columbia(3)
Fort Myers Evansville Olcemos Cary Greenville WEST
Fort Walton Ft. Wayne Raleigh Florence VIRGINIA-2
Gainesville Indianapolis(2) MISSISSIPPI-7 Rocky Mount Myrtle Beach Charleston
Jacksonville(3) South Bend Jackson(2) High Point Spartanburg Barboursville
Lake Wales Terre Haute Tupelo
Naples Harrisburg TENNESSEE-12 WISCONSIN-2
Orlando(3) KANSAS-2 Biloxi Jackson Appleton
Panama City Kansas City(2) Columbus Knoxville(2) Eau Claire
Pembroke Meridian Memphis(3)
Pensacola Nashville(4)
Plantation Chattanooga
Sanford Johnson City
St. Petersburg
Tallahassee
Tampa(3)
Vero Beach
</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."
2
<PAGE> 4

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.

3
<PAGE> 5

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 although there are many specialty retailers
with higher net sales, the Company currently maintains one of the highest
operating margins among comparable specialty retailers.

The Company's 195 stores in 27 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

4
<PAGE> 6

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 July 31, 1998, the Company purchased all of the capital stock of The
Briar Patch Management Corporation ("Briar Patch"), a specialty retailer of home
accessories and gifts based in Savannah, Georgia.

5
<PAGE> 7

Briar Patch currently operates 35 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. See "Business - Growth Strategy."

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 ) 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".

6
<PAGE> 8

SUMMARY COMBINED FINANCIAL DATA

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------------------------------- -------------------
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 $ 56,494 $ 63,380
Gross profit.................... 33,080 38,088 43,200 47,508 56,586 17,539 20,417
Operating expenses.............. 17,177 19,572 24,192 27,915 35,004 15,062 18,247
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 2,027 2,344
------- ------- -------- -------- -------- -------- --------
Operating income(loss).......... 2,008 1,546 2,720 15,356 16,684 450 (174)
Interest expense, net(3)........ 719 814 1,253 6,247 10,099 5,042 4,575
Other income, net............... (184) (255) (221) (147) (154) (110) (151)
Income tax provision
(benefit)..................... -- -- -- 2,693 2,817 (1,412) (1,437)
------- ------- -------- -------- -------- -------- --------
Net income(loss)................ 1,473 987 1,688 6,563 3,922 (3,070) (3,161)
Accretion of redeemable
preferred stock and dividends
accrued(4).................... -- -- -- 2,313 3,755 1,877 1,929
------- ------- -------- -------- -------- -------- --------
Net income (loss) allocable to
common stock.................. $ 1,473 $ 987 $ 1,688 $ 4,250 $ 167 $ (4,947) $ (5,090)
======= ======= ======== ======== ======== ======== ========
Earnings (loss) per common share
Basic......................... $14,730 $ 9,870 $ 16,880 $ 76.18 $ 1.67 $ (49.47) $ (55.08)
Diluted....................... $14,730 $ 9,870 $ 16,880 $ 65.55 $ 1.35 $ (49.47) $ (55.08)
Weighted average common and
common equivalent shares
outstanding
Basic......................... 100 100 100 55,789 100,000 100,000 92,403
Diluted....................... 100 100 100 64,838 123,549 100,000 92,403
PRO FORMA DATA(5):
Pro forma net income (loss)..... $ 7,603 $ (1,229)
======== ======== ========
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 $ 2,587 $ 2,321
Net cash provided by (used in)
operating activities.......... 3,422 2,040 1,269 11,065 8,669 (11,984) (15,503)
Net cash provided by (used in)
investing activities.......... 2,818 2,652 (4,130) (4,205) (5,479) (3,142) (3,677)
Net cash provided by (used in)
financing activities.......... 772 1,320 3,278 (982) (3,537) 3,898 10,603
</TABLE>

7
<PAGE> 9

<TABLE>
<CAPTION>
JUNE 30, 1998
----------------------------
ACTUAL AS ADJUSTED(10)
--------- ---------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Working capital............................................. $ 9,753 $10,523
Total assets................................................ 55,970 55,970
Total long-term and short-term debt, including mandatorily
redeemable Class C Preferred Stock........................ 103,212 53,913
Redeemable convertible preferred stock (Class A and Class B
Preferred Stock).......................................... 48,515 --
Shareholders' deficit....................................... (106,706) (8,122)
</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
$900,000 and $770,000 for the six months ended June 30, 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 $194,000 for the six
months ended June 30, 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
and $12.4 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 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.

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(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."

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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 directly 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's existing senior credit
facility limits the Company's capital expenditures to $5.5 million. As a result,
a waiver or amendment of this limitation will be required in order for the
Company to carry out its total planned store openings, remodels and expansions
in 1998. Under the existing limitation on capital expenditures, the Company
estimates that it would be able to open only approximately 20 stores and would
not be able to complete any additional store remodels or expansions. 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 which
will, among other things, provide for a level of permitted new store openings
and capital expenditures sufficient for the Company to carry out its 1998 growth
plans in full. 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.

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The Company acquired Briar Patch on July 31, 1998. The full benefits of the
acquisition of Briar Patch will require the integration of each company's
administrative, finance, 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 (including the new revolving credit
facility currently under negotiation) 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 half 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
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instability causing disruption of trade from the countries in which the
suppliers of the Company's vendors are located.

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

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<PAGE> 14

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.

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 June 30, 1998 of
approximately $53.9 million, including approximately $41.7 million outstanding
under its senior credit facility, and its total interest expense for the first
half of 1998 would have been $2.0 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

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<PAGE> 15

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 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 125 of the Company's 195 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.
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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
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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

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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.

17
<PAGE> 19

USE OF PROCEEDS

The net proceeds to be received by the Company from the sale of the
shares offered hereby will be approximately $50.3 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) $20.0 million to repay outstanding subordinated debt; (ii) $17.9
million to purchase or redeem all of the outstanding shares of mandatorily
redeemable Class C Preferred Stock (including approximately $770,000 of amounts
classified as interest associated with the Class C Preferred Stock); and (iii)
$12.4 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 June 30, 1998, the Company's senior indebtedness consisted of $54.1
million outstanding under a senior credit facility which matures in June 2002.
As of June 30, 1998, the weighted average interest rate on the senior
indebtedness expected to be repaid with net proceeds of the Offering was 9.4%.
Immediately following the completion of the Offering, the Company expects to
have remaining outstanding senior indebtedness of approximately $41.7 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 June 30, 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.

18
<PAGE> 20

DILUTION

The pro forma net negative tangible book value of the Company as of June
30, 1998, after giving effect to the Pre-Offering Transactions, was $58.2
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 June
30, 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 June 30, 1998 would have been $8.1
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 June 30,
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 June 30, 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:

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."

19
<PAGE> 21

CAPITALIZATION

The following table sets forth, as of June 30, 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>
JUNE 30, 1998
----------------------------------------
PRO FORMA
ACTUAL PRO FORMA(1) AS ADJUSTED
--------- ------------ -----------
<S> <C> <C> <C>
Short-term debt........................................ $ 16,553 $ 16,553 $ 16,553
Long-term debt:
Senior credit facility............................... $ 49,489 $ 49,489 $ 37,098
Subordinated debt.................................... 19,786 19,786 --
Other indebtedness................................... 262 262 262
Mandatorily redeemable preferred stock (Class C)..... 17,122 17,122 --
--------- --------- ---------
86,659 86,659 37,360
--------- --------- ---------
Total long-term debt..............................
Common stock warrants..................................
Redeemable convertible preferred stock
(Class A and Class B Preferred Stock)................ 48,515 -- --
--------- --------- ---------
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...................................... 1,243 49,758 100,041
Accumulated deficit.................................. (108,152) (108,152) (108,366)
--------- --------- ---------
Total shareholders' deficit....................... (106,706) (58,191) (8,122)
--------- --------- ---------
Total capitalization......................... $ 28,468 $ 28,468 $ 29,238
========= ========= =========
</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 June 30, 1998, of which shares were
subject to options which will be exercisable upon completion of the
Offering.

20
<PAGE> 22

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 June 30, 1998 and the
pro forma combined condensed statements of operations for the fiscal year 1997
and the six months ended June 30, 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.

21
<PAGE> 23

UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET

JUNE 30, 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....................... $ 2,304 $ 2,304 $ 2,304
Inventories..................................... 30,913 30,913 30,913
Other current assets............................ 4,038 4,038 4,038
--------- --------- ---------
Total current assets.......................... 37,255 37,255 37,255
Property and equipment, net....................... 14,748 14,748 14,748
Noncurrent deferred income taxes.................. 201 201 201
Debt issue costs, net............................. 3,766 3,766 3,766
--------- --------- ---------
Total assets.................................. 55,970 55,970 55,970
========= ========= =========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND
SHAREHOLDERS' DEFICIT
Current liabilities:
Current maturities of long-term debt............ 16,553 16,553 16,553
Accounts payable and accrued liabilities........ 10,949 10,949 (770) (d) 10,179
--------- -------- --------- -------- ---------
Total current liabilities..................... 27,502 -- 27,502 (770) 26,732
Senior credit facility............................ 49,489 49,489 (12,391) (c) 37,098
Subordinated debt................................. 19,786 19,786 (19,786) (b) --
Other indebtedness................................ 262 262 262
Class C Preferred Stock........................... 17,122 17,122 (17,122) (d) --
--------- -------- --------- -------- ---------
Total liabilities............................. 114,161 -- 114,161 (50,069) 64,092
--------- -------- --------- -------- ---------
Redeemable convertible preferred stock:
Class A......................................... 35,912 (35,912) (a) -- --
Class B......................................... 12,603 (12,603) (a) -- --
--------- -------- --------- -------- ---------
48,515 (48,515) -- -- --
--------- -------- --------- -------- ---------
Shareholders' deficit:
Common stock.................................... 203 203 203
Paid-in capital................................. 1,243 49,758 50,283 (e) 100,041
48,515 (a)
Accumulated deficit............................. (108,152) (108,152) (214) (b) (108,366)
--------- -------- --------- -------- ---------
Total shareholders' deficit................... (106,706) 48,515 (58,191) 50,069 (8,122)
--------- -------- --------- -------- ---------
Total liabilities, redeemable preferred stock
and shareholders' deficit................... $ 55,970 $ -- $ 55,970 $ -- $ 55,970
========= ======== ========= ======== =========
</TABLE>

- ---------------

(a) 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).

(b) Represents the full repayment of the subordinated debt from the estimated
net proceeds of the Offering. The accretion of $214,000 of debt discount
associated with the early extinguishment of the subordinated debt is also
reflected. See "Use of Proceeds."

(c) Represents the repayment of approximately $12.4 million of senior
indebtedness from the estimated net proceeds of the Offering. See "Use of
Proceeds."

(d) Represents the purchase or redemption of mandatorily redeemable Class C
Preferred Stock for $17.9 million (including $770,000 of accrued amounts
classified as interest associated with such preferred stock) from the
estimated net proceeds of the Offering. See "Use of Proceeds."

(e) 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.

22
<PAGE> 24

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 SIX MONTHS ENDED JUNE 30, 1998

<TABLE>
<CAPTION>
PRE-OFFERING OFFERING PRO FORMA
HISTORICAL ADJUSTMENTS SUBTOTAL ADJUSTMENTS AS ADJUSTED
---------- ------------ -------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net sales............................................. $ 63,380 $ $ 63,380 $ $ 63,380
Cost of sales (including store occupancy costs)....... 42,963 42,963 42,963
-------- ------- -------- ------- --------
Gross profit........................................ 20,417 -- 20,417 -- 20,417
Operating expenses.................................... 18,247 -- 18,247 -- 18,247
Depreciation and amortization......................... 2,344 2,344 2,344
-------- ------- -------- ------- --------
Operating loss...................................... (174) -- (174) -- (174)
Interest expense:
Senior credit facility and other indebtedness....... 2,693 2,693 (573)(d) 2,120
Subordinated debt................................... 1,224 1,224 (1,224)(e) --
Class C Preferred Stock............................. 770 770 (770)(f) --
Interest income....................................... (112) (112) (112)
Other income, net..................................... (151) (151) (151)
-------- ------- -------- ------- --------
Income (loss) before income taxes................. (4,598) -- (4,598) 2,567 (2,031)
Income tax provision (benefit)........................ (1,437) (1,437) 635(g) (802)
-------- ------- -------- ------- --------
Net loss.......................................... (3,161) -- (3,161) 1,932 (1,229)
Accretion of redeemable preferred stock and dividends
accrued............................................. 1,929 (1,929)(c) -- --
-------- ------- -------- ------- --------
Net loss allocable to common stock(a)................. $ (5,090) $ 1,929 $ (3,161) $ 1,932 $ (1,229)
======== ======= ======== ======= ========
Income (loss) per common share(a):

Basic............................................... $ (23.40)
======== ========
Diluted............................................. $ (23.40)
======== ========
Weighted average number of common shares
outstanding(a):

Basic............................................... 135,092
======== ========
Diluted............................................. 135,092
======== ========
</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 $12.4 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 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.

23
<PAGE> 25

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 June 30, 1997 and 1998 and for the six-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 six months
ended June 30, 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>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------------------------------- -----------------
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 $56,494 $63,380
Gross profit................................. 33,080 38,088 43,200 47,508 56,586 17,539 20,417
Operating expenses........................... 17,177 19,572 24,192 27,915 35,004 15,062 18,247
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 2,027 2,344
------- ------- -------- -------- -------- ------- -------
Operating income(loss)....................... 2,008 1,546 2,720 15,356 16,684 450 (174)
Interest expense:
Senior, subordinated and other notes
payable.................................. 777 940 1,415 5,114 7,990 4,062 3,917
Class C Preferred Stock.................... -- -- -- 990 1,800 900 770
Accretion of common stock warrants(3)...... -- -- -- 190 389 194 --
Interest income.............................. (58) (126) (162) (47) (80) (114) (112)
Other income, net............................ (184) (255) (221) (147) (154) (110) (151)
Income tax provision (benefit)............... -- -- -- 2,693 2,817 (1,412) (1,437)
------- ------- -------- -------- -------- ------- -------
Net income(loss)............................. 1,473 987 1,688 6,563 3,922 (3,070) (3,161)
Accretion of redeemable preferred stock and
accrual of dividends(4).................... -- -- -- 2,313 3,755 1,877 1,929
------- ------- -------- -------- -------- ------- -------
Net income (loss) allocable to common
stock...................................... $ 1,473 $ 987 $ 1,688 $ 4,250 $ 167 $(4,947) $(5,090)
======= ======= ======== ======== ======== ======= =======
Earnings (loss) per common share
Basic...................................... $14,730 $ 9,870 $ 16,880 $ 76.18 $ 1.67 $(49.47) $(55.08)
Diluted.................................... $14,730 $ 9,870 $ 16,880 $ 65.55 $ 1.35 $(49.47) $(55.08)
Weighted average common and common equivalent
shares outstanding
Basic...................................... 100 100 100 55,789 100,000 100,000 92,403
Diluted.................................... 100 100 100 62,838 123,549 100,000 92,403
</TABLE>

24
<PAGE> 26

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------------- -------------------
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 $ 2,587 $ 2,321
Net cash provided by (used in) operating
activities.............................. 3,422 2,040 1,269 11,065 8,669 (11,984) (15,503)
Net cash (used in) investing activities... 2,818 2,652 (4,130) (4,205) (5,479) (3,142) (3,677)
Net cash provided by (used in) financing
activities.............................. 772 1,320 3,278 (982) (3,537) 3,898 10,603
SELECTED STORE DATA:
Comparable store net sales increase(6).... 7.1% 4.4% 0.7% 1.4% 5.2% 8.5% (0.9%)
Number of stores at end of period......... 80 91 104 120 138 127 144
Average net sales per store (in
thousands)(7)........................... $ 1,159 $ 1,159 $ 1,145 $ 1,147 $ 1,178 $ 462 $ 434
Average gross square footage per
store(8)................................ 3,753 3,821 3,942 4,091 4,186 4,208 4,323
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------ JUNE 30,
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 $ 9,753
Total assets.............................. 22,518 25,461 32,584 45,636 49,884 55,970
Total long-term and short-term debt,
including mandatorily redeemable Class C
Preferred Stock......................... 9,491 10,479 13,291 92,134 88,597 103,212
Common stock warrants..................... -- -- -- 490 879
Redeemable convertible preferred stock
(Class A and Class B Preferred Stock)... -- -- -- 46,836 50,591 48,515
Shareholders' equity (deficit)............ $ 8,405 $ 9,724 $11,879 $(102,655) $(102,488) $(106,706)
</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.

25
<PAGE> 27

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 ($3.8 million
at June 30, 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

26
<PAGE> 28

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.

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.

27
<PAGE> 29

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>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------- --------------
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 69.0 67.8
----- ----- ----- ----- -----
Gross profit............................. 38.6 37.1 36.8 31.0 32.2
Operating expenses......................... 21.6 21.8 22.8 26.7 28.8
Severance charge(1)........................ -- -- 0.5 -- --
Recapitalization expenses.................. -- 0.7 -- -- --
Owners' compensation(2).................... 12.4 -- -- -- --
Depreciation and amortization.............. 2.1 2.6 2.7 3.6 3.7
----- ----- ----- ----- -----
Operating income (loss).................. 2.5 12.0 10.8 0.8 (0.3)
Interest expense:
Senior, subordinated and other notes
payable............................... 1.3 4.0 5.2 7.2 6.2
Class C Preferred Stock(3)............... -- 0.8 1.2 1.6 1.2
Accretion of common stock warrants....... -- 0.1 0.3 0.3 --
Interest income............................ (0.1) -- (0.1) (0.2) (0.2)
Other income, net.......................... (0.2) (0.1) (0.1) (0.2) (0.2)
----- ----- ----- ----- -----
Income (loss) before income taxes........ 1.5 7.2 4.3 (7.9) (7.3)
Income tax provision (benefit)............. -- 2.1 1.8 (2.5) (2.3)
----- ----- ----- ----- -----
Net income (loss)........................ 1.5 5.1 2.5 (5.4) (5.0)
Accretion of redeemable preferred stock and
accrual of dividends (Class A and B
Preferred Stock)......................... -- 1.8 2.4 3.3 3.0
----- ----- ----- ----- -----
Net income (loss) allocable to common
stock.................................... 1.5 3.3 0.1 (8.8) (8.0)
===== ===== ===== ===== =====
</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."

Six Months Ended June 30, 1998 Compared to Six Months Ended June 30, 1997

Net sales increased by 12.2% to $63.4 million for the six months ended June
30, 1998 from $56.5 million for the six months ended June 30, 1997. This
increase resulted primarily from the opening of 12 new stores during the final
two quarters of 1997 and eight new stores during the first two quarters of 1998,
offset in part by the closing of two stores in the first quarter of 1997 and two
stores in the first quarter of 1998. In addition, comparable store net sales
declined by 0.9% during the first half of 1998. This decline was attributable
primarily to (i) a difficult comparison to the first six months of 1997, when
comparable store net sales increased 8.5%, 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 since that time.

The overall $6.9 million increase was due to $7.3 million from new stores
and stores not in the comparable store net sales calculation, offset by
decreases in comparable store net sales in the amount of $0.4 million. The
decrease in comparable store net sales was due primarily to a decline in the
number of

28
<PAGE> 30

transactions, partially offset by a higher average transaction size. The
increase in average transaction size resulted primarily from the Company's
strategy of increasing its average product prices and deemphasizing lower-priced
products.

Gross profit, equal to net sales less cost of sales, was $20.4 million, or
32.2% of net sales, in the first six months of 1998 as compared to $17.5
million, or 31.0% of net sales, in the first six 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. Comparable store gross profit
increased 3.5% during the first six months of 1998.

Operating expenses were $18.2 million, or 28.8% of net sales, in the first
six months of 1998 as compared to $15.1 million, or 26.7% of net sales, in the
first six 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 six 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 $2.3 million, or 3.7% of net
sales, in the first six months of 1998 as compared to $2.0 million, or 3.6% of
net sales, in the first six months of 1997. The increase resulted primarily from
an increase in depreciable assets due to the Company's new store openings during
1997 and 1998.

Interest expense on senior, subordinated and other notes payable decreased
slightly to $3.9 million in the first six months of 1998 from $4.1 million in
the first six months of 1997. Average debt balances were lower in the first six
months of 1998 as compared to the prior year period due to principal 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 $770,000 in
the first six months of 1998 from $900,000 in the first six 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 $1.4 million in the first six
months of 1998, equivalent to a benefit of $1.4 million that it received in the
first six months of 1997. The income tax benefit expressed as a percentage of
income before income taxes for the first six months of 1998 and 1997 was 31.3%
and 31.5%, respectively. The effective tax rate was lower than the statutory tax
rate by approximately 8% of income before income taxes due to surtax exemptions
in the first six months of both 1998 and 1997.

Net loss allocable to common stock increased slightly to $5.1 million in
the first six months of 1998 from $4.9 million in the first six 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.

29
<PAGE> 31

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 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

30
<PAGE> 32

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.

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.

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.

31
<PAGE> 33

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) 1,286 1,760 14,474 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 $15.5 million was used in
operating activities for the six months ended June 30, 1998. During 1995, 1996,
1997 and the six months ended June 30, 1998, net cash used in investing
activities was $4.1 million, $4.2 million, $5.5 million and $3.7 million,
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. For the six months ended June
30, 1998, net cash of $10.6 million 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

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<PAGE> 34

financing activities in 1996 were the repurchase of a portion of shareholders'
Common Stock and repayment of long-term debt in connection with the
Recapitalization. In 1997, the cash used in financing activities was for
repayment of long-term debt. For the six months ended June 30, 1998, the
principal sources of cash in financing activities were proceeds from the
revolving line of credit and the issuance of long-term debt, offset by the
payment of $6.9 million for the redemption of stock and $1.2 million of
principal payments on long-term debt. See "Certain Transactions - January 1998
Redemption."

In addition to the 35 stores added through the acquisition of Briar Patch,
the Company expects to open approximately 27 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 $9.1 million,
$5.0 million of which is budgeted for capital expenditures and $4.1 million of
which is budgeted for initial inventory. During the six months ended June 30,
1998, the Company incurred $1.8 million in capital expenditures for the three
new stores opened during the period and $1.2 million 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 $3.8 million was incurred in the six months ended June 30,
1998. 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 existing senior
credit facility limits the Company's 1998 new store openings to 25 and limits
capital expenditures to $5.5 million. As a result, a waiver or amendment of this
limitation will be required in order for the Company to carry out its total
growth plans and total planned capital expenditures in 1998. Under the existing
limitation on 1998 capital expenditures, the Company estimates that it would be
able to open a total of only approximately 20 stores and would not be able to
complete any additional store expansions or remodels. In addition, the Company
would not be able to complete the expansion of its corporate headquarters or the
upgrade of its POS computer system in 1998. As discussed below, 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 which will,
among other things, provide for a level of permitted capital expenditures
sufficient for the Company to carry out its 1998 growth plans in full.

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 June 30, 1998, the
Company had $11,725,000 in 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 June 30, 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 expense 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)
3.4x, (ii) $72.0 million, (iii) $2.8x and (iv) 1.03x, 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
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<PAGE> 35

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 financed 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 new revolving
credit facility currently under negotiation) through the end of 1999 from net
cash provided by operations and availability under revolving credit facilities.

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

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.
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<PAGE> 36

BUSINESS

THE COMPANY

The Company's 195 stores in 27 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

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<PAGE> 37

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

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.
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<PAGE> 38

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 two quarters of 1998.

<TABLE>
<CAPTION>
JUNE 30,
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 8
Stores closed............................ 0 0 0 1 2 2
Stores open at end of period............. 80 91 104 120 138 144
Stores expanded and remodeled............ 2 3 5 3 6 4
Stores remodeled......................... 0 0 2 0 2 6
Average gross square footage per
store(2)............................... 3,753 3,821 3,942 4,091 4,186 4,323
</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

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<PAGE> 39

fixturing a permanent store. Due to the success of this initial test, the
Company is operating ten 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 three stores in
such strip centers, one in Memphis, Tennessee, one in Kansas City,
Missouri, and one in a power center in Louisville, Kentucky.

- 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 July 31, 1998, the Company purchased all of
the outstanding capital stock of Briar Patch, a specialty retailer of home
accessories and gifts based in Savannah, Georgia. The purchase price was $5.5
million in cash, subject to adjustment based on an audit of Briar Patch's
working capital at closing. Of the total purchase price, $3.7 million was used
to repay all of the outstanding indebtedness of Briar Patch. The Company
financed the purchase price with additional borrowings under its senior credit
agreement.

Briar Patch currently operates 35 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 Easter. Management
estimates that approximately 10% of the Company's merchandise assortment is
designed

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<PAGE> 40

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.

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<PAGE> 41

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.

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<PAGE> 42

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

41
<PAGE> 43

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 few competitors focus exclusively
on decorative home accessories and gifts, primarily in a mall environment.
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

42
<PAGE> 44

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 June 30, 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.

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<PAGE> 45

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 2002
Chairman of the Board of
Directors
Robert E. Alderson................. 51 President, Chief Operating 2002
Officer and Director
Reynolds C. Faulkner............... 34 Senior Vice President, Chief 2001
Financial Officer and Director
Steven J. Collins.................. 29 Director of Finance and --
Treasurer
David M. Mussafer(a)(b)............ 35 Director 2002
R. Wilson Orr, III(a).............. 35 Director 2001
John P. Oswald (b)................. 38 Director 2000
Alexander S. McGrath(a)............ 36 Director 2000

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

44
<PAGE> 46

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."

45
<PAGE> 47

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.

46
<PAGE> 48

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.

47
<PAGE> 49

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..................... -- -- 0/230 $ /$
</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.

48
<PAGE> 50

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 will become exercisable in November 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).

49
<PAGE> 51

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 or
disability, unless otherwise specified by the Compensation Committee with
respect to a particular option, any option or SAR not exercised prior to the
date of such termination will immediately expire. 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 disability)
or six months (in the case of retirement) from the date of termination or until
the expiration of the stated term of the option or SAR, whichever period is
shorter.

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
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

50
<PAGE> 52

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 who have been employees for
12 consecutive months, 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 85% 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 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

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<PAGE> 53

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 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.
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<PAGE> 54

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, which will become exercisable in November 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.

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<PAGE> 55

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 June 30, 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 half of 1998, the Company paid an aggregate of $1.4 million, $2.5
million and $1.2 million, 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,

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<PAGE> 56

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 June 30, 1998, there were 162 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

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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 $476,000 during the years ended December 31, 1995,
1996 and 1997 and the six months ended June 30, 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 $151,200 during the
years ended December 31, 1995, 1996 and 1997 and the six months ended June 30,
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 six months
ended June 30, 1998, the Company spent $44,076, $29,136, $75,898 and $31,234.50,
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 six months ended June 30, 1998,
the Company spent $15,292, $18,311, $13,404 and $9,695.82, 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 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

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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.

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PRINCIPAL AND SELLING SHAREHOLDERS

The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock at June 30, 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

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<PAGE> 60

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.

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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

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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.

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<PAGE> 63

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.
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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

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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 StockTrans, Inc.

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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.

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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.

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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

67
<PAGE> 69

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 July 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.

During the Company's two most recent fiscal years preceding the change of
accountants discussed above, there were no disagreements with KPMG Peat Marwick
LLP on any matter of accounting principles or practices, financial statement
disclosure or auditing scope or procedure which, if not resolved to its
satisfaction, would have caused KPMG Peat Marwick LLP to make reference thereto
in connection with its reports. The reports of KPMG Peat Marwick LLP on the
Company's 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.

68
<PAGE> 70

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.

69
<PAGE> 71

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
June 30, 1998............................................. F-4
Combined Statement of Income for the years ended December
31, 1995, 1996 and 1997 and the six months ended June 30,
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 June 30, 1998............. F-6
Combined Statement of Cash Flows for the years ended
December 31, 1995, 1996 and 1997 and the three months
ended June 30, 1997 and 1998.............................. F-7
Notes to Combined Financial Statements...................... F-8
</TABLE>

F-1
<PAGE> 72

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> 73

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> 74

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)
---------------------- JUNE 30, JUNE 30,
1996 1997 1998 1998
--------- --------- ----------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................... $ 11,228 $ 10,881 $ 2,304
Inventories....................................... 16,985 20,036 30,913
Prepaid expenses and other current assets......... 822 1,005 1,341
Income taxes refundable........................... -- -- 2,026
Deferred income taxes............................. 552 596 671
--------- --------- ---------
Total current assets....................... 29,587 32,518 37,255
Property and equipment, net......................... 10,613 12,895 14,748
Noncurrent deferred income taxes.................... 165 201 201
Debt issue costs, net............................... 5,271 4,270 3,766
--------- --------- ---------
Total assets............................... $ 45,636 $ 49,884 $ 55,970
========= ========= =========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND SHAREHOLDERS' DEFICIT
Current liabilities:
Current maturities of long-term debt.............. $ 3,583 $ 4,421 $ 16,553
Accounts payable.................................. 1,315 1,696 6,289
Income taxes payable.............................. 1,565 1,774 --
Accrued liabilities............................... 5,951 8,835 4,660
--------- --------- ---------
Total current liabilities.................. 12,414 16,726 27,502
--------- --------- ---------
Long-term debt:
Senior credit facility............................ 48,281 44,051 49,489 $ 37,098
Subordinated debt................................. 19,721 19,764 19,786 --
Mandatorily redeemable preferred stock (Class
C).............................................. 20,000 20,000 17,122 --
Other notes payable............................... 549 361 262 262
--------- --------- --------- ---------
88,551 84,176 86,659 37,360
--------- --------- --------- ---------
Common stock warrants............................... 490 879 -- --
--------- --------- --------- ---------
Total liabilities.......................... 101,455 101,781 114,161 64,092
--------- --------- --------- ---------
Commitments and contingencies (Notes 7 and 11)......
Redeemable convertible preferred stock, no par
value:
Class A........................................... 31,899 34,468 35,912 --
Class B........................................... 14,937 16,123 12,603 --
--------- --------- --------- ---------
46,836 50,591 48,515 --
--------- --------- --------- ---------
Shareholders' deficit:

Common stock, at stated value; 100,000, 100,000 and
92,100 shares issued and outstanding at December
31, 1996, 1997 and June 30, 1998, respectively.... 235 210 203 203
Paid-in capital..................................... 6,157 2,293 1,243 100,041
Accumulated deficit................................. (109,047) (104,991) (108,152) (108,366)
--------- --------- --------- ---------
Total shareholders' deficit................ (102,655) (102,488) (106,706) (8,122)
--------- --------- --------- ---------

Total liabilities, redeemable preferred
stock and shareholders' deficit.......... $ 45,636 $ 49,884 $ 55,970 $ 55,970
========= ========= ========= =========
</TABLE>

See accompanying notes to combined financial statements.
F-4
<PAGE> 75

KIRKLAND'S, INC. AND AFFILIATES

COMBINED STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------ -------------------
1995 1996 1997 1997 1998
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales............................... $112,035 $127,946 $153,584 $ 56,494 $ 63,380
Cost of sales (including store occupancy
costs)................................ 68,835 80,438 96,998 38,955 42,963
-------- -------- -------- -------- --------
Gross profit.................. 43,200 47,508 56,586 17,539 20,417
Operating expenses...................... 24,192 27,915 35,004 15,062 18,247
Severance charge........................ -- -- 756 -- --
Recapitalization expenses............... -- 854 -- -- --
Owners' compensation.................... 13,926 -- -- -- --
Depreciation and amortization........... 2,362 3,383 4,142 2,027 2,344
-------- -------- -------- -------- --------
Operating income (loss)....... 2,720 15,356 16,684 450 (174)
Interest expense:
Senior, subordinated and other notes
payable............................ 1,415 5,114 7,990 4,062 3,917
Class C Preferred Stock............... -- 990 1,800 900 770
Accretion of common stock warrants.... -- 190 389 194 --
Interest income......................... (162) (47) (80) (114) (112)
Other income, net....................... (221) (147) 154 (110) (151)
-------- -------- -------- -------- --------
Income (loss) before income
taxes....................... 1,688 9,256 6,739 (4,482) (4,598)
Income tax provision (benefit).......... -- 2,693 2,817 (1,412) (1,437)
-------- -------- -------- -------- --------
Net income (loss)............. 1,688 6,563 3,922 (3,070) (3,161)
Accretion of redeemable preferred stock
and accrual of dividends (Class A and
B Preferred Stock).................... -- 2,313 3,755 1,877 1,929
-------- -------- -------- -------- --------
Net income (loss) allocable to common
stock................................. $ 1,688 $ 4,250 $ 167 $ (4,947) $ (5,090)
======== ======== ======== ======== ========
Income (loss) per common share:
Basic................................. $ 16,880 $ 76.18 $ 1.67 $ (49.47) $ (55.08)
======== ======== ======== ======== ========
Diluted............................... $ 16,880 $ 65.55 $ 1.35 $ (49.47) $ (55.08)
======== ======== ======== ======== ========
Weighted average number of common shares
outstanding:
Basic................................. 100 55,789 100,000 100,000 92,403
======== ======== ======== ======== ========
Diluted............................... 100 64,838 123,549 100,000 92,403
======== ======== ======== ======== ========
</TABLE>

See accompanying notes to combined financial statements.
F-5
<PAGE> 76

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)
Transfer of common stock warrants from
liabilities to equity due to
cancellation of
put feature (unaudited)................. 879 879
Redemption of stock from former
shareholder (unaudited)................. (7,900) (7) (7)
Accretion of redeemable preferred stock
and dividends accrued (unaudited)....... (1,929) (1,929)
Net loss (unaudited)...................... (3,161) (3,161)
------- ----- ------- --------- ---------
Balance at June 30, 1998........ 92,100 $ 203 $ 1,243 $(108,152) $(106,706)
======= ===== ======= ========= =========
</TABLE>

See accompanying notes to combined financial statements.
F-6
<PAGE> 77

KIRKLAND'S, INC. AND AFFILIATES

COMBINED STATEMENT OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------ --------------------
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 $ (3,070) $ (3,161)
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 1,523 1,840
Amortization of debt issue costs........ -- 593 1,001 504 504
Accretion of common stock warrants...... -- 190 389 194 --
(Gain) Loss on disposal of property and
equipment............................. 3 52 56 -- (16)
Deferred tax (benefit) expense.......... -- (717) (80) 226 (75)
Changes in assets and liabilities:
Inventories........................... (4,816) 319 (3,051) (8,884) (10,877)
Prepaid expenses and other assets..... (124) (143) (183) (355) (336)
Accounts payable...................... 1,728 (2,196) 381 2,652 4,593
Income taxes payable.................. -- 1,565 209 (3,387) (3,800)
Accrued liabilities................... 428 2,049 2,884 (1,387) (4,175)
------- -------- ------- -------- --------
Net cash provided by (used in)
operating activities............. 1,269 11,065 8,669 (11,984) (15,503)
------- -------- ------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and
equipment............................... 10 52 12 -- 105
Capital expenditures....................... (4,140) (4,257) (5,491) (3,142) (3,782)
------- -------- ------- -------- --------
Net cash used in investing
activities....................... (4,130) (4,205) (5,479) (3,142) (3,677)
------- -------- ------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) under notes
payable to banks........................ 224 (448) -- -- --
Borrowings on revolving line of credit..... 7,405 11,725
Repayments on revolving line of credit..... (2,525)
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) (982) (1,232)
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) 3,898 10,603
------- -------- ------- -------- --------
Cash and cash equivalents
Net increase (decrease)............ 417 5,878 (347) (11,228) (8,577)
Beginning of year.................. 4,933 5,350 11,228 11,228 10,881
------- -------- ------- -------- --------
End of year........................ $ 5,350 $ 11,228 $10,881 $ -- $ 2,304
======= ======== ======= ======== ========
Supplemental Disclosures:
Interest paid.............................. $ 1,195 $ 5,045 $ 9,041 $ 5,282 $ 6,163
======= ======== ======= ======== ========
Income taxes paid.......................... $ -- $ 1,298 $ 2,687 $ 1,799 $ 2,440
======= ======== ======= ======== ========
</TABLE>

See accompanying notes to combined financial statements.
F-7
<PAGE> 78

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> 79
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> 80
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 June 30, 1998 adjusts the historical June 30,
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> 81
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, 68,400 shares of Class A Preferred Stock
and 31,600 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> 82
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 (68,400 shares) was recorded at its liquidation value of
$30,749,000, or $449.55 per share, less an issuance cost of $432,000. The
Class B Preferred Stock (31,600 shares) was recorded at its liquidation
value of $14,206,000, or $449.55 per share. (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> 83
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> 84
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> 85
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> 86
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, all of these
warrants could be sold back (i.e., put) to the Company at the holders' option on
the maturity date of the debt for fair market value, as defined in the
Subordinated Note Agreement. An initial value of $300,000 was allocated to the
warrants and recorded as debt discount. The debt discount is being amortized
over the life of the notes.

Prior to January 1, 1998, when the holders of the warrants agreed to
terminate the put, the warrants were marked to market based upon the fair value
of the underlying common stock as of each period end (approximately $74 per
share at December 31, 1997). The accretion ceased upon the termination of the
put at which time the recorded liability of $879,000 was recorded as an increase
in paid-in capital.

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> 87
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> 88
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> 89
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> 90
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> 91

- ------------------------------------------------------
- ------------------------------------------------------

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............................... 4
Risk Factors.......................... 10
Use of Proceeds....................... 18
Dividend Policy....................... 18
Dilution.............................. 19
Capitalization........................ 20
Unaudited Pro Forma Combined Condensed
Financial Statements................ 21
Selected Combined Financial Data...... 24
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 26
Business.............................. 35
Management............................ 44
Certain Transactions.................. 54
Principal and Selling Shareholders.... 58
Description of Capital Stock.......... 60
Shares Eligible for Future Sale....... 65
Underwriting.......................... 66
Legal Matters......................... 68
Experts............................... 68
Available Information................. 69
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.
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------

KIRKLAND'S, INC.

COMMON STOCK
------------------------
PROSPECTUS
, 1998
------------------------
LEHMAN BROTHERS

THE ROBINSON-HUMPHREY
COMPANY

BANCAMERICA ROBERTSON STEPHENS

MORGAN KEEGAN
& COMPANY, INC.
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 92

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> 93

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 6 above were exempt from registration under Section 3(b) or 4(2) of the
Securities Act because the subject securities were either (i) issued pursuant to
a compensatory benefit plan pursuant to Rule 701 under the Securities Act or
(ii) sold to a limited group of persons, each of whom was believed to have been
a sophisticated investor or to have had a preexisting business or personal
relationship with 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> 94

<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> 95

<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
27.6 Financial Data Schedule (six months ended June 30, 1997)
27.7 Financial Data Schedule (six months ended June 30, 1998)
</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

II-4
<PAGE> 96

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.

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> 97

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 10th day of
November, 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 November 10, 1998
- ------------------------------------------ (principal executive officer)
Carl Kirkland

/s/ REYNOLDS C. FAULKNER Senior Vice President and Chief Financial November 10, 1998
- ------------------------------------------ Officer; Director (principal financial
Reynolds C. Faulkner officer)

/s/ STEVEN J. COLLINS Director of Finance and Treasurer November 10, 1998
- ------------------------------------------ (principal accounting officer)
Steven J. Collins

/s/ ROBERT E. ALDERSON Director November 10, 1998
- ------------------------------------------
Robert E. Alderson

* Director November 10, 1998
- ------------------------------------------
Alexander S. McGrath

* Director November 10, 1998
- ------------------------------------------
David M. Mussafer

* Director November 10, 1998
- ------------------------------------------
R. Wilson Orr, III

* Director November 10, 1998
- ------------------------------------------
John P. Oswald

*By: November 10, 1998
- ------------------------------------
Robert E. Alderson,
Attorney-in-Fact
</TABLE>

II-6
<PAGE> 98

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S> <C>
4.1 Form of Specimen Stock Certificate
10.10 1998 Incentive Plan
10.11 Employee Stock Purchase Plan
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
27.6 Financial Data Schedule (six months ended June 30, 1997)
27.7 Financial Data Schedule (six months ended June 30, 1998)
</TABLE>

<PAGE> 1
Exhibit 4.1

KIRKLAND'S INC.

NUMBER SHARES

INCORPORATED UNDER THE LAWS SEE REVERSE FOR CERTAIN DEFINITIONS
OF THE STATE OF TENNESSEE CUSIP 497498 10 5

THIS CERTIFIES THAT

is the owner of

FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK, NO PAR VALUE, OF

KIRKLAND'S INC.

transferable on the books of the Corporation by the holder hereof in person or
by duly authorized attorney upon surrender of this certificate properly
endorsed or assigned. This certificate and the shares represented hereby are
issued and shall be held subject to all of the provisions of the Charter and all
amendments thereto, to all of which the holder by acceptance hereof assents.

This certificate is not valid until countersigned by the Transfer Agent and
registered by the Registrar.

WITNESS the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officers.

Dated:

Kirkland's, Inc.
Corporate Seal
1981
Tennessee

/s/ Carl Kirkland /s/ Robert E. Alderson
Chief Executive Officer Secretary

COUNTERSIGNED AND REGISTERED
StockTrans, Inc.
TRANSFER AGENT AND REGISTRAR

AUTHORIZED SIGNATURE

<PAGE> 2

The Corporation will furnish without charge to each stockholder who so
requests the powers, designations, preferences and relative, participating,
optional, or other special rights of each class of stock or series thereof and
the qualifications, limitations or restrictions of such preferences and/or
rights.

The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:

TEN COM -- as tenants in common
TEN ENT -- as tenants by the entireties
JT TEN -- as joint tenants with right of
survivorship and not as tenants
in common

UNIF GIFT MIN ACT -- _______________ Custodian _______________
(Cust) (Minor)
under Uniform Gifts to Minors
Act _____________________________________
(State)

Additional abbreviations may also be used though not in the above list.

For value received, __________________ hereby sell, assign and transfer unto

PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE

______________________________________

________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)

________________________________________________________________________________

_________________________________________________________________________ Shares
of the common stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint

_______________________________________________________________________ Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.

Dated _________________________

SIGNATURE(S) GUARANTEED: _________________________________________________
NOTICE: The signature to this assignment must
correspond with the name as written upon the face
of the certificate in every particular without
alteration or enlargement or any change whatever.
The signature of the person executing this power
must be guaranteed by an Eligible Guarantor
Institution such as a Commercial Bank, Trust
Company, Securities Broker/Dealer, Credit Union,
or a Savings Association participating in a
Medallion program approved by the Securities
Transfer Association, Inc.

<PAGE> 1
EXHIBIT 10.10

KIRKLAND'S, INC.
1998 INCENTIVE PLAN

SECTION 1. PURPOSE; DEFINITIONS. The purpose of the Kirkland's, Inc.
1998 Incentive Plan (the "Plan") is to offer to certain employees, consultants
and Directors of Kirkland's, Inc. (the "Company"), a Tennessee corporation, and
its subsidiaries, equity interests in the Company, options to acquire equity
interests in the Company, and other performance-based incentive awards, thereby
attracting, retaining and motivating such persons, and strengthening the
mutuality of interests between such persons and the Company's shareholders.

For purposes of the Plan, the following initially capitalized
words and phrases shall be defined as set forth below, unless the context
clearly requires a different meaning:

a. "Affiliate" means, with respect to a person or entity, a
person that directly or indirectly controls, or is controlled by, or is under
common control with such person or entity.

b. "Award" means a grant of Options, SARs or Restricted Shares
to an employee, consultant or Director of the Company or a Subsidiary pursuant
to the provisions of this Plan.

c. "Board" means the Board of Directors of the Company, as
constituted from time to time; provided, however, that if the Board appoints a
Committee to perform some or all of the Board's administrative functions
hereunder pursuant to Section 2, references in this Plan to the "Board" will be
deemed to also refer to that Committee in connection with administrative matters
to be performed by that Committee.

d. "Cause" exists when the Participant (as determined by the
Board,(in its sole discretion):

(i) engages in any type of disloyalty to the
Company, including without limitation,
fraud, embezzlement, theft, or dishonesty in
the course of his employment or engagement,
or otherwise breaches any fiduciary duty
owed to the Company;

(ii) is convicted of a felony or a misdemeanor
involving moral turpitude;

(iii) enters a plea of guilty or nolo contendere
to a felony or a misdemeanor involving moral
turpitude.

(iv) discloses any Proprietary Information
without the consent of the Company; or

(iv) breaches any agreement with or duty to the
Company regarding confidentiality,
non-disclosure, non-competition or
otherwise.
<PAGE> 2
e. "Code" means the Internal Revenue Code of 1986, as amended
from time to time, and any successor thereto.

f. "Committee"shall mean a committee appointed by the Board in
accordance with Section 2 of this Plan.

g. "Director" means a member of the Board.

h. "Disability" shall mean a disability which renders
individual unable to perform the full extent of his duties and responsibilities
to the Company or its subsidiaries by reason of his illness or incapacity which
would entitle that employee or Director to receive Social Security Disability
Income under the Social Security Act, as amended, and the regulations
promulgated thereunder. "Disabled" shall mean having a Disability. The
determination of whether a Participant is Disabled shall be made by the Board,
whose determination shall be conclusive; provided that, if a Participant is
bound by the terms of an employment or consulting agreement between the
Participant and the Company, whether the Participant is "Disabled" for purposes
of the Plan shall be determined in accordance with the procedures set forth in
said employment agreement, if such procedures are therein provided.

i. "Exchange Act" means the Securities Exchange Act of 1934,
as amended.

j. "Fair Market Value" means, as of any date: (i) the closing
price of the Shares as reported on the principal nationally recognized stock
exchange on which the Shares are traded on such date, or if no Share prices are
reported on such date, the closing price of the Shares on the next preceding
date on which there were reported Share prices; or (ii) if the Shares are not
listed or admitted to unlisted trading privileges on a nationally recognized
stock exchange, the closing price of the Shares as reported by The Nasdaq Stock
Market on such date, or if no Share prices are reported on such date, the
closing price of the Shares on the next preceding date on which there were
reported Share prices; or (3) if the Shares are not listed or admitted to
unlisted trading privileges on a nationally recognized stock exchange or traded
on The Nasdaq Stock Market, then the Fair Market Value shall be determined by
the Board acting in its discretion, which determination shall be conclusive.

k. "Incentive Stock Option" means any Option intended to be
and designated as an "Incentive Stock Option" within the meaning of Section 422
of the Code.

l. "Non-Qualified Stock Option" means any Option that is not
an Incentive Stock Option.

m. "Participant" means an employee, consultant or Director of
the Company or a Subsidiary to whom an award is granted pursuant to the Plan.

n. "Proprietary Information" shall mean any and all
confidential, proprietary, business and technical information or trade secrets
of the Company or of any Subsidiary or affiliate of the Company revealed,
obtained or developed in the course of Participant's employment with or
engagement by the Company. Such Proprietary Information shall include

- 2 -
<PAGE> 3
but shall not be limited to, methods of production and manufacture, research,
marketing and development plans and efforts, cost information, pricing
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. Proprietary
Information shall not include (i) such information as may be necessary or
appropriate for an Participant to disclose in the course of his employment or
engagement for the effective and efficient discharge of his duties to the
Company or as may be required by law to be disclosed; and (ii) such information
as is readily available to the general public, so long as such information did
not become available to the general public as a direct or indirect result of
Participant's breach of his obligation to maintain confidentiality.

o. "Qualified Retirement" means a Retirement that occurs (i)
on or after the date the Participant attains ages 62 or (ii) on or after the
date the Participant completes ten (10) years of service with the Company or a
Subsidiary and attains age 60.

p. "Restricted Shares" means Shares that are subject to
restrictions pursuant to Section 8 hereof.

q. "Retirement" means termination of the employment of a
Participant with the Company or Subsidiary other than (i) a termination effected
by or at the direction of the Company or Subsidiary (whether or not the Company
effects such termination for Cause), (ii) termination on account of Disability,
or (iii) termination on account of death. With respect to a Director who is not
also an employee of the Company, Retirement shall occur at such time as the
individual ceases to be a Director. Retirement will not be deemed to occur with
respect to a consultant.

r. "SAR" means a share appreciation right granted under the
Plan and described in Section 6 hereof.

s. "Share" means a common share of common stock, no par value,
of the Company, subject to substitution or adjustment as provided in Section
3(c) hereof.

t. "Stock Option" or "Option" means any option to purchase
Shares (including Restricted Shares, if the Committee so determines) granted
pursuant to Section 5 hereof.

u. "Subsidiary" means, in respect of the Company, a subsidiary
company, whether now or hereafter existing, as defined in Sections 424(f) and
(g) of the Code.

SECTION 2. ADMINISTRATION. The Plan shall be administered by the Board;
provided, however, that the Board may at any time appoint a Committee to perform
some or all of the Board's administrative functions hereunder; and provided
further, that the authority of any Committee appointed pursuant to this Section
2 will be subject to such terms and conditions as the Board may prescribe and
will be coextensive with, and not in lieu of, the authority of the Board
hereunder.

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<PAGE> 4
Any Committee established under this Section 2 will be composed of not
fewer than two members, each of whom will serve for such period of time as the
Board determines. From time to time the Board may increase the size of the
Committee and appoint additional members thereto, remove members (with or
without cause) and appoint new members in substitution therefor, fill vacancies
however caused, or remove all members of the Committee and thereafter directly
administer the Plan.

Members of the Board or the Committee who are eligible for Awards or
have received Awards may vote on any matters affecting the administration of the
Plan or the grant of Awards, except that no such member shall act upon the grant
of an Award to himself or herself, but any such member may be counted in
determining the existence of a quorum at any meeting of the Board or Committee
during which action is taken with respect to the grant of Awards to himself or
herself.

The Board shall have full authority to grant Awards under this Plan. In
particular, the Board shall have the authority:

a. to select the persons to whom Awards may from time to time
be granted hereunder (consistent with the eligibility conditions set forth in
Section 4);

b. to determine whether and to what extent Incentive Stock
Options, Non-Qualified Stock Options, SARs and Restricted Shares, or any
combination thereof, are to be granted hereunder;

c. to determine the number of Shares, if any, to be covered by
each such Award;

d. to determine the terms and conditions, not inconsistent
with the terms of the Plan, of any Award, including, but not limited to, the
exercise price, any restriction or limitation, any vesting provisions, or any
vesting acceleration or forfeiture waiver regarding any Option or other Award
and/or the Shares relating thereto, or the length of the period following
termination of employment of any Participant during which any Option or SAR may
be exercised (which, in the case of an Incentive Stock Option, shall be no
longer than one year in the case of the termination of employment of a
Participant by reason of death or Disability, or three months in the case of the
termination of employment of a Participant for any reason other than death or
Disability), based on such factors as the Board shall determine, in its sole
discretion;

e. to determine whether and under what circumstances an Option
may be exercised without a payment of cash under Section 5(f); and

f. to determine whether, to what extent and under what
circumstances Shares and other amounts payable with respect to an Award may be
deferred either automatically or at the election of the Participant.

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<PAGE> 5
The Board shall have the authority to adopt, alter and repeal such
administrative rules, guidelines and practices governing the Plan as it shall,
from time to time, deem advisable; to interpret the terms and provisions of the
Plan and any award issued under the Plan (and any agreements relating thereto);
to amend the terms of any agreement relating to any Award, provided that the
Participant consents to such amendment; and to otherwise supervise the
administration of the Plan. The Board may correct any defect, supply any
omission or reconcile any inconsistency in the Plan or in any Award in the
manner and to the extent it shall deem necessary to carry out the intent of the
Plan.

All decisions made by the Board pursuant to the provisions of the Plan
shall be final and binding on all persons, including the Company and
Participants. No member of the Board shall be liable for any good faith
determination, act or omission in connection with the Plan or any Award.

SECTION 3. SHARES SUBJECT TO THE PLAN.

a. Shares Subject to the Plan. The Shares to be subject or
related to awards under the Plan shall be authorized and unissued Shares of the
Company, whether or not previously issued and subsequently acquired by the
Company. The maximum number of Shares that may be the subject of awards under
the Plan is 750,000* and the Company shall reserve for the purposes of the Plan,
out of its authorized and unissued Shares, such number of Shares.
Notwithstanding the foregoing, no individual shall receive, over the term of the
Plan, awards for more than an aggregate of 250,000* Shares, or SARs with respect
to such Shares, authorized for grant under the Plan.

b. Effect of the Expiration or Termination of Awards. If and
to the extent that an Award expires, terminates or is canceled or forfeited for
any reason without having been exercised in full, the Shares associated with the
expired, terminated, canceled or forfeited portion of the Award shall again
become available for grant under the Plan.

c. Other Adjustment. In the event of any merger,
reorganization, consolidation, recapitalization, Share distribution or dividend,
Share split or combination, or other change in entity structure affecting the
Shares, substitutions or adjustments may be made to the aggregate number, type
and issuer of the securities reserved for issuance under the Plan, in the number
and exercise price of securities subject to outstanding Options granted under
the Plan and in the number and price of securities subject to other Awards made
under the Plan, as may be determined to be appropriate by the Board, in its sole
discretion. The Board, in its sole discretion, may also make appropriate
anti-dilution adjustments to the number of then-outstanding SARs, and to the
Fair Market Value upon which the value of such SARs is based.

d. Change Control. In addition, upon or in anticipation of any
change of control of the Company (as determined by the Board), the Board, in its
sole and absolute

- --------
*As constituted after the stock split to be effected in connection with
the Company's initial public offering.

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<PAGE> 6
discretion and without the need for consent of any Participant (and contingent
upon the occurrence of the change of control, if the change of control has not
yet occurred), may take other action with respect to outstanding Awards,
including, but not limited to: (i) acceleration of the vesting of Options and
SARs and the expiration date of Options and SARs, (ii) cancellation of Options
in exchange for options to purchase common stock in a successor corporation,
(iii) cancellation of Restricted Shares in exchange for restricted shares of the
common stock of any successor corporation, or (iv) cancellation of Options in
conjunction with causing the Company to distribute cash and/or other property in
an amount equal to and in the same form as would have been received from a
successor corporation by an Option holder if that Option holder would have owned
the Shares subject to the Option (rather than the Option) at the time of the
change of control, provided that any such amount paid to an Participant shall be
net of the exercise price the Participant would have paid to exercise such
Options.

SECTION 4. ELIGIBILITY. Employees, directors, consultants, and other
individuals who provide services to the Company or its Subsidiaries are eligible
to be granted awards under the Plan; provided, however, that any employee who is
covered by a collective bargaining agreement shall not be eligible to be granted
Awards, exercise outstanding Awards, receive shares or cash pursuant to
outstanding Awards, or have any restrictions lapse with respect to any
restricted stock Awards under the Plan, unless such collective bargaining
agreement, by specific reference to the Plan, expressly provides for
participation in the Plan. Persons who are not employees of the Company or a
Subsidiary are eligible to be granted Awards, but are not eligible to be granted
Incentive Stock Options.

SECTION 5. OPTIONS. Options granted under the Plan may be of two types:
(i) Incentive Stock Options or (ii) Non-Qualified Stock Options. Options may be
granted alone, in addition to or in tandem with other Awards. Any Option granted
under the Plan shall be in such form as the Board may from time to time approve.

The Board shall have the authority to grant any Participant eligible
under Section 4 Incentive Stock Options, Non-Qualified Stock Options, or both
types of Options (in each case with or without SARs). To the extent that any
Option does not qualify as an Incentive Stock Option, it shall constitute a
separate Non-Qualified Stock Option.

Options granted under the Plan shall be subject to the following terms
and conditions and shall contain such additional terms and conditions, not
inconsistent with the terms of the Plan, as the Board shall deem appropriate;
provided, however, that the provisions of Option Awards need to be the same with
respect to each Participant:

a. Option Price. The exercise price per Share purchasable
under a Non-Qualified Stock Option shall be determined by the Board. The
exercise price per Share purchasable under an Incentive Stock Option shall be
100% of the Fair Market Value of the Share on the date of the grant. However,
any Incentive Stock Option granted to any Participant who, at the time the
Option is granted, owns more than 10% of the voting power of all classes of
shares of the Company or of a Subsidiary shall have an exercise price per Share
of not less than 110% of Fair Market Value per Share on the date of the grant.

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<PAGE> 7
b. Option Term. The term of each Option shall be fixed by the
Board, but no Option shall be exercisable more than ten years after the date the
Option is granted. However, any Incentive Stock Option granted to any
Participant who, at the time such Option is granted, owns more than 10% of the
voting power of all classes of shares of the Company or of a Subsidiary may not
have a term of more than five years. No Option may be exercised by any person
after expiration of the term of the Option.

c. Exercisability. Options shall vest and be exercisable at
such time or times and subject to such terms and conditions as shall be
determined by the Board at the time of grant. If the Board provides, in its
discretion, that any Option is exercisable only in installments, the Board may
waive such installment exercise provisions at any time at or after grant, in
whole or in part, based on such factors as the Board shall determine, in its
sole discretion.

d. Method of Exercise. Subject to the exercise provisions
under Section 5(c) and the termination provisions set forth in Section 7,
Options may be exercised in whole or in part at any time and from time to time
during the term of the Option, by giving written notice of exercise to the
Company specifying the number of Shares to be purchased. Such notice shall be
accompanied by payment in full of the purchase price, either by certified or
bank check, or such other instrument as the Board may accept. As determined by
the Board, in its sole discretion, at or after grant, payment in full or in part
of the exercise price of an Option may be made in the form of unrestricted
Shares based on the Fair Market Value of the Shares on the date the Option is
exercised; provided, however, that, in the case of an Incentive Stock Option,
the right to make a payment in the form of already owned Shares may be
authorized only at the time the Option is granted.

No Shares shall be issued upon exercise of an Option until
full payment therefor has been made. A Participant shall not have the right to
distributions or dividends or any other rights of a shareholder with respect to
Shares subject to the Option until the Participant has given written notice of
exercise, has paid in full for such Shares, and, if requested, has given the
representation described in Section 11(a) hereof.

e. Incentive Stock Option Limitations. To the extent required
for "incentive stock option" status under Section 422 of the Code, the aggregate
Fair Market Value (determined as of the time of grant) of the Shares with
respect to which Incentive Stock Options are exercisable for the first time by
the Participant during any calendar year under the Plan and/or any other plan of
the Company or any Subsidiary shall not exceed $100,000. For purposes of
applying the foregoing limitation, Incentive Stock Options shall be taken into
account in the order granted. Any Option not meeting such limitation shall be
treated for all purposes as a Non-Qualified Stock Option.

f. Cashless Exercise. The Company may, in the sole discretion
of the Board, cooperate in a "cashless exercise" of an Option. The cashless
exercise shall be effected by the Participant delivering to a registered
securities broker instructions to sell a sufficient number of Shares to cover
the costs and expenses associated therewith.

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<PAGE> 8
SECTION 6. SHARE APPRECIATION RIGHTS.

a. Grant. SARs may be granted alone ("Stand-Alone SARs") or in
conjunction with all or part of any Option granted under the Plan ("Tandem
SARs"). In the case of a Non-Qualified Stock Option, a Tandem SAR may be granted
either at or after the time of the grant of such Option. In the case of an
Incentive Stock Option, a Tandem SAR may be granted only at the time of the
grant of such Option.

b. Exercise.

(i) Tandem SARs. A Tandem SAR or applicable portion
thereof shall terminate and no longer be exercisable upon the termination or
exercise of the related Option or portion thereof, except that, unless otherwise
determined by the Board, in its sole discretion at the time of grant, a Tandem
SAR granted with respect to less than the full number of Shares covered by a
related Option shall be reduced only after such related Option is exercised or
otherwise terminated with respect to the number of Shares not covered by the
Tandem SAR.

A Tandem SAR may be exercised by a Participant by
surrendering the applicable portion of the related Option, only at such time or
times and to the extent that the Option to which such Tandem SAR relates shall
be exercisable in accordance with the provisions of Section 5 and this Section
6. Options which have been so surrendered, in whole or in part, shall no longer
be exercisable to the extent the related Tandem SARs have been exercised.

Upon the exercise of a Tandem SAR, a Participant
shall be entitled to receive, upon surrender to the Company of all (or a
portion) of an Option in exchange for cash and/or Shares, an amount equal to the
excess of (A) the Fair Market Value, as of the date such Option (or such portion
thereof) is surrendered, of the Shares covered by such Option (or such portion
thereof) over (B) the aggregate exercise price of such Option (or such portion
thereof).

Upon the exercise of a Tandem SAR, the Option or part
thereof to which such Tandem SAR is related, shall be deemed to have been
exercised for the purpose of the limitation set forth in Section 3 of the Plan
on the number of Shares to be issued under the Plan, but only to the extent of
the number of Shares issued under the Tandem SAR at the time of exercise based
on the value of the Tandem SAR at such time.

A Tandem SAR may be exercised only if and when the
Fair Market Value of the Shares subject to the Option exceeds the exercise price
of such Option.

(ii) Stand-Alone SARs. A Stand-Alone SAR may be
exercised by a Participant giving notice of intent to exercise to the Company,
provided that all or a portion of such Stand-Alone SAR shall have become vested
and exercisable as of the date of exercise.

Upon the exercise of a Stand-Alone SAR, a Participant
shall be entitled to receive, in either cash and/or Shares, an amount equal to
the excess, if any, of (A) the Fair Market Value, as of the date such SAR (or
portion of such SAR) is exercised, of the Shares covered by such SAR (or portion
of such SAR) over (B) the Fair Market Value of the Shares covered by

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<PAGE> 9
such SAR (or a portion of such SAR) as of the date such SAR (or a portion of
such SAR) was granted.

c. Terms and Conditions. SARs shall be subject to such terms
and conditions, not inconsistent with the provisions of the Plan, as shall be
determined from time to time by the Board, in its sole discretion; provided,
however, that the provisions of SAR awards need not be the same with respect to
each Participant. Such terms and conditions include the following:

(i) Term of SAR. The term of each SAR shall be fixed
by the Board, provided that the term of a Tandem SAR shall be determined by the
terms of the applicable Option, and provided further that the term of a
Stand-Alone SAR shall be ten (10) years, unless another term is specified by the
Board.

(ii) Exercisability. SARs shall vest and be
exercisable at such time or times and subject to such terms and conditions as
shall be determined by the Board at the time of grant, provided that the term of
a Tandem SAR shall be determined by the terms of the applicable Option. A
Participant shall not have any rights as a shareholder with respect to any SAR.

(iii) Termination of Employment. Unless otherwise
specified in the terms of an Award, SARs shall be subject to the terms of
Section 7 with respect to exercise upon termination of employment.

SECTION 7. TERMINATION OF SERVICE. Unless otherwise specified with
respect to a particular Award, Options or SARs granted hereunder will remain
exercisable after termination of employment only to the extent specified in this
Section 7.

a. Termination by Reason of Death. If a Participant's service
with the Company or any Subsidiary terminates by reason of death, any Option or
SAR held by such Participant may thereafter be exercised, to the extent then
exercisable or on such accelerated basis as the Board may determine, at or after
grant, by the legal representative of the estate or by the legatee of the
Participant under the will of the Participant, for a period expiring (i) at such
time as may be specified by the Board at or after the time of grant, or (ii) if
not specified by the Board, then one (1) year from the date of death, or (iii)
if sooner than the applicable period specified under (i) or (ii) above, then
upon the expiration of the stated term of such Option or SAR.

b. Termination by Reason of Disability. If a Participant's
service with the Company or any Subsidiary terminates by reason of Disability,
any Option or SAR held by such Participant may thereafter be exercised by the
Participant or his personal representative, to the extent it was exercisable at
the time of termination, or on such accelerated basis as the Board may determine
at or after grant, for a period expiring (i) at such time as may be specified by
the Board at or after the time of grant, or (ii) if not specified by the Board,
then twelve (12) months from the date of termination of service, or (iii) if
sooner than the applicable period specified under (i) or (ii) above, then upon
the expiration of the stated term of such Option or SAR; provided, however, that
if the Participant dies within such period, any unexercised Option or SAR held
by such

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<PAGE> 10
Participant shall, at the sole discretion of the Board, thereafter be
exercisable to the extent to which it was exercisable at the time of death for a
period of one (1) year from the date of such death (or such other period as may
be specified by the Board) or until the expiration of the stated term of such
Option or SAR, whichever period is shorter.

c. Qualified Retirement. If a Participant's service with the
Company or any Subsidiary terminates by reason of Qualified Retirement, any
Option or SAR held by such Participant may thereafter be exercised, to the
extent then exercisable or on such accelerated basis as the Board may determine,
at or after grant, by the Participant for a period expiring (i) at such time as
may be specified by the Board at or after the time of grant, or (ii) if not
specified by the Board, then six months from the date of Qualified Retirement,
or (iii) if sooner than the applicable period specified under (i) or (ii) above,
then upon the expiration of the stated term of such Option or SAR; provided,
however, that any Option that, at the time of grant, was intended to be an
Incentive Stock Option but which is exercised more than three (3) months after
termination of employment will then become a Non-Qualified Stock Option.

d. Cause. If a Participant's service is terminated for Cause:
(i) any Option or SAR not already exercised shall be immediately and
automatically forfeited as of the date of such termination, and (ii) any Shares
for which the Company has not yet delivered share certificates shall be
immediately and automatically forfeited and the Company shall refund to the
Participant the Option exercise price paid for such Shares, if any.

e. Other Termination. If a Participant's service with the
Company or any Subsidiary terminates for any reason other than death,
Disability, Qualified Retirement or Cause, any Option or SAR held by such
Participant may thereafter be exercised by the Participant, to the extent it was
exercisable at the time of such termination or on such accelerated basis as the
Board may determine at or after the time of grant, for a period expiring at such
time as may be specified by the Board at or after the time of grant, but in no
event later than the expiration of the stated term of such Option or SAR;
provided, however, that if the Board does not specifically provide for any
post-termination exercise period, then any Option or SAR held by such terminated
Participant will expire immediately as of the date of such termination.

SECTION 8. RESTRICTED SHARES.

a. Issuance. Restricted Shares may be issued either alone or
in addition to other awards granted under the Plan. The Board shall determine
the time or times within which Restricted Shares may be subject to forfeiture,
and all other conditions of such awards. The Board may condition the lapse of
restrictions on Restricted Shares upon the continued employment or service or
the recipient, the attainment of specified individual or corporate performance
goals, or such other factors as the Board may determine, in its sole discretion,
at the time of the award. The provisions of Restricted Share awards need not be
the same with respect to each Participant.

b. Awards and Certificates. The prospective recipient of a
Restricted Share award shall not have any rights with respect to such award,
unless and until such recipient has executed an agreement evidencing the award
and has delivered a fully executed copy thereof to

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<PAGE> 11
the Company, and has otherwise complied with the applicable terms and conditions
of such award. The purchase price for Restricted Shares may, but need not, be
zero.

Each Participant receiving a Restricted Share award shall be
issued a share certificate in respect of such Restricted Shares. Such
certificate shall be registered in the name of such Participant, and shall bear
an appropriate legend referring to the terms, conditions, and restrictions
applicable to such award, substantially in the following form:

THE TRANSFERABILITY OF THIS CERTIFICATE AND THE SHARES REPRESENTED
HEREBY ARE SUBJECT TO THE TERMS AND CONDITIONS (INCLUDING FORFEITURE)
OF THE KIRKLAND'S, INC. 1998 INCENTIVE PLAN AND AN AGREEMENT ENTERED
INTO BETWEEN THE REGISTERED OWNER AND KIRKLAND'S, INC. COPIES OF SUCH
PLAN AND AGREEMENT ARE ON FILE IN THE PRINCIPAL OFFICES OF KIRKLAND'S,
INC. AND WILL BE MADE AVAILABLE TO ANY SHAREHOLDER WITHOUT CHARGE UPON
REQUEST TO THE SECRETARY OF THE COMPANY.

The Board shall require that the share certificates evidencing
Restricted Shares be held in custody by the Company until the restrictions
thereon shall have lapsed, and that, as a condition of any Restricted Share
award, the Participant shall have delivered to the Company a share power,
endorsed in blank, relating to the Shares covered by such award.

c. Restrictions and Conditions. The Restricted Shares awarded
pursuant to this Section 8 shall be subject to the following restrictions and
conditions:

(i) During a period set by the Board commencing with
the date of such award (the "Restriction Period"), the Participant shall not be
permitted to sell, transfer, pledge, assign or otherwise encumber Restricted
Shares awarded under the Plan. The Board, in its sole discretion, may provide
for the lapse of such restrictions in installments and may accelerate or waive
such restrictions in whole or in part, based on service, performance and/or such
other factors or criteria as the Board may determine, in its sole discretion.

(ii) Except as provided in this Paragraph (ii) and
Section 8(c)(i), once the Participant has been issued a certificate or
certificates for Restricted Shares, the Participant shall have, with respect to
the Restricted Shares, all of the rights of a shareholder of the Company,
including the right to vote the Shares, and the right to receive any cash
distributions or dividends. The Board, in its sole discretion, as determined at
the time of award, may permit or require the payment of cash distributions or
dividends to be deferred and, if the Board so determines, reinvested in
additional Restricted Shares to the extent Shares are available under Section 3
of the Plan.

(iii) Subject to the applicable provisions of the
award agreement and this Section 8, upon termination of a Participant's service
with the Company for reasons other than death or Disability, all Restricted
Shares still subject to restriction shall be forfeited by the Participant. Upon
the death or Disability of a Participant during the Restriction Period:

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<PAGE> 12
(1) restrictions based on continued
employment will lapse with respect to a percentage of the Restricted Shares
award granted to the Participant that is equal to the percentage of the
Restriction Period that has elapsed as of the date of death or the date on which
such Disability commenced (as determined by the Board in its sole discretion),

(2) restrictions based on individual or
corporate performance will lapse to the extent determined by the Board in its
sole discretion, and

a share certificate or share certificates representing such Shares, without
bearing the restrictive legend described in Section 8(b), shall be delivered by
the Company to the Participant or the Participant's estate, as the case may be,
in exchange for the share certificate or share certificates that contain such
restrictive legend.

(iv) In the event of hardship or other special
circumstances of a Participant whose service with the Company is involuntarily
terminated (other than for Cause), the Board may, in its sole discretion, waive
in whole or in part any or all remaining restrictions with respect to such
Participant's Restricted Shares, based on such factors as the Board may deem
appropriate.

(v) If and when the Restriction Period expires
without a prior forfeiture of the Restricted Shares subject to such Restriction
Period, the certificates for such Shares, without bearing the restrictive legend
described in Section 8(b), shall be promptly delivered by the Company to the
Participant, in exchange for the share certificate or share certificates that
contain such restrictive legend.

(vi) In the event of a Change of Control, the Board,
in its sole discretion, may cause all Restricted Shares remaining subject to
forfeiture to immediately cease to be subject to forfeiture and a share
certificate or shares certificates representing such Shares, without bearing the
restrictive legend described in Section 8(b), shall be issued by the Company and
delivered to the Participant, in exchange for the share certificate or share
certificates that contain such restrictive legend.

SECTION 9. AMENDMENTS AND TERMINATION. The Board may amend, alter or
discontinue the Plan at any time, but, except as otherwise provided in Section
3(d) of the Plan, no amendment, alteration or discontinuation shall be made
which would impair the rights of a Participant with respect to an Option, SAR or
Restricted Share which has been granted under the Plan, without the
Participant's consent, or which, without the approval of such amendment within
one year (365 days) of its adoption by the Board, by a majority of the votes
cast at a duly held shareholder meeting at which a quorum representing a
majority of the Company's outstanding voting shares is present (either in person
or by proxy), would:

a. except as otherwise provided in the Plan, increase the
total number of Shares reserved for the purposes of the Plan;

b. change the persons or class of persons eligible to
participate in the Plan; or

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<PAGE> 13
c. extend the maximum Option term under Section 5(b) of the
Plan.

Subject to the above provisions, the Board shall have broad authority
to amend the Plan to take into account changes in applicable tax laws and
accounting rules, as well as other developments.

SECTION 10. UNFUNDED STATUS OF PLAN. The Plan is intended to be
"unfunded." With respect to any payments not yet made to a Participant by the
Company, nothing contained herein shall give any such Participant any rights
that are greater than those of a general creditor of the Company. In its sole
discretion, the Board may authorize the creation of grantor trusts or other
arrangements to meet the obligations created under the Plan to deliver Shares or
payments in lieu of Shares or with respect to awards hereunder.

SECTION 11. GENERAL PROVISIONS.

a. The Board may require each person acquiring Shares or a
Share-based Award under the Plan to represent to and agree with the Company in
writing that the Participant is acquiring the Shares or Share-based Award for
investment purposes and without a view to distribution thereof and as to such
other matters as the Board believes are appropriate to ensure compliance with
applicable Federal and state securities laws. The certificate evidencing such
Award and any securities issued pursuant thereto may include any legend which
the Board deems appropriate to reflect any restrictions on transfer and
compliance with securities laws.

All certificates for Shares or other securities delivered
under the Plan shall be subject to such share-transfer orders and other
restrictions as the Board may deem advisable under the rules, regulations, and
other requirements of the Securities Act of 1933, as amended, the Exchange Act,
any stock exchange upon which the Shares are then listed, and any other
applicable Federal or state securities laws, and the Board may cause a legend or
legends to be put on any such certificates to make appropriate reference to such
restrictions.

b. Nothing contained in the Plan shall prevent the Board from
adopting other or additional compensation arrangements, subject to shareholder
approval if such approval is required; and such arrangements may be either
generally applicable or applicable only in specific cases.

c. The adoption of the Plan shall not confer upon any employee
of the Company or a Subsidiary any right to continued employment with the
Company or such Subsidiary, nor shall it interfere in any way with the right of
the Company or such Subsidiary to terminate the employment of any of its
employees at any time.

d. No later than the date as of which an amount first becomes
includable in the gross income of the Participant for Federal income tax
purposes with respect to any award under the Plan, the Participant shall pay to
the Company, or make arrangements satisfactory to the Board regarding the
payment, of any Federal, state or local taxes of any kind required by law to be
withheld with respect to such amount. Unless otherwise determined by the Board,
the minimum required withholding obligations may be settled with Shares,
including Shares that are

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<PAGE> 14
part of the award that gives rise to the withholding requirement. The
obligations of the Company under the Plan shall be conditional on such payment
or arrangements and the Company shall, to the extent permitted by law, have the
right to deduct any such taxes from any payment of any kind otherwise due to the
Participant.

e. The Board shall establish such procedures as it deems
appropriate for a Participant to designate a beneficiary to whom any amounts
payable in the event of the Participant's death are to be paid.

f. Except as may otherwise be specifically determined by the
Board with respect to a particular award of Non-Qualified Stock Option, SARs or
Restricted Shares, no Award will be transferable by the Participant otherwise
than by will or by the laws of descent and distribution, and all awards will be
exercisable, during the Participant's lifetime, only by the Participant or, in
the event of his Disability, by his personal representative.

g. The Plan and all Awards made and actions taken thereunder
shall be governed by and construed in accordance with the laws of the State of
Tennessee.

SECTION 12. EFFECTIVE DATE OF PLAN. This Plan shall become effective on
the date that it is adopted by the Board; provided, however, that it shall not
be an Incentive Stock Option Plan if it is not approved, within one year (365
days) of its adoption by the Board, by a majority of the votes cast at a duly
held shareholder meeting at which a quorum representing a majority of Company's
outstanding voting shares is present, either in person or by proxy. The Board
may make awards hereunder prior to approval of the Plan; provided, however, that
any and all Incentive Stock Options so awarded automatically shall be converted
into Non-Qualified Stock Options if the Plan is not approved by shareholders
within 365 days of its adoption.

SECTION 13. TERM OF PLAN. No Option, SAR or Restricted Share will be
granted pursuant to the Plan on or after the tenth (10th) anniversary of the
date of shareholder approval of the Plan, but awards granted prior to such tenth
(10th) anniversary may extend beyond that date.

SECTION 14. INVALID PROVISIONS. In the event that any provision of this
Plan is found to be invalid or otherwise unenforceable under any applicable law,
such invalidity or unenforceability shall not be construed as rendering any
other provisions contained herein as invalid or unenforceable, and all such
other provisions shall be given full force and effect to the same extent as
though the invalid or unenforceable provision was not contained herein.

SECTION 15. GOVERNING LAW. This Plan shall be governed by and construed
in accordance with the laws and judicial decisions of the State of Tennessee,
without regard to the application of the principles of conflicts of laws.

SECTION 16. BOARD ACTION. Notwithstanding anything to the contrary set
forth in this Plan, any and all actions of the Board or Committee, as the case
may be, taken under or in connection with this Plan and any agreements,
instruments, documents, certificates or other writings entered into, executed,
granted, issued and/or delivered pursuant to the terms hereof,

- 14 -
<PAGE> 15
shall be subject to and limited by any and all votes, consents, approvals,
waivers or other actions of all or certain stockholders of the Company or other
persons required by:

(i) the Company's Articles of Incorporation (as the same may be
amended and/or restated from time to time);

(ii) the Company's Bylaws (as the same may be amended and/or
restated from time to time); and

(iii) any other agreement, instrument, document or writing now or
hereafter existing, between or among the Company and its
stockholders or other persons (as the same may be amended from
time to time).

ADOPTION AND APPROVAL OF PLAN

Date Plan adopted by Board: _____________
Date Plan approved by Stockholders: _____________
Effective Date of Plan: _____________

- 15 -

<PAGE> 1
EXHIBIT 10.11

KIRKLAND'S, INC.
EMPLOYEE STOCK PURCHASE PLAN

1. PURPOSE.

The Kirkland's, Inc. Employee Stock Purchase Plan (the "Plan")
is intended to encourage and facilitate the purchase of Shares of the Common
Stock of Kirkland's, Inc. (the "Company"), by employees of the Company and any
Participating Companies, thereby providing employees with a personal stake in
the Company and a long range inducement to remain in the employ of the Company
and Participating Companies. It is the intention of the Company that the Plan
qualify as an "employee stock purchase plan" within the meaning of Section 423
of the Code.

2. DEFINITIONS.

(a) "Account" means a bookkeeping account established by the Committee
on behalf of a Participant to hold Payroll Deductions.

(b) "Approved Leave of Absence" means a leave of absence that has been
approved by the applicable Participating Company in such a manner as the Board
may determine from time to time.

(d) "Code" means the Internal Revenue Code of 1986, as amended.

(e) "Committee" means the Committee appointed pursuant to section 14 of
the Plan.

(f) "Company" means Kirkland's, Inc.

(g) "Compensation" means an Employee's total cash compensation payable
for services rendered to a Participating Company during a calendar month.

(h) "Election Form" means the form acceptable to the Committee which an
Employee shall use to make an election to purchase Shares through Payroll
Deductions pursuant to the Plan.

(i) "Eligible Employee" means an Employee who meets the requirements
for eligibility under section 3 of the Plan.

(j) "Employee" means a person who is an employee of a Participating
Company.

(k) "Five Percent Owner" means an Employee who, with respect to a
Participating Company, is described in section 423(b) of the Code.

- 1 -
<PAGE> 2
(l) "Offering" means an offering of Shares to Eligible Employees
pursuant to the Plan.

(m) "Offering Commencement Date" means the first day of each January,
April, July and October, beginning on or after adoption of the Plan by the
Board, until the Plan Termination Date, provided that the first Offering
Commencement Date shall be July 1, 1998, or such later date as may be determined
by the Committee.

(n) "Offering Period" means the period extending from an Offering
Commencement Date through the following Offering Termination Date.

(o) "Offering Termination Date" means the last day of each three-month
period following an Offering Commencement Date.

(p) "Option Price" means 85 percent of the average of the high and low
sales prices per Share on the principal exchange on which the Shares are listed
or, if not so listed, on the Nasdaq National Market, on the Offering Termination
Date, or if such date is not a trading day, then on the next trading day
thereafter.

(q) "Participant" means an Employee who meets the requirements for
eligibility under section 3 of the Plan and who has timely delivered an Election
Form to the Committee.

(r) "Participating Company" means, the Company and subsidiaries of the
Company, within the meaning of section 424(f) of the Code, if any, that are
approved by the Board from time to time and whose employees are designated as
Employees by the Board.

(s) "Payroll Deductions" means amounts withheld from a Participant's
Compensation pursuant to the Plan, as described in section 5 of the Plan.

(t) "Plan" means Kirkland's, Inc. Employee Stock Purchase Plan, as set
forth in this document, and as may be amended from time to time.

(u) "Plan Termination Date" means the earlier of:

(1) The Offering Termination Date for the Offering in which
the maximum number of Shares specified in section 5 of the Plan have been issued
pursuant to the Plan; or

(2) The date as of which the Board chooses to terminate the
Plan as provided in section 15 of the Plan.

(v) "Shares" means shares of Common Stock of the Company, no par value.

- 2 -
<PAGE> 3
(w) "Successor-in-Interest" means the Participant's executor or
administrator, or such other person or entity to whom the Participant's rights
under the Plan shall have passed by will or the laws of descent and
distribution.

(x) "Termination Form" means the form acceptable to the Committee which
an Employee shall use to withdraw from an Offering pursuant to section 8 of the
Plan.

3. ELIGIBILITY AND PARTICIPATION.

(a) Initial Eligibility. Except as provided in section 3(b) of the
Plan, each Employee shall be eligible to participate in the Plan.

(b) Ineligibility. An Employee shall not be eligible to participate in
the Plan if such Employee:

(1) is a Five Percent Owner;

(2) has not been employed by a Participating Company for a
period of at least twelve (12) consecutive months;

(3) does not customarily perform work for a Participating
Company more than 20 hours per week; or

(4) is restricted from participating under section 3(d) of the
Plan.

(c) Leave of Absence. For purposes of participation in the Plan, an
Employee on an Approved Leave of Absence shall be deemed to be an Employee for
the first 90 days of such Approved Leave of Absence and such Employee's
employment shall be deemed to have terminated for purposes of participation
under the Plan at the close of business on the 90th day of such Approved Leave
of Absence unless such Employee shall have returned to regular non-temporary
employment before the close of business on such 90th day. Termination by the
Participating Company of an Employee's Approved Leave of Absence, other than
termination or return to non-temporary employment, shall terminate an Employee's
employment for all purposes of the Plan and shall terminate such Employee's
participation in the Plan and the right to exercise any option. An Approved
Leave of Absence shall be considered active employment for purposes of sections
3(b)(2) and 3(b)(3) of the Plan.

(d) Restrictions on Participation. Notwithstanding any provisions of
the Plan to the contrary, no Employee shall be granted an option to participate
in the Plan if:

(1) Immediately after the grant, such Employee would be a Five
Percent Owner; or

- 3 -
<PAGE> 4
(2) Such option would permit such Employee's rights to
purchase stock under all employee stock purchase plans of the Participating
Companies which meet the requirements of section 423(b) of the Code to accrue at
a rate which exceeds $25,000 in fair market value (as determined pursuant to
section 423(b)(8) of the Code) for each calendar year in which such option is
outstanding.

(e) Commencement of Participation. An Employee who meets the
eligibility requirements of sections 3(a) and 3(b) of the Plan and whose
participation is not restricted under section 3(d) of the Plan shall become a
Participant by completing an Election Form and filing it with the Committee on
or before the 15th day of the month immediately preceding the Offering
Commencement Date for the first Offering to which such Election Form applies.
Payroll Deductions for a Participant shall commence on the applicable Offering
Commencement Date when his or her authorization for Payroll Deductions becomes
effective, and shall end on the Plan Termination Date, unless sooner terminated
by the Participant pursuant to section 8 of the Plan.

4. SHARES PER OFFERING.

The Plan shall be implemented by a series of Offerings that shall
terminate on the Plan Termination Date. Offerings shall be made with respect to
Compensation payable for each calendar month of the Company's fiscal year for
the period commencing with the first day of the initial Offering Commencement
Date and ending with the Plan Termination Date. Shares available for any
Offering shall be the difference between the maximum number of Shares that may
be issued under the Plan, as determined pursuant to section 10(a) of the Plan,
for all of the Offerings, less the actual number of Shares purchased by
Participants pursuant to prior Offerings. If the total number of Shares for
which options are exercised on any Offering Termination Date exceeds the maximum
number of Shares available, the Committee shall make a pro rata allocation of
Shares available for delivery and distribution in as nearly a uniform manner as
practicable, and as it shall determine to be fair and equitable, and the
unapplied Account balances shall be returned to Participants as soon as
practicable following the Offering Termination Date.

5. PAYROLL DEDUCTIONS.

(a) Amount of Payroll Deductions. Each Participant's Election Form
shall specify the amount of Payroll Deductions to be made from his or her
Compensation on each regular payday during the time that he or she participates
in the Plan; provided, however, that the Committee may from time to time
establish rules or limitations applicable to the amount of Payroll Deductions
that may be made from each Participant's Compensation; and provided further that
any rules or limitations established by the Committee under this Section 5 shall
be consistent with section 423(b)(5) of the Code.

(b) Participants' Accounts. All Payroll Deductions with respect to a
Participant pursuant to section 5(a) of the Plan shall be credited to the
Participant's Account under the Plan.

- 4 -
<PAGE> 5
(c) Changes in Payroll Deductions. A Participant may discontinue his
participation in the Plan as provided in section 8(a) of the Plan, but no other
change can be made during an Offering, including, but not limited to, changes in
the amount of Payroll Deductions for such Offering. A Participant may change the
amount of Payroll Deductions for subsequent Offerings by giving written notice
of such change to the Committee on or before the 15th day of the month
immediately preceding the Offering Commencement Date for the Offering for which
such change is effective.

(d) Leave of Absence. A Participant who goes on an Approved Leave of
Absence before the Offering Termination Date after having filed an Election Form
with respect to such Offering may:

(1) Withdraw the balance credited to his or her Account
pursuant to section 8(b) of the Plan;

(2) Discontinue contributions to the Plan but remain a
Participant in the Plan through the Offering Termination Date;

(3) Remain a Participant in the Plan during such Approved
Leave of Absence through the Offering Termination Date and continue the
authorization for the Participating Company to make Payroll Deductions for each
payroll period out of continuing payments to such Participant, if any.

6. GRANTING OF OPTIONS.

On each Offering Termination Date, each Participant shall be deemed to
have been granted an option to purchase a minimum of one (1) Share and a maximum
number of Shares that shall be a number of whole Shares equal to the quotient
of: (a) the balance credited to the Participant's Account as of the Offering
Termination Date, divided by (b) the Option Price.

7. EXERCISE OF OPTIONS.

(a) Automatic Exercise. With respect to each Offering, a Participant's
option for the purchase of Shares granted pursuant to section 6 of the Plan
shall be deemed to have been exercised automatically on the Offering Termination
Date applicable to such Offering.

(b) Fractional Shares and Minimum Number of Shares. To the extent that
a Participant's Account is not sufficient to acquire whole shares only,
fractional Shares shall be credited to the Participant.

- 5 -
<PAGE> 6
(c) Transferability of Option. No option granted to a Participant
pursuant to the Plan shall be transferable other than by will or by the laws of
descent and distribution, and no such option shall be exercisable during the
Participant's lifetime other than by the Participant.

(d) Delivery of Certificates for Shares. The Company shall deliver
certificates for Shares acquired on the exercise of options during an Offering
Period as soon as practicable following the Offering Termination Date.

8. WITHDRAWALS.

(a) Withdrawal of Account. A Participant may elect to withdraw the
balance credited to the Participant's Account by providing a Termination Form to
the Committee at any time before the Offering Termination Date applicable to any
Offering.

(b) Amount of Withdrawal. A Participant may withdraw all, but not less
than all, of the amounts credited to the Participant's Account by giving a
Termination Form to the Committee. All amounts credited to such Participant's
Account shall be paid as soon as practicable following the Committee's receipt
of the Participant's Termination Form, and no further Payroll Deductions will be
made with respect to the Participant.

(c) Effect of Withdrawal on Subsequent Participation. A Participant who
elects to withdraw from an Offering pursuant to section 8(a) of the Plan shall
be deemed to have elected not to participate in each of the four succeeding
Offerings following the date on which the Participant gives a Termination Form
to the Committee.

(d) Termination of Employment. Upon termination of a Participant's
employment for any reason other than death, including termination due to
disability or continuation of a leave of absence beyond 90 days, all amounts
credited to such Participant's Account shall be returned to the Participant. In
the event of a Participant's (1) termination of employment due to death or (2)
death after termination of employment but before the Participant's Account has
been returned, all amounts credited to such Participant's Account shall be
returned to the Participant's Successor-in-Interest.

(e) Leave of Absence. A Participant who is on an Approved Leave of
Absence shall, subject to the Participant's election pursuant to section 5(d) of
the Plan, continue to be a Participant in the Plan until the end of the first
Offering ending after commencement of such Approved Leave of Absence. A
Participant who has been on an Approved Leave of Absence for more than 90 days
shall not be eligible to participate in any Offering that begins on or after the
commencement of such Approved Leave of Absence so long as such leave of absence
continues.

- 6 -
<PAGE> 7
9. INTEREST.

No interest shall be paid or allowed with respect to amounts paid into
the Plan or credited to any Participant's Account.

10. SHARES.

(a) Maximum Number of Shares. No more than 250,000(1) Shares may be
issued under the Plan. Such Shares may be unissued shares or treasury shares of
the Company. The number of Shares available for any Offering and all Offerings
shall be adjusted if the number of outstanding Shares of the Company is
increased or reduced by split-up, reclassification, stock dividend or other
similar event. All Shares issued pursuant to the Plan shall be validly issued,
fully paid and nonassessable.

(b) Participant's Interest in Shares. A Participant shall have no
interest in Shares subject to an option until such option has been exercised.

(c) Registration of Shares. Shares to be delivered to a Participant
under the Plan shall be registered in the name of the Participant.

(d) Restrictions on Exercise. The Board may, in its discretion, require
as conditions to the exercise of any option such conditions as it may deem
necessary to assure that the exercise of options is in compliance with all
applicable laws.

11. EXPENSES.

The Participating Companies shall pay all fees and expenses incurred
(excluding individual Federal, state, local or other taxes) in connection with
the Plan. No charge or deduction for any such expenses will be made to a
Participant upon the termination of his or her participation under the Plan or
upon the distribution of certificates representing Shares purchased with his or
her contributions.

12. TAXES.

The Participating Companies shall have the right to withhold from each
Participant's Compensation an amount equal to all Federal, state, city or other
taxes as the Participating Companies shall determine are required to be withheld
by them. In connection with such withholding, the Participating Companies may
make any such arrangements as are consistent with the Plan as it may deem
appropriate, including the right to withhold from Compensation paid to a
Participant other than in connection with the Plan.

- --------
(1) As constituted after the stock split to be effected in connection
with the Company's initial public offering.

- 7 -
<PAGE> 8
13. PLAN AND CONTRIBUTIONS NOT TO AFFECT EMPLOYMENT.

The Plan shall not confer upon any Eligible Employee any right to
continue in the employ of the Participating Companies.

14. ADMINISTRATION.

The Plan shall be administered by the Board, which may delegate
responsibility for such administration to a committee of the Board (the
"Committee"). If the Board fails to appoint the Committee, any references in the
Plan to the Committee shall be treated as references to the Board. The Board, or
the Committee, shall have authority to interpret the Plan, to prescribe, amend
and rescind rules and regulations relating to it, and to make all other
determinations deemed necessary or advisable in administering the Plan, with or
without the advice of counsel. The determinations of the Board or the Committee
on the matters referred to in this paragraph shall be conclusive and binding
upon all persons in interest.

15. AMENDMENT AND TERMINATION.

The Board may terminate the Plan at any time and may amend the Plan
from time to time in any respect; provided, however, that upon any termination
of the Plan, all Shares or Payroll Deductions (to the extent not yet applied to
the purchase of Shares) under the Plan shall be distributed to the Participants;
provided further, that no amendment to the Plan shall affect the right of a
Participant to receive his or her proportionate interest in the Shares or his or
her Payroll Deductions (to the extent not yet applied to the purchase of Shares)
under the Plan; and provided further that the Company may seek shareholder
approval of an amendment to the Plan if such approval is determined to be
required by or advisable under the regulations of the Securities or Exchange
Commission or the Internal Revenue Service, the rules of any stock exchange or
system on which the Shares are listed, or other applicable law, rule or
regulation.

16. EFFECTIVE DATE.

The Plan shall be effective on the date of adoption by the Board,
subject to approval by the Company's shareholders within one year thereafter.
Any option granted before the approval of the Plan by the Company's shareholders
shall be expressly conditioned upon such approval, and no Share certificates
shall be issued until such approval. If shareholder approval is not received
within 12 months before or after the date of the initial adoption of the Plan by
the Board, no Share certificates shall be issued with respect to any automatic
exercises which may have occurred pursuant to section 7 of the Plan, and all
amounts credited to Participants' Accounts with respect to such Shares shall be
returned to Participants as soon as administratively practicable.

- 8 -
<PAGE> 9
17. GOVERNMENT AND OTHER REGULATIONS.

(a) In General. The purchase of Shares under the Plan shall be subject
to all applicable laws, rules and regulations, and to such approvals by any
governmental agencies as may be required.

(b) Securities Law. The Committee shall have the power to make each
grant under the Plan subject to such conditions as it deems necessary or
appropriate to comply with the then-existing requirements of the Securities Act
of 1933, as amended, and the Securities Exchange Act of 1934, as amended,
including Rule 16b-3 (or any similar rule) of the Securities and Exchange
Commission.

18. NON-ALIENATION.

No Participant shall be permitted to assign, alienate, sell, transfer,
pledge or otherwise encumber his interest under the Plan prior to the
distribution to him of Share certificates. Any attempt at assignment,
alienation, sale, transfer, pledge or other encumbrance shall be void and of no
effect.

19. NOTICES.

Any notice required or permitted hereunder shall be sufficiently given
only if delivered personally, telecopied, or sent by first class mail, postage
prepaid, and addressed:

If to the Company:

Kirkland's, Inc.
805 N. Parkway
P.O. Box 7222
Jackson, Tennessee 38308-7222
Attention: Employee Stock Purchase Plan Committee

Or any other address provided pursuant to written notice.

If to the Participant:

At the address on file with the Company from time to time, or to such
other address as either party may hereafter designate in writing by
notice similarly given by one party to the other.

- 9 -
<PAGE> 10
20. SUCCESSORS.

The Plan shall be binding upon and inure to the benefit of any
successor, successors or assigns of the Company.

21. SEVERABILITY.

If any part of this Plan shall be determined to be invalid or void in
any respect, such determination shall not affect, impair, invalidate or nullify
the remaining provisions of this Plan which shall continue in full force and
effect.

22. ACCEPTANCE.

The election by any Eligible Employee to participate in this Plan
constitutes his or her acceptance of the terms of the Plan and his or her
agreement to be bound hereby.

23. APPLICABLE LAW.

This Plan shall be construed in accordance with the laws of the State
of Tennessee, without regard to the application of the principles of conflicts
or choice of laws.

- 10 -

<PAGE> 1
Exhibit 16

[KPMG PEAT MARWICK LLP LETTERHEAD]

November 10, 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. 2 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
The Briar Patch Management Corporation Georgia
</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
November 10, 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
November 10, 1998

<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS

<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 0
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 0
<SALES> 56,494
<TOTAL-REVENUES> 56,494
<CGS> 38,955
<TOTAL-COSTS> 38,955
<OTHER-EXPENSES> 16,979
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,156
<INCOME-PRETAX> (4,482)
<INCOME-TAX> (1,412)
<INCOME-CONTINUING> (3,070)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,070)
<EPS-PRIMARY> (49.47)
<EPS-DILUTED> (49.47)

</TABLE>

<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS

<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1
<CASH> 2,304
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 30,913
<CURRENT-ASSETS> 37,255
<PP&E> 32,647
<DEPRECIATION> 17,899
<TOTAL-ASSETS> 55,970
<CURRENT-LIABILITIES> 27,502
<BONDS> 86,659
48,515
0
<COMMON> 203
<OTHER-SE> (106,909)
<TOTAL-LIABILITY-AND-EQUITY> 55,970
<SALES> 63,380
<TOTAL-REVENUES> 63,380
<CGS> 42,963
<TOTAL-COSTS> 42,963
<OTHER-EXPENSES> 20,440
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,575
<INCOME-PRETAX> (4,590)
<INCOME-TAX> (1,437)
<INCOME-CONTINUING> (3,161)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,161)
<EPS-PRIMARY> (55.08)
<EPS-DILUTED> (55.08)

</TABLE>