Note 7 — Employee Benefit Plans

Stock-based compensation — Stock-based compensation includes stock option grants, restricted stock unit grants, and other transactions under the Company’s equity plans. Total stock-based compensation expense (a component of compensation and benefits) was approximately $2.8 million, $2.8 million and $2.7 million for fiscal years 2014, 2013 and 2012, respectively.

On June 4, 2013, the Company adopted the Kirkland’s, Inc. Amended and Restated 2002 Equity Incentive Plan (the “2002 Plan”), replacing the plan adopted in July 2002. The 2002 Plan provides for the award of restricted stock, restricted stock units (“RSUs”), incentive stock options, non-qualified stock options and stock appreciation rights with respect to shares of common stock to employees, directors, consultants and other individuals who perform services for the Company. The 2002 Plan is authorized to provide awards for up to a maximum of 3,500,000 shares of common stock. Options issued to employees under the 2002 Plan have maximum contractual terms of 10 years and generally vest ratably over 3 or 4 years. Restricted stock units granted to employees vest on the third anniversary of the grant date, and are convertible into common stock on the date of vesting. Options issued to non-employee directors vest immediately on the date of the grant. Restricted stock units granted to non-employee directors vest on the first anniversary of the grant date.

As of January 31, 2015, options to purchase 1,371,785 shares of common stock were outstanding under the 2002 Plan at exercise prices ranging from $2.03 to $19.06 per share. As of January 31, 2015, there were 231,500 RSUs outstanding under the 2002 Plan with fair value grant prices ranging from $10.93 to $18.46 per share. Shares reserved for future stock-based grants under the 2002 Plan approximated 1,094,570 at January 31, 2015.

Stock options — The Company allows for the settlement of vested stock options on a net share basis (“net settled stock options”), instead of settlement with a cash payment (“cash settled stock options”), if so desired by the holder. With net settled stock options, the employee does not surrender any cash or shares upon exercise. Rather, the Company withholds the number of shares to cover the option exercise price and the minimum statutory tax withholding obligations from the shares that would otherwise be issued upon exercise. The settlement of vested stock options on a net share basis results in fewer shares issued by the Company.

As of January 31, 2015, there were 1,371,785 outstanding in-the-money options. The aggregate intrinsic value of in-the-money options outstanding and options exercisable as of January 31, 2015 was approximately $14.9 million and $12.3 million, respectively. The weighted average grant date fair values of options granted during fiscal 2014, fiscal 2013 and fiscal 2012 were $9.68, $9.51 and $5.79, respectively. The intrinsic value of options exercised was $0.2 million in fiscal 2014, $2.6 million in fiscal 2013, and $0.4 million in fiscal 2012. At January 31, 2015, unrecognized stock compensation expense related to the unvested portion of outstanding stock options was approximately $2.8 million, which is expected to be recognized over a weighted average period of 2.1 years.

Stock option activity for the year ended January 31, 2015, was as follows:


	Number of Options			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in years)
Balance at February 1, 2014		1,285,792		$	11.77
Options granted		182,500			18.46
Options exercised		(30,785	)		13.07
Options forfeited		(65,722	)		16.62

Balance at January 31, 2015		1,371,785		$	12.40		5.8

Options Exercisable As of:
January 31, 2015		1,006,464		$	11.06		4.8

The fair value of each option is recorded as compensation expense on a straight-line basis over the applicable vesting period. The Company has estimated the fair value of all stock option awards as of the date of the grant by applying the Black-Scholes multiple-option pricing valuation model. The application of this valuation model involves assumptions that are judgmental and highly subjective in the determination of compensation expense. The weighted average for key assumptions used in determining the fair value of options granted in fiscal years 2014, 2013 and 2012 and a summary of the methodology applied to develop each assumption are as follows:


	52 Weeks Ended January 31, 2015			52 Weeks Ended February 1, 2014			53 Weeks Ended February 2, 2013
Expected price volatility		0.53			0.65			0.56
Risk-free interest rate		2.10	%		1.46	%		0.77	%
Expected life		6.3 years			6.3 years			6.3 years
Forfeiture rate		5	%		5	%		5	%
Dividend yield		0	%		0	%		0	%

Expected price volatility — The expected price volatility is a measure of the amount by which the stock price has fluctuated or is expected to fluctuate. The Company uses actual historical changes in the market value of its stock to calculate the volatility assumption as it is management’s belief that this is the best indicator of future volatility. The Company calculates daily market value changes to the date of grant over a period beginning one year following the Company’s initial public offering date. An increase in the expected volatility will increase compensation expense.

Risk-free interest rate — The risk-free interest rate is the U.S. Treasury rate for the week of the grant having a term equal to the expected life of the option. An increase in the risk-free interest rate will increase compensation expense.

Expected life — The expected life is the period of time over which the options granted are expected to remain outstanding. The Company uses the “simplified” method found in the Securities and Exchange Commission’s Staff Accounting Bulletin No. 107 to estimate the expected life of stock option grants. Options granted have a maximum term of ten years. An increase in the expected life will increase compensation expense.

Forfeiture rate — The forfeiture rate is the estimated percentage of options granted that are expected to be forfeited or canceled before becoming fully vested. This estimate is based on historical experience of similar grants. An increase in the forfeiture rate will decrease compensation expense. The Company’s forfeiture estimate has a minimal effect on expense as the majority of the Company’s stock option awards vest quarterly.

Dividend yield — The Company has not paid a dividend on its common stock for each of the last three fiscal years. The addition or increase of a dividend will decrease compensation expense.

Restricted stock units — The Company periodically grants restricted stock units for a fixed number of shares to various employees and directors. The RSUs granted to directors become 100% vested on the first anniversary of the grant date. The RSUs granted to employees become 100% vested on the third anniversary of the grant date, provided the employee has remained in continuous service with the Company through that date. The fair value of the RSUs is equal to the closing price of the Company’s common stock on the date of the grant. The Company granted 97,000, 104,000 and 94,000 RSUs during fiscal 2014, 2013 and 2012, respectively. The weighted average grant date fair values of the RSUs granted during fiscal 2014, 2013 and 2012 were $18.46, $15.79 and $10.93, respectively. Compensation expense related to RSUs is recognized ratably over the requisite service period. Compensation expense for RSUs during fiscal 2014, 2013 and 2012 was approximately $1.3 million, $1.3 million and $1.3 million, respectively. As of January 31, 2015, there was approximately $1.8 million of unrecognized compensation expense related to RSUs which is expected to be recognized over a weighted average period of 1.0 years.

RSU activity in each of the periods indicated was as follows:


	Shares			Weighted Average Grant Date Fair Value
Non-vested at February 1, 2014		236,000		$	13.44
Granted		97,000			18.46
Vested		(82,000	)		13.34
Forfeited		(19,500	)		14.31

Non-vested at January 31, 2015		231,500		$	15.50

Employee stock purchase plan — In July 2002, the Company adopted an Employee Stock Purchase Plan (“ESPP”). Under the ESPP, full-time employees who have completed twelve consecutive months of service are allowed to purchase shares of the Company’s common stock, subject to certain limitations, through payroll deduction, at 85% of the fair market value. The Company’s ESPP is authorized to issue up to 500,000 shares of common stock. During fiscal 2014, 2013 and 2012, there were 19,062, 19,478 and 30,545 shares of common stock, respectively, issued to participants under the ESPP, with approximately 32,592 shares remaining under the original authorization.

401(k) savings plan — The Company maintains a defined contribution 401(k) employee benefit plan, which covers all employees meeting certain age and service requirements. Up to 6% of the employee’s compensation may be matched at the Company’s discretion, subject to statutory limitations. For all fiscal years presented, this discretionary percentage was 50% of an employee’s contribution subject to Plan maximums. The Company’s matching contributions were approximately $457,000, $383,000 and $446,000 in fiscal 2014, 2013 and 2012, 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 fiscal 2014, 2013, or 2012.

Deferred compensation plan — Effective March 1, 2005, the Company adopted The Executive Non-Qualified Excess Plan (the “Deferred Compensation Plan”). The Deferred Compensation Plan is available for certain employees whose benefits under the 401(k) Savings Plan are limited due to provisions of the Internal Revenue Code. The Company’s matching contributions to this Plan were approximately $52,000, $62,000 and $65,000 in fiscal years 2014, 2013 and 2012, respectively.