-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Hp7bIqMMZrvt9v5AeQvx353hp77POjLsJyIr8Tbys0iAtSOri1rj5XYg2P6tRvXd RjdK1X2qhqoCpJUEK6vBZg== 0000912057-96-007331.txt : 19960430 0000912057-96-007331.hdr.sgml : 19960430 ACCESSION NUMBER: 0000912057-96-007331 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 14 CONFORMED PERIOD OF REPORT: 19960128 FILED AS OF DATE: 19960429 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: MICHAELS STORES INC CENTRAL INDEX KEY: 0000740670 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-HOBBY, TOY & GAME SHOPS [5945] IRS NUMBER: 751943604 STATE OF INCORPORATION: DE FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-11822 FILM NUMBER: 96552931 BUSINESS ADDRESS: STREET 1: 5931 CAMPUS CIRCLE DR CITY: IRVING STATE: TX ZIP: 75063 BUSINESS PHONE: 2147147000 MAIL ADDRESS: STREET 1: PO BOX 619566 CITY: DFW STATE: TX ZIP: 75261 10-K405 1 10-K405 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K (MARK ONE) /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) FOR THE FISCAL YEAR ENDED JANUARY 28, 1996 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from ___________________ to ___________________ Commission file number 0-11822 ------------------------ MICHAELS STORES, INC. (Exact name of registrant as specified in its charter) DELAWARE 75-1943604 (State or other jurisdiction of (I.R.S. employer incorporation or organization) identification number)
5931 CAMPUS CIRCLE DRIVE IRVING, TEXAS 75063 P.O. BOX 619566 DFW, TEXAS 75261-9566 (Address of principal executive offices, including zip code) (214) 714-7000 (Registrant's telephone number, including area code) SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: TITLE OF EACH CLASS Common Stock, Par Value $.10 Per Share ------------------------ Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. __ As of April 26, 1996, the aggregate market value of the voting stock held by non-affiliates of the Registrant was $367,922,957, based on the closing price of the Registrant's Common Stock on such date, $18 7/8, as reported on the NASDAQ National Market System. As of April 26, 1996, 23,506,960 shares of the Registrant's Common Stock were outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Annual Report to Shareholders for the year ended January 28, 1996 are incorporated by reference into Part II of this report, and portions of the Proxy Statement for the Annual Meeting of Shareholders of the Registrant to be held during 1996 are incorporated by reference into Part III of this report. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART I ITEM 1. BUSINESS. GENERAL With approximately $1.3 billion in sales, Michaels Stores, Inc. (the "Company") is the nation's largest retailer dedicated to serving the arts, crafts and decorative items marketplace. The Company's Michaels stores offer a wide selection of competitively priced items, including general crafts, home decor items, picture framing materials and services, art and hobby supplies, party supplies, silk and dried flowers, wearable art, and seasonal and holiday merchandise. The Company's primary customers in its stores are women aged 25-54 with above average median household incomes, and the Company believes that repeat customers account for a substantial portion of its sales. The average sale in the Company's Michaels stores has increased annually from approximately $12.00 in fiscal 1991 to $14.44 in fiscal 1995, due in part to increased sales of custom framing, custom floral arrangements and home decor items. In March 1995, the Company acquired Aaron Brothers, Inc. ("Aaron Brothers"), a chain of specialty framing and art supply stores operating primarily in California, that management believes both complements the Michaels store concept and further strengthens the Company's position in Southern California. The Company's Aaron Brothers stores offer professional custom framing services, photo frames, and a full line of ready made frames as well as a wide selection of art supplies. During fiscal 1995, Aaron Brothers generated sales of $53.9 million. The average sale in the Company's Aaron Brothers stores is approximately $23.94. The Company operates 446 Michaels stores and 68 Aaron Brothers stores in 44 states, Puerto Rico and Canada. The Company's Michaels stores average approximately 16,000 square feet of selling space and offer an assortment of approximately 44,000 stock keeping units ("SKUs") in a typical store during the course of a year (including seasonal product), of which approximately 31,000 SKUs are "planogrammed" SKUs offered at all times. The Company's Aaron Brothers stores average approximately 6,700 square feet of selling space and offer an assortment of approximately 6,500 SKUs. For fiscal 1995, the average sales of the Company's Michaels and Aaron Brothers stores open for the full fiscal year were $3.0 million and $0.9 million, respectively. The Company believes it is well positioned to continue to solidify its position as the dominant nationwide specialty arts, crafts and decorative items retailer and to increase its return on invested capital through its business strategies of (i) offering a broad selection of products in an appealing store environment that emphasizes superior customer service, (ii) effectively managing its investment in inventory through centralized purchasing and distribution combined with significant investment in management information systems, and (iii) continuing to expand its nationwide presence. MERCHANDISING AND MARKETING The Company's Michaels store merchandising strategy is to provide a broad selection of products in an appealing store environment which emphasizes superior customer service. PRODUCT SELECTION In general, each Michaels store offers products from a number of departments. Most of the departments offer essentially the same type of merchandise throughout the year, although the products may vary from season to season. The merchandise offered by the major departments is as follows: - General craft materials, including those for stenciling, doll making, jewelry making, woodworking, wall decor, tole painting, and plaster; - Items for personalizing home decor, including vases, containers, baskets, candles, potpourri, accent furniture, lamps, candleholders and gifts; - Picture framing materials and services, including ready-made frames and custom framing, mat boards, glass, backing materials and related supplies, framed art and photo albums; 1 - Fine art materials, representing a number of major brand lines and including items such as pastels, water colors, oil paints, acrylics, easels, brushes, paper and canvas; - Hobby items, including finished doll houses and miniature furniture, wooden and plastic model kits and related supplies, and paint-by-number kits; - Party needs, including paper party goods, gift wrap, candy making and cake decorating supplies, invitations, greeting cards, balloons and candy; - Needlecraft items, including stitchery supplies, hand-knitting yarns, needles, canvas and related supplies for needlepoint, embroidery and cross stitching, knitting, crochet, rug making kits, and quilts and afghans, which are sold separately or in kits; - Silk flowers, dried flowers and artificial plants sold separately or in ready-made and custom floral arrangements, all accessories needed for floral arranging, wedding millinery, and other floral items such as wreaths; - Wearable art, including adult's and children's garments, fabric paints, embellishments, jewels and sequins, transfers and appliques; - Ribbon, including satins, laces, florals and other styles sold both in bolts and by the yard. In addition to the basic departments described above, the Company regularly features seasonal merchandise. Seasonal merchandise is ordered for several holiday periods, including Valentine's Day, Easter, Mother's Day, Halloween and Thanksgiving, in addition to the Christmas season. For example, seasonal merchandise for the Christmas season includes trees, wreaths, candles, lights and ornaments. The Company is adding a home decor do-it-yourself fabric program in approximately 40 Michaels stores which complements the Company's core strategy. In addition, Michaels has successfully added a new wedding invitation business and a wedding equipment rental business. The following table shows Michaels' sales by department as a percent of total sales for fiscal 1995, 1994 and 1993:
PERCENT OF SALES ------------------------------------- DEPARTMENT 1995 1994 1993 - --------------------------------------------------------------------------------------- ----------- ----------- ----------- Silk and dried flowers and plants...................................................... 22% 22% 21% General craft materials and wearable art............................................... 17 20 21 Picture framing........................................................................ 16 15 15 Home decor, seasonal and promotional items............................................. 15 14 14 Fine art materials..................................................................... 11 10 11 Hobby, party, needlecraft, ribbon and all other........................................ 19 19 18 --- --- --- Total.............................................................................. 100% 100% 100% --- --- --- --- --- ---
During the Christmas selling season, up to 25% of floor and shelf space in a typical store is devoted to Christmas crafts, Christmas decorating and gift making merchandise. Because of the project-oriented nature of these products, the Company's peak Christmas selling season extends from October through December. Accordingly, a fully developed seasonal merchandising program, including inventory, merchandise layout and instructional ideas, is implemented in each Michaels store beginning in July of each year. This program requires additional inventory accumulation so that each store is fully stocked during the peak season. Sales of all merchandise typically increase during the Christmas selling season because of increased customer traffic. The Company believes that merchandise centered around other traditional holidays, such as Valentine's Day, Easter and Halloween, is becoming more popular and is a growing contributor to sales. 2 The Michaels selling floor strategy is developed centrally and implemented at the store level through the use of "planograms" which provide store managers with detailed descriptions and illustrations with respect to store layout and merchandise presentation. Planograms are also used to cluster various products which can be combined to create individual projects. Aaron Brothers stores offer professional custom framing services, photo frames, and a full line of ready made frames as well as a wide selection of art supplies. The Company's merchandising strategy for its Aaron Brothers stores is to provide competitively priced superior custom framing services and selection, with a five business day guarantee or the frame is free. In addition, Aaron Brothers strives to provide a fashion forward merchandise selection in an appealing environment with superior customer service. CUSTOMER SERVICE The Company believes that customer service is critically important to its merchandising strategy. Many of the craft supplies sold in Michaels stores can be assembled into unique end-products with an appropriate amount of guidance and direction. Accordingly, Michaels has hundreds of displays in every store in an effort to stimulate new project ideas, and supplies project sheets with detailed instructions on how to assemble the products. In addition, many Michaels sales associates are craft enthusiasts who are able to help customers with ideas and instructions. The Company also offers free demonstrations and inexpensive classes in stores as a means of promoting new craft ideas. Michaels believes that the in-store "how-to" demonstrations, instructional classes, knowledgeable sales associates, and customer focus groups have allowed the Company to better understand and serve its customers. ADVERTISING The Company believes that its advertising promotes art, craft, floral, framing and home decor ideas among its customers. The Company focuses on circular and newspaper advertising. The Company has found full-color circular advertising, primarily as an insert to newspapers but also through direct mail or on display within its stores, to be the most effective medium of advertising. Such circulars advertise numerous products in order to emphasize the wide selection of products available at Michaels stores. The Company believes that its ability to advertise through circulars and newspapers approximately once a week in each of its markets provides the Company with an advantage over its smaller competitors. Generally, the Company has limited television advertising to network television in those major markets in which it has clusters of Michaels stores or in which it is adding new stores. From time to time, Michaels' marketing program has included advertising campaigns on certain national cable television networks, among them The Discovery Channel-TM-, Lifetime Television, and USA Network-Registered Trademark-. A significant portion of the cost of these advertising campaigns were underwritten by vendors in 1994 and 1995. These programs have coordinated television advertising and circular advertisements together with project booklets, in-store demonstrations, and new point-of-sale techniques. PURCHASING, DISTRIBUTION AND INVENTORY MANAGEMENT To enhance its competitive positioning the Company is actively pursuing improvements throughout its supply chain. These improvements are intended to minimize the investment in inventory necessary to support the Company's sales growth objectives, maximize its stores' in-stock position, and improve the cost-effectiveness of the delivery of goods from its vendors to its stores. PURCHASING AND DISTRIBUTION The Company utilizes a centralized purchasing and distribution strategy to manage its inventory. The Company's purchasing strategy is to negotiate centrally with its vendors in order to take advantage of volume purchasing discounts and improve control over product mix and inventory. In excess of 90% of the merchandise acquired by the stores is from vendors on the Company's "approved list." Of this merchandise, approximately one-half is received from the Company's distribution centers and one-half is received directly from vendors. In addition, most stores have the flexibility to purchase 3 from 2% to 5% of their merchandise directly from local vendors, which allows the store managers to tailor the products offered in their stores to local tastes and trends. District managers are responsible for monitoring store purchases on a weekly basis to further manage the stores' merchandise needs. The Company believes that its distribution capabilities allow it to maintain a high in-stock position in its stores while balancing its overall inventory position. The Company believes its distribution network is a competitive advantage and it intends to increase the flow of goods through its distribution centers and thereby reduce its supply chain costs and more effectively manage its investment in inventories. The Company currently operates four distribution centers which supply the Michaels stores with certain merchandise, including substantially all seasonal and promotional items. The Company's distribution centers are located in Texas, California, Kentucky, and Florida. The Company also utilizes a third-party warehouse in Oregon which allows the Company to store bulk purchases of seasonal and promotional merchandise prior to distribution and operates a secondary bulk storage facility in Arizona. Michaels stores receive deliveries from the distribution centers generally once a week (twice a week during the Christmas selling season) through an internal distribution network using hired trucks. To improve its capacity and efficiency, the Company is relocating its Texas distribution center within the Dallas/Fort Worth area during the summer of 1996 at a total cost of $21 million, of which $14 million is covered by an operating lease and $7 million will be paid as a capital expenditure in fiscal 1996 by the Company. (The leases on the Company's current Texas facilities expire in January 1997.) The Florida distribution center, which opened during 1995, and the new Texas facility give the Company considerable flexibility and capacity in meeting its distribution needs. Substantially all of the products sold in Michaels stores are manufactured in the United States, the Far East and Mexico. Goods manufactured in the Far East generally require long lead times and are ordered four to six months in advance of delivery. Such products are either imported directly by the Company or acquired from distributors based in the United States. In all cases, purchases are denominated in U.S. dollars (or Canadian dollars for purchases of certain items delivered directly to stores in Canada). Aaron Brothers purchases all of its merchandise centrally. Aaron Brothers operates a 126,000 square foot distribution center located in the City of Commerce, California that currently serves all of its stores. Approximately 60% of the store stock is shipped directly from the Aaron Brothers distribution center, with the remaining 40% being shipped directly from the vendors. Aaron Brothers systematically replenishes each of its stores automatically on a weekly basis. INVENTORY MANAGEMENT The Company's primary objectives for inventory management are maximizing the efficiency of the flow of product to the stores, maximizing store in-stock position, improving store efficiency, and optimizing overall investment in inventory. The Company manages its inventory in several ways, including: weekly tracking of the "open-to-buy" status for each of several sources of inventory flow to the stores; the use of planograms with "order point/order quantity" information to control the reorder for each SKU; the review of item-level sales information in order to track the sell-through of seasonal and promotional items and to plan its assortments; and the use of management incentive plans that are linked to the achievement of inventory goals. The data that the Company is obtaining from its new point-of-sale ("POS") system is an integral component in the inventory management process. In addition, inventories are verified through physical counts conducted throughout the year generally in groups of 30 to 40 stores and a complete physical count in all stores as close as practicable to year-end. STORE OPERATIONS The Company's 446 Michaels stores average approximately 16,000 square feet of selling space. The Company's 68 Aaron Brothers stores average approximately 6,700 square feet of selling space. Net sales for fiscal 1995 averaged approximately $3.0 million per store for Michaels stores open the entire fiscal year and $188 per square foot of selling space, and averaged approximately $0.9 million 4 per store for Aaron Brothers stores open the entire fiscal year and $137 per square foot of selling space. Store sites are selected based upon meeting certain economic, demographic and traffic criteria or for clustering stores in markets where certain operating efficiencies can be achieved. The Michaels and Aaron Brothers stores currently in operation are located primarily in strip shopping centers in areas with easy access and ample parking. Typically, a Michaels store is managed by a store manager and one to three assistant store managers, depending on the sales volume of the store. Michaels' field organization is headed by an executive vice president and is divided into four geographic zones. Each zone has its own vice president, operations manager, merchandise manager, and eight or nine district managers. There are a total of 35 districts. The Company believes this organizational structure enhances the communication among the individual stores and between the stores and corporate headquarters. In addition, the Company believes that the training and experience of its managers and assistant managers are vital to the success of its stores, and therefore conducts training programs for such personnel. STORE EXPANSION Having achieved its objective of becoming the largest national retailer in the arts, crafts and decorative items industry, the Company has shifted its focus towards achieving improved operational efficiencies, resulting in higher returns on its invested capital. Accordingly, having grown sales and store locations (excluding Aaron Brothers) at compounded annual rates of 32% and 33%, respectively, over the past four fiscal years, Michaels has moderated its internal store growth target to 15% per annum over the longer term. However, in 1996 the Company currently anticipates opening only 12 to 15 new Michaels stores and five to ten new Aaron Brothers stores. The slower growth in 1996 will allow the Company to invest its resources to complete its POS system rollout, expand its distribution capacity and enhance its inventory management systems. The Company currently anticipates opening approximately 50 to 55 new Michaels stores during fiscal 1997. The Company's expansion strategy is to give priority to adding stores in existing markets in order to enhance economies of scale associated with advertising, distribution, field supervision, and other regional expenses. Management believes that few of its existing markets are saturated and that there are attractive new markets available to the Company. The anticipated development of Michaels and Aaron Brothers stores in 1996 and the rate at which stores are developed thereafter will depend upon a number of factors, including the success of existing Michaels and Aaron Brothers stores, the availability and the cost of capital for expansion, the availability of suitable store sites, the availability of suitable acquisition candidates, and the ability to hire and train qualified managers. The Company intends to continue to review acquisition opportunities in existing and new markets. The Company has no arrangements or understandings pending with respect to any acquisitions. Michaels has developed a standardized procedure which allows for the efficient opening of new stores and their integration into the Company's information and distribution systems. Michaels develops the floor plan and inventory layout, and organizes the advertising and promotions in connection with the opening of each new store. In addition, Michaels maintains a qualified store opening staff to provide new store personnel with in-store training. Accordingly, Michaels generally opens new stores during the period from February through October because new store personnel require significant in-store training prior to entering the Christmas selling season. The Company anticipates developing a similar process for opening new Aaron Brothers stores. Costs for opening stores at particular locations depend upon the type of building and general cost levels in the area. In fiscal 1995, the average net cost to the Company of opening a new Michaels store was approximately $530,000, which included leasehold improvements, furniture, fixtures and equipment, and pre-opening expenses. The initial inventory investment associated with each new Michaels store in fiscal 1995 was approximately $450,000 to $650,000 depending on the store size, operating format and the time of year in which the store was opened. The initial inventory investment in new Michaels stores is offset, in part, by extended vendor terms and allowances. 5 INVESTMENT IN INFORMATION TECHNOLOGY Recognizing the increasingly competitive nature of retailing in general and the need for productivity improvements through technology, the Company decided to accelerate its POS system rollout and to implement item level scanning for the majority of the Company's product. The Company believes that the extent of its investment in POS technology is unique in the arts and crafts industry, and that this initiative is likely to provide it with a competitive advantage in the future. The Company expects the POS system, which is presently installed in more than 240 stores, to be in substantially all Michaels stores by the end of July 1996. The Company believes the information obtained from item level scanning through the new POS system will enable it to identify important trends to assist it in managing its inventory by facilitating the elimination of less profitable SKUs, increasing the in-stock level of more popular SKUs, assisting in the analysis of product margins, and generating data for advertising cost/benefit evaluations. The Company believes that the POS system will also allow Michaels to provide better customer service by increasing the speed and accuracy of register check out, enabling the more rapid restocking of items, and enabling the seamless repricing of sale items. The Company will finance this new POS system through a $25 million capital lease with IBM Credit Corporation at an interest rate of approximately 8%. COMPETITION Michaels is the largest nationwide retailer dedicated to serving the arts and crafts marketplace. The specialty arts, crafts and decorative item retail business is highly competitive. Michaels competes primarily with regional and local merchants that tend to specialize in particular aspects of arts and crafts, and mass merchandisers that typically dedicate a portion of their selling space to a limited selection of arts, crafts, picture framing and seasonal products. The Company believes that its Michaels stores compete based on quality and variety of merchandise assortment, customer service, such as instructional demonstrations, and competitive pricing where appropriate. The Company believes the combination of its broad selection of products, emphasis on customer service, loyal customer base, and capacity to advertise frequently in all of its markets provides the Company with a competitive advantage. The U.S. arts, crafts and decorative items retailing industry, which is estimated by trade publications to have exceeded $10.8 billion in sales in fiscal 1995, has increased in size each year since 1990 when industry sales totaled $6.0 billion. The industry is highly fragmented and Michaels is the only nationwide independent arts and crafts retailer. Management believes that there are only a few competitors with arts and crafts sales that exceed $200 million annually, and that the Company's arts and crafts sales are more than four times larger than those of its largest direct competitor. The Company believes that its significant size relative to its competitors provides it with several advantages including (i) superior purchasing power,(ii) critical mass to support a cost efficient nationwide distribution network, and (iii) the financial resources to support an annual advertising budget of approximately 5% of sales ($63 million in fiscal 1995), and significant ongoing capital investments in information technology. Michaels' primary competitors include Hobby Lobby, a chain based in Oklahoma City which operates approximately 100 stores primarily in the southwestern United States; MJ Designs, a chain which operates approximately 62 stores in Dallas/Fort Worth, Baltimore/Washington, D.C. and selected other east coast markets; and A.C. Moore, a chain which operates approximately 20 stores in the Philadelphia and New York markets. The Company also competes, to a lesser degree, with Frank's Nursery (owned by General Host), Old America Stores and Garden Ridge Pottery. Aaron Brothers' competition is composed primarily of local independent custom frame shops, and mass merchandisers. Aaron Brothers believes it remains competitive due to its five day guarantee on custom frame orders, its pricing structure, its fashion forward merchandising assortments, and its customer service. 6 SERVICE AND TRADE MARKS The name "Michaels" and the Michaels logo are both federally registered service marks held by an affiliate of the Company. The name "Aaron Brothers" and the Aaron Brothers logo are federally registered trademarks. FRANCHISES The Company had previously granted to Dupey Management Corporation ("DMC") the right to open royalty-free, licensed Michaels stores in an eight-county area in north Texas which includes the Dallas-Fort Worth area. As a result of a recent agreement between the Company and DMC, DMC will relinquish its right to use the Michaels name on March 31, 1997. EMPLOYEES As of April 15, 1996, approximately 19,330 persons were employed by the Company, approximately 10,330 of whom were employed on a part-time basis. The number of part-time employees is substantially increased during the Christmas selling season. Of the Company's full-time employees, approximately 1,310 are engaged in various executive, operating, training and administrative functions in the Company's corporate office and distribution centers, and the remainder are engaged in store operations. EXECUTIVE OFFICERS OF THE REGISTRANT
NAME AGE POSITION - --------------------------------- --- ---------------------------------------------------------------------- Sam Wyly 61 Chairman of the Board of Directors Charles J. Wyly, Jr. 62 Vice Chairman of the Board of Directors R. Michael Rouleau 57 Chief Executive Officer Douglas B. Sullivan 45 President and Chief Operating Officer R. Don Morris 56 Executive Vice President and Chief Financial Officer David E. Bolen 44 Executive Vice President Rex A. Rambo 54 Executive Vice President-Merchandising/Marketing Kristen L. Magnuson 40 Vice President-Finance and Business Planning Donald R. Miller, Jr. 41 Vice President-Market Development John H. Rittenhouse 39 Vice President-Distribution Colby H. Springer 48 Vice President-Information Services
Mr. Sam Wyly has served as Chairman of the Board since 1984. In 1963, Mr. Wyly founded University Computing Company, a computer software and services company, and served as President or Chairman from 1963 until February 1979. Mr. Wyly co-founded Earth Resources Company, an oil refining and silver and gold mining company, and served as its Executive Committee Chairman from 1968 to 1980. Mr. Wyly and his brother, Charles J. Wyly, Jr., bought the 20 restaurant Bonanza Steakhouse chain in 1967. While he served as Chairman, the restaurant chain grew to approximately 600 restaurants by 1989. Mr. Wyly co-founded Sterling Software, Inc. in 1981 and since that time has served as Chairman of the Board and a director. Mr Wyly serves as President of Maverick Capital, Ltd., an investment fund management company, and has served as a director of Sterling Commerce, Inc. since December 1995. Sam Wyly is the father of Evan A. Wyly, a director of the Company. Mr. Charles J. Wyly, Jr. became a director of the Company in October 1984 and Vice Chairman in February 1985. He co-founded Sterling Software, Inc. in 1981 and since such time has served as a director and (since November 1984) as Vice Chairman of Sterling Software, Inc. Mr. Wyly served as an officer and director of University Computing Company from 1964 to 1975, including President from 1969 to 1973. From 1968 to 1980, Mr. Wyly served as Chairman of the Board of Earth Resources Company, an oil refining and silver and gold mining company which he co-founded with his brother, Sam Wyly. Mr. Wyly served as Vice Chairman of the Bonanza Steakhouse chain from 1967 to 1989. 7 Mr. Wyly serves as Chairman of Maverick Capital Ltd., an investment fund management company, and has served as a director of Sterling Commerce, Inc. since December 1995. Charles J. Wyly, Jr. is the father-in-law of Donald R. Miller, Jr., a director and Vice President-Market Development of the Company. Mr. Rouleau became Chief Executive Officer of the Company in April 1996. Prior to joining the Company, Mr. Rouleau had served as Executive Vice President of store operations for Lowe's Companies, Inc. since May 1992 and as President of Lowe's Contractor Yard Division since February 1995. Prior to joining Lowe's, Mr. Rouleau was a co-founder and President of Office Warehouse which subsequently merged into Office Max. Mr. Sullivan became President and Chief Operating Officer of the Company in August 1995. He joined the Company in 1988 and has served in a variety of capacities, including overseeing the Company's store operations, distribution, store opening, real estate, legal and personnel functions. Prior to his joining the Company, Mr. Sullivan had served with Family Dollar Stores, Inc. for 11 years, most recently as Vice President-Real Estate. Mr. Morris became Executive Vice President and Chief Financial Officer of the Company in August 1990. From January 1990 until August 1990 he was Senior Vice President-Finance and Chief Financial Officer. From April 1988 until January 1990, Mr. Morris was a director, President and Chief Executive Officer of Frostcollection, Inc. Prior to April 1988, Mr. Morris was Partner-In-Charge of the Accounting and Audit and the Merger and Acquisition Departments of the Dallas, Texas office of Arthur Young & Company. Mr. Bolen joined the Company as Executive Vice President in July 1994. From January 1987 until July 1994, he held the positions of Vice President of Stores and more recently Executive Vice President and Chief Operating Officer with Leewards Creative Crafts, Inc. Prior to Leewards, Mr. Bolen held various positions with Gemco and Zayre Corporation, principally in store operations. Mr. Rambo has been Executive Vice President Merchandising/Marketing, with responsibility for all merchandising and marketing functions, since November 1995. Mr. Rambo joined the Company most recently from Lechmere, Inc., a retail chain, where he served as President. Prior to that he ran the Electric Avenue division for Montgomery Wards. He also worked approximately 25 years with Sears, Roebuck and Company. Ms. Magnuson became Vice President-Finance and Business Planning for the Company in August 1990. She was Senior Vice President-Controller, Financial and Strategic Planning, Mergers and Acquisitions, Treasury and Investments for MeraBank from March 1987 to August 1990. Prior to March 1987, Ms. Magnuson was a Senior Manager/Principal at Arthur Young & Company. Mr. Miller has served as Vice President-Marketing Development of the Company since November 1990 and as a director of the Company since September 1992. From September 1984 to November 1990, he was Director of Real Estate. Prior to joining the Company, Mr. Miller served in various real estate positions with Bonanza and Peoples Restaurants. Mr. Miller has served as a director of Sterling Software, Inc. since September 1993. He also serves on the Board of Directors of Xscribe Corp. Mr. Miller is the son-in-law of Charles J. Wyly, Jr., Vice Chairman of the Company. Mr. Rittenhouse joined the Company as Vice President-Distribution in January 1995. For the previous eight years he had served with Target Stores, a division of Dayton Hudson Corporation, as Director of Distribution. Prior to that he held various positions with Southland Corporation. Mr. Springer has been Vice President-Information Services since November 1995. From 1993 to November 1995 he was Vice President-Information Services with Blockbuster Entertainment Corporation. Prior to that he was Vice President of Management Information Systems with Pearle Vision, Incorporated. 8 ITEM 2. PROPERTIES. The Company's Michaels stores generally are situated in strip shopping centers located near malls and on well-traveled roads. Almost all stores are in leased premises with lease terms generally ranging from five to ten years. The base rental rates generally range from $85,000 to $235,000 per year. Rental expense for stores open during the full 12-month period of fiscal 1995 averaged $156,000. The leases are generally renewable, with increases in lease rental rates. A majority of the existing leases contain provisions pursuant to which the lessor has provided leasehold improvements to prepare for opening. However, the Company has been paying and anticipates continuing to pay for a larger portion of future improvements directly as opposed to financing them through the lessor. The Company's Aaron Brothers stores are generally located in high visibility strip shopping centers in trade areas having a high density of population and above average discretionary income. The locations typically contain high profile and/or complementary anchor stores. As of this date, all current stores are located in leased properties with lease terms generally ranging from five to ten years with options to renew. Rental expense for stores opened the full 12-month period of fiscal 1995 averaged approximately $105,000. The following table indicates the number of the Company's stores located in each state or province as of April 25, 1996:
STATE NUMBER OF STORES - ------------------------------------ ------------------- Alabama............................. 5 Alaska.............................. 1 Arizona............................. 17* Arkansas............................ 3 British Columbia.................... 1 California.......................... 144* Colorado............................ 9 Connecticut......................... 1 Florida............................. 22 Georgia............................. 19 Idaho............................... 2 Illinois............................ 22 Indiana............................. 9 Iowa................................ 6 Kansas.............................. 4 Kentucky............................ 3 Louisiana........................... 4 Maine............................... 2 Maryland............................ 1 Massachusetts....................... 10 Michigan............................ 16 Minnesota........................... 9 Mississippi......................... 1 Missouri............................ 11 Nebraska............................ 1 STATE NUMBER OF STORES - ------------------------------------ ------------------- Nevada.............................. 6* New Hampshire....................... 2 New Jersey.......................... 7 New Mexico.......................... 3 New York............................ 11 North Carolina...................... 14 North Dakota........................ 1 Ohio................................ 21 Oklahoma............................ 7 Ontario............................. 15 Oregon.............................. 10 Pennsylvania........................ 9 Puerto Rico......................... 3 Rhode Island........................ 1 South Carolina...................... 4 Tennessee........................... 9 Texas............................... 35 Utah................................ 4 Virginia............................ 8 Washington.......................... 13 West Virginia....................... 1 Wisconsin........................... 7 --- Total........................... 514
*Of the store counts indicated in Arizona, California and Nevada, Aaron Brothers accounts for 3, 63 and 2 stores, respectively. The Company leases a 210,000 square foot building in Irving, Texas for use as a distribution center and as the Company's corporate headquarters. In addition it leases four nearby facilities for supplemental warehouse and office space. During 1995 the Company entered into lease agreements to relocate its Irving distribution center and office space. A lease was entered into and construction was started on a 426,000 square foot distribution facility at the Alliance Airport in Tarrant County, Texas. In addition, a lease was entered into for a 136,000 square foot building in Irving, Texas, to which the 9 Company will relocate its corporate offices. The move of the distribution center and corporate offices is scheduled for mid 1996. Michaels also leases a 400,000 square foot building in Buena Park, California, a 350,000 square foot building in Lexington, Kentucky, and a 500,000 square foot facility in Jacksonville, Florida, all of which are used as distribution centers. Aaron Brothers leases a 126,000 square foot building in City of Commerce, California, for use as a distribution center and office facility. ITEM 3. LEGAL PROCEEDINGS. In August 1995, two lawsuits were filed by certain security holders against the Company and certain present and former officers and directors seeking class action status on behalf of purchasers of the Company's Common Stock between February 1, 1995 and August 23, 1995. Among other things, the plaintiffs allege that misstatements and omissions by defendants relating to projected and historical operating results, inventory and other matters involving future plans resulted in an inflation of the prices of the Company's Common Stock. The plaintiffs seek on behalf of the purported class an unspecified amount of compensatory damages and reimbursement for the plaintiffs' fees and expenses. The United States District Court for the Northern District of Texas consolidated the two lawsuits on November 16, 1995. The Company and the individual defendants have filed a motion to dismiss the consolidated, amended complaint. The court has not yet ruled on this motion. Discovery related to both class certification issues and the merits of plaintiffs' claims has been stayed pending resolution of defendants' motion to dismiss. The Company believes the claims are without merit and intends to vigorously defend this action. The Company is a defendant from time to time in lawsuits incidental to its business. Based on currently available information, the Company believes that resolution of all known contingencies, including the security holder litigation described above, would not have a material adverse impact on the Company's financial position. However, there can be no assurance that future costs would not be material to results of operations of the Company for a particular future period. In addition, the Company's estimates of future costs are subject to change as events evolve and additional information becomes available during the course of litigation. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. The Company did not submit any matter to a vote of security holders during the fourth quarter of the fiscal year covered by this report. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS. Since September 3, 1991, the Common Stock has been quoted through the NASDAQ National Market System under the symbol "MIKE". From December 10, 1986 until September 3, 1991, the Common Stock was traded on the American Stock Exchange. The Company's Common Stock began trading in the over-the-counter market in May 1984 and was quoted through the NASDAQ National Market System from May 21, 1985 until December 10, 1986. 10 The following table sets forth the high and low sales prices of the Company's Common Stock for each quarterly period within the two most recent fiscal years.
FISCAL 1995 HIGH LOW - ------------------------------------------------------------------ --------- --------- First............................................................. $ 37 1/2 $ 27 3/4 Second............................................................ 32 3/4 20 3/4 Third............................................................. 25 3/4 11 Fourth............................................................ 18 11 3/8 FISCAL 1994 HIGH LOW - ------------------------------------------------------------------ --------- --------- First............................................................. $ 44 3/4 $ 31 Second............................................................ 46 1/2 30 1/2 Third............................................................. 45 29 1/2 Fourth............................................................ 45 3/4 32 1/4
On April 26, 1996, the last reported sale price of the Common Stock on the NASDAQ National Market System was $18 7/8, and as of such date there were approximately 1,232 holders of record of the Common Stock. The Company's present plan is to retain earnings for the foreseeable future for use in the Company's business and the financing of its growth. The Company did not pay any dividends on its Common Stock during fiscal 1994 and 1995. ITEM 6. SELECTED FINANCIAL DATA. The selected financial information required by this item is included in the Company's 1995 Annual Report to Shareholders (the "1995 Annual Report") under the heading "Financial Highlights." Such information is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The information required by this item is included in the Company's 1995 Annual Report on pages 9 through 11 under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations." Such information is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The financial statements and supplementary data required by this item are included in this Annual Report on Form 10-K, or are included in the Company's 1995 Annual Report and are incorporated herein by reference, as indicated in the following Index to Financial Statements.
INDEX TO FINANCIAL STATEMENTS AND 1995 ANNUAL FINANCIAL STATEMENT SCHEDULES REPORT PAGE - ---------------------------------------------------------------------------------------------------- ------------- Report of Independent Auditors 19 Consolidated Balance Sheets at January 28, 1996 and January 29, 1995 12 Consolidated Statements of Operations for the fiscal years ended January 28, 1996, January 29, 1995 and January 30, 1994 13 Consolidated Statements of Cash Flows for the fiscal years ended January 28, 1996, January 29, 1995 and January 30, 1994 14 Consolidated Statements of Shareholders' Equity for the fiscal years ended January 28, 1996, January 29, 1995 and January 30, 1994 15 Notes to Consolidated Financial Statements 15-18
All schedules are omitted since the required information is not present or is not present in amounts sufficient to require submission of the schedules, or because the information required is included in the consolidated financial statements and notes thereto. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. 11 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information concerning the directors of the Company is set forth in the Proxy Statement to be delivered to shareholders in connection with the Company's Annual Meeting of Shareholders to be held on June 11, 1996 (the "Proxy Statement") under the heading "Election of Directors," which information is incorporated herein by reference. The name, age and position of each executive officer of the Company is set forth under the heading: "Executive Officers of the Registrant" in Item 1 of this report, which information is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION. The information concerning executive compensation is set forth in the Proxy Statement under the heading "Management Compensation," which information is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information concerning security ownership of certain beneficial owners and management is set forth in the Proxy Statement under the heading "Principal Shareholders and Management Ownership," which information is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information concerning certain relationships and related transactions is set forth in the Proxy Statement under the heading "Certain Transactions," which information is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) The following documents are filed as a part of this Annual Report on Form 10-K: (1) Financial Statements: The financial statements filed as a part of this report are listed in the "Index to Financial Statements and Financial Statement Schedules" at Item 8. (2) Financial Statement Schedules: The financial statement schedules filed as a part of this report are listed in the "Index to Financial Statements and Financial Statement Schedules" at Item 8. (3) Exhibits: The exhibits filed as a part of this report are listed under "Exhibits" at subsection (c) of this Item 14. (b) Reports of Form 8-K: No report on Form 8-K was filed on behalf of the Registrant during the last quarter of the period covered by this report. (c) Exhibits: 2.1 -- Agreement and Plan of Merger, dated as of May 10, 1994, among Michaels Stores, Inc., LWA Acquisition Corporation and Leewards Creative Crafts, Inc. (13) 2.2 -- First Amendment to Agreement and Plan of Merger dated as of June 2, 1994 among Michaels Stores, Inc., LWA Acquisition Corporation and Leewards Creative Crafts, Inc. (14)
12 2.3 -- Stock Purchase Agreement, dated as of February 16, 1994, among Michaels Stores, Inc., Treasure House Stores, Inc. and the stockholders of Treasure House Stores, Inc. (15) 2.4 -- Amendment No. 1 to Stock Purchase Agreement (15) 2.5 -- Agreement and Plan of Merger, dated as of March 3, 1994, among Michaels Stores, Inc. and the other parties listed therein. (13) 2.6 -- Amendment No. 1 to Agreement and Plan of Merger, dated as of March 31, 1994, among Michaels Stores, Inc. and the other parties listed therein. (13) 2.7 -- Stock Purchase Agreement, dated as of March 8, 1995, among Aaron Brothers Holdings, Inc., ABAM Investors Limited Partnership, and Michaels Stores, Inc. (16) 3.1 -- Bylaws of the Registrant, as amended and restated. (16) 3.2 -- Restated Certificate of Incorporation of the Registrant. (3) 4.1 -- Form of Common Stock Certificate. (4) 4.2 -- Common Stock and Warrant Agreement dated as of October 16, 1984 between Michaels Stores, Inc. and Peoples Restaurants, Inc., including form of Warrant. (10) 4.3 -- First Amendment to Common Stock and Warrant Agreement dated October 31, 1984 between the First Dallas Group, Ltd. and Michaels Stores, Inc. (10) 4.4 -- Second Amendment to Common Stock and Warrant Agreement dated November 28, 1984 between First Dallas Investments-Michaels I, Ltd. and Michaels Stores, Inc. (10) 4.5 -- Third Amendment to Common Stock and Warrant Agreement dated February 27, 1985 between First Dallas Investments-Michaels I, Ltd., The First Dallas Group, Ltd., Sam Wyly, Charles J. Wyly, Jr. and Michaels Stores, Inc. (2) 4.6 -- Indenture, dated as of January 22, 1993, between Michaels Stores, Inc. and NationsBank of Texas, N.A., as Trustee, including the form of 4 3/4%/6 3/4% Step-up Convertible Subordinated Note included therein. (10) 4.7 -- Stock Purchase Agreement entered into as of March 27, 1996 between Michaels Stores, Inc. and Qualye Limited. (1) 4.8 -- Stock Purchase Agreement entered into as of March 27, 1996 between Michaels Stores, Inc. and Locke Limited. (1) 4.9 -- Stock Purchase Agreement entered into as of March 27, 1996 between Michaels Stores, Inc. and Fugue Limited. (1) 10.1 -- Michaels Stores, Inc. Employees 401(k) Plan. (8) 10.2 -- Michaels Stores, Inc. Employees 401(k) Trust. (6) 10.3 -- Form of Indemnity Agreement between Michaels Stores, Inc. and certain officers and directors of the Registrant. (10) 10.4 -- Form of Employment Agreement between Michaels Stores, Inc. and certain directors of the Registrant. (7)(12) 10.5 -- Form of Consulting Agreement between Michaels Stores, Inc. and certain directors of the Registrant.(7)(12) 10.6 -- Form of Employment Agreement between Michaels Stores, Inc. and certain key executives of the Registrant.(7)(12) 10.7 -- Michaels Stores, Inc. Employees Stock Purchase Plan.(9) 10.8 -- Michaels Stores, Inc. Key Employee Stock Compensation Program, as amended effective January 25, 1992.(3)(12)
13 10.9 -- Michaels Stores, Inc. 1992 Non-Statutory Stock Option Plan dated August 1, 1992.(3)(12) 10.10 -- Form of Non-Statutory Stock Option Agreement covering options granted to certain directors and consultants of the Company other than pursuant to the Michaels Stores, Inc. Key Employee Stock Compensation Program and the Michaels Stores, Inc. 1992 Non-Statutory Stock Option Plan.(10)(12) 10.11 -- Credit Agreement dated April 29, 1994, between Michaels Stores, Inc. and NationsBank of Texas, N.A. (the "Credit Agreement")(8) 10.12 -- First Amendment to Credit Agreement dated April 26, 1995.(16) 10.13 -- Second Amendment to Credit Agreement dated as of September 1, 1995.(17) 10.14 -- Third Amendment to Credit Agreement dated as of February 12, 1996.(1) 10.15 -- Fourth Amendment to Credit Agreement dated as of March 4, 1996.(1) 10.16 -- Michaels Stores, Inc. 1994 Non-Statutory Stock Option Plan dated March 31, 1994.(16) 10.17 -- Amended, Modified and Restated Master Lease Agreement dated as of December 18, 1995 between Jacksonville Funding Corporation as Lessor and Michaels Stores, Inc., as Lessee. (1) 10.18 -- Agreement dated as of January 30, 1996 by and between Michaels Stores, Inc. and Jack E. Bush. (1) 10.19 -- First Amendment to the Michaels Stores, Inc. Employees 401(k) Plan. (1) 11 -- Computation of Earnings Per Common Share.(1) 13 -- Portions of 1995 Annual Report to Shareholders that are incorporated by reference into Items 6, 7 and 8 of this Annual Report on Form 10-K.(1) 21.1 -- Subsidiaries of Michaels Stores, Inc.(1) 23 -- Consent of Ernst & Young.(1) 27 -- Financial Data Schedule.(1)
- ------------------------ (1) Filed herewith. (2) Previously filed as an Exhibit to the Registrant's Registration Statement on Form S-1 (No. 33-9456) and incorporated herein by reference. (3) Previously filed as an Exhibit to the Registrant's Registration Statement on Form S-8 (No. 33-54726) and incorporated herein by reference. (4) Previously filed as an Exhibit to the Registrant's Registration Statement on Form S-1 (No. 2-89370) and incorporated herein by reference. (5) Previously filed as an Exhibit to the Peoples Restaurants, Inc. Registration Statement on Form S-1 (No. 2-85737) and incorporated herein by reference. (6) Previously filed as an Exhibit to the Registrant's Registration Statement on Form S-8 (No. 33-11985) and incorporated herein by reference. (7) Previously filed as an Exhibit to the Registrant's Annual Report on Form 10-K for the year ended January 29, 1989 and incorporated herein by reference. (8) Previously filed as an Exhibit to the Registrant's Annual Report on Form 10-K for the year ended January 30, 1994 and incorporated herein by reference. (9) Previously filed as an Exhibit to the Registrant's Annual Report on Form 10-K for the year ended February 2, 1992 and incorporated herein by reference. 14 (10) Previously filed as an Exhibit to the Registrant's Annual Report on Form 10-K for the year ended January 31, 1993 and incorporated herein by reference. (11) Previously filed as an Exhibit to the Registrant's Quarterly Report on Form 10-Q for the Quarter ended August 1, 1993 and incorporated herein by reference. (12) Management contract or compensatory plan or arrangement required to be filed as an exhibit to this form pursuant to Item 14(c). (13) Previously filed as an Exhibit to the Registrant's Registration Statement on Form S-3 (No. 33-53639) and incorporated herein by reference. (14) Previously filed as an Exhibit to the Registrant's Quarterly Report on Form 10-Q for the Quarter ended March 1, 1994 and incorporated herein by reference. (15) Previously filed as an Exhibit to the Registrant's Registration Statement on Form S-3 (No. 33-52311) and incorporated herein by reference. (16) Previously filed as an Exhibit to the Registrant's Annual Report on Form 10-K for the year ended January 29, 1995 and incorporated herein by reference. (17) Previously filed as an Exhibit to the Registrant's Quarterly Report on Form 10-Q for the Quarter ended July 30, 1995 and incorporated herein by reference. 15 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MICHAELS STORES, INC. Date: April 29, 1996 By: /s/ SAM WYLY ----------------------------------- Sam Wyly CHAIRMAN OF THE BOARD OF DIRECTORS Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/ SAM WYLY - ----------------------------------- Chairman of the Board of April 29, 1996 Sam Wyly Directors /s/ CHARLES J. WYLY, JR. - ----------------------------------- Vice Chairman of the April 29, 1996 Charles J. Wyly, Jr. Board of Directors /s/ R. MICHAEL ROULEAU Chief Executive Officer - ----------------------------------- (Principal Executive April 29, 1996 R. Michael Rouleau Officer) Executive Vice President /s/ R. DON MORRIS and Chief Financial - ----------------------------------- Officer (Principal April 29, 1996 R. Don Morris Financial and Accounting Officer) /s/ EVAN A. WYLY - ----------------------------------- Vice President and April 29, 1996 Evan A. Wyly Director - ----------------------------------- Director F. Jay Taylor - ----------------------------------- Director Richard E. Hanlon Vice President-Market - ----------------------------------- Development, and Donald R. Miller, Jr. Director /s/ MICHAEL C. FRENCH - ----------------------------------- Director April 29, 1996 Michael C. French 16 INDEX TO EXHIBITS
SEQUENTIALLY EXHIBIT NO. DESCRIPTION OF EXHIBIT NUMBERED PAGE - ----------- ---------------------------------------------------------------------------------------- --------------- 2.1 -- Agreement and Plan of Merger, dated as of May 10, 1994, among Michaels Stores, Inc., LWA Acquisition Corporation and Leewards Creative Crafts, Inc. (13) 2.2 -- First Amendment to Agreement and Plan of Merger dated as of June 2, 1994 among Michaels Stores, Inc., LWA Acquisition Corporation and Leewards Creative Crafts, Inc. (14) 2.3 -- Stock Purchase Agreement, dated as of February 16, 1994, among Michaels Stores, Inc., Treasure House Stores, Inc. and the stockholders of Treasure House Stores, Inc. (15) 2.4 -- Amendment No. 1 to Stock Purchase Agreement (15) 2.5 -- Agreement and Plan of Merger, dated as of March 3, 1994, among Michaels Stores, Inc. and the other parties listed therein. (13) 2.6 -- Amendment No. 1 to Agreement and Plan of Merger, dated as of March 31, 1994, among Michaels Stores, Inc. and the other parties listed therein. (13) 2.7 -- Stock Purchase Agreement, dated as of March 8, 1995, among Aaron Brothers Holdings, Inc., ABAM Investors Limited Partnership, and Michaels Stores, Inc. (16) 3.1 -- Bylaws of the Registrant, as amended and restated. (16) 3.2 -- Restated Certificate of Incorporation of the Registrant. (3) 4.1 -- Form of Common Stock Certificate. (4) 4.2 -- Common Stock and Warrant Agreement dated as of October 16, 1984 between Michaels Stores, Inc. and Peoples Restaurants, Inc., including form of Warrant. (10) 4.3 -- First Amendment to Common Stock and Warrant Agreement dated October 31, 1984 between the First Dallas Group, Ltd. and Michaels Stores, Inc. (10) 4.4 -- Second Amendment to Common Stock and Warrant Agreement dated November 28, 1984 between First Dallas Investments-Michaels I, Ltd. and Michaels Stores, Inc. (10) 4.5 -- Third Amendment to Common Stock and Warrant Agreement dated February 27, 1985 between First Dallas Investments-Michaels I, Ltd., The First Dallas Group, Ltd., Sam Wyly, Charles J. Wyly, Jr. and Michaels Stores, Inc. (2) 4.6 -- Indenture, dated as of January 22, 1993, between Michaels Stores, Inc. and NationsBank of Texas, N.A., as Trustee, including the form of 4 3/4%/6 3/4% Step-up Convertible Subordinated Note included therein. (10) 4.7 -- Stock Purchase Agreement entered into as of March 27, 1996 between Michaels Stores, Inc. and Qualye Limited. (1) 4.8 -- Stock Purchase Agreement entered into as of March 27, 1996 between Michaels Stores, Inc. and Locke Limited. (1) 4.9 -- Stock Purchase Agreement entered into as of March 27, 1996 between Michaels Stores, Inc. and Fugue Limited. (1) 10.1 -- Michaels Stores, Inc. Employees 401(k) Plan. (8) 10.2 -- Michaels Stores, Inc. Employees 401(k) Trust. (6)
10.3 -- Form of Indemnity Agreement between Michaels Stores, Inc. and certain officers and directors of the Registrant. (10) 10.4 -- Form of Employment Agreement between Michaels Stores, Inc. and certain directors of the Registrant. (7)(12) 10.5 -- Form of Consulting Agreement between Michaels Stores, Inc. and certain directors of the Registrant.(7)(12) 10.6 -- Form of Employment Agreement between Michaels Stores, Inc. and certain key executives of the Registrant.(7)(12) 10.7 -- Michaels Stores, Inc. Employees Stock Purchase Plan.(9) 10.8 -- Michaels Stores, Inc. Key Employee Stock Compensation Program, as amended effective January 25, 1992.(3)(12) 10.9 -- Michaels Stores, Inc. 1992 Non-Statutory Stock Option Plan dated August 1, 1992.(3)(12) 10.10 -- Form of Non-Statutory Stock Option Agreement covering options granted to certain directors and consultants of the Company other than pursuant to the Michaels Stores, Inc. Key Employee Stock Compensation Program and the Michaels Stores, Inc. 1992 Non-Statutory Stock Option Plan.(10)(12) 10.11 -- Credit Agreement dated April 29, 1994, between Michaels Stores, Inc. and NationsBank of Texas, N.A. (the "Credit Agreement")(8) 10.12 -- First Amendment to Credit Agreement dated April 26, 1995.(16) 10.13 -- Second Amendment to Credit Agreement dated as of September 1, 1995.(17) 10.14 -- Third Amendment to Credit Agreement dated as of February 12, 1996.(1) 10.15 -- Fourth Amendment to Credit Agreement dated as of March 4, 1996.(1) 10.16 -- Michaels Stores, Inc. 1994 Non-Statutory Stock Option Plan dated March 31, 1994.(16) 10.17 -- Amended, Modified and Restated Master Lease Agreement dated as of December 18, 1995 between Jacksonville Funding Corporation as Lessor and Michaels Stores, Inc., as Lessee. (1) 10.18 -- Agreement dated as of January 30, 1996 by and between Michaels Stores, Inc. and Jack E. Bush. (1) 10.19 -- First Amendment to the Michaels Stores, Inc. Employees 401(k) Plan. (1) 11 -- Computation of Earnings Per Common Share.(1) 13 -- Portions of 1995 Annual Report to Shareholders that are incorporated by reference into Items 6, 7 and 8 of this Annual Report on Form 10-K.(1) 21.1 -- Subsidiaries of Michaels Stores, Inc.(1) 23 -- Consent of Ernst & Young.(1) 27 -- Financial Data Schedule.(1)
- ------------------------ (1) Filed herewith. (2) Previously filed as an Exhibit to the Registrant's Registration Statement on Form S-1 (No. 33-9456) and incorporated herein by reference. (3) Previously filed as an Exhibit to the Registrant's Registration Statement on Form S-8 (No. 33-54726) and incorporated herein by reference. (4) Previously filed as an Exhibit to the Registrant's Registration Statement on Form S-1 (No. 2-89370) and incorporated herein by reference. (5) Previously filed as an Exhibit to the Peoples Restaurants, Inc. Registration Statement on Form S-1 (No. 2-85737) and incorporated herein by reference. (6) Previously filed as an Exhibit to the Registrant's Registration Statement on Form S-8 (No. 33-11985) and incorporated herein by reference. (7) Previously filed as an Exhibit to the Registrant's Annual Report on Form 10-K for the year ended January 29, 1989 and incorporated herein by reference. (8) Previously filed as an Exhibit to the Registrant's Annual Report on Form 10-K for the year ended January 30, 1994 and incorporated herein by reference. (9) Previously filed as an Exhibit to the Registrant's Annual Report on Form 10-K for the year ended February 2, 1992 and incorporated herein by reference. (10) Previously filed as an Exhibit to the Registrant's Annual Report on Form 10-K for the year ended January 31, 1993 and incorporated herein by reference. (11) Previously filed as an Exhibit to the Registrant's Quarterly Report on Form 10-Q for the Quarter ended August 1, 1993 and incorporated herein by reference. (12) Management contract or compensatory plan or arrangement required to be filed as an exhibit to this form pursuant to Item 14(c). (13) Previously filed as an Exhibit to the Registrant's Registration Statement on Form S-3 (No. 33-53639) and incorporated herein by reference. (14) Previously filed as an Exhibit to the Registrant's Quarterly Report on Form 10-Q for the Quarter ended March 1, 1994 and incorporated herein by reference. (15) Previously filed as an Exhibit to the Registrant's Registration Statement on Form S-3 (No. 33-52311) and incorporated herein by reference. (16) Previously filed as an Exhibit to the Registrant's Annual Report on Form 10-K for the year ended January 29, 1995 and incorporated herein by reference. (17) Previously filed as an Exhibit to the Registrant's Quarterly Report on Form 10-Q for the Quarter ended July 30, 1995 and incorporated herein by reference. EX-4.7 2 EXHIBIT 4.7 STOCK PURCHASE AGREEMENT This STOCK PURCHASE AGREEMENT (this "Agreement") is made and entered as of March 29, 1996 between Michaels Stores, Inc., a Delaware corporation ("Seller") and Quayle Limited, an Isle of Man corporation ("Purchaser"). RECITAL Seller desires to issue and sell to Purchaser, and Purchaser desires to purchase from Seller, 666,667 newly issued and outstanding shares (the "Shares") of Common Stock, par value $.10 per share, of Seller (the "Common Stock") on the terms and subject to the conditions set forth in this Agreement. Seller and Purchaser hereby agree as follows: I. PURCHASE AND SALE 1.1 PURCHASE AND SALE. On the terms and subject to the conditions set forth in this Agreement, at the Closing (as defined in Section 1.3) Seller will issue and sell to Purchaser, and Purchaser will purchase from Seller, the Shares. 1.2 PURCHASE PRICE. As consideration for the issuance of the Shares, Purchaser will pay to Seller at the Closing the aggregate amount equal to the product of (a) the number of Shares to be issued pursuant to this Agreement multiplied by (b) $12.50 per Share (the "Purchase Price") 1.3 THE CLOSING. (a) Subject to Section 1.4, the closing of the purchase and sale of the Shares hereunder (the "Closing") will take place on April 5, 1996 or such other date as Seller and Purchaser may agree (the "Closing Date"). (b) At the Closing, (i) Purchaser will pay to Seller the Purchase Price by wire transfer of immediately available funds to an account or accounts designated by Seller and (ii) Seller will deliver to Purchaser a single certificate representing the Shares registered in the name of "Quayle Limited". (c) At the Closing Seller will deliver to Purchaser, and Purchaser will deliver to Seller, a certificate confirming that their respective representations and warranties set forth in this Agreement are true and complete in all material respects on the Closing Date as if made on that date. 1.4 CONDITION TO CLOSING. (a) Notwithstanding anything to the contrary in this Agreement, the obligation of Seller to consummate the sale and purchase of the Shares contemplated hereby is subject to satisfaction of each of the following conditions: (i) The Board of Directors of Seller shall have approved the sale of the Shares on or before the Closing Date. (ii) The representations and warranties of Purchaser in this Agreement shall be true and complete in all material respects on and as of the Closing Date. (b) Notwithstanding anything to the contrary in this Agreement, the obligations of Purchaser to consummate the sale and purchase of the Shares contemplated hereby are subject to the condition that the representations and warranties made by Seller in this Agreement shall be true and complete in all material respects on and as of the Closing Date. II. REPRESENTATIONS AND WARRANTIES OF SELLER 2.1 ORGANIZATION; POWER AND AUTHORITY. Seller is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. Seller has requisite corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. The execution and delivery by Seller of this Agreement and the performance by it of the transactions contemplated hereby to be performed by it have been duly authorized by all necessary corporate action on the part of Seller. This Agreement has been duly executed and delivered by Seller and constitutes a valid and binding obligation of Seller. 2.2 CAPITALIZATION. The authorized capital stock of Seller consists of (i) 50,000,000 shares of Common Stock, of which as of March 15, 1996, 21,617,025 shares were issued and outstanding, fully paid and nonassessable and no shares were held in the treasury, and (ii) 2,000,000 shares of preferred stock, $.10 par value per share, of which as of March 15, 1996, no shares were outstanding. Upon the issuance of the Shares to Purchaser and the payment to Seller of the Purchase Price, the Shares will be validly issued and outstanding, fully paid and nonassessable, and Purchaser will acquire good and valid title to the Shares, free and clear of any charges, liens or other encumbrances ("Encumbrances") of any kind. None of the Shares have been issued in violation of any preemptive rights, rights of first refusal or other acquisition rights. -2- 2.3 CONSENT AND APPROVALS; NO VIOLATION. Neither the execution and delivery of this Agreement by Seller nor the consummation by Seller of the transactions contemplated hereby will (a) conflict with or result in any breach or violation of, or constitute a default under, any note, pledge, trust, commitment, agreement or other instrument or obligation to which Seller is a party or by which Seller or any of its properties may be bound, (b) require any consent, approval, authorization or permit of, or filing with or notification to, any court, governmental authority or other regulatory or administrative agency or commission, domestic or foreign ("Governmental Entity"), or (c) violate any statute or any order, decree, injunction, rule or regulation of any Governmental Entity applicable to Seller. 2.4 SEC REPORTS; FINANCIAL STATEMENTS. (a) Seller has delivered to Purchaser (i) its Annual Report on Form 10-K for the fiscal year ended January 29, 1995 and (ii) its Quarterly Reports on Form 10-Q for each of the fiscal quarters ended April 30, 1995, July 30, 1995 and October 29, 1995, respectively, each in the form (including exhibits) filed with the Securities and Exchange Commission ("SEC") (collectively, the "SEC Reports"). Each SEC Report has been prepared and filed in accordance with all applicable rules and regulations of the SEC and at the time of its filing was in compliance with such rules and regulations in all material respects. As of their respective dates, the SEC Reports did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. (b) Each of the audited consolidated financial statements and unaudited consolidated interim financial statements of Seller (and the related notes and schedules) included in the SEC Reports present fairly, in all material respects, the consolidated financial position of Seller and its consolidated subsidiaries as of the respective dates thereof and the results of operations and cash flows for the respective periods set forth therein, in accordance with generally accepted accounting principles consistently applied during the period involved, except as otherwise noted therein and subject, in the case of the unaudited interim consolidated financial statements, to the omission of certain notes not ordinarily accompanying such unaudited interim consolidated financial statements and to normal year-end adjustments and any other adjustments described therein. (c) Except as set forth in the SEC Reports, any other reports filed with the SEC pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act"), that relate to Seller, and any public announcements made by Seller, since October 29, 1995 there has been no material adverse change in the -3- assets, earnings, financial position, business or prospects of Seller and its subsidiaries, considered as a whole. 2.5 NO BROKER; FINDER; ETC. None of Seller or its directors, officers or employees has employed any investment banker, consultant, broker or finder or incurred any liability for any brokerage fees, commissions or finders fees in connection with the transactions contemplated under this Agreement. III. REPRESENTATIONS AND WARRANTIES OF PURCHASER 3.1 POWER AND AUTHORITY. Purchaser has the requisite corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. This Agreement has been duly executed and delivered by Purchaser and constitutes a valid and binding obligation of Purchaser. 3.2 PURCHASE FOR INVESTMENT. Purchaser acknowledges that the Shares have not been registered under the Securities Act of 1933, as amended ("Securities Act"), or under any state or foreign securities laws. Purchaser is not an underwriter as such term is defined under the Securities Act, and is purchasing the Shares solely for investment with no present intention to distribute any of the Shares to any person or entity ("Person"). Purchaser will not sell or otherwise dispose of any of the Shares, except in accordance with the registration requirements or exemption provisions under the Securities Act and the rules and regulations promulgated thereunder, and any other applicable securities laws. Purchaser further understands that the certificate representing the Shares will bear the following legend and agrees that it will hold the Shares subject thereto: THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED PURSUANT TO THE SECURITIES ACT OF 1933 OR ANY STATE SECURITIES LAW. NEITHER THIS SECURITY NOR ANY PORTION HEREOF OR INTEREST HEREIN MAY BE SOLD, ASSIGNED, TRANSFERRED, PLEDGED OR OTHERWISE DISPOSED OF UNLESS THE SAME IS REGISTERED UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES LAW, OR UNLESS AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE AND MICHAELS STORES, INC. SHALL HAVE RECEIVED, AT THE EXPENSE OF THE HOLDER HEREOF, EVIDENCE OF SUCH EXEMPTION REASONABLY SATISFACTORY TO MICHAELS STORES, INC. (WHICH MAY INCLUDE, AMONG OTHER THINGS, AN OPINION OF COUNSEL SATISFACTORY TO MICHAELS STORES, INC.). -4- 3.3 SUITABILITY AND SOPHISTICATION. Purchaser represents and warrants that it (a) is an "accredited investor" as defined in Rule 501(a) promulgated under the Securities Act, (b) has such knowledge and experience in financial and business matters that it is capable of independently evaluating the risks and merits of purchasing the Shares, (c) has been provided with the opportunity to make a reasonable investigation of Seller, including the opportunity to make any inquiries and to request additional information necessary to its investment decision, and Seller has satisfactorily responded to any inquiries and furnished to Purchaser all requested information, (d) has independently evaluated the risks and merits of purchasing the Shares and has independently determined that the Shares are a suitable investment for it, and (e) has sufficient financial resources to bear the loss of its entire investment in the Shares. 3.4 CONSENT AND APPROVALS; NO VIOLATION. Neither the execution and delivery of this Agreement by Purchaser nor the consummation by Purchaser of the transactions contemplated hereby will (a) conflict with or result in any breach or violation of, or constitute a default under, any note, pledge, trust, commitment, agreement or other instrument or obligation to which Purchaser is a party or by which Purchaser or any of its properties may be bound, (b) require any consent, approval, authorization or permit of, or filing with or notification to, any Governmental Entity, or (c) violate any statute or any order, decree, injunction, rule or regulation of any Governmental Entity applicable to Purchaser. 3.5 NO AGREEMENTS. Purchaser acknowledges that there are no agreements, arrangements, commitments or understandings relating to any of the Shares except pursuant to this Agreement. 3.6 NO BROKER; FINDER; ETC. None of Purchaser or its directors, officers, agents or employees has employed any investment banker, consultant, broker or finder or incurred any liability for any brokerage fees, commissions or finders fees in connection with the transactions contemplated under this Agreement. IV. REGISTRATION RIGHTS 4.1 REGISTRATION. Upon receipt of a written request (the "Registration Notice") by Purchaser at any time after one year from the date of this Agreement, Seller shall cause to be filed as soon as practicable a registration statement (a "Shelf Registration Statement") under the Securities Act on Form S-3 or any other appropriate form under the Securities Act for an offering to be made on a delayed or continuous basis pursuant to Rule 415 thereunder or any similar rule that may be adopted by the SEC and permitting sales in ordinary course brokerage or dealer transactions not involving an underwritten public offering (and shall register or qualify the shares to be sold in such -5- offering under such other securities or "blue sky" laws as required pursuant to this Section 4.1) covering no less than the aggregate number of Shares then held by Purchaser (those Shares together with any shares of Common Stock or other securities that may subsequently be issued with respect to the Shares as result of a stock split or dividend, reclassification, or combination of shares or any sale, transfer, assignment or other transaction by Seller or Purchaser involving the Shares and any securities into which the Shares may thereafter be changed as a result of merger, consolidation, or recapitalization or otherwise are referred to as the "Registrable Shares") so that the Registrable Shares will be included in an effective registration statement under the Securities Act. Seller shall use its reasonable efforts to cause the Shelf Registration Statement to be declared effective by the SEC on or before 90 days following Seller's receipt of the Registration Notice. Seller shall use its reasonable efforts to keep the Shelf Registration Statement continuously effective (and to register or qualify the shares to be sold in such offering under such other securities or "blue sky" laws as required pursuant to this Section 4.1) for so long as Purchaser holds any Registrable Shares or until Seller has caused to be delivered to Purchaser an opinion of counsel, which counsel shall be reasonably acceptable to Purchaser, stating that the Registrable Shares may be sold by Purchaser pursuant to Rule 144 without regard to any volume limitations and that Seller has satisfied the informational requirements of Rule 144. Seller shall file any necessary listing applications or amendments to existing applications to cause the Registrable Shares to be listed on the primary exchange or quotation system on which its shares of Common Stock are then listed, if any. Seller will use reasonable efforts to register or qualify the Registrable Shares under such other securities or "blue sky" laws of such jurisdictions as Purchaser may reasonably request and do any and all other acts and things that may be reasonably necessary or advisable to register or qualify for sale in such jurisdictions the Registrable Shares owned by Purchaser; PROVIDED THAT Seller shall not be required to (i) qualify generally to do business in any jurisdiction where it is not then so qualified, (ii) subject itself to taxation in any such jurisdiction, (iii) consent to general service of process in any such jurisdiction, or (iv) provide any undertaking required by such other securities or "blue sky" laws or make any change in its charter or bylaws that the Board of Directors of Seller determines in good faith to be contrary to the best interest of Seller and its stockholders. Notwithstanding the foregoing, if Seller shall furnish to Purchaser a certificate signed by the chief executive officer of Seller stating that in the good faith judgment of the Board of Directors of Seller it would be significantly disadvantageous to Seller and its stockholders for the Shelf Registration Statement to be amended or supplemented, Seller may defer such amending or supplementing of such Shelf Registration Statement for not more than 45 days and in such event Purchaser shall be required to discontinue disposition of any Registrable Shares covered by such Shelf Registration Statement during such period. -6- 4.2 DISTRIBUTION OF REGISTERABLE SECURITIES. If Purchaser intends to distribute the Registerable Securities covered by the Shelf Registration Statement by means of an underwriting, Purchaser shall so advise Seller. In that event, the underwriting shall be managed by an underwriter or underwriters selected by Purchaser that are reasonably acceptable to Seller (which approval shall not unreasonably be withheld). Purchaser shall have the right to negotiate with the underwriters and to determine all terms of the underwriting, including the gross price and net price at which the Registrable Securities are to be sold. Seller shall enter into an underwriting agreement in customary form with the underwriter or underwriters selected as above provided and any representations and warranties of Seller thereunder to and for the benefit of the underwriters shall also be made to and for the benefit of Purchaser. Seller will furnish to Purchaser and the underwriters (i) an opinion of counsel for Seller, addressed to Purchaser and the underwriters, dated the date of the closing under the underwriting agreement, and (ii) a "comfort letter" signed by the independent public accountants who have certified Seller's financial statements included in the Shelf Registration Statement, addressed to Purchaser and the underwriters; PROVIDED HOWEVER, that (i) the opinion and "comfort letter" shall cover substantially the same matters with respect to the Shelf Registration Statement (and the prospectus included therein) as are customarily covered in opinions of issuer's counsel and in accountants' letters delivered to underwriters in underwritten public secondary offerings and such other matters as Purchaser may reasonably request, and (ii) the "comfort letter" shall also cover events subsequent to the date of such financial statements. 4.3 FURNISH INFORMATION. In connection with the Shelf Registration Statement, Purchaser will (a) cooperate with Seller to effect such registration and to maintain the effectiveness thereof, (b) promptly and accurately furnish any information reasonably requested by Seller concerning Purchaser and the proposed distribution by Purchaser, and (c) promptly comply with all applicable requirements of the Securities Act, the Exchange Act and any other applicable federal or state laws, including, but not limited to, furnishing Seller such information regarding Purchaser, the Shares held by it and the intended method of disposition of such securities as reasonably required in connection with the action to be taken by Seller pursuant to this Agreement. 4.4 EXPENSES OF REGISTRATION. Seller will bear all expenses incurred in effecting any registration pursuant to this Agreement, including without limitation, all registration, qualification and filing fees, printing expenses, escrow fees, fees and disbursements of counsel for Seller, blue sky fees and expenses, expenses of any regular or special audit incident to or required by any such registration, but will not include any expenses payable by Purchaser under this Section 4.4. Purchaser will pay in connection with any registration of its Shares any -7- underwriting discounts, selling commissions, fees or disbursements of Purchaser's counsel or of any advisor to Purchaser not retained by Seller, or fees and expenses incident to preparation of information by Purchaser, and expenses incurred in connection with the qualification of the Registrable Shares in a jurisdiction that requires those expenses to be paid by a selling shareholder. 4.5 REGISTRATION PROCEDURE. (a) Seller will keep Purchaser advised in writing of the initiation and the completion of each registration, qualification and compliance effected by Seller under this Agreement. (b) At its expense, Seller will: (i) prepare and file with the SEC such amendments and supplements to the Shelf Registration Statement and the prospectus used in connection therewith as may be necessary to keep the Shelf Registration Statement effective for the period described in Section 4.1(a) and to comply with the provisions of the Securities Act with respect to the sale or other disposition of the Registrable Securities whenever the Purchaser shall desire to sell or otherwise dispose of the Registrable Securities within that period; (ii) furnish to Purchaser and any underwriters such numbers of copies of the Shelf Registration Statement, amendments and supplements thereto, the prospectus included in the Shelf Registration Statement including any preliminary prospectus, and any amendments or supplements thereto, and such other documents, as Purchaser and any underwriters may reasonably request in order to facilitate the sale or other disposition of the Registrable Securities; (iii) use its reasonable efforts to comply with all applicable rules and regulations of the SEC, and make available to its security holders, as soon as reasonably practicable, an earnings statement covering the period of at least twelve months, beginning with the first fiscal quarter beginning after the effective date of the registration statement, which earnings statement shall satisfy the provisions of Section 11(a) of the Securities Act; and (iv) notify Purchaser at any time when a prospectus relating to the Registrable Securities is required to be delivered under the Securities Act, of the happening of any event of which Seller has knowledge as a result of which the prospectus included in the Shelf Registration Statement, as then in effect, contains an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing. -8- 4.6 POSTPONEMENT OF REGISTRATION. If after any registration statement including Registrable Shares has become effective there exists in the opinion of Seller's management material non-public information about Seller which has not been released and which, in the reasonable opinion of Seller's management, would not be advisable to release, then upon receipt of notice from Seller, Purchaser will not offer or sell or permit to be offered or sold any of the Registrable Shares for such time as Seller believes such condition is continuing. If the offering is not completed because of Seller's exercise of its rights hereunder, Seller will reimburse Purchaser for all of its expenses incurred in connection with the terminated offering. 4.7 INDEMNIFICATION BY SELLER. (a) Seller will indemnify Purchaser, its directors, officers, employees, and agents, and any person controlling the Purchaser (within the meaning of the Securities Act) and each underwriter, if any, of the Registrable Shares and each person controlling that underwriter (within the meaning of the Securities Act), against all claims, losses, expenses, damages, liabilities and actions ("Claims) in respect of Claims (including any Claim incurred in settlement of any litigation, commenced or threatened) arising out of or based on (i) any untrue statement or alleged untrue statement of a material fact in any prospectus or any related registration statement, or any amendment or supplement thereto, or any notification or the like incident to any such registration, or any amendment or supplement thereto, or any qualification or compliance, or (ii) any omission or alleged omission to state in any such prospectus or related registration statement incident to such registration, qualification or compliance, a material fact required to be stated in it or necessary to make that statement in it not misleading in light of the circumstance in which the statement was made, or (iii) any violation by Seller of any rule or regulation promulgated under the Securities Act applicable to Seller and relating to action or inaction required of Seller in connection with any such registration, qualification or compliance; provided, however, that the indemnity agreement contained in this Section 4.7(a) will not apply (A) to amounts paid in settlement of any Claim if such settlement is effected without the consent of Seller (which consent will not be unreasonably withheld) and (B) with respect to any untrue statement or omission or alleged untrue statement or omission made in any preliminary prospectus or the prospectus or the prospectus as amended or supplemented, but eliminated or remedied in the prospectus or the prospectus as amended or supplemented, and will not inure to the benefit of Purchaser, its directors, officers, employees, agents, or any underwriter (or to the benefit of any person who controls Purchaser or such underwriter within the meaning of the Securities Act) from whom the person asserting the Claim purchased any of the Registrable Shares, if a copy of the prospectus (as then amended or supplemented and provided to Purchaser) was not sent or given to such person through no fault of Seller at or prior to the time -9- such action is required by the Securities Act, nor will Seller be liable in any such case for any Claim to the extent that it arises out of or is based upon (1) any untrue statement or alleged untrue statement of a material fact contained in any registration statement, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto, (2) the omission or alleged omission to state therein a material fact required to be stated therein, or necessary to make the statements therein not misleading, or (3) any violation or alleged violation by Seller of the Securities Act, the Exchange Act, any state securities law or any rule or regulation promulgated under the Securities Act, the Exchange Act or any state securities law (collectively a "Violation") which occurs in reliance upon and in conformity with written information furnished for use in connection with such registration by or on behalf of Purchaser (with respect to a Claim by Purchaser under this Section 4.7(a)) or such underwriter or controlling person (with respect to a Claim by such underwriter or controlling person under this Section 4.7(a)). (b) Seller will reimburse Purchaser, its directors, officers, employees, agents, and controlling person and each such underwriter or controlling person for any legal or any other expenses reasonably incurred in connection with investigating or defending any Claim; provided, however, that the reimbursement provisions contained in this Section 4.7(b) will not apply (i) to amounts paid in settlement of any Claim if such settlement is effected without the consent of Seller (which consent will not be unreasonably withheld) and (ii) with respect to any untrue statement or omission or alleged untrue statement or omission made in any preliminary prospectus or the prospectus or the prospectus as amended or supplemented, but eliminated or remedied in the prospectus or the prospectus as amended or supplemented, and will not inure to the benefit of Purchaser, its directors, officers, employees, agents, and controlling person or any underwriter (or to the benefit of any person who controls such underwriter within the meaning of the Securities Act) from whom the person asserting any Claim purchased any of the Registrable Shares, if a copy of the prospectus (as then amended or supplemented and provided to Purchaser) was not sent or given to such person through no fault of Seller at or prior to the time such action is required by the Securities Act, nor will Seller be liable in any such case for any Claim to the extent that it arises out of or is based upon a Violation which occurs in reliance upon and in conformity with written information furnished for use in connection with such registration by or on behalf of Purchaser (with respect to a claim for reimbursement by Purchaser, its directors, officers, employees, agents, and controlling person under this Section 4.7(b)) or such underwriter or controlling person (with respect to a claim for reimbursement by such underwriter or controlling person under this Section 4.7(b)). -10- 4.8 INDEMNIFICATION BY PURCHASER. (a) Purchaser hereby indemnifies Seller, its directors, officers, employees, agents, and any person controlling Seller (within the meaning of the Securities Act) each underwriter, if any, of Seller's securities covered by such registration statement, each person who controls that underwriter (within the meaning of the Securities Act) against all Claims (including any Claim incurred in settlement of any litigation commenced or settled) arising out of or based on (i) any untrue statement or alleged untrue statement of a material fact in any prospectus or any related registration statement, notification or the like, incident to such registration, qualification or compliance, or (ii) any omission or alleged omission to state in any such prospectus or any related registration statement, qualification or compliance, a material fact required to be stated in it or necessary to make the statement(s) in it not misleading in light of the circumstance in which the statement was made, or (iii) any violation by Purchaser of any rule or regulation promulgated under the Securities Act applicable to Purchaser and relating to action or inaction required of Purchaser in connection with any such registration, qualification or compliance; provided, however, that the indemnity agreement contained in this Section 4.8(a) will apply to any Claim only to the extent that it arises out of or is based upon a Violation which occurs solely in reliance upon and in conformity with written information furnished expressly for use in connection with such registration by or on behalf of Purchaser, and provided further that Purchaser will have no liability hereunder if (A) any such written information contained an untrue statement or omission or alleged untrue statement or omission that was subsequently corrected in writing by Purchaser and furnished to Seller or the underwriter in sufficient time for incorporation into the final prospectus, or (B) Seller pays any amounts in settlement of any such Claim if such settlement is effected without the consent of Purchaser (which consent will not be unreasonably withheld). (b) Purchaser will reimburse Seller and its directors, officers, employees, agents and controlling person (within the meaning of the Securities Act) each underwriter, and each person controlling that underwriter (within the meaning of the Securities Act) for any legal or any other expenses reasonably incurred in connection with investigating or defending any such Claim; provided, however, that the reimbursement provisions contained in this Section 4.8(b) will apply to any such Claim only to the extent that it arises out of or is based upon a Violation which occurs in reliance upon and in conformity with written information furnished expressly for use in connection with such registration by or on behalf of Purchaser. 4.9 NOTICE. Promptly after receipt by an indemnified party under Section 4.7 or 4.8 of notice of the commencement of any action (including, but not limited to, any action by a -11- Governmental Entity), such indemnified party will, if a Claim in respect thereof is to be made against any indemnifying party under Sections 4.7 or 4.8, deliver to the indemnifying party a written notice of the commencement thereof and the indemnifying party will have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume the defense thereof with counsel mutually satisfactory to the parties and the indemnified party will bear the fees and expenses of any additional counsel thereafter retained by it; provided, however, that indemnified parties will have the right to retain counsel to represent all indemnified parties, with the fees and expenses to be paid by the indemnifying party, if representation of such indemnified parties by the counsel retained by the indemnifying party would be inappropriate due to actual or potential material differing interests between such indemnified parties and any other party represented by such counsel in such proceeding. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action, if prejudicial to its ability to defend such action, will relieve such indemnifying party of any liability to the indemnified party under Section 4.7 or 4.8, but the omission so to deliver written notice to the indemnifying party will not relieve it of any liability that it may have to any indemnified party otherwise than under Section 4.7 or 4.8. 4.11 CONTRIBUTION. (a) If for any reason the indemnification provided for in Section 4.7 or 4.8 is unavailable to an indemnified party or insufficient to hold it harmless as contemplated by such sections, then the indemnifying party will contribute to the amount paid or payable by the indemnified party as a result of any Claim in such proportion as is appropriate to reflect not only the relative benefits received by the indemnified party and the indemnifying party, but also the relative fault of the indemnified party and the indemnifying party, as well as any other relevant equitable considerations; provided, however, that, in any such case, (i) Purchaser will not be required to contribute any amount in excess of the sales price of all Registrable Shares sold by Purchaser pursuant to such registration statement, and (ii) no party guilty of a fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) will be entitled to contribution from any other party who was not guilty of such fraudulent misrepresentation. (b) Promptly after receipt by a party of notice of the commencement of any action, suit or proceeding in connection with a public offering of Common Stock, such party will, if a claim for contribution in respect thereof is able to be made against another party, notify the contributing party of the commencement thereof. The omission to notify the contributing party will not relieve it from any liability which it may have to any other party other than for contribution under the Securities Act. In -12- case any such action, suit or proceeding is brought against any party, and such party notifies a contributing party of the commencement thereof, the contributing party will be entitled to participate therein with the notifying party and any other contributing party similarly notified. 4.12 "MARKET STAND-OFF" AGREEMENT. Purchaser will not, to the extent requested by Seller or the underwriter(s) managing any underwritten offering of Seller's securities, sell, make any short sale of, loan, grant any option for the purchase of or otherwise transfer or dispose of any Shares (other than those included in the underwritten offering) without the prior written consent of Seller or such underwriters for such period of time as Seller or the underwriters may specify commencing up to 7 days before the anticipated effective date of an underwritten registration of Seller's securities and extending up to 120 days after that effective date. In order to enforce the foregoing, Seller may impose stop-transfer instructions with respect to the Shares. V. ADDITIONAL COVENANTS 5.1 RESTRICTIONS ON TRANSFER. (a) RESTRICTION. For a period of 3 years from the date of this Agreement, Purchaser covenants and agrees that it will not and it will cause each of its "Affiliates" (as hereinafter defined) to not directly or indirectly sell, tender, transfer, pledge, hypothecate or otherwise dispose of, or offer or agree to do any of the foregoing ("Transfer"), any interest in the Shares which may be owned "beneficially" (as that term is defined in Rule 13d-3 under the Exchange Act) or of record by it and such Affiliates, except: (i) a Transfer to any person or entity who or which agrees to be bound by all the provisions of this Article V; (ii) a Transfer to any person or entity who or which has made a tender offer for Seller's Common Stock, but only if the Board of Directors of Seller has recommended acceptance of such tender offer to the stockholders of Seller; (iii) a Transfer to Seller or any of its Subsidiaries; (iv) a Transfer to an Affiliate of Purchaser which is (or agrees to become) a party hereto; (v) a Transfer which is a bona fide pledge of, or grant of a security interest in, the Shares to an institutional, commercial, or other bona fide lender (including without limitation any securities brokerage) for money borrowed; -13- (vi) a Transfer in connection with any registration statement of Seller that is declared effective during the term of this Article V and includes the Shares as a result of exercise of the registration rights granted pursuant to this Agreement; provided, however, that any such disposition by Purchaser or an underwriter pursuant to this Section 5.1(vi) will be made in a manner which (if pursuant to an underwritten offering, in the written opinion of the underwriter) is intended to effect a broad distribution with no Transfers of the Shares to any one "person" or "group" (as such terms are defined in and under Section 13(d) of the Exchange Act) if after such Transfers such person or group would beneficially hold in excess of 5 percent of Seller's Common Stock; or (vii) a Transfer permitted pursuant to Rule 144 under the Securities Act; provided, that Purchaser will use its best efforts to effect as wide a distribution of the Shares as is reasonably practicable. (b) DEFINITION OF AFFILIATE. For all purposes of this Agreement, when used with reference to Purchaser, the word "Affiliate" means any person directly or indirectly controlling, controlled by, or under direct or indirect control with, Purchaser or such other person, as the case may be. For the purposes of this definition, "control" when used with respect to any specified person means the power to direct the management and policies of such person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise, and the terms "controlling" and "controlled" have meanings correlative of the foregoing. For the purposes of this definition, "Person" includes, without limitation, any individual, corporation, partnership, joint venture, trust, and any employee pension, profit sharing and other benefit plan and trust. As to any individual person, the term "person" means such individual's spouse, children, brothers and sisters. 5.2 NO TRANSFER. Purchaser covenants and agrees that for a period of 3 years from the date of this Agreement, without Seller's prior written consent, it will not and it will cause each of its Affiliates to not Transfer or otherwise dispose of or encumber any of the Shares or any beneficial interest therein except as permitted pursuant to this Article V. 5.3 LEGENDS AND STOP TRANSFER ORDERS. (a) LEGEND. During the term of the restrictions and covenants of this Article V each of the certificates representing the Shares will be registered in the name of Purchaser (except as hereinafter permitted), will be subject to stop transfer instructions, and will include substantially the following legend in addition to any other legends required by the terms of this Agreement: -14- THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN LIMITATIONS ON TRANSFER SET FORTH IN A STOCK PURCHASE AGREEMENT, DATED MARCH 29, 1996, BETWEEN MICHAELS STORES, INC. AND QUAYLE LIMITED, WHICH MAY BE APPLICABLE TO CERTAIN TRANSFEREES. A COPY OF SUCH AGREEMENT IS ON FILE WITH THE SECRETARY OF MICHAELS STORES, INC. (b) REMOVAL OF LEGEND. Such stop transfer instructions and legend will be applicable to any disposition of the Shares other than pursuant to a public offering of the Shares permitted pursuant to Section 5.1(vi). 5.4 TERM AND TERMINATION. (a) TERM. The term of these restrictions and covenants in this Article V will commence on the date hereof and will continue for a period of 3 years. (b) TERMINATION. Notwithstanding the foregoing, the restrictions and covenants in this Article V will terminate immediately if individuals who at the date hereof constituted the Board of Directors of Seller and any new director whose election by the Board or nomination for election by Seller's stockholders was approved by a vote of at least two-thirds of the directors then still in office, who either were directors at such date or whose election or nomination for election was previously so approved, have ceased for any reason to constitute a majority thereof. 5.5 CERTAIN ACTIONS. Purchaser agrees that for a period of 3 years from the date of this Agreement, except within the terms of a specific request from Seller, it will not propose or publicly announce or otherwise disclose an intent to propose, or enter into or agree to enter into, singly or with any other person or directly or indirectly, (a) any form of business combination, acquisition, or other transaction relating to Seller or any majority-owned affiliate thereof, (b) any form of restructuring, recapitalization or similar transaction with respect to Seller or any such affiliate, or (c) any demand, request or proposal to amend, waiver or terminate any provision of this Agreement, and except as aforesaid during such period, Purchaser will not (i) acquire, or offer, propose or agree to acquire by purchase or otherwise, any securities of Seller entitled to be voted generally in the election of directors of Seller or any direct or indirect options or other rights to acquire any such securities ("Voting Securities"), (ii) make, or in any way participate in, any solicitation of proxies with respect to any Voting Securities (including by the execution of action by written consent), become a participant in any election contest with respect to Seller, seek to influence any Person with respect to any Voting Securities or demand a copy of Seller's -15- list of its stockholders or other books and records, (iii) participate in or encourage the formation of any partnership, syndicate or other group which owns or seeks or offers to acquire beneficial ownership of any Voting Securities or which seeks to affect control of Seller or for the purpose of circumventing any provision of this Agreement, or (iv) otherwise act, alone or in concert with others (including by providing financing for another Person), to seek or to offer to control of influence, in any manner, the management, Board of Directors or policies of Seller. 5.6 SPECIFIC PERFORMANCE. Purchaser acknowledges that Seller would be irreparably damaged and would not have an adequate remedy at law for money damages in the event that any of the covenants of Seller in this Article V were not performed in accordance with its terms or otherwise were materially breached. Purchaser therefore agrees that Seller will be entitled to an injunction or injunctions to prevent breaches of such performance and to specific enforcement of such covenants in addition to any other remedy to which it may be entitled, at law or in equity. VI. MISCELLANEOUS 6.1 CONFIDENTIALITY. The terms of this Agreement will remain confidential; provided, however, Seller may make such disclosure in any public filing or announcement as may be necessary to comply with applicable law. 6.2 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS. Each of the representations, warranties and covenants in this Agreement will survive the consummation of the transactions contemplated in this Agreement. 6.3 ENTIRE AGREEMENT. This Agreement contains the entire agreement between Purchaser and Seller with respect to the transactions contemplated hereby and supersedes all prior agreements among the parties with respect to such matters. 6.4 RIGHTS OF THE PARTIES. Nothing expressed or implied in this Agreement is intended or will be construed to confer upon or give any person or entity other than the parties hereto and their permitted assigns any rights or remedies under or by reason of this Agreement or any transaction contemplated hereby. 6.5 FURTHER ASSURANCES. From time to time, as and when requested by either party hereto, the other party will execute and deliver, or cause to be executed and delivered, all such documents and instruments as may be reasonably necessary to consummate the transactions contemplated hereby. 6.6 APPLICABLE LAW. This Agreement will be governed by and construed in accordance with the laws of the State of Texas applicable to contracts made and to be performed in that State, -16- without giving effect to the principles of conflicts of law thereof. 6.7 INTERPRETATION. For purposes of this Agreement, a "subsidiary" of a corporation means any corporation more than 50% of the outstanding voting securities of which are directly or indirectly owned by such other corporation. The descriptive headings contained herein are for convenience and reference only and will not effect in any way the meaning or interpretation of this Agreement. 6.8 NOTICES. All notices and other communications hereunder must be in writing and must be given (and will be deemed to have been duly given upon receipt) by delivery in person, by cable, telegram, telex, facsimile transmission or other standard form of telecommunications, or by registered or certified mail, postage prepaid, return receipt requested, addressed as follows: If to Seller: Michaels Stores, Inc. 5931 Campus Circle Drive Irving, Texas 75063 Attn: General Counsel Fax No.: 214-714-1338 If to Purchaser: Quayle Limited c/o MeesPierson (Isle of Man) Limited 18-20 North Quay Douglas, Isle of Man British Isles Attention: Andrew Wallis Fax No.: 011-44-1624-688-334 or to such other address as any party may have furnished to the other parties in writing in accordance herewith. 6.9 COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which will be deemed to be an original but all of which together will constitute but one agreement. 6.10 SUCCESSORS AND ASSIGNS. This Agreement will be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns, but will not be assignable by any party without the prior written consent of the other party; provided that any such assignment will not relieve the assigning party from any of its obligations hereunder. -17- 6.11 EXPENSES. Subject to Section 4.7 and 4.8 hereof, all costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby will be paid by the party incurring such expense. 6.12 SEVERABILITY. If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any rule of law or public policy, all other terms and provisions of this Agreement will nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner adverse to any party hereto. Upon any such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto will negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner to the end that the transactions contemplated by this Agreement are consummated to the extent possible. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement. SELLER: MICHAELS STORES, INC. By: /s/ R. DON MORRIS ------------------------------------ Name: R. Don Morris --------------------------------- Title: Exec. VP and CFO --------------------------------- PURCHASER: QUAYLE LIMITED, an Isle of Man corporation By: /s/ FRANCIS WEBB ----------------------------------- Name: Francis Webb -------------------------------- Title: Director -------------------------------- By: /s/ SOBHAN KENNEDY ----------------------------------- Name: Sobhan Kennedy -------------------------------- Title: Director -------------------------------- -18- EX-4.8 3 EXHIBIT 4.8 STOCK PURCHASE AGREEMENT This STOCK PURCHASE AGREEMENT (this "Agreement") is made and entered as of March 29, 1996 between Michaels Stores, Inc., a Delaware corporation ("Seller") and Locke Limited, an Isle of Man corporation ("Purchaser"). RECITAL Seller desires to issue and sell to Purchaser, and Purchaser desires to purchase from Seller, 900,000 newly issued and outstanding shares (the "Shares") of Common Stock, par value $.10 per share, of Seller (the "Common Stock") on the terms and subject to the conditions set forth in this Agreement. Seller and Purchaser hereby agree as follows: I. PURCHASE AND SALE 1.1 PURCHASE AND SALE. On the terms and subject to the conditions set forth in this Agreement, at the Closing (as defined in Section 1.3) Seller will issue and sell to Purchaser, and Purchaser will purchase from Seller, the Shares. 1.2 PURCHASE PRICE. As consideration for the issuance of the Shares, Purchaser will pay to Seller at the Closing the aggregate amount equal to the product of (a) the number of Shares to be issued pursuant to this Agreement multiplied by (b) $12.50 per Share (the "Purchase Price") 1.3 THE CLOSING. (a) Subject to Section 1.4, the closing of the purchase and sale of the Shares hereunder (the "Closing") will take place on April 5, 1996 or such other date as Seller and Purchaser may agree (the "Closing Date"). (b) At the Closing, (i) Purchaser will pay to Seller the Purchase Price by wire transfer of immediately available funds to an account or accounts designated by Seller and (ii) Seller will deliver to Purchaser a single certificate representing the Shares registered in the name of "Locke Limited". (c) At the Closing Seller will deliver to Purchaser, and Purchaser will deliver to Seller, a certificate confirming that their respective representations and warranties set forth in this Agreement are true and complete in all material respects on the Closing Date as if made on that date. 1.4 CONDITION TO CLOSING. (a) Notwithstanding anything to the contrary in this Agreement, the obligation of Seller to consummate the sale and purchase of the Shares contemplated hereby is subject to satisfaction of each of the following conditions: (i) The Board of Directors of Seller shall have approved the sale of the Shares on or before the Closing Date. (ii) The representations and warranties of Purchaser in this Agreement shall be true and complete in all material respects on and as of the Closing Date. (b) Notwithstanding anything to the contrary in this Agreement, the obligations of Purchaser to consummate the sale and purchase of the Shares contemplated hereby are subject to the condition that the representations and warranties made by Seller in this Agreement shall be true and complete in all material respects on and as of the Closing Date. II. REPRESENTATIONS AND WARRANTIES OF SELLER 2.1 ORGANIZATION; POWER AND AUTHORITY. Seller is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. Seller has requisite corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. The execution and delivery by Seller of this Agreement and the performance by it of the transactions contemplated hereby to be performed by it have been duly authorized by all necessary corporate action on the part of Seller. This Agreement has been duly executed and delivered by Seller and constitutes a valid and binding obligation of Seller. 2.2 CAPITALIZATION. The authorized capital stock of Seller consists of (i) 50,000,000 shares of Common Stock, of which as of March 15, 1996, 21,617,025 shares were issued and outstanding, fully paid and nonassessable and no shares were held in the treasury, and (ii) 2,000,000 shares of preferred stock, $.10 par value per share, of which as of March 15, 1996, no shares were outstanding. Upon the issuance of the Shares to Purchaser and the payment to Seller of the Purchase Price, the Shares will be validly issued and outstanding, fully paid and nonassessable, and Purchaser will acquire good and valid title to the Shares, free and clear of any charges, liens or other encumbrances ("Encumbrances") of any kind. None of the Shares have been issued in violation of any preemptive rights, rights of first refusal or other acquisition rights. -2- 2.3 CONSENT AND APPROVALS; NO VIOLATION. Neither the execution and delivery of this Agreement by Seller nor the consummation by Seller of the transactions contemplated hereby will (a) conflict with or result in any breach or violation of, or constitute a default under, any note, pledge, trust, commitment, agreement or other instrument or obligation to which Seller is a party or by which Seller or any of its properties may be bound, (b) require any consent, approval, authorization or permit of, or filing with or notification to, any court, governmental authority or other regulatory or administrative agency or commission, domestic or foreign ("Governmental Entity"), or (c) violate any statute or any order, decree, injunction, rule or regulation of any Governmental Entity applicable to Seller. 2.4 SEC REPORTS; FINANCIAL STATEMENTS. (a) Seller has delivered to Purchaser (i) its Annual Report on Form 10-K for the fiscal year ended January 29, 1995 and (ii) its Quarterly Reports on Form 10-Q for each of the fiscal quarters ended April 30, 1995, July 30, 1995 and October 29, 1995, respectively, each in the form (including exhibits) filed with the Securities and Exchange Commission ("SEC") (collectively, the "SEC Reports"). Each SEC Report has been prepared and filed in accordance with all applicable rules and regulations of the SEC and at the time of its filing was in compliance with such rules and regulations in all material respects. As of their respective dates, the SEC Reports did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. (b) Each of the audited consolidated financial statements and unaudited consolidated interim financial statements of Seller (and the related notes and schedules) included in the SEC Reports present fairly, in all material respects, the consolidated financial position of Seller and its consolidated subsidiaries as of the respective dates thereof and the results of operations and cash flows for the respective periods set forth therein, in accordance with generally accepted accounting principles consistently applied during the period involved, except as otherwise noted therein and subject, in the case of the unaudited interim consolidated financial statements, to the omission of certain notes not ordinarily accompanying such unaudited interim consolidated financial statements and to normal year-end adjustments and any other adjustments described therein. (c) Except as set forth in the SEC Reports, any other reports filed with the SEC pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act"), that relate to Seller, and any public announcements made by Seller, since October 29, 1995 there has been no material adverse change in the -3- assets, earnings, financial position, business or prospects of Seller and its subsidiaries, considered as a whole. 2.5 NO BROKER; FINDER; ETC. None of Seller or its directors, officers or employees has employed any investment banker, consultant, broker or finder or incurred any liability for any brokerage fees, commissions or finders fees in connection with the transactions contemplated under this Agreement. III. REPRESENTATIONS AND WARRANTIES OF PURCHASER 3.1 POWER AND AUTHORITY. Purchaser has the requisite corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. This Agreement has been duly executed and delivered by Purchaser and constitutes a valid and binding obligation of Purchaser. 3.2 PURCHASE FOR INVESTMENT. Purchaser acknowledges that the Shares have not been registered under the Securities Act of 1933, as amended ("Securities Act"), or under any state or foreign securities laws. Purchaser is not an underwriter as such term is defined under the Securities Act, and is purchasing the Shares solely for investment with no present intention to distribute any of the Shares to any person or entity ("Person"). Purchaser will not sell or otherwise dispose of any of the Shares, except in accordance with the registration requirements or exemption provisions under the Securities Act and the rules and regulations promulgated thereunder, and any other applicable securities laws. Purchaser further understands that the certificate representing the Shares will bear the following legend and agrees that it will hold the Shares subject thereto: THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED PURSUANT TO THE SECURITIES ACT OF 1933 OR ANY STATE SECURITIES LAW. NEITHER THIS SECURITY NOR ANY PORTION HEREOF OR INTEREST HEREIN MAY BE SOLD, ASSIGNED, TRANSFERRED, PLEDGED OR OTHERWISE DISPOSED OF UNLESS THE SAME IS REGISTERED UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES LAW, OR UNLESS AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE AND MICHAELS STORES, INC. SHALL HAVE RECEIVED, AT THE EXPENSE OF THE HOLDER HEREOF, EVIDENCE OF SUCH EXEMPTION REASONABLY SATISFACTORY TO MICHAELS STORES, INC. (WHICH MAY INCLUDE, AMONG OTHER THINGS, AN OPINION OF COUNSEL SATISFACTORY TO MICHAELS STORES, INC.). -4- 3.3 SUITABILITY AND SOPHISTICATION. Purchaser represents and warrants that it (a) is an "accredited investor" as defined in Rule 501(a) promulgated under the Securities Act, (b) has such knowledge and experience in financial and business matters that it is capable of independently evaluating the risks and merits of purchasing the Shares, (c) has been provided with the opportunity to make a reasonable investigation of Seller, including the opportunity to make any inquiries and to request additional information necessary to its investment decision, and Seller has satisfactorily responded to any inquiries and furnished to Purchaser all requested information, (d) has independently evaluated the risks and merits of purchasing the Shares and has independently determined that the Shares are a suitable investment for it, and (e) has sufficient financial resources to bear the loss of its entire investment in the Shares. 3.4 CONSENT AND APPROVALS; NO VIOLATION. Neither the execution and delivery of this Agreement by Purchaser nor the consummation by Purchaser of the transactions contemplated hereby will (a) conflict with or result in any breach or violation of, or constitute a default under, any note, pledge, trust, commitment, agreement or other instrument or obligation to which Purchaser is a party or by which Purchaser or any of its properties may be bound, (b) require any consent, approval, authorization or permit of, or filing with or notification to, any Governmental Entity, or (c) violate any statute or any order, decree, injunction, rule or regulation of any Governmental Entity applicable to Purchaser. 3.5 NO AGREEMENTS. Purchaser acknowledges that there are no agreements, arrangements, commitments or understandings relating to any of the Shares except pursuant to this Agreement. 3.6 NO BROKER; FINDER; ETC. None of Purchaser or its directors, officers, agents or employees has employed any investment banker, consultant, broker or finder or incurred any liability for any brokerage fees, commissions or finders fees in connection with the transactions contemplated under this Agreement. IV. REGISTRATION RIGHTS 4.1 REGISTRATION. Upon receipt of a written request (the "Registration Notice") by Purchaser at any time after one year from the date of this Agreement, Seller shall cause to be filed as soon as practicable a registration statement (a "Shelf Registration Statement") under the Securities Act on Form S-3 or any other appropriate form under the Securities Act for an offering to be made on a delayed or continuous basis pursuant to Rule 415 thereunder or any similar rule that may be adopted by the SEC and permitting sales in ordinary course brokerage or dealer transactions not involving an underwritten public offering (and shall register or qualify the shares to be sold in such -5- offering under such other securities or "blue sky" laws as required pursuant to this Section 4.1) covering no less than the aggregate number of Shares then held by Purchaser (those Shares together with any shares of Common Stock or other securities that may subsequently be issued with respect to the Shares as result of a stock split or dividend, reclassification, or combination of shares or any sale, transfer, assignment or other transaction by Seller or Purchaser involving the Shares and any securities into which the Shares may thereafter be changed as a result of merger, consolidation, or recapitalization or otherwise are referred to as the "Registrable Shares") so that the Registrable Shares will be included in an effective registration statement under the Securities Act. Seller shall use its reasonable efforts to cause the Shelf Registration Statement to be declared effective by the SEC on or before 90 days following Seller's receipt of the Registration Notice. Seller shall use its reasonable efforts to keep the Shelf Registration Statement continuously effective (and to register or qualify the shares to be sold in such offering under such other securities or "blue sky" laws as required pursuant to this Section 4.1) for so long as Purchaser holds any Registrable Shares or until Seller has caused to be delivered to Purchaser an opinion of counsel, which counsel shall be reasonably acceptable to Purchaser, stating that the Registrable Shares may be sold by Purchaser pursuant to Rule 144 without regard to any volume limitations and that Seller has satisfied the informational requirements of Rule 144. Seller shall file any necessary listing applications or amendments to existing applications to cause the Registrable Shares to be listed on the primary exchange or quotation system on which its shares of Common Stock are then listed, if any. Seller will use reasonable efforts to register or qualify the Registrable Shares under such other securities or "blue sky" laws of such jurisdictions as Purchaser may reasonably request and do any and all other acts and things that may be reasonably necessary or advisable to register or qualify for sale in such jurisdictions the Registrable Shares owned by Purchaser; PROVIDED THAT Seller shall not be required to (i) qualify generally to do business in any jurisdiction where it is not then so qualified, (ii) subject itself to taxation in any such jurisdiction, (iii) consent to general service of process in any such jurisdiction, or (iv) provide any undertaking required by such other securities or "blue sky" laws or make any change in its charter or bylaws that the Board of Directors of Seller determines in good faith to be contrary to the best interest of Seller and its stockholders. Notwithstanding the foregoing, if Seller shall furnish to Purchaser a certificate signed by the chief executive officer of Seller stating that in the good faith judgment of the Board of Directors of Seller it would be significantly disadvantageous to Seller and its stockholders for the Shelf Registration Statement to be amended or supplemented, Seller may defer such amending or supplementing of such Shelf Registration Statement for not more than 45 days and in such event Purchaser shall be required to discontinue disposition of any Registrable Shares covered by such Shelf Registration Statement during such period. -6- 4.2 DISTRIBUTION OF REGISTERABLE SECURITIES. If Purchaser intends to distribute the Registerable Securities covered by the Shelf Registration Statement by means of an underwriting, Purchaser shall so advise Seller. In that event, the underwriting shall be managed by an underwriter or underwriters selected by Purchaser that are reasonably acceptable to Seller (which approval shall not unreasonably be withheld). Purchaser shall have the right to negotiate with the underwriters and to determine all terms of the underwriting, including the gross price and net price at which the Registrable Securities are to be sold. Seller shall enter into an underwriting agreement in customary form with the underwriter or underwriters selected as above provided and any representations and warranties of Seller thereunder to and for the benefit of the underwriters shall also be made to and for the benefit of Purchaser. Seller will furnish to Purchaser and the underwriters (i) an opinion of counsel for Seller, addressed to Purchaser and the underwriters, dated the date of the closing under the underwriting agreement, and (ii) a "comfort letter" signed by the independent public accountants who have certified Seller's financial statements included in the Shelf Registration Statement, addressed to Purchaser and the underwriters; PROVIDED HOWEVER, that (i) the opinion and "comfort letter" shall cover substantially the same matters with respect to the Shelf Registration Statement (and the prospectus included therein) as are customarily covered in opinions of issuer's counsel and in accountants' letters delivered to underwriters in underwritten public secondary offerings and such other matters as Purchaser may reasonably request, and (ii) the "comfort letter" shall also cover events subsequent to the date of such financial statements. 4.3 FURNISH INFORMATION. In connection with the Shelf Registration Statement, Purchaser will (a) cooperate with Seller to effect such registration and to maintain the effectiveness thereof, (b) promptly and accurately furnish any information reasonably requested by Seller concerning Purchaser and the proposed distribution by Purchaser, and (c) promptly comply with all applicable requirements of the Securities Act, the Exchange Act and any other applicable federal or state laws, including, but not limited to, furnishing Seller such information regarding Purchaser, the Shares held by it and the intended method of disposition of such securities as reasonably required in connection with the action to be taken by Seller pursuant to this Agreement. 4.4 EXPENSES OF REGISTRATION. Seller will bear all expenses incurred in effecting any registration pursuant to this Agreement, including without limitation, all registration, qualification and filing fees, printing expenses, escrow fees, fees and disbursements of counsel for Seller, blue sky fees and expenses, expenses of any regular or special audit incident to or required by any such registration, but will not include any expenses payable by Purchaser under this Section 4.4. Purchaser will pay in connection with any registration of its Shares any -7- underwriting discounts, selling commissions, fees or disbursements of Purchaser's counsel or of any advisor to Purchaser not retained by Seller, or fees and expenses incident to preparation of information by Purchaser, and expenses incurred in connection with the qualification of the Registrable Shares in a jurisdiction that requires those expenses to be paid by a selling shareholder. 4.5 REGISTRATION PROCEDURE. (a) Seller will keep Purchaser advised in writing of the initiation and the completion of each registration, qualification and compliance effected by Seller under this Agreement. (b) At its expense, Seller will: (i) prepare and file with the SEC such amendments and supplements to the Shelf Registration Statement and the prospectus used in connection therewith as may be necessary to keep the Shelf Registration Statement effective for the period described in Section 4.1(a) and to comply with the provisions of the Securities Act with respect to the sale or other disposition of the Registrable Securities whenever the Purchaser shall desire to sell or otherwise dispose of the Registrable Securities within that period; (ii) furnish to Purchaser and any underwriters such numbers of copies of the Shelf Registration Statement, amendments and supplements thereto, the prospectus included in the Shelf Registration Statement including any preliminary prospectus, and any amendments or supplements thereto, and such other documents, as Purchaser and any underwriters may reasonably request in order to facilitate the sale or other disposition of the Registrable Securities; (iii) use its reasonable efforts to comply with all applicable rules and regulations of the SEC, and make available to its security holders, as soon as reasonably practicable, an earnings statement covering the period of at least twelve months, beginning with the first fiscal quarter beginning after the effective date of the registration statement, which earnings statement shall satisfy the provisions of Section 11(a) of the Securities Act; and (iv) notify Purchaser at any time when a prospectus relating to the Registrable Securities is required to be delivered under the Securities Act, of the happening of any event of which Seller has knowledge as a result of which the prospectus included in the Shelf Registration Statement, as then in effect, contains an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing. -8- 4.6 POSTPONEMENT OF REGISTRATION. If after any registration statement including Registrable Shares has become effective there exists in the opinion of Seller's management material non-public information about Seller which has not been released and which, in the reasonable opinion of Seller's management, would not be advisable to release, then upon receipt of notice from Seller, Purchaser will not offer or sell or permit to be offered or sold any of the Registrable Shares for such time as Seller believes such condition is continuing. If the offering is not completed because of Seller's exercise of its rights hereunder, Seller will reimburse Purchaser for all of its expenses incurred in connection with the terminated offering. 4.7 INDEMNIFICATION BY SELLER. (a) Seller will indemnify Purchaser, its directors, officers, employees, and agents, and any person controlling the Purchaser (within the meaning of the Securities Act) and each underwriter, if any, of the Registrable Shares and each person controlling that underwriter (within the meaning of the Securities Act), against all claims, losses, expenses, damages, liabilities and actions ("Claims) in respect of Claims (including any Claim incurred in settlement of any litigation, commenced or threatened) arising out of or based on (i) any untrue statement or alleged untrue statement of a material fact in any prospectus or any related registration statement, or any amendment or supplement thereto, or any notification or the like incident to any such registration, or any amendment or supplement thereto, or any qualification or compliance, or (ii) any omission or alleged omission to state in any such prospectus or related registration statement incident to such registration, qualification or compliance, a material fact required to be stated in it or necessary to make that statement in it not misleading in light of the circumstance in which the statement was made, or (iii) any violation by Seller of any rule or regulation promulgated under the Securities Act applicable to Seller and relating to action or inaction required of Seller in connection with any such registration, qualification or compliance; provided, however, that the indemnity agreement contained in this Section 4.7(a) will not apply (A) to amounts paid in settlement of any Claim if such settlement is effected without the consent of Seller (which consent will not be unreasonably withheld) and (B) with respect to any untrue statement or omission or alleged untrue statement or omission made in any preliminary prospectus or the prospectus or the prospectus as amended or supplemented, but eliminated or remedied in the prospectus or the prospectus as amended or supplemented, and will not inure to the benefit of Purchaser, its directors, officers, employees, agents, or any underwriter (or to the benefit of any person who controls Purchaser or such underwriter within the meaning of the Securities Act) from whom the person asserting the Claim purchased any of the Registrable Shares, if a copy of the prospectus (as then amended or supplemented and provided to Purchaser) was not sent or given to such person through no fault of Seller at or prior to the time -9- such action is required by the Securities Act, nor will Seller be liable in any such case for any Claim to the extent that it arises out of or is based upon (1) any untrue statement or alleged untrue statement of a material fact contained in any registration statement, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto, (2) the omission or alleged omission to state therein a material fact required to be stated therein, or necessary to make the statements therein not misleading, or (3) any violation or alleged violation by Seller of the Securities Act, the Exchange Act, any state securities law or any rule or regulation promulgated under the Securities Act, the Exchange Act or any state securities law (collectively a "Violation") which occurs in reliance upon and in conformity with written information furnished for use in connection with such registration by or on behalf of Purchaser (with respect to a Claim by Purchaser under this Section 4.7(a)) or such underwriter or controlling person (with respect to a Claim by such underwriter or controlling person under this Section 4.7(a)). (b) Seller will reimburse Purchaser, its directors, officers, employees, agents, and controlling person and each such underwriter or controlling person for any legal or any other expenses reasonably incurred in connection with investigating or defending any Claim; provided, however, that the reimbursement provisions contained in this Section 4.7(b) will not apply (i) to amounts paid in settlement of any Claim if such settlement is effected without the consent of Seller (which consent will not be unreasonably withheld) and (ii) with respect to any untrue statement or omission or alleged untrue statement or omission made in any preliminary prospectus or the prospectus or the prospectus as amended or supplemented, but eliminated or remedied in the prospectus or the prospectus as amended or supplemented, and will not inure to the benefit of Purchaser, its directors, officers, employees, agents, and controlling person or any underwriter (or to the benefit of any person who controls such underwriter within the meaning of the Securities Act) from whom the person asserting any Claim purchased any of the Registrable Shares, if a copy of the prospectus (as then amended or supplemented and provided to Purchaser) was not sent or given to such person-through no fault of Seller at or prior to the time such action is required by the Securities Act, nor will Seller be liable in any such case for any Claim to the extent that it arises out of or is based upon a Violation which occurs in reliance upon and in conformity with written information furnished for use in connection with such registration by or on behalf of Purchaser (with respect to a claim for reimbursement by Purchaser, its directors, officers, employees, agents, and controlling person under this Section 4.7(b)) or such underwriter or controlling person (with respect to a claim for reimbursement by such underwriter or controlling person under this Section 4.7(b)). -10- 4.8 INDEMNIFICATION BY PURCHASER. (a) Purchaser hereby indemnities Seller, its directors, officers, employees, agents, and any person controlling Seller (within the meaning of the Securities Act) each underwriter, if any, of Seller's securities covered by such registration statement, each person who controls that underwriter (within the meaning of the Securities Act) against all Claims (including any Claim incurred in settlement of any litigation commenced or settled) arising out of or based on (i) any untrue statement or alleged untrue statement of a material fact in any prospectus or any related registration statement, notification or the like, incident to such registration, qualification or compliance, or (ii) any omission or alleged omission to state in any such prospectus or any related registration statement, qualification or compliance, a material fact required to be stated in it or necessary to make the statements) in it not misleading in light of the circumstance in which the statement was made, or (iii) any violation by Purchaser of any rule or regulation promulgated under the Securities Act applicable to Purchaser and relating to action or inaction required of Purchaser in connection with any such registration, qualification or compliance; provided, however, that the indemnity agreement contained in this Section 4.8(a) will apply to any Claim only to the extent that it arises out of or is based upon a Violation which occurs solely in reliance upon and in conformity with written information furnished expressly for use in connection with such registration by or on behalf of Purchaser, and provided further that Purchaser will have no liability hereunder if (A) any such written information contained an untrue statement or omission or alleged untrue statement or omission that was subsequently corrected in writing by Purchaser and furnished to Seller or the underwriter in sufficient time for incorporation into the final prospectus, or (B) Seller pays any amounts in settlement of any such Claim if such settlement is effected without the consent of Purchaser (which consent will not be unreasonably withheld). (b) Purchaser will reimburse Seller and its directors, officers, employees, agents and controlling person (within the meaning of the Securities Act) each underwriter, and each person controlling that underwriter (within the meaning of the Securities Act) for any legal or any other expenses reasonably incurred in connection with investigating or defending any such Claim; provided, however, that the reimbursement provisions contained in this Section 4.8(b) will apply to any such Claim only to the extent that it arises out of or is based upon a Violation which occurs in reliance upon and in conformity with written information furnished expressly for use in connection with such registration by or on behalf of Purchaser. 4.9 NOTICE. Promptly after receipt by an indemnified party under Section 4.7 or 4.8 of notice of the commencement of any action (including, but not limited to, any action by a -11- Govermental Entity), such indemnified party will, if a Claim in respect thereof is to be made against any indemnifying party under Sections 4.7 or 4.8, deliver to the indemnifying party a written notice of the commencement thereof and the indemnifying party will have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume the defense thereof with counsel mutually satisfactory to the parties and the indemnified party will bear the fees and expenses of any additional counsel thereafter retained by it; provided, however, that indemnified parties will have the right to retain counsel to represent all indemnified parties, with the fees and expenses to be paid by the indemnifying party, if representation of such indemnified parties by the counsel retained by the indemnifying party would be inappropriate due to actual or potential material differing interests between such indemnified parties and any other party represented by such counsel in such proceeding. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action, if prejudicial to its ability to defend such action, will relieve such indemnifying party of any liability to the indemnified party under Section 4.7 or 4.8, but the omission so to deliver written notice to the indemnifying party will not relieve it of any liability that it may have to any indemnified party otherwise than under Section 4.7 or 4.8. 4.11 CONTRIBUTION. (a) If for any reason the indemnification provided for in Section 4.7 or 4.8 is unavailable to an indemnified party or insufficient to hold it harmless as contemplated by such sections, then the indemnifying party will contribute to the amount paid or payable by the indemnified party as a result of any Claim in such proportion as is appropriate to reflect not only the relative benefits received by the indemnified party and the indemnifying party, but also the relative fault of the indemnified party and the indemnifying party, as well as any other relevant equitable considerations; provided, however, that, in any such case, (i) Purchaser will not be required to contribute any amount in excess of the sales price of all Registrable Shares sold by Purchaser pursuant to such registration statement, and (ii) no party guilty of a fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) will be entitled to contribution from any other party who was not guilty of such fraudulent misrepresentation. (b) Promptly after receipt by a party of notice of the commencement of any action, suit or proceeding in connection with a public offering of Common Stock, such party will, if a claim for contribution in respect thereof is able to be made against another party, notify the contributing party of the commencement thereof. The omission to notify the contributing party will not relieve it from any liability which it may have to any other party other than for contribution under the Securities Act. In -12- case any such action, suit or proceeding is brought against any party, and such party notifies a contributing party of the commencement thereof, the contributing party will be entitled to participate therein with the notifying party and any other contributing party similarly notified. 4.12 "MARKET STAND-OFF" AGREEMENT. Purchaser will not, to the extent requested by Seller or the underwriters) managing any underwritten offering of Seller's securities, sell, make any short sale of, loan, grant any option for the purchase of or otherwise transfer or dispose of any Shares (other than those included in the underwritten offering) without the prior written consent of Seller or such underwriters for such period of time as Seller or the underwriters may specify commencing up to 7 days before the anticipated effective date of an underwritten registration of Seller's securities and extending up to 120 days after that effective date. In order to enforce the foregoing, Seller may impose stop-transfer instructions with respect to the Shares. V. ADDITIONAL COVENANTS 5.1 RESTRICTIONS ON TRANSFER. (a) RESTRICTION. For a period of 3 years from the date of this Agreement, Purchaser covenants and agrees that it will not and it will cause each of its "Affiliates" (as hereinafter defined) to not directly or indirectly sell, tender, transfer, pledge, hypothecate or otherwise dispose of, or offer or agree to do any of the foregoing ("Transfer"), any interest in the Shares which may be owned "beneficially" (as that term is defined in Rule 13d-3 under the Exchange Act) or of record by it and such Affiliates, except: (i) a Transfer to any person or entity who or which agrees to be bound by all the provisions of this Article V; (ii) a Transfer to any person or entity who or which has made a tender offer for Seller's Common Stock, but only if the Board of Directors of Seller has recommended acceptance of such tender offer to the stockholders of Seller; (iii) a Transfer to Seller or any of its Subsidiaries; (iv) a Transfer to an Affiliate of Purchaser which is (or agrees to become) a party hereto; (v) a Transfer which is a bona fide pledge of, or grant of a security interest in, the Shares to an institutional, commercial, or other bona fide lender (including without limitation any securities brokerage) for money borrowed; -13- (vi) a Transfer in connection with any registration statement of Seller that is declared effective during the term of this Article V and includes the Shares as a result of exercise of the registration rights granted pursuant to this Agreement; provided, however, that any such disposition by Purchaser or an underwriter pursuant to this Section 5.1(vi) will be made in a manner which (if pursuant to an underwritten offering, in the written opinion of the underwriter) is intended to effect a broad distribution with no Transfers of the Shares to any one "person" or "group" (as such terms are defined in and under Section 13(d) of the Exchange Act) if after such Transfers such person or group would beneficially hold in excess of 5 percent of Seller's Common Stock; or (vii) a Transfer permitted pursuant to Rule 144 under the Securities Act; provided, that Purchaser will use its best efforts to effect as wide a distribution of the Shares as is reasonably practicable. (b) DEFINITION OF AFFILIATE. For all purposes of this Agreement, when used with reference to Purchaser, the word "Affiliate" means any person directly or indirectly controlling, controlled by, or under direct or indirect control with, Purchaser or such other person, as the case may be. For the purposes of this definition, "control" when used with respect to any specified person means the power to direct the management and policies of such person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise, and the terms "controlling" and "controlled" have meanings correlative of the foregoing. For the purposes of this definition, "person" includes, without limitation, any individual, corporation, partnership, joint venture, trust, and any employee pension, profit sharing and other benefit plan and trust. As to any individual person, the term "person" means such individuals spouse, children, brothers and sisters. 5.2 NO TRANSFER. Purchaser covenants and agrees that for a period of 3 years from the date of this Agreement, without Seller's prior written consent, it will not and it will cause each of its Affiliates to not Transfer or otherwise dispose of or encumber any of the Shares or any beneficial interest therein except as permitted pursuant to this Article V. 5.3 LEGENDS AND STOP TRANSFER ORDERS. (a) LEGEND. During the term of the restrictions and covenants of this Article V each of the certificates representing the Shares will be registered in the name of Purchaser (except as hereinafter permitted), will be subject to stop transfer instructions, and will include substantially the following legend in addition to any other legends required by the terms of this Agreement: -14- THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN LIMITATIONS ON TRANSFER SET FORTH IN A STOCK PURCHASE AGREEMENT, DATED MARCH 29, 1996, BETWEEN MICHAELS STORES, INC. AND LOCKE LIMITED, WHICH MAY BE APPLICABLE TO CERTAIN TRANSFEREES. A COPY OF SUCH AGREEMENT IS ON FILE WITH THE SECRETARY OF MICHAELS STORES, INC. (b) REMOVAL OF LEGEND. Such stop transfer instructions and legend will be applicable to any disposition of the Shares other than pursuant to a public offering of the Shares permitted pursuant to Section 5.1(vi). 5.4 TERM AND TERMINATION. (a) TERM. The term of these restrictions and covenants in this Article V will commence on the date hereof and will continue for a period of 3 years. (b) TERMINATION. Notwithstanding the foregoing, the restrictions and covenants in this Article V will terminate immediately if individuals who at the date hereof constituted the Board of Directors of Seller and any new director whose election by the Board or nomination for election by Seller's stockholders was approved by a vote of at least two-thirds of the directors then still in office, who either were directors at such date or whose election or nomination for election was previously so approved, have ceased for any reason to constitute a majority thereof. 5.5 CERTAIN ACTIONS. Purchaser agrees that for a period of 3 years from the date of this Agreement, except within the terms of a specific request from Seller, it will not propose or publicly announce or otherwise disclose an intent to propose, or enter into or agree to enter into, singly or with any other person or directly or indirectly, (a) any form of business combination, acquisition, or other transaction relating to Seller or any majority-owned affiliate thereof, (b) any form of restructuring, recapitalization or similar transaction with respect to Seller or any such affiliate, or (c) any demand, request or proposal to amend, waiver or terminate any provision of this Agreement, and except as aforesaid during such period, Purchaser will not (i) acquire, or offer, propose or agree to acquire by purchase or otherwise, any securities of Seller entitled to be voted generally in the election of directors of Seller or any direct or indirect options or other rights to acquire any such securities ("Voting Securities"), (ii) make, or in any way participate in, any solicitation of proxies with respect to any Voting Securities (including by the execution of action by written consent), become a participant in any election contest with respect to Seller, seek to influence any Person with respect to any Voting Securities or demand a copy of Seller's -15- list of its stockholders or other books and records, (iii) participate in or encourage the formation of any partnership, syndicate or other group which owns or seeks or offers to acquire beneficial ownership of any Voting Securities or which seeks to affect control of Seller or for the purpose of circumventing any provision of this Agreement, or (iv) otherwise act, alone or in concert with others (including by providing financing for another Person), to seek or to offer to control of influence, in any manner, the management, Board of Directors or policies of Seller. 5.6 SPECIFIC PERFORMANCE. Purchaser acknowledges that Seller would be irreparably damaged and would not have an adequate remedy at law for money damages in the event that any of the covenants of Seller in this Article V were not performed in accordance with its terms or otherwise were materially breached. Purchaser therefore agrees that Seller will be entitled to an injunction or injunctions to prevent breaches of such performance and to specific enforcement of such covenants in addition to any other remedy to which it may be entitled, at law or in equity. VI. MISCELLANEOUS 6.1 CONFIDENTIALITY. The terms of this Agreement will remain confidential; provided, however, Seller may make such disclosure in any public filing or announcement as may be necessary to comply with applicable law. 6.2 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS. Each of the representations, warranties and covenants in this Agreement will survive the consummation of the transactions contemplated in this Agreement. 6.3 ENTIRE AGREEMENT. This Agreement contains the entire agreement between Purchaser and Seller with respect to the transactions contemplated hereby and supersedes all prior agreements among the parties with respect to such matters. 6.4 RIGHTS OF THE PARTIES. Nothing expressed or implied in this Agreement is intended or will be construed to confer upon or give any person or entity other than the parties hereto and their permitted assigns any rights or remedies under or by reason of this Agreement or any transaction contemplated hereby. 6.5 FURTHER ASSURANCES. From time to time, as and when requested by either party hereto, the other party will execute and deliver, or cause to be executed and delivered, all such documents and instruments as may be reasonably necessary to consummate the transactions contemplated hereby. 6.6 APPLICABLE LAW. This Agreement will be governed by and construed in accordance with the laws of the State of Texas applicable to contracts made and to be performed in that State, -16- without giving effect to the principles of conflicts of law thereof. 6.7 INTERPRETATION. For purposes of this Agreement, a "subsidiary" of a corporation means any corporation more than 50% of the outstanding voting securities of which are directly or indirectly owned by such other corporation. The descriptive headings contained herein are for convenience and reference only and will not effect in any way the meaning or interpretation of this Agreement. 6.8 NOTICES. All notices and other communications hereunder must be in writing and must be given (and will be deemed to have been duly given upon receipt) by delivery in person, by cable, telegram, telex, facsimile transmission or other standard form of telecommunications, or by registered or certified mail, postage prepaid, return receipt requested, addressed as follows: If to Seller: Michaels Stores, Inc. 5931 Campus Circle Drive Irving, Texas 75063 Attn: General Counsel Fax No.: 214-714-1338 If to Purchaser: Locke Limited Aundyr Trust Company Limited International House Castle Hill, Victoria Road Douglas, Isle of Man British Isles Attention: K.A. Jones and N.J. Carter Fax No.: 011-44-1624-624-469 or to such other address as any party may have furnished to the other parties in writing in accordance herewith. 6.9 COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which will be deemed to be an original but all of which together will constitute but one agreement. 6.10 SUCCESSORS AND ASSIGNS. This Agreement will be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns, but will not be assignable by any party without the prior written consent of the other party; provided that any such assignment will not relieve the assigning party from any of its obligations hereunder. -17- 6.11 EXPENSES. Subject to Section 4.8 and 4.9 hereof, all costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby will be paid by the party incurring such expense. 6.12 SEVERABILITY. If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any rule of law or public policy, all other terms and provisions of this Agreement will nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner adverse to any party hereto. Upon any such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto will negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner to the end that the transactions contemplated by this Agreement are consummated to the extent possible. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement. SELLER: MICHAELS STORES, INC. By: /s/ R. DON MORRIS ---------------------------------- Name: R. Don Morris ------------------------------- Title: Executive Vice President and Chief Financial Officer ------------------------------ PURCHASER: LOCKE LIMITED, an Isle of Man corporation By: /s/ NIAMA FIELD-CORBETT ---------------------------------- Name: Niama Field-Corbett ------------------------------- Title: Director ------------------------------ -18- EX-4.9 4 EXHIBIT 4.9 STOCK PURCHASE AGREEMENT This STOCK PURCHASE AGREEMENT (this "Agreement") is made and entered as of March 29, 1996 between Michaels Stores, Inc., a Delaware corporation ("Seller") and Fugue Limited, an Isle of Man corporation ("Purchaser"). RECITAL Seller desires to issue and sell to Purchaser, and Purchaser desires to purchase from Seller, 433,333 newly issued and outstanding shares (the "Shares") of Common Stock, par value $.10 per share, of Seller (the "Common Stock") on the terms and subject to the conditions set forth in this Agreement. Seller and Purchaser hereby agree as follows: I. PURCHASE AND SALE 1.1 PURCHASE AND SALE. On the terms and subject to the conditions set forth in this Agreement, at the Closing (as defined in Section 1.3) Seller will issue and sell to Purchaser, and Purchaser will purchase from Seller, the Shares. 1.2 PURCHASE PRICE. As consideration for the issuance of the Shares, Purchaser will pay to Seller at the Closing the aggregate amount equal to the product of (a) the number of Shares to be issued pursuant to this Agreement multiplied by (b) $12.50 per Share (the "Purchase Price") 1.3 THE CLOSING. (a) Subject to Section 1.4, the closing of the purchase and sale of the Shares hereunder (the "Closing") will take place on April 5, 1996 or such other date as Seller and Purchaser may agree (the "Closing Date"). (b) At the Closing, (i) Purchaser will pay to Seller the Purchase Price by wire transfer of immediately available funds to an account or accounts designated by Seller and (ii) Seller will deliver to Purchaser a single certificate representing the Shares registered in the name of "Fugue Limited". (c) At the Closing Seller will deliver to Purchaser, and Purchaser will deliver to Seller, a certificate confirming that their respective representations and warranties set forth in this Agreement are true and complete in all material respects on the Closing Date as if made on that date. 1.4 CONDITION TO CLOSING. (a) Notwithstanding anything to the contrary in this Agreement, the obligation of Seller to consummate the sale and purchase of the Shares contemplated hereby is subject to satisfaction of each of the following conditions: (i) The Board of Directors of Seller shall have approved the sale of the Shares on or before the Closing Date. (ii) The representations and warranties of Purchaser in this Agreement shall be true and complete in all material respects on and as of the Closing Date. (b) Notwithstanding anything to the contrary in this Agreement, the obligations of Purchaser to consummate the sale and purchase of the Shares contemplated hereby are subject to the condition that the representations and warranties made by Seller in this Agreement shall be true and complete in all material respects on and as of the Closing Date. II. REPRESENTATIONS AND WARRANTIES OF SELLER 2.1 ORGANIZATION; POWER AND AUTHORITY. Seller is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. Seller has requisite corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. The execution and delivery by Seller of this Agreement and the performance by it of the transactions contemplated hereby to be performed by it have been duly authorized by all necessary corporate action on the part of Seller. This Agreement has been duly executed and delivered by Seller and constitutes a valid and binding obligation of Seller. 2.2 CAPITALIZATION. The authorized capital stock of Seller consists of (i) 50,000,000 shares of Common Stock, of which as of March 15, 1996, 21,617,025 shares were issued and outstanding, fully paid and nonassessable and no shares were held in the treasury, and (ii) 2,000,000 shares of preferred stock, $.10 par value per share, of which as of March 15, 1996, no shares were outstanding. Upon the issuance of the Shares to Purchaser and the payment to Seller of the Purchase Price, the Shares will be validly issued and outstanding, fully paid and nonassessable, and Purchaser will acquire good and valid title to the Shares, free and clear of any charges, liens or other encumbrances ("Encumbrances") of any kind. None of the Shares have been issued in violation of any preemptive rights, rights of first refusal or other acquisition rights. -2- 2.3 CONSENT AND APPROVALS; NO VIOLATION. Neither the execution and delivery of this Agreement by Seller nor the consummation by Seller of the transactions contemplated hereby will (a) conflict with or result in any breach or violation of, or constitute a default under, any note, pledge, trust, commitment, agreement or other instrument or obligation to which Seller is a party or by which Seller or any of its properties may be bound, (b) require any consent, approval, authorization or permit of, or filing with or notification to, any court, governmental authority or other regulatory or administrative agency or commission, domestic or foreign ("Governmental Entity"), or (c) violate any statute or any order, decree, injunction, rule or regulation of any Governmental Entity applicable to Seller. 2.4 SEC REPORTS; FINANCIAL STATEMENTS. (a) Seller has delivered to Purchaser (i) its Annual Report on Form 10-K for the fiscal year ended January 29, 1995 and (ii) its Quarterly Reports on Form 10-Q for each of the fiscal quarters ended April 30, 1995, July 30, 1995 and October 29, 1995, respectively, each in the form (including exhibits) filed with the Securities and Exchange Commission ("SEC") (collectively, the "SEC Reports"). Each SEC Report has been prepared and filed in accordance with all applicable rules and regulations of the SEC and at the time of its filing was in compliance with such rules and regulations in all material respects. As of their respective dates, the SEC Reports did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. (b) Each of the audited consolidated financial statements and unaudited consolidated interim financial statements of Seller (and the related notes and schedules) included in the SEC Reports present fairly, in all material respects, the consolidated financial position of Seller and its consolidated subsidiaries as of the respective dates thereof and the results of operations and cash flows for the respective periods set forth therein, in accordance with generally accepted accounting principles consistently applied during the period involved, except as otherwise noted therein and subject, in the case of the unaudited interim consolidated financial statements, to the omission of certain notes not ordinarily accompanying such unaudited interim consolidated financial statements and to normal year-end adjustments and any other adjustments described therein. (c) Except as set forth in the SEC Reports, any other reports filed with the SEC pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act"), that relate to Seller, and any public announcements made by Seller, since October 29, 1995 there has been no material adverse change in the -3- assets, earnings, financial position, business or prospects of Seller and its subsidiaries, considered as a whole. 2.5 NO BROKER; FINDER; ETC. None of Seller or its directors, officers or employees has employed any investment banker, consultant, broker or finder or incurred any liability for any brokerage fees, commissions or finders fees in connection with the transactions contemplated under this Agreement. III. REPRESENTATIONS AND WARRANTIES OF PURCHASER 3.1 POWER AND AUTHORITY. Purchaser has the requisite corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. This Agreement has been duly executed and delivered by Purchaser and constitutes a valid and binding obligation of Purchaser. 3.2 PURCHASE FOR INVESTMENT. Purchaser acknowledges that the Shares have not been registered under the Securities Act of 1933, as amended ("Securities Act"), or under any state or foreign securities laws. Purchaser is not an underwriter as such term is defined under the Securities Act, and is purchasing the Shares solely for investment with no present intention to distribute any of the Shares to any person or entity ("Person"). Purchaser will not sell or otherwise dispose of any of the Shares, except in accordance with the registration requirements or exemption provisions under the Securities Act and the rules and regulations promulgated thereunder, and any other applicable securities laws. Purchaser further understands that the certificate representing the Shares will bear the following legend and agrees that it will hold the Shares subject thereto: THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED PURSUANT TO THE SECURITIES ACT OF 1933 OR ANY STATE SECURITIES LAW. NEITHER THIS SECURITY NOR ANY PORTION HEREOF OR INTEREST HEREIN MAY BE SOLD, ASSIGNED, TRANSFERRED, PLEDGED OR OTHERWISE DISPOSED OF UNLESS THE SAME IS REGISTERED UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES LAW, OR UNLESS AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE AND MICHAELS STORES, INC. SHALL HAVE RECEIVED, AT THE EXPENSE OF THE HOLDER HEREOF, EVIDENCE OF SUCH EXEMPTION REASONABLY SATISFACTORY TO MICHAELS STORES, INC. (WHICH MAY INCLUDE, AMONG OTHER THINGS, AN OPINION OF COUNSEL SATISFACTORY TO MICHAELS STORES, INC.). -4- 3.3 SUITABILITY AND SOPHISTICATION. Purchaser represents and warrants that it (a) is an "accredited investor" as defined in Rule 501(a) promulgated under the Securities Act, (b) has such knowledge and experience in financial and business matters that it is capable of independently evaluating the risks and merits of purchasing the Shares, (c) has been provided with the opportunity to make a reasonable investigation of Seller, including the opportunity to make any inquiries and to request additional information necessary to its investment decision, and Seller has satisfactorily responded to any inquiries and furnished to Purchaser all requested information, (d) has independently evaluated the risks and merits of purchasing the Shares and has independently determined that the Shares are a suitable investment for it, and (e) has sufficient financial resources to bear the loss of its entire investment in the Shares. 3.4 CONSENT AND APPROVALS; NO VIOLATION. Neither the execution and delivery of this Agreement by Purchaser nor the consummation by Purchaser of the transactions contemplated hereby will (a) conflict with or result in any breach or violation of, or constitute a default under, any note, pledge, trust, commitment, agreement or other instrument or obligation to which Purchaser is a party or by which Purchaser or any of its properties may be bound, (b) require any consent, approval, authorization or permit of, or filing with or notification to, any Governmental Entity, or (c) violate any statute or any order, decree, injunction, rule or regulation of any Governmental Entity applicable to Purchaser. 3.5 NO AGREEMENTS. Purchaser acknowledges that there are no agreements, arrangements, commitments or understandings relating to any of the Shares except pursuant to this Agreement. 3.6 NO BROKER; FINDER; ETC. None of Purchaser or its directors, officers, agents or employees has employed any investment banker, consultant, broker or finder or incurred any liability for any brokerage fees, commissions or finders fees in connection with the transactions contemplated under this Agreement. IV. REGISTRATION RIGHTS 4.1 REGISTRATION. Upon receipt of a written request (the "Registration Notice") by Purchaser at any time after one year from the date of this Agreement, Seller shall cause to be filed as soon as practicable a registration statement (a "Shelf Registration Statement") under the Securities Act on Form S-3 or any other appropriate form under the Securities Act for an offering to be made on a delayed or continuous basis pursuant to Rule 415 thereunder or any similar rule that may be adopted by the SEC and permitting sales in ordinary course brokerage or dealer transactions not involving an underwritten public offering (and shall register or qualify the shares to be sold in such -5- offering under such other securities or "blue sky," laws as required pursuant to this Section 4.1) covering no less than the aggregate number of Shares then held by Purchaser (those Shares together with any shares of Common Stock or other securities that may subsequently be issued with respect to the Shares as result of a stock split or dividend, reclassification, or combination of shares or any sale, transfer, assignment or other transaction by Seller or Purchaser involving the Shares and any securities into which the Shares may thereafter be changed as a result of merger, consolidation, or recapitalization or otherwise are referred to as the "Registrable Shares") so that the Registrable Shares will be included in an effective registration statement under the Securities Act. Seller shall use its reasonable efforts to cause the Shelf Registration Statement to be declared effective by the SEC on or before 90 days following Seller's receipt of the Registration Notice. Seller shall use its reasonable efforts to keep the Shelf Registration Statement continuously effective (and to register or qualify the shares to be sold in such offering under such other securities or "blue sky" laws as required pursuant to this Section 4.1) for so long as Purchaser holds any Registrable Shares or until Seller has caused to be delivered to Purchaser an opinion of counsel, which counsel shall be reasonably acceptable to Purchaser, stating that the Registrable Shares may be sold by Purchaser pursuant to Rule 144 without regard to any volume limitations and that Seller has satisfied the informational requirements of Rule 144. Seller shall file any necessary listing applications or amendments to existing applications to cause the Registrable Shares to be listed on the primary exchange or quotation system on which its shares of Common Stock are then listed, if any. Seller will use reasonable efforts to register or qualify the Registrable Shares under such other securities or "blue sky" laws of such jurisdictions as Purchaser may reasonably request and do any and all other acts and things that may be reasonably necessary or advisable to register or qualify for sale in such jurisdictions the Registrable Shares owned by Purchaser; PROVIDED THAT Seller shall not be required to (i) qualify generally to do business in any jurisdiction where it is not then so qualified, (ii) subject itself to taxation in any such jurisdiction, (iii) consent to general service of process in any such jurisdiction, or (iv) provide any undertaking required by such other securities or "blue sky" laws or make any change in its charter or bylaws that the Board of Directors of Seller determines in good faith to be contrary to the best interest of Seller and its stockholders. Notwithstanding the foregoing, if Seller shall furnish to Purchaser a certificate signed by the chief executive officer of Seller stating that in the good faith judgment of the Board of Directors of Seller it would be significantly disadvantageous to Seller and its stockholders for the Shelf Registration Statement to be amended or supplemented, Seller may defer such amending or supplementing of such Shelf Registration Statement for not more than 45 days and in such event Purchaser shall be required to discontinue disposition of any Registrable Shares covered by such Shelf Registration Statement during such period. -6- 4.2 DISTRIBUTION OF REGISTERABLE SECURITIES. If Purchaser intends to distribute the Registerable Securities covered by the Shelf Registration Statement by means of an underwriting, Purchaser shall so advise Seller. In that event, the underwriting shall be managed by an underwriter or underwriters selected by Purchaser that are reasonably acceptable to Seller (which approval shall not unreasonably be withheld). Purchaser shall have the right to negotiate with the underwriters and to determine all terms of the underwriting, including the gross price and net price at which the Registrable Securities are to be sold. Seller shall enter into an underwriting agreement in customary form with the underwriter or underwriters selected as above provided and any representations and warranties of Seller thereunder to and for the benefit of the underwriters shall also be made to and for the benefit of Purchaser. Seller will furnish to Purchaser and the underwriters (i) an opinion of counsel for Seller, addressed to Purchaser and the underwriters, dated the date of the closing under the underwriting agreement, and (ii) a "comfort letter" signed by the independent public accountants who have certified Seller's financial statements included in the Shelf Registration Statement, addressed to Purchaser and the underwriters; PROVIDED HOWEVER, that (i) the opinion and "comfort letter" shall cover substantially the same matters with respect to the Shelf Registration Statement (and the prospectus included therein) as are customarily covered in opinions of issuer's counsel and in accountants' letters delivered to underwriters in underwritten public secondary offerings and such other matters as Purchaser may reasonably request, and (ii) the "comfort letter" shall also cover events subsequent to the date of such financial statements. 4.3 FURNISH INFORMATION. In connection with the Shelf Registration Statement, Purchaser will (a) cooperate with Seller to effect such registration and to maintain the effectiveness thereof, (b) promptly and accurately furnish any information reasonably requested by Seller concerning Purchaser and the proposed distribution by Purchaser, and (c) promptly comply with all applicable requirements of the Securities Act, the Exchange Act and any other applicable federal or state laws, including, but not limited to, furnishing Seller such information regarding Purchaser, the Shares held by it and the intended method of disposition of such securities as reasonably required in connection with the action to be taken by Seller pursuant to this Agreement. 4.4 EXPENSES OF REGISTRATION. Seller will bear all expenses incurred in effecting any registration pursuant to this Agreement, including without limitation, all registration, qualification and filing fees, printing expenses, escrow fees, fees and disbursements of counsel for Seller, blue sky fees and expenses, expenses of any regular or special audit incident to or required by any such registration, but will not include any expenses payable by Purchaser under this Section 4.4. Purchaser will pay in connection with any registration of its Shares any -7- underwriting discounts, selling commissions, fees or disbursements of Purchaser's counsel or of any advisor to Purchaser not retained by Seller, or fees and expenses incident to preparation of information by Purchaser, and expenses incurred in connection with the qualification of the Registrable Shares in a jurisdiction that requires those expenses to be paid by a selling shareholder. 4.5 REGISTRATION PROCEDURE. (a) Seller will keep Purchaser advised in writing of the initiation and the completion of each registration, qualification and compliance effected by Seller under this Agreement. (b) At its expense, Seller will: (i) prepare and file with the SEC such amendments and supplements to the Shelf Registration Statement and the prospectus used in connection therewith as may be necessary to keep the Shelf Registration Statement effective for the period described in Section 4.1(a) and to comply with the provisions of the Securities Act with respect to the sale or other disposition of the Registrable Securities whenever the Purchaser shall desire to sell or otherwise dispose of the Registrable Securities within that period; (ii) furnish to Purchaser and any underwriters such numbers of copies of the Shelf Registration Statement, amendments and supplements thereto, the prospectus included in the Shelf Registration Statement including any preliminary prospectus, and any amendments or supplements thereto, and such other documents, as Purchaser and any underwriters may reasonably request in order to facilitate the sale or other disposition of the Registrable Securities; (iii) use its reasonable efforts to comply with all applicable rules and regulations of the SEC, and make available to its security holders, as soon as reasonably practicable, an earnings statement covering the period of at least twelve months, beginning with the first fiscal quarter beginning after the effective date of the registration statement, which earnings statement shall satisfy the provisions of Section 11(a) of the Securities Act; and (iv) notify Purchaser at any time when a prospectus relating to the Registrable Securities is required to be delivered under the Securities Act, of the happening of any event of which Seller has knowledge as a result of which the prospectus included in the Shelf Registration Statement, as then in effect, contains an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing. -8- 4.6 POSTPONEMENT OF REGISTRATION. If after any registration statement including Registrable Shares has become effective there exists in the opinion of Seller's management material non-public information about Seller which has not been released and which, in the reasonable opinion of Seller's management, would not be advisable to release, then upon receipt of notice from Seller, Purchaser will not offer or sell or permit to be offered or sold any of the Registrable Shares for such time as Seller believes such condition is continuing. If the offering is not completed because of Seller's exercise of its rights hereunder, Seller will reimburse Purchaser for all of its expenses incurred in connection with the terminated offering. 4.7 INDEMNIFICATION BY SELLER. (a) Seller will indemnify Purchaser, its directors, officers, employees, and agents, and any person controlling the Purchaser (within the meaning of the Securities Act) and each underwriter, if any, of the Registrable Shares and each person controlling that underwriter (within the meaning of the Securities Act), against all claims, losses, expenses, damages, liabilities and actions ("Claims) in respect of Claims (including any Claim incurred in settlement of any litigation, commenced or threatened) arising out of or based on (i) any untrue statement or alleged untrue statement of a material fact in any prospectus or any related registration statement, or any amendment or supplement thereto, or any notification or the like incident to any such registration, or any amendment or supplement thereto, or any qualification or compliance, or (ii) any omission or alleged omission to state in any such prospectus or related registration statement incident to such registration, qualification or compliance, a material fact required to be stated in it or necessary to make that statement in it not misleading in light of the circumstance in which the statement was made, or (iii) any violation by Seller of any rule or regulation promulgated under the Securities Act applicable to Seller and relating to action or inaction required of Seller in connection with any such registration, qualification or compliance; provided, however, that the indemnity agreement contained in this Section 4.7(a) will not apply (A) to amounts paid in settlement of any Claim if such settlement is effected without the consent of Seller (which consent will not be unreasonably withheld) and (B) with respect to any untrue statement or omission or alleged untrue statement or omission made in any preliminary prospectus or the prospectus or the prospectus as amended or supplemented, but eliminated or remedied in the prospectus or the prospectus as amended or supplemented, and will not inure to the benefit of Purchaser, its directors, officers, employees, agents, or any underwriter (or to the benefit of any person who controls Purchaser or such underwriter within the meaning of the Securities Act) from whom the person asserting the Claim purchased any of the Registrable Shares, if a copy of the prospectus (as then amended or supplemented and provided to Purchaser) was not sent or given to such person through no fault of Seller at or prior to the time -9- such action is required by the Securities Act, nor will Seller be liable in any such case for any Claim to the extent that it arises out of or is based upon (1) any untrue statement or alleged untrue statement of a material fact contained in any registration statement, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto, (2) the omission or alleged omission to state therein a material fact required to be stated therein, or necessary to make the statements therein not misleading, or (3) any violation or alleged violation by Seller of the Securities Act, the Exchange Act, any state securities law or any rule or regulation promulgated under the Securities Act, the Exchange Act or any state securities law (collectively a "Violation") which occurs in reliance upon and in conformity with written information furnished for use in connection with such registration by or on behalf of Purchaser (with respect to a Claim by Purchaser under this Section 4.7(a)) or such underwriter or controlling person (with respect to a Claim by such underwriter or controlling person under this Section 4.7(a)). (b) Seller will reimburse Purchaser, its directors, officers, employees, agents, and controlling person and each such underwriter or controlling person for any legal or any other expenses reasonably incurred in connection with investigating or defending any Claim; provided, however, that the reimbursement provisions contained in this Section 4.7(b) will not apply (i) to amounts paid in settlement of any Claim if such settlement is effected without the consent of Seller (which consent will not be unreasonably withheld) and (ii) with respect to any untrue statement or omission or alleged untrue statement or omission made in any preliminary prospectus or the prospectus or the prospectus as amended or supplemented, but eliminated or remedied in the prospectus or the prospectus as amended or supplemented, and will not inure to the benefit of Purchaser, its directors, officers, employees, agents, and controlling person or any underwriter (or to the benefit of any person who controls such underwriter within the meaning of the Securities Act) from whom the person asserting any Claim purchased any of the Registrable Shares, if a copy of the prospectus (as then amended or supplemented and provided to Purchaser) was not sent or given to such person through no fault of Seller at or prior to the time such action is required by the Securities Act, nor will Seller be liable in any such case for any Claim to the extent that it arises out of or is based upon a Violation which occurs in reliance upon and in conformity with written information furnished for use in connection with such registration by or on behalf of Purchaser (with respect to a claim for reimbursement by Purchaser, its directors, officers, employees, agents, and controlling person under this Section 4.7(b)) or such underwriter or controlling person (with respect to a claim for reimbursement by such underwriter or controlling person under this Section 4.7(b)). -10- 4.8 INDEMNIFICATION BY PURCHASER. (a) Purchaser hereby indemnifies Seller, its directors, officers, employees, agents, and any person controlling Seller (within the meaning of the Securities Act) each underwriter, if any, of Seller's securities covered by such registration statement, each person who controls that underwriter (within the meaning of the Securities Act) against all Claims (including any Claim incurred in settlement of any litigation commenced or settled) arising out of or based on (i) any untrue statement or alleged untrue statement of a material fact in any prospectus or any related registration statement, notification or the like, incident to such registration, qualification or compliance, or (ii) any omission or alleged omission to state in any such prospectus or any related registration statement, qualification or compliance, a material fact required to be stated in it or necessary to make the statement(s) in it not misleading in light of the circumstance in which the statement was made, or (iii) any violation by Purchaser of any rule or regulation promulgated under the Securities Act applicable to Purchaser and relating to action or inaction required of Purchaser in connection with any such registration, qualification or compliance; provided, however, that the indemnity agreement contained in this Section 4.8(a) will apply to any Claim only to the extent that it arises out of or is based upon a Violation which occurs solely in reliance upon and in conformity with written information furnished expressly for use in connection with such registration by or on behalf of Purchaser, and provided further that Purchaser will have no liability hereunder if (A) any such written information contained an untrue statement or omission or alleged untrue statement or omission that was subsequently corrected in writing by Purchaser and furnished to Seller or the underwriter in sufficient time for incorporation into the final prospectus, or (B) Seller pays any amounts in settlement of any such Claim if such settlement is effected without the consent of Purchaser (which consent will not be unreasonably withheld). (b) Purchaser will reimburse Seller and its directors, officers, employees, agents and controlling person (within the meaning of the Securities Act) each underwriter, and each person controlling that underwriter (within the meaning of the Securities Act) for any legal or any other expenses reasonably incurred in connection with investigating or defending any such Claim; provided, however, that the reimbursement provisions contained in this Section 4.8(b) will apply to any such Claim only to the extent that it arises out of or is based upon a violation which occurs in reliance upon and in conformity with written information furnished expressly for use in connection with such registration by or on behalf of Purchaser. 4.9 NOTICE. Promptly after receipt by an indemnified party under Section 4.7 or 4.8 of notice of the commencement of any action (including, but not limited to, any action by a -11- Governmental Entity), such indemnified party will, if a Claim in respect thereof is to be made against any indemnifying party under Sections 4.7 or 4.8, deliver to the indemnifying party a written notice of the commencement thereof and the indemnifying party will have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume the defense thereof with counsel mutually satisfactory to the parties and the indemnified party will bear the fees and expenses of any additional counsel thereafter retained by it; provided, however, that indemnified parties will have the right to retain counsel to represent all indemnified parties, with the fees and expenses to be paid by the indemnifying party, if representation of such indemnified parties by the counsel retained by the indemnifying party would be inappropriate due to actual or potential material differing interests between such indemnified parties and any other party represented by such counsel in such proceeding. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action, if prejudicial to its ability to defend such action, will relieve such indemnifying party of any liability to the indemnified party under Section 4.7 or 4.8, but the omission so to deliver written notice to the indemnifying party will not relieve it of any liability that it may have to any indemnified party otherwise than under Section 4.7 or 4.8. 4.11 CONTRIBUTION. (a) If for any reason the indemnification provided for in Section 4.7 or 4.8 is unavailable to an indemnified party or insufficient to hold it harmless as contemplated by such sections, then the indemnifying party will contribute to the amount paid or payable by the indemnified party as a result of any Claim in such proportion as is appropriate to reflect not only the relative benefits received by the indemnified party and the indemnifying party, but also the relative fault of the indemnified party and the indemnifying party, as well as any other relevant equitable considerations; provided, however, that, in any such case, (i) Purchaser will not be required to contribute any amount in excess of the sales price of all Registrable Shares sold by Purchaser pursuant to such registration statement, and (ii) no party guilty of a fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) will be entitled to contribution from any other party who was not guilty of such fraudulent misrepresentation. (b) Promptly after receipt by a party of notice of the commencement of any action, suit or proceeding in connection with a public offering of Common Stock, such party will, if a claim for contribution in respect thereof is able to be made against another party, notify the contributing party of the commencement thereof. The omission to notify the contributing party will not relieve it from any liability which it may have to any other party other than for contribution under the Securities Act. In -12- case any such action, suit or proceeding is brought against any party, and such party notifies a contributing party of the commencement thereof, the contributing party will be entitled to participate therein with the notifying party and any other contributing party similarly notified. 4.12 "MARKET STAND-OFF" AGREEMENT. Purchaser will not, to the extent requested by Seller or the underwriter(s) managing any underwritten offering of Seller's securities, sell, make any short sale of, loan, grant any option for the purchase of or otherwise transfer or dispose of any Shares (other than those included in the underwritten offering) without the prior written consent of Seller or such underwriters for such period of time as Seller or the underwriters may specify commencing up to 7 days before the anticipated effective date of an underwritten registration of Seller's securities and extending up to 120 days after that effective date. In order to enforce the foregoing, Seller may impose stop-transfer instructions with respect to the Shares. V. ADDITIONAL COVENANTS 5.1 RESTRICTIONS ON TRANSFER. (a) RESTRICTION. For a period of 3 years from the date of this Agreement, Purchaser covenants and agrees that it will not and it will cause each of its "Affiliates" (as hereinafter defined) to not directly or indirectly sell, tender, transfer, pledge, hypothecate or otherwise dispose of, or offer or agree to do any of the foregoing ("Transfer"), any interest in the Shares which may be owned "beneficially" (as that term is defined in Rule 13d-3 under the Exchange Act) or of record by it and such Affiliates, except: (i) a Transfer to any person or entity who or which agrees to be bound by all the provisions of this Article V; (ii) a Transfer to any person or entity who or which has made a tender offer for Seller's Common Stock, but only if the Board of Directors of Seller has recommended acceptance of such tender offer to the stockholders of Seller; (iii) a Transfer to Seller or any of its Subsidiaries; (iv) a Transfer to an Affiliate of Purchaser which is (or agrees to become) a party hereto; (v) a Transfer which is a bona fide pledge of, or grant of a security interest in, the Shares to an institutional, commercial, or other bona fide lender (including without limitation any securities brokerage) for money borrowed; -13- (vi) a Transfer in connection with any registration statement of Seller that is declared effective during the term of this Article V and includes the Shares as a result of exercise of the registration rights granted pursuant to this Agreement; provided, however, that any such disposition by Purchaser or an underwriter pursuant to this Section 5.1(vi) will be made in a manner which (if pursuant to an underwritten offering, in the written opinion of the underwriter) is intended to effect a broad distribution with no Transfers of the Shares to any one "person" or "group" (as such terms are defined in and under Section 13(d) of the Exchange Act) if after such Transfers such person or group would beneficially hold in excess of 5 percent of Seller's Common Stock; or (vii) a Transfer permitted pursuant to Rule 144 under the Securities Act; provided, that Purchaser will use its best efforts to effect as wide a distribution of the Shares as is reasonably practicable. (b) DEFINITION OF AFFILIATE. For all purposes of this Agreement, when used with reference to Purchaser, the word "Affiliate" means any person directly or indirectly controlling, controlled by, or under direct or indirect control with, Purchaser or such other person, as the case may be. For the purposes of this definition, "control" when used with respect to any specified person means the power to direct the management and policies of such person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise, and the terms "controlling" and "controlled" have meanings correlative of the foregoing. For the purposes of this definition, "person" includes, without limitation, any individual, corporation, partnership, joint venture, trust, and any employee pension, profit sharing and other benefit plan and trust. As to any individual person, the term "person" means such individual's spouse, children, brothers and sisters. 5.2 NO TRANSFER. Purchaser covenants and agrees that for a period of 3 years from the date of this Agreement, without Seller's prior written consent, it will not and it will cause each of its Affiliates to not Transfer or otherwise dispose of or encumber any of the Shares or any beneficial interest therein except as permitted pursuant to this Article V. 5.3 LEGENDS AND STOP TRANSFER ORDERS. (a) LEGEND. During the term of the restrictions and covenants of this Article V each of the certificates representing the Shares will be registered in the name of Purchaser (except as hereinafter permitted), will be subject to stop transfer instructions, and will include substantially the following legend in addition to any other legends required by the terms of this Agreement: -14- THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN LIMITATIONS ON TRANSFER SET FORTH IN A STOCK PURCHASE AGREEMENT, DATED MARCH 29, 1996, BETWEEN MICHAELS STORES, INC. AND FUGUE LIMITED, WHICH MAY BE APPLICABLE TO CERTAIN TRANSFEREES. A COPY OF SUCH AGREEMENT IS ON FILE WITH THE SECRETARY OF MICHAELS STORES, INC. (b) REMOVAL OF LEGEND. Such stop transfer instructions and legend will be applicable to any disposition of the Shares other than pursuant to a public offering of the Shares permitted pursuant to Section 5.1(vi). 5.4 TERM AND TERMINATION. (a) TERM. The term of these restrictions and covenants in this Article V will commence on the date hereof and will continue for a period of 3 years. (b) TERMINATION. Notwithstanding the foregoing, the restrictions and covenants in this Article V will terminate immediately if individuals who at the date hereof constituted the Board of Directors of Seller and any new director whose election by the Board or nomination for election by Seller's stockholders was approved by a vote of at least two-thirds of the directors then still in office, who either were directors at such date or whose election or nomination for election was previously so approved, have ceased for any reason to constitute a majority thereof. 5.5 CERTAIN ACTIONS. Purchaser agrees that for a period of 3 years from the date of this Agreement, except within the terms of a specific request from Seller, it will not propose or publicly announce or otherwise disclose an intent to propose, or enter into or agree to enter into, singly or with any other person or directly or indirectly, (a) any form of business combination, acquisition, or other transaction relating to Seller or any majority-owned affiliate thereof, (b) any form of restructuring, recapitalization or similar transaction with respect to Seller or any such affiliate, or (c) any demand, request or proposal to amend, waiver or terminate any provision of this Agreement, and except as aforesaid during such period, Purchaser will not (i) acquire, or offer, propose or agree to acquire by purchase or otherwise, any securities of Seller entitled to be voted generally in the election of directors of Seller or any direct or indirect options or other rights to acquire any such securities ("Voting Securities"), (ii) make, or in any way participate in, any solicitation of proxies with respect to any Voting Securities (including by the execution of action by written consent), become a participant in any election contest with respect to Seller, seek to influence any Person with respect to any Voting Securities or demand a copy of Seller's -15- list of its stockholders or other books and records, (iii) participate in or encourage the formation of any partnership, syndicate or other group which owns or seeks or offers to acquire beneficial ownership of any Voting Securities or which seeks to affect control of Seller or for the purpose of circumventing any provision of this Agreement, or (iv) otherwise act, alone or in concert with others (including by providing financing for another Person), to seek or to offer to control of influence, in any manner, the management, Board of Directors or policies of Seller. 5.6 SPECIFIC PERFORMANCE. Purchaser acknowledges that Seller would be irreparably damaged and would not have an adequate remedy at law for money damages in the event that any of the covenants of Seller in this Article V were not performed in accordance with its terms or otherwise were materially breached. Purchaser therefore agrees that Seller will be entitled to an injunction or injunctions to prevent breaches of such performance and to specific enforcement of such covenants in addition to any other remedy to which it may be entitled, at law or in equity. VI. MISCELLANEOUS 6.1 CONFIDENTIALITY. The terms of this Agreement will remain confidential; provided, however, Seller may make such disclosure in any public filing or announcement as may be necessary to comply with applicable law. 6.2 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS. Each of the representations, warranties and covenants in this Agreement will survive the consummation of the transactions contemplated in this Agreement. 6.3 ENTIRE AGREEMENT. This Agreement contains the entire agreement between Purchaser and Seller with respect to the transactions contemplated hereby and supersedes all prior agreements among the parties with respect to such matters. 6.4 RIGHTS OF THE PARTIES. Nothing expressed or implied in this Agreement is intended or will be construed to confer upon or give any person or entity other than the parties hereto and their permitted assigns any rights or remedies under or by reason of this Agreement or any transaction contemplated hereby. 6.5 FURTHER ASSURANCES. From time to time, as and when requested by either party hereto, the other party will execute and deliver, or cause to be executed and delivered, all such documents and instruments as may be reasonably necessary to consummate the transactions contemplated hereby. 6.6 APPLICABLE LAW. This Agreement will be governed by and construed in accordance with the laws of the State of Texas applicable to contracts made and to be performed in that State, -16- without giving effect to the principles of conflicts of law thereof. 6.7 INTERPRETATION. For purposes of this Agreement, a "subsidiary" of a corporation means any corporation more than 50% of the outstanding voting securities of which are directly or indirectly owned by such other corporation. The descriptive headings contained herein are for convenience and reference only and will not effect in any way the meaning or interpretation of this Agreement. 6.8 NOTICES. All notices and other communications hereunder must be in writing and must be given (and will be deemed to have been duly given upon receipt) by delivery in person, by cable, telegram, telex, facsimile transmission or other standard form of telecommunications, or by registered or certified mail, postage prepaid, return receipt requested, addressed as follows: If to Seller: Michaels Stores, Inc. 5931 Campus Circle Drive Irving, Texas 75063 Attn: General Counsel Fax No.: 214-714-1338 If to Purchaser: Fugue Limited Lorne House Trust Limited Lorne House Castletown, Isle of Man British Isles Attention: Ronald Buchanan and Barbara Rhodes Fax No.: 011-44-1624-822-952 or to such other address as any party may have furnished to the other parties in writing in accordance herewith. 6.9 COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which will be deemed to be an original but all of which together will constitute but one agreement. 6.10 SUCCESSORS AND ASSIGNS. This Agreement will be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns, but will not be assignable by any party without the prior written consent of the other party; provided that any such assignment will not relieve the assigning party from any of its obligations hereunder. -17- 6.11 EXPENSES. Subject to Section 4.7 and 4.8 hereof, all costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby will be paid by the party incurring such expense. 6.12 SEVERABILITY. If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any rule of law or public policy, all other terms and provisions of this Agreement will nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner adverse to any party hereto. Upon any such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto will negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner to the end that the transactions contemplated by this Agreement are consummated to the extent possible. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement. SELLER: MICHAELS STORES, INC. By: /s/ R. DON MORRIS ---------------------------------- Name: R. Don Morris -------------------------------- Title: Executive Vice President and Chief Financial Officer ------------------------------ PURCHASER: FUGUE LIMITED, an Isle of Man corporation By: /s/ R. BUCHANAN ---------------------------------- Name: R. Buchanan -------------------------------- Title: Director ------------------------------- -18- EX-10.14 5 EXHIBIT 10.14 EXHIBIT 10.14 THIRD AMENDMENT TO CREDIT AGREEMENT THIS THIRD AMENDMENT TO CREDIT AGREEMENT (this "Third Amendment") is dated as of the 12th day of February, 1996, and entered into among MICHAELS STORES, INC., Delaware corporation ("Company"), the Lenders signatory hereto, NATIONSBANK OF TEXAS, N.A., a national banking association, individually and as Administrative Lender (in such latter capacity, the "Administrative Lender"), and BANK OF AMERICA ILLINOIS, a national banking association, individually and as Co-Agent. WITNESSETH: WHEREAS, Company, the Lenders, and the Administrative Lender entered into a First Amended and Restated Credit Agreement, effective as of June 18, 1994 (as amended, restated, or otherwise modified from time to time, including without limitation, as amended by that certain First Amendment to Credit Agreement dated as of April 26, 1995, among the parties hereto, and that certain Second Amendment to Credit Agreement dated as of September 1, 1995 among the parties hereto, the "Credit Agreement"); WHEREAS, the Lenders, Company, and the Administrative Lender have agreed to amend the Credit Agreement to make certain changes to the terms therein; and WHEREAS, the Lenders, the Administrative Lender, and Company have agreed to modify the Credit Agreement upon the terms and conditions set forth below; NOW, THEREFORE, for valuable consideration hereby acknowledged, Company, the Lenders and the Administrative Lender agree as follows: SECTION 1. DEFINITIONS. Unless specifically defined or redefined below, capitalized terms used herein shall have the meanings ascribed thereto in the Credit Agreement. SECTION 2. AMENDMENTS. (a) The definition of "Debt" in the Credit Agreement is hereby amended to read in its entirety as follows: "DEBT" means, with respect to Company and its Subsidiaries, (i) all indebtedness, direct or indirect, whether or not represented by bonds, debentures, notes or other securities, for the repayment of money borrowed, (ii) all deferred indebtedness for the payment of the purchase price of property or assets purchased, (iii) all indebtedness under any lease which, under GAAP, is required to be capitalized for balance sheet purposes (other than Tax Retention Leases), (iv) all guaranties, endorsements, assumptions or other contingent obligations, in respect of, or to purchase or otherwise acquire, indebtedness of others, (v) all contingent obligations (as defined in accordance with GAAP) of any type whatsoever (excluding contingent obligations arising as a result of litigation listed on SCHEDULE 5.05 or with respect to which Company's reasonable expectation is that such litigation will result in a liability or other obligation of less than $1,000,000 in the aggregate for Company or any such Subsidiary); and (vi) all indebtedness secured by any mortgage, pledge, security interest or lien existing on property owned by any of Company and its Subsidiaries, whether or not the indebtedness secured thereby shall have been assumed by any of Company and its Subsidiaries; provided that under no circumstances shall trade payables of Company and its Subsidiaries incurred in the ordinary course of business be included in this definition of "Debt". (b) The definition of "Tax Retention Lease" is hereby added to the Credit Agreement and shall read in its entirety as follows: "Tax Retention Leases" means any lease of Company or any of its Subsidiaries which, at the time entered into by Company and/or its Subsidiaries, is or was treated as an operating lease for accounting purposes under GAAP and as a capital lease for tax reporting purposes. (c) Section 7.02 of the Credit Agreement is hereby amended by adding the following clause (vi) at the end of the second sentence thereof: and (vi) the capital lease obligations incurred from time to time for point-of-sale equipment and store systems, and services and equipment supporting this equipment and systems, the obligations under which do not exceed $32,000,000 in the aggregate throughout the term of this Agreement. (d) Section 7.03(a) of the Credit Agreement is hereby amended by adding the following clause (iv) at the end of clause (a) thereof: and (iv) Liens, if any, created by capital lease obligations incurred from time to time for point-of-sale equipment and store systems, and services and equipment supporting this equipment and systems, the obligations under which do not exceed $32,000,000 in the aggregate throughout the term of this Agreement. (e) Section 7.14 is hereby added to the Credit Agreement is hereby amended and shall read in its entirety as follows: Section 7.14. FINANCIAL OR COVENANT COMPLIANCE. Notwithstanding the reporting requirements of GAAP, in no event will any Tax Retention Lease be considered a capital lease for financial or other covenant compliance. SECTION 3. CONDITIONS PRECEDENT. This Third Amendment shall not be effective until all proceedings of Company taken in connection with this Third Amendment and the transactions contemplated hereby shall be satisfactory in form and substance to the Administrative Lender 2 and Lenders, and the Administrative Lender and Lenders shall have each received such documents, instruments, and certificates, in form and substance satisfactory to the Lenders, as the Lenders shall deem necessary or appropriate in connection with this Third Amendment and the transactions contemplated hereby. SECTION 4. REPRESENTATIONS AND WARRANTIES. Company represents and warrants to the Lenders and the Administrative Lender that (a) this Third Amendment constitutes its legal, valid, and binding obligations, enforceable in accordance with the terms hereof (subject as to enforcement of remedies to any applicable bankruptcy, reorganization, moratorium, or other laws or principles of equity affecting the enforcement of creditors' rights generally), (b) there exists no Event of Default or Default under the Credit Agreement both before and after giving effect to this Third Amendment, (c) its representations and warranties set forth in the Credit Agreement and other Loan Papers are true and correct on the date hereof both before and after giving effect to this Third Amendment, (d) it has complied with all agreements and conditions to be complied with by it under the Credit Agreement and the other Loan Papers by the date hereof, (e) the Credit Agreement, as amended hereby, and the other Loan Papers remain in full force and effect, and (f) no notice to, or consent of, any Person is required under the terms of any agreement of Company in connection with the execution of this Third Amendment. SECTION 5. FURTHER ASSURANCES. Company shall execute and deliver such further agreements, documents, instruments, and certificates in form and substance satisfactory to the Administrative Lender, as the Administrative Lender or any Lender may deem necessary or appropriate in connection with this Third Amendment. SECTION 6. COUNTERPARTS. This Third Amendment and the other Loan Papers may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument. In making proof of any such agreement, it shall not be necessary to produce or account for any counterpart other than one signed by the party against which enforcement is sought. SECTION 7. ENTIRE AGREEMENT. THIS THIRD AMENDMENT AND THE OTHER LOAN PAPERS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. SECTION 8. GOVERNING LAW. (a) THIS THIRD AMENDMENT AND ALL LOAN PAPERS SHALL BE DEEMED CONTRACTS MADE UNDER THE LAWS OF TEXAS AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF TEXAS, EXCEPT TO THE EXTENT (A) FEDERAL LAWS GOVERN THE VALIDITY, CONSTRUCTION, ENFORCEMENT AND INTERPRETATION OF ALL OR ANY PART OF THIS THIRD AMENDMENT AND ALL LOAN PAPERS OR (B) STATE LAW GOVERNS UCC COLLATERAL INTERESTS FOR PROPERTIES OF COMPANY AND THE SUBSIDIARIES OUTSIDE THE STATE OF 3 OF TEXAS. WITHOUT EXCLUDING ANY OTHER JURISDICTION, COMPANY AND EACH SUBSIDIARY AGREES THAT THE COURTS OF TEXAS WILL HAVE JURISDICTION OVER PROCEEDINGS IN CONNECTION HEREWITH. (b) COMPANY AND EACH SUBSIDIARY HEREBY WAIVES PERSONAL SERVICE OF ANY LEGAL PROCESS UPON IT. IN ADDITION, COMPANY AND EACH SUBSIDIARY AGREES THAT SERVICE OF PROCESS MAY BE MADE UPON IT BY REGISTERED MAIL (RETURN RECEIPT REQUESTED) DIRECTED TO COMPANY AT ITS ADDRESS DESIGNATED FOR NOTICE UNDER THIS THIRD AMENDMENT AND SERVICE SO MADE SHALL BE DEEMED TO BE COMPLETED UPON RECEIPT BY COMPANY. NOTHING IN THIS SECTION SHALL AFFECT THE RIGHT OF THE ADMINISTRATIVE LENDER OR ANY LENDER TO SERVE LEGAL PROCESS IN ANY OTHER MANNER PERMITTED BY LAW. SECTION 9. WAIVER OF JURY TRIAL. TO THE MAXIMUM EXTENT PERMITTED BY LAW, COMPANY, EACH SUBSIDIARY AND EACH LENDER HEREBY WAIVES ANY RIGHT THAT IT MAY HAVE TO A TRIAL BY JURY OF ANY DISPUTE (WHETHER A CLAIM IN TORT, CONTRACT, EQUITY, OR OTHERWISE) ARISING UNDER OR RELATING TO THIS THIRD AMENDMENT, THE OTHER LOAN PAPERS, OR ANY RELATED MATTERS, AND AGREES THAT ANY SUCH DISPUTE SHALL BE TRIED BEFORE A JUDGE SITTING WITHOUT A JURY. IN WITNESS WHEREOF, this Third Amendment to Credit Agreement is executed as of the date first set forth above. COMPANY: MICHAELS STORES, INC. /s/ Kristen L. Magnuson ----------------------------------------------------- By: Kristen L. Magnuson ---------------------------------------------- Its: Vice President - Finance and Business Planning ---------------------------------------------- LENDERS: NATIONSBANK OF TEXAS N.A., as Administrative Lender, and individually as a Lender /s/ Joseph G. Taylor ----------------------------------------------------- By: Joseph G. Taylor Its: Senior Vice President 4 BANK OF AMERICA ILLINOIS, as Co-Agent and as a Lender /s/ Jody B. Schneider ----------------------------------------------------- By: Jody B. Schneider ---------------------------------------------- Its: Vice President ---------------------------------------------- BANK ONE, TEXAS, N.A., as a Lender /s/ Alan L. Miller ----------------------------------------------------- By: Alan L. Miller ---------------------------------------------- Its: Vice President ---------------------------------------------- CREDIT LYONNAIS NEW YORK BRANCH, as a Lender /s/ Alain Papiasse ----------------------------------------------------- By: Alain Papiasse ---------------------------------------------- Its: Executive Vice President ---------------------------------------------- FIRST INTERSTATE BANK OF TEXAS, N.A., as a Lender /s/ Susan L. Coulter ----------------------------------------------------- By: Susan L. Coulter ---------------------------------------------- Its: Vice President ---------------------------------------------- 5 MELLON BANK, N.A., as a Lender /s/ Marc T. Kennedy ----------------------------------------------------- By: Marc T. Kennedy ---------------------------------------------- Its: Assistant Vice President ---------------------------------------------- THE BOATMEN'S NATIONAL BANK OF ST. LOUIS, as a Lender /s/ David T. Wilsdorf ----------------------------------------------------- By: David T. Wilsdorf ---------------------------------------------- Its: Vice President ---------------------------------------------- UNITED STATES NATIONAL BANK OF OREGON, as a Lender /s/ Douglas A. Rich ----------------------------------------------------- By: Douglas A. Rich ---------------------------------------------- Its: Vice President ---------------------------------------------- 6 AGREED AND ACCEPTED: The following guarantors agree and accept the above increase the Commitment: MICHAELS OF CANADA, INC. /s/ Kristen L. Magnuson - ------------------------------ By: Kristen L. Magnuson Its: Treasurer LEEWARDS CREATIVE CRAFTS, INC. /s/ Kristen L. Magnuson - ------------------------------ By: Kristen L. Magnuson Its: Vice President - Finance and Business Planning MICHAELS INTERNATIONAL FINANCE, INC. 5931, INC. TREASURE HOUSE STORES, INC. OREGON CRAFT & FLORAL SUPPLY CO., INC. OREGON CRAFT & FLORAL SUPPLY CO. II, INC. OREGON CRAFT & FLORAL SUPPLY CO. III, INC. OREGON CRAFT & FLORAL SUPPLY CO. IV, INC. OREGON CRAFT & FLORAL SUPPLY CO. V, INC. OREGON CRAFT & FLORAL SUPPLY CO. VI, INC. OREGON CRAFT & FLORAL SUPPLY CO. VII, INC. OREGON CRAFT & FLORAL SUPPLY CO. VIII, INC. OREGON CRAFT & FLORAL SUPPLY CO. IX, INC. HABIF & ROSS ENTERPRISES, INC. RIVERSIDE CRAFT & FLORAL SUPPLY CO., INC. SAN DIEGO CRAFT & FLORAL SUPPLY CO. INC. MISSION VIEJO CRAFT & FLORAL, INC. H.F.C.S., INC. SAN LEANDRO CRAFT & FLORAL SUPPLY COMPANY, INC. ORANGE CRAFT & FLORAL SUPPLY CO., INC. H & H CRAFT & FLORAL SUPPLY CO. #9, INC. OC&F NUMBER 18, INC. MICHAELS OF PUERTO RICO, INC. 7 AARON BROTHERS, INC. AARON BROTHERS HOLDINGS, INC. AARON BROTHERS ART MARTS, INC. /s/ Kristen L. Magnuson - ------------------------------ By: Kristen L. Magnuson Its: Vice President 8 EX-10.15 6 EXHIBIT 10.15 EXHIBIT 10.15 FOURTH AMENDMENT TO CREDIT AGREEMENT THIS FOURTH AMENDMENT TO CREDIT AGREEMENT (this "Fourth Amendment") is dated as of the 4th day of March, 1996, and entered into among MICHAELS STORES, INC., a Delaware corporation ("Company"), the Lenders signatory hereto, NATIONSBANK OF TEXAS, N.A., a national banking association, individually and as Administrative Lender (in such latter capacity, the "Administrative Lender"), and BANK OF AMERICA ILLINOIS, a national banking association, individually and as Co-Agent. WITNESSETH: WHEREAS, Company, the Lenders, and the Administrative Lender entered into a First Amended and Restated Credit Agreement, effective as of June 18, 1994 (as amended, restated, or otherwise modified from time to time, including without limitation, as amended by the First Amendment to Credit Agreement dated as of April 26, 1995, among the parties hereto, the Second Amendment to Credit Agreement dated as of September 1, 1995, and the Third Amendment to Credit Agreement dated as of February 12, 1996 among the parties hereto, the "Credit Agreement"); WHEREAS, Company has requested a waiver of compliance with Section 7.01(b) of the Credit Agreement for the fiscal quarter ended January 28, 1996, effective as of the first day of such fiscal quarter, and the Lenders and the Administrative Lender have agreed to such a waiver upon the terms and conditions set forth below; and WHEREAS, the Lenders, the Administrative Lender, and Company have agreed to amend the Credit Agreement to make certain changes to the terms therein upon the terms and conditions set forth below; NOW, THEREFORE, for valuable consideration hereby acknowledged, Company, the Lenders and the Administrative Lender agree as follows: SECTION 1. DEFINITIONS. Unless specifically defined or redefined below, capitalized terms used herein shall have the meanings ascribed thereto in the Credit Agreement. SECTION 2. AMENDMENTS. (a) The definition of "Fixed Charges" in the Credit Agreement is hereby amended to read in its entirety as follows: "FIXED CHARGES" means for Company and its Subsidiaries as of any determination date for the preceding 12-month period, the sum of (a) interest expense for such period, plus (b) operating lease expense for such period, all as determined and consolidated in accordance with GAAP, plus (c) capital expenditures (other than capital lease obligations incurred from time to time for point-of-sale equipment and store systems, and services and equipment supporting this equipment and systems not to exceed $32,000,000 in the aggregate throughout the term of this Agreement). (b) The definition of "Fixed Charges Coverage Ratio" is hereby amended to read in its entirety as follows: "FIXED CHARGES COVERAGE RATIO" means for Company and its Subsidiaries as of any determination date for the preceding 12-month period, the ratio of (a) the sum of (i) consolidated income of Company and its Subsidiaries before income taxes for such period (excluding extraordinary cash gains or losses for such period), plus (ii) interest expense for such period plus (iii) operating lease expense for such period plus (iv) depreciation and amortization for such period to (b) Fixed Charges. (c) The definition of "Total Liabilities" is hereby amended to read in its entirety as follows: "TOTAL LIABILITIES" means, as of the date of any determination thereof, the aggregate (after eliminating intercompany items) of all liabilities of Company and its Subsidiaries determined in accordance with GAAP (including capitalized leases). Notwithstanding anything contained herein or in the other Loan Papers to the contrary, such term shall include all guaranties and liabilities relating to letters of credit (other than commercial letters of credit) without duplication for liabilities related to workmen's compensation. (d) Section 2.06 of the Credit Agreement shall be deleted in its entirety and the following substituted in its stead: Section 2.06 BORROWING BASE AND BORROWING BASE REPORT. Notwithstanding anything to the contrary in this Agreement or in any of the other Loan Papers, the sum of the (a) aggregate amount of all Advances outstanding at any time under the Loan, plus (b) the aggregate face amount of all outstanding Letters of Credit at any such time, shall not exceed the lesser of (i) the Commitment and (ii) the Borrowing Base. The Borrowing Base shall be computed on the Closing Date, and thereafter shall be recomputed as of the last day of each Fiscal Month utilizing a Borrowing Base Report, with appropriate completions, which shall be furnished to Administrative Lender within 30 days after the end of each Fiscal Month and certified as to correctness by an Authorized Financial Officer; provided that the correctness of the Borrowing Base Report submitted for the 12th Fiscal Month of each fiscal year shall be qualified to the extent of adjustments reflected in the audited financial statements for such fiscal year. At the option of the Company, the Borrowing Base may be redetermined at any time during the month (but not more than twice in any one month) upon one Business Day's prior notice from the Company to the Administrative Lender. Upon such a recomputation the Company will furnish to Administrative Lender a new Borrowing Base Report, with appropriate completions, certified as to correctness by an Authorized Financial Officer. 2 Each redetermination shall be effective upon receipt by Administrative Lender of a new Borrowing Base Report, with appropriate completions, certified as to correctness by an Authorized Financial Officer. (e) Section 7.01(b) the Credit Agreement shall be deleted in its entirety and the following substituted in its stead: (b) FIXED CHARGES COVERAGE RATIO. Company will not permit the Fixed Charges Coverage Ratio at any time during the first three fiscal quarters in fiscal year 1996 to be less than 1.00 to 1.00, and, in the fourth fiscal quarter in fiscal year 1996 and at all times thereafter, to be less than 1.15 to 1.00. $64,400,000 of the provisions established in the fiscal quarter ending July 30, 1995 for inventory markdowns and other charges shall be added to pretax consolidated income of the Company for the fiscal quarter ending July 30, 1995 only for purposes of determining compliance with the covenant contained in this Section for the fiscal quarter ending April 28, 1996 only. SECTION 3. WAIVER. The Lenders hereby waive effective as of the first day of the fiscal quarter ending January 28, 1996, compliance with Section 7.01(b) of the Credit Agreement for the fiscal quarter ending January 28, 1996. Company hereby acknowledges and agrees that nothing in this Fourth Amendment shall affect Company's obligations under the Credit Agreement or the other Loan Papers executed in connection therewith (except as specifically provided in this Fourth Amendment), which remain valid, binding and enforceable, and except as amended hereby, unamended, or shall constitute a waiver by the Lenders of any of their rights or remedies (except as specifically provided in this Amendment), now or at any time in the future, with respect to any requirement under the Credit Agreement or the other Loan Papers or with respect to an Event of Default or Default, occurring now or at any time in the future. SECTION 4. CONDITIONS PRECEDENT. This Fourth Amendment shall not be effective until (a) Company has paid to the Administrative Lender for the benefit of all Lenders an amendment fee equal to 0.175% of the Commitment, (b) all proceedings of Company taken in connection with this Fourth Amendment and the transactions contemplated hereby shall be satisfactory in form and substance to the Administrative Lender and Lenders signatory hereto, and (c) the Administrative Lender and Lenders shall have each received such documents, instruments, and certificates, in form and substance satisfactory to the Lenders, as the Lenders shall deem necessary or appropriate in connection with this Fourth Amendment and the transactions contemplated hereby. SECTION 5. REPRESENTATIONS AND WARRANTIES. Company represents and warrants to the Lenders and the Administrative Lender that (a) this Fourth Amendment constitutes its legal, valid, and binding obligations, enforceable in accordance with the terms hereof (subject as to enforcement of remedies to any applicable bankruptcy, reorganization, moratorium, or other laws or principles of equity affecting the enforcement of creditors' rights generally), (b) there exists no Event of Default or Default under the Credit Agreement after giving effect to this Fourth Amendment, (c) its representations and warranties set forth in the Credit Agreement and 3 other Loan Papers are true and correct on the date hereof after giving effect to this Fourth Amendment, (d) it has complied with all agreements and conditions to be complied with by it under the Credit Agreement and the other Loan Papers by the date hereof, (e) the Credit Agreement, as amended hereby, and the other Loan Papers remain in full force and effect, and (f) no notice to, or consent of, any Person is required under the terms of any agreement of Company in connection with the execution of this Fourth Amendment. SECTION 6. FURTHER ASSURANCES. Company shall execute and deliver such further agreements, documents, instruments, and certificates in form and substance satisfactory to the Administrative Lender, as the Administrative Lender or any Lender may deem reasonably necessary or appropriate in connection with this Fourth Amendment. SECTION 7. COUNTERPARTS. This Fourth Amendment and the other Loan Papers may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument. In making proof of any such agreement, it shall not be necessary to produce or account for any counterpart other than one signed by the party against which enforcement is sought. SECTION 8. ENTIRE AGREEMENT. THIS FOURTH AMENDMENT AND THE OTHER LOAN PAPERS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. SECTION 9. GOVERNING LAW. (a) THIS FOURTH AMENDMENT AND ALL LOAN PAPERS SHALL BE DEEMED CONTRACTS MADE UNDER THE LAWS OF TEXAS AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF TEXAS, EXCEPT TO THE EXTENT FEDERAL LAWS GOVERN THE VALIDITY, CONSTRUCTION, ENFORCEMENT AND INTERPRETATION OF ALL OR ANY PART OF THIS FOURTH AMENDMENT AND ALL LOAN PAPERS. WITHOUT EXCLUDING ANY OTHER JURISDICTION, COMPANY AND EACH SUBSIDIARY AGREES THAT THE COURTS OF TEXAS WILL HAVE JURISDICTION OVER PROCEEDINGS IN CONNECTION HEREWITH. (b) COMPANY AND EACH SUBSIDIARY HEREBY WAIVES PERSONAL SERVICE OF ANY LEGAL PROCESS UPON IT. IN ADDITION, COMPANY AND EACH SUBSIDIARY AGREES THAT SERVICE OF PROCESS MAY BE MADE UPON IT BY REGISTERED MAIL (RETURN RECEIPT REQUESTED) DIRECTED TO COMPANY AT ITS ADDRESS DESIGNATED FOR NOTICE UNDER THE CREDIT AGREEMENT AND SERVICE SO MADE SHALL BE DEEMED TO BE COMPLETED UPON RECEIPT BY COMPANY. NOTHING IN THIS SECTION SHALL AFFECT THE RIGHT OF THE ADMINISTRATIVE LENDER OR ANY LENDER TO SERVE LEGAL PROCESS IN ANY OTHER MANNER PERMITTED BY LAW. 4 SECTION 10. WAIVER OF JURY TRIAL. TO THE MAXIMUM EXTENT PERMITTED BY LAW, COMPANY, EACH SUBSIDIARY AND EACH LENDER HEREBY WAIVES ANY RIGHT THAT IT MAY HAVE TO A TRIAL BY JURY OF ANY DISPUTE (WHETHER A CLAIM IN TORT, CONTRACT, EQUITY, OR OTHERWISE) ARISING UNDER OR RELATING TO THIS FOURTH AMENDMENT, THE OTHER LOAN PAPERS, OR ANY RELATED MATTERS, AND AGREES THAT ANY SUCH DISPUTE SHALL BE TRIED BEFORE A JUDGE SITTING WITHOUT A JURY. IN WITNESS WHEREOF, this Fourth Amendment to Credit Agreement is executed as of the date first set forth above. COMPANY: MICHAELS STORES, INC. /s/ Kristen L. Magnuson -------------------------------------- By: Kristen L. Magnuson -------------------------------- Its: Vice President - Finance and Business Planning -------------------------------- LENDERS: NATIONSBANK OF TEXAS N.A., as Administrative Lender, and individually as a Lender /s/ Joseph G. Taylor -------------------------------------- By: Joseph G. Taylor Its: Senior Vice President BANK OF AMERICA ILLINOIS, as Co-Agent and as a Lender /s/ J. Stephen Mernick -------------------------------------- By: J. Stephen Mernick -------------------------------- Its: Senior Vice President -------------------------------- 5 BANK ONE, TEXAS, N.A., as a Lender /s/ Alan L. Miller -------------------------------------- By: Alan L. Miller -------------------------------- Its: Vice President -------------------------------- CREDIT LYONNAIS NEW YORK BRANCH, as a Lender /s/ ? Ivosevisi -------------------------------------- By: ? Ivosevisi -------------------------------- Its: Senior Vice President -------------------------------- FIRST INTERSTATE BANK OF TEXAS, N.A., as a Lender /s/ Susan L. Coulter -------------------------------------- By: Susan L. Coulter -------------------------------- Its: Vice President -------------------------------- MELLON BANK, N.A., as a Lender /s/ Marc T. Kennedy -------------------------------------- By: Marc T. Kennedy -------------------------------- Its: Assistant Vice President -------------------------------- 6 THE BOATMEN'S NATIONAL BANK OF ST. LOUIS, as a Lender /s/ Dwight D. Erdbruegger -------------------------------------- By: Dwight D. Erdbruegger -------------------------------- Its: Vice President -------------------------------- UNITED STATES NATIONAL BANK OF OREGON, as a Lender /s/ Blake R. Howells ------------------------------------ By: Blake R. Howells -------------------------------- Its: Vice President -------------------------------- AGREED AND ACCEPTED: The following guarantors agree and accept the above increase the Commitment: MICHAELS OF CANADA, INC. /s/ Kristen L. Magnuson - ------------------------------ By: Kristen L. Magnuson Its: Treasurer LEEWARDS CREATIVE CRAFTS, INC. /s/ Kristen L. Magnuson - ------------------------------ By: Kristen L. Magnuson Its: Vice President - Finance and Business Planning 7 MICHAELS INTERNATIONAL FINANCE, INC. 5931, INC. TREASURE HOUSE STORES, INC. OREGON CRAFT & FLORAL SUPPLY CO., INC. OREGON CRAFT & FLORAL SUPPLY CO. II, INC. OREGON CRAFT & FLORAL SUPPLY CO. III, INC. OREGON CRAFT & FLORAL SUPPLY CO. IV, INC. OREGON CRAFT & FLORAL SUPPLY CO. V, INC. OREGON CRAFT & FLORAL SUPPLY CO. VI, INC. OREGON CRAFT & FLORAL SUPPLY CO. VII, INC. OREGON CRAFT & FLORAL SUPPLY CO. VIII, INC. OREGON CRAFT & FLORAL SUPPLY CO. IX, INC. HABIF & ROSS ENTERPRISES, INC. RIVERSIDE CRAFT & FLORAL SUPPLY CO., INC. SAN DIEGO CRAFT & FLORAL SUPPLY CO. INC. MISSION VIEJO CRAFT & FLORAL, INC. H.F.C.S., INC. SAN LEANDRO CRAFT & FLORAL SUPPLY COMPANY, INC. ORANGE CRAFT & FLORAL SUPPLY CO., INC. H & H CRAFT & FLORAL SUPPLY CO. #9, INC. OC&F NUMBER 18, INC. MICHAELS OF PUERTO RICO, INC. AARON BROTHERS, INC. AARON BROTHERS HOLDINGS, INC. AARON BROTHERS ART MARTS, INC. /s/ Kristen L. Magnuson - ------------------------------ By: Kristen L. Magnuson Its: Vice President 8 EX-10.17 7 EXHIBIT 10.17 ----------------------------------------------------- ----------------------------------------------------- AMENDED, MODIFIED AND RESTATED MASTER LEASE AGREEMENT Dated as of December 18, 1995 between JACKSONVILLE FUNDING CORPORATION, as Lessor and MICHAELS STORES, INC., as Lessee ----------------------------------------------------- ----------------------------------------------------- TABLE OF CONTENTS
PAGE ---- ARTICLE I DEFINITIONS; CONSTRUCTION OF REFERENCES.......................... 1 SECTION 1.01. Definitions...................................................... 1 SECTION 1.02. Construction of References....................................... 1 ARTICLE II LEASE OF EACH FACILITY; TERM..................................... 1 SECTION 2.01. Lease of Each Facility........................................... 1 SECTION 2.02. Term............................................................. 1 (a) Basic Term................................................... 1 (b) Renewal Term................................................. 2 SECTION 2.03. Conditions Precedent for Lease of the Haslet Facility............ 2 (a) Principal Conditions......................................... 2 (b) Additional Conditions........................................ 3 SECTION 2.03A. Conditions Precedent for Lease of Additional Facilities.......... 4 SECTION 2.04. Conditions Precedent for Lease of Additional Assets Relating to Each Facility...................................... 4 (a) Documentation................................................ 4 (b) Additional Agreements........................................ 4 SECTION 2.05. Additional Provisions Regarding Other Facilities................. 5 (a) Power of Attorney............................................ 5 (b) Escrow of Documents.......................................... 5 SECTION 2.06. Lessee Mortgage Provisions....................................... 5 (a) Granting Language............................................ 5 (b) Definition................................................... 5 ARTICLE III RENT............................................................. 6 SECTION 3.01. Basic Rent....................................................... 6 SECTION 3.02. Supplemental Rent................................................ 6 SECTION 3.03. Method of Payment................................................ 6 SECTION 3.04. Late Payment..................................................... 6 SECTION 3.05. Net Lease; No Setoff; Etc........................................ 6 SECTION 3.06. Appraisals....................................................... 7 ARTICLE IV TERMINATION OPTIONS.............................................. 7 SECTION 4.01. Lessee Purchase or Third Party Purchase - End of Term............ 7 (a) Lessee's Purchase Option..................................... 7 (b) Third Party Sale of the Facility............................. 8 (c) End of Term Adjustment....................................... 8 (d) Settlement Terms............................................. 9 SECTION 4.02. Lessee Purchase - Negative Trigger Event......................... 12 ARTICLE V DISCLAIMER OF WARRANTIES......................................... 13 ARTICLE VI RESTRICTION ON LIENS............................................. 13 ARTICLE VII OPERATION AND MAINTENANCE; REPLACEMENT EQUIPMENT; PERMITTED CONTESTS............................................... 14 SECTION 7.01. Operation and Maintenance........................................ 14 SECTION 7.02. Replacement Equipment............................................ 14 SECTION 7.03. Alterations Required by Law; Mandatory Tenant Improvement and Facility Modifications........................... 14 SECTION 7.04. Optional Alterations............................................. 14 SECTION 7.05. Title to Replacement Equipment................................... 15 SECTION 7.06. Permitted Contests............................................... 15 ARTICLE VIII LEASE INTENDED AS SECURITY....................................... 16 ARTICLE IX INSURANCE........................................................ 16 SECTION 9.01. Coverage......................................................... 16 (a) Property Insurance........................................... 16 (b) Liability Insurance.......................................... 16
-i- (c) Other Insurance.............................................. 16 SECTION 9.02. Policy Provisions................................................ 17 (a) Additional Insured/Loss Payee............................... 17 (b) Adjustment of Claims........................................ 17 (c) Waiver of Premiums.......................................... 17 (d) Insurance Not Invalidated................................... 17 (e) Primary Coverage............................................ 17 (f) Cancellation................................................ 18 (g) Subrogation................................................. 18 (h) Assignment.................................................. 18 (i) Other....................................................... 18 SECTION 9.03. Evidence of Insurance............................................ 18 SECTION 9.04. Application of Insurance Proceeds................................ 18 SECTION 9.05. Additional Insurance by Lessor................................... 18 ARTICLE X RETURN AND DISPOSITION OF THE FACILITIES......................... 18 ARTICLE XI FINANCIAL INFORMATION; FINANCIAL COVENANTS; MERGERS, CONSOLIDATIONS AND OTHER CORPORATE REORGANIZATIONS............... 19 SECTION 11.01. Financial Information............................................ 19 SECTION 11.02. Financial Covenants.............................................. 20 (a) Ratio of Total Liabilities to Net Worth...................... 20 (b) Fixed Charges Coverage Ratio................................. 20 (c) Current Ratio................................................ 20 (d) Modified Leverage Ratio...................................... 20 SECTION 11.03. Amendments of Revolving Credit Agreement......................... 21 SECTION 11.04. Financial or Covenant Compliance................................. 21 SECTION 12.01. Payment of Termination Value on an Event of Loss................. 21 SECTION 12.02. Application of Payments on an Event of Loss or Otherwise......... 21 SECTION 12.03. Other Dispositions............................................... 21 ARTICLE XIII FEDERAL AND STATE TAX CONSEQUENCES............................... 22 ARTICLE XIV ASSIGNMENT AND SUBLEASE; LOCATION................................ 22 SECTION 14.01. Assignment and Sublease.......................................... 22 SECTION 14.02. Location......................................................... 23 ARTICLE XV INSPECTION AND REPORTS........................................... 23 SECTION 15.01. Condition and Operation.......................................... 23 SECTION 15.02. Liability........................................................ 23 ARTICLE XVI EVENTS OF DEFAULT................................................ 24 (a) Basic Rent, Termination Value and Amounts under Section 3.07 hereof.......................................... 24 (b) Supplemental Payments........................................ 24 (c) Automatic Covenant Defaults.................................. 24 (d) Other Covenant Defaults...................................... 24 (e) Bankruptcy, Etc. ............................................ 24 (f) Misrepresentation............................................ 25 (g) Cross Default................................................ 25 ARTICLE XVII ENFORCEMENT...................................................... 25 SECTION 17.01. Remedies......................................................... 25 (a) Rescission................................................... 25 (b) Possession of Facilities..................................... 25 (c) Sale of Facilities........................................... 25 (d) Hold, Utilize or Lease Facilities............................ 25 (e) Liquidated Damages........................................... 26 (f) Acceleration................................................. 26 (g) Other Rights at Law.......................................... 26 SECTION 17.02. Survival of Lessee's Obligations................................. 27 SECTION 17.03. Remedies Cumulative.............................................. 27 ARTICLE XVIII RIGHT TO PERFORM FOR LESSEE...................................... 27
-ii- ARTICLE XIX INDEMNITIES...................................................... 27 SECTION 19.01. GENERAL INDEMNITY................................................ 27 (A) PAYMENT OF EXPENSES BY LESSEE................................ 27 (B) EXCEPTIONS................................................... 28 (C) NOTICE....................................................... 29 (D) SUPPLEMENTAL RENT............................................ 29 (E) EFFECTIVENESS................................................ 29 SECTION 19.02. FEES, TAXES AND OTHER CHARGES.................................... 29 (A) PAYMENT BY LESSEE............................................ 29 (B) REFUNDS...................................................... 31 (C) SUPPLEMENTAL RENT............................................ 31 (D) EFFECTIVENESS................................................ 31 SECTION 19.03. HAZARDOUS SUBSTANCES............................................. 31 (A) GENERAL PROVISIONS........................................... 31 (B) NOTICE....................................................... 32 (C) SUPPLEMENTAL RENT............................................ 33 (D) EFFECTIVENESS................................................ 33 SECTION 19.04. INCOME TAX INDEMNITY............................................. 33 (A) PAYMENT OBLIGATION OF LESSEE................................. 33 (B) SUPPLEMENTAL RENT............................................ 33 (C) EFFECTIVENESS................................................ 33 SECTION 19.05. NO BROKERS....................................................... 33 SECTION 19.06. INDEMNIFICATION FOR SUBLESSEE ACTS, OMISSIONS, ETC............... 33 SECTION 19.07. INDEMNITY OBLIGATIONS NOT LIMITED BY MAXIMUM LESSEE RISK AMOUNT...................................................... 33 SECTION 19.08. COMPUTATION BASIS FOR INDEMNITY OBLIGATIONS...................... 34 SECTION 19.09. SPECIAL PROVISIONS REGARDING HASLET FACILITY..................... 34 SECTION 19.10. INDEMNIFICATION FOR NEGLIGENCE................................... 34 SECTION 19.11. SURVIVAL......................................................... 34 ARTICLE XX MISCELLANEOUS.................................................... 34 SECTION 20.01. Further Assurances............................................... 34 SECTION 20.02. Quiet Enjoyment.................................................. 35 SECTION 20.03. Security for Lessor's Obligations................................ 35 SECTION 20.04. Notices.......................................................... 35 SECTION 20.05. Severability..................................................... 36 SECTION 20.06. Amendment........................................................ 36 SECTION 20.07. Headings......................................................... 36 SECTION 20.08. Counterparts; Uniform Commercial Code............................ 36 SECTION 20.09. Governing Law.................................................... 36 SECTION 20.10. (intentionally omitted).......................................... 37 SECTION 20.11. Binding Effect; Successors and Assigns; Survival................. 37 SECTION 20.12. Divisible Lease.................................................. 37 SECTION 20.13. Transaction Costs................................................ 37 SECTION 20.14. Calculation of Interest.......................................... 37 SECTION 20.15. Sales Expenses................................................... 38 SECTION 20.16. Principal Place of Business; Chief Executive Office.............. 38 SECTION 20.17. ENTIRE AGREEMENT................................................ 38 SECTION 20.18. Usury Savings Provision.......................................... 38 SECTION 20.19. Amendment, Modification and Restatement.......................... 39 SCHEDULE 1 BASIC RENT SCHEDULE 2A DESCRIPTION OF JACKSONVILLE FACILITY SCHEDULE 2A-I LEGAL DESCRIPTION OF JACKSONVILLE SITE SCHEDULE 2A-II DESCRIPTION OF JACKSONVILLE EQUIPMENT, PERSONAL PROPERTY AND FIXTURES SCHEDULE 2B FORM OF LEASE SUPPLEMENT SCHEDULE 3 LEASE SUPPLEMENT AND ACCEPTANCE CERTIFICATE (ADDITIONAL EQUIPMENT) SCHEDULE 4 TRADE NAMES AND OTHER NAMES UNDER WHICH LESSEE HAS DONE BUSINESS APPENDIX A DEFINITIONS
-iii- AMENDED, MODIFIED AND RESTATED MASTER LEASE AGREEMENT THIS AMENDED, MODIFIED AND RESTATED MASTER LEASE AGREEMENT dated as of December __, 1995 (the "Lease") is between JACKSONVILLE FUNDING CORPORATION, a Delaware corporation ("Lessor"), and MICHAELS STORES, INC., a Delaware corporation ("Lessee") and amends, modifies and restates that certain Lease Agreement dated as of February 17, 1995 (the "Original Lease") between Lessor and Lessee. In consideration of the mutual agreements herein contained and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound hereby, hereby agree as follows: ARTICLE I DEFINITIONS; CONSTRUCTION OF REFERENCES SECTION 1.01. DEFINITIONS. The capitalized terms used herein and not otherwise defined herein shall have the meanings assigned thereto in APPENDIX A hereto for all purposes hereof (such definitions to be equally applicable to both the singular and plural forms of the terms defined). SECTION 1.02. CONSTRUCTION OF REFERENCES. All references in this Lease to designated Sections and other subdivisions are to designated Sections and other subdivisions of this Lease, and the words "herein", "hereof" and "hereunder" and other words of similar import refer to this Lease as a whole and not to any particular Section or other subdivision. Except as otherwise indicated, all the documents, agreements or instruments herein defined shall mean such documents, agreements or instruments as the same may from time to time be supplemented, amended, modified, restated or replaced or the terms thereof waived to the extent permitted by, and in accordance with, the terms thereof. ARTICLE II LEASE OF EACH FACILITY; TERM SECTION 2.01. LEASE OF EACH FACILITY. On the Jacksonville Commencement Date, subject to all the terms and conditions of this Lease, Lessor shall lease, and hereby as of the Jacksonville Commencement Date does lease, the Jacksonville Facility to Lessee, and Lessee shall lease, and hereby as of the Jacksonville Commencement Date does lease, the Jacksonville Facility from Lessor. With respect to all other Facilities, if any, the Lessor shall lease such Facility to Lessee, and the Lessee shall lease such Facility from Lessor, beginning on the Commencement Date set forth in the respective Lease Supplement. NOTWITHSTANDING ANY TERM OF ANY OPERATIVE DOCUMENT, TO THE EXTENT THE HASLET FACILITY IS NOT COMPLETED OR, FOR WHATEVER REASON, ALL OF THE CONDITIONS PRECEDENT SET FORTH IN SECTION 2.03 OF THIS LEASE ARE NOT SATISFIED IN FULL RESPECTING THE HASLET FACILITY ON OR BEFORE MARCH 15, 1997, LESSOR SHALL HAVE NO OBLIGATION OR RESPONSIBILITY RESPECTING THE ACQUISITION, FINANCING OR LEASING OF THE HASLET FACILITY OR OTHERWISE RESPECTING THE HASLET FACILITY. SECTION 2.02. TERM. (a) BASIC TERM. The Jacksonville Basic Term for lease of the Jacksonville Facility hereunder shall commence on the Jacksonville Commencement Date, and unless sooner terminated in accordance with the terms hereof shall end on the Basic Term Expiration Date. The Basic Term for lease of any other Facility hereunder shall commence on the Commencement Date set forth in the applicable Lease Supplement, and unless sooner terminated in accordance with the terms hereof shall end on the Basic Term Expiration Date set forth in the applicable Lease Supplement. (b) RENEWAL TERM. If no Lease Event of Default has occurred and is continuing, and if Lessor does not receive a notice from Lessee as described in Section 4.01 at least sixty (60) days prior to the Basic Term Expiration Date or the expiration of the then current Renewal Term, as the case may be, or as otherwise described in Section 4.02, then Lessee shall be deemed to have renewed this Lease as to all, but not less than all, the Facilities, and this Lease shall continue in full force and effect respecting all, but not less than all, the Facilities, at a rental equal to the Basic Rent, for up to, but not to exceed, three (3) one-year renewal terms (each such renewal term may be referred to herein as a "Renewal Term"), unless this Lease is sooner terminated pursuant to the provisions hereof. SECTION 2.03. CONDITIONS PRECEDENT FOR LEASE OF THE HASLET FACILITY. The obligations of Lessor to purchase the Haslet Facility and to lease the same to Lessee are subject to the following conditions precedent, and all documents, agreements, instruments, certificates, opinions and other items referenced below shall be in form and substance reasonably satisfactory to Lessor: (a) PRINCIPAL CONDITIONS. Lessor shall have received xeroxed copies of the certificates referenced in subsections (i) and (ii) of this subsection (a) and originally executed copies of the other documents referenced in this subsection (a), each in form and substance reasonably satisfactory to Lessor and issued with respect to the Haslet Facility: (i) a certificate of occupancy issued by the appropriate governmental authorities with respect to the Haslet Facility on or before March 15, 1997; (ii) a certificate of substantial completion meeting the then current minimum standard requirements for American Institute of Architects (AIA) with respect to the Haslet Facility issued on or before March 15, 1997; (iii) Bills of Sale with respect to the Equipment to be used at the Haslet Facility; (iv) a Deed with respect to the Haslet Facility; (v) an executed Lease Supplement substantially in the form of SCHEDULE 2B hereto; (vi) title insurance commitments to issue title insurance policies regarding advances made in connection with the Haslet Facility in favor of Lessor and the Agent and the Holders Agent, with such title exceptions thereto as are reasonably acceptable to the beneficiaries of such policies; (vii) an environmental site assessment of the Haslet Facility prepared by an independent recognized professional reasonably acceptable to the Agent and the Holders Agent; (viii) a survey of the Haslet Facility, with an appropriate flood hazard certification, prepared by an independent recognized professional meeting the then current minimum standard requirements for American Land Title Association/American Congress of Surveying and Mapping (ALTA/ACSM) Land Title Surveys certified to the Agent and the Holders Agent; (ix) Subordination Agreement; - 2 - (x) Release; (xi) Legal opinion from counsel to Lessee in form and substance reasonably satisfactory to Lessor; (xii) invoices for any and all transaction expenses to be funded in connection with the acquisition by Lessor of the Haslet Facility; (xiii) certificates of insurance evidencing coverages required under the Lease with respect to the Haslet Facility; (xiv) the funding certificate referenced in Section 3B.6 of the Loan Agreement; (xv) an Assignment of Leases with respect to the Haslet Facility; (xvi) a Mortgage with respect to the Haslet Facility; (xvii) an Assignment of Contract of Sale with respect to the Haslet Facility; (xviii) Uniform Commercial Code Financing Statements and amendments to Uniform Commercial Code Financing Statements with respect to the Haslet Facility as deemed necessary or appropriate by the Agent; (xix) a memorandum of lease in a form recordable in the State where the Haslet Facility is located regarding the Lease; (xx) a settlement statement regarding the costs and expenses of the acquisition of the Haslet Facility; (xxi) an affidavit from the seller of the Facility; and (xxii) a FIRPTA non-foreign seller's certificate with respect to the sale of the Haslet Facility to Lessor. (b) ADDITIONAL CONDITIONS. Additional conditions precedent include the fulfillment to the satisfaction of Lessor of the following Conditions on or prior to the date of acquisition of the Haslet Facility; (i) Lessor shall have received good and indefeasible title with respect to the Haslet Facility free and clear of any Liens other than any Permitted Liens; (ii) there shall not have occurred and be continuing any Event of Default or Lease Event of Default; (iii) Lessee shall have paid all fees, expenses and other amounts due and owing with respect to the Jacksonville Facility and/or all other Facilities; and (iv) Lessor's Cost shall not exceed the amount set forth in the applicable Lease Supplement and including amounts proposed to be advanced in connection with the Facility under consideration and previous advances made in connection with all other Facilities, advances by the Lenders in the aggregate and individually and advances by the Holders in the aggregate and individually shall not exceed permitted amounts under the Loan Agreement or Trust Agreement, as the case may be. - 3 - SECTION 2.03A. CONDITIONS PRECEDENT FOR LEASE OF ADDITIONAL FACILITIES. The obligation of Lessor to purchase additional Facilities in addition to the Jacksonville Facility and the Haslet Facility shall be in the sole discretion of the Lessor and shall be on such terms and subject to such closing conditions as the parties hereto may agree. In no event shall any property become a Facility hereunder until such time as good and marketable title to such Facility shall be granted to Lessor and a Lease Supplement shall be executed in favor of Lessor with respect to the property which shall constitute the Facility. It is expressly agreed that neither Lessor, nor any Lender nor any Holder is under any obligation to obtain any additional commitment with respect to any Facility beyond the Jacksonville Facility and the Haslet Facility. SECTION 2.04. CONDITIONS PRECEDENT FOR LEASE OF ADDITIONAL ASSETS RELATING TO EACH FACILITY. The obligations of Lessor to purchase equipment and other property for any Facility and to lease the same to Lessee are subject to the following conditions precedent, and all documents, agreements, instruments, certificates, opinions and other items referenced below shall be in form and substance reasonably satisfactory to Lessor: (a) DOCUMENTATION. Lessor shall have received originally executed copies of the following documents in form and substance reasonably satisfactory to Lessor and regarding the Equipment then being acquired: (i) a warranty bill of sale in favor of Lessor with respect to the Equipment and other property then being acquired for the Facility; (ii) a Lease Supplement and Acceptance Certificate in a form substantially similar to the form attached to this Lease as SCHEDULE 3; (iii) certificates of insurance evidencing coverages required under this Lease with respect to the equipment and other property then being acquired for the Facility; and (iv) Uniform Commercial Code Financing Statements and amendments thereto, as deemed necessary or appropriate by Lessor. (b) ADDITIONAL AGREEMENTS. Additional conditions precedent include the fulfillment to the satisfaction of Lessor of the following conditions on or prior to the date of acquisition of the Equipment and other property for any Facility: (i) the granting of a credit commitment by the Lenders and the agreement by the Holders to make a capital contribution in favor of Lessor in amounts sufficient to finance the acquisition of Equipment and other property; (ii) Lessor shall have received good and indefeasible title with respect to such Equipment and other property free and clear of any lien other than any Permitted Liens; (iii) there shall not have occurred and be continuing any Event of Default or Lease Event of Default; and (iv) Lessee shall have paid all fees, expenses and other amounts due and owing with respect to the Jacksonville Facility and/or any other Facility. IT IS EXPRESSLY AGREED TO BY THE PARTIES HERETO THAT NEITHER LESSOR, NOR ANY LENDER NOR ANY HOLDER IS UNDER ANY OBLIGATION TO OBTAIN OR GIVE SUCH ADDITIONAL COMMITMENTS WITH RESPECT TO ANY FACILITY. - 4 - SECTION 2.05. ADDITIONAL PROVISIONS REGARDING OTHER FACILITIES. (a) POWER OF ATTORNEY. Lessee hereby appoints Lessor as Lessee's attorney, irrevocably, with full power of substitution, to execute and deliver the Additional Lease Supplement upon satisfaction or waiver by Lessor of the conditions precedent set forth in Section 2.04. (b) ESCROW OF DOCUMENTS. Lessee may execute and deliver to Lessor, or Lessor's designee, the items referenced in Section 2.03(a)(xiv)-(xviii) to be held in escrow pending closing. Such items shall be held in escrow by the recipient thereof until such time as the conditions precedent set forth in Section 2.03 have either been satisfied or waived by the appropriate parties, and thereafter, such items shall be released from escrow. SECTION 2.06. LESSEE MORTGAGE PROVISIONS. (a) GRANTING LANGUAGE. If a court of competent jurisdiction determines that the transaction represented by this Lease will be treated as a financing transaction, then in such event it is the intention of the parties hereto (1) that this Lease be treated as a mortgage and security agreement or other similar instrument (the "LESSEE MORTGAGE") from Lessee, as mortgagor, to Lessor, as mortgagee, encumbering the Facilities, (2) that Lessor shall have, as a result of such determination, all of the rights, powers and remedies of a mortgagee available under applicable law, including without limitation, the right to take possession of and sell (whether by foreclosure or otherwise) any one or more of the Facilities in the event of a Lease Default or Event of Default, (3) that the effective date of the Lessee Mortgage shall be the effective date of this Lease, (4) that the recording of an instrument referencing this provision shall be deemed to be the recording of the Lessee Mortgage and (5) to conform strictly to any applicable usury laws (in such regard, if the Lessee Mortgage would otherwise be usurious under applicable law, then, notwithstanding anything herein to the contrary, it is agreed as follows: (A) the aggregate of all consideration that constitutes interest under applicable law that is contracted for, taken, reserved, charged or received shall under no circumstances exceed the maximum amount allowed by such applicable law, (B) in the event of acceleration or any required or permitted prepayment, then such consideration that constitutes interest under applicable law may never include more than the maximum amount allowed by such applicable law, and (C) excess interest, if any, provided for in this Lease shall be cancelled automatically and if theretofore paid, shall be credited to or refunded to Lessee. It is further agreed that sums paid or agreed to be paid for the use, forbearance or detention of money hereunder shall, to the extent permitted by applicable law, be amortized, prorated, allocated and spread throughout the full Term until payment in full so that the rate or amount of interest does not exceed the applicable usury ceiling, if any). In any such event the assignment of this Lease by Lessor shall be treated as an assignment of the Lessee Mortgage to the Agent as additional security for the loans under the Loan Agreement (and the Holder Advances under the Trust Agreement), and any termination of this Lease shall be treated as a transfer of the Facilities in lieu of foreclosure of the Lessee Mortgage. (b) DEFINITION. If this Lease is treated as a mortgage, deed of trust or similar document, then for purposes of clause (a) above, the term "applicable law" shall mean (i) the law of the State of Florida respecting the Jacksonville Facility, (ii) the law of the state of the jurisdiction where a Facility is located or (iii) the law of any other jurisdiction whose laws may be mandatorily applicable notwithstanding other provisions of this Lease or law of the United States of America applicable hereto which would permit the parties to contract for, charge, take, reserve or receive a greater amount Of interest than under Florida (or such other jurisdiction's) law. - 5 - ARTICLE III RENT SECTION 3.01. BASIC RENT. During the Basic Term and each of the three (3) Renewal Terms, if any, Lessee shall pay to Lessor Basic Rent for the Facilities in consecutive quarterly installments, with each quarterly installment in an amount specified in SCHEDULE 1. Each payment of Basic Rent shall be payable in arrears, on the Rent Payment Date to which such payment of Basic Rent corresponds. Lessor shall cause a notice to be given to Lessee no less than five (5) days prior to each Rent Payment Date specifying the amount of Basic Rent payable on such Rent Payment Date and the Applicable Rate. Any delinquency in the giving of such notice shall entitle Lessee to defer paying the specified payment of Basic Rent until five (5) days after such notice has been given, but in no event shall a delinquent notice enable Lessee to refuse paying the specified payment of Basic Rent. SECTION 3.02. SUPPLEMENTAL RENT. Lessee shall pay to Lessor, or to whomever shall be entitled thereto as expressly provided herein or in any other Operative Document, any and all Supplemental Rent promptly as the same shall become due and payable. In addition to the foregoing, Lessee shall be obligated to pay as Supplemental Rent any and all amounts, excepting principal and interest payments, at any time due under the Agency Agreement, the Loan Agreement, any Note, the Trust Agreement, any Holder Certificate or any other Operative Document (including, without limitation, amounts payable, but not paid, under the Loan Agreement, the Notes, the Trust Agreement, the Holder Certificates and the other Operative Documents). SECTION 3.03. METHOD OF PAYMENT. Each payment of Rent shall be made by Lessee to Lessor (or in the case of Supplemental Rent, to whomever shall be entitled thereto as expressly provided herein or in any other Operative Document) in immediately available funds on the scheduled date when such payment shall be due, unless such scheduled date shall not be a Business Day, in which case such payment shall be made on the next succeeding Business Day, with the same force and effect as though made on such scheduled date, except that in the case of Rent based on the LIBOR Rate, if the extension would cause the payment to be made in the next calendar month then such payment shall instead be made on the preceding Business Day. Payments shall be made without abatement, deduction or setoff for any reason to Lessor at the address set forth in Section 20.04 hereof, or such other address as may be designated by Lessor to Lessee in writing. Payments shall be made to Persons other than Lessor at the addresses such Persons may specify from time to time. SECTION 3.04. LATE PAYMENT. If any Rent shall not be paid when due, Lessee shall pay in immediately available funds to Lessor, as Supplemental Rent, interest (to the extent permitted by law) on such overdue amount from and including the due date thereof to but excluding the date of payment thereof at the Overdue Rate; PROVIDED, notwithstanding the foregoing, if such Supplemental Rent is owed to a Person other than Lessor, then such Supplemental Rent shall be paid to such Person to whom it is owed. SECTION 3.05. NET LEASE; NO SETOFF; ETC. This Lease is a net lease and, notwithstanding any other provision of this Lease, it is intended that Basic Rent and Supplemental Rent shall be paid without notice (other than any such notice which is explicitly required pursuant to the terms hereof), demand, counterclaim, setoff, deduction or defense and without abatement, suspension, deferment, diminution or reduction. Except to the extent otherwise expressly specified herein, the obligations and liabilities of Lessee hereunder shall in no way be released, discharged or otherwise affected for any reason, including without limitation: (a) any defect in the condition, quality or fitness for use of any Facility or any part thereof; (b) any damage to, removal, abandonment, salvage, loss, scrapping or destruction of or any requisition or taking of any Facility or any part thereof; (c) any restriction, prevention or curtailment of or interference with any use of any Facility or any part thereof; (d) any defect in title to or rights to any Facility or any Lien on such title or rights to any Facility; (e) any change, - 6 - waiver, extension, indulgence or other action or omission in respect of any obligation or liability of Lessee, Lessor, any Holder or any other Person; (f) any bankruptcy, insolvency, reorganization, composition, adjustment, dissolution, liquidation or other like proceedings relating to Lessee, Lessor or any other Person, or any action taken with respect to this Lease by any trustee or receiver of Lessee, Lessor or any other Person, or by any court, in any such proceeding; (g) any claim that Lessee has or might have against any Person, including without limitation Lessor; (h) any failure on the part of Lessor to perform or comply with any of the terms hereof or of any other agreement; (i) any invalidity or unenforceability or disaffirmance of this Lease against or by Lessee or any provision hereof or any of the other operative Documents or any provision thereof; or (j) any other occurrence whatsoever, whether similar or dissimilar to the foregoing, whether or not Lessee shall have notice or knowledge of any of the foregoing. This Lease shall be noncancelable by Lessee and, except as expressly provided herein, Lessee, to the extent permitted by law, waives all rights now or hereafter conferred by statute or otherwise to quit, terminate or surrender this Lease, or to any diminution or reduction of Rent payable by Lessee hereunder. If for any reason whatsoever this Lease shall be terminated in whole or in part by operation of law or otherwise except as expressly provided herein, Lessee shall, to the extent permitted by applicable law, nonetheless pay to Lessor (or, in the case of Supplemental Rent, to whomever shall be entitled thereto as expressly provided herein or in any other Operative Document) an amount equal to each Rent payment at the time and in the manner that such payment would have become due and payable under the terms of this Lease if it had not been terminated in whole or in part, and in such case, so long as such payments are made and no Lease Event of Default shall have occurred and be continuing Lessor will deem this Lease to have remained in effect. SECTION 3.06. APPRAISALS. Lessor may at any time obtain an appraisal of all Facilities or any of them from an appraiser or appraisers selected by Lessor or by the Agent. With respect to any such appraisal of the Jacksonville Facility and subject to the remaining provisions of this Section 3.06, Lessee shall be obligated to pay for one such appraisal during the first two (2) calendar years of the Term and one such additional appraisal during each three- calendar year period thereafter for the remainder of the Term. with respect to any such appraisal of any other Facility and subject to the remaining provisions of this Section 3.06, Lessee shall be obligated to pay for one such appraisal during each three-calendar year period of the Term. If a Lease Event of Default shall have occurred and be continuing, Lessor may obtain appraisals respecting the Facilities or any of them from an appraiser or appraisers selected by Lessor or by the Agent, and Lessee shall be obligated to pay for all such appraisals. Notwithstanding the foregoing, Lessor or the Agent may at any time obtain, at Lessee's expense, an appraisal of all Facilities or any of them from an appraiser or appraisers selected by Lessor or by the Agent to the extent any Law hereafter requires or mandates the obtaining of such an appraisal or appraisals. ARTICLE IV TERMINATION OPTIONS SECTION 4.01. LESSEE PURCHASE OR THIRD PARTY PURCHASE - END OF TERM. If this Lease shall not have been earlier terminated, Lessee, upon written notice to Lessor delivered not later than the Option Election Notice Date, may elect one of the options described in Sections 4.01(a) or (b); PROVIDED, that Lessee shall be deemed to have elected the option described in Section 4.01(a) without regard to any cure rights which might otherwise be available to Lessee under Section 16(d) hereof if Lessor does not receive such notice by the Option Election Notice Date preceding the expiration of the third Renewal Term; PROVIDED, FURTHER that such election by Lessee once made shall be irrevocable: (a) LESSEE'S PURCHASE OPTION. On the Expiration Date, Lessee shall purchase all, but not less than all, the Facilities for an amount equal to the aggregate Termination Value of all the Facilities on such - 7 - date. Lessee shall also pay to the appropriate parties all other Basic Rent and Supplemental Rent then due and owing or accrued and all Sales Expenses. Lessor's transfer of title regarding all the Facilities shall be made in accordance with Section 4.01(d) and shall be on an as-is, where-is basis, without representation or warranty and without recourse to Lessor (except as specifically provided in Section 4.01(d)). If Lessee has exercised its purchase option but not yet consummated the purchase of the Facilities, then Lessee shall continue to pay Lessor an amount after the Expiration Date equal to the pro rata portion of the Basic Rent until Lessee has paid or caused to be paid all the amounts for which it is obligated under this Section 4.01(a); PROVIDED, the foregoing is not intended to imply Lessee shall have a unilateral right to extend this Lease beyond the Expiration Date. If Lessee has exercised its purchase option under Section 4.01(a) and any Lease Default or Lease Event of Default exists and is continuing on or after the date Lessor receives notice of Lessee's election regarding the exercise of Lessee's rights under this Section 4.01(a) (or the date of Lessee's deemed election), then Lessor shall promptly notify Lessee in writing of any Lease Default or Lease Event of Default to the extent Lessor has actual knowledge thereof. If on the Expiration Date any Lease Default or any Lease Event of Default continues to exist or if Lessor has notified Lessee of any Lease Default or Lease Event of Default which occurred on or after the date of Lessor's receipt of Lessee's election notice (or the date of Lessee's deemed election) and such Lease Default or Lease Event of Default continues to exist on the Expiration Date, then Lessor in its sole discretion may elect to refuse to sell all the Facilities, or any of them, to Lessee. (b) THIRD PARTY SALE OF THE FACILITY. Lessee shall solicit bona fide bids for all, but not less than all, the Facilities from one or more prospective purchasers who are not Affiliates or Subsidiaries of Lessee and are financially capable of purchasing the Facilities. All bids received by Lessee prior to the end of the Term shall be immediately certified to Lessor in writing, setting forth the amount of such bids and the name and address of the person or entity submitting each such bid. If any bids are received from one or more bona fide prospective purchasers for an aggregate amount in excess of the Maximum Lessor Risk Amount for all the Facilities or if Lessor agrees in its reasonable discretion to accept bids which in the aggregate are, for less than the Maximum Lessor Risk Amount for all the Facilities, then on the Expiration Date (i) Lessor shall sell all, but not less than all, the Facilities on an as-is, where-is basis, without recourse (except as specifically provided in Section 4.01(d)) to the highest of such bidders for each Facility, (ii) such bidders shall pay Lessor the bid amounts for the respective Facility or Facilities solely for the account of Lessor and (iii) Lessee shall pay, or cause to be paid, all Basic Rent and Supplemental Rent then due and owing or accrued and all Sales Expenses. Lessor shall promptly transfer title to the Facilities to the appropriate purchaser on an as-is, where-is basis, without representation or warranty and without recourse (except as specifically provided in Section 4.01(d)). If Lessor (X) does not receive bids which in the aggregate are, in excess of the aggregate Maximum Lessor Risk Amount for all the Facilities from one or more bona fide prospective purchasers and does not accept bids received for less than the aggregate Maximum Lessor Risk Amount for all the Facilities, or (Y) does not receive the bid amounts from each third party purchaser or any other amounts referenced in this Section 4.01(b) as payable to Lessor on or prior to the Expiration Date, then on the Expiration Date, Lessee shall pay Lessor the aggregate Maximum Lessee Risk Amount for all the Facilities and all such other amounts referenced in this Section 4.01(b) and Lessor, at its option, may either retain title to the Facilities or convey the Facilities to Lessee pursuant to Section 4.01(a). (C) END OF TERM ADJUSTMENT. If the aggregate Net Proceeds of Sale are more than the aggregate Termination Value of all the Facilities on the applicable Expiration Date, Lessor shall, on such Expiration - 8 - Date, pay Lessee an amount equal to such excess as an adjustment to the Rent payable under this Lease, PROVIDED that Lessor shall have the right to offset against such adjustment payable by Lessor, any amounts then due and payable from Lessee to Lessor hereunder. If the aggregate Net Proceeds of Sale are less than the aggregate Termination Value of all the Facilities on such Expiration Date, Lessee shall, on the Expiration Date, pay to Lessor, an amount equal to such deficiency as an adjustment to the Rent payable under this Lease, but in no event shall the amount Lessee is required to pay Lessor with respect to such deficiency exceed the aggregate Maximum Lessee Risk Amount for all the Facilities. (d) SETTLEMENT TERMS. In the event that Lessee purchases the Facilities from Lessor, Lessor and Lessee hereby agree that all of the following provisions shall apply (and satisfaction and certification of the same, if requested by the beneficiary thereof, shall be a condition precedent to such sale) and in the event the Facilities are sold to a third party purchaser pursuant to Section 4.01(b), Lessor and Lessee hereby agree that subsections (i), (ii) and (v) of the following provisions shall apply (and satisfaction and certification of the same, if requested by the beneficiary thereof, shall be a condition precedent to such sale): (i) REPRESENTATIONS AND WARRANTIES OF LESSOR. Lessor shall represent and warrant to Lessee or any third party purchaser, as appropriate, as of the date of any sale of the Facilities by Lessor to Lessee or to a third party purchaser pursuant to Section 4.01(b), except where specific reference is made to another date or dates that: (A) There are no Lessor Liens on the applicable Facilities; (B) Lessor has the full right, power and authority to sell and convey its right, title and interest in and to the applicable Facilities and to carry out Lessor's obligations hereunder, and all requisite action necessary to authorize Lessor to sell and convey its right, title and interest in and to the applicable Facilities has been, or on the date of the sale to Lessee or the third party purchaser, will have been, taken and that the documents executed by Lessor in connection with such sale and conveyance are enforceable against Lessor in accordance with their terms, subject to applicable bankruptcy, insolvency, moratorium or other laws and equitable principles relating to or affecting creditors' rights generally; and (C) Lessor has such title in the applicable Facilities as was originally conveyed to Lessor by the seller thereof as of the applicable Commencement Date, but subject in all respects to any and all Liens created by, through or under Lessee or which Liens Lessee is otherwise obligated to remove under the terms of this Lease; (ii) SURVIVAL BEYOND CLOSING. The representations and warranties of Lessor contained in Section 4.01(d)(i) (to be made by Lessor upon the closing date of the sale of the Facilities, if any, by Lessor to Lessee or to a third party purchaser pursuant to Section 4.01(b)) shall survive any sale and conveyance of Lessor's right, title and interest in and to the Facilities by Lessor to Lessee or to a third party purchaser pursuant to Section 4.01(b); PROVIDED, HOWEVER, that, in addition to other limitations on Lessee's or such third party's rights and remedies expressly set forth in this Lease, Lessor's entire liability for any misrepresentation or breach of warranty under this Lease shall be limited to $100.00 with respect to any misrepresentation or breach of warranty for which Lessee or any - 9 - third party purchaser pursuant to Section 4.01(b) fails to both (a) provide Lessor with written notice, within one hundred eighty (180) days after the date of any sale of the Facilities (which notice must state with specificity the alleged misrepresentation or breach), and (b) file a cause of action, within three hundred sixty (360) days after such date. (iii) REPRESENTATIONS AND WARRANTIES OF LESSEE OR ANY THIRD PARTY PURCHASER. Lessee or any third party purchaser shall represent and warrant to, and agree with, Lessor as of the date of any sale of the Facilities by Lessor to such party, except where specific reference is made to another date or dates, that: (A) Such party has the full right, power and authority to purchase the applicable Facilities from Lessor as provided in this Lease and to carry out such party's obligations under this Lease (as such pertain to the sale of the applicable Facilities), and all requisite action necessary to authorize such party to enter into the purchase of the applicable Facilities and to carry out such party's obligations with respect thereto has been, or on or before the date of any sale of the applicable Facilities to such party, will have been, taken and that the documents executed by such party in connection with such purchase are enforceable against such party in accordance with their terms, subject to applicable bankruptcy, insolvency, moratorium or other laws and equitable principles relating to or affecting creditors' rights generally; (B) Except for Lessor's representations and warranties expressly provided in Section 4.01(d)(i) and such party's right to rely an the accuracy thereof: (1) Such party is purchasing the applicable and such Facilities shall be conveyed and to such party, "AS-IS, WHERE-IS, AND WITH ALL FAULTS" and specifically and expressly without any warranties, representations, or expressed or implied, of any kind, nature, or type whatsoever from or on behalf of Lessor (except as specifically provided in Section 4.01(d)(i)). Such party acknowledges that it has not relied, and is not relying, on any information, document, sales brochures, or other literature, maps or sketches, projection, pro forma, statement, representation, guarantee, or warranty (whether express or implied, or oral or written, or material or immaterial) that may have been given by, or made by, or on behalf of, Lessor; (2) Such party shall not be entitled to, and shall not rely on, Lessor or Lessor's agents as to (a) the quality, nature, adequacy or physical condition of the applicable Facilities including, but not limited to, the structural elements, foundation, roof, appurtenances, access, landscaping, parking facilities, or the electrical, mechanical, HVAC, plumbing, sewage or utility systems, facilities or appliances at the applicable Facilities, if any; (b) the quality, nature, adequacy or physical condition of soils or the existence of ground water at the applicable Facilities; (c) the existence, quality, nature, adequacy or physical condition of any utilities serving the applicable Facilities; (d) the development potential of the applicable Facilities, its habitability, merchantability or fitness, - 10 - suitability or adequacy of the applicable Facilities for any particular purpose; (e) the zoning or other legal status of the applicable Facilities; (f) the compliance by the applicable Facilities or any of their respective operations with any applicable codes, laws, regulations, statutes, ordinances, covenants, conditions or restrictions of any governmental or quasi-governmental entity or of any other Person or entity; (g) the quality of any labor or materials relating in any way to the applicable Facilities; or (h) the condition of title to the applicable Facilities (except as to the absence of Lessor Liens) or the nature, status and extent of any right-of-way, lease, right of redemption, possession, lien, encumbrance, license, reservations, covenant, condition, restriction or any other matter affecting title to the applicable Facilities; (3) LESSOR HAS NOT, DOES NOT AND WILL NOT, WITH RESPECT TO THE APPLICABLE FACILITIES, MAKE ANY WARRANTIES OR REPRESENTATIONS, EXPRESSED OR IMPLIED, OR ARISING BY OPERATION OF LAW (EXCEPT AS TO THE ABSENCE OF LESSOR LIENS), INCLUDING, BUT NOT IN ANY WAY LIMITED TO, ANY WARRANTY OF CONDITION, MERCHANTABILITY, HABITABILITY OR FITNESS FOR A PARTICULAR USE OR WITH RESPECT TO THE VALUE, PROFITABILITY OR MARKETABILITY OF THE APPLICABLE FACILITIES; (4) LESSOR HAS NOT, DOES NOT AND WILL NOT MAKE ANY REPRESENTATION OR WARRANTY WITH REGARD TO COMPLIANCE WITH ANY ENVIRONMENTAL PROTECTION, POLLUTION OR LAND USE LAWS, RULES, REGULATIONS, ORDERS OR REQUIREMENTS INCLUDING, BUT NOT LIMITED TO, THOSE PERTAINING TO THE HANDLING, GENERATING, TREATING, STORING OR DISPOSING OF ANY HAZARDOUS WASTE OR SUBSTANCE; and (5) Without in any way limiting the generality of the preceding subparagraphs (1) through (4), and except to the extent such claim is based on the inaccuracy of any of Lessor's representations and warranties contained in Section 4.01(d)(i) (to be made by Lessor upon the closing date of the sale by Lessor to such party of the applicable Facilities), such party specifically hereby waives, releases and discharges any claim such party has, might have had or may have against Lessor with respect to the condition of the applicable Facilities, patent or latent, such party's ability or inability to obtain or maintain building permits, either temporary or final certificates of occupancy or other licenses for the use or operation of the applicable Facilities and/or certificates of compliance for the applicable Facilities, the actual or potential income or profits to be derived from the applicable Facilities, the real estate taxes or assessments now or hereafter payable thereon, the compliance with any environmental protection, pollution or land use laws, rules, regulations or requirements and any other state of facts which exists with respect to the applicable Facilities. (iv) SURVIVAL BEYOND CLOSING. The representations and warranties and agreements of such party contained in this Lease as set forth in Section 4.01(d)(iii) shall survive the - 11 - closing of the sale of the applicable Facilities by Lessor to such party. (v) SELLER. At the sale of the Facilities to Lessee or any third party purchaser pursuant to Section 4.01(b), Lessor shall deliver or cause to be delivered to such party, at such party's sole cost and expense (except as provided to the contrary): (A) a special warranty deed to the applicable Site and the applicable Building, duly executed by Lessor and acknowledged, transferring Lessor's right, title and interest in and to such Site and such Building free and clear of all Lessor Liens; (B) a special warranty bill of sale of the applicable Equipment, duly executed by Lessor, transferring Lessor's right, title and interest in and to such Equipment free and clear of all Lessor Liens; (C) respecting the Jacksonville Facility, an assignment of the Railroad Crossing License Agreement, duly executed by Lessor, transferring Lessor's right, title and interest in and to the Railroad Crossing License Agreement free and clear of all Lessor Liens; (D) a copy of the Board of Directors' resolution for Lessor, certified by a corporate secretary of Lessor, evidencing Lessor's authority to execute and deliver the documents set forth in this Section 4.01(d)(v); (E) A FIRPTA non-foreign seller's certificate respecting Lessor's sale of the Facilities; and (F) a general assignment of all intangible property and contract rights of Lessor relating to the Facilities. At the sale of the Jacksonville Facility to Lessee or any third party purchaser pursuant to Section 4.01(b), Lessor shall also use all reasonable efforts to obtain a consent to the assignment of the Railroad Crossing License Agreement (referenced in subsection (C) immediately above), duly executed by Railroad, consenting to such assignment. (vi) BUYER. At the sale of the Facilities to Lessee or any third party purchaser, Lessee or such third party purchaser, as applicable, shall deliver to Lessor and to any other party all such amounts as required pursuant to Sections 4.01(a) and 4.02. (vii) POSSESSION AND CLOSING. Upon any sale of the Facilities to Lessee hereunder, possession of the Facilities shall be retained by Lessee at the closing, subject to the Liens existing at such time (excepting Lessor Liens). Upon any sale of the Facilities to any third party or third parties hereunder, Lessee shall abandon the Facilities to the possession of such third party at the closing, subject only to the Lessor Liens existing at such time. (viii) COSTS OF CLOSING. Lessee shall pay the Sales Expenses of Lessor incurred in connection with the negotiation, preparation and closing of the transaction contemplated by this Section 4.01(d). SECTION 4.02. LESSEE PURCHASE - NEGATIVE TRIGGER EVENT. Upon the occurrence of a Negative Trigger Event, Lessee shall have the option to - 12 - terminate this Lease on the Rent Payment Date immediately following the effective date of such Negative Trigger Event (or on the second succeeding Rent Payment Date, if the effective date of the Negative Trigger Event occurs within twenty-five (25) days of the next Rent Payment Date). Once made, such election by Lessee to terminate this Lease under this Section 4.02 shall be irrevocable. On the applicable Rent Payment Date, Lessee shall purchase all, but not less than all, the Facilities for an amount equal to the aggregate Termination Value of all the Facilities on such date. Lessee shall also pay to the appropriate parties all other Basic Rent and Supplemental Rent then due and owing or accrued and all Sales Expenses. Lessor's transfer of title regarding all the Facilities shall be made in accordance with Section 4.01(d) and shall be on an as-is, where-is basis, without representation or warranty and without recourse to Lessor (except as specifically provided in Section 4.01(d)). If Lessee has exercised its purchase option but not yet consummated the purchase of the Facilities, then Lessee shall continue to pay Lessor an amount after the applicable Rent Payment Date equal to the pro rata portion of the Basic Rent until Lessee has paid or caused to be paid all the amounts for which it is obligated under this Section 4.02; PROVIDED, the foregoing is not intended to imply Lessee shall have a unilateral right to extend this Lease beyond the applicable Rent Payment Date (after Lessee has elected to terminate this Lease under this Section 4.02). If Lessee has exercised its purchase option under this Section 4.02, but on the applicable Rent Payment Date there exists and is continuing any Lease Default or any Lease Event of Default, then Lessor in its sole discretion may elect to refuse to sell the Facilities to Lessee. All payments made by any entity pursuant to this Article IV shall be in United States dollars, in good, immediately available funds. ARTICLE V DISCLAIMER OF WARRANTIES EXCEPT AS SPECIFICALLY PROVIDED IN SECTION 20.02, NEITHER LESSOR, NOR ANY LENDER NOR ANY HOLDER SHALL BE DEEMED TO HAVE MADE ANY REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, AS TO THE TITLE, VALUE, MERCHANTABILITY, COMPLIANCE WITH SPECIFICATIONS, CONDITION, DESIGN, OPERATION, FREEDOM FROM PATENT OR TRADE INFRINGEMENT, ABSENCE OF LATENT DEFECTS OR FITNESS FOR USE OF ANY FACILITY (OR ANY PART THEREOF), OR ANY OTHER REPRESENTATION OR WARRANTY WHATSOEVER, EXPRESS OR IMPLIED, WITH RESPECT TO ANY FACILITY (OR ANY PART THEREOF). It is agreed that except as expressly provided herein all risks incident to the matters discussed in the preceding sentence, as between Lessor, on the one hand, and Lessee on the other are to be borne by Lessee. The provisions of this paragraph have been negotiated, and, except to the extent otherwise expressly stated, the foregoing provisions are intended to be a complete exclusion and negation of any representations or warranties by Lessor, express or implied, with respect to any of the Facilities (or any part thereof), that may arise pursuant to any law now or hereafter in effect, or otherwise. ARTICLE VI RESTRICTION ON LIENS Lessee shall not directly or indirectly create, incur, assume or suffer to exist any Lien on or with respect to any Facility, title thereto or any interest therein, except Permitted Liens. Lessee shall within a reasonable time and in no event more than thirty (30) days after Lessee shall have obtained knowledge of the attachment of any Lien that it shall be obligated to discharge or eliminate pursuant to this Article VI, at its own expense, take such action as may be necessary duly to discharge or eliminate or bond in a manner satisfactory to Lessor any such Lien if the same shall arise at any time. Lessee further agrees that it shall pay or cause to be paid on or before the time or times prescribed by law (after giving effect to any applicable grace period) any taxes, assessments, fees or charges imposed on - 13 - Lessee (or any Affiliate or Subsidiary of Lessee) under the laws of any jurisdiction that, if unpaid, might result in any Lien prohibited by this Lease. Lessee shall within a reasonable time and in no event later than thirty (30) days after it shall have obtained knowledge of the attachment of any Lien that it shall be obligated to discharge or eliminate pursuant to this Article VI notify Lessor of the attachment of such Lien and the full particulars thereof unless the same shall have been removed or discharged by Lessee on or prior to such requested notice date. Notwithstanding any other provision in this Lease, Lessor shall have no obligation for the payment of any amount associated with the maintenance, repair, use or occupancy of any Facility including without limitation any Alterations, Replacement Equipment or any similar or related costs, expenses or amounts. ARTICLE VII OPERATION AND MAINTENANCE; REPLACEMENT EQUIPMENT; PERMITTED CONTESTS SECTION 7.01. OPERATION AND MAINTENANCE. Lessee, at its own expense, shall at all times operate, maintain, service and repair each Facility in accordance with good commercial operating maintenance practices and (a) in accordance with all applicable requirements of law and of any court and of any governmental authority having jurisdiction (including without limitation all zoning, environmental protection, pollution, sanitary and safety laws) and (b) to the extent required to (i) maintain each Facility in good operating condition, ordinary wear and tear excepted, (ii) cause each Facility to continue to have the capacity and functional ability to continue its operations in normal commercial operation, in a commercially reasonable manner, (iii) comply with the standards imposed by any insurance policies in effect at any time with respect to each Facility or any of them or any part thereof, and (iv) remediate, or cause the remediation of, any hazardous substance contamination (of any soil, surface water, groundwater or otherwise) at any Facility, as required by and in accordance with all applicable requirements of law and of any court and of any governmental authority having jurisdiction. SECTION 7.02. REPLACEMENT EQUIPMENT. Except after the occurrence of an Event of Loss, Lessee, at its own expense, shall promptly replace all material, necessary or useful appliances, appurtenances, accessories and miscellaneous property of whatever nature (herein collectively referred to as "Replacement Equipment", which term shall include all Alterations other than Optional Alterations) that may from time to time be incorporated or installed in or attached to or otherwise be part of (collectively, "incorporated in") any Facility and that may from time to time fail to function in a commercially efficient manner or become worn out, destroyed, damaged beyond repair, lost, condemned, confiscated, stolen or seized for any reason whatsoever. SECTION 7.03. ALTERATIONS REQUIRED BY LAW; MANDATORY TENANT IMPROVEMENT AND FACILITY MODIFICATIONS. Lessee shall make such Alterations to each Facility as may be required from time to time to meet the requirements of and be in conformity with all applicable requirements of law, of any court and of any governmental authority having jurisdiction and will maintain the same in the condition required by such laws and requirements. SECTION 7.04. OPTIONAL ALTERATIONS. In addition to the foregoing, Lessee, at its own expense, may from time to time make such Alterations to any Facility as Lessee may deem desirable in the proper conduct of its business (the "Optional Alterations"), PROVIDED that such Alterations shall not adversely and materially affect the value, usefulness or remaining economic useful life of such Facility. Title to any Optional Alteration shall remain with Lessee and Lessee may remove any Optional Alterations from the applicable Facility; PROVIDED, HOWEVER, that such removal shall not be permitted at any - 14 - time during the existence of a Lease Event of Default and, PROVIDED, FURTHER, Lessee shall be obligated to repair any damage to the applicable Facility caused by the affixing or any optional Alteration or the removal of any Optional Alteration. SECTION 7.05. TITLE TO REPLACEMENT EQUIPMENT. Title to each item of the Replacement Equipment (including any Alteration other than an Optional Alteration) incorporated in the Equipment pursuant to this Article VII shall without further act vest in Lessor, shall be free and clear of all Liens except Permitted Liens and shall be deemed to constitute a part of the applicable Facility and be subject to this Lease. All Replacement Equipment removed from the Equipment shall remain the property of Lessor until replaced by additional Replacement Equipment complying with the requirements hereof. Lessor hereby waives any right to distrain Lessee Owned Equipment and any landlord's lien or similar lien upon Lessee Owned Equipment, regardless of whether such lien is created by statute or otherwise. Lessor agrees, at the request and at the expense of Lessee, to execute a waiver (in a written form reasonably satisfactory to Lessee, Lessor and the Agent), of any landlord's lien or similar lien for the benefit of any present or future holder of a security interest in, or lessor of, any Lessee Owned Equipment. Lessor acknowledges, and agrees to acknowledge in the future (in a written form reasonably satisfactory to Lessee, Lessor and the Agent), to such Persons, at such times and for such purposes as Lessee may reasonably request, that Lessee Owned Equipment is Lessee's property and not Equipment, Alterations or Replacement Equipment (regardless of whether or to what extent such Lessee Owned Equipment is affixed to any Facility), or otherwise subject to the terms of this Lease, and that Lessor has no right, title or interest in any Lessee Owned Equipment. Lessee shall not affix any Lessee Owned Equipment to any Facility to the extent such would adversely and materially affect the value, usefulness or remaining economic useful life of any Facility. At Lessee's cost, Lessee shall repair any damage caused to any Facility in connection with any affixing of Lessee Owned Equipment or removal of Lessee Owned Equipment from such Facility. Prior to any sale of any Facility to any third party purchaser pursuant to Section 4.01(b) hereof, any return of any Facility to Lessor or any exercise of remedies by Lessor hereunder in connection with a Lease Event of Default, Lessee shall remove all Lessee Owned Equipment from such Facility and comply with its other obligations hereunder with respect to Lessee Owned Equipment. If Lessee fails to remove (or cause to be removed) Lessee Owned Equipment in compliance with the requirements of the preceding sentence or otherwise to comply with its obligations hereunder with respect to Lessee Owned Equipment, then all such Lessee Owned Equipment shall be deemed abandoned, title thereto without further action shall immediately vest with Lessor and Lessor shall have no obligation or liability to Lessee or any other Person (except the Agent) with respect to such Lessee Owned Equipment. SECTION 7.06. PERMITTED CONTESTS. Lessee may challenge any requirement of law relating to any Facility to the extent and for so long as (a) a test, challenge, appeal or proceeding for review of any applicable requirement of law or of a governmental authority relating to the operation or maintenance of any Facility shall be diligently and (to the extent Lessee has control of any such test, challenge, appeal or proceeding) timely prosecuted in good faith by Lessee or (b) compliance with such requirement shall have been excused or exempted by a nonconforming use permit, waiver, extension or forbearance. In any event, Lessee may pursue such test, challenge, appeal, proceeding or noncompliance only if such test, challenge, appeal, proceeding or noncompliance shall not reasonably be expected to involve a material risk of (i) foreclosure, sale, forfeiture or loss of, or imposition of any Lien other than a Permitted Lien on, any part of any Facility or of impairment of the operation of any Facility, (ii) extending the ultimate imposition of such requirement beyond the termination of the Term (unless there shall have been furnished indemnification reasonably satisfactory to Lessor), (iii) any material claim against Lessor or the Facility (unless there shall have been furnished indemnification reasonably satisfactory to Lessor) or (iv) the - 15 - nonpayment of Rent. Challenges conducted in accordance with the requirements of this Section 7.06 shall in no event be deemed a Lease Event of Default. ARTICLE VIII LEASE INTENDED AS SECURITY Title to the Facilities shall at all times remain in Lessor and at no time during the Term shall title become vested in Lessee. This Lease is a lease intended as security. Lessee hereby (a) irrevocably grants to Lessor (respecting those aspects of the Facilities which are personal property) a security interest and lien in the Facilities and all proceeds thereof and (b) irrevocably mortgages, grants, bargains, sells, conveys, transfers, assigns and sets over to Lessor (respecting those aspects of the Facilities which are real property) a mortgage lien on the Facilities, all as collateral security for the payment and performance by Lessee of Lessee's obligations as Lessee hereunder. ARTICLE IX INSURANCE SECTION 9.01. COVERAGE. Without limiting any of the other obligations or liabilities of Lessee under this Lease, Lessee (at its own cost and expense) shall carry and maintain or cause to be carried and maintained at all times prior to the expiration or earlier termination of the Lease at least the following insurance coverages: (a) PROPERTY INSURANCE. All risk property damage insurance with respect to each Facility insuring against loss or damage in an amount not less than the replacement cost of such Facility, less the footing and foundation costs, as such amount may change from time to time and not excluding from coverage (i) fire and normal extended coverage perils customarily included in policies available with respect to property in the same general region comparable to such Facility, (ii) flood, tornado, hurricane and other perils customarily included under policies so available and (iii) business interruption relating to the loss of rental payments from sublessees for a period of one or more years; (b) LIABILITY INSURANCE. Commercial general liability, excess liability, including blanket contractual, personal injury, bodily injury and property damage (including broad form property damage and explosion, collapse and underground property damage) insurance applicable to each Facility and/or the ownership operation, maintenance, condition or use of such Facility in such amounts as are usually carried by Persons operating facilities presenting comparable risks in the same general region but in any event in an amount not less than $20,000,000 per occurrence; and (c) OTHER INSURANCE. Such other insurance with respect to each Facility in such amounts and against such insurable hazards as is usually carried by Persons operating similar properties in the same general region, but any loss of the type customarily covered by the policies described in Sections 9.01(a) and (b), whether actually covered in whole or in part by such policies, shall be the responsibility of Lessee and the absence of such coverage shall not relieve Lessee from any of its obligations under any of the Operative Documents. All insurance policies carried in accordance with this Section 9.01 shall be maintained with insurers of recognized responsibility and standing in the industry reasonably approved by Lessor and not disqualified from insuring risks in the States of Florida, Texas or any other State where a Facility is located. Each insurer will have a Best Rating of no less than "A". - 16 - Any insurance policies carried in accordance with this Section 9.01 shall be subject to deductible and/or retention amounts of no more than $1,500,000 with respect to each Facility on an individual basis. SECTION 9.02. POLICY PROVISIONS. Any insurance policy maintained by Lessee pursuant to Section 9.01 hereof shall: (a) ADDITIONAL INSURED/LOSS PAYEE. (i) Name Lessee as an insured and the Additional Insureds as additional insureds, to the extent of their respective interests (with respect to liability policies) and (ii) name the Agent, so long as the Notes shall not have been paid in full and the Liens of the Loan Agreement and the Mortgages shall not have been discharged, as a loss payee to the extent of its interests and also shall name Lessor as a loss payee to the extent of its interest (with regard to property damage policies); (b) ADJUSTMENT OF CLAIMS. Provide that all insurance proceeds in respect of any loss or occurrence shall be adjusted (i) with Lessee, unless and until the Agent or Lessor, as appropriate, notifies the insurer that a Lease Default or a Lease Event of Default shall have occurred and be continuing, or (ii) except in the case of public liability insurance and workers' compensation insurance, if the insurer receives a notice from the Agent or Lessor, as appropriate, that a Lease Default or a Lease Event of Default shall have occurred and be continuing, (A) with the Agent, so long as the Notes shall not have been paid in full and the Liens of the Loan Agreement and the Mortgages shall not have been discharged, and (B) thereafter with Lessor. Notwithstanding the foregoing, Lessee shall not finally agree to any adjustment of claim for damages with respect to any Facility in excess of $1,000,000 (in the aggregate on a calendar year basis) until Lessee shall have given the Agent or Lessor, as appropriate, notice of the proposed settlement and ten (10) Business Days in which to object thereto. Failure of the Agent or Lessor, as appropriate, to object to such proposed settlement by the end of such ten (10) Business Days shall be deemed as consent thereto. (c) WAIVER OF PREMIUMS. Include effective waivers by the insurer of all claims for insurance premiums or commissions or (if such policies provide for the payment thereof) additional premiums or assessments against any Additional Insured; (d) INSURANCE NOT INVALIDATED. Provide that in respect of the interests of each Additional Insured, such policies shall not be invalidated by any action or inaction of Lessee or any other Person and shall insure each Additional Insured regardless of, and any claims for losses shall be payable notwithstanding: (i) any act of negligence, including any breach of any condition or warranty in any policy of insurance, of Lessee, any Additional Insured or any other Person; (ii) the occupation or use of any Facility for purposes more hazardous than permitted by the terms of the policy; (iii) any foreclosure or other proceeding or notice of sale relating to any Facility; or (iv) any change in the title to or ownership of any Facility; (e) PRIMARY COVERAGE. Provide that such insurance shall be primary insurance and that the insurers under such insurance policies shall be liable under such policies without right of contribution from any other insurance coverage effected by or on behalf of any Additional Insured under any other insurance policies covering a loss that is also - 17 - covered under the insurance policies maintained by Lessee pursuant to this Article IX; (f) CANCELLATION. Provide that any cancellation thereof or material adverse change therein shall not be effective as to any Additional Insured until at least 30 days after receipt by such Additional Insured of written notice thereof; (g) SUBROGATION. Waive any right of subrogation of the insurers against each Additional Insured, and waive any right of the insurers to any setoff or counterclaim or any other deduction, whether by attachment or otherwise, in respect of any liability of any Additional Insured; (h) ASSIGNMENT. Provide that the whole or any part of the right, title and interest of Lessor or Lessee therein may be assigned consistent with the Operative Documents to the Agent; and (i) OTHER. Subject to Section 9.01 hereof, be reasonably satisfactory to each Additional Insured in all other material respects. SECTION 9.03. EVIDENCE OF INSURANCE. Lessee shall deliver to the Agent by the applicable Commencement Date, and by the annual anniversary of each year thereafter, certificates of insurance executed by the insurer or its duly authorized agent evidencing the amounts and duration of the respective insurance policies then maintained by Lessee with respect to each such Facility. At each such time, Lessee shall also provide the Agent an opinion letter from Lessee's insurance broker stating that in such broker's opinion after due inquiry, the insurance policies which Lessee has in place regarding each Facility satisfy in all respects the insurance requirements of this Lease. Upon written request from any Additional Insured, Lessee shall also cause such insurance certificates and opinion letters from Lessee's insurance broker to be addressed to and delivered to such Additional Insured. SECTION 9.04. APPLICATION OF INSURANCE PROCEEDS. All proceeds of insurance maintained pursuant to Section 9.01(a) on account of any damage to or destruction of any Facility or any part thereof not constituting an Event of Loss (in each case less the actual costs, fees and expenses incurred in the collection thereof) shall (so long as no Lease Default or Lease Event of Default shall have occurred and be continuing) be paid to Lessee or as it may direct and applied by Lessee to pay the costs referred to in Section 12.02 hereof. All such proceeds received or payable on account of an Event of Loss shall be distributed in accordance with Section 12.02. If a Lease Default or Lease Event of Default shall have occurred and be continuing, such proceeds shall be held and applied as provided in Section 12.03. SECTION 9.05. ADDITIONAL INSURANCE BY LESSOR. Nothing in this Article IX shall prohibit any party from maintaining, at its expense, additional insurance for its own account with respect to any Facility or any part thereof PROVIDED that any such additional insurance shall not provide for or result in a reduction of coverage or amounts payable under insurance required to be maintained under this Article IX. ARTICLE X RETURN AND DISPOSITION OF THE FACILITIES Unless each Facility shall have been transferred to Lessee or a third party purchaser pursuant to the terms and provisions hereof (including without limitation Article IV, Section 12.01 or Article XVII), Lessee shall, on termination of this Lease, and at its own expense, return all the Facilities to Lessor by surrendering the same into the possession of Lessor (x) free and clear of all Liens other than Lessor Liens, Liens for taxes not yet due and those Liens identified in subsections (b) and (f) of the definition of "Permitted Liens" and (y) in the condition required by Article VII hereof; - 18 - PROVIDED, the foregoing provisions of this Article X are not intended, and shall not, create a right of return and/or abandonment in favor of Lessee and shall be effective only with regard to (i) the exercise of certain remedies by Lessor upon the occurrence of a Lease Event of Default or (ii) the retention of any Facility, by Lessor pursuant to Section 4.01(b). ARTICLE XI FINANCIAL INFORMATION; FINANCIAL COVENANTS; MERGERS, CONSOLIDATIONS AND OTHER CORPORATE REORGANIZATIONS SECTION 11.01. FINANCIAL INFORMATION. NOTWITHSTANDING ANY OTHER PROVISION IN THIS AGREEMENT, ALL FINANCIAL REPORTING INFORMATION, REPORTS, STATEMENTS, CERTIFICATES, ACCOUNTING OPINIONS AND THE LIKE (INCLUDING WITHOUT LIMITATION THE ANNUAL FINANCIAL INFORMATION, QUARTERLY FINANCIAL INFORMATION AND COMPLIANCE CERTIFICATES OF THE TYPE REFERENCED IN SECTIONS 11.01(a)-(d) HEREOF) DELIVERED TO AGENT UNDER OR WITH RESPECT TO THE REVOLVING CREDIT AGREEMENT SHALL (WITHOUT FURTHER ACTION AND REGARDLESS OF ANY FUTURE DISCLAIMER TO THE CONTRARY BY LESSEE, ANY OF ITS AFFILIATES OR ANY OTHER PERSON) BE DEEMED DELIVERED HEREUNDER AND MAY BE RELIED UPON BY LESSOR, THE AGENT AND EACH LENDER AS THOUGH DELIVERED HEREUNDER. LESSEE HEREBY EXPRESSLY CONSENTS TO THE DELIVERY OF ANY AND ALL OF THE ABOVE REFERENCED FINANCIAL REPORTING INFORMATION, REPORTS, STATEMENTS, CERTIFICATES, ACCOUNTING OPINIONS AND THE LIKE (INCLUDING WITHOUT LIMITATION THE ANNUAL FINANCIAL INFORMATION, QUARTERLY FINANCIAL INFORMATION AND COMPLIANCE CERTIFICATES OF THE TYPE REFERENCED IN SECTIONS 11.01(a)-(d) HEREOF) BY THE AGENT, IN ITS DISCRETION, TO LESSOR. LESSOR MAY FROM TIME TO TIME REQUEST, AND LESSEE SHALL DELIVER AS REQUESTED, THE FINANCIAL REPORTING INFORMATION REFERENCED IN SECTIONS 11.01(a)-(d) TO THE EXTENT (I) ANY OF THE PROVISIONS OR REQUIREMENTS OF THIS SECTION 11.01 ARE CHALLENGED OR DEEMED UNENFORCEABLE, (II) THE REVOLVING CREDIT AGREEMENT IS TERMINATED OR EXPIRES PRIOR TO THE TERMINATION OR EXPIRATION OF THE TERM OR (III) AGENT OR ANY LENDER, FOR WHATEVER REASON, CEASES TO BE A LENDER UNDER THE REVOLVING CREDIT AGREEMENT PRIOR TO THE TERMINATION OR EXPIRATION OF THE TERM. The financial information referenced in Sections 11.01(a) - (c) below shall be delivered by Lessee to Lessor consistent with the terms and provisions of the first paragraph of Section 11.01: (a) ANNUAL FINANCIAL INFORMATION. As soon as available, and in any event within ninety (90) days after the end of each fiscal year, Lessee will furnish to Lessor a copy of the annual consolidated audit report of Lessee and its Consolidated Subsidiaries for such fiscal year containing balance sheets, statements of income, statements of stockholders' equity, and statement of cash flow, and prepared in accordance with GAAP, certified by Lessee's independent public accountants to Lessor to present fairly the financial condition and results of the operations of Lessee and its Consolidated Subsidiaries at the date and for the periods indicated therein, such audit report to be accompanied by a compliance certificate in form and substance reasonably satisfactory to Lessor, signed by a senior financial officer of Lessee; (b) QUARTERLY FINANCIAL INFORMATION. As soon as available, and in any event within forty-five (45) days after the end of each of the first three fiscal quarters in each fiscal year, Lessee will furnish to Lessor a copy of an unaudited financial report of Lessee and its Consolidated Subsidiaries as at the end of such fiscal quarter and for both the quarterly period then ended and the then-elapsed portion of the fiscal year, containing balance sheets and statements of income, and prepared in accordance with GAAP (except for the absence of footnotes and subject to changes resulting from audit and normal year-end adjustments), certified by a senior financial officer of Lessee to present fairly the financial condition and results of the operations of Lessee and its Consolidated Subsidiaries at the date and for the periods indicated therein, each such financial report to be accompanied by a - 19 - compliance certificate in form and substance reasonably to Lessor, signed by a senior financial officer of Lessee; and (c) COMPLIANCE CERTIFICATE. Together with each set of financial statements delivered pursuant to subsections (a) and (b) above, a duly executed and completed financial covenants compliance certificate, in form and substance reasonably satisfactory to Lessor. The financial reporting requirements specified above in Sections 11.01(a)-(d) shall automatically be deemed to be amended and modified at such times as (and in the same manner and to the same extent as) the corresponding financial reporting requirements under the Revolving Credit Agreement are amended and modified; PROVIDED, HOWEVER, notwithstanding the foregoing, to the extent (i) the Revolving Credit Agreement is terminated or expires prior to the termination or expiration of the Term or (ii) NationsBank or Credit Lyonnais, for whatever reason, ceases to be a lender under the Revolving Credit Agreement prior to the termination or expiration of the Term, then in each such case, the financial reporting requirements under this Lease thereafter shall be identical to those in existence (A) as of the date the Revolving Credit Agreement terminates or expires (in the case of subsection (i) of this proviso) or (B) as of the date NationsBank or Credit Lyonnais ceases to be a lender under the Revolving Credit Agreement (in the case of subsection (ii) of this proviso). SECTION 11.02. FINANCIAL COVENANTS. Lessee will comply with the following financial covenants and demonstrate such compliance as of the end of each fiscal quarter of Lessee pursuant to a Lessee Compliance Certificate delivered to Lessor in accordance with the terms of Section 11.01 hereof: (a) RATIO OF TOTAL LIABILITIES TO NET WORTH. Lessee will not permit the ratio of Total Liabilities to Net Worth at any time during Lessee's (i) second and third fiscal quarters each year during the term of this Lease to be greater than 2.25 to 1.00, and (ii) first and fourth fiscal quarters each year during the term of this Lease to be greater than 1.25 to 1.00. (b) FIXED CHARGES COVERAGE RATIO. Lessee will not permit the Fixed Charges Coverage Ratio at any time to be less than 1.30 to 1.00. $50,000,000 of the provision established in the fiscal quarter ending July 30, 1995 for inventory markdowns shall be added to pretax consolidated income of the Lessee for fiscal quarter ending July 30, 1995 only for purposes of determining compliance with the covenant contained in this Section for the fiscal quarters ending July 30, 1995; October 29, 1995; January 28, 1996; and April 28, 1996. (c) CURRENT Ratio. Lessee will not permit the ratio of (i) Current Assets to (ii) the sum of (A) Current Liabilities plus (B) amounts outstanding under the Revolving Credit Agreement as Advances, at any time to be less than 1.20 to 1.00. (d) MODIFIED LEVERAGE Ratio. Lessee will not permit the ratio, measured at the end of each quarter, of (1) Adjusted Total Debt to (ii) the sum of (A) consolidated income of Lessee and its Subsidiaries before income taxes for the preceding twelve month period (excluding extraordinary cash gains or losses for the preceding twelve month period), plus (B) interest expense for the preceding twelve month period, plus (C) operating lease expense for the preceding twelve month period plus (D) depreciation and amortization expense for the preceding twelve month period, at any time to be greater than six (6) to one (1). $50,000,000 of the provision established in the fiscal quarter ending July 30, 1995 for inventory markdowns shall be added to pretax consolidated income of the Lessee for fiscal quarter ending July 30, 1995 only for purposes of determining compliance with the covenant contained in this Section for the fiscal quarters ending July 30, 1995; October 29, 1995; January 28, 1996; and April 28, 1996. - 20 - The financial covenants specified above in this Section 11.02 shall automatically be deemed to be amended and modified at such times as (and in the same manner and to the same extent as) the corresponding financial covenants under the Revolving Credit Agreement are amended and modified; PROVIDED, HOWEVER, notwithstanding the foregoing, to the extent (i) the Revolving Credit Agreement is terminated or expires prior to the termination or expiration of the Term or (ii) NationsBank or Credit Lyonnais, for whatever reason, ceases to be a lender under the Revolving Credit Agreement prior to the termination or expiration of the Term, then in each such case, the financial covenants under this Lease thereafter shall be identical to those in existence (A) as of the date the Revolving Credit Agreement terminates or expires (in the case of subsection (i) of this proviso) or (B) as of the date such Lender ceases to be a lender under the Revolving Credit Agreement (in the case of subsection (ii) of this proviso). SECTION 11.03. AMENDMENTS OF REVOLVING CREDIT AGREEMENT. Lessee hereby agrees to notify (within ten (10) Business Days) the Agent of each amendment, modification and/or other change regarding the Revolving Credit Agreement, and the Lessor, the Agent and each Lender may rely on such notice as if delivered hereunder. In such notice, Lessee shall provide a reasonably detailed explanation of such amendment, modification and/or other change. SECTION 11.04. FINANCIAL OR COVENANT COMPLIANCE. Notwithstanding the reporting requirements of GAAP, in no event will any tax retention operating lease which is provided for in the Operative Documents be considered a capital lease for financial or other covenant compliance. ARTICLE XII LOSS, DESTRUCTION, CONDEMNATION OR DAMAGE SECTION 12.01. PAYMENT OF TERMINATION VALUE ON AN EVENT OF LOSS. If an Event of Loss shall occur, Lessee shall give Lessor written notice of such occurrence, and the date thereof, and shall pay on the next occurring Termination Value Date (or if such next occurring Termination Value Date is within twenty-five (25) days of the date of the Event of Loss, then on the second occurring Termination Value Date), an amount equal to the sum of the Termination Value respecting the Facility which incurred such Event of Loss as of the date of payment, all Basic Rent and all Supplemental Rent due and owing or accrued through and including the date of payment and all Sales Expenses. Upon payment in full of such amounts, (i) the Term shall end respecting the Facility which incurred such Event of Loss, (ii) the obligations of Lessee hereunder respecting the Facility which incurred such Event of Loss (other than any other such obligations expressed herein as surviving termination of this Lease) shall terminate as of the date of such payment and (iii) Lessor shall transfer the Facility which incurred such Event of Loss to Lessee upon the settlement terms specified in Section 4.01(d) hereof. SECTION 12.02. APPLICATION OF PAYMENTS ON AN EVENT OF LOSS OR OTHERWISE. Unless a Lease Default or a Lease Event of Default shall have occurred and shall then be continuing (in which case dispositions shall be made pursuant to Section 12.03 hereof), insurance proceeds or payments received at any time by Lessor or Lessee from any insurer or governmental authority or other Person with respect to any loss, condemnation, confiscation, or seizure of, or requisition of title to or use of, or damage to, any Facility or any part thereof shall be paid to Lessee. SECTION 12.03. OTHER DISPOSITIONS. Notwithstanding the foregoing provisions of this Article XII, so long as a Lease Default or a Lease Event of Default shall have occurred and be continuing and to the extent Lessor has notified the appropriate insurer, governmental authority or other Person of the occurrence of such Lease Default or Lease Event of Default, any amount that would otherwise be payable to or for the account of, or that would otherwise be retained by, Lessee pursuant to this Article XII shall be paid to Lessor. The portion of such payments as shall not exceed the amount required to be paid by Lessee pursuant to Section 12.01 hereof shall be applied in - 21 - reduction of Lessee's obligation to pay such amounts (if not already paid by Lessee), and the remainder shall be held by Lessor as security for the obligations of Lessee under this Lease. At such time thereafter as no Lease Default or a Lease Event of Default shall be continuing, such amount shall be paid promptly to Lessee unless Lessor shall have theretofore declared this Lease to be in default pursuant to Section 17.01 hereof, in which event such amount shall be disposed of by Lessor in accordance with this Lease. ARTICLE XIII FEDERAL AND STATE TAX CONSEQUENCES It is expressly agreed that for federal and state income tax purposes the parties entered into the transaction contemplated by this Lease intending such transaction to be characterized as a mere financing and for Lessee to be considered the owner of each Facility for such tax purposes. Consistent with the foregoing, Lessee intends to claim the cost recovery deductions associated with each Facility, and Lessor agrees not to take an inconsistent position on its federal or state income tax returns; PROVIDED, HOWEVER, Lessor makes no representation or warranty as to the correctness of such intended tax characterization. ARTICLE XIV ASSIGNMENT AND SUBLEASE; LOCATION SECTION 14.01. ASSIGNMENT AND SUBLEASE. With the prior written consent of Lessee, Lessor may assign, sell, convey or otherwise transfer any of its right, title or interest in, to or under any of the Operative Documents, and/or with respect to any Facility; PROVIDED, HOWEVER, in its discretion and without Lessee's consent, Lessor may (x) collaterally assign to the Agent or any replacement Agent (to the extent such replacement Agent is an Affiliate of the Agent to the Lenders, a successor to the Agent to the Lenders or otherwise a Lender at such time under the Loan Agreement, as the case may be) any of its right, title or interest in, to or under any of the Operative Documents, and/or with respect to any Facility and (y) in connection with the sale of such Facility pursuant to a foreclosure or deed in lieu of foreclosure, assign to any Person any of the Lessor's right, title and interest in, to or under any of the Operative Documents and/or any Facility (and in the event Lessor assigns such interest to the Agent or any Lender hereunder, the Agent or any Lender may further assign its right, title and interest to any Person); PROVIDED, FURTHER, with Lessee's consent, such consent not to be unreasonably withheld, Lessor may collaterally assign to any other Person (not referenced in the immediately preceding proviso) any of its right, title or interest in, to or under any of the Operative Documents, and/or with respect to any Facility. To the extent any such assignment, sale, conveyance or other transfer is absolute and not on a collateral basis, Lessor shall be released, from and after the effective date thereof, from all liability in, to and under the Operative Documents and with respect to each Facility, and the assignee, purchaser, acquirer or other transferee shall be responsible for all such liabilities. In its discretion and without the prior written consent of Lessor, Lessee may sublease any Facility or any part thereof to an Affiliate of Lessee or a Subsidiary of Lessee or assign any of its rights or interests hereunder to an Affiliate of Lessee or a Subsidiary of Lessee. Lessee may not sublease any Facility or any part thereof or assign any of its rights or interests hereunder, in either case to any Person other than an Affiliate of Lessee or a Subsidiary of Lessee, without the prior written consent of Lessor, which consent shall not be unreasonably withheld by Lessor; PROVIDED, HOWEVER, that any such sublease or assignment or any sale, conveyance or other transfer (including to an Affiliate or a Subsidiary of Lessee) shall not release Lessee from any of its obligations or liabilities of any nature whatsoever arising under any of the Operative Documents; PROVIDED, FURTHER, no such sublease, assignment, sale, conveyance or other transfer by Lessee (including to an Affiliate or a Subsidiary of Lessee) shall be permitted if a Lease Default or Lease Event of Default has occurred and is continuing. The rights and obligations of Lessor and Lessee hereunder shall inure to the benefit of, and - 22 - be binding upon, the permitted successors and assigns of Lessor and Lessee, respectively. Lessee hereby grants Lessor a Lien on any and all subleases Lessee enters respecting any and all Facilities or any part thereof whether now existing or hereafter arising. Lessee further acknowledges and agrees that no further act or documentation shall be required to document such event. SECTION 14.02. LOCATION. Except as permitted pursuant to Article VII hereof, Lessee shall not remove, or permit to be removed, any Facility, or any portion thereof, from any Site on which such Facility is initially located without the prior written consent of Lessor, except that Lessee or any other Person may remove a component of any Facility if title thereto shall have passed to Lessee in accordance with the provisions of Article XII hereof. The restrictions imposed pursuant to this Section 14.02 shall not apply to any Lessee Owned Equipment. ARTICLE XV INSPECTION AND REPORTS SECTION 15.01. CONDITION AND OPERATION. Lessor and its authorized representatives, including without limitation each of (x) the Agent and (y) the Lenders (collectively, the "Inspecting Parties") may, upon reasonable notice to Lessee during normal business hours, inspect any and all Facilities. Provided such inspection by the Inspecting Parties does not unduly interfere with Lessee's operations at the Facility then under inspection, the Inspecting Parties may also inspect the books and records of Lessee relating to the condition and state of repair of the Facility then under inspection and make copies and abstracts therefrom. All such inspections shall be at the expense of the Inspecting Parties prior to the occurrence of a Lease Event of Default and at Lessee's expense after such occurrence. Lessee shall furnish to the Inspecting Parties a detailed, written report (in a form reasonably satisfactory to Lessor) accurate in all material respects regarding the condition and state of repair of the Facilities, all at such times and as often as may be reasonably requested by the Inspecting Parties. None of the Inspecting Parties shall have any duty to make any such inspection or inquiry and none of the Inspecting Parties shall incur any liability or obligation by reason of not making any such inspection or inquiry. To the extent permissible, Lessee shall prepare and file in timely fashion, or, where Lessor shall be required to file, Lessee shall prepare and deliver to Lessor within a reasonable time prior to the date for filing, any reports with respect to the condition or operation of the Facilities that shall be required to be filed with any Federal, state or other governmental or regulatory authority. SECTION 15.02. LIABILITY. Lessee shall, promptly after obtaining knowledge thereof, give written notice within a reasonable time (but in any event within thirty (30) days of Lessee having gained such knowledge) to Lessor of each accident likely to result in material damages, or claims for material damages against Lessee or any other Person, with respect to any Facility in excess of $1,000,000 for any single occurrence and for all such occurrences during any twelve (12) month period during the Term which in the aggregate respecting the Facilities result in material damages or claims for material damages in excess of $2,000,000, and occurring in whole or in part (whenever asserted) during the Term, and on written request shall furnish to Lessor the names and addresses of the parties involved, any Persons injured, witnesses and owners of any property damaged, and such other information as may be known to it, and shall within a reasonable time (but in any event within thirty (30) days of Lessee having gained such knowledge) following receipt of written request furnish Lessor with copies of all correspondence, papers, notices and documents whatsoever received by Lessee in connection therewith. - 23 - ARTICLE XVI EVENTS OF DEFAULT Each of the following events shall constitute a "Lease Event of Default" (whether any such event shall be voluntary or involuntary or come about or be effected by operation of law or pursuant to or in compliance with any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body): (a) BASIC RENT, TERMINATION VALUE AND AMOUNTS UNDER SECTION 3.07 HEREOF. Lessee shall fail to make any payment of Basic Rent (with respect to which notice has been given pursuant to Section 3.01 hereof), Termination Value or any amount under Section 3.07 hereof when due and such failure shall continue unremedied for a period of five (5) Business Days after the same is due and payable; (b) SUPPLEMENTAL PAYMENTS. Lessee shall fail to make any payment of Supplemental Rent (other than as referenced in clause (a) of this Article XVI) or any other amount payable hereunder within ten (10) Business Days after Lessee's receipt of (i) notice of such failure and (ii) documentation which in Lessor's reasonable judgment is necessary or appropriate to verify the calculation of Supplemental Rent or any other amount payable hereunder; (c) AUTOMATIC COVENANT DEFAULTS. Lessee shall fail to perform or observe any covenant, condition or agreement to be performed or observed by it (not included in clause (a) or (b) of this Article XVI) (i) under Sections 11.02 or 14.01 hereof, (ii) regarding Lessee's obligation to maintain in effect the insurance policies referenced in Section 9.01(a)-(c) in accordance with the requirements of Section 9.02 or (iii) regarding Lessee's obligations to pay all amounts owed under Article IV on the specified due date therefor or to deliver possession of the Facilities to the appropriate third party purchaser on the Expiration Date; (d) OTHER COVENANT DEFAULTS. Lessee shall fail to perform or observe any covenant, condition or agreement (not included in clause (a), (b) or (c) of this Article XVI) to be performed or observed by it hereunder or under any other Operative Document and such failure shall continue unremedied for a period of thirty (30) days after Lessee's receipt of notice thereof; (e) BANKRUPTCY, ETC. The filing by Lessee of any petition for dissolution or liquidation of Lessee, or the commencement by Lessee of a voluntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or Lessee shall have consented to the entry of an order for relief in an involuntary case under any such law, or the failure of Lessee generally to pay its debts as such debts become due (within the meaning of the Bankruptcy Reform Act of 1978, as amended), or the failure by Lessee promptly to satisfy or discharge any execution, garnishment or attachment of such consequence as will impair its ability to carry out its obligations under this Lease, or the appointment of or taking possession by a receiver, custodian or trustee (or other similar official) for Lessee or any substantial part of its property, or a general assignment by Lessee for the benefit of its creditors, or the entry by Lessee into an agreement of composition with its creditors, or Lessee shall have taken any corporate action in furtherance of any of the foregoing; or the filing against Lessee of an involuntary petition in bankruptcy which results in an order for relief being entered or, notwithstanding that an order for relief has not been entered, the petition is not dismissed within ninety (90) days of the date of the filing of the petition, or the filing under any law relating to bankruptcy, insolvency or relief of debtors of any petition against Lessee for reorganization, composition, extension or arrangement with creditors which either (i) results in a finding or - 24 - adjudication of insolvency of Lessee or (ii) is not dismissed within ninety (90) days of the date of the filing of such petition; (f) MISREPRESENTATION. Any representation or warranty by Lessee in any Operative Document or in any certificate or document delivered pursuant thereto shall have been materially false when made; and (g) CROSS DEFAULT. Any default (after receipt of any notice required thereunder and expiration of any applicable grace period) shall have occurred under (i) the Revolving Credit Agreement, (ii) to the extent the Revolving Credit Agreement has expired or been terminated, the then current principal credit agreement of Lessee (provided such credit agreement is senior or pari passu with the obligations of Lessee hereunder or under any of the other Operative Documents or (iii) by Lessee under any of the Operative Documents. ARTICLE XVII ENFORCEMENT SECTION 17.01. REMEDIES. Upon the occurrence of any Lease Event of Default and at any time thereafter so long as the same shall be continuing, Lessor may, at its option, by notice to Lessee declare this Lease to be in default, and at any time thereafter Lessor may do one or more of the following as Lessor in its sole discretion shall determine: (a) RESCISSION. Lessor may, by notice to Lessee, rescind or terminate this Lease; (b) POSSESSION OF FACILITIES. Lessor may (i) demand that Lessee, and Lessee shall upon the written demand of Lessor, deliver control of any or all Facilities so demanded promptly to Lessor in the manner and condition required by, and otherwise in accordance with all of the provisions of, Articles VII and X hereof as if such Facility or Facilities, as the case may be, were being returned at the end of the Term, and Lessor shall not be liable for the reimbursement of Lessee for any costs and expenses incurred by Lessee in connection therewith and (ii) enter upon the respective Site or Sites, as the case may be, and take immediate possession of (to the exclusion of Lessee) such Facility or Facilities, as the case may be, or remove the related Equipment, by summary proceedings or otherwise, all without liability to Lessee for or by reason of such entry or taking of possession, whether for the restoration of damage to property caused by such taking or otherwise, except for the use of excessive force; (c) SALE OF FACILITIES. Lessor may sell all or any part of any or all the Facilities and the rights of Lessor to such Facility or Facilities, as the case may be, at public or private sale, as Lessor may determine, free and clear of any rights of Lessee and without any duty to account to Lessee with respect to such action or inaction or any proceeds with respect thereto except to the extent required by Section 17.01(e)(ii) hereof in the event Lessor elects to exercise its rights under Section 17.01(e)(ii) in lieu of its rights under this Section 17.01(c); (d) HOLD, UTILIZE OR LEASE FACILITIES. Lessor may hold, utilize to the extent Lessor deems reasonably appropriate or lease to others all or any part of any or all the Facilities as Lessor in its sole discretion may determine, free and clear of any rights of Lessee and without any duty to account to Lessee with respect to such action or inaction or for any proceeds with respect to such action or inaction, except that Lessee's obligation to pay Basic Rent with respect to such Facility or Facilities, as the case may be, for periods commencing after Lessee shall have been deprived of use of such Facility or Facilities, as the case may be, pursuant to this paragraph (d) shall be reduced by the net proceeds, if any, received by Lessor from leasing such Facility - 25 - or Facilities, as the case may be, to any Person other than Lessee for the same periods or any portion thereof; (e) LIQUIDATED DAMAGES. Lessor may, whether or not Lessor shall have exercised or shall thereafter at any time exercise any of its rights under clauses (a), (b), (c) or (d) above with respect to any or all the Facilities, demand, by written notice to Lessee specifying a payment date which shall be a Rent Payment Date not earlier than ten (10) days after the date of such notice, that Lessee pay to Lessor, and Lessee shall pay to Lessor, on the payment date specified in such notice, as liquidated damages for loss of a bargain and not as a penalty (in lieu of Basic Rent for such Facility or Facilities, as the case may be, due after the payment date specified in such notice), any unpaid Basic Rent for any Facility due through the payment date specified in such notice plus whichever of the following amounts Lessor, in its sole discretion, shall specify in such notice (together with interest on such amount at the Overdue Rate from the payment date specified in such notice to the date of actual payment): (i) if a sale pursuant to clause (c) above has not occurred, an amount equal to the excess, if any, of the aggregate Termination Value of all the Facilities then being subjected to the remedy set forth under this Section 17.01(e)(i) (as Lessor in its sole discretion may determine), computed as of the payment date specified in such notice, over the aggregate Fair Market Sales Value for all such Facilities as of the payment date specified in such notice (such Fair Market Sales Value to be determined by the Appraisal Procedure) plus all other expenses or costs reasonably incurred by Lessor (and not otherwise reimbursed) in connection with the exercise of Lessor's remedies hereunder pursuant to the occurrence and continuation of a Lease Event of Default; or (ii) if a sale pursuant to clause (c) has occurred, an amount equal to (A) the aggregate Termination Value of all the Facilities then being subjected to the remedy set forth under this Section 17.01(e)(ii) (as Lessor in its sole discretion may determine) minus any proceeds of a sale of any of such Facilities pursuant to clause (c) above which has occurred prior to the date of payment of the amount due hereunder (although Lessor has no obligation whatsoever to exercise any right pursuant to clause (c) above), plus (B) all Sales Expenses and plus (C) all other expenses or costs reasonably incurred by Lessor (and not otherwise reimbursed) in connection with the exercise of Lessor's remedies hereunder pursuant to the occurrence and continuation of a Lease Event of Default; (f) ACCELERATION. Lessor may, by written notice to Lessee specifying a payment date which may be any date not earlier than five (5) Business Days after the date of such notice, require that Lessee pay to Lessor (and Lessee shall pay to Lessor on the payment date specified in such notice) the aggregate Termination Value of all the Facilities then being subjected to the remedy set forth under this Section 17.01(f) (as Lessor in its sole discretion may determine) as of the payment date specified in such notice and any and all other unpaid Basic Rent, Supplemental Rent and any and all other amounts and obligations of any and every kind owing or accrued by Lessee to Lessor hereunder or under any other Operative Document due prior to or on the payment date specified in such notice whereupon the same shall be immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by Lessee. Upon Lessor's receipt of all the amounts described in the previous sentence, Lessor shall transfer its title in and to such Facilities in accordance with the provisions of Section 4.01(d) hereof. - 26 - (g) OTHER RIGHTS AT LAW. Lessor may exercise any other right or remedy that may be available to it under applicable law or proceed by appropriate court action to enforce the terms hereof or to recover damages for the breach hereof. SECTION 17.02. SURVIVAL OF LESSEE'S OBLIGATIONS. No termination of this Lease, in whole or in part, or repossession of any of the Facilities or exercise of any remedy under Section 17.01 hereof shall, except as specifically provided therein, relieve Lessee of any of its liabilities and obligations hereunder. In addition, Lessee shall be liable, except as otherwise provided above, for any and all unpaid Rent due hereunder before, after or during the exercise of any of the foregoing remedies, including all legal fees and other costs and expenses reasonably incurred by Lessor by reason of the occurrence of any Lease Event of Default or the exercise of Lessor's remedies with respect thereto, and including all costs and expenses reasonably incurred in connection with the return of the Facilities (or any of them) in the manner and condition required by, and otherwise in accordance with the terms and provisions of this Lease. At any sale of any Facility or any part thereof or any other rights pursuant to Section 17.01 hereof, Lessor may bid for and purchase such property. SECTION 17.03. REMEDIES CUMULATIVE. To the extent permitted by, and subject to the mandatory requirements of, applicable law, each and every right, power and remedy herein specifically given to Lessor or otherwise existing in this Lease shall be cumulative and shall be in addition to every other right, power and remedy herein specifically given or now or hereafter existing at law, in equity or by statute, and each and every right, power and remedy whether specifically herein given or otherwise existing may be exercised from time to time and as often and in such order as may be deemed expedient by Lessor, and the exercise or the beginning of the exercise of any power or remedy shall not be construed to be a waiver of the right to exercise at the same time or thereafter any right, power or remedy. No delay or omission by Lessor in the exercise of any right, power or remedy or in the pursuit of any remedy shall impair any such right, power or remedy or be construed to be a waiver of any default on the part of Lessee or to be an acquiescence therein. No express or implied waiver by Lessee of any Lease Event of Default shall in any way be, or be construed to be, a waiver of any future or subsequent Lease Event of Default. To the extent permitted by applicable law, Lessee hereby waives any rights now or hereafter conferred by statute or otherwise that may limit or modify any of Lessor's rights or remedies under this Article XVII. ARTICLE XVIII RIGHT TO PERFORM FOR LESSEE If Lessee shall fail to perform or comply with any of its agreements contained herein, Lessor may (after delivery of written notice to Lessee and the failure of Lessee to perform or comply with the same within thirty (30) days) perform or comply with such agreement, and the amount of such payment and the amount of the expenses of Lessor incurred in connection with such payment or the performance of or compliance with such agreement, as the case may be, together with interest thereon at the overdue Rate, shall be deemed Supplemental Rent, payable by Lessee upon demand. ARTICLE XIX INDEMNITIES SECTION 19.01. GENERAL INDEMNITY. (A) PAYMENT OF EXPENSES BY LESSEE. WHETHER OR NOT ANY OF THE TRANSACTIONS CONTEMPLATED BY THE OPERATIVE DOCUMENTS SHALL BE CONSUMMATED, LESSEE SHALL PAY, AND SHALL INDEMNIFY AND HOLD HARMLESS EACH INDEMNITEE FROM AND AGAINST, ANY AND ALL LIABILITIES, OBLIGATIONS, LOSSES, DAMAGES, PENALTIES, CLAIMS, ACTIONS, SUITS, COSTS, EXPENSES AND -27- DISBURSEMENTS, INCLUDING REASONABLE LEGAL FEES AND EXPENSES (EXCEPT AS FEES AND EXPENSES ARE OTHERWISE LIMITED HEREIN AND EXCEPT WITH RESPECT TO THE LEGAL FEES AND EXPENSES OF CL INCURRED PRIOR TO THE DATE OF THIS LEASE IN CONNECTION WITH THE FINANCING TRANSACTIONS RELATED TO THIS LEASE AND THOSE SUBSEQUENTLY INCURRED IN CONNECTION WITH THE CLOSING, IF ANY, OF THE FINANCING OF ADDITIONAL FACILITIES UNDER SECTION 2.03), OF WHATSOEVER KIND AND NATURE (HEREIN COLLECTIVELY REFERRED TO AS "EXPENSES" AND INDIVIDUALLY AS AN "EXPENSE"), IMPOSED ON, REASONABLY INCURRED BY OR ASSERTED AGAINST ANY INDEMNITEE (WHETHER BECAUSE OF AN ACTION OR OMISSION BY SUCH INDEMNITEE OR OTHERWISE), IN ANY WAY RELATING TO OR ARISING OUT OF (I) ANY OPERATIVE DOCUMENT, OR PAYMENTS MADE PURSUANT THERETO OR ANY OTHER TRANSACTIONS CONTEMPLATED BY ANY OPERATIVE DOCUMENT, (II) THE MANUFACTURE, FINANCING, CONSTRUCTION, PREPARATION, INSTALLATION, PURCHASE, OWNERSHIP, ACQUISITION, ACCEPTANCE, REJECTION, DELIVERY, NON-DELIVERY, POSSESSION, RENTAL, USE, OPERATION, TRANSPORTATION, LEASING, SUBLEASING, CONDITION, MAINTENANCE, STORAGE, REPAIR, SALE, TRANSFER OF TITLE, RETURN, ABANDONMENT, OR OTHER APPLICATION OR DISPOSITION OF ANY FACILITY OR ANY PORTION THEREOF, INCLUDING WITHOUT LIMITATION (A) CLAIMS OR PENALTIES ARISING FROM ANY VIOLATION OF LAW OR LIABILITY IN TORT (STRICT OR OTHERWISE) OR FROM THE ACTIVE OR PASSIVE NEGLIGENCE OF ANY INDEMNITEE, (B) LOSS OF OR DAMAGE TO ANY PROPERTY OR DEATH OR INJURY TO ANY PERSON, (C) LATENT OR OTHER DEFECTS, WHETHER OR NOT DISCOVERABLE AND (D) ANY CLAIM FOR PATENT, TRADEMARK OR COPYRIGHT INFRINGEMENT RELATING TO ANY FACILITY, THE TRANSACTION SPECIFIED IN ANY OF THE OPERATIVE DOCUMENTS OR ANY PROCESS, METHOD OR PRODUCT USED OR PRODUCED BY LESSEE BY OPERATION OF ANY FACILITY, (III) THE SALE OR OTHER DISPOSITION OF ANY FACILITY OR ANY PART THEREOF (SUBJECT IN THE CASE OF A SALE TO A THIRD PARTY TO THE PROVISIONS OF SECTION 4.01(B)) OR (IV) THE REVOCATION, TERMINATION, NON-RENEWAL OR LIMITATION OF, OR THE REFUSAL BY ANY GOVERNMENTAL ENTITY WITH JURISDICTION UPON AND DURING THE CONTINUANCE OF A LEASE EVENT OF DEFAULT OR AT THE END OF THE TERM, TO ISSUE TO LESSOR OR ANY PURCHASER OR LESSEE OF ANY FACILITY ANY PERMIT, LICENSE OR APPROVAL NECESSARY FOR THE MAINTENANCE, REPAIR OR OPERATION (IN A MANNER SIMILAR TO LESSEE'S OPERATION) OF ANY FACILITY (FOR PURPOSES OF THIS CLAUSE (IV), "EXPENSE" SHALL INCLUDE THE DIFFERENCE BETWEEN THE FAIR MARKET SALES VALUE OF THE RELEVANT FACILITY ASSUMING SUCH PERMIT, LICENSE OR APPROVAL WERE IN FULL FORCE AND EFFECT AND THE FAIR MARKET SALES VALUE OF SUCH FACILITY GIVEN SUCH REVOCATION, TERMINATION, NON-RENEWAL, LIMITATION, NONISSUANCE OR NON-TRANSFER OF SUCH PERMIT, LICENSE OR APPROVAL). WITHOUT LIMITATION OF THE FOREGOING, WHETHER OR NOT ANY OF THE TRANSACTIONS CONTEMPLATED BY THE OPERATIVE DOCUMENTS SHALL BE CONSUMMATED, LESSEE SHALL PAY ALL COSTS AND EXPENSES REASONABLY INCURRED BY ANY INDEMNITEE IN CONNECTION WITH (A) A LEASE DEFAULT OR LEASE EVENT OF DEFAULT, (B) THE ENTERING INTO OR GIVING OR WITHHOLDING OF ANY AMENDMENTS, SUPPLEMENTS, WAIVERS OR CONSENTS WITH RESPECT TO ANY OPERATIVE DOCUMENT OR (C) ANY EVENT OF LOSS. (B) EXCEPTIONS. THE INDEMNITIES CONTAINED IN SECTIONS 19.01(A) HEREOF EXCLUDE THE FOLLOWING: (I) WITH REGARD TO ANY PARTICULAR INDEMNITEE, ANY EXPENSE RESULTING FROM THE WILFUL MISCONDUCT OR GROSS NEGLIGENCE (EXCLUDING NEGLIGENCE WHICH DOES NOT RISE TO THE OF GROSS NEGLIGENCE) OF SUCH INDEMNITEE (OTHER THAN WILFUL MISCONDUCT OR GROSS NEGLIGENCE IMPUTED TO SUCH INDEMNITEE SOLELY BY REASON OF ITS INTEREST IN ANY FACILITY); (II) ANY EXPENSE RESULTING FROM CLAIMS ARISING AFTER THIS LEASE EXPIRES BY ITS TERMS OR OTHERWISE TERMINATES OR AFTER LESSEE ACQUIRES THE FACILITIES THEN SUBJECT TO THIS LEASE PURSUANT TO THE EXERCISE OF ONE OF ITS PURCHASE OPTIONS AS HEREIN SET FORTH, EXCEPT TO THE EXTENT SUCH EXPENSE OR CLAIM THEREFOR (A) IS BASED UPON OR RELATES TO EVENTS THAT OCCURRED OR CONDITIONS THAT EXISTED PRIOR TO OR DURING THE TERM OF THIS LEASE OR (B) RELATES IN ANY WAY TO THE OCCURRENCE OF A LEASE OF DEFAULT OR THE EXERCISE OF REMEDIES WITH RESPECT TO SUCH LEASE EVENT OF DEFAULT; (III) ANY EXPENSE RESULTING FROM CLAIMS ARISING OUT OF ANY LESSOR LIENS, EXCEPT ANY LIEN IN FAVOR OF ANY AGENT OR ANY REPLACEMENT AGENT; (IV) ANY EXPENSE RESULTING FROM CLAIMS -28- ARISING OUT OF ANY TRANSFER OF ANY INTEREST IN ANY FACILITY OR ANY PORTION OF BY SUCH INDEMNITEE OTHER THAN PURSUANT TO THE TERMS OF ANY OPERATIVE DOCUMENT OR IN CONNECTION WITH A FORECLOSURE OR DEED IN LIEU OF FORECLOSURE REGARDING ANY FACILITY AS A RESULT OF A LEASE EVENT OF DEFAULT OR OTHERWISE IN CONNECTION WITH THE EXERCISE OF REMEDIES WITH RESPECT TO A LEASE EVENT OF DEFAULT; AND (V) ANY EXPENSE RESULTING FROM CLAIMS AS TO THE DEFENSE OR MITIGATION OF WHICH LESSEE HAS BEEN MATERIALLY DISADVANTAGED AS THE RESULT OF THE FAILURE BY AN INDEMNITEE SEEKING INDEMNIFICATION TO NOTIFY LESSEE OF SUCH CLAIM IN A TIMELY MANNER AS REQUIRED HEREUNDER, BUT ONLY TO THE EXTENT OF ADDITIONAL COSTS OR DAMAGES CAUSED BY SUCH DELAY. (C) NOTICE. IF ANY PARTY ENTITLED TO INDEMNITY UNDER THIS SECTION 19.01 OR LESSEE SHALL HAVE RECEIVED WRITTEN NOTICE OF ANY LIABILITY INDEMNIFIED AGAINST UNDER THIS SECTION 19.01, IT SHALL GIVE PROMPT NOTICE THEREOF TO LESSEE, OR THE PARTY ENTITLED TO BE INDEMNIFIED, AS THE CASE MAY BE, BUT THE FAILURE TO GIVE SUCH NOTICE SHALL NOT AFFECT ANY OBLIGATION UNDER THIS SECTION 19.01, EXCEPT AS OTHERWISE EXPRESSLY PROVIDED HEREIN. IN CASE ANY ACTION, INCLUDING ANY INVESTIGATORY PROCEEDING, SHALL BE BROUGHT AGAINST, OR COMMENCED WITH RESPECT TO, ANY INDEMNITEE IN RESPECT OF WHICH LESSEE IS REQUIRED TO INDEMNIFY SUCH INDEMNITEE PURSUANT TO THE PROVISIONS OF THIS SECTION 19.01, LESSEE SHALL HAVE THE RIGHT TO ASSUME THE DEFENSE THEREOF, INCLUDING THE EMPLOYMENT OF COUNSEL REASONABLY SATISFACTORY TO SUCH INDEMNITEE AND THE PAYMENT OF ALL EXPENSES. IN THE EVENT LESSEE ASSUMES THE DEFENSE OF ANY SUCH ACTION, ANY INDEMNITEE SHALL HAVE THE RIGHT TO EMPLOY SEPARATE COUNSEL IN SUCH ACTION AND PARTICIPATE THEREIN, BUT THE FEES AND EXPENSES OF SUCH COUNSEL SHALL BE AT THE EXPENSE OF SUCH INDEMNITEE, UNLESS (I) EMPLOYMENT OF SUCH COUNSEL HAS BEEN SPECIFICALLY AUTHORIZED THE BY LESSEE, (II) THE NAMED PARTIES TO SUCH ACTION (INCLUDING ANY IMPLEADED PARTIES) INCLUDE BOTH SUCH INDEMNITEE AND LESSEE AND REPRESENTATION OF SUCH INDEMNITEE AND LESSEE BY THE SAME COUNSEL, IN THE REASONABLE JUDGMENT OF SUCH INDEMNITEE, WOULD BE INAPPROPRIATE OR (III) THE COUNSEL EMPLOYED BY LESSEE HAS ADVISED SUCH INDEMNITEE, IN WRITING, THAT SUCH COUNSEL'S REPRESENTATION OF SUCH INDEMNITEE WOULD BE LIKELY TO INVOLVE SUCH COUNSEL IN REPRESENTING DIFFERING INTERESTS WHICH COULD ADVERSELY AFFECT EITHER THE JUDGMENT OR LOYALTY OF SUCH COUNSEL TO SUCH INDEMNITEE, WHETHER IT BE A CONFLICTING, INCONSISTENT, DIVERSE OR OTHER INTEREST (IN WHICH CASE LESSEE SHALL NOT HAVE THE RIGHT TO ASSUME THE DEFENSE OF SUCH ACTION ON BEHALF OF SUCH INDEMNITEE). LESSEE SHALL NOT BE LIABLE FOR ANY SETTLEMENT OF ANY SUCH ACTION EFFECTED WITHOUT ITS CONSENT, BUT IF SETTLED WITH THE CONSENT OF LESSEE OR IF THERE BE A FINAL JUDGMENT, BEYOND FURTHER REVIEW OR APPEAL, IN ANY SUCH ACTION, LESSEE AGREES TO INDEMNIFY AND HOLD HARMLESS ANY INDEMNITEE FROM AND AGAINST ANY LOSS OR LIABILITY BY REASON OF SUCH SETTLEMENT OR JUDGMENT. (D) SUPPLEMENTAL RENT. LESSEE COVENANTS AND AGREES TO PAY, AS SUPPLEMENTAL RENT, ALL AMOUNTS UNDER THIS SECTION 19.01 ON DEMAND THE RELEVANT INDEMNITEE. (E) EFFECTIVENESS. LESSEE HEREBY AGREES TO BE BOUND BY, AND TO COMPLY WITH, ITS OBLIGATIONS UNDER THIS SECTION 19.01 ON AND AFTER THE DATE HEREOF, AND THE OBLIGATIONS OF LESSEE (EXCEPT AS EXPRESSLY PROVIDED TO THE CONTRARY IN SECTION 19.01(B) HEREOF) UNDER THIS SECTION 19.01 SHALL SURVIVE THE EXPIRATION OR ANY TERMINATION OF THIS LEASE FOR ALL MATTERS DESCRIBED IN THIS SECTION 19.01. SECTION 19.02. FEES, TAXES AND OTHER CHARGES. (A) PAYMENT BY LESSEE. (1) LESSEE HEREBY AGREES TO PAY AND ASSUME LIABILITY AS BETWEEN LESSEE AND EACH OF THE INDEMNITEES FOR, AND OR WRITTEN DEMAND TO INDEMNIFY, PROTECT, DEFEND, SAVE AND HOLD HARMLESS EACH INDEMNITEE FROM AND AGAINST, ANY AND ALL OF THE FOLLOWING ITEMS TO THE EXTENT SUCH ARISE OR ARE INCURRED ON OR AFTER THE APPLICABLE COMMENCEMENT DATE: ALL GOVERNMENTAL OR QUASI-GOVERNMENTAL FEES -29- (INCLUDING WITHOUT LIMITATION LICENSE AND REGISTRATION FEES), TAXES (INCLUDING WITHOUT LIMITATION GROSS RECEIPTS, FRANCHISE, SALES, USE, PROPERTY, REAL OR PERSONAL, TANGIBLE OR INTANGIBLE BUT SPECIFICALLY EXCLUDING FEDERAL, STATE AND LOCAL INCOME TAXES OF EACH INDEMNITEE), INTEREST EQUALIZATION AND STAMP TAXES, ASSESSMENTS, LEVIES, IMPOSTS, DUTIES, CHARGES OR WITHHOLDINGS OF ANY NATURE WHATSOEVER, TOGETHER WITH ANY AND ALL PENALTIES, FINES OR INTEREST THEREON ("FEES, TAXES AND OTHER CHARGES") IMPOSED AGAINST ANY INDEMNITEE, LESSEE OR ANY FACILITY OR ANY PORTION THEREOF BY ANY FEDERAL, STATE OR LOCAL GOVERNMENTAL OR TAXING AUTHORITY IN THE UNITED STATES OF AMERICA OR BY ANY FOREIGN GOVERNMENT OR ANY SUBDIVISION OR TAXING AUTHORITY THEREOF, UPON OR WITH RESPECT TO (I) ANY FACILITY OR ANY PORTION THEREOF, (II) THE MANUFACTURE, FINANCING, CONSTRUCTION, PREPARATION, INSTALLATION, PURCHASE, OWNERSHIP, ACQUISITION, ACCEPTANCE, REJECTION, DELIVERY, NON-DELIVERY, POSSESSION, RENTAL, USE, OPERATION, TRANSPORTATION, LEASING, SUBLEASING, CONDITION, MAINTENANCE, STORAGE, REPAIR, SALE, TRANSFER OF TITLE, RETURN, ABANDONMENT, OR OTHER APPLICATION OR DISPOSITION OF ANY FACILITY OR ANY PORTION THEREOF, (III) THE RENTAL PAYMENTS, RECEIPTS OF EARNINGS ARISING FROM ANY FACILITY OR ANY PORTION THEREOF OR PAYABLE PURSUANT TO THIS LEASE (PROVIDED SUCH PAYMENTS, RECEIPTS OR EARNINGS DO NOT ARISE AS A RESULT OF LESSOR TAKING ACTIONS EXPRESSLY CONTRARY TO THE PROVISIONS OF ARTICLE XIII) OR (IV) THE OPERATIVE DOCUMENTS OR OTHERWISE WITH RESPECT TO OR IN CONNECTION WITH THE OVERALL TRANSACTIONS RELATED TO THE OPERATIVE DOCUMENTS. (2) NOTWITHSTANDING ANYTHING IN THE FOREGOING, THE PROVISIONS OF THIS SECTION 19.02 SHALL NOT APPLY TO: (I) FEES, TAXES AND OTHER CHARGES ON, OR MEASURED IN WHOLE OR IN PART BY THE NET INCOME OR GROSS INCOME OF AN INDEMNITEE OR THE FRANCHISE, CAPITAL, CONDUCT OF BUSINESS OR NET WORTH OF AN INDEMNITEE; (II) FEES, TAXES OR OTHER CHARGES IMPOSED SOLELY WITH RESPECT TO ANY PERIOD AFTER THE END OF THE TERM UNLESS A LEASE EVENT OF DEFAULT HAS OCCURRED AND IS CONTINUING AND LESSOR SHALL BE EXERCISING REMEDIES WITH RESPECT THERETO; (III) FEES, TAXES AND OTHER CHARGES IMPOSED SOLELY AS A RESULT OF THE WILLFUL MISCONDUCT OR GROSS NEGLIGENCE (EXCLUDING NEGLIGENCE WHICH DOES NOT RISE TO THE LEVEL OF GROSS NEGLIGENCE) OF THE INDEMNITEE. (3) IN CASE ANY REPORT OR RETURN IS REQUIRED TO BE MADE WITH RESPECT TO ANY OBLIGATIONS OF LESSEE UNDER THIS SECTION 19.02 OR ARISING OUT OF THIS SECTION 19.02, LESSEE SHALL, TO THE EXTENT PERMITTED BY LAW, EITHER SUCH REPORT OR RETURN IN SUCH MANNER (INCLUDING THE MAKING THEREOF IN LESSOR'S NAME) AS WILL SHOW THE OWNERSHIP OF THE RELEVANT FACILITY IN LESSOR AND SEND A COPY OF SUCH REPORT OR RETURN TO LESSOR, OR SHALL NOTIFY LESSOR OF SUCH REQUIREMENT AND MAKE SUCH REPORT OR RETURN IN SUCH MANNER AS SHALL BE REASONABLY SATISFACTORY TO LESSOR. EACH INDEMNITEE AGREES THAT IT WILL PROMPTLY FORWARD FOLLOWING RECEIPT TO LESSEE ANY NOTICE, BILL OR ANY ADVICE RECEIVED BY IT CONCERNING ANY SUCH FEES, TAXES AND OTHER CHARGES. (4) THE AMOUNT WHICH LESSEE SHALL BE REQUIRED TO PAY TO OR FOR THE ACCOUNT OF ANY INDEMNITIES WITH RESPECT TO ANY FEES, TAXES AND OTHER CHARGES WHICH ARE SUBJECT TO INDEMNIFICATION UNDER THIS SECTION 19.02 SHALL BE AN AMOUNT SUFFICIENT TO RESTORE THE INDEMNITEE TO THE SAME POSITION THE INDEMNITEE WOULD HAVE BEEN IN HAD SUCH FEES, TAXES AND OTHER CHARGES NOT BEEN INCURRED OR IMPOSED. IF THE PAYMENT BY LESSEE UNDER THIS SECTION 19.02 OF AN AMOUNT EQUAL TO SUCH FEES, TAXES AND OTHER CHARGES WOULD BE MORE OR LESS THAN THE AMOUNT WHICH WOULD BE REQUIRED TO MAKE SUCH INDEMNITEE WHOLE AS A RESULT OF ANY TAX EFFECT TO AN INDEMNITEE IN CONNECTION WITH SUCH PAYMENT OF SUCH FEES, TAXES OR OTHER CHARGES, INCLUDING WITHOUT LIMITATION (I) THE INCLUSION OF ANY -30- PAYMENT TO BE MADE BY LESSEE UNDER THIS SECTION 19.02 IN THE TAXABLE INCOME OF ANY INDEMNITEE IN ONE YEAR AND THE DEDUCTION OF THE FEES, TAXES AND OTHER CHARGES WITH RESPECT TO WHICH SUCH PAYMENT IS MADE FROM THE TAXABLE INCOME OF SUCH INDEMNITEE IN A DIFFERENT YEAR, (II) THE NONDEDUCTIBILITY OF SUCH FEES, TAXES AND OTHER CHARGES FROM THE TAXABLE INCOME OF SUCH INDEMNITEE OR (III) THE ANTICIPATED REALIZATION BY SUCH INDEMNITEE IN A DIFFERENT YEAR OF TAX BENEFITS RESULTING FROM THE TRANSACTION GIVING RISE TO SUCH FEES, TAXES AND OTHER CHARGES, THE AMOUNT OF THE INDEMNITY TO BE PAID BY LESSEE SHALL BE ADJUSTED TO AN AMOUNT WHICH (AFTER TAKING INTO ACCOUNT ALL TAX EFFECTS ON SUCH INDEMNITEE, ANY LOSS OF USE OF MONEY RESULTING FROM DIFFERENCES IN TIMING BETWEEN THE INCLUSION OF SUCH INDEMNITY IN THE TAXABLE INCOME OF SUCH INDEMNITEE AND THE ANTICIPATED REALIZATION BY SUCH INDEMNITEE OF TAX BENEFITS RESULTING FROM THE TRANSACTION TO WHICH SUCH INDEMNITY IS RELATED AND THE PRESENT VALUE OF ANY ANTICIPATED FUTURE TAX BENEFITS TO BE REALIZED BY SUCH INDEMNITEE AS A RESULT OF DEDUCTING SUCH FEES, TAXES AND OTHER CHARGES OR AS A RESULT OF THE TRANSACTION GIVING RISE THERETO) WILL BE SUFFICIENT TO PLACE THE INDEMNITEE IN THE SAME POSITION SUCH INDEMNITEE WOULD HAVE BEEN IN HAD SUCH FEES, TAXES AND OTHER CHARGES NOT BEEN IMPOSED. COMPUTATIONS INVOLVING THE LOSS OF USE OF MONEY OR CALCULATIONS OF PRESENT VALUE SHALL BE BASED ON THE THEN CURRENT APPLICABLE RATE AS ADJUSTED FOR APPLICABLE INCOME TAX EFFECTS AND COMPOUNDED QUARTERLY ON THE RENT PAYMENT DATES. EACH INDEMNITEE SHALL IN GOOD FAITH USE REASONABLE EFFORTS IN FILING ITS TAX RETURNS AND IN DEALING WITH TAXING AUTHORITIES TO SEEK AND CLAIM ALL TAX BENEFITS AVAILABLE WITH RESPECT TO ITEMS REFERRED TO HEREIN. (B) REFUNDS. IF ANY INDEMNITEE SHALL OBTAIN A REFUND OR CREDIT OF ALL OR ANY PART OF ANY FEES, TAXES AND OTHER CHARGES, PAYMENT OF OR INDEMNITY FOR WHICH SHALL HAVE BEEN MADE BY LESSEE PURSUANT TO THIS SECTION 19.02, SUCH INDEMNITEE SHALL, UNLESS A LEASE DEFAULT OR A LEASE EVENT OF DEFAULT SHALL NOT HAVE BEEN CURED IN ACCORDANCE WITH THE REQUIREMENTS HEREOF, PROMPTLY PAY TO LESSEE THE AMOUNT OF SUCH REFUND OR CREDIT (TOGETHER WITH ANY INTEREST PAID TO SUCH INDEMNITEE WITH RESPECT TO SUCH REFUND OR CREDIT). (C) SUPPLEMENTAL RENT. LESSEE COVENANTS AND AGREES TO PAY, AS SUPPLEMENTAL RENT, ALL AMOUNTS UNDER THIS SECTION 19.02 ON DEMAND BY THE RELEVANT INDEMNITEE. (D) EFFECTIVENESS. LESSEE HEREBY AGREES TO BE BOUND BY, AND TO COMPLY WITH, ITS OBLIGATIONS UNDER THIS SECTION 19.02 ON AND AFTER THE DATE HEREOF, AND THE OBLIGATIONS OF LESSEE UNDER THIS SECTION 19.02 SHALL SURVIVE THE EXPIRATION OR ANY TERMINATION OF THIS LEASE FOR ALL MATTERS DESCRIBED IN THIS SECTION 19.02. SECTION 19.03. HAZARDOUS SUBSTANCES. (A) GENERAL PROVISIONS. LESSEE WARRANTS AND REPRESENTS TO EACH INDEMNITEE THAT TO THE BEST OF LESSEE'S KNOWLEDGE AND EXCEPT AS DISCLOSED IN THE ENVIRONMENTAL REPORT, THE JACKSONVILLE FACILITY AND/OR JACKSONVILLE SITE HAVE NOT BEEN, AND ARE NOT NOW BEING USED IN VIOLATION OF ANY ENVIRONMENTAL LAW, THAT NO PROCEEDINGS HAVE BEEN COMMENCED, OR NOTICE(S) RECEIVED, CONCERNING ANY ALLEGED VIOLATION OF ANY ENVIRONMENTAL LAW, AND THAT THE JACKSONVILLE FACILITY AND THE JACKSONVILLE SITE ARE FREE OF HAZARDOUS OR TOXIC SUBSTANCES AND WASTES, CONTAMINANTS, OIL, RADIOACTIVE OR OTHER MATERIALS (INCLUDING WITHOUT LIMITATION ANY ASBESTOS CONTAINING MATERIALS) THE FAILURE TO REMOVE OF WHICH WOULD HAVE A MATERIAL ADVERSE EFFECT ON THE JACKSONVILLE FACILITY OR THE FAILURE TO REMOVE AND/OR THE MAINTENANCE OF WHICH IS RESTRICTED, PROHIBITED OR PENALIZED BY ANY FEDERAL, STATE OR LOCAL AGENCY, AUTHORITY OR GOVERNMENTAL UNIT. LESSEE COVENANTS THAT IT SHALL NOT PERMIT ANY SUCH HAZARDOUS OR TOXIC SUBSTANCES OR WASTES, CONTAMINANTS, OIL, RADIOACTIVE OR OTHER MATERIALS, INCLUDING WITHOUT LIMITATION ANY ASBESTOS CONTAINING MATERIALS (PROVIDED SUCH LIMITATION APPLIES ONLY TO THE EXTENT ANY FAILURE TO REMOVE THE FOREGOING WOULD HAVE A MATERIAL ADVERSE EFFECT ON -31- THE FACILITY OR THE FAILURE TO REMOVE AND/OR THE MAINTENANCE OF THE FOREGOING IS RESTRICTED, PROHIBITED OR PENALIZED BY ANY FEDERAL, STATE OR LOCAL AGENCY, AUTHORITY OR GOVERNMENTAL UNIT), TO BE BROUGHT TO OR ON THE JACKSONVILLE FACILITY OR THE JACKSONVILLE SITE, OR IF SO BROUGHT OR FOUND LOCATED THEREON, SHALL BE IMMEDIATELY REMOVED, WITH PROPER DISPOSAL, AND ALL REQUIRED ENVIRONMENTAL CLEANUP PROCEDURES SHALL BE DILIGENTLY UNDERTAKEN PURSUANT TO ALL ENVIRONMENTAL LAWS. WITHOUT THE NEED FOR FURTHER ACTION, THE ACCEPTANCE BY LESSEE OF ANY OTHER FACILITY UPON THE APPLICABLE COMMENCEMENT DATE SHALL AUTOMATICALLY BE DEEMED A REPRESENTATION AND WARRANTY AND A COVENANT (AS APPROPRIATE) BY LESSEE AS OF SUCH DATE (WITH REFERENCE TO SUCH FACILITY) AS TO THE FOREGOING MATTERS SET FORTH IN THIS SECTION 19.03(A). LESSEE FURTHER REPRESENTS, WARRANTS AND COVENANTS THAT LESSEE WILL PROMPTLY TRANSMIT TO THE AGENT COPIES OF ANY CITATIONS, ORDERS, NOTICES OR OTHER MATERIAL GOVERNMENTAL OR OTHER COMMUNICATIONS RECEIVED WITH RESPECT TO ANY HAZARDOUS MATERIALS, SUBSTANCES, WASTES OR OTHER ENVIRONMENTALLY REGULATED SUBSTANCES AFFECTING ANY FACILITY OR ANY SITE. LESSEE AGREES THAT IT WILL INDEMNIFY AND REIMBURSE EACH INDEMNITEE FOR AND HEREBY HOLDS EACH INDEMNITEE HARMLESS FROM ALL FINES OR PENALTIES MADE OR LEVIED AGAINST SUCH INDEMNITEE BY ANY GOVERNMENTAL AGENCY OR AUTHORITY AS A RESULT OF OR IN CONNECTION WITH (I) THE USE OF ANY FACILITY AND/OR ANY SITE, (II) THE USE OF THE FACILITIES THEREON, OR (III) THE USE, GENERATION, STORAGE, TRANSPORTATION, DISCHARGE, RELEASE OR HANDLING OF ANY HAZARDOUS OR TOXIC MATERIALS, WASTES OR SUBSTANCES (AS SUCH TERMS ARE DEFINED BY ANY APPLICABLE ENVIRONMENTAL LAW), OR ANY OTHER MATERIAL THE USE, GENERATION, STORAGE, TRANSPORTATION, DISCHARGE, RELEASE OR HANDLING OF WHICH IS REGULATED BY ANY ENVIRONMENTAL LAW AT ANY TIME, OR AS A RESULT OF ANY RELEASE OF ANY NATURE ONTO THE GROUND OR INTO THE WATER OR AIR FROM OR UPON ANY FACILITY AND/OR ANY SITE AT ANY TIME. LESSEE ALSO AGREES THAT IT WILL INDEMNIFY AND REIMBURSE EACH INDEMNITEE FOR AND HOLD EACH INDEMNITEE HARMLESS FROM ANY AND ALL COSTS, EXPENSES, (INCLUDING WITHOUT LIMITATION REASONABLE ATTORNEYS' FEES) AND FOR ALL CIVIL JUDGMENTS OR PENALTIES INCURRED, ENTERED, ASSESSED, OR LEVIED AGAINST EACH INDEMNITEE IN CONNECTION WITH ANY FACILITY AND/OR ANY SITE AS A RESULT OF ANY RELEASE OF ANY NATURE ONTO THE GROUND OR INTO THE WATER OR AIR BY LESSEE OR ANY OTHER PERSON (EXCLUDING SUCH IMDEMNITEE) FROM OR UPON ANY FACILITY AND/OR ANY SITE. SUCH REIMBURSEMENT OR INDEMNIFICATION SHALL INCLUDE BUT NOT BE LIMITED TO ANY AND ALL JUDGMENTS OR PENALTIES TO RECOVER THE COST OF CLEANUP OF ANY SUCH RELEASE FROM OR UPON ANY FACILITY AND/OR ANY SITE AND ALL EXPENSES INCURRED BY ANY INDEMNITEE AS A RESULT OF SUCH A CIVIL ACTION, INCLUDING, BUT NOT LIMITED TO, REASONABLE ATTORNEYS' FEES. (B) NOTICE. IF ANY PARTY ENTITLED TO INDEMNITY UNDER THIS SECTION 19.03 OR LESSEE SHALL HAVE RECEIVED WRITTEN NOTICE OF ANY LIABILITY INDEMNIFIED AGAINST UNDER THIS SECTION 19.03, IT SHALL GIVE PROMPT NOTICE THEREOF TO LESSEE, OR THE PARTY ENTITLED TO BE INDEMNIFIED, AS THE CASE MAY BE, BUT THE FAILURE TO GIVE SUCH NOTICE SHALL NOT AFFECT ANY OBLIGATION UNDER THIS SECTION 19.03, EXCEPT AS OTHERWISE EXPRESSLY PROVIDED HEREIN. IN CASE ANY ACTION, INCLUDING ANY INVESTIGATORY PROCEEDING, SHALL BE BROUGHT AGAINST, OR COMMENCED WITH RESPECT TO, ANY INDEMNITEE IN RESPECT OF WHICH LESSEE IS REQUIRED TO INDEMNIFY SUCH INDEMNITEE PURSUANT TO THE PROVISIONS OF THIS SECTION 19.03, LESSEE SHALL HAVE THE RIGHT TO ASSUME THE DEFENSE THEREOF, INCLUDING THE EMPLOYMENT OF COUNSEL SATISFACTORY TO SUCH INDEMNITEE AND THE PAYMENT OF ALL EXPENSES. IN THE EVENT LESSEE ASSUMES THE DEFENSE OF ANY SUCH ACTION, ANY INDEMNITEE SHALL HAVE THE RIGHT TO EMPLOY SEPARATE COUNSEL IN SUCH ACTION AND PARTICIPATE THEREIN, BUT THE FEES AND EXPENSES OF SUCH COUNSEL SHALL BE AT THE EXPENSE OF SUCH INDEMNITEE, UNLESS (I) THE EMPLOYMENT OF SUCH COUNSEL HAS BEEN SPECIFICALLY AUTHORIZED BY LESSEE, (II) THE NAMED PARTIES TO SUCH ACTION (INCLUDING ANY IMPLEADED PARTIES) INCLUDE BOTH SUCH INDEMNITEE AND LESSEE AND REPRESENTATION OF SUCH INDEMNITEE AND LESSEE BY THE SAME COUNSEL, IN THE REASONABLE JUDGMENT OF SUCH INDEMNITEE, WOULD BE INAPPROPRIATE OR (III) THE COUNSEL EMPLOYED BY LESSEE HAS ADVISED SUCH INDEMNITEE, IN WRITING, THAT SUCH COUNSEL'S REPRESENTATION OF SUCH INDEMNITEE WOULD BE LIKELY TO INVOLVE SUCH COUNSEL IN REPRESENTING DIFFERING INTERESTS WHICH COULD ADVERSELY AFFECT EITHER THE JUDGEMENT OR LOYALTY OF SUCH COUNSEL TO SUCH INDEMNITEE, WHETHER IT -32- BE A CONFLICTING, INCONSISTENT, DIVERSE OR OTHER INTEREST (IN WHICH CASE LESSEE SHALL NOT HAVE THE RIGHT TO ASSUME THE DEFENSE OF SUCH ACTION ON BEHALF OF SUCH INDEMNITEE). LESSEE SHALL NOT BE LIABLE FOR ANY SETTLEMENT OF ANY SUCH ACTION EFFECTED WITHOUT ITS CONSENT, BUT IF SETTLED WITH THE CONSENT OF LESSEE OR IF THERE BE A FINAL JUDGMENT BEYOND FURTHER REVIEW OR APPEAL, IN ANY SUCH ACTION, LESSEE AGREES TO INDEMNIFY AND HOLD HARMLESS ANY INDEMNITEE FROM AND AGAINST ANY LOSS OR LIABILITY BY REASON OF SUCH SETTLEMENT OR JUDGMENT. (C) SUPPLEMENTAL RENT. LESSEE COVENANTS AND AGREES TO PAY, AS SUPPLEMENTAL RENT, ALL AMOUNTS UNDER THIS SECTION 19.03 ON DEMAND BY THE RELEVANT INDEMNITEE. (D) EFFECTIVENESS. LESSEE HEREBY AGREES TO BE BOUND BY, AND TO COMPLY WITH, ITS OBLIGATIONS UNDER THIS SECTION 19.03 ON AND AFTER THE DATE OF, AND THE OBLIGATIONS OF LESSEE UNDER THIS SECTION 19.03 SHALL SURVIVE THE EXPIRATION OR ANY TERMINATION OF THIS LEASE FOR ALL MATTERS DESCRIBED IN THIS SECTION 19.03. SECTION 19.04. INCOME TAX INDEMNITY. (A) PAYMENT OBLIGATION OF LESSEE. WHETHER OR NOT ANY OF THE TRANSACTIONS CONTEMPLATED BY THE OPERATIVE DOCUMENTS SHALL BE CONSUMMATED, LESSEE SHALL PAY, AND SHALL INDEMNIFY AND HOLD HARMLESS LESSOR FROM AND AGAINST, ANY AND ALL INCOME TAX LIABILITY IMPOSED AGAINST LESSOR BY ANY FEDERAL, STATE OR LOCAL GOVERNMENTAL OR TAXING AUTHORITY IN THE UNITED STATES OF AMERICA OR BY ANY FOREIGN GOVERNMENT OR ANY SUBDIVISION OR TAXING AUTHORITY THEREOF. (B) SUPPLEMENTAL RENT. LESSEE COVENANTS AND AGREES TO PAY, AS SUPPLEMENTAL RENT, ALL AMOUNTS UNDER THIS SECTION 19.04 ON DEMAND BY LESSOR. (C) EFFECTIVENESS. LESSEE HEREBY AGREES TO BE BOUND BY, AND TO COMPLY WITH, ITS OBLIGATIONS UNDER THIS SECTION 19.04 ON AND AFTER THE DATE HEREOF PROVIDED THAT THIS SECTION 19.04 SHALL BE EFFECTIVE ONLY FOR SO LONG AS THE SOLE BUSINESS OR ACTIVITY OF LESSOR IS THE ACQUISITION (INCLUDING ANY RELATED FINANCING) AND OWNERSHIP OF THE FACILITIES THEN SUBJECT TO THE TERMS AND CONDITIONS OF THIS LEASE AND THE LEASE OF SUCH FACILITIES TO LESSEE PURSUANT TO THE TERMS OF THIS LEASE. THE OBLIGATIONS OF LESSEE UNDER THIS SECTION 19.04 SHALL SURVIVE THE EXPIRATION OR ANY TERMINATION OF THIS LEASE FOR ALL MATTERS DESCRIBED IN THIS SECTION 19.04. SECTION 19.05. NO BROKERS. EXCEPT FOR AN ARRANGEMENT LESSEE HAS WITH THE STAUBACH COMPANY PURSUANT TO WHICH LESSEE SHALL PAY THE STAUBACH COMPANY A FEE SPECIFIED IN OTHER DOCUMENTATION, LESSOR AND LESSEE REPRESENT AND WARRANT TO EACH OTHER THAT THEY HAVE NOT CONTACTED OR ENTERED INTO ANY AGREEMENT WITH ANY REAL ESTATE BROKER, AGENT, FINDER OR ANY OTHER SIMILAR PERSON IN CONNECTION WITH THIS LEASE. LESSOR AND LESSEE EACH AGREES TO INDEMNIFY THE OTHER PARTY AND HOLD IT HARMLESS FROM ANY LOSS, LIABILITY, DAMAGE OR EXPENSE (INCLUDING WITHOUT LIMITATION REASONABLE ATTORNEY'S FEES) RESULTING FROM SUCH INDEMNIFYING PARTY'S BREACH OF THE REPRESENTATION AND WARRANTY MADE PURSUANT TO THE IMMEDIATELY PRECEDING SENTENCE. SECTION 19.06. INDEMNIFICATION FOR SUBLESSEE ACTS, OMISSIONS, ETC. THE INDEMNITY AND REIMBURSE OBLIGATIONS OF LESSEE UNDER THIS LEASE (INCLUDING WITHOUT LIMITATION ARTICLE XIX) SHALL APPLY FULLY, WITHOUT LIMITATION, WITH RESPECT TO ANY ACT OR OMISSION BY ANY SUBLESSEE OR ANY OTHER EVENT OR OCCURRENCE RELATING TO ANY SUBLESSEE GIVING RISE TO A CLAIM UNDER ARTICLE XIX. SECTION 19.07. INDEMNITY OBLIGATIONS NOT LIMITED BY MAXIMUM LESSEE RISK AMOUNT. THE INDEMNITY AND REIMBURSEMENT OBLIGATIONS OF LESSEE UNDER THIS LEASE (INCLUDING WITHOUT LIMITATION ARTICLE XIX) SMALL REQUIRE PAYMENT IN FULL FOR ALL SUCH INDEMNITY AND REIMBURSEMENT AMOUNTS AND SHALL NOT BE LIMITED IN ANY WAY BY THE MAXIMUM LESSEE RISK AMOUNT OR THE TERMINATION VALUE. -33- SECTION 19.08. COMPUTATION BASIS FOR INDEMNITY OBLIGATIONS. THE PAYMENT OBLIGATIONS OF LESSEE UNDER ARTICLE XIX SHALL IN EACH CASE BE COMPUTED ON A NET AFTER-TAX BASIS FOR EACH INDEMNITEE, AS APPROPRIATE (AT THE THEN EFFECTIVE MARGINAL FEDERAL AND APPLICABLE STATE, LOCAL AND FOREIGN INCOME TAX RATES APPLICABLE TO SUCH INDEMNITEE FOR THE YEAR IN WHICH THE INDEMNITY AMOUNT IS PAID). SECTION 19.09. SPECIAL PROVISIONS REGARDING HASLET FACILITY. NOTWITHSTANDING ANY OTHER PROVISION OF THIS LEASE OR ANY OTHER OPERATIVE DOCUMENT, LESSEE ACKNOWLEDGES AND AGREES THAT ITS INDEMNITY AND OTHER OBLIGATIONS UNDER THIS ARTICLE XIX WITH REGARD TO THE HASLET FACILITY COMMENCE AS OF THE DATE OF THIS LEASE WITHOUT REGARD TO THE COMMENCEMENT DATE FOR THE HASLET FACILITY, IF ANY. SECTION 19.10. INDEMNIFICATION FOR NEGLIGENCE. NOTWITHSTANDING ANY PROVISION CONTAINED IN THIS ARTICLE XIX TO THE CONTRARY, EACH INDEMNITEE SHALL BE INDEMNIFIED FOR ALL OF ITS ACTS AND OMISSIONS NOT CONSTITUTING GROSS NEGLIGENCE OR WILFUL MISCONDUCT. SECTION 19.11. SURVIVAL. THE OBLIGATIONS OF LESSEE UNDER ARTICLE XIX SHALL SURVIVE THE TERMINATION OF THIS LEASE AND ARE EXPRESSLY MADE FOR THE BENEFIT OF AND SHALL BE ENFORCEABLE BY ANY INDEMNITEE, SEPARATELY OR TOGETHER, WITHOUT DECLARING THIS LEASE TO BE IN DEFAULT AND NOTWITHSTANDING ANY ASSIGNMENT BY LESSOR OF THIS LEASE OR ANY OF ITS RIGHTS HEREUNDER. THE EXTENSION OF APPLICABLE STATUTES OF LIMITATIONS BY AN INDEMNITEE OR LESSEE SHALL NOT AFFECT THE SURVIVAL OF LESSEE'S OR ANY INDEMNITEE'S OBLIGATIONS, AS THE CASE MAY BE, UNDER ANY OF SUCH SECTIONS. THE OBLIGATIONS OF LESSEE UNDER THIS ARTICLE XIX SHALL SURVIVE THE EXPIRATION OR ANY TERMINATION OF THIS LEASE FOR ALL MATTERS DESCRIBED IN THIS ARTICLE XIX WHICH RESULT FROM, OCCUR OR ARISE (I) PRIOR TO SUCH EXPIRATION OR TERMINATION, (II) IN CONNECTION WITH A FORECLOSURE OR DEED IN LIEU OF FORECLOSURE REGARDING ANY FACILITY AS A RESULT OF A LEASE EVENT OF DEFAULT OR OTHERWISE IN CONNECTION WITH A LEASE EVENT OF DEFAULT OR THE EXERCISE OF REMEDIES WITH RESPECT TO A LEASE EVENT OF DEFAULT, (III) IN CONNECTION WITH FACTS, EVENTS, CLAIMS, LIABILITIES, ACTIONS, CONDITIONS OR ANY OTHER MATTERS OCCURRING, ARISING OR EXISTING ON OR BEFORE SUCH EXPIRATION OR TERMINATION, (IV) IN CONNECTION WITH ANY FEES, TAXES AND OTHER CHARGES RELATING TO A POINT IN TIME PRIOR TO SUCH EXPIRATION OR TERMINATION OR (V) IN CONNECTION WITH ANY INCOME TAX LIABILITY, RELATING TO A POINT IN TIME PRIOR TO SUCH EXPIRATION OR TERMINATION, IMPOSED AGAINST LESSOR BY ANY FEDERAL, STATE OR LOCAL GOVERNMENTAL OR TAXING AUTHORITY IN THE UNITED STATES OF AMERICA OR BY ANY FOREIGN GOVERNMENT OR ANY SUBDIVISION OR TAXING AUTHORITY THEREOF. ALL PAYMENTS REQUIRED TO BE PAID PURSUANT To ARTICLE XIX SHALL BE MADE DIRECTLY TO, OR AS OTHERWISE REQUESTED BY, THE INDEMNITEE ENTITLED THERETO, UPON WRITTEN DEMAND BY SUCH INDEMNITEE. ALL SUCH WRITTEN DEMANDS SHALL SPECIFY THE AMOUNTS PAYABLE AND THE FACTS UPON WHICH THE RIGHT TO INDEMNIFICATION IS BASED. ARTICLE XX MISCELLANEOUS SECTION 20.01. FURTHER ASSURANCES. (a) Lessee shall cause the Operative Documents and any amendments and supplements to any of them (together with any other instruments, financing statements or amendments thereto, continuation statements, records or papers necessary in connection therewith) to be recorded and/or filed and rerecorded and/or refiled in each jurisdiction as and to the extent required by law in order to, and shall take such other actions as may from time to time be necessary to, establish, perfect and maintain (i) Lessor's right, title and interest in and to each Facility, not subject to any Liens except Permitted Liens, (ii) each of the other rights and interests created by any Operative Document for the benefit of Lessor and (iii) each of the rights and interests of the Agent referenced in Section 20.03. Lessor and Lessee will promptly and duly execute and deliver to the other party such documents and assurances and take such further action as the requesting party may from time to time reasonably request in order to carry out more effectively the intent and purpose of the Operative Documents and to -34- establish and protect the rights and remedies created or intended to be created in favor of Lessor, to establish, perfect and maintain Lessor's right, title and interest in and to each Facility and, including without limitation if requested by Lessor at the expense of Lessee, the recording or filing of counterparts or appropriate memoranda of the Operative Documents, or of such financing statements or other documents with respect thereto as Lessor may from time to time reasonably request, and Lessee agrees promptly to execute and deliver such of the foregoing financing statements or other documents as may require execution by Lessee. SECTION 20.02. QUIET ENJOYMENT. Lessor covenants that Lessor will not interfere in Lessee's quiet enjoyment of any Facility hereunder during the Term, so long as no Lease Event of Default has occurred and is continuing. It is expressly acknowledged however that the violation of this covenant shall not permit Lessee to withhold amounts due hereunder or to terminate this Lease and Leasee's sole action shall be a personal action against the Lessor. SECTION 20.03. SECURITY FOR LESSOR'S OBLIGATIONS. In order to secure the indebtedness evidenced by the JFC Notes and the Holder Certificates, Lessor provides in the Loan Agreement and the Mortgages, among other things, for the creation in favor of the Agent to the Lenders and the Holders Agent of a mortgage lien and security interest for the benefit of the Agent to the Lenders and the Holders Agent in the Collateral (including without limitation each Facility) and for the assignment by Lessor to the Agent to the Lenders and the Holders Agent of the right, title and interest of Lessor in and to this Lease and the other Operative Documents, to the extent provided in the Loan Agreement and the Mortgages. Lessor covenants and agrees that there shall be no mortgage liens or security interests superior to the foregoing. Lessee hereby (a) consents to the Loan Agreement and the Mortgages and such assignment pursuant to the terms of the Loan Agreement and the Mortgages, (b) agrees to pay directly to the Agent for the benefit of the Lenders and the Holders (or, after receipt of notice from the Agent stating that the Notes have been paid in full and the Liens of the Loan Agreement and Mortgages have been discharged, to Lessor) all amounts of Rent and any other payments due or to become due to Lessor hereunder (other than Excepted Payments which shall be paid to the appropriate party), it being acknowledged by the Lessee that for the purposes of enforcing the obligations to pay Rent hereunder, the Agent, the Lenders and the Holders shall be deemed to be third party beneficiaries under the Lease, (c) agrees that the right of the Agent to such payments from Lessee and such other rights as are referenced in this Section 20.03 (and all other payments due Lessor from any third party including without limitation insurance proceeds) hereunder shall be absolute, unconditional and irrevocable and shall not be affected by any circumstance whatsoever, including without limitation those circumstances set forth in Section 3.05 hereof, (d) agrees to cause insurance policies to be maintained in conformity with the provisions of Article IX of the Lease, (e) recognize each Additional Insured as an indemnified party to the same extent as an Indemnitee hereunder, (f) provide the Agent with any and all notices, financial statements, certificates and such other information as shall be provided from time to time under any Operative Document to Lessor and (g) recognize and acknowledge the assignment by Lessor to the Agent of any and/or all of Lessor's rights, but none of Lessor's obligations, hereunder. SECTION 20.04. NOTICES. unless otherwise specifically provided herein, all notices, consents, directions, approvals, instructions, requests and other communications required or permitted by the terms hereof to be given to any Person shall be in writing and shall be directed to the address of such Person referenced below and any such notice shall become effective (a) five (5) Business Days after being deposited in the mails, certified or registered, return receipt requested, with appropriate postage prepaid for first-class mail, (b) one (1) Business Day after being deposited with a recognized overnight courier with the applicable fees prepaid or (c) if delivered by hand, when received. From time to time any such Person may designate a new address for purposes of notice hereunder by notice to each of the other parties: -35- if to Lessor: Jacksonville Funding Corporation One International Place, Room 608 Boston, Massachusetts 02110 Attention: R. Douglas Donaldson if to Lessee: Michaels Stores, Inc. 5931 Campus Circle Drive Irving, Texas 75063 Attention: Vice President of Real Estate with a copy to: Michaels Stores, Inc. 5931 Campus Circle Drive Irving, Texas 75063 Attention: General Counsel SECTION 20.05. SEVERABILITY. Any provision of this Lease that shall be prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. To the extent permitted by applicable law, Lessee hereby waives any provision of law that renders any provision hereof prohibited or unenforceable in any respect. SECTION 20.06. Amendment. Neither this Lease nor any of the terms hereof may be terminated, amended, supplemented, waived or modified orally, but only by an instrument in writing signed by both parties hereto. SECTION 20.07. HEADINGS. The headings of the various Articles and Sections of this Lease are for convenience of reference only and shall not modify, define or limit any of the terms or provisions hereof. SECTION 20.08. COUNTERPARTS; UNIFORM COMMERCIAL Code. This Lease may be executed by the parties hereto in separate counterparts, each of which when so executed and delivered shall be an original, but all such counterparts shall together constitute but one and the same instrument. To the extent, if any, that this Lease shall constitute chattel paper (as such term is defined in the Uniform Commercial Code as in effect in any applicable jurisdiction), no security interest in this Lease may be created by the transfer or possession of any counterpart hereof other than the counterpart containing the receipt therefor executed by the Agent to the Lenders on the signature page thereof. SECTION 20.09. GOVERNING LAW. This Lease has been delivered in, and shall in all respects be governed by, and construed in accordance with, the laws of the State of Texas applicable to agreements made and to be performed entirely within such State, including all matters of construction, validity and performance; PROVIDED, notwithstanding the foregoing, to the extent relating to the creation and perfection of liens on real estate in the State of Florida or any other state, this Lease shall be governed by, and construed in accordance with, the laws of the State of Florida or such other state. LESSEE AND LESSOR HEREBY IRREVOCABLY SUBMIT TO THE NON-EXCLUSIVE JURISDICTION, AND THE VENUE, OF A TEXAS STATE OR FEDERAL COURT LOCATED IN DALLAS COUNTY, TEXAS FOR ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS LEASE OR ANY OTHER OPERATIVE DOCUMENT. LESSEE AND LESSOR HEREBY IRREVOCABLY AGREE THAT ALL CLAIMS IN RESPECT OF SUCH ACTION OR PROCEEDING MAY BE HEARD OR DETERMINED IN SUCH TEXAS STATE COURT, OR TO THE EXTENT PERMITTED BY LAW, SUCH FEDERAL COURT. IN ADDITION, LESSEE AND LESSOR HEREBY IRREVOCABLY SUBMIT TO THE NON- -36- EXCLUSIVE JURISDICTION, AND THE VENUE, OF A STATE OR FEDERAL COURT LOCATED IN ANY STATE IN WHICH A FACILITY IS LOCATED. LESSEE AND LESSOR HEREBY IRREVOCABLY WAIVE, TO THE FULLEST EXTENT THEY MAY EFFECTIVELY DO SO, THE DEFENSE OF AN INCONVENIENT FORUM TO THE MAINTENANCE OF ANY ACTION OR PROCEEDING. SECTION 20.10. (intentionally omitted). SECTION 20.11. BINDING EFFECT; SUCCESSORS AND ASSIGNS; SURVIVAL. The terms and provisions of this Lease, and the respective rights and obligations hereunder of Lessor and Lessee, shall be binding upon their respective successors and assigns (including, in the case of Lessor, any Person to whom Lessor may transfer the Facility), and inure to the benefit of their respective permitted successors and assigns. SECTION 20.12. DIVISIBLE LEASE. It is the intention of the parties hereto that this Lease shall constitute the lease of both personal property and real property and, to such extent, shall be deemed divisible. It is the intention and understanding of the parties hereto that all of the Equipment constitutes personal property and all of the Sites and Buildings constitute real property for all purposes of this Lease and the other documents referred to herein and for all purposes of bankruptcy laws of the United States; PROVIDED, HOWEVER, that nothing herein shall affect the rights and obligations of Lessor or Lessee under Section 20.01 hereof, it being understood that no filing, refiling, recording, re-recording, registration or re-registration in any office for the filing, recording or registration of interests in real property shall constitute or be deemed to constitute evidence or an admission by Lessor or Lessee that the Equipment is real property. If, notwithstanding the foregoing, any portion of Equipment shall be finally determined to be real property by any court of competent jurisdiction, such determination shall not in any way affect the character of any of the remainder of the Equipment as personal property or in any way affect any payment or obligation of Lessee hereunder in respect to such remainder. SECTION 20.13. TRANSACTION COSTS. Lessee shall pay all out-of-pocket costs, fees and expenses of Lessee and all such costs, fees and expenses reasonably incurred by Lessor and Agent to the Lenders (including, without limitation, commitment fees) in connection with the negotiation, preparation, execution and delivery of the Operative Documents. Lessee shall also pay all out-of-pocket costs, fees and expenses of Lessee, Lessor, Agent to the Lenders, each Lender, Agent to the Holders, each Holder and the Owner Trustee in connection with the enforcement or administration of the Operative Documents (and all amendments, modifications and supplements thereto) and except as otherwise specified in the final sentence of Section 20.13, the purchasing and financing of each Facility by Lessor, all other such costs, fees and expenses of Lessee and all other such costs, fees and expenses reasonably incurred by Lessor, Agent to the Lenders and each Lender in connection with the transactions related to the Operative Documents including without limitation such costs, fees and expenses (a) of any appraiser of any Facility, (b) of Moore & Van Allen, PLLC, special counsel to Agent to Lenders, (c) of Ropes & Gray, special counsel to Lessor and (d) associated with any and all filings, searches and recordation necessary or appropriate in connection with the Operative Documents. Collectively, the foregoing costs, fees and expenses to be paid by Lessee may be referred to herein as "Transaction Costs." Neither Lessor nor Lessee shall pay the costs, fees and expenses of counsel to CL incurred prior to the date of this Lease in connection with the transactions referenced in the Operative Documents nor such costs, fees and expenses of counsel to CL subsequently incurred in connection with the closing of the financing of additional Facilities under Section 2.03. Transaction Costs shall be deemed to be Supplemental Rent. SECTION 20.14. CALCULATION OF INTEREST. All calculations of interest amounts hereunder shall be computed based on the actual number of days elapsed over a year of 360 days. -37- SECTION 20.15. SALES EXPENSES. Notwithstanding any other provision of this Lease, Lessee shall be responsible for any and all Sales Expenses including without limitation Sales Expenses incurred in connection with the exercise of remedies under Article XVII hereof, the termination of this Lease under Article IV hereof, the occurrence of an Event of Loss or other loss or damage to any Facility under Article XII hereof or Sales Expenses which otherwise arise; PROVIDED, HOWEVER, Lessee shall not be responsible for any Sales Expenses incurred subsequent to Lessor's retention of title to any Facility under Section 4.01(b) hereof. SECTION 20.16. PRINCIPAL PLACE OF BUSINESS; CHIEF EXECUTIVE OFFICE. Lessee's principal place of business and chief executive office (as such terms are defined in the Uniform Commercial Code of any jurisdiction which jurisdiction's laws are applicable to the perfection of a Lien on the Facility) has been located at 5931 Campus Circle Drive, Irving, Dallas County, Texas, for no less than the six (6) successive calendar months prior to the date hereof. For no less than the six (6) successive calendar months prior to the date hereof, Lessee has not used or operated under any tradename(s) or any other name except as specified in SCHEDULE 4 hereto. SECTION 20.17. ENTIRE AGREEMENT. THIS LEASE (INCLUDING THE SCHEDULES AND APPENDIX HERETO) REPRESENTS THE ENTIRE CONTRACT BETWEEN THE PARTIES RELATIVE TO THE SUBJECT MATTER HEREOF. ANY PREVIOUS AGREEMENT BETWEEN THE PARTIES WITH RESPECT TO THE SUBJECT MATTER HEREOF IS SUPERSEDED BY THIS LEASE. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. NOTHING IN THIS LEASE, EXPRESSED OR IMPLIED, IS INTENDED TO CONFER UPON ANY PARTY OTHER THAN THE PARTIES HERETO ANY RIGHTS, REMEDIES, OBLIGATIONS OR LIABILITIES UNDER OR BY REASON OF THIS LEASE. SECTION 20.18. USURY SAVINGS PROVISION. It is the intent of Lessor and Lessee to conform to and contract in strict compliance with applicable usury law from time to time in effect. To the extent Rent is hereinafter characterized by any court of competent jurisdiction as the repayment of principal and interest thereon, this Section 20.18 shall apply. Any such Rent so characterized as interest may be referred to herein as "Interest." All agreements between Lessor and Lessee are hereby limited by the provisions of this paragraph which shall override and control all such agreements, whether now existing or hereafter arising and whether written or oral. In no way, nor in any event or contingency (including, but not limited to, prepayment or acceleration of the maturity of any obligation), shall any Interest taken, reserved, contracted for, charged, or received under this Lease or otherwise, exceed the maximum nonusurious amount permissible under applicable law. If, from any possible construction of any of the Operative Documents or any other document, Interest would otherwise be payable in excess of the maximum nonusurious amount, any such construction shall be subject to the provisions of this paragraph and such documents shall be automatically reduced to the maximum nonusurious amount permitted under applicable law, without the necessity of execution of any amendment or new document. If Lessor shall ever receive anything of value which is characterized as Interest with respect to the obligations owed hereunder under applicable law and which would, apart from this provision, be in excess of the maximum lawful amount, an amount equal to the amount which would have been excessive Interest shall, without penalty, be applied to the reduction of the component of Rent deemed to be principal and not to the payment of Interest, or refunded to Lessee or any other payor thereof, if and to the extent such amount which would have been excessive exceeds the component of Rent deemed to be principal. The right to demand payment of Rent or any other amounts evidenced by any of the Operative Documents does not include the right to receive any Interest which has not otherwise accrued on the date of such demand, and Lessor does not intend to charge or receive any unearned Interest in the event of such demand. All Interest paid or agreed to be paid to Lessor shall, to the extent permitted by applicable law, be amortized, prorated, allocated, and spread throughout the full stated term (including any renewal or extension) of this Lease so that the amount of Interest on account of such Rent does not exceed the maximum nonusurious amount permitted by applicable law. - 38 - SECTION 20.19. AMENDMENT, MODIFICATION AND RESTATEMENT. This Lease amends, modifies, restates and supersedes the Original Lease, as such may have been amended, modified and/or restated from time to time prior to the date hereof. (The remainder of this page has been intentionally left blank.] - 39 - IN WITNESS WHEREOF, the undersigned have each caused this Lease to be duly executed and delivered and their corporate seals to be hereunto affixed and attested by their respective officers thereunto duly authorized as of the day and year first above written. JACKSONVILLE FUNDING CORPORATION Attest: By: /s/ ILLEGIBLE By: /s/ Tiffany Percival Title: Treasurer Title: Tiffany Percival, Vice President (Affix Seal Here) MICHAELS STORES, INC. Attest: By: /s/ Janet S. Morehouse By: /s/ K.L. Magnuson Title: Assistant Secretary Title: Vice President (Affix Seal Here) Receipt acknowledged for purposes of determining the chattel paper copy of this Lease: NATIONSBANK OF TEXAS, N.A., as Agent to the Lenders By: /s/ Joseph G. Taylor Title: SVP SCHEDULE 1 to LEASE AGREEMENT BASIC RENT Each payment of Basic Rent due on a Rent Payment Date shall be equal to the product of (i) the aggregate Lessor's Cost for all Facilities then subject to the terms and conditions of this Lease Agreement multiplied by (ii) the Applicable Rate; PROVIDED, notwithstanding the foregoing provisions of this Schedule 1, the Basic Rent due with respect to: (x) any newly leased Facility on the first Rent Payment Date after the Commencement Date set forth in the applicable Lease Supplement (assuming such Commencement Date is not a Rent Payment Date) shall be equal to the product of (1) Lessor's Cost for such Facility (as set forth in the applicable Lease Supplement) multiplied by (2) the Base Rate multiplied by (3) a fraction having as its numerator the number of days from the applicable Commencement Date to the next occurring Rent Payment Date and as its denominator the number 90; and (y) (i) the Jacksonville Facility and (ii) all other Facilities subject to this Lease as of the immediately preceding Rent Payment Date, on the first Rent Payment Date after the Commencement Date for a newly leased Facility shall be equal to the product of (1) the sum of Jacksonville Lessor's Cost and the aggregate Lessor's Cost for such other Facilities (as set forth in the applicable Lease Supplements) multiplied by (2) the Applicable Rate. (The Applicable Rate and the Base Rate shall be calculated on the basis of the actual number of days elapsed over a year of 360 days.) During the Term for each Facility then subject to the terms and conditions of this Lease Agreement, Basic Rent shall be adjusted as of the first day of each Rent Payment Period based on the then current Applicable Rate which shall be used to calculate the Basic Rent that is due for such Rent Payment Period and that is payable on the last day of such Rent Payment Period. Notwithstanding the foregoing provisions of this SCHEDULE 1, Basic Rent with respect to any equipment and other property subject to an Additional Lease Supplement shall be determined in accordance with the terms and provisions of such the Additional Lease Supplement. SCHEDULE 2A to LEASE AGREEMENT DESCRIPTION OF JACKSONVILLE FACILITY PART 1 - JACKSONVILLE EQUIPMENT (AS of the date hereof or hereafter, the following items may be deemed to be fixtures.) Any and all personal property of any kind or type conveyed to Lessor pursuant to the Jacksonville Bill of Sale, including without limitation the equipment, other personal property and fixtures referenced in Schedule 2A-II attached hereto and made a part hereof. PART 2 - JACKSONVILLE BUILDING Any and all improvements located on the Jacksonville Site. PART 3 - JACKSONVILLE SITE See Schedule 2A-I attached hereto and made a part hereof. PART 4 - RAILROAD CROSSING LICENSE AGREEMENT See definition of Railroad Crossing License Agreement in APPENDIX A to the Lease. The property subject to the Railroad Crossing License Agreement is also part of the Jacksonville Facility. PART 5 - MISCELLANEOUS All other property, to the extent good and indefeasible title has been granted, bargained, sold, transferred, assigned and conveyed to Lessor, pursuant to the Jacksonville Purchase Agreement. SCHEDULE 2A-I to LEASE AGREEMENT LEGAL DESCRIPTION OF JACKSONVILLE SITE PARCEL A: Part of Tract 2, Block 2, Section 21, Township 2 South, Range 25 East, JACKSONVILLE HEIGHTS, according to the plat thereof as recorded in Plat Book 5, page 93, of the current public records of Duval County, Florida, more particularly described as follows: Begin at the intersection of the East line of Block 16, SUNSET GARDENS, according the plat thereof recorded in Plat Book 11, pages 1 and 2, of the current public records of said County, with the South line of Beaver Street (a 66.0 foot right-of-way); thence North 82 degrees 48 minutes 35 seconds East, 650.35 feet, along with South line of said Beaver Street to the West line of Jones Road (a 30 foot right- of-way); thence South 01 degrees 09 minutes 35 seconds East, 81.26 feet along the West line of said Jones Road, to the North line of the C.S.X. Railroad (a 200.0 foot right-of-way); thence South 82 degrees 27 minutes 49 seconds West, 650.74 feet, along the North line of said railroad, to the East line of said Block 16, said Sunset Gardens; thence North 01 degrees 11 minutes 05 seconds West, 85.21 feet, along the East line of said Block 16, to the Point of Beginning. PARCEL B; Tract 9, and Part of Tracts, 3, 4, 5, 6, 8, 10, 11, 12, 13 and 14, Black 1 and Tract 15 and part of Tracts 2, 13, 14 and 16, Block 2, Section 21, Township 2 South, Range 25 East, JACKSONVILLE HEIGHTS, according to the plat thereof recorded in Plat Book 5, page 93, of the current public records of Duval County, Florida, together with that certain closed 30.0 foot road, lying between said Block 1 and 2, more particularly described as follows: Begin at the intersection of the West line of Addor Lane (formerly Pike Road - a 60.0 foot right-of-way), with the South line of the C.S.X. Railroad (a 200 foot right-of-way); thence South 82 degrees, 27 minutes 49 seconds West, 2,618.1 feet, along the South line of said Railroad, to the East line of Sunset Gardens, as recorded in Plat Book 11, pages 1 and 2, of the current public records of said County; thence the following three courses along the East line of said Sunset Gardens, (1) South 01 degrees 11 minutes 05 seconds East, 302.82 feet; (2) thence South 87 degrees 01 minutes 27 seconds West 661.0 feet; (3) thence South 01 degrees 06 minutes 40 seconds East, 1,104.76 feet to the North line of Interstate Highway No. 10 (a 300.0 foot limited access right-of-way); thence North 80 degrees 01 minutes 38 seconds East, 1.066.89 feet, along the North line of said I-10, to the point of curve of a curve, concave to the Southeast and having a radius of 23,068.31 feet; thence around and along said curve, through a central angle of 05 degrees 29 minutes 59 seconds, an arc distance of 2,214.26 feet, (chord bearing and distance of North 82 degrees 46 minutes 52 seconds East, 2,213.41 feet); thence North 00 degrees 48 minutes 41 seconds West, 1,322.23 feet, along the Southerly production of the West line of and the West line of said Addor Lane, to the Point of Beginning. PARCEL C: Part of Tracts 3 and 4, Block 1, Section 21, Township 2 South, Range 25 East, JACKSONVILLE HEIGHTS, according to the plat thereof recorded in Plat Book 5, page 93 of the current public records of Duval County, Florida more particularly described as follows: Begin at the intersection of the South line of Beaver Street (a 66.0 foot right-of-way) with the West line of Addor Lane (a 60.0 foot right- of-way); thence South 00 degrees 48 minutes 41 seconds East, 63.06 feet, along the West line of said Addor Lane, to the North line of the CSX Railroad (a 200.0 foot right-of-way): thence South 82 degrees 17 minutes 25 seconds West, 311.01 feet, along the North line of said Railroad: thence North 07 degrees 11 minutes 25 seconds West, 65.49 feet, to the south line of said Beaver Street; thence North 82 degrees 48 minutes 35 seconds East, 318.0 feet, along the South line of said Beaver Street, to the point of beginning. Less and except the following described parcels: Part of Tracts 3 and 4, Block 1, Section 21, Township 2 South, Range 25 East, JACKSONVILLE HEIGHTS, according to the plat thereof recorded in Plat Book 5, page 93 of the current public records of Duval County, Florida, more particularly described as follows: Begin at the intersection of the South line of Beaver Street (a 66.0 foot right-of-way) with the West line of Addor Lane (a 60.0 foot right-of-way); thence South 00 degrees 48 minutes 41 seconds East, 10.06 feet, along the West line of said Addor Lane; thence South 82 degrees 48 minutes 35 seconds West, 316.88 feet; thence North 07 degrees 11 minutes 25 seconds West, 10.0 feet, to the South line of said Beaver Street; thence North 82 degrees 48 minutes 35 seconds East, 318.0 feet, along the South line of said Beaver Street, to the Point of Beginning. Part of Tract 3, Block 1, Section 21, Township 2 South, Range 25 East, JACKSONVILLE HEIGHTS, according to the plat thereof recorded in Plat Book 5, page 93 of the current public records of Duval County, Florida, more particularly described as follows: Commence at the intersection of the South line of Beaver Street (a 66.0 foot right-of-way) with the West line of Addor Lane (a 60.0 foot right-of-way); thence South 00 degrees 48 minutes 41 seconds East, 10.06 feet, along the West line of said Addor Lane, to the point of beginning; thence continue South 00 degrees 48 minutes 41 seconds East, 53.00 feet, along the West line of said Addor Lane, to the North line of the CSX Railroad (a 200.0 foot right-of-way); thence South 82 degrees 17 minutes 25 seconds West, 10.07 feet, along the North line of said railroad; thence North 00 degrees 48 minutes 41 seconds West, 27.0 feet; thence North 53 degrees 23 minutes 31 seconds West, 37.46 feet; thence North 82 degrees 48 minutes 35 seconds East, 40.0 feet, to the Point of Beginning. SCHEDULE 2A-II to LEASE AGREEMENT (Description of Jacksonville Equipment, Personal Property and Fixtures) SCHEDULE 2B to LEASE AGREEMENT FORM OF HASLET LEASE SUPPLEMENT This Lease Supplement and Acceptance Certificate is dated_________________ (the "Haslet Lease Supplement") and is executed by JACKSONVILLE FUNDING CORPORATION, a Delaware corporation ("Lessor") and MICHAELS STORES, INC., a Delaware corporation ("Lessee") pursuant to Section 2.03 of the Amended, Modified and Restated Master Lease Agreement dated as of December 18, 1995 between Lessor and Lessee (as amended, modified and/or restated from time to time prior to the date hereof, the "Agreement"). All capitalized terms used herein but not defined herein shall have the meanings given to such terms in the Agreement. Lessee hereby acknowledges and agrees that the Facility specified on RIDER A attached hereto and made a part hereof has been delivered to Lessee on the date hereof at the delivery place described below, and that, as between Lessor and Lessee, the Facility (a) has been inspected to the complete satisfaction of Lessee, (b) is in good operating order, repair and condition, (c) is of a size, design, capacity, construction and manufacture selected by and suitable to Lessee, (d) is suitable for Lessee's purposes, (e) has been unconditionally accepted by Lessee on the date hereof, for all purposes of the Agreement, and (f) is subject to all of the terms, conditions and provisions of the Agreement. Lessee acknowledges, agrees and certifies that Lessor has made no warranty, express or implied, with respect to the Facility. Lessee hereby represents and warrants as of the date hereof that all of the representations and warranties contained in the Agreement with respect to the Lessee and the Facility remain true and correct and no Lease Default or Event of Default has occurred thereunder. Lessor hereby leases to Lessee and Lessee hereby leases from Lessor the Facility upon and subject to all of the terms, conditions and provisions of the Agreement, and Lessor and Lessee further agree and state as follows: 1. Delivery Place for the Facility: ___________________, ______. 2. Legal description of Site: See RIDER B attached hereto and made a part hereof. 3. Description of the Equipment, related personal property and fixtures: See RIDER C attached hereto and made a part hereof. 4. The Lessor's Cost is $_____________. 5. The Basic Term commences on the date of this Lease Supplement (the "Commencement Date") and ends on the Basic Term Expiration Date, both dates inclusive, unless sooner terminated in accordance with the provisions of the Agreement. 6. The aggregate quarterly Basic Rent for the Facility and the Jacksonville Facility shall be computed in accordance with Section 3.01 of the Agreement. 7. This Lease Supplement may be executed in as many counterparts as shall be determined by the parties hereto when so executed, and each such counterpart shall be binding on both parties hereto, notwithstanding that both parties are not signatories to the same counterpart. (The remainder of this page has been intentionally left blank.] IN WITNESS WHEREOF, the undersigned have each caused this Lease to be duly executed and delivered and their corporate seals to be hereunto affixed and attested by their respective officers thereunto duly authorized as of the day and year first above written. JACKSONVILLE FUNDING CORPORATION Attest: By:_________________________________ By:_________________________________ Title:______________________________ Title:______________________________ (Affix Seal Here) MICHAELS STORES, INC. Attest: By:_________________________________ By:_________________________________ Title:______________________________ Title:______________________________ (Affix Seal Here) Receipt acknowledged for purposes of determining the chattel paper copy of this Lease Supplement: NATIONSBANK OF TEXAS, N.A., as Agent to the Lenders By:_________________________________ Title:______________________________ RIDER A TO LEASE SUPPLEMENT DESCRIPTION OF FACILITY PART 1 - EQUIPMENT PART 2 - BUILDING PART 3 - SITE PART 4 - MISCELLANEOUS RIDER B TO LEASE SUPPLEMENT LEGAL DESCRIPTION OF SITE RIDER C TO LEASE SUPPLEMENT DESCRIPTION OF EQUIPMENT, PERSONAL PROPERTY AND FIXTURES SCHEDULE 3 TO LEASE AGREEMENT LEASE SUPPLEMENT AND ACCEPTANCE CERTIFICATE (ADDITIONAL EQUIPMENT) This Lease Supplement and Acceptance Certificate (Additional Equipment) is dated _______________________ (the "Lease Supplement") and is executed by JACKSONVILLE FUNDING CORPORATION, a Delaware corporation ("Lessor") and MICHAELS STORES, INC., a Delaware corporation ("Lessee") pursuant to Section 2.04 of the Amended, Modified and Restated Master Lease Agreement dated as of December __, 1995 between Lessor and Lessee (as amended, modified and/or restated from time to time prior to the date hereof, the "Agreement"). All capitalized terms used herein but not defined herein shall have the meanings given to such terms in the Agreement. Lessee hereby acknowledges and agrees that the equipment and other property specified on RIDER A attached hereto and made a part hereof (the "Additional Equipment") has been delivered to Lessee at the Facility on the date hereof at the delivery place described below, and that, as between Lessor and Lessee, the Additional Equipment (a) has been inspected to the complete satisfaction of Lessee, (b) is in good operating order, repair and condition, (c) is of a size, design, capacity, construction and manufacture selected by and suitable to Lessee, (d) is suitable for Lessee's purposes, (e) has been unconditionally accepted by Lessee on the date hereof, for all purposes of the Agreement, and (f) is subject to all of the terms, conditions and provisions of the Agreement. Lessee acknowledges, agrees and certifies that Lessor has made no warranty, express or implied, with respect to the Facility. Lessee hereby represents and warrants as of the date hereof that all of the representations and warranties contained in the Agreement with respect to the Lessee and the Facility remain true and correct and no Lease Default or Event of Default has occurred thereunder. Lessor hereby leases to Lessee and Lessee hereby leases from Lessor the Additional Equipment upon and subject to all of the terms, conditions and provisions of the Agreement, and Lessor and Lessee further agree and state as follows: 1. Delivery Place for the Additional Equipment: _______________, _____. 2. Legal description of Site: See RIDER B attached hereto and made a part hereof. 3. The Lessor's Cost for the Additional Equipment is $____________. 4. The Basic Term for the Additional Equipment commences on the date of this Lease Supplement and ends on _______________, both dates inclusive, unless sooner terminated in accordance with the provisions of the Agreement. 5. The aggregate quarterly Basic Rent for the Additional Equipment shall be computed as follows: 6. This Lease Supplement may be executed in as many counterparts as shall be determined by the parties hereto when so executed, and each such counterpart shall be binding on both parties hereto, notwithstanding that both parties are not signatories to the same counterpart. (The remainder of this page has been intentionally left blank.) IN WITNESS WHEREOF, the undersigned have each caused this Lease to be duly executed and delivered and their corporate seals to be hereunto affixed and attested by their respective officers thereunto duly authorized as of the day and year first above written. JACKSONVILLE FUNDING CORPORATION Attest: By:_________________________________ By:_________________________________ Title:______________________________ Title:______________________________ (Affix Seal Here) MICHAELS STORES, INC. Attest: By:_________________________________ By:_________________________________ Title:______________________________ Title:______________________________ (Affix Seal Here) Receipt acknowledged for purposes of determining the chattel paper copy of this Lease Supplement: NATIONSBANK OF TEXAS, N.A., as Agent to the Lenders By:_________________________________ Title:______________________________ RIDER A TO LEASE SUPPLEMENT (ADDITIONAL EQUIPMENT) DESCRIPTION OF ADDITIONAL EQUIPMENT RIDER B TO LEASE SUPPLEMENT (ADDITIONAL EQUIPMENT) LEGAL DESCRIPTION OF SITE SCHEDULE 4 TO LEASE AGREEMENT TRADENAMES AND OTHER NAME UNDER WHICH LESSEE HAS DONE BUSINESS 1. Michaels 2. Aaron Bros. 3. Moskatel's APPENDIX A The terms referenced below shall have the following meanings: "Additional Lease Supplement" shall mean, if any, the Lease Supplement and Acceptance Certificate (Additional Equipment) dated after the date of the Lease between Lessee and Lessor, substantially in the form of Schedule 3 to the Lease, as amended, modified, supplemented, restated and/or replaced from time to time in accordance with the provisions thereof. "Additional Insured" shall mean, collectively, Lessor, each Lender, each Holder, the Agent to the Lenders and the Agent to the Holders and their respective successors and assigns. "Adjusted Total Debt" means, as of the date of any determination thereof, the sum of (a) Total Debt, plus (b) eight (8) times operating lease expense for Lessee and its Subsidiaries for the preceding 12-month period. "Advance" or "Advances" shall mean the disbursement or disbursements of a sum or sums loaned by the lenders (under the Revolving Credit Agreement) to Lessee pursuant to Article II of the Revolving Credit Agreement. "Affiliate" shall mean a Person (other than a Subsidiary): (a) which directly or indirectly through one or more intermediaries controls or is controlled by, or is under common control with such Person; or (b) which beneficially owns or holds five percent (5%) or more of the voting stock of such Person; or (c) five percent (5%) or more of the voting stock (or in the case of a Person which is not a corporation, five percent (5%) or more of the equity interest) of which is beneficially owned or held by such Person or a Subsidiary of such Person. "Agency Agreement" shall mean that certain agency agreement dated as of the date hereof between JFC, as lessor and Michaels Stores, Inc., as construction agent. "Agency Agreement Event of Default" shall mean an event set forth in Section 5.1 of the Agency Agreement. "Agent to the Lenders" shall mean NationsBank, as agent to the Lenders under the Loan Agreement and its successors and assigns. "Agent" shall mean the Agent to the Lenders, its successors and assigns in such capacity. "Alterations" shall mean, with respect to the Facility, alterations, improvements, modifications and additions to the Facility, but shall in no event include any Lessee Owned Equipment. "Applicable Rate" shall mean, with respect to each Rent Payment Period, a per annum interest rate equal to the lesser of (a) the Highest Lawful Rate or (b) in accordance with Section 3B.6 of the Loan Agreement, the Base Rate or the LIBOR Rate, as appropriate; PROVIDED, HOWEVER, in the event and so long as the Agent determines that (1) dollar deposits are not generally available in the interbank Eurodollar market, (2) that reasonable means do not exist for ascertaining the LIBOR Rate, (3) as a result of changes in the Law, or the adoption or making of any interpretations, directives or regulations (whether or not having the force of Law) by any court, governmental authority or reserve bank charged with the interpretation or administration thereof, the LIBOR Rate will not adequately and fairly reflect the cost to each Lender of making, maintaining or funding a proposed LIBOR Rate borrowing that the Lessor has requested be made or continued or (4) as a result of changes in the Law, or the adoption or making of any interpretations, directives or regulations (whether or not having the force of Law) by any court, governmental authority or reserve bank-charged with the interpretation or administration thereof, it shall be or become unlawful or impossible to make, maintain or fund any LIBOR Rate borrowing, then with respect to any of the foregoing instances, the Applicable Rate shall mean, with respect to each Rent Payment Period, a per annum interest rate equal to the lesser of (x) the Highest Lawful Rate and (y) the Base Rate. "Appraisal Procedure" shall mean the following procedure for determining the Fair Market Sales Value of any property or any other amount which may, pursuant to any provision of any Operative Document, be determined by the Appraisal Procedure: two qualified appraisers, one chosen by Lessee and one chosen by Lessor, shall mutually agree thereupon, but if either party shall fail to choose an appraiser within ten (10) days after notice from the other party of the selection of its appraiser, then the appraisal by such appointed appraiser shall be binding on Lessee and Lessor. If the two (2) appraisers cannot agree within twenty (20) days after both shall have been appointed, then a third appraiser shall be selected by the two (2) appraisers or, failing agreement as to such third appraiser within thirty (30) days after both shall have been appointed, by the American Arbitration Association. The decisions of the three (3) appraisers shall be given within twenty (20) days of the appointment of the third appraiser and the decision of the appraiser most different from the average of the other two (2) shall be discarded and such average of such two (2) appraisers shall be binding on Lessor and Lessee. The fees and expenses of the appraiser appointed by Lessee shall be paid by Lessee; the fees and expenses of the appraiser appointed by Lessor shall be paid by Lessor (such fees and expenses not being indemnifiable pursuant to Section 19.01 of the Lease); the fees and expenses of the third appraiser shall be divided equally between Lessee and Lessor, except that all fees and expenses of all of the appraisers shall be paid by Lessee in the case of an appraisal or determination under Article XVII of the Lease. "Assignment Agreement" shall mean the First Level Assignment Agreement and the Second Level Assignment Agreement. "Assignment and Assumption Agreement" shall mean the Assignment and Assumption Agreement dated as of December 20, 1994 between Lessor and Lessee. "Assignment of Contract of Sale" shall mean the Jacksonville Assignment of Contract of Sale and, to the extent applicable, any other Purchase Agreement Assignment between Lessor and the Agent and, if necessary (as determined in the reasonable judgment of the Agent), acknowledged by the seller of the applicable Facility, as the same may be amended, modified, supplemented, restated or replaced from time to time in accordance with the provisions thereof. "Assignment of Leases" shall mean each Assignment of Leases and each Amended, Modified and Restated Assignment of Leases, as the case may be, respecting one or more of the Facilities dated as of the applicable Commencement Date executed by Lessor in favor of the Agent, as the same may be amended, modified, supplemented, restated or replaced from time to time in accordance with the provisions thereof. "Base Rate" means a fluctuating rate per annum as shall be in effect from time to time equal to the lesser of (a) the Highest Lawful Rate and (b) the sum of (i) the Federal Funds Rate, plus (ii) 1.25%. The Base Rate shall be adjusted automatically as of the opening of business on the effective date of each change in the prime commercial lending rate or Federal Funds Rate, as applicable, to account for such change. "Basic Rent" shall mean, for the Term, the basic rent payable pursuant to Section 3.01 of the Lease. Such basic rent shall be determined in accordance with the provisions of SCHEDULE 1 to the Lease and, if any, the Additional Lease supplement. "Basic Term" shall mean the Jacksonville Basic Term and, with respect to any other Facility, if any, the period from the Commencement Date set forth in the applicable Lease Supplement to the date set forth in the applicable Lease Supplement as the Basic Term Expiration Date, unless this Lease is sooner terminated pursuant to the provisions hereof. "Basic Term Expiration Date" shall mean December 18, 1997. "Bill of Sale" shall mean the Jacksonville Bill of Sale and, with respect to any other Facility, if any, each warranty bill of sale given by the seller of equipment and other property for such Facility for the benefit of Lessor, as the same may be amended, modified, supplemented, restated or replaced from time to time in accordance with the provisions thereof. "Building" shall mean the Jacksonville Building and, with respect to any other Facility, if any, the building and other properties specifically described in the applicable Lease Supplement together with any and all Replacement Equipment which may from time to time be incorporated in the building. "Business Day" shall mean any day other than a Saturday, Sunday or other day on which banks are authorized to be closed in Dallas, Texas. "CL" shall mean Credit Lyonnais New York Branch, and its successors and assigns. "CO-Agent to the Lenders" shall mean CL, as co-agent to the Lenders under the Loan Agreement, and its successors and assigns. "Collateral" shall mean, collectively, the "Collateral", as such term is defined in the Loan Agreement, the "Collateral", as such term is defined in the applicable Mortgage and the "Mortgaged Property", as such term is defined in the applicable Mortgage. "Commencement Date" shall mean the Jacksonville Commencement Date and, with respect to any other Facility, if any, the respective dates (a) under the Lease Supplement (in form and substance substantially similar to SCHEDULE 2B of the Lease) as of which Lessor pays, or causes to be paid, the outstanding balance for such Facility under the applicable Purchase Agreement and (b) under the Additional Lease Supplement, the date specified therein as such commencement date. "Consolidated Subsidiary" shall mean as of any date a Subsidiary or other entity the accounts of which would be consolidated with those of any Person in its consolidated financial statements if such statements were prepared as of such date. "Current Assets" shall mean, as of the date of any determination thereof, such assets of Lessee and its Subsidiaries as would be required by GAAP to be included as current assets on the consolidated balance sheet of a corporation conducting a business the same as or similar to that of Lessee. "Current Liabilities" shall mean, as of the date of determination thereof, all indebtedness which by its terms is payable an demand or matures not more than one year from the date of determination thereof, fixed sinking fund payments or other prepayments to be made with respect to any indebtedness within one year after the date of determination thereof and all of the items which in accordance with GAAP would be included as current liabilities on the consolidated balance sheet of Lessee and its Subsidiaries. "Deed" shall mean the Jacksonville Deed and, with respect to any other Facility, if any, the Warranty Deed dated the applicable Commencement Date given by the seller of the Facility for the benefit of Lessor, as the same may be amended, modified, supplemented, restated or replaced from time to time in accordance with the provisions thereof. "Environmental Law" shall mean any federal, state or local law, statute, ordinance, rule, regulation or standard pertaining to the protection of human health, the environment or the generation, treatment, storage, disposal, manufacturing, processing or transportation of hazardous, toxic or dangerous materials or wastes, including, without limitation, the Comprehensive Environmental Response, Compensation and Liability Act, the Resource Conservational Recovery Act, the Toxic Substances Control Act, the Clean Air Act, the Clean Water Act, the Hazardous Material Transportation Act, and any other analogous federal, state or local law, statute, ordinance, rule, regulation or standard. "Environmental Report" shall mean that certain Phase I Environmental Assessment dated September 1994 and produced by CRC Environmental Risk Management, Inc. and that certain Phase II Limited Subsurface Assessment dated October 1994 and produced by CRC Environmental Risk Management, Inc. "Equipment" shall mean the Jacksonville Equipment and, with respect to any other Facility, if any, the equipment and other property described in any Lease Supplement together with any Replacement Equipment which may from time to time be incorporated in such equipment and other property and title to which shall have vested in Lessor. "Eurodollar Reserve Percentage" means, with respect to each Rent Payment Period during which the LIBOR Rate is applicable, that percentage (expressed as a decimal) determined by the Agent to the Lenders to be the actual reserve requirement in effect on the first day of such Rent Payment Period for NationsBank, as prescribed by the Board of Governors of the Federal Reserve System (or any successor), (including any basic, supplemental and emergency reserves applicable to "eurocurrency liabilities") pursuant to Regulation D or any other then applicable regulation of the Board of Governors which prescribes reserve requirements applicable to "eurocurrency liabilities," as defined in Regulation D. The Eurodollar Reserve Percentage shall be a fixed percentage calculated at, and effective from the first day of, such Rent Payment Period. Each determination by the Agent to the Lenders of the Eurodollar Reserve Percentage shall, in the absence of manifest error, be conclusive and binding. "Event of Default" shall have the meaning specified in Section 7.1 of the Loan Agreement. "Event of Loss" with respect to any Facility means any of the following events whether existing at the expiration or earlier termination of this Agreement: (a) loss of a material portion of such Facility or of the use thereof due to theft or disappearance during the Term, or the non-existence of such Facility, (b) destruction, damage beyond repair, or rendition of a material portion of such Facility permanently unfit for normal use for any reason whatsoever, (c) any damage to such Facility or any part thereof which results in an insurance settlement with respect to such Facility on the basis of a total loss, or (d) the condemnation, confiscation, seizure, or requisition of use or title to a material portion of such Facility by any governmental authority under the power of eminent domain or otherwise. "Excepted Payments" shall mean and include (a) any indemnity (whether or not Rent) which is payable directly to Lessor under Article XIX of the Lease but excluding payments to either Agent or any Lender, (b) any amounts of Supplemental Rent payable to and for the account of Lessor pursuant to Section 3.04 of the Lease with respect to such indemnity payments and (c) proceeds of public liability or property damage insurance maintained under any Operative Document for the benefit of Lessor but excluding in all cases insurance amounts allocable to either Agent or any Lender. "Expense" shall have the meaning specified in Section 19.01(a) of the Lease. "Expiration Date" shall mean (a) the last day of the Basic Term or (b) the last day of the final Renewal Term in effect, if any. "Facility" shall mean the Jacksonville Facility and, to the extent applicable, the Haslet Facility (if any) and, if approved by Lessor, each Lender and each Holder, all other Equipment, Buildings, Sites, and all other property, to the extent good and indefeasible title shall have been granted, bargained, sold, transferred, assigned and conveyed to Lessor pursuant to a Purchase Agreement, all as more particularly described in the applicable Lease Supplement. "Fair Market Sales Value" shall mean with respect to any Facility or any portion thereof the fair market sales value that would be obtained in an arm's-length transaction between an informed and willing buyer (other than a lessee currently in possession) and an informed and willing seller, under no compulsion, respectively, to buy or sell, and neither of which is related to Lessor or Lessee, for the purchase of such Facility or such portion thereof, as the case may be. Such fair market sales value shall be calculated as the value for the ownership and use of any Facility or portion thereof to be purchased in place at the applicable Site, assuming, in the determination of such fair market sales value, that such Facility or such portion thereof is in the condition and repair required to be maintained by the terms of the Lease. "Fees, Taxes and other Charges" shall have the meaning specified in Section 19.02 of the Lease. "Federal Funds Rate" means, for any period, a fluctuating interest rate per annum equal for each day during such period to the weighted average of the rates on overnight federal funds transactions with members of the Federal Reserve System arranged by federal funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of Dallas, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for such date on such transactions received by NationsBank from three federal funds brokers of recognized standing selected by it. "First Level Assignment Agreement" shall mean the Assignment Agreement dated as of the date hereof among NationsBank and the Agent to the Lenders, as the same may be amended, modified, supplemented, restated and/or replaced from time to time in accordance with the provisions thereof. "Fixed Charges" shall mean for Lessee and its Subsidiaries as of any determination date for the preceding 12-month period, the sum of (a) interest expense for such period plus (b) operating lease expense for such period all as determined and consolidated in accordance with GAAP. "Fixed Charges Coverage Ratio" shall mean for Lessee and its Subsidiaries as of any determination date for the preceding 12-month period, the ratio of (a) the sum of (i) consolidated income of Lessee and its Subsidiaries before income taxes for such period (excluding extraordinary cash gains or losses for such period), plus (ii) interest expense for such period plus (iii) operating lease expense for such period to (b) Fixed Charges. "FSB" shall mean First Security Bank of Utah, N.A. and its successors and assigns. "GAAP" shall mean generally accepted accounting principles, applied on a consistent basis, set forth in opinions of the Accounting Principles Board of the American Institute of Certified Public Accountants and/or in statements of the Financial Accounting Standards Board and/or their successors which are applicable in the circumstances as of the date in question; and the requisite that such principles be applied on a consistent basis means that the accounting principles observed in a current period are comparable in all material respects to those applied in a preceding period. "Haslet Facility" shall mean, if any, the Equipment, the Building, the Site and all other property located at or to be located at Haslet, Tarrant County, Texas and described in that certain Contract of Sale dated October 2, 1995 between Westport Park No. 2 Ltd. and Hastex Investments, Inc. The foregoing property shall not constitute a "Facility" under the Lease until such time as (a) good and indefeasible title shall have been granted, bargained, sold, transferred, assigned and conveyed to Lessor pursuant to a Purchase Agreement and (b) the Lessee shall have executed and delivered (and Lessor shall have accepted) a Lease Supplement with respect to the property. "Highest Lawful Rate" means the maximum nonusurious interest rate, if any, that at any time or from time to time may be contracted for, taken, reserved, charged or received on the obligations owed hereunder and under the Laws of the United States and the Laws of such states as may be applicable thereto which are presently in effect or, to the extent allowed by Law under such applicable Laws of the United States and the Laws of such states, which may hereafter be in effect and which allow a higher maximum nonusurious interest rate than applicable Laws now allow. To the extent that Tex. Rev. Civ. Stat. Ann. art. 5069-1.04, as amended (the "Act"), is relevant to any holder of any obligation for the purpose of determining the Highest Lawful Rate, the maker and each holder elect to determine such applicable legal rate under the Act pursuant to the "indicated rate ceiling," from time to time in effect, as referred to and defined in Article 1.04(a)(1) of the Act; SUBJECT, HOWEVER, to the limitations on such applicable rate ceiling referred to and defined in Article 1.04(b)(2) of the Act, and further subject to any right such holder may have subsequently, under applicable Laws, to change the method of determining the Highest Lawful Rate. "Holder Advance" shall mean any advance made by any Holder to the Owner Trustee pursuant to the terms of the Trust Agreements. "Holder Certificate" shall mean each certificate issued in favor of each Holder regarding the Holder Commitment of such Holder issued pursuant to the terms and conditions of the Trust Agreements. "Holder Commitments" shall mean initially $423,900, as such amount may be increased in accordance with the terms of each of the Trust Agreements. "Holders" shall mean each of NationsBank, CL and their respective successors and assigns regarding their rights and obligations under the Trust Agreements. "Indemnitee" shall mean each of Lessor, the Lenders, the Holders, the Agent to the Lenders, the Co-Agent to the Lenders and their respective successors, assigns, servants, agents, shareholders and board members. "Inspecting Parties" shall have the meaning specified in Section 15.01 of the Lease. "Intercreditor Agreement" shall mean that certain intercreditor agreement dated as of the date hereof among the Lenders, the Holders, the Agent to the Lenders and the Agent to the Holders regarding the distribution of proceeds with respect to the Collateral, as the same may be amended, modified, supplemented, restated or replaced from time to time. "Interest" shall have the meaning specified in Section 20.18 of the Lease. "Jacksonville Assignment of Contract of Sale" shall mean the Purchase Agreement Assignment dated as of February 17, 1995 between Lessor and NationsBank and acknowledged by Tamco Distributing Company, debtor and debtor-in-possession, as modified pursuant to the Amendment and Assignment of Purchase Agreement Assignment dated as of the Jacksonville Commencement Date between NationsBank and the Agent, as the same may be amended, modified, supplemented, restated or replaced from time to time in accordance with the provisions thereof. "Jacksonville Basic Term" shall mean the period of two (2) years from the Jacksonville Commencement Date to the second year anniversary of the Jacksonville Commencement Date, unless this Lease is sooner terminated pursuant to the provisions hereof. "Jacksonville Bill of Sale" shall mean the Bill of Sale dated the Jacksonville Commencement Date given by Tamco Distributing Company, debtor and debtor-in-possession, for the benefit of Lessor, as the same may be amended, modified, supplemented, restated or replaced from time to time in accordance with the provisions thereof. "Jacksonville Building" shall mean the building and other properties specifically described in Part 2 of SCHEDULE 2A to the Lease, together at all times with any and all Replacement Equipment which may from time to time be incorporated in the building. "Jacksonville Commencement Date" shall mean the date of the Lease. "Jacksonville Deed" shall mean the Warranty Deed dated February 17, 1995 given by Tamco Distributing Company, debtor and debtor-in-possession for the benefit of Lessor, as the same may be amended, modified, supplemented, restated or replaced from time to time in accordance with the provisions thereof. "Jacksonville Equipment" shall mean the equipment and other property described in Part 1 of SCHEDULE 2A of the Lease together with any Replacement Equipment which may from time to time be incorporated in such equipment and other property and title to which shall have vested in Lessor. "Jacksonville Facility" shall mean the Jacksonville Equipment, the Jacksonville Building, the Jacksonville Site, the Railroad Crossing License Agreement, the property subject to the Railroad Crossing License Agreement and all other property, to the extent good and indefeasible title has been granted, bargained, sold, transferred, assigned and conveyed to Lessor pursuant to the Jacksonville Purchase Agreement, all as more particularly described in SCHEDULE 2A TO the Lease. "Jacksonville Lessor's Cost" shall mean $9,700,000, the aggregate amount paid by Lessor with regard to its acquisition of the Jacksonville Facility. "Jacksonville Purchase Agreement" shall mean the Agreement For Sale and Purchase of Property dated as of September 11, 1994, as amended from time to time, between Tamco Distributors Company and Lessee. "Jacksonville Site" shall mean the land and easements described in Part 3 of SCHEDULE 2A of the Lease. "Jacksonville Termination Value" as of any Termination Value Date shall equal the Jacksonville Lessor's Cost. "JFC Note" shall mean each amended, restated and replacement promissory note and each other promissory note, in each case dated the Jacksonville Commencement Date in the original principal amount up to such amount as set forth in such promissory note executed by the Lessor in favor of each Lender and each additional promissory note hereafter issued under the Loan Agreement executed by the Lessor in favor of any Lender, as such promissory notes may hereafter be amended, modified, supplemented, restated and/or replaced from time to time, in accordance with the provisions thereof. "Law" shall mean all statutes, laws, ordinances, regulations, orders, writs, injunctions or decrees of the United States, any state or commonwealth, any municipality, any foreign country, any territory or possession or any Tribunal. "Lease" shall mean the Amended, Modified and Restated Master Lease Agreement dated as of the Jacksonville Commencement Date between Lessor and Lessee, as the same may be amended, modified, supplemented, restated or replaced from time to time in accordance with the provisions thereof. "Lease Default" shall mean any event or condition which, with notice or lapse of time or both, would become a Lease Event of Default. "Lease Event of Default" shall mean any event or condition designated as a "Lease Event of Default" in Article XVI of the Lease. "Lease Supplement" shall mean, if any, each of the Lease Supplement and Acceptance Certificates dated as of the applicable Commencement Date between Lessor and Lessee, substantially in the form of SCHEDULE 2B to the Lease and the Additional Lease Supplement. "Lender" shall mean each of NationsBank, CL and their respective successors and assigns regarding their rights and obligations under the Loan Agreement. "Lessee" shall mean Michaels Stores, Inc., a Delaware corporation, and its permitted successors and assigns. "Lessee Compliance Certificate" shall mean the certificate delivered by Lessee to Lessor as required pursuant to Section 11.01 of the Lease. "Lessee Entity" shall mean, collectively, Lessee, its Subsidiaries and its Affiliates. "Lessee Mortgage" shall have the meaning stated in Section 2.06(a) of the Lease. "Lessee Owned Equipment" shall mean any equipment and other property owned by Lessee excluding in all cases the Facility, including without limitation the Equipment, the Alterations and the Replacement Equipment. "Lessor" shall mean Jacksonville Funding Corporation, a Delaware corporation, and its successors and assigns. "Lessor Entity" shall mean, collectively, Lessor, its Subsidiaries and its Affiliates. "Lessor Liens" shall mean Liens on any Facility or any part thereof (excluding in all cases Liens existing as of the applicable Commencement Date or created thereafter by Lessee or Lessor, with Lessee's consent and Liens arising from nonpayment by Lessor of any taxes imposed on or incurred by its net or gross income or of the consolidated group of taxpayers of which it is a part) which Liens were not consented to by Lessee and are created by, through or under Lessor, including without limitation Liens arising from any act of or claim against Lessor arising out of events or conditions not related to the transactions described in or permitted by the Operative Documents and the Liens in favor of the Agent created by the Loan Agreement, the Mortgages and/or any other Operative Document. "Lessor's Cost" shall mean (i) the Jacksonville Lessor's Cost and (ii) with respect to any other Facility, if any, (a) the aggregate amount Lessor pays with regard to its acquisition of such Facility at or about the date of execution and delivery of the applicable Lease Supplement in the form of SCHEDULE 2B to the Lease, and (b) the aggregate amount Lessor pays with regard to its acquisition of the equipment and other property for such Facility at or about the date of execution and delivery of the Lease Supplement in the form of SCHEDULE 3 to the Lease. "LIBOR Rate" shall mean the sum of (a) 0.90% plus (b) the interest rate per annum (rounded upwards, if necessary to the nearest one-sixteenth of one percent) which is the quotient of (A) the rate per annum at which dollar deposits in immediately available funds are offered to NationsBank two Business Days before the first day of such applicable Payment Period by prime banks in the interbank Eurodollar market as at or about 11:00 A.M., Dallas, Texas time, for delivery on the first day of such applicable Rent Payment Period, for the number of days comprised therein and in an amount equal to the aggregate amount bearing such interest rate to be outstanding for such applicable Rent Payment Period, divided by (B) the remainder of 1.00 MINUS the Eurodollar Reserve Percentage applicable to such amounts. "Lien" shall mean any lien, mortgage, encumbrance, pledge, charge, lease, easement, servitude, right of others or security interest of any kind, including without limitation any thereof arising under any conditional sale or other title retention agreement. "Loan Agreement" shall mean the Amended, Modified and Restated Loan and Security Agreement, dated as of the date of the Lease among Lessor, each Lender and Agent to the Lenders, as the same may be amended, modified, supplemented, restated or replaced from time to time in accordance with the provisions thereof. "Material Adverse Change" shall mean any circumstance or event that (a) can reasonably be expected to cause a Lease Default or Event of Default, (b) otherwise can reasonably be expected to (i) be material and adverse to the continued operation of Lessee and its Subsidiaries taken as a whole or (ii) be material and adverse to the financial condition, business operations, prospects or properties of Lessee and its Subsidiaries taken as a whole, (c) could reasonably be expected to adversely affect the performance by Lessee of its obligations under the Operative Documents or (d) in any manner whatsoever does or can reasonably be expected to materially and adversely affect the validity or enforceability of any of the Operative Documents. "Maximum Lessee Risk Amount" shall mean an amount equal to the product of the aggregate Lessor's Cost for all Facilities then subject to the terms and conditions of the Lease multiplied by 87.0%. "Maximum Lessor Risk Amount" shall mean an amount equal to the product of the aggregate Lessor's Cost for all Facilities then subject to the terms and conditions of the Lease multiplied by 13.0%. "Mortgage" shall mean each mortgage or deed of trust dated as of the applicable Commencement Date executed by Lessor in favor of the Agent with respect to a particular Facility, as the same may be amended, modified, supplemented, restated or replaced from time to time in accordance with the provisions thereof. "NationsBank" shall mean NationsBank of Texas, N.A., a national banking association, and its successors and assigns. "Negative Trigger Event" shall mean the occurrence of (i) any change in any tax law, statute, rule or regulation under or with respect to the Internal Revenue Code of 1986, as amended from time to time, which materially and adversely affects the ability of Lessee to depreciate the Facilities in the manner contemplated as of the Jacksonville Commencement Date, (ii) any change in GAAP which requires recharacterization of the Lease as a "capital lease" rather than as an "operating lease", or any action or omission by Lessor and/or any change in, or disposition of any of the assets of Lessor that would result in its consolidation with Lessee under GAAP or (iii) any occurrence of an "Event of Default" under the Loan Agreement at a time when no Lease Event of Default exists under the Lease. "Net Proceeds of Sale" shall mean the net amount received by Lessor from, if any, a third party purchaser of the Facility pursuant to a sale of the Facility under Section 4.01(b) of the Lease. "Net Worth" shall mean the consolidated net worth of Lessee and its Subsidiaries, determined in accordance with GAAP. "Note" shall mean each JFC Note. "Operative Documents" shall mean each Deed, each Bill of Sale, the Agency Agreement, the Lease, each memorandum of the Lease, each Purchase Agreement, the Assignment and Assumption Agreement, each Assignment Agreement, the Loan Agreement, each JFC Note, each Trust Agreement, each Holder Certificate, each Mortgage, each Assignment of Leases, each Assignment of Contract of Sale, the Railroad Crossing License Agreement, the Intercreditor Agreement, the Subordination Agreement and the Release. "Option Election Notice Date" shall mean sixty (60) days prior to the final day of the Basic Term or the final day of any Renewal Term, if any. "Optional Alterations" shall have the meaning specified in Section 7.04 of the Lease. "Original Lease" shall mean the Lease Agreement dated as of February 17, 1995 between JFC (as predecessor in interest to Lessor) and Lessee. "Overdue Rate" shall mean the lesser of (a) the highest interest rate permitted by applicable law and (b) two percent (2%) in excess of the then current Applicable Rate. "Permitted Liens" shall mean (a) prior to the Termination Date, but not thereafter, the respective rights and interests of Lessee and Lessor as provided in the Operative Documents, (b) Liens consented to by both Lessor and Lessee, (c) Lessor Liens, (d) Liens for taxes either not yet due or being contested in good faith and by appropriate proceedings, so long as such proceedings shall not involve any danger of the sale, forfeiture or loss of any part of any Facility, title thereto or any interest therein and shall not interfere with the use or disposition of any Facility or the payment of Rent, (e) materialmen's, mechanics', workers, repairmen's, employees' or other like Liens arising in the ordinary course of business of Lessee for amounts either not yet due or being contested in good faith and by appropriate proceedings so long as such proceedings shall not involve any material danger of the sale, forfeiture or loss of any material part of any Facility (which part or parts in the aggregate exceed $500,000 in value), title thereto or any interest therein and shall not interfere with the use or disposition of any Facility or the payment of Rent, (f) easements, rights of way, reservations, servitudes and rights of others against any Site existing as of the applicable Commencement Date or created thereafter by Lessor, with Lessee's consent, which in the aggregate do not adversely affect the use, marketability or value of such Site, (g) assignments, leases and subleases expressly permitted by the Operative Documents and (h) Liens in favor of either of the Agent permitted by the terms of the Operative Documents. "Person" shall mean any individual, corporation, partnership, joint venture, association, joint-stock company, trust, nonincorporated organization or government or any agency or political subdivision thereof. "Prime Rate" shall mean the rate of interest per annum publicly announced by NationsBank as its prime Lending rate as in effect from time to time; PROVIDED, HOWEVER, the Prime Rate is not necessarily the best or lowest rate of interest offered by NationsBank. "Purchase Agreement" shall mean the Jacksonville Purchase Agreement and, with respect to any other Facility, if any, the agreement for sale and purchase of property between the seller of the Facility and Lessor, as the same may be amended, modified, supplemented, restated or replaced from time to time in accordance with the provisions thereof. "Railroad" shall mean CSX Transportation, Inc., a Virginia corporation, and its successors and assigns. "Railroad Crossing License Agreement" shall mean that certain Private Road Grade Crossing Agreement dated December 2, 1991 between CSX Transportation, Inc. and Tamco Distributors, Inc., as the same may be amended, modified, supplemented, restated or replaced from time to time in accordance with the provisions thereof. "Release" shall mean the Release Agreement dated as of the date of the Lease among Lessee, Lessor and J H Holdings Corporation, as amended, modified, supplemented, restated and/or replaced from time to time in accordance with the provisions thereof. "Renewal Term" shall have the meaning specified in Section 2.02(b) of the Lease. "Rent" shall mean Basic Rent and Supplemental Rent, collectively. "Rent Payment Date" shall mean the 18th day of each March, June, September and December during the Term and also the last day of the Term, with the first such Rent Payment Date commencing with March 18, 1996. "Rent Payment Period" means each three-month quarterly period during the Term commencing, in each case, on a Rent Payment Date and ending, in each case, on the next occurring Rent Payment Date. "Replacement Equipment" shall have the meaning specified in Section 7.02 of the Lease. "Responsible Officer" shall mean the President, any Vice President (whether or not designated by a number or a word or words added before or after the title "Vice President', including without limitation any Assistant Vice President), the Secretary, any Assistant Secretary, the Treasurer or any Assistant Treasurer. "Revolving Credit Agreement" shall mean the First Amended and Restated Credit Agreement dated as of June 18, 1994 among Lessee, NationsBank, as the administrative lender thereunder and the lenders as referenced therein, as the same may be amended, modified, supplemented, restated or replaced from time to time in accordance with the provisions thereof. "Sales Expenses" shall mean (a) all documentary stamps, property, excise, sales and use taxes and other taxes (as such may be applicable to the sale or transfer of the Facility), (b) all fees, costs and expenses of such sale or transfer of the Facility (including without limitation fees, costs and expenses associated with transportation, storage, security or insurance) reasonably incurred by Lessor and (c) any and all other amounts reasonably incurred in connection with such sale or transfer of the Facility for which, if not paid, Lessor would be liable or which, if not paid, would constitute a Lien on the Facility, or any part thereof (including without limitation any pro rata portion of property tax or any other similar tax relating to the Facility incurred or accrued prior to or on any date of transfer of the Facility). "Second Level Assignment Agreement" shall mean the Assignment Agreement dated as of the date hereof among the Agent to the Lenders and the Lenders, as the same may be amended, modified, supplemented, restated and/or replaced from time to time in accordance with the provisions thereof. "Site" shall mean the Jacksonville Site and, with respect to any other Facility, if any, the land and easements described in the applicable Lease Supplement. "Subordination Agreement" shall mean the Subordination, Non- Disturbance and Attornment Agreement dated as of the date of the Lease among Lessee and the Agent to the Lenders, as the same may be amended, modified, supplemented, restated and/or replaced from time to time in accordance with the provisions thereof. "Subsidiary" shall mean any Person, and "Subsidiaries" shall mean all such Persons that meet either of the following criteria: (a) more than fifty percent (50%) of the outstanding voting securities of which shall at the time be owned or controlled, directly or indirectly, by Lessee or by one or more Subsidiaries, or by Lessee and one or more Subsidiaries, or any voluntary association, joint stock company, voting trust or similar organization which is so owned or controlled or (b) (i) any of the outstanding voting securities of which shall at the time be owned or controlled, directly or indirectly, by Lessee or by one or more Subsidiaries, or by Lessee and one or more Subsidiaries, or any voluntary association, joint stock company, voting trust or similar organization which is so owned or controlled and (ii) such Subsidiary has received any advance or loan from Lessee or any Subsidiary and such loan or advance is outstanding on such date. "Supplemental Rent" shall mean any and all amounts, liabilities and obligations other than Basic Rent which Lessee assumes or agrees to pay under the Lease or any other Operative Document (whether or not designated as Supplemental Rent) to Lessor or any Indemnitee, including without limitation Termination Value, Fair Market Sales Value, any amount payable by Lessee under Sections 3.07 and 20.13 of the Lease and indemnities and damages for breach of any covenants, representations, warranties or agreements. "Term" shall mean the Basic Term and each Renewal Term, if any. "Termination Date" shall mean the effective date of termination of the Lease. "Termination Value" as of any Termination Value Date shall equal the Jacksonville Termination Value or, with respect to any other Facility, if any, an amount equal to Lessor's Cost for such Facility as set forth in the applicable Lease Supplement. "Termination Value Date" shall mean each Rent Payment Date. "Total Debt" shall mean, as of the date of any determination thereof, with respect to Lessee and its Subsidiaries, (i) all indebtedness, direct or indirect, whether or not represented by bonds, debentures, notes or other securities, for the repayment of money borrowed, (ii) all deferred indebtedness for the payment of the purchase price of property or assets purchased, (iii) all indebtedness under any lease which, under GAAP, is required to be capitalized for balance sheet purposes provided that notwithstanding the reporting requirements of GAAP, in no event will any tax retention operating lease which is provided for in the Operative Documents be considered a capital lease for financial or other covenant compliance, (iv) all guaranties, endorsements, assumptions or other contingent obligations, in respect of, or to purchase or otherwise acquire, indebtedness of others, (v) all contingent obligations (as defined in accordance with GAAP) of any type whatsoever and (vi) all indebtedness secured by any mortgage, pledge, security interest or lien existing on property owned by any of Lessee and its Subsidiaries, whether or not the indebtedness secured thereby shall have been assumed by any of Lessee and its Subsidiaries; provided that under no circumstances shall trade payables of Lessee and its Subsidiaries incurred in the ordinary course of business be included in this definition of "Total Debt". "Total Liabilities" shall mean, as of the date of any determination thereof, the aggregate (after eliminating intercompany items) of all liabilities of Lessee and its Subsidiaries determined in accordance with GAAP (including capitalized leases). Notwithstanding anything contained herein or in the other Operative Documents to the contrary, such term shall include all guaranties and liabilities relating to letters of credit (other than commercial letters of credit). "Transaction Costs" shall have the meaning stated in Section 20.13 of the Lease. "Tribunal" shall mean any state, federal, foreign or other court, or governmental department, board, bureau, agency, commission or instrumentality. "Trust Agreements" shall mean each of the Trust Agreements dated as of the date hereof among FSB, individually and in its capacity as owner trustee thereunder and the Holders thereto. EX-10.18 8 EXHIBIT 10.18 AGREEMENT THIS AGREEMENT is made as of the 30th day of January, 1996, by and between Michaels Stores, Inc., a Delaware corporation (the "Company"), and Jack E. Bush ("Bush"). R E C I T A L S A. Bush was a director of the Company and was employed by the Company as its President and Chief Operating Officer until his resignation on August 8, 1995. B. The Company wishes to engage Bush's services as a consultant, and Bush wishes to perform services for the Company as a consultant, on the terms set forth in this Agreement. C. The Company also wishes to discharge its prior commitment to Bush with respect to certain deferred income benefits, all as set forth below. NOW, THEREFORE, in consideration of the mutual covenants contained in this Agreement, the parties agree as follows: 1. CONSULTING SERVICES. (a) SERVICES. The Company retains Bush to perform consulting and advisory services to the Company, and Bush agrees to act as a consultant and advisor to the Company, for the period beginning on February 1, 1996, and ending on January 31, 1999 (the "Contract Period"). During the Contract Period, Bush will be available in person and by telephone in and around the geographic areas of the Company's operations and at such other designated areas of assignment as may be made from time to time to perform such consulting and advisory services to the Company at such time or times as the Chairman of the Company may request. In addition, both during the Contract Period and thereafter, Bush will make himself available to assist in the defense of any litigation against the Company. During the Contract Period, Bush may serve as a director of or consultant to any corporation that does not compete directly or indirectly with the Company. (b) INDEPENDENT CONTRACTOR STATUS. The Company and Bush agree that Bush will perform services pursuant to this Agreement as an independent contractor and not as an employee, agent, partner, or joint venturer of the Company. Bush acknowledges that as an independent contractor he is not eligible to participate in employee benefit plans of the Company and will not be entitled to employee benefits except as set forth in paragraph 3. 2. COMPENSATION. As compensation for Bush's services pursuant to this Agreement and in satisfaction of the Company's deferred compensation obligations to him, the Company will pay Bush the following sums: (a) CONSULTING FEES. Bush will be paid a consulting fee in monthly installments in advance at the rate of $153,500 per year for the period beginning on February 1, 1996, and ending on January 31, 1999. (b) DEFERRED COMPENSATION ACCOUNT. The Company will establish a deferred compensation account for Bush on its books and will credit to the account the sum of $1,918,750. The deferred compensation account will be paid to Bush on the earlier of (i) February 1, 1999, or (ii) ten days after the occurrence of a Change in Control as hereinafter defined. Notwithstanding the foregoing, prior to February 1, 1999, and prior to a Change in Control, Bush may, upon ten days prior written notice to the Company, withdraw all or any portion of the deferred compensation account at any time, and the Company will deduct from the deferred compensation account balance an amount for such early withdrawal. The amount of the deduction will be equal to 24% of the amount withdrawn, if the withdrawal is made on or before February 1, 1996; 16% of the amount withdrawn, if the withdrawal is made on February 1, 1997; and 10% of the amount withdrawn, if the withdrawal is made on or after February 1, 1998. If Bush makes a withdrawal from the deferred compensation account after February 1, 1996, and before February 1, 1997, the amount of the deduction will be equal to 24% reduced by 0.667% for each full calendar month by which the date of withdrawal is after February 1, 1996; and if Bush makes a withdrawal from the deferred compensation account after February 1, 1997, and before February 1, 1998, the amount of the deduction will be equal to 16% reduced by 0.5% for each full calendar month by which the date of withdrawal is after February 1, 1997. For purposes of this Agreement, a Change in Control means a Change in Control of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended, as such disclosure requirement may in the future be otherwise identified, whether or not the Company is then subject to such reporting requirement. (c) SUPPLEMENTAL RETIREMENT BENEFITS. The Company will purchase a single-life annuity providing for payments to Bush of $60,000 per year for life beginning on Bush's 65th birthday. The purchase of such annuity will satisfy in full the Company's obligation to provide Bush with an annuity, as set -2- forth in the letter dated June 25, 1991, from the Chairman of the Company to Bush. (d) DEFERRED SALARY. During the course of his employment Bush elected, pursuant to the Michaels Stores, Inc. Nonqualified Retirement Plan effective September 1, 1994, to defer salary payments in the aggregate amount of $431,701.00. Promptly upon the execution of this Agreement by Bush, the Company will pay to Bush the sum of $467,865.38, which represents the full amount of Bush's deferred salary payments plus simple interest at the rate of 8% per annum, accrued from the date of deferral of each salary payment to January 30, 1996. (e) EXPENSES. If, in performance of his obligations under this Agreement, Bush is required to travel more than 30 miles from his principal residence, wherever that might be, the Company will reimburse Bush for reasonable expenses (supported by receipts satisfactory to the Company) incurred as a result of such travel, including without limitation reasonable expense for travel to and from his principal residence and food and lodging while away from his principal residence. Further, if Bush is required to incur any other actual out-of-pocket expenses in connection with the performance of his obligations under this Agreement, the Company will reimburse Bush for such expenses, provided such expenses are approved in advance by the Company and Bush furnishes the Company with receipts for such expenses satisfactory to the Company. 3. BENEFITS. (a) MEDICAL BENEFITS. During the Contract Period, the Company will provide health care benefits to Bush under the Company's executive medical plan on the same terms as such benefits are available to active executive employees of the Company. (b) LIFE AND DISABILITY BENEFITS. During the term of the Contract, the Company will provide life insurance and disability benefits to Bush on the same terms as such benefits are provided to an active employee with annual compensation of $153,500. (c) 401(k) BENEFITS. Bush may defer distribution of his benefits under the Company's Employees 401(k) Plan until the end of the Contract Period or may elect to receive such benefits at any time during the Contract Period. All distributions will be made in accordance with the provisions of the Employees 401(k) Plan. (d) AAIRPASS. The Company hereby transfers and assigns to Bush its interest in and to the American Airlines -3- AAirpass (the "AAirpass") purchased for his use by the Company and currently in his possession. Bush hereby assumes full responsibility for all current and future charges, fees and assessments incurred under the AAirpass and indemnifies the Company against such charges, fees and assessments. (e) AUTOMOBILE. During the Contract Period, Bush may continue to use the automobile purchased for his use by the Company and currently in his possession and at the end of the Contract Period may purchase from the Company such automobile at the then fair market value of the automobile. (f) TAX MATTERS. During the term of the Contract Period, the Company will make available to Bush tax preparation services to the same extent such services were provided to him during his employment by the Company. Bush will pay and be solely liable for all income and other taxes and charges imposed as a result of payments made or other benefits provided to him pursuant to this Agreement. (g) LIABILITY INSURANCE. The Company will cover Bush under a policy of officers' and directors' liability insurance with respect to his prior service as an officer and director of the Company which will provide coverage that is comparable to that provided to other individuals serving as executive officers and directors of the Company during the period of such prior service by Bush. 4. RELEASE OF CLAIMS. (a) RELEASE. As a material inducement to the Company to enter into this Agreement, Bush hereby irrevocably and unconditionally releases, acquits, and forever discharges the Company and each of the Company's stockholders, predecessors, successors, assigns, agents, directors, officers, employees, representatives, attorneys, divisions, subsidiaries and Affiliates (and agents, directors, officers, employees, representatives and attorneys of such divisions, subsidiaries and Affiliates), and all persons acting by, through, under or in concert with any of them (collectively, "Releasees"), or any of them, from any and all charges, complaints, claims, liabilities, obligations, promises, agreements, controversies, damages, actions, causes of action, suits, rights, demands, costs, losses, debts and expenses (including without limitation attorney's fees and costs actually incurred), of any nature whatsoever (other than obligations arising solely under this Agreement), known or unknown ("Claim" or "Claims"), which Bush now has, owns, or holds, or claims to have, own, or hold, or which Bush at any time heretofore had, owned, or held, or claimed to have, own, or hold, against each or any of the Releasees, including but not limited to (i) claims of age discrimination under the AGE DISCRIMINATION -4- IN EMPLOYMENT ACT OF 1967, as amended; (ii) any and all Claims related to Bush's employment with the Company; and (iii) any and all Claims related to the termination of Bush's employment with the Company. Bush further agrees not to file, initiate or pursue any claim, suit, civil action, complaint or administrative action in or with any court or agency with respect to any such Claim. Bush represents and warrants to the Company that Bush has not heretofore assigned or transferred, or purported to assign or transfer, to any person or entity, any Claim or any portion thereof or interest therein. (b) ADVICE IN WRITING. Bush represents and agrees that Bush was advised by the Company in writing, by the letter to Bush transmitting this Agreement, to consult with an attorney of Bush's choice prior to signing this Agreement. (c) PERIOD OF CONSIDERATION. Bush represents and agrees that the Company has given Bush at least 21 days to consider whether to execute this Agreement and during that time Bush has had this Agreement in Bush's possession. (d) VOLUNTARY ACT. Bush represents and agrees that Bush is fully aware of Bush's right to discuss any and all aspects of this matter with an attorney of Bush's choice, that Bush has carefully read and fully understands all of the provisions of this Agreement, and that Bush is voluntarily entering into this Agreement. (e) REVOCATION PERIOD. It is expressly agreed that for seven days following execution of this Agreement by Bush, Bush may revoke this Agreement; it is further expressly agreed by the parties that this Agreement will not become effective or enforceable until the seven-day revocation period described above has expired. 5. CONFIDENTIAL INFORMATION. Bush recognizes and acknowledges that in the course of his employment with the Company he has obtained, and during the Contract Period may obtain, private or confidential information and proprietary data relating to the Company and its Affiliates (as hereinafter defined), including without limitation financial information, customer and/or supplier lists and other data which are valuable assets and property rights of the Company and its Affiliates. All of such private or confidential information and proprietary data is referred to in this Agreement as "Confidential Information;" provided, however, that Confidential Information will not include any information known generally to the public or disclosed through any public filing of information with any governing regulatory authority (other than as a result of unauthorized disclosure by Bush). Bush agrees that he will not, during the Contract Period or any time thereafter, either -5- directly or indirectly, disclose or use Confidential Information except with the prior written consent of the President or the Chief Executive officer of the Company. As used in this Agreement, the term "Affiliate" means any direct or indirect subsidiary of the Company; any other entity in which the Company or any of its direct or indirect subsidiaries owns more than 50% of the outstanding equity or beneficial interests; any officer, director or employee of the Company or of any of the foregoing entities; and any former officer, director or employee of the Company or of any of the foregoing entities. 6. NON-COMPETITION. Bush agrees that he will not during the Contract Period and for a period of one year thereafter, in his individual capacity or on behalf of another (i) divert or attempt to divert any customer or supplier of the Company or any Affiliate or (ii) hire or offer to hire any of the Company's officers, employees or agents or persuade or attempt to persuade in any manner any officer, employee or agent of the Company to discontinue any relationship with the Company. 7. DEATH BENEFITS. Notwithstanding any other provision of this Agreement, in the event of Bush's death prior to January 31, 1999, the Contract Period will end on the date of such death. On his death, the balance of Bush's deferred compensation account described in paragraph 2(a) will be paid to Bush's spouse, if she survives him, and if Bush has no surviving spouse, to his estate. Bush's surviving spouse, if any, may continue to participate in the Company's medical plan on the same terms applicable to unmarried active employees through January 31, 1999. 8. BINDING EFFECT. This Agreement will inure to the benefit of and be binding upon the Company, its subsidiaries, successors and assigns, including, without limitation, any person, partnership, company or corporation which may acquire substantially all of the Company's assets or business or with or into which the Company may be liquidated, consolidated, merged or otherwise combined, and will inure to the benefit of and be binding upon Bush, his heirs, distributees, and personal representatives. 9. SOURCE OF PAYMENTS. All payments provided for in paragraph 2 will be paid in cash from the general funds of the Company. Bush's status with respect to amounts owed under paragraph 2 will be that of a general unsecured creditor of the Company, and Bush will have no right, title, or interest whatsoever in or to any investments which the Company may make to assist the Company in meeting its obligations under this Agreement. Nothing contained in this Agreement will create or be construed to create a trust of any kind or a fiduciary relationship between the Company and Bush or any other person. -6- 10. WITHHOLDING OF Taxes. The Company may withhold from any compensation or benefits payable under this Agreement all taxes that are required to be withheld by any applicable law, regulation or ruling. 11. SEVERABILITY. If any provision of this Agreement is held to be invalid, illegal, or unenforceable, in whole or part, such invalidity will not affect any otherwise valid provision, and all other valid provisions will remain in full force and effect. 12. COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which will be deemed an original, and all of which together will constitute one document. 13. TITLES. The titles and headings preceding the text of the sections and subsections of this Agreement have been inserted solely for convenience of reference and do not constitute a part of this Agreement or affect its meaning, interpretation or effect. 14. WAIVER. The failure of either party to insist in any one or more instances upon performance of any terms or conditions of this Agreement will not be construed as a waiver of future performance of any such term, covenant, or condition and the obligations of either party with respect to such term, covenant or condition will continue in full force and effect. 15. NOTICES. All notices required or permitted to be given under this Agreement will be given in writing and will be deemed sufficiently given if delivered by hand or mailed by registered or certified mail, return receipt requested, to Bush's last address furnished to the Company and to the Company's principal executive offices. Either party may, by giving notice to the other party in accordance with this paragraph, change the address at which it is to receive notices under this Agreement. 16. ENTIRE AGREEMENT; MODIFICATION. This Agreement supersedes all previous agreements, negotiations, or communications between Bush and the Company and contains the complete and exclusive expression of the understanding between the parties. This Agreement cannot be amended, modified, or supplemented in any respect except by a subsequent written agreement entered into by both parties. 17. GOVERNING LAW. THIS AGREEMENT WILL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS, INCLUDING WITHOUT LIMITATION, THE TEXAS STATUTE OF LIMITATIONS, BUT WITHOUT GIVING EFFECT TO THE PRINCIPLES OF CONFLICTS OF LAWS OF SUCH STATE. -7- IN WITNESS WHEREOF, the parties have executed this agreement as of the date first written above. MICHAELS STORES, INC. By: /s/ R. DON MORRIS ------------------------------------ R. Don Morris Executive Vice President & CFO /s/ JACK E. BUSH --------------------------------------- Jack E. Bush -8- EX-10.19 9 EXHIBIT 10.19 Exhibit 10.19 FIRST AMENDMENT TO THE MICHAELS STORES, INC. EMPLOYEES 401(K) PLAN WHEREAS, Michaels Stores, Inc. (the "Corporation") is the employer/ sponsor of the Michaels Stores, Inc. Employees 401(k) Plan (the "Plan"); and WHEREAS, the Corporation desires to make certain amendments to the Plan to enable a change in the timing of valuations under the Plan, to correct a drafting error in the Plan document as amended and restated effective February 1, 1994, and to permit distributions under the Plan to be made in cash or in common of the Company. WHEREAS, Section 17.01 of Plan authorizes the Corporation to make amendments to the Plan. NOW, THEREFORE, the Plan is amended in the following respects: 1. Section 1.49 of the Plan is amended and restated in its entirety to read as follows, effective October 1, 1995: "1.49 VALUATION DATE SHALL MEAN THE LAST DAY OF JANUARY, APRIL, JULY, AND OCTOBER OF EACH PLAN YEAR, OR SUCH OTHER DATES AS THE ADMINISTRATION COMMITTEE MAY FROM TIME TO TIME DETERMINE. AT SUCH TIME AS THE ADMINISTRATION COMMITTEE DEEMS APPROPRIATE IN ITS SOLE DISCRETION, "VALUATION DATE" SHALL MEAN THE LAST DAY OF EACH CALENDAR MONTH IN THE PLAN YEAR, OR SUCH OTHER DATES AS THE ADMINISTRATION COMMITTEE MAY FROM TIME TO TIME DETERMINE; PROVIDED, HOWEVER, THAT FOR PURPOSES OF SECTION 5.03 OF THE PLAN DEALING WITH PARTICIPANT STATEMENTS, "VALUATION DATE" SHALL MEAN THE LAST DAY OF JANUARY, APRIL, JULY AND OCTOBER OF EACH PLAN YEAR." 2. A drafting error in Section 4.01a. of the Plan is corrected by amendment and restatement of Section 4.01a. in its entirety to read as follows, effective as if such omitted provisions had not been included in the Plan: "a. FOR EACH THREE MONTH PERIOD IN A PLAN YEAR DURING WHICH A PARTICIPANT MAKES A SALARY REDUCTION CONTRIBUTION, THE EMPLOYER SHALL CONTRIBUTE TO THE PLAN ON BEHALF OF PARTICIPANTS WHO HAVE ELECTED TO MAKE SALARY REDUCTION CONTRIBUTIONS AND WHO ARE EMPLOYED BY THE EMPLOYER ON THE LAST DAY OF THE QUARTER AN EMPLOYER MATCHING CONTRIBUTION AMOUNT. THE AGGREGATE AMOUNT OF THE EMPLOYER MATCHING CONTRIBUTION MADE PURSUANT TO THIS SUBSECTION 4.01a. SHALL BE EQUAL TO 50% OF THE SALARY REDUCTION CONTRIBUTIONS MADE BY PARTICIPANTS UP TO A MAXIMUM OF 6% OF EACH PARTICIPANT'S COMPENSATION WITH RESPECT TO SUCH CALENDAR QUARTER. COMPENSATION EARNED BY A PARTICIPANT PRIOR TO THE COMMENCEMENT OF SALARY REDUCTION CONTRIBUTIONS SHALL BE DISREGARDED." 3. The last sentence in the second paragraph of Section 6.02b. is amended and restated in its entirety to read as follows, effective October 1, 1995: "A PARTICIPANT'S NEW OR CHANGED INVESTMENT MIX SHALL BECOME EFFECTIVE AS SOON AS ADMINISTRATIVELY PRACTICABLE ON OR AFTER THE FIRST DAY OF THE MONTH FOLLOWING RECEIPT OF WRITTEN INSTRUCTIONS FROM THE PARTICIPANT BY THE ADMINISTRATION COMMITTEE OR SUCH OTHER PERSON DESIGNATED BY THE ADMINISTRATION COMMITTEE TO RECEIVE SUCH INSTRUCTIONS." 4. Section 9.01 of the Plan is amended by adding the following at the end thereof, effective October 1, 1995: NOTWITHSTANDING ANY PROVISION OF THE PLAN TO THE CONTRARY, WHENEVER A DISTRIBUTION IS PAYABLE UNDER THE PLAN TO A PARTICIPANT OR BENEFICIARY, THE DISTRIBUTEE IN HIS OR HER DISCRETION MAY ELECT TO RECEIVE SUCH DISTRIBUTION IN CASH, IN COMMON STOCK OF THE EMPLOYER, OR PART IN EACH. THE ADMINISTRATION COMMITTEE MAY ADOPT SUCH RULES AS IT MAY DEEM APPROPRIATE FOR THE IMPLEMENTATION AND ADMINISTRATION OF THIS PROVISION. Except as expressly provided above, the provisions of the Plan shall remain in full force and effect. IN WITNESS WHEREOF, the Corporation has caused this Amendment One to be executed by its duly authorized officer on this 28th day of September, 1995. MICHAELS STORES, INC. By: Mark V. Beasley -------------------------- Its: Vice President -------------------------- EX-11 10 EXHIBIT 11 MICHAELS STORES, INC. COMPUTATION OF EARNINGS PER COMMON SHARE (In thousands, except per share data) EXHIBIT 11
Weighted Weighted Average Common Average and Common Common Shares Equivalent Shares Outstanding Outstanding ------------- ----------------- Fully Primary Diluted ------- ------- For the year ended January 28, 1996 Weighted average common shares outstanding 21,451 21,451 21,451 Net shares to be issued upon exercise of dilutive stock options after applying treasury stock method - 66 66 ------ -------- --------- Total average outstanding shares 21,451 21,517 21,517 ------ -------- -------- ------ -------- -------- Net loss $(20,417) $(20,417) -------- -------- -------- -------- Loss per common share $(0.95) $(0.95) -------- -------- -------- --------
MICHAELS STORES, INC. COMPUTATION OF EARNINGS PER COMMON SHARE (In thousands, except per share data) EXHIBIT 11
Weighted Weighted Average Common Average and Common Common Shares Equivalent Shares Outstanding Outstanding ------------- ----------------- Fully Primary Diluted ------- ------- For the year ended January 29, 1995 Weighted average common shares outstanding 19,405 19,405 19,405 Assumed issuance of shares upon conversion of convertible subordinated debt 638 Net shares to be issued upon exercise of dilutive stock options after applying treasury stock method 741 764 ------ ------ ------ Total average outstanding shares 19,405 20,146 20,807 ------ ------ ------ ------ ------ ------ Net income $35,647 $35,647 Assumed interest on convertible subordinated debt less tax benefit of $607 969 ------- ------- Net income for per share computation $35,647 $36,616 ------- ------- ------- ------- Earnings per common share $1.77 $1.76 ----- ----- ----- -----
MICHAELS STORES, INC. COMPUTATION OF EARNINGS PER COMMON SHARE (In thousands, except per share data) EXHIBIT 11
Weighted Weighted Average Common Average and Common Common Shares Equivalent Shares Outstanding Outstanding ------------- ----------------- Fully Primary Diluted ------- ------- For the year ended January 30, 1994 Weighted average common shares outstanding 16,592 16,592 16,592 Assumed issuance of shares upon conversion of convertible subordinated debt at beginning of year 2,572 Net shares to be issued upon exercise of dilutive stock options and warrants after applying treasury stock method 639 645 ------ ------- ------- Total average outstanding shares 16,592 7,231 19,809 ------ ------- ------- ------ ------- ------- Net income $26,287 $26,287 Assumed interest on convertible subordinated debt less tax benefit of $2,427 3,902 ------- ------- Net income for per share computation $26,287 $30,189 ------- ------- ------- ------- Earnings per common share $1.53 $1.52 ------- ------- ------- -------
EX-13 11 EXHIBIT 13 FINANCIAL HIGHLIGHTS Exhibit 13
Fiscal Year ----------------------------------------------------------- 1995 1994 1993 1992 1991 ----------------------------------------------------------- (In thousands except per share and store data) RESULTS OF OPERATIONS: Net sales $1,294,886 $994,563 $619,688 $493,159 $410,899 Operating (loss) income (15,046)(1) 64,036 41,356 34,263 25,643 (Loss) income before extraordinary item (20,417) 35,647 26,287 20,378 10,739(2) (Loss) earnings per share (0.95) 1.76 1.52 1.21 .87(2) STORES OPEN AT END OF PERIOD: Michaels 442 380 220 168 140 Aaron Brothers 68 n/a n/a n/a n/a BALANCE SHEET DATA: Current assets $416,292 $418,532 $291,012 $170,021 $125,873 Total assets 739,780 686,026 397,830 322,099 180,913 Working capital 228,983 232,442 181,816 104,462 74,786 Long-term debt 184,140 138,050 97,750 97,750 - Total liabilities 403,827 330,109 212,415 166,822 54,614 Shareholders' equity 335,953 355,917 185,415 155,277 126,299
(1) Includes effect of an unusual pre-tax charge of $64.4 million for costs and expenses primarily associated with an inventory reduction program. (2) Before extraordinary item related to early retirement of debt. -1- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL Certain statements contained herein and elsewhere in this Annual Report which are not historical facts are forward looking statements that involve risks and uncertainties, including, but not limited to, customer demand and trends in the arts and crafts industry, related inventory risks due to shifts in customer demand, the effect of economic conditions, the impact of competitors' locations and pricing, the availability of acceptable real estate locations for new stores, difficulties with respect to new technologies such as point-of-sale ("POS") systems, supply constraints or difficulties, the results of financing efforts, the effect of the Company's accounting policies and other risks detailed in the Company's Securities and Exchange Commission filings. The financial results of Michaels Stores, Inc. (the "Company") in recent years have been significantly affected by the rapid expansion of the Company through both new store openings and acquisitions. In fiscal years 1993, 1994 and 1995, the Company added 54, 184 and 64 stores, respectively, before considering store closures of 2, 24 and 2, respectively. During these periods, the Company obtained a substantial portion of its sales increases from stores added during, or subsequent to, the prior comparable period and thus not yet included in comparable store sales comparisons. During these periods, sales from these newer stores accounted for approximately 88%, 93% and 96%, respectively, of aggregate sales increases. The Company anticipates that future growth will be more moderate than in the past as it continues to focus on return on investment, inventory control, productivity enhancements and improved cash flow. The Company intends to add approximately 12 to 15 Michaels stores and five to ten Aaron Brothers stores in fiscal 1996, of which five Michaels stores have been opened as of April 25, 1996. In 1994 the Company added 184 Michaels stores in part due to acquisitions. In February 1994 the Company acquired Treasure House Stores, Inc., a chain of nine arts and crafts stores operating primarily in the Seattle market, for 280,000 shares of the Company's Common Stock. In April 1994 the Company acquired the affiliated arts and crafts stores of Oregon Craft & Floral Supply Co., with eight stores located primarily in the Portland, Oregon area, and H&H Craft & Floral Supply Co., with eight stores located in southern California, for a total of 455,000 shares of the Company's Common Stock. In July 1994 Michaels acquired Leewards Creative Crafts, Inc. ("Leewards"), an Illinois based arts and crafts retailer which owned 98 stores located primarily in the midwestern and northeastern United States. The acquisition consideration consisted of approximately $7.9 million in cash and 1,195,140 shares of the Company's Common Stock. Upon consummation of the acquisition of Leewards, the Company also repaid approximately $39.6 million of Leewards' indebtedness. Nineteen of these acquired stores were closed and all remaining stores were converted to the Michaels format. In March 1995 the Company acquired Aaron Brothers, Inc. ("Aaron Brothers"), which currently operates a chain of 68 specialty framing and art supply stores located primarily in California. The acquisition consideration of $25 million consisted of approximately $5.3 million in cash and the assumption of $19.7 million in bank debt. Shortly after consummation of the acquisition, the Company repaid Aaron Brothers' bank debt. Having achieved its objective of becoming the largest retailer in the arts, crafts and decorative items industry, the Company recognized that it has the critical mass to achieve improved operating efficiencies resulting in higher returns on its invested capital. Toward that end, on August 23, 1995, the Company announced a shift in its focus from sales growth towards realizing higher returns on its invested capital. During the second quarter of fiscal 1995, the Company's management conducted a critical analysis of the composition of the Company's merchandise assortment and the velocity of turnover of individual SKUs and vendor lines included in each category of merchandise. The Company then implemented a program (the "SKU Reduction Program") designed to reduce the amount of the Company's capital allocated to store inventories by approximately 5% on a per-store basis by year-end 1995 compared to year-end 1994. The SKU Reduction Program was implemented by setting new levels of the appropriate number of SKUs to be included in the various merchandise categories and by eliminating slower turning and less profitable product lines without impairing the stores' overall broad selection of more popular merchandise. As part of promotional activity during the second quarter of fiscal 1995, the Company had begun to identify SKUs to be included in clearance sales in June and July 1995. Concurrently with the analysis which led to the SKU Reduction Program, the Company also identified additional SKUs, including various seasonal SKUs, for clearance or elimination. The Company identified a total of approximately 7,500 SKUs for elimination in the SKU Reduction Program and substantially all of the inventory identified for liquidation has been sold. As a result of the SKU Reduction Program, the Company now offers an assortment of approximately 44,000 SKUs in the typical Michaels store during the course of a year (including seasonal product), of which approximately 31,000 SKUs are "planogrammed" SKUs offered at all times. Moreover, the Company's inventory per Michaels stores at the end of fiscal 1995 was approximately $804,000 per store, which represents a 19% decrease versus the end of fiscal 1994. The SKU Reduction Program resulted in the Company incurring approximately $64.4 million of unusual costs and expenses for the fiscal quarter ended July 30, 1995, which primarily included costs for inventory liquidated during the quarter as well as anticipated costs of inventory liquidations during the balance of fiscal 1995. The Company believes that operating at lower inventory levels as a result of the SKU Reduction Program will result in an increase in inventory turns, providing improved cash flow and higher returns on invested capital. Management believes that this improved cash flow, combined with lower inventory financing requirements, will also further strengthen the Company's balance sheet. -9- RECENT DEVELOPMENTS On April 2, 1996 the Company announced the selection of R. Michael Rouleau as Chief Executive Officer of the Company. Mr. Rouleau had most recently served as Executive Vice President of Store Operations for Lowe's Companies, Inc. since May 1992, and as President of Lowe's Contractor Yard Division since February 1995. Prior to joining Lowe's, Mr. Rouleau was a co-founder and President of Office Warehouse which subsequently merged into Office Max. Douglas B. Sullivan, who succeeded Jack Bush as President of the Company in August 1995, will continue as President and Chief Operating Officer of the Company. In April 1996 the Company completed a private placement of 2,000,000 shares of the Company's Common Stock at a price of $12.50 per share (the "Private Placement"). The Common Stock was sold through three private transactions with separate entities owned by independent trusts of which family members of Sam Wyly and Charles J. Wyly, Jr. are beneficiaries. The Common Stock is subject to restrictions on future transfer. The Company intends to use the $25 million for working capital purposes and to facilitate future growth. 1996 OUTLOOK Management of the Company believes that the retail sales environment likely will continue to be soft through the end of fiscal 1996. This outlook is based, in part, upon historically high levels of consumer indebtedness and the number of clearance sales being conducted by other retailers. The Company expects to achieve comparable store sales increases for fiscal 1996 taken as a whole, although there may be comparable store sales decreases in some individual months during the year. The Company expects comparable store sales growth during the first six months of fiscal 1996 as compared to the first six months of fiscal 1995 to be unfavorable because the Company experienced a 9% comparable store sales increase during the first six months of 1995, with such increase principally due to promotional activity conducted during the spring of 1995. In addition, the Company expects that operating results in the first and second quarters of fiscal 1996 will be negatively impacted by several factors. As a result of the change in merchandise assortment, the Company will relay all stores with new planograms, and may therefore experience disruption in its stores and increased labor costs as the result of the relaying of the planograms as well as the accelerated rollout of the POS system. Further, it is expected that the inventory assortment in the Michaels stores will not attain optimal presentation and in-stock position with the reduced assortment of merchandise until after all of the planograms have been reset. The Company currently anticipates that all planograms will be reset in substantially all of its stores by September 1, 1996. In summary, while the Company expects cash flow from operations to be favorably affected throughout the year and to be higher in fiscal 1996 than in recent years, the favorable effects of the Company's initiatives to improve profitability may not become apparent in the Company's operating results until the second half of fiscal 1996. RESULTS OF OPERATIONS The following table shows the percentage of net sales that each item in the Consolidated Statements of Operations represents. This table should be read in conjunction with the following discussion and with the Company's Consolidated Financial Statements, including the related notes.
Fiscal Year ------------------------------ 1995 1994 1993 - --------------------------------------------------------------------------- Net sales 100.0% 100.0% 100.0% Cost of sales and occupancy expense 72.3 64.9 65.2 Selling, general and administrative expense 28.9 28.0 28.1 Store closing and conversion costs 0.0 0.7 0.0 ----- ----- ----- Operating (loss) income (1.2) 6.4 6.7 Interest expense 1.3 0.9 1.0 Other expense and (income), net 0.2 (0.2) (1.2) ----- ----- ----- (Loss) income before income taxes (2.7) 5.7 6.9 (Benefit) provision for income taxes (1.1) 2.1 2.7 ----- ----- ----- Net (loss) income (1.6)% 3.6% 4.2% ----- ----- ----- ----- ----- -----
In the discussion below, all percentages given for expense items (excluding taxes) are calculated as a percentage of net sales for the applicable year. FOR FISCAL 1995 COMPARED TO FISCAL 1994 Net sales in the fiscal year ended January 28, 1996 ("1995") increased $300.3 million, or 30%, over the fiscal year ended January 29, 1995 ("1994"). The results for 1995 included sales from 62 Michaels stores (net of 2 closures) that were opened during the year. During 1995 sales of the newer stores accounted for $287.3 million of the increase. Comparable store sales increased three percent in 1995 compared to the prior year. Cost of sales and occupancy expense for 1995 increased by 7.4% compared to 1994 due primarily to reduced margin on merchandise associated with the SKU Reduction Program. Other contributing factors included the Company's aggressive promotional strategy during the Christmas holiday sales period and an increase in occupancy expense as a percentage of sales. Occupancy expense increased primarily due to the inclusion of the results of operations of the Aaron Brothers stores, which had higher occupancy expense as a percentage of sales than the typical Michaels store, and to the impact of fixed occupancy expense in certain of the Company's more mature stores that encountered sales declines. Selling, general and administrative expense increased by 0.9% in 1995 from 1994. A significant portion of the increase can be attributed to the one-time charge taken in the second quarter of 1995 ($4.9 million, or 0.4% of sales) to cover certain retirement costs of the Company's former President and Chief Operating Officer and costs related to the SKU Reduction Program. The balance of the increase was primarily due to increased store depreciation due to the Company's continued investment in its new POS system. Interest expense for 1995 was $16.8 million compared to $9.1 million in 1994. The increase was due to higher bank borrowings to acquire Aaron Brothers and to finance new stores, investment in POS equipment, and seasonal inventory growth. Other expense was $3.0 million in 1995 compared to other income of $2.2 million in 1994. The net expense in 1995 was due principally to investment losses sustained as the Company liquidated its remaining investment portfolio, compared to net investment income earned in the prior year. -10- The effective tax rate changed to a 41.4% benefit rate in 1995 from a 37.6% provision rate in 1994 due principally to the interrelated effects in 1995 of increased goodwill amortization and the level of the Company's pre-tax loss. FOR FISCAL 1994 COMPARED TO FISCAL 1993 Net sales in 1994 increased $374.9 million, or 60%, over the fiscal year ended January 30, 1994 ("1993"). The results for 1994 included sales from 160 stores (net of 24 closures) that were opened or acquired during the year. During 1994 sales of the newer stores accounted for $348.6 million of the increase. Comparable store sales increased seven percent in 1994 compared to the prior year. Cost of sales and occupancy expense for 1994 decreased by 0.3% compared to 1993 due primarily to increases in sales of higher margin custom framing and floral services, an improvement in the gross margin achieved on seasonal merchandise sales and greater margin contributions from new and acquired stores, due principally to new store volume discounts from vendors. This improvement in gross margin was partially offset by an increase in occupancy expenses driven by the Company's shift to new stores with higher average selling square footage than existing stores, coupled with the Company's expansion into states with higher occupancy costs such as New York, Massachusetts and Connecticut. Selling, general and administrative expense decreased by 0.1% in 1994 from 1993. The decrease was due primarily to continued leveraging of the Company's general and administrative expenditures over a larger revenue base. Interest expense for 1994 was $9.1 million compared to $6.4 million in 1993. The increase was due to higher bank borrowings coupled with higher interest rates than in 1993. Other income (net of other expense) was $2.2 million in 1994 compared to $7.7 million in 1993. This year's decrease from last year was due to a decline in the Company's average investment portfolio, which was used to fund the store expansion program. The effective tax rate was reduced to 37.6% in 1994 from 38.4% in 1993 primarily due to the Company's participation in tax advantaged programs, partially offset by increases in non-deductible goodwill amortization. LIQUIDITY AND CAPITAL RESOURCES The Company's working capital needs are driven primarily by the seasonal build in inventory to support higher sales in the third and fourth quarters, and to a lesser extent to fund the Company's growth in new stores and systems improvements. Net cash provided by operating activities for 1995 was $9.2 million as compared to net cash used by operating activities of $38.3 million for 1994. Net cash provided by operating activities during 1995 increased primarily due to the SKU Reduction Program. Proceeds from the SKU Reduction Program were used to pay down bank debt. Capital expenditures (excluding acquisitions) during 1995 were $54.9 million, incurred primarily for the opening of 64 new Michaels stores and the remodeling, relocation or expansion of approximately 27 existing Michaels stores, and to a lesser extent the opening of a new distribution facility and certain computer system enhancements. The Company plans to spend approximately $60 million to $65 million on capital expenditures during fiscal 1996. The Company plans to add only 12 to 15 Michaels stores, at a cost of approximately $300,000 to $400,000 per store, and five to ten Aaron Brothers stores, at a cost of approximately $135,000 per store. These costs include furniture, fixtures,and equipment. The initial inventory investment associated with the typical new Michaels store ranges from approximately $450,000 to $650,000 depending on the store size, operating format and time of year opened. The inventory invested in the typical new Aaron Brothers store ranges from $120,000 to $135,000. Although leasehold improvement costs tend to vary among locations, the Company expects that capital expenditures related to new store openings will be approximately $6 million in 1996. In addition to new store opening costs and expenses, the Company expects to spend an additional $28 million to $30 million on POS and merchandising systems, approximately $12 million on store relocations and remodeling, $7 million on the relocation of the Company's Texas distribution center, and $7 million to $10 million on the relocation of the Company's corporate offices and various other projects. The Company's new POS system, which has been installed in more than 240 Michaels stores as of April 25, 1996 and which the Company believes will be in place in almost all Michaels stores by the end of summer 1996, will be financed primarily through a $25 million capital lease with IBM Credit Corporation at an interest rate of approximately 8%. At January 28, 1996 the Company had working capital of $229.0 million, compared to $232.4 million at January 29, 1995. The Company currently has a bank credit agreement ("Credit Agreement") which provides for an unsecured line of credit, and the issuance of letters of credit, in an aggregate amount not to exceed $200 million. As of January 28, 1996 the Company had $95.7 million in available unused borrowing capacity under the Credit Agreement. In April 1996 the Company completed the Private Placement resulting in proceeds to the Company of $25 million. The Company used these proceeds to further reduce its borrowings under the Credit Agreement. Michaels believes that its available cash, funds generated by operations, the IBM capital lease financing and funds available under the Credit Agreement should be sufficient to finance its continuing operations and sustain current growth plans. The Company believes that it can finance an annual store expansion of 12% to 15% (on a store square footage basis) from internally generated cash flow. SEASONALITY AND INFLATION The Company's business is seasonal in nature with higher sales in the third and fourth quarters. Historically, the fourth quarter, which includes the Christmas selling season, has accounted for approximately 37% of the Company's sales and (excluding 1995) approximately 55% of its operating income. Management considers the effect of inflation on 1995 results and its projected effect on 1996 financial results to be nominal. -11- MICHAELS STORES, INC. CONSOLIDATED BALANCE SHEETS (In thousands except share data)
January 28, 1996 January 29, 1995 ASSETS ---------------- ---------------- CURRENT ASSETS: Cash and equivalents $ 2,870 $ 1,907 Marketable securities - 15,002 Merchandise inventories 366,102 375,096 Income taxes receivable and deferred income taxes 35,177 15,002 Prepaid expenses and other 12,143 11,525 -------- -------- Total current assets 416,292 418,532 -------- -------- PROPERTY AND EQUIPMENT, AT COST 255,386 204,032 Less accumulated depreciation (82,157) (62,228) -------- -------- 173,229 141,804 -------- -------- COSTS IN EXCESS OF NET ASSETS OF ACQUIRED OPERATIONS, NET 143,721 117,377 OTHER ASSETS 6,538 8,313 -------- -------- 150,259 125,690 -------- -------- $739,780 $686,026 -------- -------- -------- -------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 98,799 $103,649 Accrued liabilities and other 88,510 82,441 -------- -------- Total current liabilities 187,309 186,090 -------- -------- BANK DEBT 87,200 41,100 CONVERTIBLE SUBORDINATED NOTES 96,940 96,950 OTHER LONG-TERM LIABILITIES 32,378 5,969 -------- -------- Total long-term liabilities 216,518 144,019 403,827 330,109 -------- -------- COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY: Preferred stock, $.10 par value, 2,000,000 shares authorized, none issued - - Common stock, $.10 par value, 50,000,000 shares authorized, 21,504,110 issued and outstanding (21,354,167 in fiscal 1994) 2,150 2,135 Additional paid-in capital 243,325 244,561 Retained earnings 90,478 109,221 -------- -------- Total shareholders' equity 335,953 355,917 -------- -------- $739,780 $686,026 -------- -------- -------- --------
See accompanying notes to consolidated financial statements. -12- MICHAELS STORES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands except per share data)
Fiscal Year ------------------------------- 1995 1994 1993 ---------- -------- -------- NET SALES $1,294,886 $994,563 $619,688 ---------- -------- -------- Cost of sales and occupancy expense 936,537 644,737 403,869 Selling, general and administrative expense 373,395 278,716 174,463 Store closing and conversion costs - 7,074 -- ---------- -------- -------- OPERATING (LOSS) INCOME (15,046) 64,036 41,356 Interest expense 16,841 9,103 6,378 Other expense and (income), net 2,952 (2,226) (7,666) ---------- -------- -------- (LOSS) INCOME BEFORE INCOME TAXES (34,839) 57,159 42,644 (Benefit) provision for income taxes (14,422) 21,512 16,357 ---------- -------- -------- NET (LOSS) INCOME $ (20,417) $ 35,647 $ 26,287 ---------- -------- -------- ---------- -------- -------- (LOSS) EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE: Primary $(0.95) $1.77 $1.53 Assuming full dilution $(0.95) $1.76 $1.52 WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING: Primary 21,517 20,146 17,231 Assuming full dilution 21,517 20,807 19,809
See accompanying notes to consolidated financial statements. -13- MICHAELS STORES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Fiscal Year -------------------------------- 1995 1994 1993 -------- -------- -------- OPERATING ACTIVITIES: Net (loss) income $(20,417) $ 35,647 $ 26,287 Adjustments: Depreciation and amortization 30,928 21,512 12,490 Other 943 (501) (3,537) Change in assets and liabilities excluding the effects of acquisitions: Merchandise inventories 13,406 (134,671) (87,885) Prepaid expenses and other (1,534) 5,747 (6,358) Deferred income taxes and other (11,188) 7,276 (611) Accounts payable (6,585) 37,065 11,545 Income taxes payable - (8,363) 3,304 Accrued liabilities and other 3,695 (1,979) 15,830 -------- -------- -------- Net change in assets and liabilities (2,206) (94,925) (64,175) -------- -------- -------- Net cash provided by (used in) operating activities 9,248 (38,267) (28,935) -------- -------- -------- INVESTING ACTIVITIES: Additions to property and equipment (54,906) (68,106) (46,816) Net proceeds from sales of property and equipment 3,159 - - Net proceeds from sales of marketable securities 18,860 44,484 17,807 Acquisitions and other (24,909) (43,685) - -------- -------- -------- Net cash used in investing activities (57,796) (67,307) (29,009) -------- -------- -------- FINANCING ACTIVITIES: Net borrowings under bank credit facilities 46,100 28,100 13,000 Payment of other long-term liabilities (891) (89) (115) Proceeds from issuance of common stock 4,302 78,603 3,851 -------- -------- -------- Net cash provided by financing activities 49,511 106,614 16,736 -------- -------- -------- NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS 963 1,040 (41,208) CASH AND EQUIVALENTS AT BEGINNING OF YEAR 1,907 867 42,075 -------- -------- -------- CASH AND EQUIVALENTS AT END OF YEAR $ 2,870 $ 1,907 $ 867 -------- -------- -------- -------- -------- -------- Cash payments (receipts) for: Interest $ 15,236 $ 7,166 $ 5,034 Income taxes (2,155) 17,753 11,620
See accompanying notes to consolidated financial statements. -14- MICHAELS STORES, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY For the Three Years Ended January 28, 1996 (In thousands except share data)
- ------------------------------------------------------------------------------------------ Number Additional of Common paid-in Retained shares stock capital earnings Total - ------------------------------------------------------------------------------------------ BALANCE AT JANUARY 31, 1993 16,474,330 $1,647 $103,340 $50,290 $155,277 Exercise of stock options, net 223,027 23 3,828 - 3,851 Net income - - - 26,287 26,287 ---------- ------ -------- ------- -------- BALANCE AT JANUARY 30, 1994 16,697,357 1,670 107,168 76,577 185,415 Adjustment for pooling- of-interests accounting in an acquisition - - - (1,157) (1,157) Issuance of shares in acquisitions 1,992,268 199 58,257 - 58,456 Proceeds from stock offering 2,353,432 235 71,980 - 72,215 Adjustment for change in market value of marketable securities - - - (1,514) (1,514) Exercise of stock options and other 311,110 31 7,156 (332) 6,855 Net income - - - 35,647 35,647 ---------- ------ -------- ------- -------- BALANCE AT JANUARY 29, 1995 21,354,167 2,135 244,561 109,221 355,917 Retirement of shares reacquired (170,025) (17) (5,516) - (5,533) Adjustment for change in market value of marketable securities - - - 1,514 1,514 Exercise of stock options and other 319,968 32 4,280 160 4,472 Net loss - - - (20,417) (20,417) ---------- ------ -------- ------- -------- BALANCE AT JANUARY 28, 1996 21,504,110 $2,150 $243,325 $90,478 $335,953 ---------- ------ -------- ------- -------- ---------- ------ -------- ------- --------
See accompanying notes to consolidated financial statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF BUSINESS Michaels Stores, Inc. (the "Company") owns and operates a chain of specialty retail stores featuring creative craft products and home decor items. The Company operates nationwide and also has stores in Canada and Puerto Rico. FISCAL YEAR END The Company reports on a 52/53-week fiscal year which ends on the Sunday closest to January 31; thus, fiscal 1995 ("1995"), fiscal 1994 ("1994") and fiscal 1993 ("1993"), ended on January 28, 1996, January 29, 1995 and January 30, 1994, respectively. CONSOLIDATION The consolidated financial statements include the accounts of the Company and all wholly-owned and majority-owned subsidiaries. All intercompany accounts and transactions have been eliminated. ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires the Company to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. MARKETABLE SECURITIES Marketable securities are carried at fair value, based on quoted market prices or dealer quotes as of the last trading day of the fiscal year. Marketable securities held by the Company at January 29, 1995 were classified as available- for-sale securities. Net realized gains (losses), dividend income, and interest income were: $(2.9) million, $0.5 million and $0.1 million, respectively, for 1995; $0.1 million, $1.0 million and $0.3 million, respectively, for 1994; and $4.1 million, $4.0 million and $1.5 million, respectively, for 1993. MERCHANDISE INVENTORIES Store merchandise inventories are valued at the lower of average cost (determined by a retail method) or market. Distribution center inventories are valued at the lower of cost (determined by the first-in, first-out method) or market. During 1995 the Company implemented an inventory SKU reduction program which resulted in charges of approximately $64.4 million primarily associated with the retail markdown of inventories. -15- PROPERTY AND EQUIPMENT Depreciation is provided on a straight-line basis over the estimated useful lives of the assets. COSTS IN EXCESS OF NET ASSETS OF ACQUIRED OPERATIONS Costs in excess of net assets of acquired operations are being amortized over 40 years on a straight-line basis. Accumulated amortization was $10,532,000 and $7,295,000 as of the end of 1995 and 1994, respectively. The Company assesses the recoverability of costs in excess of net assets acquired annually based on existing facts and circumstances. The Company measures the recoverability of this asset on an on-going basis based on projected earnings before interest, depreciation and amortization, on an undiscounted basis. Should the Company's assessment indicate an impairment of this asset in the future, an appropriate write-down will be recorded. INTEREST-RATE SWAP AGREEMENTS The Company enters into interest-rate swap agreements from time to time to modify the interest characteristics of its outstanding debt from a floating rate to a fixed basis. These agreements involve the receipt of fixed rate amounts in exchange for floating rate interest payments over the life of the agreement without an exchange of the underlying principal amount. The differential to be paid or received is accrued as interest rates change and recognized as an adjustment to interest expense related to the debt. ADVERTISING COSTS Advertising costs are expensed in the period in which the advertising first occurs. In 1995, 1994 and 1993, the Company incurred $62,696,000, $47,089,000 and $29,227,000, respectively, of advertising expense. STORE PRE-OPENING COSTS Store pre-opening costs are expensed in the fiscal year in which the store opens. In 1995, 1994 and 1993, the Company incurred $7,466,000, $6,541,000 and $4,893,000, respectively, of store pre-opening costs. EARNINGS PER SHARE Earnings per share data are based on the weighted average number of shares outstanding, including common stock equivalents and other dilutive securities. The assumed conversion of the convertible subordinated notes was dilutive for the fourth quarter and full year of both 1993 and 1994 and was therefore included in the calculation of fully diluted earnings per share data for those periods. NEW ACCOUNTING PRONOUNCEMENTS The Company accounts for its stock compensation arrangements under the provisions of APB 25, "Accounting for Stock Issued to Employees," and intends to continue to do so. In the first quarter of fiscal 1996 the Company will adopt SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets." The adoption is not expected to have a material effect on the Company's financial position or results of operations. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS
1995 1994 - -------------------------------------------------------------------------------- (In thousands) Property and equipment: Land and buildings $ 3,284 $ 7,640 Fixtures and equipment 183,545 145,253 Leasehold improvements 68,557 51,139 -------- -------- $255,386 $204,032 -------- -------- -------- -------- Accrued liabilities and other: Salaries, bonuses and other payroll- related costs $ 29,467 $ 21,527 Rent 8,237 16,524 Taxes, other than income and payroll 15,439 13,344 Other 35,367 31,046 -------- -------- $ 88,510 $ 82,441 -------- -------- -------- --------
DEBT In January 1993, the Company issued $97.75 million of convertible subordinated notes ("Subordinated Notes") due January 15, 2003. Interest, payable semi-annually on January 15 and July 15, was computed at the rate of 4 3/4% from the date of issuance to January 15, 1996, and at 6 3/4% thereafter. Interest expense is accrued by the Company based on an effective interest rate of 6.38% (including amortization of deferred issuance costs) over the full term of the Subordinated Notes. The Subordinated Notes are redeemable at the option of the Company at redemption prices ranging from 104.14% to 100%. The Subordinated Notes are not entitled to any sinking fund. The Subordinated Notes are convertible into the Company's common stock at any time, at a conversion price of $38 per share. A total of 2,551,053 shares of common stock are reserved for conversion. During 1994 and 1995, a total of $800,000 and $10,000, respectively, in Subordinated Notes were converted to 21,315 shares of the Company's common stock. The fair value, based on dealer quotes, of the outstanding Subordinated Notes as of January 28, 1996 and January 29, 1995 was $76.0 million and $98.6 million, respectively. The Company has a bank credit agreement ("Credit Agreement") which includes an unsecured line of credit and provides for the issuance of commercial letters of credit. Borrowings under the Credit Agreement, which expires in June 1998, were $87.2 million and $41.1 million at January 28, 1996 and January 29, 1995, respectively. The weighted average interest rates for outstanding borrowings were 7.3% and 7.7% during 1995 and 1994, respectively. Borrowings under the Credit Agreement are limited to the lesser of $200 million or the Company's borrowing base (as defined in the Credit Agreement, $183.1 million at January 28, 1996) in either case minus the aggregate amount of letters of credit outstanding. The Credit Agreement requires the Company to maintain various financial ratios and restricts the Company's ability to pay dividends. On March 4, 1996, the Credit Agreement was amended to provide, among other things, for a waiver of the fixed charges coverage ratio for the fourth quarter of 1995. -16- INCOME TAXES Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of deferred tax liabilities and assets as of the respective year-end balance sheets are as follows:
1995 1994 ---------------------- (In thousands) Deferred tax assets: Tax inventory in excess of book inventory $ 3,100 $ 748 Accrued expenses not deductible until paid 13,529 11,114 Net operating loss and alternative minimum tax credit carryforwards 10,390 2,687 Other - net 2,295 1,582 ------- ------- Total deferred tax assets 29,314 16,131 Valuation allowance for deferred tax assets (5,077) - ------- ------- Net deferred tax assets 24,237 16,131 ------- ------- Deferred tax liabilities: Tax over book depreciation/amortization 12,885 3,546 Other - net 4,608 2,313 ------- ------- Total deferred tax liabilities 17,493 5,859 ------- ------- Net deferred tax assets $ 6,744 $10,272 ------- ------- ------- ------- 1995 1994 1993 ------------------------------------ (In thousands) Income tax (benefit) provision: Federal: Current $(18,202) $ 6,103 $14,249 Deferred 9,749 14,090 147 -------- ------- ------- Total federal (8,453) 20,193 14,396 -------- ------- ------- State: Current (5,089) 1,319 1,961 Deferred (880) - - -------- ------- ------- Total state (5,969) 1,319 1,961 -------- ------- ------- $(14,422) $21,512 $16,357 -------- ------- ------- -------- ------- ------- 1995 1994 1993 ------------------------------------ (In thousands) Reconciliation of income tax provision to statutory rate: Income tax (benefit) expense at statutory rate $(12,194) $20,005 $14,925 State income taxes, net of federal income tax effect (3,879) 858 1,275 Amortization of intangibles and other 1,651 649 157 -------- ------- ------- $(14,422) $21,512 $16,357 -------- ------- ------- -------- ------- -------
At January 28, 1996, the Company had federal and state net operating loss and tax credit carryforwards of $10,390,000 of which $8,590,000 expire at various dates between 1998 and 2011. When realized, the tax benefit associated with $4,501,000 of such carryforwards will be applied to reduce goodwill. COMMITMENTS AND CONTINGENCIES COMMITMENTS The Company operates stores and uses distribution centers, office facilities and equipment generally leased under noncancellable operating leases, the majority of which provide for renewal options. Future minimum rentals for all noncancellable operating leases as of January 28, 1996 are as follows:
Fiscal Year Rent ---------------------------------- (In thousands) 1996 $ 89,582 1997 85,419 1998 77,259 1999 67,433 2000 56,895 2001 and thereafter 190,901 -------- $567,489 -------- --------
Rental expense applicable to operating leases was $81,036,000, $56,181,000 and $33,551,000 in 1995, 1994 and 1993, respectively. The Company has entered into operating leases for two distribution facilities that require that the Company guarantee payment of the residual value of the property to the lessor at the end of each lease. As of January 28, 1996 the guaranteed residual value of assets subject to these leases was $8,439,000. CONTINGENCIES In August 1995, two lawsuits were filed by certain security holders against the Company and certain present and former officers and directors seeking class action status on behalf of purchasers of the Company's Common Stock between February 1, 1995 and August 23, 1995. Among other things, the plaintiffs allege that misstatements and omissions by defendants relating to projected and historical operating results, inventory and other matters involving future plans resulted in an inflation of the prices of the Company's Common Stock. The plaintiffs seek on behalf of the purported class an unspecified amount of compensatory damages and reimbursement for the plaintiffs' fees and expenses. The United States District Court for the Northern District of Texas consolidated the two lawsuits on November 16, 1995. The Company and the individual defendants have filed a motion to dismiss the consolidated, amended complaint. The court has not yet ruled on this motion. Discovery related to both class certification issues and the merits of the plaintiffs' claims has been stayed pending resolution of the defendants' motion to dismiss. The Company believes the claims are without merit and intends to vigorously defend this action. The Company is a defendant from time to time in lawsuits incidental to its business. Based on currently available information, the Company believes that resolution of all known contingencies, including the security holder litigation described above, would not have a material adverse impact on the Company's financial position. However, there can be no assurance that future costs would not be material to results of operations of the Company for a particular future period. In addition, the Company's estimates of future costs are subject to change as events evolve and additional information becomes available during the course of litigation. Standby letters of credit relating to workers compensation and general liability insurance coverages aggregated $6.5 million as of January 28, 1996. -17- STOCK OPTIONS All full-time employees are eligible to participate in the Michaels Stores, Inc. Key Employee Stock Compensation Program (the "Program"), as amended, under which 3,000,000 shares of Common Stock have been authorized for issuance. Select employees and key advisors, including directors, of the Company may participate in the 1992 and 1994 Non-Statutory Stock Option Plans of Michaels Stores, Inc. (the "Plans"), with an aggregate of 4,000,000 shares of Common Stock having been authorized for issuance under the Plans. In addition, stock options have been granted to certain directors and key advisors other than pursuant to the Program or the Plans. The exercise price of all options granted was the fair market value on the date of grant.
Exercise price Shares per share ---------------------------------------- Exercised during 1993 223,027 $3 to $27 Exercised during 1994 308,424 $3 to $27 7/8 Exercised during 1995 319,705 $8 7/8 to $32 1/4 Outstanding at January 28, 1996 4,067,316 $3 to $17 Exercisable at January 28, 1996 575,335 $3 to $16 3/4
ACQUISITIONS In February 1994, the Company acquired Treasure House Stores, Inc. ("THSI"), for 280,000 shares of the Company's Common Stock in a transaction accounted for as a pooling-of-interests. The transaction was not considered material to the Company's sales, net income or financial position of any previous year, and therefore the Company's financial statements were not restated. In April 1994, the Company acquired the affiliated companies that operated the arts and crafts store chains of Oregon Craft & Floral Supply Co. ("OCF") and H&H Craft & Floral Supply Co. ("H&H") for a total of 455,000 shares of the Company's Common Stock valued at $18.5 million in a transaction accounted for as a purchase. This transaction resulted in the Company recording an addition to goodwill in the amount of $22.3 million. Effective July 10, 1994, Michaels acquired Leewards Creative Crafts, Inc. ("Leewards"), an arts and crafts retailer with 98 stores located primarily in the midwestern and northeastern United States. The acquisition consideration consisted of $7.9 million in cash and 1,257,279 shares of the Company's Common Stock valued at $39.9 million. Upon consummation of the Leewards acquisition, Michaels also repaid $39.6 million of Leewards' indebtedness. The cost in excess of the estimated fair value of net assets acquired was recorded as goodwill in the amount of $77.9 million. In March 1995, the Company purchased Aaron Brothers, Inc. ("Aaron Brothers"), which operated a chain of 71 framing and art supplies stores predominantly in California, for a purchase price of $25 million consisting of approximately $5.3 million in cash and the assumption of $19.7 million of debt. The transaction was accounted for as a purchase and resulted in the Company recording an addition to goodwill in the amount of $26.7 million. The OCF, H&H, Leewards and Aaron Brothers transactions were accounted for as purchases; accordingly, the purchase prices have been allocated to assets and liabilities based on estimated fair values as of the respective acquisition dates. The results of operations since the acquisition dates are included in the accompanying consolidated financial statements. The following pro forma combined net sales, net income and earnings per share data summarize the results of operations for 1994 and 1993 as if Leewards had been acquired as of the beginning of 1993.
Pro Forma (In thousands, except per share amounts) 1994 1993 ---------------------------------------------------- Net sales $1,050,173 $780,302 ---------- -------- ---------- -------- Net income (1) $ 36,456 $ 26,157 ---------- -------- ---------- -------- Earnings per share assuming full dilution(1) $ 1.71 $ 1.41 ---------- -------- ---------- --------
(1) Excludes a $7.1 million charge ($4.4 million after tax or $.21 per share) for store closing and conversion costs. The above pro forma data does not include THSI, OCF, H&H or Aaron Brothers prior to their respective acquisition dates since the acquisitions were not considered material, individually or in the aggregate, to the operating results of the Company. -18- REPORT OF INDEPENDENT AUDITORS The Board of Directors and Shareholders Michaels Stores, Inc. We have audited the accompanying consolidated balance sheets of Michaels Stores, Inc. as of January 28, 1996 and January 29, 1995, and the related consolidated statements of operations, cash flows, and shareholders' equity for each of the three years in the period ended January 28, 1996. 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 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 audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Michaels Stores, Inc. at January 28, 1996 and January 29, 1995, and the results of its operations and its cash flows for each of the three years in the period ended January 28, 1996, in conformity with generally accepted accounting principles. /s/ ERNST & YOUNG LLP Dallas, Texas March 6, 1996 UNAUDITED SUPPLEMENTAL QUARTERLY FINANCIAL DATA
First Second Third Fourth Quarter Quarter Quarter Quarter - -------------------------------------------------------------------------------- (In thousands except per share data) 1995: Net sales $265,547 $259,910 $312,696 $456,733 Cost of sales and occupancy expense 172,043 230,133 208,736 325,625 Operating income (loss) 15,420 (54,973)(1) 12,921 11,586 Net income (loss) 7,557 (33,124) 3,006 2,144 Fully-diluted earnings (loss) per common share $ .35 $ (1.55) $ .14 $ .10 Weighted average shares outstanding - assuming full dilution 21,845 21,413 21,337 21,475 1994: Net sales $159,798 $174,204 $283,069 $377,492 Cost of sales and occupancy expense 103,511 111,237 187,566 242,423 Operating income 9,071 3,076 14,827 37,062 Net income 4,967 713(2) 7,813 22,154 Fully-diluted earnings per common share $ .28 $ .04(2) $ .36 $ .94 Weighted average shares outstanding - assuming full dilution 17,856 18,845 21,930 24,577
(1) Includes effect of an unusual pre-tax charge of $64.4 million for costs and expenses primarily associated with an inventory reduction program. (2) Includes a one-time charge of $4.4 million, net of tax, or $.23 per share for store closing and conversion costs. -19- EX-21.1 12 EXHIBIT 21.1 EXHIBIT 21.1 SUBSIDIARIES OF MICHAELS STORES, INC. Michaels of Canada, Inc., a New Brunswick San Diego Craft & Floral Supply Co., Inc., corporation a California corporation Leewards Creative Crafts, Inc., a Delaware Mission Viejo Craft & Floral, Inc., a corporation California corporation Treasure House Stores, Inc., a Delaware H.F.C.S., Inc., a California corporation corporation Oregon Craft & Floral Supply Co., Inc., an San Leandro Craft and Floral Supply Oregon corporation Company, Inc., a California corporation Oregon Craft & Floral Supply Co., II, Inc., Orange Craft & Floral Supply Co., Inc., a an Oregon corporation California corporation Oregon Craft & Floral Supply Co., III, Inc., H & H Craft & Floral Supply Co. #9, Inc., an Oregon corporation a California corporation Oregon Craft & Floral Supply Co., IV, Inc., OC&F Number 18, Inc., an Oregon an Oregon corporation corporation Oregon Craft & Floral Supply Co., V, Inc., Michaels Stores of Puerto Rico, Inc., a Delaware a Washington corporation corporation Oregon Craft & Floral Supply Co., VI, Inc., Aaron Brothers Holdings, Inc., a Delaware an Oregon corporation corporation Oregon Craft & Floral Supply Co., VII, Inc., Aaron Brothers Art Marts, Inc., a Delaware an Oregon corporation corporation (an indirect subsidiary) Oregon Craft & Floral Supply Co., VIII, Aaron Brothers, Inc., a Delaware Inc., an Oregon corporation corporation (an indirect subsidiary) Oregon Craft & Floral Supply Co., IX, Inc., Michaels International Finance, Inc., an Oregon corporation a Cayman Island corporation Habif & Ross Enterprises, Inc., a California 5931, Inc., corporation a Delaware corporation Riverside Craft & Floral Supply Co., Inc., 5931 Business Trust, a California corporation a Delaware business trust
EX-23 13 EXHIBIT 23 Exhibit 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report (Form 10-K) of Michaels Stores, Inc. of our report dated March 6, 1996, included in the 1995 Annual Report to Shareholders of Michaels Stores, Inc. We also consent to the incorporation by reference in the Registration Statements listed below and in the related Prospectuses of our report dated March 6, 1996, with respect to the consolidated financial statements of Michaels Stores, Inc. incorporated by reference in the Annual Report (Form 10-K) for the year ended January 28, 1996. FORM REGISTRATION NO. PERTAINING TO MICHAELS STORES, INC. ---- ---------------- ----------------------------------- S-8 2-92413 Stock Investment Plan S-8 2-97848 Key Employee Stock Compensation Program S-8 33-18476 Key Employee Stock Compensation Program S-8 33-11985 Employees 401(K) Plan S-3 33-21299 Registration of 802,000 shares of Common Stock S-3 33-9456 Post Effective Amendment No. 1 to the Registration Statement on Form S-1 for the registration of 1,000,000 shares of Common Stock S-8 33-26338 Key Employee Stock Compensation Program S-8 33-21573 Moskatel's Inc. 401(K) Plan S-3 33-22532 Registration of 30,000 shares of Common Stock S-3 33-40673 Registration of 1,240,000 shares of Common Stock S-8 33-43039 Employee Stock Purchase Plan S-8 33-54726 Key Employee Stock Compensation Program S-3 33-52311 Registration of 280,000 shares of Common Stock S-3 33-67804 1992 Non-Statutory Stock Option Plan S-3 33-53883 Registration of 455,000 shares of Common Stock S-3 33-55537 Registration of 901,066 shares of Common Stock S-3 33-61769 1994 Non-Statutory Stock Option Plan S-3 33-64379 1994 Non-Statutory Stock Option Plan S-8 33-61055 Employees 401(K) Plan /s/ ERNST & YOUNG LLP Dallas, Texas April 24, 1996 EX-27 14 EXHIBIT 27
5 1,000 YEAR JAN-28-1996 JAN-30-1995 JAN-28-1996 2,870 0 0 0 366,102 416,292 255,386 82,157 739,780 187,309 0 0 0 2,150 333,803 739,780 1,294,886 1,294,886 936,537 1,309,932 2,952 0 16,841 (34,839) (14,422) (20,417) 0 0 0 (20,417) (0.95) (0.95)
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