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-----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, CPEtLktUrjwzaNT035/yclBDEaY+pLaSL9dJfOteL2p6rSUIq4xI7qtsg4vlCIe1 Oz+mjbsqDNyePCWIt21hNw== 0000950134-06-011525.txt : 20060613 0000950134-06-011525.hdr.sgml : 20060613 20060613172643 ACCESSION NUMBER: 0000950134-06-011525 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 20060429 FILED AS OF DATE: 20060613 DATE AS OF CHANGE: 20060613 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: 0201 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-09338 FILM NUMBER: 06903154 BUSINESS ADDRESS: STREET 1: 8000 BENT BRANCH DR STREET 2: ******** CITY: IRVING STATE: TX ZIP: 75063 BUSINESS PHONE: (972)409-1300 MAIL ADDRESS: STREET 1: PO BOX 619566 CITY: DFW STATE: TX ZIP: 75261-9566 10-Q 1 d36685e10vq.htm FORM 10-Q e10vq

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q


(Mark One)
þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 29, 2006
OR
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to

Commission file number 001-09338

MICHAELS STORES, INC.

(Exact name of registrant as specified in its charter)


Delaware		75-1943604
(State or other jurisdiction of incorporation or organization)		(I.R.S. employer identification number)

8000 Bent Branch Drive

Irving, Texas 75063

P.O. Box 619566

DFW, Texas 75261-9566

(Address of principal executive offices, including zip code)

(972) 409-1300

(Registrant’s telephone number, including area code)

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 þ No o

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ Accelerated filer o Non-accelerated filer o

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

Indicate the number of shares outstanding of each of the Registrant’s classes of Common Stock, as of the latest practicable date.


		Shares Outstanding as of
Title		June 9, 2006
Common Stock, par value $.10 per share		132,137,792

MICHAELS STORES, INC.
FORM 10-Q


Part I—FINANCIAL INFORMATION
	Item 1.	Financial Statements
		Consolidated Balance Sheets at April 29, 2006, January 28, 2006, and April 30, 2005 (unaudited)	3
		Consolidated Statements of Income for the quarter ended April 29, 2006 and April 30, 2005 (unaudited)	4
		Consolidated Statements of Cash Flows for the quarter ended April 29, 2006 and April 30, 2005 (unaudited)	5
		Notes to Consolidated Financial Statements (unaudited)	6
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	24
	Item 4.	Controls and Procedures	24

Part II—OTHER INFORMATION
	Item 1.	Legal Proceedings	25
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	29
	Item 6.	Exhibits	30
Signatures			31
Forms of Award Agreements under 2005 Incentive Compensation Plan
Form of Change in Control Severance Agreement
Change in Control Retention Bonus Plan
Fiscal Year 2006 Bonus Plan Enhancement
Certifications of Jeffrey N. Boyer Pursuant to Section 302
Certifications of Gregory A. Sandfort Pursuant to Section 302
Certification Pursuant to Section 906

MICHAELS STORES, INC.

Part I—FINANCIAL INFORMATION


Item 1.	Financial Statements.

MICHAELS STORES, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

(Unaudited)


	April 29,			January 28,			April 30,
	2006			2006			2005

ASSETS
Current assets:
Cash and equivalents	$	441,843		$	452,449		$	558,546
Merchandise inventories		795,047			784,032			835,765
Prepaid expenses and other		46,397			44,042			26,999
Deferred and prepaid income taxes		34,156			34,125			64,669

Total current assets		1,317,443			1,314,648			1,485,979

Property and equipment, at cost		1,046,956			1,011,201			936,091
Less accumulated depreciation		(611,495	)		(586,382	)		(525,555	)

		435,461			424,819			410,536

Goodwill		115,839			115,839			115,839
Other assets		23,082			20,249			19,136

		138,921			136,088			134,975

Total assets	$	1,891,825		$	1,875,555		$	2,031,490


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	267,154		$	193,595		$	269,684
Accrued liabilities and other		226,541			282,499			227,053
Income taxes payable		15,730			20,672			—

Total current liabilities		509,425			496,766			496,737

91/4% Senior Notes due 2009		—			—			200,000
Deferred income taxes		2,791			2,803			26,848
Other long-term liabilities		89,098			88,637			79,359

Total long-term liabilities		91,889			91,440			306,207

		601,314			588,206			802,944

Commitments and contingencies
Stockholders’ equity:
Preferred Stock, $0.10 par value, 2,000,000 shares authorized; none issued		—			—			—
Common Stock, $0.10 par value, 350,000,000 shares authorized; 134,841,303 shares issued and 132,074,903 shares outstanding at April 29, 2006, 133,821,417 shares issued and 132,986,517 shares outstanding at January 28, 2006, and 135,293,468 shares issued and outstanding at April 30, 2005		13,484			13,382			13,529
Additional paid-in capital		416,052			386,627			425,432
Retained earnings		946,980			907,773			781,333
Treasury Stock (2,766,400 shares at April 29, 2006, 834,900 shares at January 28, 2006, and none at April 30, 2005)		(94,127	)		(27,944	)		—
Accumulated other comprehensive income		8,122			7,511			8,252

Total stockholders’ equity		1,290,511			1,287,349			1,228,546

Total liabilities and stockholders’ equity	$	1,891,825		$	1,875,555		$	2,031,490

See accompanying notes to consolidated financial statements.

MICHAELS STORES, INC.

CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data)

(Unaudited)


	Quarter Ended
	April 29,			April 30,
	2006			2005

Net sales	$	832,481		$	821,016
Cost of sales and occupancy expense		512,041			503,204

Gross profit		320,440			317,812
Selling, general, and administrative expense		241,736			227,894
Store pre-opening costs		1,437			2,739

Operating income		77,267			87,179
Interest expense		172			5,089
Other (income) and expense, net		(7,162	)		(2,680	)

Income before income taxes and cumulative effect of accounting change		84,257			84,770
Provision for income taxes		31,807			32,216

Income before cumulative effect of accounting change		52,450			52,554
Cumulative effect of accounting change, net of income tax of $54.2 million		—			88,488

Net income (loss)	$	52,450		$	(35,934	)

Basic earnings (loss) per common share:
Income before cumulative effect of accounting change	$	0.40		$	0.39
Cumulative effect of accounting change, net of income tax		—			0.65

Net income (loss)	$	0.40		$	(0.26	)

Diluted earnings (loss) per common share:
Income before cumulative effect of accounting change	$	0.39		$	0.38
Cumulative effect of accounting change, net of income tax		—			0.64

Net income (loss)	$	0.39		$	(0.26	)

Dividends declared per common share	$	0.10		$	0.07

See accompanying notes to consolidated financial statements.

MICHAELS STORES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)


	Quarter Ended
	April 29,			April 30,
	2006			2005

Operating activities:
Net income (loss)	$	52,450		$	(35,934	)
Adjustments:
Depreciation		27,341			23,680
Amortization		115			99
Share-based compensation		5,568			4,478
Tax benefits from stock options exercised		(8,203	)		(7,349	)
Non-cash charge for the cumulative effect of accounting change		—			142,723
Other		2			254
Changes in assets and liabilities:
Merchandise inventories		(10,964	)		(41,972	)
Prepaid expenses and other		(2,689	)		(386	)
Deferred income taxes and other		(3,199	)		(5,148	)
Accounts payable		60,874			13,418
Accrued liabilities and other		(19,615	)		(3,128	)
Income taxes payable		3,261			(48,330	)
Other long-term liabilities		1,526			6,982

Net cash provided by operating activities		106,467			49,387

Investing activities:
Additions to property and equipment		(38,920	)		(27,488	)
Purchases of short-term investments		—			(226	)
Sales of short-term investments		—			50,605
Net proceeds from sales of property and equipment		6			—

Net cash (used in) provided by investing activities		(38,914	)		22,891

Financing activities:
Cash dividends paid to stockholders		(26,625	)		(19,045	)
Repurchase of Common Stock		(66,182	)		(52,363	)
Proceeds from stock options exercised		14,876			13,262
Tax benefits from stock options exercised		8,203			7,349
Proceeds from issuance of Common Stock and other		1,095			1,213
Change in cash overdraft.		(9,526	)		—

Net cash used in financing activities		(78,159	)		(49,584	)

Net (decrease) increase in cash and equivalents		(10,606	)		22,694
Cash and equivalents at beginning of period		452,449			535,852

Cash and equivalents at end of period	$	441,843		$	558,546

See accompanying notes to consolidated financial statements.

MICHAELS STORES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the Quarter Ended April 29, 2006

(Unaudited)


Note 1.	Basis of Presentation

The consolidated financial statements include the accounts of Michaels Stores, Inc. and our wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. All expressions of “us,” “we,” “our,” and all similar expressions are references to Michaels Stores, Inc. and our consolidated, wholly-owned subsidiaries, unless otherwise expressly stated or the context otherwise requires.

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals and other items, as disclosed) considered necessary for a fair presentation have been included. Because of the seasonal nature of our business, the results of operations for the quarter ended April 29, 2006 are not indicative of the results to be expected for the entire year.

The balance sheet at January 28, 2006 has been derived from the audited financial statements at that date but does not include all of the information and notes required by generally accepted accounting principles for complete financial statements. For further information, refer to the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended January 28, 2006.

All references herein to “fiscal 2006” relate to the 53 weeks ending February 3, 2007 and all references to “fiscal 2005” relate to the 52 weeks ended January 28, 2006. In addition, all references herein to “the first quarter of fiscal 2006” relate to the 13 weeks ended April 29, 2006 and all references to “the first quarter of fiscal 2005” relate to the 13 weeks ended April 30, 2005.

Amounts as of and for the three months ended April 30, 2005 were restated to reflect weighted average cost accounting for inventory and the impact of expensing stock options under SFAS No. 123(R). The changes to our accounting policies are more fully described in Note 2 to these financial statements.


Note 2.	Changes in Accounting

As more fully described in our fiscal 2005 Annual Report on Form 10-K, we changed our method of accounting for merchandise inventories from a retail inventory method to the weighted average cost method in the fourth quarter of fiscal 2005, effective as of the beginning of that fiscal year. We also adopted SFAS No. 123(R), Share-Based Payment, during the fourth quarter of fiscal 2005 using the modified retrospective transition method from the beginning of fiscal 2005. As a result of these accounting changes, certain items on our consolidated balance sheets and statements of cash flows for the first quarter of fiscal 2005 are not comparable to previously reported amounts on our Form 10-Q, although total cash flows did not change as a result of these changes in accounting. We presented the effects on the income statement of adopting these policies in our fiscal 2005 Annual Report on Form 10-K.

MICHAELS STORES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

For the Quarter Ended April 29, 2006

(Unaudited)


Note 2.	Changes in Accounting (Continued)

The following table reconciles the line items in our consolidated balance sheets and statements of cash flows from the previously reported amounts to the restated amounts:


	Quarter Ended April 30, 2005
	As previously			WAC			SFAS No. 123(R)			As
	reported			Adjustments			Adjustments			restated
	(In thousands)

Balance Sheet
Merchandise inventories	$	964,177		$	(128,412	)	$	—		$	835,765
Deferred and prepaid income taxes		22,027			42,642			—			64,669
Other assets		17,434			—			1,702			19,136
Income taxes payable		6,155			(6,155	)		—			—
Additional paid-in capital		420,954			—			4,478			425,432
Retained earnings		863,800			(79,691	)		(2,776	)		781,333
Accumulated other comprehensive income		8,176			76			—			8,252
Statement of Cash Flows
Net income		46,533			(79,691	)		(2,776	)		(35,934	)
Share-based compensation expense		—			—			4,478			4,478
Non-cash charge for the cumulative effect of accounting change		—			142,723			—			142,723
Merchandise inventories		(27,782	)		(14,190	)		—			(41,972	)
Deferred income taxes and other		(3,446	)		—			(1,702	)		(5,148	)
Income taxes payable		512			(48,842	)		—			(48,330	)
Tax benefit from stock options exercised (a reclassification from operating activities to financing activities)		—			—			7,349			7,349

MICHAELS STORES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

For the Quarter Ended April 29, 2006

(Unaudited)

Note 3. Earnings per Share

The following table sets forth the computation of basic and diluted earnings (loss) per common share:


	Quarter Ended
	April 29,		April 30,
	2006		2005
	(In thousands, except per share data)

Numerator:
Income before cumulative effect of accounting change	$	52,450	$	52,554
Cumulative effect of accounting change, net of income tax		—		88,488

Net income (loss)	$	52,450	$	(35,934	)

Denominator:
Denominator for basic earnings per common share—weighted average shares		132,399		136,018
Effect of dilutive securities:
Employee stock options		2,218		2,417

Denominator for diluted earnings per common share—weighted average shares adjusted for dilutive securities		134,617		138,435

Basic earnings (loss) per common share:
Income before cumulative effect of accounting change	$	0.40	$	0.39
Cumulative effect of accounting change, net of income tax		—		0.65

Net income (loss)	$	0.40	$	(0.26	)

Diluted earnings (loss) per common share:
Income before cumulative effect of accounting change	$	0.39	$	0.38
Cumulative effect of accounting change, net of income tax		—		0.64

Net income (loss)	$	0.39	$	(0.26	)

Our purchase and subsequent retirement of 1.9 million shares and 1.5 million shares of our Common Stock in the first quarters of fiscal 2006 and 2005, respectively, reduced the number of weighted average shares outstanding by 843,000 and 239,000 for the first quarters of fiscal 2006 and 2005, respectively.


Note 4.	Share-Based Compensation

Our Compensation Committee administers option and awards plans. On April 21, 2006, our Compensation Committee approved amendments to the award agreements under the 1997 Stock Option Plan and the 2005 Incentive Compensation Plan to add a provision that would accelerate the vesting of awards under those Plans upon a change in control of Michaels. Options issued under our 2001 General Stock Option Plan and 2001 Employee Stock Option Plan already contain an acceleration provision that triggers upon our entering into a change in control agreement. Under the 2001 Plans, our Board of Directors has the power to defer the acceleration of vesting until the actual consummation of a change in control, thereby conforming the accelerated vesting of options under those plans to the accelerated vesting provision in the awards under the 1997 Stock Options Plan and the 2005 Incentive Compensation Plan. Should a change in control occur, we

MICHAELS STORES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

For the Quarter Ended April 29, 2006

(Unaudited)


Note 4.	Share-Based Compensation (Continued)

will accelerate the recognition of any unrecognized compensation cost related to the accelerated vesting of awards. As of April 29, 2006, unrecognized compensation cost for all Plan awards totaled $33.7 million.


Note 5.	Debt

91/4% Senior Notes due 2009

In fiscal 2001, we issued $200 million in principal amount of 91/4% Senior Notes due July 1, 2009, which were unsecured and interest thereon was payable semi-annually on each January 1 and July 1. On July 1, 2005, we redeemed the Senior Notes at a price of $1,046.25 per $1,000 of principal amount. This early redemption resulted in a pre-tax charge of $12.1 million in the second quarter of fiscal 2005, which represents a combination of a $9.3 million call premium and $2.8 million of unamortized costs associated with the Senior Notes, and was recorded as interest expense.

Credit Agreement

On November 18, 2005, we entered into a new five-year, $300 million senior unsecured credit facility with Bank of America, N.A. and other lenders. The $300 million Credit Agreement replaced our existing $200 million revolving credit facility with Fleet National Bank and the other lenders, which we terminated immediately prior to entering into our $300 million Credit Agreement. We were in compliance with all terms and conditions of our $200 million credit agreement through the termination date, and we did not incur any early termination penalties in connection with its termination. No borrowings were outstanding under our $200 million credit agreement at any time during fiscal 2005.

Our $300 million Credit Agreement provides for a committed line of credit of $300 million (with a provision for an increase, at our option on stated conditions, of up to a total of $400 million), a $250 million sublimit on the issuance of letters of credit, and a $25 million sublimit for borrowings in Euro, Sterling, Yen, Canadian Dollars, and other approved currencies. We may use borrowings under our $300 million Credit Agreement for working capital and other general corporate purposes, including stock repurchases and permitted acquisitions. Our $300 million Credit Agreement limits our ability to, among other things, create liens, engage in mergers, consolidations and certain other transactions, and requires us to adhere to certain consolidated financial covenants. Our obligations under our $300 million Credit Agreement are guaranteed by Michaels Stores Procurement Company, Inc., our wholly-owned subsidiary, and such other of our subsidiaries as may be necessary to cause the assets owned by us and our subsidiary guarantors to be 85% of our consolidated total assets. Borrowings available under our $300 million Credit Agreement will be reduced by the aggregate amount of letters of credit outstanding, which was $13.7 million as of April 29, 2006. We had no outstanding borrowings under our $300 million Credit Agreement as of January 28, 2006 or April 29, 2006.

MICHAELS STORES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

For the Quarter Ended April 29, 2006

(Unaudited)

Note 6. Comprehensive Income (Loss)

Our comprehensive income (loss) is as follows:


	Quarter Ended
	April 29,		April 30,
	2006		2005
	(In thousands)

Net income (loss)	$	52,450	$	(35,934	)
Other comprehensive income:
Foreign currency translation adjustment and other		611		2,854

Comprehensive income (loss)	$	53,061	$	(33,080	)


Note 7.	Commitments and Contingencies

Derivative Claims

On March 21, 2003, Julie Fathergill filed a purported stockholder derivative action, which is pending in the 192nd District Court for Dallas County, Texas. The lawsuit names certain former and current officers and directors, including all of Michaels’ current directors, as individual defendants and Michaels as a nominal defendant. The derivative action relates to actions prior to our announcement on November 7, 2002, that we had revised our outlook for the fourth fiscal quarter of 2002, adjusting downward guidance for annual earnings per diluted share. The plaintiff alleges that, prior to that announcement, certain of the defendants made misrepresentations and failed to disclose negative information about the financial condition of Michaels while the individual defendants were selling shares of Michaels Common Stock. The plaintiff asserts claims against the individual defendants for breach of fiduciary duties, abuse of control, gross mismanagement, waste of corporate assets, and unjust enrichment. All of these claims are asserted derivatively on behalf of Michaels. On November 7, 2005, the Court entered a written order granting the defendants’ special exceptions and ordering that the case will be dismissed with prejudice unless the plaintiff amends her petition to state an actionable claim against the defendants. On December 8, 2005, the plaintiff filed an amended petition in which she reasserts many of the same factual allegations, but also adds new allegations questioning, among other things, issues relating to Michaels’ inventory systems and infrastructure, as well as transactions and holdings of Michaels Common Stock by certain family-owned trusts or benefiting trusts of two of Michaels’ directors. In her amended petition, the plaintiff continues to assert all her claims derivatively on behalf of Michaels against the individual defendants for breach of fiduciary duties, abuse of control, gross mismanagement, waste of corporate assets, and unjust enrichment. We believe these claims are without merit and will vigorously oppose them.

On September 11, 2003, Leo J. Dutil filed a purported stockholder derivative action, which is pending in the United States District Court for the Northern District of Texas, Dallas Division. The lawsuit names certain former and current officers and directors as individual defendants and Michaels as a nominal defendant. In this derivative action, the plaintiff makes allegations of fact similar to those made in the Fathergill derivative lawsuit described above. The plaintiff asserts claims against the individual defendants for breach of fiduciary duty, misappropriation of confidential information, and contribution and indemnification. All of these claims are asserted derivatively on behalf of Michaels. We believe these claims are without merit and will vigorously oppose them.

On June 9, 2006, Feivel Gottlieb and on June 12, 2006, Roberta Schuman each filed purported stockholder derivative actions, which are pending in the 191st and the 14th District Courts for Dallas County,

MICHAELS STORES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

For the Quarter Ended April 29, 2006

(Unaudited)

Note 7. Commitments and Contingencies (Continued)

Texas, respectively. The lawsuits name our Chairman of the Board and Vice Chairman of the Board, both in their capacities as officers of Michaels and as directors, and all of Michaels’ other current directors as individual defendants and Michaels as a nominal defendant. The plaintiffs assert claims against the individual defendants for breach of fiduciary duty, abuse of control, gross mismanagement, waste of corporate assets and unjust enrichment in connection with the granting of stock options by Michaels between 1990 and October 2001 and seek, among other relief, an indeterminate amount of damages from the individual defendants and injunctive relief against Michaels with regard to various corporate governance matters. All of these claims are asserted derivatively on behalf of Michaels. Prior to the filing of these derivative actions, Michaels announced that its Audit Committee (assisted by independent legal counsel and outside accounting experts) had commenced an internal review into Michaels’ historical stock option practices, including a review of Michaels’ underlying option grant documentation and procedures and related accounting. The Audit Committee has not reached any final conclusions as the internal review is not complete and is continuing. See “— Internal Review of Stock Option Practices” below.

Cotton Claim

On December 20, 2002, James Cotton, a former store manager of Michaels of Canada, ULC, our wholly-owned subsidiary, and Suzette Kennedy, a former assistant manager of Michaels of Canada, commenced a proposed class proceeding against Michaels of Canada and Michaels Stores, Inc. on behalf of themselves and current and former employees employed in Canada. The Cotton claim was filed in the Ontario Superior Court of Justice and alleges that the defendants violated employment standards legislation in Ontario and other provinces and territories of Canada by failing to pay overtime compensation as required by that legislation. The Cotton claim also alleges that this conduct was in breach of the contracts of employment of those individuals. The Cotton claim seeks a declaration that the defendants have acted in breach of applicable legislation, payment to current and former employees for overtime, damages for breach of contract, punitive, aggravated and exemplary damages, interest, and costs. In May of 2005, the plaintiffs delivered material in support of their request that this action be certified as a class proceeding. Michaels filed and served its responding materials opposing class certification on January 31, 2006. A date has not yet been set for the hearing with respect to certification. We intend to contest certification of this claim as a class action. Further, we believe we have certain defenses on the merits and intend to defend this lawsuit vigorously. We are unable to estimate a range of possible loss, if any, in this claim.

Clark Claim

On July 13, 2005, Michael Clark, a former Michaels store assistant manager, and Lucinda Prouty, a former Michaels store department manager, commenced a proposed class action proceeding against Michaels Stores, Inc. on behalf of themselves and current and former hourly retail employees employed in California from July 13, 2001 to the present. The Clark suit was filed in the Superior Court of California, County of San Diego, and alleges that Michaels failed to pay overtime wages, provide meal and rest periods (or compensation in lieu thereof), and provide itemized employee wage statements. The Clark suit also alleges that this conduct was in breach of California’s unfair competition law. The plaintiffs seek injunctive relief, damages for unpaid overtime pay, meal break penalties, waiting time penalties, interest, and attorneys’ fees and costs. Under the Class Action Fairness Act, we removed the case to federal court on August 5, 2005. We are in the early stages of our investigation; however, we believe that the Clark claim lacks merit, and we intend to vigorously defend our interests.

MICHAELS STORES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

For the Quarter Ended April 29, 2006

(Unaudited)

Note 7. Commitments and Contingencies (Continued)

Morris Claim

On November 16, 2005, Geoffrey Morris, a former Aaron Brothers employee in San Diego, California, commenced a proposed class action proceeding against Aaron Brothers, Inc. on behalf of himself and current and former Aaron Brothers employees in California from November 16, 2001 to the present. The Morris suit was filed in the Superior Court of California, County of San Diego, and alleges that Aaron Brothers failed to pay overtime wages, reimburse the plaintiff for necessary expenses (including the cost of gas used in driving his car for business purposes), and provide adequate meal and rest breaks (or compensation in lieu thereof). The Morris suit also alleges that this conduct was in breach of California’s unfair competition law. The plaintiff seeks injunctive relief, damages for unpaid overtime pay, meal break penalties, waiting time penalties, interest, and attorneys’ fees and costs. We are in the early stages of our investigation; however, we believe that the Morris claim lacks merit, and we intend to vigorously defend our interests.

Olivas Claim

On December 2, 2005, Sandra Olivas and Jerry Soskins, former Michaels store managers in Los Angeles, California, commenced a proposed class action proceeding against Michaels Stores, Inc. on behalf of themselves and current and former salaried store employees employed in California from December 1, 2001 to the present. Michaels was served with the complaint on January 31, 2006. The Olivas suit was filed in the Superior Court of California, County of Los Angeles, and alleges that Michaels failed to pay overtime wages, accurately record hours worked, and provide itemized employee wage statements. The Olivas suit also alleges that this conduct was in breach of California’s unfair competition law. The plaintiffs seek injunctive relief, damages for unpaid overtime pay, penalties, interest, and attorneys’ fees and costs. On March 1, 2006, we removed the case to the United States District Court for the Central District of California. We are in the early stages of our investigation; however, we believe that the Olivas claim lacks merit, and we intend to vigorously defend our interests.

Governmental Inquiries and Related Matters

In early 2005, the District Attorney’s office of the County of New York and the SEC opened inquiries concerning non-U.S. trusts that directly or indirectly hold and have held shares of Michaels Common Stock and Common Stock options. The staff of a U.S. Senate subcommittee and a federal grand jury have requested information with respect to the same facts. We are cooperating in these inquiries and requests for information.

Certain of these trusts and corporate subsidiaries of the trusts acquired securities of Michaels in transactions directly or indirectly with Charles J. Wyly, Jr. and Sam Wyly, who are, respectively, Chairman and Vice Chairman of the Board of Directors, or with other Wyly family members. In addition, subsidiaries of certain of these trusts acquired securities directly from us in private placement transactions in 1996 and 1997 and upon the exercise of stock options transferred, directly or indirectly, to the trusts or their subsidiaries by Charles Wyly, Sam Wyly, or other Wyly family members.

We understand that Charles Wyly and Sam Wyly and/or certain of their family members are beneficiaries of irrevocable non-U.S. trusts. The 1996 and 1997 private placement sales by us of Michaels securities to subsidiaries of certain of these trusts were disclosed by us in filings with the SEC. The transfer by Charles Wyly and/or Sam Wyly (or by other Wyly family members or family-related entities) of Michaels securities to certain of these trusts and subsidiaries was also disclosed in filings with the SEC by us and/or by Charles Wyly and Sam Wyly. Based on information provided to us, our SEC filings did not report securities owned by

MICHAELS STORES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

For the Quarter Ended April 29, 2006

(Unaudited)

Note 7. Commitments and Contingencies (Continued)

the non-U.S. trusts or their corporate subsidiaries as beneficially owned by Charles Wyly and Sam Wyly prior to 2005.

Following the filing by Charles Wyly and Sam Wyly of an amended Schedule 13D with the SEC on April 8, 2005, stating that they may be deemed the beneficial owners of Michaels securities held directly or indirectly by the non-U.S. trusts, we disclosed in a press release that, as of March 31, 2005, under SEC Rule 13d-3, Charles Wyly may be deemed the owner of 6,045,818 shares, or 4.4% of our outstanding Common Stock, and Sam Wyly may be deemed the beneficial owner of 4,822,534 shares, or 3.5% of our outstanding Common Stock. In our 2005 and 2006 proxy statements, we included the securities held in the non-U.S. trusts or their separate subsidiaries, as reported by the Wylys, in the beneficial ownership table of our principal stockholders and management, with appropriate footnotes.

Charles Wyly and Sam Wyly have not reported purchases and sales of Michaels securities by the non-U.S. trusts and their subsidiaries in reports filed by them with the SEC under Section 16 of the Securities Exchange Act of 1934. In an April 2005 letter from their counsel, Charles Wyly and Sam Wyly undertook to file any additional required Section 16 reports and to pay us the amount of any Section 16 liability. Counsel for Michaels and counsel for the Wylys have exchanged factual information and engaged in discussions of legal issues.

Charles Wyly and Sam Wyly have not filed additional or amended Section 16 reports with respect to the transactions in question. Charles Wyly and Sam Wyly have made a proposal to settle the issue, without admitting or denying that they have or had, for Section 16 purposes, beneficial ownership of Michaels securities that are or were held by the non-U.S. trusts or their subsidiaries.

On March 15, 2006, the Board of Directors appointed a special committee of the Board to investigate and make decisions on behalf of Michaels with respect to the potential Section 16 liability issue. The members of the special committee are Richard C. Marcus (Chairman), Cece Smith and Liz Minyard, all independent Board members. The special committee has the full authority of the Board to make all decisions with respect to the potential Section 16 issues, including the authority to approve or reject the proposed settlement, to negotiate the terms of any settlement, and, if there is no agreed settlement, to take all other actions it deems necessary or appropriate to resolve the potential Section 16 liability issues other than pursuant to an agreed settlement. The Board of Directors has also given the special committee the full authority of the Board to make decisions for Michaels relating to the new allegations in the Fathergill derivative suit, described above under Derivative Claims, including investigating the new allegations and determining what actions Michaels should take concerning those allegations. In addition, the Board has given the special committee authority to investigate and respond to the governmental inquiries, described above, but reserving to the full Board the authority to decide upon proposed actions or decisions concerning the pursuit, compromise or ultimate resolution of any claim or dispute with respect to those governmental inquiries. The special committee has retained the firm of Debevoise & Plimpton LLP as its independent counsel to advise it in these matters.

Internal Review of Stock Options Practices

The Company’s Audit Committee has initiated an internal review on a proactive basis into the Company’s historical stock option practices, including a review of the Company’s underlying option grant documentation and procedures and related accounting. In accordance with New York Stock Exchange requirements, the Audit Committee is composed solely of independent directors. The Audit Committee’s internal review is being conducted with the assistance of independent legal counsel and outside accounting experts. The Company’s

MICHAELS STORES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

For the Quarter Ended April 29, 2006

(Unaudited)

Note 7. Commitments and Contingencies (Continued)

independent registered public accounting firm has been informed about the internal review. The Company has also voluntarily reported the commencement of this review to the Securities and Exchange Commission.

The internal review is focused principally on the period from 1990 to 2001. Since October 2001, the Company has followed a process of utilizing pre-determined effective grant dates and generally pre-determined grant levels for its stock option program. Stock option grants from October 2001 to the present have consistently followed this process.

Prior to October 2001, the Company granted stock options principally utilizing a process in which an authorized committee of the Board would approve stock option grants from time to time through unanimous written consent resolutions with specified effective dates that generally preceded the date on which the consents were fully executed by members of the applicable committee.

The Company has historically considered the effective date specified in the written consents by the applicable committee as the accounting measurement date for determining stock-based compensation expense under APB No. 25, Accounting for Stock Issued to Employees. For the period under review, based on preliminary findings, the Company presently believes that, with respect to certain non-routine grants, the measurement date may differ from the measurement date used in its accounting prior to 2001. Based on the Company’s current analysis, non-cash compensation cost could potentially be recorded in an amount up to approximately $60 million, which relates to periods prior to fiscal 2001. Therefore, the amounts do not affect results of operations or the statement of cash flows in any period presented in the Company’s Annual Report on Form 10-K for fiscal 2005. The Company expects the effect, if any, on its financial position in each of the years presented in the fiscal 2005 Form 10-K would be a reclassification of any unrecorded non-cash compensation cost between retained earnings and accumulated paid in capital, with no impact on total stockholders’ equity. Based on the Company’s current analysis, any potential misstatement of the Company’s financial statements presented in its fiscal 2005 Form 10-K is not considered material.

As the Audit Committee’s review is not complete and is ongoing as of the date of this filing, additional information may become available which could cause the current estimate of potential unrecorded compensation to change materially. Once the review is complete, the Company will make a final determination as to what, if any, estimated unrecorded stock-based compensation cost should be recorded in the Company’s financial statements. However, based on its current analysis and estimates, the Company does not believe a restatement of prior period financial statements will be required.

The Company is also evaluating whether previously deducted compensation related to exercised stock options might be non-deductible under Section 162(m) of the Internal Revenue Code, which could result in additional taxes and interest related to the prior deductions. The Company currently believes that the amount of lost tax deductions, if any, previously claimed would not be material to results of operations, cash flow, or the Company’s financial position, but has not finalized its assessment of this matter.

Two derivative lawsuits have been filed against the directors and certain officers of Michaels relating to the Company’s historical stock option procedures. See “— Derivative Claims” above.

General

We are a defendant from time to time in lawsuits incidental to our business. Based on currently available information, we believe that resolution of all known contingencies is uncertain. There can be no assurance that future costs of such litigation would not be material to our financial position, results of operations, or cash flows.

MICHAELS STORES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

For the Quarter Ended April 29, 2006

(Unaudited)


Note 8.	Segments

We consider our Michaels, Aaron Brothers, and Recollections stores and our Star Decorators Wholesale operations to be our operating segments for purposes of determining reportable segments based on the criteria set forth in SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information. We determined that our Michaels and Aaron Brothers operating segments have similar economic characteristics and meet the aggregation criteria in paragraph 17 of SFAS No. 131. Our Aaron Brothers operating segment does not meet the quantitative thresholds for separate disclosure set forth in SFAS No. 131, and our Recollections stores and Star Decorators Wholesale operations are immaterial for segment reporting purposes individually, and in the aggregate. Therefore, we combine all operating segments into one reporting segment.

Our sales, operating income, and assets by country are as follows:


	Net Sales		Operating Income		Total Assets
	(In thousands)

Quarter ended April 29, 2006:
United States	$	778,356	$	68,576	$	1,808,567
Canada		54,125		8,691		83,258

Consolidated Total	$	832,481	$	77,267	$	1,891,825

Quarter ended April 30, 2005:
United States	$	776,900	$	82,029	$	1,971,499
Canada		44,116		5,150		59,991

Consolidated Total	$	821,016	$	87,179	$	2,031,490

Canada’s operating income includes corporate allocations, such as overhead, and amounts related to our distribution and Artistree operations. We present assets based on their physical, geographic location. Certain assets located in the United States are also used to support our Canadian operations, but we do not allocate those assets or their associated expenses to Canada.


Note 9.	Exploration of Strategic Alternatives

On March 20, 2006, we announced that our Board of Directors had decided to begin a process to explore strategic alternatives to enhance shareholder value including, but not limited to, a potential sale of Michaels. We retained JPMorgan as a financial advisor in this process, which we said probably would take a number of months. Among the strategic alternatives that may be considered would be a possible sale, recapitalization or similar transaction. The Board has appointed a special advisory committee, with the full power and authority of the Board to consider, evaluate, and negotiate with any third parties the terms of any such transaction and to recommend to our Board that it approve or reject, and, if approved, that the Board recommend to our shareholders any such transaction. The members of the special advisory committee are Cece Smith (Chairman), Richard E. Hanlon, Richard C. Marcus, and Liz Minyard, each of whom is an independent director. The special advisory committee has retained the firm of Wachtell, Lipton, Rosen & Katz as its independent counsel to advise it in this matter.

On March 20, 2006, we also announced certain management changes. Effective on March 15, 2006, R. Michael Rouleau retired as President and Chief Executive Officer and became special advisor to the Board of Directors. The Board has left the office of Chief Executive Officer vacant and has assigned all the duties of that office to our newly appointed co-Presidents, Jeffrey N. Boyer, formerly Executive Vice President—Chief

MICHAELS STORES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

For the Quarter Ended April 29, 2006

(Unaudited)

Note 9. Exploration of Strategic Alternatives (Continued)

Financial Officer, and Gregory A. Sandfort, formerly Executive Vice President—General Merchandise Manager.


Note 10.	Subsequent Event

We recorded a $3.0 million pre-tax gain in other income during the first quarter of fiscal 2006 due to the favorable resolution of a civil lawsuit related to a tax matter. This lawsuit was resolved subsequent to the end of the first quarter of fiscal 2006 but pertained to events that occurred prior to fiscal 2006.


Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.

All expressions of “us,” “we,” “our,” and all similar expressions are references to Michaels Stores, Inc. and its consolidated wholly-owned subsidiaries, unless otherwise expressly stated or the context otherwise requires.

Disclosure Regarding Forward-Looking Information

The following discussion should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q. The following discussion, as well as other portions of this Quarterly Report on Form 10-Q, contains forward-looking statements that reflect our plans, estimates, and beliefs. Any statements contained herein (including, but not limited to, statements to the effect that Michaels or its management “anticipates,” “plans,” “estimates,” “expects,” “believes,” and other similar expressions) that are not statements of historical fact should be considered forward-looking statements and should be read in conjunction with our consolidated financial statements and related notes in our Annual Report on Form 10-K for the fiscal year ended January 28, 2006. Specific examples of forward-looking statements include, but are not limited to, statements regarding our future cash dividend policy, forecasts of financial performance, capital expenditures, working capital requirements, and stock repurchases. Our actual results could materially differ from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to:


	•	our ability to remain competitive in the areas of merchandise quality, price, breadth of selection, customer service, and convenience;

	•	our ability to anticipate and/or react to changes in customer demand and preferences for products and supplies used in creative activities and the related potential impact to merchandise inventories in categories that represent a significant portion of our business;

	•	changes in consumer confidence resulting in a reduction in consumer spending on items perceived to be discretionary;

	•	unexpected consumer responses to our promotional programs;

	•	unusual weather conditions;

	•	the execution and management of our store growth, including new concepts, the impact of new competitor stores in locations near our existing stores, and the availability of acceptable real estate locations for new store openings;

	•	the effective optimization and maintenance of our perpetual inventory and automated replenishment systems and related impacts to inventory levels;

	•	the identification and implementation of enhancements to our supply chain to enable us to distribute additional SKUs through our distribution centers;

	•	delays in the receipt of merchandise ordered from suppliers due to vendor payment delays associated with recently implemented systems or delays in connection with either the manufacture or shipment of such merchandise;

	•	transportation delays (including dock strikes and other work stoppages) and increases in transportation costs due to fuel surcharges and transportation regulations;

	•	restrictive actions by foreign governments or changes in United States laws and regulations affecting imports or domestic distribution;

	•	significant increases in inflation or commodity prices, such as petroleum, natural gas, electricity, steel, and paper, which may adversely affect our costs, including cost of merchandise;

	•	significant increases in tariffs or duties levied on imports which may limit the a6vailability of certain merchandise from our foreign suppliers;

	•	changes in political, economic, and social conditions;

	•	significant fluctuations in exchange rates;


	•	financial difficulties of any of our key vendors, suppliers, or insurance providers;

	•	the design and implementation of new management information systems as well as the maintenance and enhancement of existing systems, particularly in light of our continued store growth and the addition of new concepts;

	•	our ability to maintain the security of electronic and other confidential information;

	•	our ability to maintain effective internal controls over our newly implemented financial reporting system;

	•	our ability to comply with the terms and restrictions of our Credit Agreement;

	•	our exploration of strategic alternatives;

	•	our ability to attract and retain qualified personnel to successfully execute our operating plans;

	•	the seasonality of the retail business; and

	•	other factors as set forth in our Annual Report on Form 10-K for the fiscal year ended January 28, 2006, particularly in “Critical Accounting Policies and Estimates” and “Risk Factors,” and in our other Securities and Exchange Commission filings.

We intend these forward-looking statements to speak only as of the time of filing this Quarterly Report on Form 10-Q and do not undertake to update or revise them as more information becomes available.

General

The following table sets forth certain of our unaudited operating data:


	Quarter Ended
	April 29,			April 30,
	2006			2005

Michaels stores:
Retail stores open at beginning of period		885			844
Retail stores opened during the period		17			14
Retail stores opened (relocations) during the period		3			8
Retail stores closed during the period		(3	)		(1	)
Retail stores closed (relocations) during the period		(3	)		(8	)

Retail stores open at end of period		899			857

Aaron Brothers stores:
Retail stores open at beginning of period		166			164
Retail stores opened during the period		—			1
Retail stores closed during the period		(1	)		—

Retail stores open at end of period		165			165

Recollections stores:
Retail stores open at beginning of period		11			8
Retail stores opened during the period		—			1

Retail stores open at end of period		11			9


	Quarter Ended
	April 29,			April 30,
	2006			2005


Star Decorators Wholesale stores:
Wholesale stores open at beginning of period		4			3
Wholesale stores opened during the period		—			1

Wholesale stores open at end of period		4			4

Total store count at end of period		1,079			1,035


Other operating data:
Average inventory per Michaels store(1)	$	821		$	909
Comparable store sales (decrease) increase(2)		(3.0	)%		7.8	%


(1)		Average inventory per Michaels store calculation excludes our Aaron Brothers, Recollections, and Star Decorators Wholesale stores.

(2)		Comparable store sales (decrease) increase represents the increase or decrease in net sales for stores open the same number of months in the indicated period and the comparable period of the previous year, including stores that were relocated or expanded during either period. A store is deemed to become comparable in its 14th month of operation in order to eliminate grand opening sales distortions. A store temporarily closed more than 2 weeks due to a catastrophic event is not considered comparable during the month it closed. If a store is closed longer than 2 weeks but less than 2 months, it becomes comparable in the month in which it reopens, subject to a mid-month convention. A store closed longer than 2 months becomes comparable in its 14th month of operation after its reopening.

Results of Operations

The following table sets forth the percentage relationship to net sales of each line item of our unaudited consolidated statements of income. This table should be read in conjunction with the following discussion and with our consolidated financial statements, including the related notes, contained herein.


	Quarter Ended
	April 29,			April 30,
	2006			2005

Net sales		100.0	%		100.0	%
Cost of sales and occupancy expense		61.5			61.3

Gross profit		38.5			38.7
Selling, general, and administrative expense		29.0			27.8
Store pre-opening costs		0.2			0.3

Operating income		9.3			10.6
Interest expense		0.0			0.6
Other (income) and expense, net		(0.8	)		(0.3	)

Income before income taxes and cumulative effect of accounting change		10.1			10.3
Provision for income taxes		3.8			3.9

Income before cumulative effect of accounting change		6.3			6.4
Cumulative effect of accounting change, net of income tax		—			10.8

Net income		6.3	%		(4.4	)%

Quarter Ended April 29, 2006 Compared to the Quarter Ended April 30, 2006

Net Sales—Net sales for the first quarter of fiscal 2006 increased $11.5 million, or 1.4%, over the first quarter of fiscal 2006. At the end of the first quarter of fiscal 2006, we operated 899 Michaels, 165 Aaron Brothers, 11 Recollections, and four Star Decorators Wholesale stores. The results for the first quarter of fiscal 2006 include sales from 49 Michaels, one Aaron Brothers, and two Recollections stores that were opened during the 12-month period ended April 29, 2006, more than offsetting lost sales from the closure of seven Michaels and one Aaron Brothers store during the same period. Sales at our new stores (net of closures) opened since the first quarter of fiscal 2005 provided incremental revenue of $36.0 million, which was partially offset by a comparable store sales decline of 3.0%, or $24.5 million.

Comparable store sales decreased 3.0% in the first quarter of fiscal 2006 compared to the first quarter of fiscal 2005, reflecting a decrease in customer transactions of 5.0%, partially offset by increases in the average ticket of 1.6% and custom framing deliveries of 0.4%. A favorable currency translation, due to the stronger Canadian dollar, contributed approximately 0.4% to the average ticket increase for the quarter. Comparable sales were negatively impacted by a 38% decline in comparable sales of Yarn, an increase in business disruption relative to the first quarter of fiscal 2005 due to earlier merchandising resets, and an overall reduction in store level inventory, particularly in discontinued and clearance products. Our strongest domestic departmental performances came in General Crafts, primarily due to Jewelry and Beads, Custom Floral, Apparel Crafts, and Kids Crafts. Our ability to generate comparable store sales increases is dependent, in part, on our ability to continue to maintain store in-stock positions on the top-selling items, to properly allocate merchandise to our stores, to effectively execute our pricing and sales promotion efforts, to anticipate customer demand and trends in the arts and crafts industry, and to respond to competitors’ activities.

Cost of Sales and Occupancy Expense—Cost of sales and occupancy expense increased $8.8 million primarily due to a 4.3% increase in the number of stores operated in the first quarter of fiscal 2006 compared to the first quarter of fiscal 2005, as well as an increase in certain occupancy expenses.

Cost of sales and occupancy expense, as a percentage of net sales, increased approximately 20 basis points in the first quarter of fiscal 2006 compared to the first quarter of fiscal 2005. This increase was primarily a result of occupancy expense de-leverage of approximately 50 basis points on negative comparable store sales and incremental costs of our store remodel program. Merchandise margins expanded approximately 30 basis points primarily due to higher margin rates of regular and promotional merchandise and improved sourcing.

Selling, General, and Administrative Expense—Selling, general, and administrative expense was $241.7 million, or 29.0% of net sales, in the first quarter of fiscal 2006 compared to $227.9 million, or 27.8% of net sales, in the first quarter of fiscal 2005. The expense increase was primarily due to an increase in the number of stores we operated compared to last year, in particular store operating expenses, totaling approximately $8.6 million of the overall $13.8 million increase.

As a percentage of net sales, selling, general, and administrative expense increased approximately 120 basis points, with an increase in store operating expenses generating approximately 70 basis points of the increase and the remaining 50 basis points attributable to post-employment benefits for our former CEO and costs related to our exploration of a strategic alternative to enhance shareholder value. The increase in store operating expenses was primarily caused by the de-leveraging of store payroll associated with our comparable store sales decline of 3.0%.

In addition, should a change in control occur, we will accelerate the recognition of any unrecognized compensation cost related to the accelerated vesting of share-based compensation awards. As of April 29, 2006, unrecognized compensation cost for all awards totaled approximately $33.7 million. We may also adjust our estimated rate of forfeitures with respect to those awards should we conclude that a potential change in control will cause our actual forfeiture estimate to be materially different than our current estimate. Should we adjust our estimated forfeiture rate to a level lower than the current rate, the cumulative effect of applying the change in estimate retrospectively is recognized in the period of change. Such a change may materially increase our share-based compensation costs in the period of change.

Operating Income—As a result of the above, operating income decreased from $87.2 million, or 10.6% of sales, in the first quarter of fiscal 2005 to $77.3 million, or 9.3% of sales, in the first quarter of fiscal 2006.

Interest Expense—Interest expense decreased from $5.1 million in the first quarter of fiscal 2005 to $172,000 during the first quarter of fiscal 2006. During the second quarter of fiscal 2006, we redeemed our 91/4% Senior Notes, and, as a result of the early redemption, we no longer incur interest expense in connection with the Senior Notes.

Other Income—Other income increased from $2.7 million in the first quarter of fiscal 2005 to $7.2 million during the first quarter of fiscal 2006. This increase was primarily due to a $3.0 million gain due to the favorable resolution of a civil lawsuit and higher interest rates associated with our invested cash balances.

Provision for Income Taxes—The effective tax rate was 37.75% for the first quarter of fiscal 2006 and 38.0% for the first quarter of fiscal 2005.

Cumulative Effect of Accounting Change—In fiscal 2005, we changed our method of accounting for merchandise inventories from a retail inventory method to the weighted average cost method. As a result, we recorded a non-cash charge of $88.5 million, net of income tax, or $0.64 per diluted share, in the first quarter of fiscal 2005 for the cumulative effect of accounting change on fiscal years prior to fiscal 2005.

Net Income—As a result of the above, net income for the first quarter of fiscal 2006 increased from a net loss of $35.9 million, or $(0.26) per diluted share, in the first quarter of fiscal 2005 to net income of $52.5 million, or $0.39 per diluted share, after the cumulative effect of accounting change. Income before the cumulative effect of the accounting change decreased slightly from $52.6 million in the first quarter of fiscal 2005, or $0.38 per diluted share, to $52.5 million in the first quarter of fiscal 2006, or $0.39 per diluted share.

Liquidity and Capital Resources

Our cash and equivalents decreased $10.6 million, or 2.3%, from $452.4 million at the end of fiscal 2005 to $441.8 million at the end of the first quarter of fiscal 2006. Compared to the end of the first quarter of fiscal 2005, cash and equivalents decreased $116.7 million, or 20.9%, primarily because of our early redemption of the Senior Notes and the repurchases of our Common Stock, partially offset by our net income before the cumulative effect of the accounting change.

We require cash principally for day-to-day operations and to finance capital investments, inventory for new stores, inventory replenishment for existing stores, and seasonal working capital needs. In recent years, we have financed our operations, new store openings, Common Stock repurchases, dividend payments, and other capital investments with cash from operations and proceeds from stock option exercises. We expect that our available cash, cash flow generated from operating activities, and funds available under our Credit Agreement will be sufficient to fund planned capital expenditures, working capital requirements, future growth, and any anticipated dividend payments and stock repurchases for the foreseeable future.

Cash Flow from Operating Activities

Cash flow provided by operating activities during the first three months of fiscal 2006 was $106.5 million compared to $49.4 million during the first three months of fiscal 2005. The $57.1 million increase in cash provided by operating activities was primarily due to a reduction in merchandise inventories, net of accounts payable. The working capital leverage we experienced with respect to inventories and accounts payable during the first three months of fiscal 2006 may not be indicative of full year results.

Inventories per Michaels store (including supporting distribution centers) decreased 9.7% from April 30, 2005 to April 29, 2006, with discontinued and clearance inventory per store down approximately 19%. Additionally, approximately 300 basis points of the 9.7% average inventory per store decrease was the result of the $23.9 million cumulative adjustment recorded in the fourth quarter of fiscal 2005 based on certain refinements we made to our calculation for deferring costs related to preparing inventory for sale and for vendor allowance recognition. We now anticipate average inventory per Michaels store at the end of fiscal 2006 compared to the end of fiscal 2005 to decrease approximately 3%.

Cash Flow used in Investing Activities

Cash flow used in investing activities was primarily the result of the following capital expenditure activities:


	Three Months Ended
	April 29,		April, 30
	2006(1)		2005(2)
	(In thousands)

New and relocated stores and stores not yet opened	$	8,590	$	13,597
Existing stores		15,159		5,766
Distribution system expansion		3,815		904
Information systems		10,343		6,266
Corporate and other		1,013		955

	$	38,920	$	27,488


(1)		In the first quarter of fiscal 2006, we incurred capital expenditures related to the opening of 17 Michaels stores and the relocation of three Michaels stores. Capital expenditures for existing stores for the first quarter of fiscal 2006 increased $9.4 million over the first quarter of fiscal 2005 primarily due to incremental expenditures associated with our store standardization/remodel program.

(2)		In the first quarter of fiscal 2005, we incurred capital expenditures related to the opening of 14 Michaels, one Aaron Brothers, one Recollections, and one Star Decorators Wholesale store, and the relocation of eight Michaels stores.

During the first quarter of fiscal 2005, we liquidated our investment in a Massachusetts business trust for proceeds of approximately $50.6 million, which was classified as a short-term investment for the fiscal year ended January 29, 2005.

Cash Flow used in Financing Activities

Proceeds from the exercise of outstanding stock options have historically served as a source of cash flow for us. Proceeds from the exercise of stock options were $14.9 million in the first quarter of fiscal 2006 and $13.3 million in the first quarter of fiscal 2005.

Cash used for repurchases of our Common Stock increased $13.8 million from $52.4 million in the first quarter of fiscal 2005 to $66.2 million in the first quarter of fiscal 2006. The following table sets forth information regarding our Common Stock repurchase plans as of April 29, 2006:


	Shares					Shares
	Authorized for		Shares			Available for
	Repurchase		Repurchased			Repurchase

December 5, 2000 repurchase plan (variable portion)		72,510		(72,509	)		1	(1)
December 6, 2005 repurchase plan		5,000,000		(2,428,688	)		2,571,312	(2)

		5,072,510		(2,501,197	)		2,571,313


(1)		Our Board of Directors provided that proceeds of the exercise of options under our 2001 General Stock Option Plan may be used to repurchase shares under the 2000 repurchase plan and that the maximum number of shares authorized to be repurchased under the 2000 repurchase plan may be increased to the extent necessary to so use the proceeds from such option exercises. In fiscal years 2005 and 2004, we repurchased and subsequently retired 17,958 shares and 54,551 shares of our Common Stock, respectively, at average prices of $40.93 and $27.03 per share, respectively, using proceeds from exercises of stock options granted under the 2001 General Stock Option plan.

(2)		In the first quarter of fiscal 2006, we repurchased approximately 1.9 million shares of our Common Stock authorized to be repurchased under the December 2005 repurchase plan at an average price of $34.26 per share and, as a result, we had approximately 2.6 million shares available for repurchase under the plan as of April 29, 2006. We hold the repurchased shares as Treasury Stock.

We anticipate that we will continue to repurchase shares of our Common Stock during the remainder of fiscal 2006, until such time we may be restricted pending any developments in our exploration of strategic alternatives. We may also be restricted by regulations of the Securities and Exchange Commission from making future repurchases during certain time periods.

We paid dividends of $0.20 per share and $0.14 per share during the quarters ended April 29, 2006 and April 30, 2005, respectively. During each quarter, we paid the current quarter’s dividend declaration as well as the previous quarter’s dividend declaration.

Debt

Recent Accounting Pronouncements

In June 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections. This statement supersedes APB Opinion No. 20, Accounting Changes and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements. The statement applies to all voluntary changes in accounting principle and changes the requirements for accounting and reporting of a change in accounting principle. SFAS No. 154 requires retrospective application to prior period financial statements of a voluntary change in accounting principle unless it is impracticable to do so. The statement requires that a change in method of depreciation, amortization, or depletion for long-lived, nonfinancial assets be accounted for as a change in accounting estimate that is affected by a change in accounting principle. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The statement does not change the transition provisions of any existing accounting pronouncements, including those that are in a transition phase as of the effective date of this statement. We adopted SFAS No. 154 during the first quarter of fiscal 2006, which did not have a material impact on our consolidated results of operations, financial position, or cash flows.

Recent Events

There can be no assurance that a transaction will result from this exploration of strategic alternatives, and we do not intend to disclose developments regarding this exploration unless and until a specific transaction has been approved.


Item 3.	Quantitative and Qualitative Disclosures About Market Risk.

We typically invest cash balances in excess of operating requirements primarily in money market mutual funds and short-term interest-bearing securities, generally with maturities of 90 days or less. Due to the short-term nature of our investments, the fair value of our cash and equivalents at April 29, 2006 approximated carrying value. We have market risk exposure arising from changes in interest rates. The interest rates on our new $300 million Credit Agreement will reprice frequently, at market rates, which will likely result in carrying amounts that approximate fair value. No borrowings were outstanding under our $300 million Credit Agreement as of April 29, 2006.


Item 4.	Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

We maintain a set of disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934). An evaluation was carried out under the supervision and with the participation of our management, including our President and Chief Financial Officer and our President and Chief Operating Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, our President and Chief Financial Officer and our President and Chief Operating Officer concluded that our disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms. We note that the design of any system of controls is based, in part, upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

Change in Internal Control Over Financial Reporting

During the first quarter of fiscal 2006, we completed the implementation of a new financial reporting system. We believe the conversion to and implementation of this new system further strengthened our existing internal control over financial reporting by automating certain processes and activities and enhancing certain business processes.

Other than the change described above, there has not been any change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) as promulgated by the SEC under the Securities Exchange Act of 1934) during our most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

MICHAELS STORES, INC.
Part II—OTHER INFORMATION


Item 1.	Legal Proceedings.

Derivative Claims

On June 9, 2006, Feivel Gottlieb and on June 12, 2006 Roberta Schuman each filed purported stockholder derivative actions, which are pending in the 191st and the 14th District Courts for Dallas County, Texas, respectively. The lawsuits name our Chairman of the Board and Vice Chairman of the Board, both in their capacities as officers of Michaels and as directors, and all of Michaels’ other current directors as individual defendants and Michaels as a nominal defendant. The plaintiffs assert claims against the individual defendants for breach of fiduciary duty, abuse of control, gross mismanagement, waste of corporate assets and unjust enrichment in connection with the granting of stock options by Michaels between 1990 and October 2001 and seek, among other relief, an indeterminate amount of damages from the individual defendants and injunctive relief against Michaels with regard to various corporate governance matters. All of these claims are asserted derivatively on behalf of Michaels. Prior to the filing of these derivative actions, Michaels announced that its Audit Committee (assisted by independent legal counsel and outside accounting experts) had commenced an internal review into Michaels’ historical stock option practices, including a review of Michaels’ underlying option grant documentation and procedures and related accounting. The Audit Committee has not reached any final conclusions as the internal review is not complete and is continuing. See “— Internal Review of Stock Option Practices” below.

Cotton Claim

Clark Claim

Morris Claim

On November 16, 2005, Geoffrey Morris, a former Aaron Brothers employee in San Diego, California, commenced a proposed class action proceeding against Aaron Brothers, Inc. on behalf of himself and current and former Aaron Brothers employees in California from November 16, 2001 to the present. The Morris suit was filed in the Superior Court of California, County of San Diego and alleges that Aaron Brothers failed to pay overtime wages, reimburse the plaintiff for necessary expenses (including the cost of gas used in driving his car for business purposes), and provide adequate meal and rest breaks (or compensation in lieu thereof). The Morris suit also alleges that this conduct was in breach of California’s unfair competition law. The plaintiff seeks injunctive relief, damages for unpaid overtime pay, meal break penalties, waiting time penalties, interest, and attorneys’ fees and costs. We are in the early stages of our investigation; however, we believe that the Morris claim lacks merit, and we intend to vigorously defend our interests.

Olivas Claim

removed the case to the United States District Court for the Central District of California. We are in the early stages of our investigation; however, we believe that the Olivas claim lacks merit, and we intend to vigorously defend our interests.

Governmental Inquiries and Related Matters

for Michaels relating to the new allegations in the Fathergill derivative suit, described above under Derivative Claims, including investigating the new allegations and determining what actions Michaels should take concerning those allegations. In addition, the Board has given the special committee authority to investigate and respond to the governmental inquiries, described above, but reserving to the full Board the authority to decide upon proposed actions or decisions concerning the pursuit, compromise or ultimate resolution of any claim or dispute with respect to those governmental inquiries. The special committee has retained the firm of Debevoise & Plimpton LLP as its independent counsel to advise it in these matters.

Internal Review of Stock Option Practices

The Company has historically considered the effective date specified in the written consents by the applicable committee as the accounting measurement date for determining stock-based compensation expense under APB No. 25, Accounting for Stock Issued to Employees. For the period under review, based on preliminary findings, the Company presently believes that, with respect to certain non-routine grants, the measurement date may differ from the measurement date used in its accounting prior to 2001. Based on the Company’s current analysis, non-cash compensation cost could potentially be recorded in an amount up to approximately $60 million, which relates to periods prior to fiscal 2001. Therefore, the amounts do not affect results of operations or the statement of cash flows in any period presented in the Company’s Annual Report on Form 10-K for fiscal 2005. The Company expects the effect, if any, on its financial position in each of the years presented in the fiscal 2005 Form 10-K, would be a reclassification of any unrecorded non-cash compensation cost between retained earnings and accumulated paid in capital, with no impact on total stockholders’ equity. Based on the Company’s current analysis, any potential misstatement of the Company’s financial statements presented in its fiscal 2005 Form 10-K is not considered material.

Two derivative lawsuits have been filed against the directors and certain officers of Michaels relating to the Company’s historical stock option procedures. See “— Derivative Claims” above.

General


Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.

On December 5, 2000, our Board of Directors authorized the repurchase of up to 4.0 million shares of our outstanding Common Stock. By later resolutions, our Board of Directors provided that proceeds of the exercise of options under our 2001 General Stock Option Plan may be used to repurchase shares under the 2000 repurchase plan and that the maximum number of shares authorized to be repurchased under the 2000 repurchase plan may be increased to the extent necessary to so use the proceeds from such option exercises. On June 16, 2005, in connection with the adoption of our 2005 Incentive Compensation Plan, we permanently ceased granting options under the 2001 General Stock Option Plan. As of April 29, 2006, options to purchase 875,000 shares of Common Stock remained outstanding pursuant to prior grants under the 2001 General Stock Option Plan.

On December 6, 2005, our Board of Directors authorized the repurchase of up to 5.0 million shares of our outstanding Common Stock.

The following table sets forth our repurchases of Common Stock for each fiscal month in the first quarter of fiscal 2006.

Issuer Purchases of Equity Securities


					Total Number		Maximum
					of Shares		Number of
					Purchased as		Shares That
					Part of Publicly		May Yet Be
	Total Number		Average		Announced		Purchased
	of Shares		Price Paid		Plans or		Under the Plans
	Purchased(1)		per Share		Programs(1)		or Programs(2)

January 29, 2006 through February 25, 2006		647,700		31.95		647,700		3,855,113
February 26, 2006 through April 1, 2006		484,400		32.48		484,400		3,370,713
April 2, 2006 through April 29, 2006		799,400		37.22		799,400		2,571,313

Total		1,931,500	$	34.26		1,931,500		2,571,313


(1)		Shares repurchased during the first quarter were under the December 6, 2005 repurchase plan and are held as Treasury shares.

(2)		As of January 28, 2006, we had used the entire fixed portion of the authority originally provided in the 2000 repurchase plan. No repurchases from proceeds of stock option exercises under the 2001 General Stock Option Plan were made in the first quarter of fiscal 2006 since there were no additional options exercised under the 2001 General Stock Option Plan during that quarter. As of April 29, 2006, we had 2,571,312 shares available for repurchase under the December 6, 2005 repurchase plan.


Item 6.	Exhibits.

(a) Exhibits:


Exhibit
Number			Description of Exhibit

	10	.1	Forms of Award Agreements under the Registrant’s 2005 Incentive Compensation Plan (filed herewith).


	10	.2	Form of Change in Control Severance Agreement (filed herewith).


	10	.3	Change in Control Retention Bonus Plan (filed herewith).


	10	.4	Fiscal Year 2006 Bonus Plan Enhancement (filed herewith).


	31	.1	Certifications of Jeffrey N. Boyer pursuant to §302 of the Sarbanes-Oxley Act of 2002 (filed herewith).


	31	.2	Certifications of Gregory A. Sandfort pursuant to §302 of the Sarbanes-Oxley Act of 2002 (filed herewith).


	32	.1	Certification pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002 (filed herewith).

MICHAELS STORES, INC.
SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

MICHAELS STORES, INC.


	By:	/s/ Jeffrey N. Boyer

Jeffrey N. Boyer

President and Chief Financial Officer

(Principal Financial Officer)

Dated: June 13, 2006

INDEX TO EXHIBITS


Exhibit
Number			Description of Exhibit

	10	.1	Forms of Award Agreements under the Registrant’s 2005 Incentive Compensation Plan (filed herewith).


	10	.2	Form of Change in Control Severance Agreement (filed herewith).


	10	.3	Change in Control Retention Bonus Plan (filed herewith).


	10	.4	Fiscal Year 2006 Bonus Plan Enhancement (filed herewith).


	31	.1	Certifications of Jeffrey N. Boyer pursuant to §302 of the Sarbanes-Oxley Act of 2002 (filed herewith).


	31	.2	Certifications of Gregory A. Sandfort pursuant to §302 of the Sarbanes-Oxley Act of 2002 (filed herewith).


	32	.1	Certification pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002 (filed herewith).

EX-10.1 2 d36685exv10w1.htm FORMS OF AWARD AGREEMENTS UNDER 2005 INCENTIVE COMPENSATION PLAN exv10w1

Exhibit 10.1

Forms of Award Agreements
under the
Michaels Stores, Inc. 2005 Incentive Compensation Plan

Amended April 21, 2006

Employee Stock Option Agreement: Performance Vested Award

MICHAELS STORES, INC.
STOCK OPTION AGREEMENT


		Participant:

		No. of Shares:

		Option Price:

		Date of Grant:

		Expiration Date:

Under the terms and conditions of the Michaels Stores, Inc. 2005 Incentive Compensation Plan (the “Plan”), a copy of which is attached hereto and incorporated herein by reference, Michaels Stores, Inc., a Delaware corporation (the “Company”), grants to the individual whose name is set forth above (the “Participant”) an option (the “Option”) to purchase the number of shares of the Company’s Common Stock set forth above at the price per share set forth above (the “Option Price”). Terms not defined in this Agreement have the meanings set forth in the Plan.

The Option will be for a term commencing on the Date of Grant set forth above and ending at 5:00 p.m. Dallas, Texas time on the Expiration Date set forth above. During the term of the Option, the Option will become exercisable in accordance with the immediately following paragraph; provided, that in no event will the Participant be entitled to acquire a fraction of a share of Common Stock pursuant to the Option.

[Insert Management Objectives to be achieved and time period in which Management Objectives are to be achieved in order for the Option (or a portion of the Option) to become vested.]

Notwithstanding the vesting provisions and Expiration Date set forth above, [(a) ]in the event the Participant’s employment with the Company or any Subsidiary is terminated by long-term disability (as determined by the Committee in good faith) or death, the portion of the Option which is unexpired at the time of such termination of employment will automatically become 100% vested and exercisable and will expire at 5:00 p.m. Dallas, Texas time (i) one day prior to the fifth anniversary of such long-term disability or (ii) one day prior to the third anniversary of the Participant’s death[; and (b) subject to the noncompetition provisions set forth below, in the event of the Participant’s Retirement (as hereinafter defined), [insert effect of Retirement]. For purposes of this Agreement, the term “Retirement” means the Participant’s termination of employment with the Company or any Subsidiary at a time when both (A) the Participant has attained at least age 55 and (B) the sum of the Participant’s full years of employment with the Company and its Subsidiaries and the Participant’s age in whole years equals 65 or more].

In the event the Participant’s employment with the Company or any Subsidiary is terminated for any reason other than [Retirement or ]such long-term disability or death, no further vesting of the Option will occur after the date of such termination and the Option will expire at 5:00 p.m. Dallas, Texas time on the 30th calendar day after such termination.

Notwithstanding any other provision herein, this Option shall become 100% vested and fully exercisable immediately prior to a Change in Control.

Payment of the Option Price of any shares purchased under the Option will be made pursuant to any of the provisions of, and in accordance with, Section 6(c) of the Plan (or any successor provision).

members of the Participant own more than 50% of the beneficial interests, to foundations in which family members of the Participant or the Participant control the management of assets, to other entities in which more than 50% of the voting interests are owned by family members of the Participant or the Participant and to charitable organizations described in Section 170(c) of the Code.

[The Participant acknowledges that he or she is employed by the Company or a Subsidiary in a capacity that will necessarily allow the Participant access to confidential information regarding the business of the Company and its Subsidiaries. The Participant understands that if he or she becomes engaged in the business of a competitor of the Company or any of its Subsidiaries, it will be inevitable that the Participant will use or disclose such confidential information to or for the benefit of such competitor. Therefore, the Participant agrees that for a period of two years following the date of the Participant’s Retirement, the Participant will not directly or indirectly participate, in any capacity, in the ownership, management, operation or control of, or have any financial interest in, any business which is in competition with any business conducted by the Company or any Subsidiary in the United States or Canada. In the event that the Participant violates any of the noncompetition provisions set forth above, (i) the Participant will promptly notify the Senior Vice President – Human Resources of the Company of such violation; (ii) the unexpired portion of the Option will expire immediately upon the occurrence of such violation; and (iii) in the event that the Participant has exercised or purported to exercise all or any part of the Option on or following the first date of such violation, the Participant will pay to the Company, immediately upon demand, an amount equal to the before-tax gain realized by the Participant upon such exercise(s) or purported exercise(s).]

The Participant hereby accepts and agrees to be bound by all the terms and conditions of the Plan and this Agreement. Any amendment to the Plan will be deemed to be an amendment to this Agreement to the extent that the Plan amendment is applicable hereto; provided, however, that no amendment will adversely affect the rights of the Participant under this Agreement without the Participant’s consent. This Agreement may be executed simultaneously in multiple counterparts, each of which will be deemed an original, but all of which together constitute one and the same instrument.

Employee Stock Option Agreement: Time Vested Award

MICHAELS STORES, INC.
STOCK OPTION AGREEMENT


		Participant:

		No. of Shares:

		Option Price:

		Date of Grant:

		Expiration Date:


Portion of Option Exercisable		On and After
33 1/3%		First Anniversary of Date of Grant
66 2/3%		Second Anniversary of Date of Grant
100%		Third Anniversary of Date of Grant

In no event, however, will the Participant be entitled to acquire a fraction of a share of Common Stock pursuant to the Option.

Notwithstanding the Vesting Schedule and Expiration Date set forth above, (a) in the event the Participant’s employment with the Company or any Subsidiary is terminated by long-term disability (as determined by the Committee in good faith) or death, the portion of the Option which is unexpired at the time of such termination of employment will automatically become 100% vested and exercisable and will expire at 5:00 p.m. Dallas, Texas time (i) one day prior to the fifth anniversary of such long-term disability or (ii) one day prior to the third anniversary of the Participant’s death; and (b) subject to the noncompetition provisions set forth below, in the event of the Participant’s Retirement (as hereinafter defined), the portion of the Option which is unexpired at the time of Retirement will continue to vest and become exercisable following Retirement in accordance with the Vesting Schedule and will expire at 5:00 p.m. Dallas, Texas time on the Expiration Date set forth above. For purposes of this Agreement, the term “Retirement” means the Participant’s termination of employment with the Company or any Subsidiary at a time when both (A) the Participant has attained at least age 55 and (B) the sum of the Participant’s full years of employment with the Company and its Subsidiaries and the Participant’s age in whole years equals 65 or more.

In the event the Participant’s employment with the Company or any Subsidiary is terminated for any reason other than Retirement or such long-term disability or death, no further vesting of the Option will occur after the date of such termination and the Option will expire at 5:00 p.m. Dallas, Texas time on the 30^th calendar day after such termination.

Notwithstanding any other provision herein, this Option shall become 100% vested and fully exercisable immediately prior to a Change in Control.

Payment of the Option Price of any shares purchased under the Option will be made pursuant to any of the provisions of, and in accordance with, Section 6(c) of the Plan (or any successor provision).

The Option may not be sold, pledged, assigned or transferred in any manner other than by will or the laws of descent and distribution, pursuant to a qualified domestic relations order or, with the consent of the Committee, by gifts to family members of the Participant, including to trusts in which family members of the Participant own more than 50% of the beneficial interests, to foundations in which family members of the Participant or the Participant control the management of assets, to other entities in which more than 50% of the voting interests are owned by family members of the Participant or the Participant and to charitable organizations described in Section 170(c) of the Code.

The Participant acknowledges that he or she is employed by the Company or a Subsidiary in a capacity that will necessarily allow the Participant access to confidential information regarding the business of the Company and its Subsidiaries. The Participant understands that if he or she becomes engaged in the business of a competitor of the Company or any of its Subsidiaries, it will be inevitable that the Participant will use or disclose such confidential information to or for the benefit of such competitor. Therefore, the Participant agrees that for a period of two years following the date of the Participant’s Retirement, the Participant will not directly or indirectly participate, in any capacity, in the ownership, management, operation or control of, or have any financial interest in, any business which is in competition with any business conducted by the Company or any Subsidiary in the United States or Canada. In the event that the Participant violates any of the noncompetition provisions set forth above, (i) the Participant will promptly notify the Senior Vice President – Human Resources of the Company of such violation; (ii) the unexpired portion of the Option will expire immediately upon the occurrence of such violation; and (iii) in the event that the Participant has exercised or purported to exercise all or any part of the Option on or following the first date of such violation, the Participant will pay to the Company, immediately upon demand, an amount equal to the before-tax gain realized by the Participant upon such exercise(s) or purported exercise(s).

Director Stock Option Agreement

MICHAELS STORES, INC.
STOCK OPTION AGREEMENT


		Participant:

		No. of Shares:

		Option Price:

		Date of Grant:

		Expiration Date:

The Option will be for a term commencing on the Date of Grant set forth above and ending at 5:00 p.m. Dallas, Texas time on the Expiration Date set forth above. The Option is fully exercisable on and after the Date of Grant.

Notwithstanding the Expiration Date set forth above, in the event of the Participant’s death, the Option shall automatically expire at 5:00 p.m. Dallas, Texas time one day prior to the third anniversary of the Participant’s death.

Payment of the Option Price of any shares purchased under the Option will be made pursuant to any of the provisions of, and in accordance with, Paragraph 6(c) of the Plan (or any successor provision).

Restricted Stock Award Agreement: Performance Vested Award

MICHAELS STORES, INC.
RESTRICTED STOCK AWARD AGREEMENT


		Participant:

		No. of Restricted Shares:

		Date of Grant:

Under the terms and conditions of the Michaels Stores, Inc. 2005 Incentive Compensation Plan (the “Plan”), a copy of which is attached hereto and incorporated herein by reference, Michaels Stores, Inc., a Delaware corporation (the “Company”), grants to the individual whose name is set forth above (the “Participant”) the number of restricted shares of the Company’s Common Stock set forth above (the “Restricted Shares”). Terms not defined in this Agreement have the meanings set forth in the Plan.

The Restricted Shares may not be transferred, sold, pledged, exchanged, assigned or otherwise encumbered or disposed of by the Participant, except to the Company, until they become vested in accordance with the immediately following paragraph. Except as hereinafter provided, any purported transfer, encumbrance or other disposition of the Restricted Shares before they become vested will be null and void, and the other party to any such purported transaction will not obtain any rights to or interest in the Restricted Shares. Notwithstanding the foregoing, the Participant may transfer the Restricted Shares, prior to the time they become vested, pursuant to a qualified domestic relations order or, with the consent of the Committee, by gifts to family members of the Participant, including to trusts in which family members of the Participant own more than 50% of the beneficial interests, to foundations in which family members of the Participant or the Participant control the management of assets, to other entities in which more than 50% of the voting interests are owned by family members of the Participant or the Participant and to charitable organizations described in Section 170(c) of the Code; provided, however, that the Restricted Shares will remain unvested and subject to forfeiture in the hands of any transferee until they vest pursuant to the terms of this Agreement in the same manner as if the Restricted Shares continued to be held by the Participant.

[Insert Management Objectives to be achieved and time period in which Management Objectives are to be achieved in order for the Restricted Shares (or a portion of the Restricted Shares) to become vested.]

Notwithstanding the vesting provisions set forth above, [(a) ]in the event the Participant’s employment with the Company or any Subsidiary is terminated by long-term disability (as determined by the Committee in good faith) or death, the unvested Restricted Shares at the time of such termination of employment will automatically become 100% vested[, and (b) subject to the noncompetition provisions set forth below, in the event of the Participant’s Retirement (as hereinafter defined), [insert effect of Retirement]. For purposes of this Agreement, the term “Retirement” means the Participant’s termination of employment with the Company or any Subsidiary at a time when both (A) the Participant has attained at least age 55 and (B) the sum of the Participant’s full years of employment with the Company and its Subsidiaries and the Participant’s age in whole years equals 65 or more].

In the event the Participant’s employment with the Company or any Subsidiary is terminated for any reason other than [Retirement or ]such long-term disability or death, the unvested Restricted Shares will be forfeited immediately upon such termination, and the certificates (if any) representing the unvested Restricted Shares will be canceled.

Notwithstanding any other provision herein, immediately prior to a Change in Control the unvested Restricted Shares will become 100% vested and the risk of forfeiture will terminate.

that may be paid thereon; provided, however, that any additional shares of Common Stock or other securities that the Participant may become entitled to receive pursuant to a stock dividend, stock split, combination of shares, recapitalization, merger, consolidation, separation or reorganization or any other change in the capital structure of the Company will be subject to the same restrictions as the Restricted Shares.

On the date any Restricted Shares vest, the Company will automatically withhold a number of vested Restricted Shares sufficient to satisfy the Participant’s tax obligations with respect to such vested Restricted Shares, unless the Participant notifies the Company that he or she will use other arrangements to satisfy such tax obligations, which must be satisfactory to the Company.

Any certificates representing the Restricted Shares will be held in custody by the Company, together with a stock power endorsed in blank by the Participant with respect thereto, until the Restricted Shares vest in accordance with this Agreement. In order for this Agreement to be effective, the Participant must sign and return such stock power as directed by the Company.

[The Participant acknowledges that he or she is employed by the Company or a Subsidiary in a capacity that will necessarily allow the Participant access to confidential information regarding the business of the Company and its Subsidiaries. The Participant understands that if he or she becomes engaged in the business of a competitor of the Company or any of its Subsidiaries, it will be inevitable that the Participant will use or disclose such confidential information to or for the benefit of such competitor. Therefore, the Participant agrees that for a period of two years following the date of the Participant’s Retirement, the Participant will not directly or indirectly participate, in any capacity, in the ownership, management, operation or control of, or have any financial interest in, any business which is in competition with any business conducted by the Company or any Subsidiary in the United States or Canada. In the event that the Participant violates any of the noncompetition provisions set forth above, (i) the Participant will promptly notify the Senior Vice President – Human Resources of the Company of such violation; (ii) the unvested Restricted Shares will be forfeited immediately upon the occurrence of such violation, and the certificates (if any) representing the unvested Restricted Shares will be canceled; and (iii) if any of the Restricted Shares that were unvested on the first date of such violation were delivered to the Participant or were otherwise treated as vested after such date, the Participant will pay to the Company, immediately upon demand, an amount equal to the aggregate Market Value per Share of the Restricted Shares that were so delivered or otherwise treated as vested, such aggregate Market Value per Share to be determined as of the first date of such violation.]

If any provision hereof is held to be illegal, invalid or unenforceable under present or future laws, such provision shall be fully severable and the remaining provisions hereof shall remain in full force in effect and shall not be affected by such illegal, invalid or unenforceable provision.


ACCEPTED:	MICHAELS STORES, INC.

	By:

[Name of Participant]		Name:
		Title:


Date:

STOCK POWER

FOR VALUE received, the undersigned does hereby sell, assign and transfer unto Michaels Stores, Inc. (the “Company”) that number of shares of the Company’s common stock awarded to the undersigned pursuant to the Restricted Stock Award Agreement with a Grant Date of (the “Agreement”) that is the subject of forfeiture under the terms of the Michaels Stores, Inc. 2005 Incentive Compensation Plan (the “Plan”) or that is transferred to the Company in satisfaction of the tax obligations of the undersigned as provided in the Plan and the Agreement, and the undersigned does hereby irrevocably constitute and appoint the Secretary or Treasurer of the Company to transfer said stock on the books of the Company, with full power of substitution in the premises.

Restricted Stock Award Agreement: Time Vested Award

MICHAELS STORES, INC.
RESTRICTED STOCK AWARD AGREEMENT


		Participant:

		No. of Restricted Shares:

		Date of Grant:

Under the terms and conditions of the Michaels Stores, Inc. 2005 Incentive Compensation Plan (the “Plan”), a copy of which is attached hereto and incorporated herein by reference, Michaels Stores, Inc., a Delaware corporation (the “Company”), grants to the individual whose name is set forth above (the “Participant”) the number of restricted shares of the Company’s Common Stock set forth above (the “Restricted Shares”). Terms not defined in this Agreement have the meanings set forth in the Plan.

The Restricted Shares may not be transferred, sold, pledged, exchanged, assigned or otherwise encumbered or disposed of by the Participant, except to the Company, until they become vested in accordance with the schedule set forth below (the “Vesting Schedule”). Except as hereinafter provided, any purported transfer, encumbrance or other disposition of the Restricted Shares before they become vested will be null and void, and the other party to any such purported transaction will not obtain any rights to or interest in the Restricted Shares. Notwithstanding the foregoing, the Participant may transfer the Restricted Shares, prior to the time they become vested, pursuant to a qualified domestic relations order or, with the consent of the Committee, by gifts to family members of the Participant, including to trusts in which family members of the Participant own more than 50% of the beneficial interests, to foundations in which family members of the Participant or the Participant control the management of assets, to other entities in which more than 50% of the voting interests are owned by family members of the Participant or the Participant and to charitable organizations described in Section 170(c) of the Code; provided, however, that the Restricted Shares will remain unvested and subject to forfeiture in the hands of any transferee until they vest pursuant to the terms of this Agreement in the same manner as if the Restricted Shares continued to be held by the Participant.


No. of Vested Shares		On and After
(1/3)		First Anniversary of Date of Grant
(1/3)		Second Anniversary of Date of Grant
(1/3)		Third Anniversary of Date of Grant

Notwithstanding the Vesting Schedule set forth above, (a) in the event the Participant’s employment with the Company or any Subsidiary is terminated by long-term disability (as determined by the Committee in good faith) or death, the unvested Restricted Shares at the time of such termination of employment will automatically become 100% vested, and (b) subject to the noncompetition provisions set forth below, in the event of the Participant’s Retirement (as hereinafter defined), the unvested Restricted Shares at the time of Retirement will continue to vest following Retirement in accordance with the Vesting Schedule. For purposes of this Agreement, the term “Retirement” means the Participant’s termination of employment with the Company or any Subsidiary at a time when both (A) the Participant has attained at least age 55 and (B) the sum of the Participant’s full years of employment with the Company and its Subsidiaries and the Participant’s age in whole years equals 65 or more.

In the event the Participant’s employment with the Company or any Subsidiary is terminated for any reason other than Retirement or such long-term disability or death, the unvested Restricted Shares will be forfeited immediately upon such termination, and the certificates (if any) representing the unvested Restricted Shares will be canceled.

Notwithstanding any other provision herein, immediately prior to a Change in Control the unvested Restricted Shares will become 100% vested and the risk of forfeiture will terminate.

Except as otherwise provided herein, the Participant will have all of the rights of a stockholder with respect to the Restricted Shares, including the right to vote such shares and receive any dividends that may be paid thereon; provided, however, that any additional shares of Common Stock or other securities that the Participant may become entitled to receive pursuant to a stock dividend, stock split, combination of shares, recapitalization, merger, consolidation, separation or reorganization or any other change in the capital structure of the Company will be subject to the same restrictions as the Restricted Shares.

The Participant acknowledges that he or she is employed by the Company or a Subsidiary in a capacity that will necessarily allow the Participant access to confidential information regarding the business of the Company and its Subsidiaries. The Participant understands that if he or she becomes engaged in the business of a competitor of the Company or any of its Subsidiaries, it will be inevitable that the Participant will use or disclose such confidential information to or for the benefit of such competitor. Therefore, the Participant agrees that for a period of two years following the date of the Participant’s Retirement, the Participant will not directly or indirectly participate, in any capacity, in the ownership, management, operation or control of, or have any financial interest in, any business which is in competition with any business conducted by the Company or any Subsidiary in the United States or Canada. In the event that the Participant violates any of the noncompetition provisions set forth above, (i) the Participant will promptly notify the Senior Vice President – Human Resources of the Company of such violation; (ii) the unvested Restricted Shares will be forfeited immediately upon the occurrence of such violation, and the certificates (if any) representing the unvested Restricted Shares will be canceled; and (iii) if any of the Restricted Shares that were unvested on the first date of such violation were delivered to the Participant or were otherwise treated as vested after such date, the Participant will pay to the Company, immediately upon demand, an amount equal to the aggregate Market Value per Share of the Restricted Shares that were so delivered or otherwise treated as vested, such aggregate Market Value per Share to be determined as of the first date of such violation.


ACCEPTED:	MICHAELS STORES, INC.

	By:

[Name of Participant]		Name:
		Title:
Date:

STOCK POWER

FOR VALUE received, the undersigned does hereby sell, assign and transfer unto Michaels Stores, Inc. (the “Company”) that number of shares of the Company’s common stock awarded to the undersigned pursuant to the Restricted Stock Award Agreement with a Grant Date of ___ (the “Agreement”) that is the subject of forfeiture under the terms of the Michaels Stores, Inc. 2005 Incentive Compensation Plan (the “Plan”) or that is transferred to the Company in satisfaction of the tax obligations of the undersigned as provided in the Plan and the Agreement, and the undersigned does hereby irrevocably constitute and appoint the Secretary or Treasurer of the Company to transfer said stock on the books of the Company, with full power of substitution in the premises.

Appreciation Rights Agreement: Performance Vested Award

MICHAELS STORES, INC.
APPRECIATION RIGHTS AGREEMENT


		Participant:

		No. of Shares:

		Grant Price:

		Date of Grant:

		Expiration Date:

Under the terms and conditions of the Michaels Stores, Inc. 2005 Incentive Compensation Plan (the “Plan”), a copy of which is attached hereto and incorporated herein by reference, Michaels Stores, Inc., a Delaware corporation (the “Company”), grants to the individual whose name is set forth above (the “Participant”) appreciation rights (the “Appreciation Rights”) with respect to the number of shares of the Company’s Common Stock set forth above. The Appreciation Rights are freestanding Appreciation Rights and are not granted in tandem with Stock Options. Terms not defined in this Agreement have the meanings set forth in the Plan.

The number of shares of Common Stock to be issued to the Participant on the exercise of the Appreciation Rights will be the number of shares of Common Stock having an aggregate Market Value per Share on the date of exercise equal to ___% of the aggregate Spread of the Appreciation Rights that are exercised, rounded down to the nearest whole share[, provided, however, that the maximum Spread per share of Common Stock may not exceed $___]. No Appreciation Rights may be exercised except at a time when the Spread is positive.

The term of the Appreciation Rights will commence upon the Date of Grant and, unless earlier terminated in accordance with the provisions below, will expire at 5:00 p.m. Dallas, Texas time on the Expiration Date set forth above. During the term of the Appreciation Rights, the Appreciation Rights will become vested and may be exercised in accordance with the immediately following paragraph.

[Insert Management Objectives to be achieved and time period in which Management Objectives are to be achieved in order for the Appreciation Rights (or a portion of the Appreciation Rights) to become vested.]

Notwithstanding the vesting provisions and Expiration Date set forth above, [(a) ]in the event the Participant’s employment with the Company or any Subsidiary is terminated by long-term disability (as determined by the Committee in good faith) or death, the portion of the Appreciation Rights which is unexpired at the time of such termination of employment will automatically become 100% vested and exercisable and will expire at 5:00 p.m. Dallas, Texas time (i) one day prior to the fifth anniversary of such long-term disability or (ii) one day prior to the third anniversary of death[; and (b) subject to the noncompetition provisions set forth below, in the event of the Participant’s Retirement (as hereinafter defined), [insert effect of Retirement]. For purposes of this Agreement, the term “Retirement” means the Participant’s termination of employment with the Company or any Subsidiary at a time when both (A) the Participant has attained at least age 55 and (B) the sum of the Participant’s full years of employment with the Company and its Subsidiaries and the Participant’s age in whole years equals 65 or more].

In the event the Participant’s employment with the Company or any Subsidiary is terminated for any reason other than [Retirement or ]such long-term disability or death, no further vesting of the Appreciation Rights will occur after the date of such termination and the Appreciation Rights will expire at 5:00 p.m. Dallas, Texas time on the 30th calendar day after such termination.

Notwithstanding any other provision herein, the Appreciation Rights shall become 100% vested and fully exercisable immediately prior to a Change in Control.

The Appreciation Rights granted hereby may not be sold, pledged, assigned or transferred in any manner other than by will or the laws of descent and distribution, pursuant to a qualified domestic relations order or, with the consent of the Committee, by gifts to family members of the Participant, including to trusts in which family members of the Participant own more than 50% of the beneficial interests, to foundations in which family members of the Participant or the Participant control the management of assets, to other entities in which more than 50% of the voting interests are owned by family members of the Participant or the Participant and to charitable organizations described in Section 170(c) of the Code.

[The Participant acknowledges that he or she is employed by the Company or a Subsidiary in a capacity that will necessarily allow the Participant access to confidential information regarding the business of the Company and its Subsidiaries. The Participant understands that if he or she becomes engaged in the business of a competitor of the Company or any of its Subsidiaries, it will be inevitable that the Participant will use or disclose such confidential information to or for the benefit of such competitor. Therefore, the Participant agrees that for a period of two years following the date of the Participant’s Retirement, the Participant will not directly or indirectly participate, in any capacity, in the ownership, management, operation or control of, or have any financial interest in, any business which is in competition with any business conducted by the Company or any Subsidiary in the United States or Canada. In the event that the Participant violates any of the noncompetition provisions set forth above, (i) the Participant will promptly notify the Senior Vice President – Human Resources of the Company of such violation; (ii) the unexpired portion of the Appreciation Rights will expire immediately upon the occurrence of such violation; and (iii) in the event that the Participant has exercised or purported to exercise all or any part of the Appreciation Rights on or following the first date of such violation, the Participant will pay to the Company, immediately upon demand, an amount equal to the before-tax gain realized by the Participant upon such exercise(s) or purported exercise(s).]

Appreciation Rights Agreement: Time Vested Award

MICHAELS STORES, INC.
APPRECIATION RIGHTS AGREEMENT


		Participant:

		No. of Shares:

		Grant Price:

		Date of Grant:

		Expiration Date:

Under the terms and conditions of the Michaels Stores, Inc. 2005 Incentive Compensation Plan (the “Plan”), a copy of which is attached hereto and incorporated herein by reference, Michaels Stores, Inc., a Delaware corporation (the “Company”), grants to the individual whose name is set forth above (the “Participant”) appreciation rights (the “Appreciation Rights”) with respect to the number of shares of the Company’s Common Stock set forth above. The Appreciation Rights are freestanding Appreciation Rights and are not granted in tandem with Stock Options. Terms not defined in this Agreement have the meanings set forth in the Plan.


Portion of Appreciation Rights Exercisable		On or After
33 1/3%		First Anniversary of Date of Grant
66 2/3%		Second Anniversary of Date of Grant
100%		Third Anniversary of Date of Grant

Notwithstanding the Vesting Schedule and Expiration Date set forth above, (a) in the event the Participant’s employment with the Company or any Subsidiary is terminated by long-term disability (as determined by the Committee in good faith) or death, the portion of the Appreciation Rights which is unexpired at the time of such termination of employment will automatically become 100% vested and exercisable and will expire at 5:00 p.m. Dallas, Texas time (i) one day prior to the fifth anniversary of such long-term disability or (ii) one day prior to the third anniversary of the Participant’s death; and (b) subject to the noncompetition provisions set forth below, in the event of the Participant’s Retirement (as hereinafter defined), the portion of the Appreciation Rights which is unexpired at the time of Retirement will continue to vest and become exercisable following Retirement in accordance with the Vesting Schedule and will expire at 5:00 p.m. Dallas, Texas time on the Expiration Date set forth above. For purposes of this Agreement, the term “Retirement” means the Participant’s termination of employment with the Company or any Subsidiary at a time when both (A) the Participant has attained at least age 55 and (B) the sum of the Participant’s full years of employment with the Company and its Subsidiaries and the Participant’s age in whole years equals 65 or more.

In the event the Participant’s employment with the Company or any Subsidiary is terminated for any reason other than Retirement or such long-term disability or death, no further vesting of the Appreciation Rights will occur after the date of such termination and the Appreciation Rights will expire at 5:00 p.m. Dallas, Texas time on the 30^th calendar day after such termination.

Notwithstanding any other provision herein, the Appreciation Rights shall become 100% vested and fully exercisable immediately prior to a Change in Control.

The Participant acknowledges that he or she is employed by the Company or a Subsidiary in a capacity that will necessarily allow the Participant access to confidential information regarding the business of the Company and its Subsidiaries. The Participant understands that if he or she becomes engaged in the business of a competitor of the Company or any of its Subsidiaries, it will be inevitable that the Participant will use or disclose such confidential information to or for the benefit of such competitor. Therefore, the Participant agrees that for a period of two years following the date of the Participant’s Retirement, the Participant will not directly or indirectly participate, in any capacity, in the ownership, management, operation or control of, or have any financial interest in, any business which is in competition with any business conducted by the Company or any Subsidiary in the United States or Canada. In the event that the Participant violates any of the noncompetition provisions set forth above, (i) the Participant will promptly notify the Senior Vice President – Human Resources of the Company of such violation; (ii) the unexpired portion of the Appreciation Rights will expire immediately upon the occurrence of such violation; and (iii) in the event that the Participant has exercised or purported to exercise all or any part of the Appreciation Rights on or following the first date of such violation, the Participant will pay to the Company, immediately upon demand, an amount equal to the before-tax gain realized by the Participant upon such exercise(s) or purported exercise(s).

EX-10.2 3 d36685exv10w2.htm FORM OF CHANGE IN CONTROL SEVERANCE AGREEMENT exv10w2

Exhibit 10.2

[FORM OF] CHANGE IN CONTROL SEVERANCE AGREEMENT (this “Agreement”) dated as of April 26, 2006, between Michaels Stores, Inc., a Delaware corporation (the “Company”), and [NAME] (the “Executive”).

WHEREAS the Executive is a skilled and dedicated employee of the Company who has important management responsibilities and talents that benefit the Company;

WHEREAS the Board of Directors of the Company (the “Board”) considers it essential to the best interests of the Company and its stockholders to assure that the Company and its subsidiaries will have the continued dedication of the Executive, notwithstanding the possibility, threat or occurrence of a Change in Control (as defined below); and

WHEREAS the Board believes that it is imperative to diminish the distraction of the Executive by virtue of the uncertainties and risks created by the circumstances surrounding a Change in Control and to ensure the Executive’s full attention to the Company and its subsidiaries during such a period of uncertainty;

NOW, THEREFORE, in consideration of the mutual agreements, provisions and covenants contained herein, and intending to be legally bound hereby, the parties hereto agree as follows:

SECTION 1. Definitions. For purposes of this Agreement, the following terms shall have the meanings set forth below:

(a) “280G Gross-Up Payment” shall have the meaning set forth in Section 7(a).

(b) “409A Gross-Up Payment” shall have the meaning set forth in Section 13.

(d) “Accrued Rights” shall have the meaning set forth in Section 6(a).

(e) “Affiliate(s)” means, with respect to any specified Person, any other Person that, directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with, such specified Person.

(f) “Annual Base Salary” shall have the meaning set forth in Section 4(a).

(g) “Annual Bonus” shall have the meaning set forth in Section 4(b).

(h) “Average Annual Incentive Award” means, as of the Termination Date, the average annual incentive award payable or actually paid to the Executive in respect of the three fiscal years preceding the Termination Date; provided, however, that (i) for any fiscal year during which an annual incentive award that was paid or is payable to the Executive was prorated because of less than a full fiscal year of plan participation or employment, such award shall be annualized and (ii) if the Executive was not employed during any of the three fiscal years immediately preceding the Termination Date or otherwise was not eligible to receive an

annual incentive award for such fiscal year, the Average Annual Incentive Award shall be determined on the basis of the number of fiscal years during such period with respect to which the Executive was eligible to receive such an award.

(i) “Cause” means the occurrence of any one of the following:

(i) the Executive is convicted of, or pleads guilty or nolo contendere to, a felony involving moral turpitude or that involves misappropriation of the assets of the Company or a Subsidiary;

(ii) the Executive commits one or more acts or omissions constituting fraud or willful misconduct that have a material detrimental effect on the Company; or

(iii) the Executive’s willful and continued failure to perform substantially the Executive’s employment duties in any material respect (other than as a result of incapacity due to physical or mental illness or after delivery by the Executive of a Notice of Termination for Good Reason) after a written demand for substantial performance is delivered to the Executive that specifically identifies the manner in which the Company believes the Executive has failed to perform his or her duties, and after the Executive has failed to resume substantial performance of the Executive’s duties on a continuous basis within 30 days of receiving such demand.

For purposes of this provision, no act or failure to act on the part of the Executive shall be considered “willful” unless it is done, or omitted to be done, by the Executive in bad faith or without reasonable belief that the Executive’s action or omission was in the best interests of the Company. The termination of employment of the Executive for Cause shall not be effective unless and until there shall have been delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of not less than three-fourths of the entire membership of the Board (excluding the Executive) at a meeting of the Board called and held for such purpose (after reasonable notice is provided to the Executive and the Executive is given an opportunity, together with counsel, to be heard before the Board), finding that, in the good faith opinion of the Board, the Executive is guilty of the conduct described in clause (i), (ii) or (iii) above and specifying the particulars thereof in detail.

(j) “Change in Control” means the occurrence of any of the following:

(i) individuals who, as of the date of this Agreement, were members of the Board (the “Incumbent Directors”) cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date of this Agreement whose election, or nomination for election, by the Company’s stockholders was approved by a vote of at least a majority of the Incumbent Directors shall be considered as though such individual were an Incumbent Director, but excluding, for purposes of this proviso, any such individual whose assumption of office after the date of this Agreement occurs as a result of an actual or threatened proxy contest with respect to election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a “person” (as such term is used in Section 13(d) of the Exchange Act) (each, a “Person”), other than the Board;

(ii) the consummation of (A) a merger, consolidation, statutory share exchange or similar form of corporate transaction involving (x) the Company or (y) any of its Subsidiaries, but in the case of this clause (y) only if Company Voting Securities (as defined below) are issued or issuable (each of the events referred to in this clause (A) being hereinafter referred to as a “Reorganization”) or (B) a sale or other disposition of all or substantially all the assets of the Company (a “Sale”), unless, immediately following such Reorganization or Sale, (1) all or substantially all the individuals and entities who were the “beneficial owners” (as such term is defined in Rule 13d-3 under the Exchange Act (or a successor rule thereto)) of shares of the Company’s common stock or other securities eligible to vote for the election of the Board outstanding immediately prior to the consummation of such Reorganization or Sale (such securities, the “Company Voting Securities”) beneficially own, directly or indirectly, more than 60% of the combined voting power of the then outstanding voting securities of the corporation or other entity resulting from such Reorganization or Sale (including a corporation or other entity that, as a result of such transaction, owns the Company or all or substantially all the Company’s assets either directly or through one or more subsidiaries) (the “Continuing Entity”) in substantially the same proportions as their ownership, immediately prior to the consummation of such Reorganization or Sale, of the outstanding Company Voting Securities (excluding any outstanding voting securities of the Continuing Entity that such beneficial owners hold immediately following the consummation of the Reorganization or Sale as a result of their ownership prior to such consummation of voting securities of any corporation or other entity involved in or forming part of such Reorganization or Sale other than the Company or a Subsidiary), (2) no Person (excluding any employee benefit plan (or related trust) sponsored or maintained by the Continuing Entity or any corporation or other entity controlled by the Continuing Entity) beneficially owns, directly or indirectly, 20% or more of the combined voting power of the then outstanding voting securities of the Continuing Entity and (3) at least a majority of the members of the board of directors or other governing body of the Continuing Entity were Incumbent Directors at the time of the execution of the definitive agreement providing for such Reorganization or Sale or, in the absence of such an agreement, at the time at which approval of the Board was obtained for such Reorganization or Sale;

(iii) the stockholders of the Company approve a plan of complete liquidation or dissolution of the Company; or

(iv) any Person, corporation or other entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) becomes the beneficial owner, directly or indirectly, of securities of the Company representing 20% or more of the combined voting power of the Company Voting Securities; provided, however, that for purposes of this subparagraph (iv), the following acquisitions shall not constitute a Change in Control: (A) any acquisition directly from the Company, (B) any acquisition by the Company or any Subsidiary, (C) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any Subsidiary, (D) any acquisition by an underwriter temporarily holding such Company Voting Securities pursuant to an offering of such securities or (E) any acquisition pursuant to a Reorganization or Sale that does not constitute a Change in Control for purposes of Section 1(j)(ii).

(k) “COBRA” shall have the meaning set forth in Section 6(b)(iii).

(l) “Code” means the Internal Revenue Code of 1986, as amended from time to time, and the regulations promulgated thereunder.

(m) “Company Voting Securities” shall have the meaning set forth in Section 1(j)(ii).

(n) “Continuing Entity” shall have the meaning set forth in Section 1(j)(ii).

(o) “Disability” shall have the meaning set forth in Section 6(c)(ii).

(p) “ERISA” means the Employee Retirement Income Security Act of 1974, as amended from time to time, and the regulations promulgated thereunder.

(q) “Exchange Act” means the Securities Exchange Act of 1934, as amended from time to time, or any successor statute thereto.

(r) “Excise Tax” means the excise tax imposed by Section 4999 of the Code, together with any interest or penalties imposed with respect to such tax.

(s) “Extension Date” shall have the meaning set forth in Section 24.

(t) “Good Reason” means, without the Executive’s express written consent, the occurrence of any one or more of the following at any time during the Retention Period:

(i) any failure by the Company to comply with the provisions of Section 3 of this Agreement, including the assignment to the Executive of duties and responsibilities that are materially inconsistent with the Executive’s status, offices, titles and reporting relationships as in effect immediately prior to the Retention Start Date (but in no event prior to the date of this Agreement), but excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Company within ten business days after receipt of notice thereof given by the Executive;

(ii) any failure by the Company to comply with any of the provisions of Section 4 or 5 of this Agreement, other than an isolated, insubstantial and inadvertent failure not occurring in bad faith and which is remedied by the Company within ten business days after receipt of notice thereof given by the Executive;

(iii) a change of the Executive’s principal place of employment to a location more than 50 miles from the Executive’s principal place of employment immediately prior to the Retention Start Date;

(iv) any failure of the Company to pay the Executive any compensation when due (other than an inadvertent failure that is remedied within ten business days after receipt of notice thereof given by the Executive);

(v) delivery by the Company or any Subsidiary of a notice to the Executive of the intent to terminate the Executive’s employment for any reason, other than for Cause or

Disability, in each case in accordance with this Agreement, regardless of whether such termination is intended to become effective during or after the Retention Period; or

(vi) any failure by the Company to comply with and satisfy Section 14(c) of this Agreement.

The Executive’s right to terminate employment for Good Reason shall not be affected by the Executive’s incapacity due to physical or mental illness. A termination of employment by the Executive for Good Reason for purposes of this Agreement shall be effectuated by giving the Company written notice (“Notice of Termination for Good Reason”) of the termination setting forth in reasonable detail the specific conduct of the Company that constitutes Good Reason and the specific provision(s) of this Agreement on which the Executive relied. Unless the parties agree otherwise, a termination of employment by the Executive for Good Reason shall be effective on the 30th day following the date when the Notice of Termination for Good Reason is given, unless the notice sets forth a later date (which date shall in no event be later than 60 days after the notice is given); provided, however, that so long as an event that constitutes Good Reason occurs during the Retention Period and the Executive delivers the Notice of Termination for Good Reason at any time prior to the expiration of the Retention Period, for purposes of the payments, benefits and other entitlements set forth in Section 6(b), the termination of the Executive’s employment pursuant thereto shall be deemed to be a resignation for Good Reason during the Retention Period. If the Company disputes the existence of Good Reason, the Company shall have the burden of proof to establish that Good Reason does not exist. If the Executive continues to provide services to the Company after one of the events giving rise to Good Reason has occurred, the Executive shall not be deemed to have consented to such event or to have waived the Executive’s right to terminate his or her employment at any time during the Retention Period for Good Reason in connection with such event.

(u) “Incumbent Directors” shall have the meaning set forth in Section 1(j)(i).

(v) “Notice of Termination for Good Reason” shall have the meaning set forth in Section 1(t).

(w) “Payment” means any payment, benefit or distribution (or combination thereof) by the Company, any of its Affiliates or any trust established by the Company or its Affiliates, to or for the benefit of the Executive, whether paid, payable, distributed, distributable or provided pursuant to this Agreement or otherwise, including any payment, benefit or other right that constitutes a “parachute payment” within the meaning of Section 280G of the Code.

(x) “Person” shall have the meaning set forth in Section 1(j)(i).

(y) “Reimbursement Period” shall have the meaning set forth in Section 9.

(z) “Release Effective Date” shall have the meaning set forth in Section 6(b)(i).

(aa) “Reorganization” shall have the meaning set forth in Section 1(j)(ii).

(bb) “Retention Period” means the period commencing on the Retention Start Date and ending on the earlier of (i) the second anniversary of the Retention Start Date and (ii) the

Termination Date. For the avoidance of doubt, in the event that the Retention Period ends on the Termination Date, the Retention Period shall be deemed (including for purposes of Section 6(b)) to include the Termination Date.

(cc) “Retention Start Date” means the date on which a Change in Control occurs during the Term; provided, however, that if, prior to the date on which such Change in Control occurs, the Executive’s employment with the Company or its Subsidiaries is terminated by the Company or its Subsidiaries other than for Cause or Disability and such termination took place (i) at the request or direction of a third party who took action that caused, or is involved in or forms a part of, a Change in Control or (ii) in contemplation of an event that would constitute or give rise to a Change in Control, the Retention Start Date shall be deemed to have occurred immediately prior to the Termination Date.

(dd) “Retirement Plan” means any “employee pension benefit plan” within the meaning of Section 3(2) of ERISA, including any tax-qualified, nonqualified, excess benefit and supplemental defined benefit and defined contribution plan.

(ee) “Sale” shall have the meaning set forth in Section 1(j)(ii).

(ff) “Section 409A Tax” shall have the meaning set forth in Section 13.

(gg) “Subsidiary” means any entity in which the Company, directly or indirectly, possesses 50% or more of the total combined voting power of all classes of its stock.

(hh) “Successor” shall have the meaning set forth in Section 14(c).

(ii) “Term” shall have the meaning set forth in Section 24.

(jj) “Termination Date” means the date on which the termination of the Executive’s employment is effective, in accordance with the terms of this Agreement.

(kk) “Underpayment” shall have the meaning set forth in Section 7(b).

SECTION 2. Continued Employment. The Company hereby agrees to continue, or to cause its Subsidiaries to continue, the Executive’s employment and the Executive hereby agrees to remain in the employ of the Company or its Subsidiaries during the Retention Period. Notwithstanding the foregoing, this Agreement does not alter the status of the Executive as an at-will employee, and nothing herein shall reduce or eliminate the right of the Company and its Subsidiaries to terminate the Executive’s employment at any time for any reason or the right of the Executive to resign at any time for any reason, in each case, subject to the terms, conditions and obligations set forth in this Agreement.

SECTION 3. Position and Duties. During the Retention Period, the Executive’s status, offices, titles and reporting relationships with the Company and its Subsidiaries shall be commensurate with those in effect immediately prior to the Retention Start Date. The duties and responsibilities assigned to the Executive may be increased, decreased or otherwise changed during the Retention Period, provided that the duties and responsibilities assigned to the Executive at any given time are not materially inconsistent with the Executive’s status, offices, titles and reporting relationships as in effect immediately prior to the Retention Start Date.

SECTION 4. Compensation and Benefits During the Retention Period. (a) Annual Base Salary. During the Retention Period, the Executive shall be paid an annual base salary (“Annual Base Salary”), in equal biweekly installments, at least equal to the annual rate of base salary being paid to the Executive by the Company and its Subsidiaries as of the Retention Start Date. The Annual Base Salary shall be reviewed at least annually and shall be increased during the Retention Period in a manner that is substantially consistent with increases in base salary generally awarded to other peer executives of the Company and its Subsidiaries. Annual Base Salary shall not be reduced after any such increase, and the term “Annual Base Salary” as used in this Agreement shall refer to Annual Base Salary as so increased.

(b) Annual Bonus. For each fiscal year ending during the Retention Period, the Executive shall be awarded an annual cash bonus (“Annual Bonus”) that is equal to or greater than the annual incentive award paid or payable to the Executive with respect to the fiscal year preceding the fiscal year in which the Retention Start Date occurs. Each such Annual Bonus shall be paid no later than the date that is two and a half months following the end of the fiscal year for which the Annual Bonus is awarded.

(c) Long-Term Incentive Compensation. During the Retention Period, the Executive shall be entitled to participate in all long-term incentive compensation plans, practices, policies and programs applicable generally to other peer executives of the Company and its Subsidiaries, but in no event shall such plans, practices, policies and programs provide the Executive with long-term incentive opportunities and potential benefits, both as to amount and percentage of compensation (but without regard to transfer restrictions or other limits on resale that may be applicable if the common stock of the Company ceases to be publicly traded), that are less favorable, in the aggregate, than the opportunities and benefits provided by the Company and its Subsidiaries to the Executive under the Company’s equity-compensation and other long-term incentive compensation plans (including stock options, stock appreciation rights, restricted stock awards, restricted stock units, performance shares and performance units) as in effect immediately prior to the Retention Start Date or, if more favorable to the Executive, those provided generally at any time after the Retention Start Date to other peer executives of the Company and its Subsidiaries.

(d) Savings and Retirement Plan Benefits. During the Retention Period, the Executive shall be entitled to participate in all savings and retirement plans, practices, policies and programs applicable generally to other peer executives of the Company and its Subsidiaries, but in no event shall such plans, practices, policies and programs provide the Executive with savings opportunities and retirement benefit opportunities, in each case, that are less favorable (without regard to whether Company stock is available as an investment alternative), in the aggregate, than the opportunities provided by the Company and its Subsidiaries to the Executive immediately prior to the Retention Start Date or, if more favorable to the Executive, those provided generally at any time after the Retention Start Date to other peer executives of the Company and its Subsidiaries.

(e) Welfare and Fringe Benefits. During the Retention Period, the Executive or the Executive’s family, as the case may be, shall be eligible to participate in, and shall receive all benefits under, the welfare benefit and fringe benefit plans, practices, policies and programs provided by the Company and its Subsidiaries (including medical, executive medical, executive physical examination, prescription drug, dental, vision, short-term disability, long-term

disability, salary continuance, paid vacation and time-off, employee life, group life, executive life, accidental death and dismemberment and business travel accident insurance plans, practices, policies and programs) to the extent applicable generally to other peer executives of the Company and its Subsidiaries, but in no event shall such plans, practices, policies and programs provide the Executive with benefits less favorable, in the aggregate, than the benefits in effect for the Executive immediately prior to the Retention Start Date or, if more favorable to the Executive, those provided generally at any time after the Retention Start Date to other peer executives of the Company and its Subsidiaries.

SECTION 5. Impact of a Change in Control on Long-Term Incentive Compensation Awards. In the event of a Change in Control during the Term, notwithstanding any provision to the contrary in any of the Company’s equity-based, equity-related or other long-term incentive compensation plans, practices, policies and programs (including the Company’s Amended and Restated 1997 Stock Option Plan, the Company’s Second Amended and Restated 2001 General Stock Option Plan, the Company’s Second Amended and Restated 2001 Employee Stock Option Plan and the Company’s 2005 Incentive Compensation Plan) or any award agreements thereunder, (a) all outstanding stock options, stock appreciation rights and similar rights and awards then held by the Executive that are unexercisable or otherwise unvested shall automatically become fully vested and immediately exercisable, as the case may be, (b) all outstanding equity-based, equity-related and other long-term incentive awards then held by the Executive that are subject to performance-based vesting criteria shall automatically become fully vested and earned at a deemed performance level equal to the maximum performance level with respect to such awards and (c) all other outstanding equity-based, equity-related and long-term incentive awards, to the extent not covered by the foregoing clause (a) or (b), then held by the Executive that are unvested or subject to restrictions or forfeiture shall automatically become fully vested and all restrictions and forfeiture provisions related thereto shall lapse.

SECTION 6. Termination of Employment. (a) Termination by the Company for Cause; Voluntary Resignation by the Executive without Good Reason. If, during the Retention Period, the Executive’s employment is terminated either by the Company or its Subsidiaries for Cause or by resignation of the Executive without Good Reason, the Executive shall not be entitled to any compensation or benefits hereunder other than (i) payment of any unpaid annual base salary, annual bonus or other amount accrued through the Termination Date and for payment of any unreimbursed business expenses incurred through the Termination Date, (ii) as explicitly set forth in any other benefit plans, practices, policies and programs in which the Executive participates, (iii) as otherwise expressly required by applicable law and (iv) any payments the Company is or becomes obligated to make pursuant to Sections 7, 8, 9, 11, 13 or 16 (the amounts described in clauses (i), (ii), (iii) and (iv) of this Section 6(a) are referred to herein as the “Accrued Rights”).

(b) Termination During the Retention Period by the Company Without Cause or by the Executive for Good Reason. Subject to Section 6(b)(vii), if the Executive’s employment is terminated either by the Company or its Subsidiaries other than for Cause or Disability or by resignation of the Executive with Good Reason, in each case during the Retention Period, then, in addition to the Accrued Rights, the Executive shall be entitled to the following payments and benefits:

(i) Severance Pay. The Company shall pay the Executive an amount equal to [MULTIPLE] ¹ times the sum of (A) the Executive’s Annual Base Salary in effect on the Termination Date (without regard to any reduction giving rise to Good Reason) and (B) the greater of the Average Annual Incentive Award and the target Annual Bonus in effect as of the Termination Date, in a lump-sum payment payable on the tenth business day after the date the release described in Section 6(b)(vii) becomes effective and irrevocable (the “Release Effective Date”); provided, however, that such amount shall be paid in lieu of, and the Executive hereby waives the right to receive, any other cash severance payment relating to salary or bonus continuation the Executive is otherwise eligible to receive upon termination of employment under any severance plan, practice, policy or program of the Company or any Subsidiary, other than the Executive’s rights under the Change in Control Bonus Program or any other change in control or other retention bonus plan, practice, policy or program of the Company or any Subsidiary.

(ii) Prorated Annual Bonus. The Company shall pay the Executive an amount equal to the product of (A) the Executive’s target Annual Bonus in effect as of the Termination Date and (B) a fraction, the numerator of which is the number of days in the current fiscal year through the Termination Date, and the denominator of which is 365, in a lump-sum payment on the tenth business day after the Release Effective Date. Provided that the Release Effective Date has occurred, in the event that the Company or its Subsidiaries make payments under the annual incentive plan in which the Executive participates immediately prior to the Termination Date to participants who remain actively employed by the Company or its Subsidiaries throughout the remainder of the fiscal year in which the Termination Date occurs at a level that exceeds the target level for such participants, the Company shall make an additional payment to the Executive (such payment, an “Additional Annual Bonus Payment”), in an amount equal to the product of (1) the excess of (x) the Annual Bonus the Executive would have received during such fiscal year had he or she remained actively employed and been paid at the same level as such other participants over (y) the Executive’s target Annual Bonus in effect as of the Termination Date and (2) a fraction, the numerator of which is the number of days in the year of termination through the Termination Date, and the denominator of which is 365, in a lump sum at the time payments under such plan are made to such other participants.

(iii) Continued Welfare and Fringe Benefits. Commencing on the Release Effective Date and for [MULTIPLE] ¹ years thereafter (such period, the “Continuation Period”), the Company shall continue to provide welfare benefits and fringe benefits to the Executive and the Executive’s spouse and dependents at least equal to the levels described in Section 4(e); provided, however, that (A) if the Executive becomes reemployed with another employer and is eligible to receive medical or other welfare benefits under another employer-provided plan, the medical and other welfare benefits described herein shall be secondary to those provided under such other plan during such applicable period of eligibility and (B) to the extent that it is commercially impracticable for the Company to continue to provide the Executive with any of the benefits described in Section 4(e) at the level described in Section 4(e) following termination of the Executive’s employment, the Company shall instead be permitted to make a lump-sum


¹		For the President and Chief Financial Officer and the President and Chief Operating Officer, the Multiple will be 3. For each of the other Executives, the Multiple will be 2. A list of Executives who have entered into Change in Control Severance Agreements is attached as Schedule A hereto.

cash payment to the Executive in an amount equal to the Company’s aggregate cost of providing such benefit at such level to a similarly situated active employee of the Company or any Subsidiary during the Continuation Period. Nothing in this Section 6(b)(iii) shall operate to reduce, or be construed as reducing, the Executive’s group health plan continuation rights under the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended (“COBRA”), in any manner and, upon the end of the Continuation Period, the Executive, if otherwise eligible, shall be entitled to elect COBRA continuation coverage for the full period applicable as if the last date of the Continuation Period were the date of the Executive’s termination of employment.

(iv) Long-Term Incentive Compensation Awards. Notwithstanding any provision to the contrary in any of the Company’s or any of its Affiliate’s equity-based, equity-related or other long-term incentive compensation plans, practices, policies and programs or any award agreements thereunder, upon the Release Effective Date, (A) all outstanding stock options, stock appreciation rights and similar rights and awards then held by the Executive that are unexercisable or otherwise unvested shall automatically become fully vested and immediately exercisable, as the case may be, and all stock options and stock appreciation rights then held by the Executive (whether vested or unvested as of immediately prior to the Release Effective Date) shall remain exercisable until the earlier of the end of the maximum period of time permissible without the imposition of the Section 409A Tax and their originally scheduled expiration dates, (B) all outstanding equity-based, equity-related and other long-term incentive awards then held by the Executive that are subject to performance-based vesting criteria shall automatically become fully vested and earned at a deemed performance level equal to the maximum performance level with respect to such awards and (C) all other outstanding equity-based, equity-related and long-term incentive awards, to the extent not covered by the foregoing clause (A) or (B), then held by the Executive that are unvested or subject to restrictions or forfeiture shall automatically become fully vested and all restrictions and forfeiture provisions related thereto shall lapse.

(v) Savings and Retirement Plan Benefits. For purposes of computing the Executive’s accrued benefits under any Retirement Plan that is a defined benefit plan, the Company shall credit the Executive with [MULTIPLE] ² years of participation in the Retirement Plan and [MULTIPLE] ² years of age, in addition to the actual years of participation and age credited to the Executive under such Retirement Plan as of the Termination Date. For purposes of computing the Executive’s accrued benefits under any Retirement Plan that is a defined contribution plan, the Company shall credit the Executive with additional Company contributions to such Retirement Plan in an amount that would be equal to the amount of Company contributions the Executive would have been entitled to receive pursuant to such Retirement Plan (or any successor plan) in accordance with Section 4(d) if the Executive (A) had remained an active participant in such Retirement Plan during the Continuation Period and (B) had made pre-tax and after-tax contributions at the highest rate permitted by the applicable Retirement Plan. In the event that the Company is prohibited under the terms of a Retirement Plan or under applicable law (including ERISA or the Code) from crediting the Executive with additional accrued benefits pursuant to any such Retirement Plan as required pursuant to this


²		For the President and Chief Financial Officer and the President and Chief Operating Officer, the Multiple will be 3. For each of the other Executives, the Multiple will be 2. A list of Executives who have entered into Change in Control Severance Agreements is attached as Schedule A hereto.

Section 6(b)(v), the Company shall instead make a lump-sum cash payment to the Executive on the tenth business day following the Release Effective Date in an amount equal to the value of (1) the actuarial equivalent of such additional benefits, if such Retirement Plan is a defined benefit plan, or (2) the amount of any such Company contributions, if such Retirement Plan is a defined contribution plan.

(vi) Outplacement Counseling. The Executive shall be entitled to reimbursement from the Company, upon the Executive’s presentation to the Company of a written invoice from the applicable vendor requesting payment, for the cost of executive level outplacement services offered by a reputable and experienced vendor selected by the Executive (including Right Management Consultants), provided that (A) the cost of such services shall not exceed $50,000 and (B) the Executive commences such services not later than six months following the Release Effective Date.

(vii) Release of Claims. Notwithstanding any provision of this Agreement to the contrary, the Company shall not be obligated to make any payments or provide any benefits described in this Section 6(b), other than payments or benefits in respect of the Accrued Rights, unless and until such time as the Executive has executed a Separation Agreement and Release substantially in the form of Exhibit A hereto and such release has become effective and irrevocable in accordance with its terms.

(c) Termination on Account of Death or Disability. (i) The Executive’s employment shall terminate automatically upon the Executive’s death or Disability. In the event of a termination as a result of death or Disability, the Executive shall not be entitled to any additional payments from the Company, other than payments with respect to the Accrued Rights.

(ii) For purposes of this Agreement, the Executive shall be deemed to have a “Disability” in the event of the Executive’s absence for a period of 180 consecutive business days as a result of incapacity due to a physical or mental condition, illness or injury which is determined to be total and permanent by a physician mutually acceptable to the Company and the Executive or the Executive’s legal representative (such acceptance not to be unreasonably withheld) after such physician has completed an examination of the Executive. The Executive agrees to make himself available for such examination upon the reasonable request of the Company.

SECTION 7. Certain Additional Payments by the Company. (a) Notwithstanding anything in this Agreement to the contrary and except as set forth below, in the event it shall be determined that any Payment that is paid or payable during the Term would be subject to the Excise Tax, the Executive shall be entitled to receive an additional payment (a “280G Gross-Up Payment”) in an amount such that, after payment by the Executive of all taxes (and any interest or penalties imposed with respect to such taxes), including any income and employment taxes (and any interest and penalties imposed with respect thereto) and Excise Taxes imposed upon the 280G Gross-Up Payment, the Executive retains an amount of the 280G Gross-Up Payment equal to the Excise Tax imposed upon such Payments. The Company’s obligation to make 280G Gross-Up Payments under this Section 7 shall not be conditioned upon the Executive’s termination of employment and shall survive and apply after the Executive’s termination of employment.

(b) Subject to the provisions of Section 7(c), all determinations required to be made under this Section 7, including whether and when a 280G Gross-Up Payment is required, the amount of such 280G Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made in accordance with the terms of this Section 7 by a nationally recognized certified public accounting firm that shall be designated by the Executive (the “Accounting Firm”). The Accounting Firm shall provide detailed supporting calculations both to the Company and the Executive within 15 business days of the receipt of notice from the Executive that there has been a Payment or such earlier time as is requested by the Company. For purposes of determining the amount of any 280G Gross-Up Payment, the Executive shall be deemed to pay Federal income tax at the highest marginal rate applicable to individuals in the calendar year in which any such 280G Gross-Up Payment is to be made and deemed to pay state and local income taxes at the highest marginal rates applicable to individuals in the state or locality of the Executive’s residence or place of employment in the calendar year in which any such 280G Gross-Up Payment is to be made, net of the maximum reduction in Federal income taxes that can be obtained from deduction of state and local taxes, taking into account limitations applicable to individuals subject to Federal income tax at the highest marginal rate. All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 7, shall be paid by the Company to the Executive within 5 business days of the receipt of the Accounting Firm’s determination. If the Accounting Firm determines that no Excise Tax is payable by the Executive, it shall so indicate to the Executive in writing. Any determination by the Accounting Firm shall be binding upon the Company and the Executive. As a result of the uncertainty in the application of the Excise Tax, at the time of the initial determination by the Accounting Firm hereunder, it is possible that the amount of the 280G Gross-Up Payment determined by the Accounting Firm to be due to the Executive, consistent with the calculations required to be made hereunder, will be lower than the amount actually due (an “Underpayment”). In the event the Company exhausts its remedies pursuant to Section 7(c) and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be paid by the Company to the Executive within 5 business days of the receipt of the Accounting Firm’s determination.

(c) The Executive shall notify the Company in writing of any written claim by the Internal Revenue Service that, if successful, would require the payment by the Company of a 280G Gross-Up Payment. Such notification shall be given as soon as practicable, but no later than 10 business days after the Executive is informed in writing of such claim. Failure to give timely notice shall not prejudice the Executive’s right to 280G Gross-Up Payments and rights of indemnity under this Section 7. The Executive shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which the Executive gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that the Company desires to contest such claim, the Executive shall (i) give the Company any information reasonably requested by the Company relating to such claim, (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, (iii) cooperate with the Company in good faith in order effectively to contest such claim and (iv) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall

bear and pay directly all costs and expenses (including additional income taxes, interest and penalties) incurred in connection with such contest, and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest or penalties) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 7(c), the Company shall control all proceedings taken in connection with such contest, and, at its sole discretion, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the applicable taxing authority in respect of such claim and may, at its sole discretion, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that (A) if the Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive, on an interest-free basis, and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties) imposed with respect to such advance or with respect to any imputed income in connection with such advance and (B) if such contest results in any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due, such extension must be limited solely to such contested amount. Furthermore, the Company’s control of the contest shall be limited to issues with respect to which the 280G Gross-Up Payment would be payable hereunder, and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority.

(d) If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 7(c), the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Company’s complying with the requirements of Section 7(c)) promptly pay to the Company the amount of such refund received (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 7(c), a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of the 30-day period after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of 280G Gross-Up Payment required to be paid.

SECTION 8. No Mitigation or Offset; Enforcement of this Agreement. (a) The Company’s obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against the Executive or others. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement and, except as otherwise expressly provided for in this Agreement, such amounts shall not be reduced whether or not the Executive obtains other employment.

(b) The Company shall reimburse, upon the Executive’s demand, any and all reasonable legal fees and expenses that the Executive may incur as a result of any contest, dispute or proceeding (regardless of whether formal legal proceedings are ever commenced and

regardless of the outcome thereof and including all stages of any contest, dispute or proceeding) by the Company, the Executive or any other Person with respect to the validity or enforceability of, or liability under, any provision of this Agreement or any guarantee of performance thereof (including as a result of any contest by the Executive regarding the amount of any payment owed pursuant to this Agreement), and shall indemnify and hold the Executive harmless, on an after-tax basis, for any tax (including Excise Tax) imposed on the Executive as a result of payment by the Company of such legal fees and expenses.

SECTION 9. Other Expenses. The Company shall (a) reimburse, upon the Executive’s demand, any and all reasonable fees and expenses (whether advisory or otherwise) actually incurred by the Executive during the Term in connection with a Change in Control or a potential Change in Control that arise from or relate to (i) the review, negotiation, amendment, modification or termination of any existing employment, employment-related or compensation (whether cash, equity, incentive, deferred or otherwise) agreement, plan or other arrangement between the Executive, on the one hand, and the Company or a Subsidiary, on the other hand, including the rollover, assumption, substitution or other treatment of existing equity compensation awards, or (ii) the negotiation, preparation or review of, or the entry into, any new employment, consulting or other service-related or other compensation (whether cash, equity, incentive, deferral or otherwise) agreement, plan or other arrangement with any Person, corporation or other entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) that is or is proposed to be a party to, or expresses in writing to the Company an intention to take any action that would result in, a Change in Control (including the Company and its Subsidiaries and any Affiliate of such Person, corporation, other entity or group), provided that, in each case, such amended, modified, terminated or new agreements, plans or other arrangements are in connection with or relate to the Executive’s continued services with the Company or its Subsidiaries or with such Person, corporation, other entity or group following the occurrence of such Change in Control, and (b) indemnify and hold the Executive harmless, on an after-tax basis, for any tax (including Excise Tax) imposed on the Executive as a result of payment by the Company of such fees and expenses. For the avoidance of doubt, the Executive’s rights under this Section 9 shall become effective immediately upon entry into this Agreement, shall remain in effect for the duration of the Term and are not contingent upon the occurrence of the Retention Start Date or the consummation of a Change in Control. In the event that the Executive’s employment with the Company or its Subsidiaries terminates for any reason prior to the Retention Start Date, the Executive shall only be entitled to reimbursement under this Section 9 for fees and expenses incurred prior to the date that the Executive’s employment terminated.

SECTION 10. Non-Exclusivity of Rights. Except as specifically provided in Section 6(b)(i), nothing in this Agreement shall prevent or limit the Executive’s continuing or future participation in any plan, practice, policy or program provided by the Company or a Subsidiary for which the Executive may qualify, nor shall anything in this Agreement limit or otherwise affect any rights the Executive may have under any contract or agreement with the Company or a Subsidiary. Vested benefits and other amounts that the Executive is otherwise entitled to receive under any incentive compensation (including any equity award agreement), deferred compensation or other plan, practice, policy or program of, or any contract or agreement with, the Company or a Subsidiary shall be payable in accordance with the terms of each such plan, practice, policy, program, contract or agreement, as the case may be, except as explicitly modified by this Agreement.

SECTION 11. Insurance and Indemnification. Commencing upon the Retention Start Date and for so long thereafter as the Executive could be subject to liability, the Company shall keep in place a directors’ and officers’ liability insurance policy (or policies) providing comprehensive coverage to the Executive for claims relating to the Executive’s service as an employee, officer or director of the Company or its Subsidiaries, at a level that is no less favorable to the Executive (e.g., with respect to scope, amounts and deductibles) than the level in effect with respect to the Executive at the Retention Start Date or, if more favorable to the Executive, the level provided to then-current officers and directors of the Company and its Subsidiaries. The Company shall indemnify the Executive to the fullest extent permitted by the Company’s Restated Certificate of Incorporation and Amended and Restated Bylaws, any officer indemnification agreement between the Executive and the Company and the general laws of the State of Delaware and shall provide indemnification expenses in advance to the extent permitted thereby. The indemnification and advance of expenses provided by the Company pursuant to this Agreement shall not be deemed exclusive of any other rights to which the Executive may be entitled under any law (common or statutory), or any agreement, vote of stockholders or disinterested directors or other provision that is consistent with law, both as to action in his or her official capacity and as to action in another capacity while holding office or while employed or acting as agent for the Company, and such rights shall continue in respect of all events occurring while the Executive was a director of or employed by the Company that continue after the Executive has ceased to be a director of or employed by the Company, and shall inure to the benefit of the estate, heirs, executors and administrators of the Executive.

SECTION 12. Withholding. The Company may deduct and withhold from any amounts payable under this Agreement such Federal, state, local, foreign or other taxes as are required to be withheld pursuant to any applicable law or regulation.

SECTION 13. Section 409A. It is the intention of the Company and the Executive that the provisions of this Agreement comply with Section 409A of the Code, and all provisions of this Agreement shall be construed and interpreted in a manner consistent with Section 409A of the Code. To the extent necessary to avoid imposition of any additional tax or interest penalties under Section 409A (such tax and interest penalties, a “Section 409A Tax”), notwithstanding the timing of payment provided in any other Section of this Agreement, the timing of any payment, distribution or benefit pursuant to this Agreement shall be subject to a six-month delay in a manner consistent with Section 409A(a)(2)(B)(i) of the Code, provided that (a) the Executive shall be credited with interest in respect of such payment, distribution or benefit during such six-month period at the rate set forth in Section 16 and (b) if the Executive dies during such six-month period, any such delayed payments shall not be further delayed, and shall be immediately payable to the Executive’s devisee, legatee or other designee or, should there be no such designee, to the Executive’s estate in accordance with the applicable provisions of this Agreement. From and after the Retention Start Date and for the remainder of the Term, (i) the Company shall administer and operate this Agreement and any “nonqualified deferred compensation plan” (as defined in Section 409A of the Code) (and any other arrangement that could reasonably be expected to constitute such a plan) in which the Executive participates and the Executive’s rights and benefits hereunder and thereunder in compliance with Section 409A of the Code and any rules, regulations or other guidance promulgated thereunder as in effect from time to time, (ii) in the event that the Company determines that any provision of this Agreement or any such plan or arrangement does not comply with Section 409A of the Code or any such rules, regulations or guidance and that the Executive may become subject to a Section

409A Tax, the Company and the Executive shall negotiate in good faith to amend or modify such provision to avoid the application of such Section 409A Tax, provided that such amendment or modification shall not (and the Executive shall not be obligated to consent to any such amendment or modification that would) reduce the economic value to the Executive of such provision, and (iii) in the event that, notwithstanding the foregoing, the Executive is subject to a Section 409A Tax with respect to any such provision, then except to the extent such Section 409A Tax is attributable to the Executive’s breach of the Executive’s obligations under clause (ii) above, the Executive shall be entitled to receive an additional payment from the Company (a “409A Gross-Up Payment”) in an amount such that, after payment by the Executive of all taxes (and any interest or penalties imposed with respect to such taxes), including any income and employment taxes (and any interest and penalties imposed with respect thereto) and any Section 409A Tax imposed upon the 409A Gross-Up Payment, the Executive retains an amount of the 409A Gross-Up Payment equal to the Section 409A Tax imposed with respect to such provision. The provisions of Sections 7(c) and (d) shall apply mutatis mutandis to any claim by the Internal Revenue Service that, if successful, would give rise to a 409A Gross-Up Payment by the Company.

SECTION 14. Assignment. (a) This Agreement is personal to the Executive and, without the prior written consent of the Company, shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution, and any assignment in violation of this Agreement shall be void.

(b) Notwithstanding the foregoing Section 14(a), this Agreement and all rights of the Executive hereunder shall inure to the benefit of, and be enforceable by, the Executive’s personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive should die while any amounts would still be payable to him or her hereunder if he or she had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the Executive’s devisee, legatee or other designee or, should there be no such designee, to the Executive’s estate.

(c) The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business or assets of the Company (a “Successor”) to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would have been required to perform it if no such succession had taken place. As used in this Agreement, the term “Company” shall mean the Company as hereinbefore defined and any Successor and any permitted assignee to which this Agreement is assigned.

SECTION 15. Dispute Resolution. (a) Except as otherwise specifically provided herein, the Executive and the Company each hereby irrevocably submit to the exclusive jurisdiction of the United States District Court for the Northern District of Texas (or, if subject matter jurisdiction in that court is not available, in any state court located within the city of Dallas, Texas) over any dispute arising out of or relating to this Agreement. Except as otherwise specifically provided in this Agreement, the parties undertake not to commence any suit, action or proceeding arising out of or relating to this Agreement in a forum other than a forum described in this Section 15(a); provided, however, that nothing herein shall preclude the Company or the Executive from bringing any suit, action or proceeding in any other court for the

purposes of enforcing the provisions of this Section 15 or enforcing any judgment obtained by the Company or the Executive.

(b) The agreement of the parties to the forum described in Section 15(a) is independent of the law that may be applied in any suit, action or proceeding and the parties agree to such forum even if such forum may under applicable law choose to apply non-forum law. The parties hereby waive, to the fullest extent permitted by applicable law, any objection that they now or hereafter have to personal jurisdiction or to the laying of venue of any such suit, action or proceeding brought in an applicable court described in Section 15(a), and the parties agree that they shall not attempt to deny or defeat such personal jurisdiction by motion or other request for leave from any such court. The parties agree that, to the fullest extent permitted by applicable law, a final and non-appealable judgment in any suit, action or proceeding brought in any applicable court described in Section 15(a) shall be conclusive and binding upon the parties and may be enforced in any other jurisdiction.

(c) The parties hereto irrevocably consent to the service of any and all process in any suit, action or proceeding arising out of or relating to this Agreement by the mailing of copies of such process to such party at such party’s address specified in Section 22.

(d) Each party hereto hereby waives, to the fullest extent permitted by applicable law, any right it may have to a trial by jury in respect of any suit, action or proceeding arising out of or relating to this Agreement. Each party hereto (i) certifies that no representative, agent or attorney of any other party has represented, expressly or otherwise, that such party would not, in the event of any suit, action or proceeding, seek to enforce the foregoing waiver and (ii) acknowledges that it and the other parties hereto have been induced to enter into this Agreement by, among other things, the mutual waiver and certifications in this Section 15(d).

SECTION 16. Default in Payment. Any payment not made within ten business days after it is due in accordance with this Agreement shall thereafter bear interest, compounded annually, at the prime rate in effect from time to time at Citibank, N.A., or any successor thereto.

SECTION 17. GOVERNING LAW. THIS AGREEMENT SHALL BE DEEMED TO BE MADE IN THE STATE OF TEXAS, AND THE VALIDITY, INTERPRETATION, CONSTRUCTION AND PERFORMANCE OF THIS AGREEMENT IN ALL RESPECTS SHALL BE GOVERNED BY THE LAWS OF THE STATE OF TEXAS WITHOUT REGARD TO ITS PRINCIPLES OF CONFLICTS OF LAW.

SECTION 18. Amendment; No Waiver. No provision of this Agreement may be amended, modified, waived or discharged except by a written document signed by the Executive and a duly authorized officer of the Company. The failure of a party to insist upon strict adherence to any term of this Agreement on any occasion shall not be considered a waiver of such party’s rights or deprive such party of the right thereafter to insist upon strict adherence to that term or any other term of this Agreement. No failure or delay by either party in exercising any right or power hereunder will operate as a waiver thereof, nor will any single or partial exercise of any such right or power, or any abandonment of any steps to enforce such right or power, preclude any other or further exercise thereof or the exercise of any other right or power. No agreements or representations, oral or otherwise, express or implied, with respect to the

subject matter hereof have been made by either party, which are not set forth expressly in this Agreement.

SECTION 19. Severability. If any term or provision of this Agreement is invalid, illegal or incapable of being enforced by any applicable law or public policy, all other conditions and provisions of this Agreement shall nonetheless remain in full force and effect so long as the economic and legal substance of the transactions contemplated by this Agreement is not affected in any manner materially adverse to any party. Upon any such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in a mutually acceptable manner in order that the transactions contemplated hereby be consummated as originally contemplated to the fullest extent possible.

SECTION 20. Entire Agreement. This Agreement sets forth the entire agreement of the parties hereto in respect of the subject matter contained herein and supersedes all prior agreements, promises, covenants, arrangements, communications, representations or warranties, whether oral or written, by any officer, employee or representative of any party hereto, and any prior agreement of the parties hereto in respect of the subject matter contained herein is hereby terminated and canceled. None of the parties shall be liable or bound to any other party in any manner by any representations and warranties or covenants relating to such subject matter except as specifically set forth herein.

SECTION 21. Survival. The rights and obligations of the parties under the provisions of this Agreement, including Sections 6, 7, 8, 9, 11, 13, 14, 15 and 16, shall survive and remain binding and enforceable, notwithstanding the expiration of the Retention Period or the Term, the termination of this Agreement, the termination of the Executive’s employment with the Company for any reason or any settlement of the financial rights and obligations arising from the Executive’s employment hereunder, to the extent necessary to preserve the intended benefits of such provisions.

SECTION 22. Notices. All notices or other communications required or permitted by this Agreement will be made in writing and all such notices or communications will be deemed to have been duly given when delivered or (unless otherwise specified) mailed by United States certified or registered mail, return receipt requested, postage prepaid, addressed as follows:


If to the Company:		Michaels Stores, Inc.
		8000 Bent Branch Drive
		Irving, Texas 75063

		Attention: (1) SVP, General Counsel and Secretary
		(2) SVP — Human Resources

		Fax: (1) 972-409-1965
		(2) 972-409-1772


If to the Executive:		To the Executive’s address as most recently supplied to the Company and set forth in the Company’s records;

or to such other address as any party may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt.

SECTION 23. Headings and References. The headings of this Agreement are inserted for convenience only and neither constitute a part of this Agreement nor affect in any way the meaning or interpretation of this Agreement. When a reference in this Agreement is made to a Section, such reference shall be to a Section of this Agreement unless otherwise indicated.

SECTION 24. Counterparts; Effectiveness and Termination. This Agreement may be executed in one or more counterparts (including via facsimile), each of which shall be deemed to be an original, but all of which together shall constitute one and the same instrument. This Agreement shall become effective when one or more counterparts have been signed by each of the parties and delivered to the other party and shall remain in effect until the third anniversary of the date it becomes effective (such period, including any extension thereof pursuant to the remainder of this Section 24, the “Term”); provided, however, that (a) beginning on the second anniversary of the effective date and on each anniversary thereafter (each, an “Extension Date”), the Term shall be automatically extended for an additional one-year period, unless the Company or the Executive provides the other party with 60 days’ prior written notice before the applicable Extension Date that the Term shall not be so extended, and (b) except as specifically provided in Section 9, this Agreement and the Term shall terminate automatically in the event that the Termination Date occurs prior to the Retention Start Date. Notwithstanding the foregoing, in the event of a Change in Control during the Term, this Agreement shall not terminate and shall remain in effect in accordance with its terms, and the Term shall be extended, until the Company and its Subsidiaries have performed all their obligations hereunder with no future performance being possible; provided, however, that, notwithstanding any extension of the Term, this Agreement shall only be effective with respect to the first Change in Control that occurs during the Term and the Executive shall not be entitled to any payments or benefits pursuant to this Agreement with respect to any subsequent Change in Control.

SECTION 25. Interpretation. For purposes of this Agreement, the words “include” and “including”, and variations thereof, shall not be deemed to be terms of limitation but rather shall be deemed to be followed by the words “without limitation”. The term “or” is not exclusive. The word “extent” in the phrase “to the extent” shall mean the degree to which a subject or other thing extends, and such phrase shall not mean simply “if”.

[Signature Page Follows]

IN WITNESS WHEREOF, this Agreement has been executed by the parties as of the date first written above.


	MICHAELS STORES, INC.
	By:
		Name:
		Title:

	EXECUTIVE


	[NAME]

EXHIBIT A

SEPARATION AGREEMENT AND RELEASE

I. Release. For good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the undersigned, with the intention of binding himself/herself, his/her heirs, executors, administrators and assigns, does hereby release and forever discharge Michaels Stores, Inc., a Delaware corporation (the “Company”), and its present and former officers, directors, executives, agents, employees, affiliated companies, subsidiaries, successors, predecessors and assigns (collectively, the “Released Parties”), from any and all claims, actions, causes of action, demands, rights, damages, debts, accounts, suits, expenses, attorneys’ fees and liabilities of whatever kind or nature in law, equity, or otherwise, whether now known or unknown (collectively, the “Claims”), which the undersigned now has, owns or holds, or has at any time heretofore had, owned or held against any Released Party, arising out of or in any way connected with the undersigned’s employment relationship with the Company, its subsidiaries, predecessors or affiliated entities, or the termination thereof, under any Federal, state or local statute, rule, or regulation, or principle of common, tort or contract law, including but not limited to, the Fair Labor Standards Act of 1938, as amended, 29 U.S.C. §§ 201 et seq., the Family and Medical Leave Act of 1993, as amended (the “FMLA”), 29 U.S.C. §§ 2601 et seq., Title VII of the Civil Rights Act of 1964, as amended, 42 U.S.C. §§ 2000e et seq., the Age Discrimination in Employment Act of 1967, as amended, 29 U.S.C. §§ 621 et seq., the Americans with Disabilities Act of 1990, as amended, 42 U.S.C. §§ 12101 et seq., the Worker Adjustment and Retraining Notification Act of 1988, as amended, 29 U.S.C. §§ 2101 et seq., the Employee Retirement Income Security Act of 1974, as amended, 29 U.S.C. §§ 1001 et seq., and any other equivalent or similar Federal, state, or local statute; provided, however, that nothing herein shall release the Company of its obligations under that certain Change in Control Severance Agreement between the undersigned and the Company. The undersigned understands that, as a result of executing this Separation Agreement and Release, he/she will not have the right to assert that the Company or any other Released Party unlawfully terminated his/her employment or violated any of his/her rights in connection with his/her employment or otherwise.

The undersigned affirms that he/she has not filed, caused to be filed, or presently is a party to any Claim, complaint or action against any Release Party in any forum or form and that he/she knows of no facts which may lead to any Claim, complaint or action being filed against any Release Party in any forum by the undersigned or by any agency, group, etc. The undersigned further affirms that he/she has been paid and/or has received all leave (paid or unpaid), compensation, wages, bonuses, commissions, and/or benefits to which he/she may be entitled and that no other leave (paid or unpaid), compensation, wages, bonuses, commissions and/or benefits are due to him/her from the Company and its subsidiaries, except as specifically provided in this Separation Agreement and Release. The undersigned furthermore affirms that he/she has no known workplace injuries or occupational diseases and has been provided and/or has not been denied any leave requested under the FMLA. If any agency or court assumes jurisdiction of any such Claim, complaint or action against any Released Party on behalf of the undersigned, the undersigned will request such agency or court to withdraw the matter.

The undersigned further declares and represents that he/she has carefully read and fully understands the terms of this Separation Agreement and Release and that he/she has been

advised and had the opportunity to seek the advice and assistance of counsel with regard to this Separation Agreement and Release, that he/she may take up to and including 21 days from receipt of this Separation Agreement and Release, to consider whether to sign this Separation Agreement and Release, that he/she may revoke this Separation Agreement and Release within seven calendar days after signing it by delivering to the Company written notification of revocation, and that he/she knowingly and voluntarily, of his/her own free will, without any duress, being fully informed and after due deliberate action, accepts the terms of and signs the same as his own free act.

[To effect a full and complete general release as described above, the undersigned expressly waives and relinquishes all rights and benefits of Section 1542 of the Civil Code of the State of California, and the undersigned does so understanding and acknowledging the significance and consequence of specifically waiving Section 1542. Section 1542 of the Civil Code of the State of California states as follows:

A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor.

Thus, notwithstanding the provisions of Section 1542, and to implement a full and complete release and discharge of the Released Parties, the undersigned expressly acknowledges this Separation Agreement and Release is intended to include in its effect, without limitation, all Claims the undersigned does not know or suspect to exist in the undersigned’s favor at the time of signing this Separation Agreement and Release, and that this Separation Agreement and Release contemplates the extinguishment of any such Claim or Claims.]³

II. Protected Rights. The Company and the undersigned agree that nothing in this Separation Agreement and Release is intended to or shall be construed to affect, limit or otherwise interfere with any non-waivable right of the undersigned under any Federal, state or local law, including the right to file a charge or participate in an investigation or proceeding conducted by the Equal Employment Opportunity Commission (“EEOC”) or to exercise any other right that cannot be waived under applicable law. The undersigned is releasing, however, his/her right to any monetary recovery or relief should the EEOC or any other agency pursue Claims on his/her behalf. Further, should the EEOC or any other agency obtain monetary relief on his/her behalf, the undersigned assigns to the Company all rights to such relief.

III. Nonsolicitation/Non-Interference with Business Relationships. The undersigned further agrees that during the one-year period commencing on the date of his/her termination of employment with the Company or its subsidiaries, he/she will not, directly or indirectly, (i) solicit, recruit or hire any person who is at such time, or who at any time during the six-month period prior to such solicitation or hiring had been, an employee of, or exclusive consultant then under contract with, the Company or its subsidiaries, without the Company’s prior written consent; (ii) solicit or encourage any employee of the Company or its subsidiaries to leave the


³		Only include for employees who were employed by the Company or its subsidiaries in California.

employment of the Company or its subsidiaries; (iii) intentionally interfere with the relationship of the Company or any of its subsidiaries with any employee of, or exclusive consultant then under contract with, the Company or any such subsidiary; or (iv) intentionally interfere with, disrupt or attempt to disrupt any past, present or prospective relationship, contractual or otherwise, between the Company or any of its subsidiaries, on the one hand, and any of their respective customers or suppliers, on the other hand.

IV. Equitable Remedies. The undersigned acknowledges that a violation by the undersigned of any of the covenants contained in Section II would cause irreparable damage to the Company and its subsidiaries in an amount that would be material but not readily ascertainable, and that any remedy at law (including the payment of damages) would be inadequate. Accordingly, the undersigned agrees that, notwithstanding any provision of this Separation Agreement and Release to the contrary, the Company shall be entitled (without the necessity of showing economic loss or other actual damage) to injunctive relief (including temporary restraining orders, preliminary injunctions and/or permanent injunctions) in any court of competent jurisdiction for any actual or threatened breach of any of the covenants set forth in Section II in addition to any other legal or equitable remedies it may have.

V. Third-Party Litigation. The undersigned agrees to be available to the Company and its affiliates on a reasonable basis in connection with any pending or threatened claims, charges or litigation in which the Company or any of its affiliates is now or may become involved, or any other claims or demands made against or upon the Company or any of its affiliates, regardless of whether or not the undersigned is a named defendant in any particular case.

VI. Return of Property. The undersigned shall return to the Company on or before [10 DAYS AFTER TERMINATION DATE], all property of the Company in the undersigned’s possession or subject to the undersigned’s control, including without limitation any laptop computers, keys, credit cards, cellular telephones and files. The undersigned shall not alter any of the Company’s records or computer files in any way after [TERMINATION DATE].

VII. Confidential Information. The undersigned agrees to hold confidential, and not to disclose to any person, firm, corporation, partnership or agency, any trade secret or Confidential Information (as defined below) gained in the course of the undersigned’s employment with the Company concerning the Company or any of its affiliates, except if such disclosure is required by law or legal process. “Confidential Information” shall include, without limitation, information concerning financial affairs, business plans or strategies, product pricing information, operating policies and procedures, vendor information and proprietary statistics or reports. The undersigned agrees not to remove any Confidential Information from the Company, not to request that others do so on the undersigned’s behalf and to return any Confidential Information currently in the undersigned’s possession to the Company.

VIII. Severability. If any term or provision of this Separation Agreement and Release is invalid, illegal or incapable of being enforced by any applicable law or public policy, all other conditions and provisions of this Separation Agreement and Release shall nonetheless remain in full force and effect so long as the economic and legal substance of the transactions contemplated by this Separation Agreement and Release is not affected in any manner materially adverse to any party.

IX. GOVERNING LAW. THIS SEPARATION AGREEMENT AND RELEASE SHALL BE DEEMED TO BE MADE IN THE STATE OF TEXAS, AND THE VALIDITY, INTERPRETATION, CONSTRUCTION AND PERFORMANCE OF THIS AGREEMENT IN ALL RESPECTS SHALL BE GOVERNED BY THE LAWS OF THE STATE OF TEXAS WITHOUT REGARD TO ITS PRINCIPLES OF CONFLICTS OF LAW.

Effective on the eighth calendar day following the date set forth below.


	MICHAELS STORES, INC.
	By:

		Name:
		Title:

	EXECUTIVE


	[NAME]

	Date:

SCHEDULE A

1.		Form of Change in Control Severance Agreement, dated as of April 26, 2006, between the Company and Jeffrey N. Boyer (President and Chief Financial Officer)

2.		Form of Change in Control Severance Agreement, dated as of April 26, 2006, between the Company and Gregory A. Sandfort (President and Chief Operating Officer)

3.		Form of Change in Control Severance Agreement, dated as of April 26, 2006, between the Company and Thomas M. Bazzone (Executive Vice President — Specialty Businesses)

4.		Form of Change in Control Severance Agreement, dated as of April 26, 2006, between the Company and Thomas C. DeCaro (Executive Vice President — Supply Chain)

5.		Form of Change in Control Severance Agreement, dated as of April 26, 2006, between the Company and Harvey S. Kanter (Executive Vice President — Chief Merchant)

6.		Form of Change in Control Severance Agreement, dated as of April 26, 2006, between the Company and Edward F. Sadler (Executive Vice President — Store Opertations)

EX-10.3 4 d36685exv10w3.htm CHANGE IN CONTROL RETENTION BONUS PLAN exv10w3

Exhibit 10.3

CHANGE IN CONTROL RETENTION BONUS PLAN

April 27, 2006

To: [Executive Officer Name & Title]

As previously reported, Michaels Stores, Inc. (the “Company”) is currently exploring strategic alternatives, including the sale of the Company, to enhance the value to its stakeholders. In your role as a key employee of the Company and to motivate your continued employment with the Company in good standing, the Board of Directors of the Company has approved a one-time Change in Control bonus to you in the amount of $125,000 (“Bonus”) in connection with your continued dedication to the Company during its ongoing review of strategic alternatives. To receive your Bonus, you must be actively employed by the Company at the time of the Change in Control (as defined in the Michaels Stores, Inc. 2005 Incentive Compensation Plan). Payment of the Bonus will be made by the Company on the one year anniversary of the Change in Control. If you are terminated as a result of the Change in Control prior to the one year anniversary, you will be paid a lump sum payment in the amount of your Bonus within 10 business days of your termination date, provided that you were employed by the Company on the date of the Change in Control.

This Bonus should be viewed as an indication of the Company’s confidence in and appreciation of your abilities, and as an additional form of compensation to meet a special need. The Bonus is not a guarantee of continued employment or a permanent or recurring element of your compensation, nor will it impact any other element of your compensation for which you may otherwise be eligible.

The terms of this Bonus are to be kept strictly confidential, until such time as these terms are made public by the Company when required by applicable law. Nothing shall prevent the Company from disclosing the terms of this Bonus to a potential purchaser of the Company or otherwise.

Your rights under this Bonus shall be personal and are not subject to any additional conditions or requirements. You may rely on the terms set forth in this Bonus Plan, and the Company may not adversely amend or modify your rights, or terminate your Bonus, without your prior written consent. Upon a Change in Control, the Company shall administer the terms of your Bonus in the ordinary course of its business, and any successor to the business or the assets of the Company shall be bound by the terms of this Bonus Plan to the same extent that the Company would have otherwise been obligated to you. In the event that any successor would not be required to be bound by the terms of this Bonus Plan under applicable law, the Company shall use its best efforts to require such successor to expressly and unconditionally assume and agree to perform the Company’s obligations under this Bonus Plan, in the same manner and to the same extent that the Company would have been required to perform such obligations if no such succession would have taken place.

Sincerely,



By: Jeffrey N. Boyer		By: Gregory A. Sandfort
President and Chief Financial Officer		President and Chief Operating Officer

EX-10.4 5 d36685exv10w4.htm FISCAL YEAR 2006 BONUS PLAN ENHANCEMENT exv10w4

Exhibit 10.4

Fiscal Year 2006 Bonus Plan Enhancement
Addendum to Fiscal Year 2006 Bonus Plan

Each bonus eligible associate of the Company will receive a one-time bonus enhancement applicable to the associate’s Fiscal Year 2006 Annual Bonus Plan (but excluding Store Manager and Assistant Store Manager level annual bonus plans, and other special project bonuses). Aaron Brothers District Managers are on a quarterly bonus plan and will be eligible for an enhancement plan using similar concepts as outlined below.

Purpose

The Company’s management team represents an important asset of the Company. This Bonus Plan Enhancement will serve to provide retention value to employees during a year in which the Company explores strategic alternatives to increase its stockholders’ value, encourage continued high levels of performance, and to ensure focus on and continuity of the Company’s business operations.

Bonus Plan Enhancement Details

	1.		The eligibility provisions set forth in the associate’s FY 2006 Bonus Plan apply to this Bonus Enhancement.

	2.		The Company guarantees a bonus payment to the associate under the FY 2006 Bonus Plan at a payout level of one step below Target (i.e., Plan 100%), to be paid in March 2007.

	3.		In addition to the bonus payout outlined in the associate’s FY 2006 Bonus Plan, each associate will be eligible to receive an additional bonus payment of between 0% and 75% of the Target bonus percentage. Determination of the additional bonus payment will be based solely upon the associate’s FY 2006 Performance Appraisal rating, as follows:


FY 2006 Performance Appraisal Rating
*		Additional Payout Potential
Exceeds Expectations		75% of Target bonus payout
High Meets Expectations		50% of Target bonus payout
Low Meets Expectations		25% of Target bonus payout
Needs Development		0%


*		More details on this rating scale will be distributed prior to the FY 2006 mid-year review

Example

	1.		Assume an employee with a FY 2006 bonus eligible salary of $60,000 (as of FY begin: January 29, 2006), with a Target bonus of 10% and Super bonus of 15%, as outlined in the employee’s FY 2006 Bonus Plan.

	2.		At a payout level of one step below Target (FY 2006 guarantee), the FY 2006 bonus payment would be:

•

$60,000 X 8.75% = $5,250 (may be higher based upon actual bonus plan criteria performance)

The additional payout potential based upon the associate’s individual performance would add the following, depending upon the FY 2006 Performance Appraisal rating:

	•		If Low Meets Expectations (25% X Target 10% X $60,000) = $1,500

	•		If High Meets Expectations (50% X Target 10% X $60,000) = $3,000

	•		If Exceeds Expectations (75% X Target 10% X $60,000) = $4,500

If the associate is rated Low Meets Expectations, the total minimum payout potential would be:

•

$5,250 + $1,500 = $6,750

If the associate is rated Exceeds Expectations and the Super payout level is achieved, the payout potential would be:

•

$60,000 X 15% = $6,000 plus $4,500 = $10,500

Plan Modifications

Your rights under this Bonus shall be personal and are not subject to any additional conditions or requirements. You may rely on the terms set forth in this Bonus Plan, and the Company may not adversely amend or modify your rights, or terminate your Bonus, without your prior written consent. Upon a Change in Control (as defined in the Company 2005 Incentive Compensation Plan), the Company shall administer the terms of your Bonus in the ordinary course of its business, and any successor to the business or the assets of the Company shall be bound by the terms of this Bonus Plan to the same extent that the Company would have otherwise been obligated to you. In the event that any successor would not be required to be bound by the terms of this Bonus Plan under applicable law, the Company shall require such successor to expressly and unconditionally assume and agree to perform the Company’s obligations under this Bonus Plan, in the same manner and to the same extent that the Company would have been required to perform such obligations if no such succession would have taken place.

EX-31.1 6 d36685exv31w1.htm CERTIFICATIONS OF JEFFREY N. BOYER PURSUANT TO SECTION 302 exv31w1

Exhibit 31.1

CERTIFICATIONS

I, Jeffrey N. Boyer, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Michaels Stores, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/s/ Jeffrey N. Boyer

Jeffrey N. Boyer

President and Chief Financial Officer
(Principal Financial Officer and co-Principal Executive Officer)

Date: June 13, 2006

EX-31.2 7 d36685exv31w2.htm CERTIFICATIONS OF GREGORY A. SANDFORT PURSUANT TO SECTION 302 exv31w2

Exhibit 31.2

CERTIFICATIONS

I, Gregory A. Sandfort, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Michaels Stores, Inc.;

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/s/ Gregory A. Sandfort

Gregory A. Sandfort

President and Chief Operating Officer
(co-Principal Executive Officer)

Date: June 13, 2006

EX-32.1 8 d36685exv32w1.htm CERTIFICATION PURSUANT TO SECTION 906 exv32w1

Exhibit 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. § 1350,

AS ADOPTED PURSUANT TO § 906

OF THE SARBANES-OXLEY ACT OF 2002

In connection with the filing of the Quarterly Report on Form 10-Q of Michaels Stores, Inc., a Delaware corporation (the “Company”), for the period ended April 29, 2006, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), each of the undersigned officers of the Company certifies, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to such officer’s knowledge:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods expressed in the Report.

/s/ Jeffrey N. Boyer

Jeffrey N. Boyer

President and Chief Financial Officer
(Principal Financial Officer and co-Principal Executive Officer)

/s/ Gregory A. Sandfort

Gregory A. Sandfort

President and Chief Operating Officer
(co-Principal Executive Officer)

Date: June 13, 2006

The foregoing certification is being furnished solely pursuant to 18 U.S.C. § 1350 and is not being filed as part of the Report or as a separate disclosure document.

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ACCEPTED:

MICHAELS STORES, INC.

Signature of Participant

Vice President – Treasurer and Investor Relations


Note 9.	Exploration of Strategic Alternatives (Continued)