0001104659-07-046787.txt : 20070611 0001104659-07-046787.hdr.sgml : 20070611 20070611144002 ACCESSION NUMBER: 0001104659-07-046787 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20070505 FILED AS OF DATE: 20070611 DATE AS OF CHANGE: 20070611 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: 0128 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-09338 FILM NUMBER: 07912106 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 a07-16109_110q.htm QUARTERLY REPORT PURSUANT TO SECTIONS 13 OR 15(D)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q

(Mark One)
x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended May 5, 2007

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		(I.R.S. employer
incorporation or organization)		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 x 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 o Accelerated filer o Non-accelerated filer x

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

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

Title		Shares Outstanding as of June 1, 2007
Common Stock, par value $.10 per share		118,262,731

MICHAELS STORES, INC.
FORM 10-Q

	Part I—FINANCIAL INFORMATION	3
Item 1.	Financial Statements	3
	Consolidated Balance Sheets at May 5, 2007, February 3, 2007, and April 29, 2006 (unaudited)	3
	Consolidated Statements of Income for the quarter ended May 5, 2007 and April 29, 2006 (unaudited)	4
	Consolidated Statements of Cash Flows for the quarter ended May 5, 2007 and April 29, 2006 (unaudited)	5
	Notes to Consolidated Financial Statements (unaudited)	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	18
Item 4.	Controls and Procedures	18
	Part II—OTHER INFORMATION	19
Item 1.	Legal Proceedings	19
Item 2.	Unregistered Sale of Equity Securities and Use of Proceeds	19
Item 4.	Submission of Matters to a Vote of Security Holders	19
Item 6.	Exhibits	20
Signatures		21

MICHAELS STORES, INC.

Part I—FINANCIAL INFORMATION

Item 1. Financial Statements.

MICHAELS STORES, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)

	May 5,			February 3,			April 29,
	2007			2007			2006
ASSETS
Current assets:
Cash and equivalents	$	45,056		$	30,098		$	441,843
Merchandise inventories	878,634			847,529			793,984
Prepaid expenses and other	77,382			54,435			46,397
Deferred income taxes	35,312			35,216			34,548
Income tax receivable	48,861			32,902			—
Total current assets	1,085,245			1,000,180			1,316,772
Property and equipment, at cost	1,139,950			1,122,948			1,046,956
Less accumulated depreciation	(686,605		)	(674,275		)	(611,495		)
	453,345			448,673			435,461
Goodwill	115,839			115,839			115,839
Debt issuance costs, net of accumulated amortization of $8,853 at May 5, 2007 and $4,537 at February 3, 2007	115,877			120,193			—
Other assets	7,523			8,117			23,082
	239,239			244,149			138,921
Total assets	$	1,777,829		$	1,693,002		$	1,891,154

LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY
Current liabilities:
Accounts payable	$	237,749		$	214,470		$	267,154
Accrued liabilities and other	256,563			290,431			226,541
Income taxes payable	—			7,331			15,730
Current portion of long-term debt	345,119			229,765			—
Total current liabilities	839,431			741,997			509,425
Long-term debt	3,731,064			3,728,745			—
Deferred income taxes	16,346			29,139			2,791
Other long-term liabilities	81,320			68,444			89,098
Total long-term liabilities	3,828,730			3,826,328			91,889
	4,668,161			4,568,325			601,314
Commitments and contingencies Stockholders’ (deficit) equity:
Common Stock, $0.10 par value, 220,000,000 shares authorized; 118,262,731 shares issued and outstanding at May 5, 2007; 117,973,396 shares issued and outstanding at February 3, 2007; 1,026,666,655 shares authorized and 395,534,488 shares issued and 387,419,715 shares outstanding at April 29, 2006	11,826			11,797			39,553
Additional paid-in capital	5,702			—			417,080
Retained (deficit) earnings	(2,917,455		)	(2,893,918		)	919,134
Accumulated other comprehensive income	9,595			6,798			8,200
Treasury Stock (none at May 5, 2007 and February 3, 2007; 8,114,773 shares at April 29, 2006)	—			—			(94,127		)
Total stockholders’ (deficit) equity	(2,890,332		)	(2,875,323		)	1,289,840
Total liabilities and stockholders’ (deficit) equity	$	1,777,829		$	1,693,002		$	1,891,154

See accompanying notes to consolidated financial statements.

MICHAELS STORES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)

	Quarter Ended
	May 5,			April 29,
	2007			2006
Net sales	$	844,133		$	832,481
Cost of sales and occupancy expense	516,421			513,245
Gross profit	327,712			319,236
Selling, general, and administrative expense	255,904			237,036
Transaction expenses	5,564			4,700
Related party expenses	5,262			—
Store pre-opening costs	1,548			1,437
Operating income	59,434			76,063
Interest expense	95,352			172
Other (income) and expense, net	(2,446		)	(7,162		)
(Loss) income before income taxes	(33,472		)	83,053
Provision for income taxes	(10,869		)	31,352
Net (loss) income	$	(22,603	)	$	51,701

See accompanying notes to consolidated financial statements.

MICHAELS STORES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

	Quarter Ended
	May 5,			April 29,
	2007			2006
Operating activities:
Net (loss) income	$	(22,603	)	$	51,701
Adjustments:
Depreciation and amortization	30,731			27,456
Share-based compensation	1,451			5,568
Tax benefits from stock options exercised	—			(8,203		)
Other	4,316			2
Changes in assets and liabilities:
Merchandise inventories	(31,106		)	(9,760		)
Prepaid expenses and other	(3,179		)	(2,689		)
Deferred income taxes and other	(13,996		)	(3,654		)
Accounts payable	13,015			60,874
Accrued liabilities and other	(27,343		)	(19,615		)
Income taxes payable	(9,513		)	3,261
Other long-term liabilities	7,000			1,526
Net cash (used in) provided by operating activities	(51,227		)	106,467

Investing activities:
Additions to property and equipment	(28,039		)	(38,914		)
Net cash used in investing activities	(28,039		)	(38,914		)

Financing activities:
Borrowings on asset-based revolving credit facility	448,025			—
Payments on asset-based revolving credit facility	(332,671		)	—
Repayments on senior secured term loan facility	(5,875		)	—
Equity investment of Management	4,280			—
Cash dividends paid to stockholders	—			(26,625		)
Repurchase of old Common Stock	—			(66,182		)
Proceeds from stock options exercised	—			14,876
Tax benefits from stock options exercised	—			8,203
Proceeds from issuance of old Common Stock and other	—			1,095
Payment of capital leases	(4,141		)	—
Change in cash overdraft	(15,394		)	(9,526		)
Net cash provided by (used in) financing activities	94,224			(78,159		)
Net increase (decrease) in cash and equivalents	14,958			(10,606		)
Cash and equivalents at beginning of period	30,098			452,449
Cash and equivalents at end of period	$	45,056		$	441,843

See accompanying notes to consolidated financial statements.

/MICHAELS STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended May 5, 2007
(Unaudited)

Note 1. Summary of Significant Accounting Policies

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 U.S. generally accepted accounting principles 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 May 5, 2007 are not indicative of the results to be expected for the entire year.

The balance sheet at February 3, 2007 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 February 3, 2007.

All references herein to “fiscal 2007” relate to the 52 weeks ending February 2, 2008 and all references to “fiscal 2006” relate to the 53 weeks ended February 3, 2007. In addition, all references herein to “the first quarter of fiscal 2007” and “the first three months of fiscal 2007” relate to the 13 weeks ended May 5, 2007 and all references to “the first quarter of fiscal 2006” and “the first three months of fiscal 2006” relate to the 13 weeks ended April 29, 2006.

Recent Accounting Pronouncements

In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109, which clarifies the accounting for uncertainty in income tax positions. FIN 48 requires that a company recognize in its consolidated financial statements the impact of a tax position that is more likely than not to be sustained upon examination based on the technical merits of the position. We adopted FIN 48 as of the beginning of our first quarter of fiscal 2007 with no material impact to our consolidated income statement, balance sheet, shareholders’ equity, or cash flows statement.

Upon adoption, we elected to record any interest and penalties associated with audits as a component of income tax expense. The Company identified its federal tax return, Canadian tax return, and its state tax returns in California, Florida, Illinois, New York, North Carolina, Pennsylvania, and Texas as “major” tax jurisdictions. The periods subject to examination for our federal return are 2002 to present, 2000 to present for our Canadian return, 2003 to present for all state returns except for California, and 1998 to present for California.

In September 2006, the FASB issued Statement of Financial Accounting Standard No. 158, Employers’ Accounting for Defined Benefit Pensions and Other Postretirement Plans, which requires an entity to recognize the overfunded or underfunded status of a defined benefit postretirement plan as an asset or liability in its balance sheet and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. It also requires an entity to measure the funded status of a plan as of the date of its year-end balance sheet. As we have no publicly traded securities (due to the Merger as described in Note 2 below), FAS 158 is effective for us at the end of fiscal 2007, with early adoption permitted. We plan to adopt FAS 158 at the end of fiscal 2007, with no material impact expected on our consolidated income statement, balance sheet, shareholders’ equity, or cash flows statement.

In February 2007, the FASB issued Statement of Financial Accounting Standard No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, which permits companies to measure certain financial instruments and other items at fair value (at specified measurement dates) that are not currently required to be measured at fair value. Any unrealized gains or losses applicable to those items measured at fair value shall be reported in earnings. The decision to apply fair value shall generally be made on an instrument by instrument basis, is irrevocable, and is applied only to an entire instrument. The provisions of FAS 159 will be effective for us as of the beginning for fiscal 2008, with early adoption permitted.

Note 2. Merger Transaction

On October 31, 2006, substantially all of the Common Stock of Michaels Stores, Inc. was acquired through a merger transaction (the “Merger”) by affiliates of two private investment firms, Bain Capital Partners, LLC and The Blackstone Group (collectively, together with their applicable affiliates, the “Sponsors”), with certain shares retained by affiliates of Highfields Capital Partners (a then-existing shareholder of Michaels Stores, Inc.). As a result of the Merger, Michaels Holdings LLC, an entity controlled by the Sponsors, owns approximately 93.3% of our outstanding Common Stock, which is no longer publicly traded. We accounted for the Merger as a leveraged recapitalization whereby the historical book value of the assets and liabilities of Michaels were maintained with no push down accounting required.

The Merger consideration paid to then-existing equity holders was approximately $5.8 billion, with fees and expenses totaling an additional $239.7 million. The purchase price was funded by:

· Aggregate cash equity contribution by the Sponsors of approximately $1.7 billion;

· Retention of certain shares held by affiliates of Highfields Capital Partners totaling $110.0 million;

· The issuance of the following debt (See Note 4 for further information concerning our issuance of debt):

· $750.0 million of 10% Senior Notes due 2014;

· $400.0 million of 113¤8% Senior Subordinated Notes due 2016;

· $250.0 million of 13% Subordinated Discount Notes due 2016;

· $2.4 billion Senior secured term loan facility; and

· $400.0 million of borrowings under our Asset-based revolving credit facility; and

· Our available cash as of the date of the Merger.

The Merger occurred simultaneously with the closing of the financing and equity transactions described above as well as the termination of our previous $300 million senior unsecured credit facility with Bank of America, N.A (Credit Agreement).

We capitalized $124.7 million of costs related to our issuance of various debt instruments. We amortize the deferred financing costs over the lives of the respective debt agreements (which range from five to ten years) and record the amortization to interest expense. Amortization of the deferred financing costs was $4.3 million for the quarter ended May 5, 2007.

Transaction expenses in the first quarter of fiscal 2007 relate primarily to compensation arrangements associated with the change in control.

Note 3. Share-Based Compensation

On February 15, 2007, our shareholders and Board of Directors approved the 2006 Equity Incentive Plan (“2006 Plan”), which provides for the grant of share-based awards exercisable for up to 14.2 million shares of Common Stock. During the first quarter of fiscal 2007, stock options exercisable for approximately 9.7 million shares of Common Stock were granted to certain employees. As of May 5, 2007, share-based awards exercisable for up to 4.5 million shares of Common Stock remain available for grant.

As of May 5, 2007, all of the awards granted under the 2006 Plan vest ratably over five years and expire eight years from the grant date. The exercise prices of the awards issued during the first quarter of fiscal 2007 ranged, depending upon the tranche in which issued, from $15 per share to $52.50 per share. The fair value of the awards was determined using the Black-Scholes-Merton option valuation model and compensation expense associated with these awards was $1.5 million for the first quarter of fiscal 2007.

All share-based awards outstanding immediately prior to the Merger were settled on the Merger date. There were no share-based awards outstanding as of February 3, 2007.

Note 4. Debt

Our outstanding debt is detailed in the table below. We had no debt outstanding as of April 29, 2006. We were in compliance with the terms and conditions of all debt agreements as of May 5, 2007.

	May 5, 2007		February 3, 2007
	Principal				Interest Rate
	(In thousands)

Senior notes	$	750,000	$	750,000	10.000	%
Senior subordinated notes	400,000		400,000		11.375	%
Subordinated discount notes	266,814		258,620		13.000	%
Senior secured term loan	2,338,250		2,344,125		Variable
Asset-based revolving credit facility	321,119		205,765		Variable
Total debt	4,076,183		3,958,510
Less current portion	345,119		229,765
Long-term debt	$	3,731,064	$	3,728,745

Asset-based revolving credit facility

The Asset-based revolving credit facility provides senior secured financing of up to $1.0 billion, subject to a borrowing base described below. As of May 5, 2007, the borrowing base was $767.2 million with $433.3 million of unused availability.

The borrowing base equals the sum of (i) 90% of eligible credit card receivables and debit card receivables; (ii) between 85% and 90% of the appraised net orderly liquidation value of eligible inventory and of eligible letters of credit; (iii) a percentage of eligible in-transit inventory, less certain reserves; and (iv) the sum of an additional 10% of the appraised net orderly liquidation value of eligible inventory and of eligible letters of credit plus an additional 5% of eligible credit card receivables and debit card receivables, up to a maximum amount of $100.0 million.

Senior secured term loan facility

During the first quarter of fiscal 2007, borrowings under the Senior secured term loan facility bore interest at a rate per annum equal to, at our option, either (a) a base rate determined by reference to the higher of (1) the prime rate of Deutsche Bank and (2) the federal funds effective rate plus ½ of 1% or (b) a LIBOR rate, subject to certain adjustments, in each case plus an applicable margin. The applicable margin was 1.75% with respect to base rate borrowings and 2.75% with respect to LIBOR borrowings, subject to downward adjustment based on the leverage and ratings thresholds set forth in the Senior secured term loan facility agreement.

On May 10, 2007, we amended the Senior secured term loan facility to reduce the applicable margin to 1.25% with respect to base rate borrowings and 2.25% with respect to LIBOR borrowings. The amendment also provides that if there is a repricing transaction that reduces the interest rate margins prior to May 10, 2008, then each lender will receive a fee equal to 1.00% of the principal amounts of loans that are repriced. Finally, the amendment eliminated the requirement that we maintain a specified consolidated secured debt ratio.

Note 5. Comprehensive Income

Our comprehensive income is as follows:

	Quarter Ended
	May 5,			April 29,
	2007			2006
	(In thousands)
Net (loss) income	$	(22,603	)	$	51,701
Other comprehensive income (loss):
Foreign currency translation adjustment and other	2,797			611
Comprehensive (loss) income	$	(19,806	)	$	52,312

Note 6. Derivative instruments

During the first quarter of fiscal 2007, we executed an interest rate collar to hedge our variability of cash flows associated with our interest payments on our Senior secured term loan that result from fluctuations in the three-month LIBOR rate. We accounted for the interest rate collar as a cash flow hedge. The interest rate collar provided a fixed interest rate, with respect to the three-month LIBOR rate, at a cap of 6.0% and a floor of 3.21% for a notional value of $1.755 billion from March 2, 2007 through May 10, 2007. We terminated the interest rate collar on May 10, 2007 in connection with the repricing of the Senior secured term loan described in Note 4 above. There were no material amounts of unrealized losses as of May 5, 2007 and the termination of the interest rate collar resulted in an immaterial loss recorded in the second quarter of fiscal 2007.

Note 7. Commitments and Contingencies

Reference is made to the consolidated action described under “Part I. Item 3. Legal Proceedings — Shareholder Claims — Federal Court Litigation” in our Annual Report on Form 10-K for fiscal 2006. In that action, on May 21, 2007 the lead plaintiff, Massachusetts Laborers’ Annuity Fund, filed a motion for leave to file a first amended consolidated class action complaint (the “Amended Complaint”). As proposed, the Amended Complaint names Michaels and certain of its current and former officers and directors as defendants. The Amended Complaint alleges that the defendants misrepresented and/or omitted material facts in Michaels’ annual proxy statements for 2004, 2005 and 2006, including, among others, failing to disclose: (a) Michaels’ and the defendants’ alleged option backdating practices; (b) information regarding transactions and holdings of Michaels Common Stock by certain trusts owned by or for the benefit of two of Michaels’ former officers and directors and their family members; and (c) that Michaels and the defendants had reported false financial statements as a result of those practices. Further, the Amended Complaint makes allegations regarding the Company’s financial restatement of periods prior to 2006, as well as the recently completed merger with entities affiliated with Bain Capital Partners LLC and The Blackstone Group. In the Amended Complaint, the lead plaintiff asserts claims against all defendants for violations of Section 14(a) of the Securities Exchange Act of 1934 and Rule 14a-9 promulgated thereunder, and Section 20(a) of the Securities Exchange Act of 1934. The plaintiff seeks, among other relief, (a) an indeterminate amount of damages, (b) pre-judgment and post-judgment interest, (c) an award of attorneys fees and costs, and (d) equitable or injunctive relief, including the rescission of stock option grants. We are unable to estimate a range of possible loss, if any, in these claims, and intend to defend this lawsuit vigorously.

We are involved in ongoing legal and regulatory proceedings. Other than the update described in the preceding paragraph, there were no material changes to our disclosures of commitments and contingencies from our Annual Report on Form 10-K for fiscal 2006.

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 of 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 set forth in paragraph 17 of SFAS No. 131. With regard to our Aaron Brothers operating segment, we determined that it did not meet the quantitative thresholds for separate disclosure set forth in SFAS No. 131. We also determined that individually, and in the aggregate, the Recollections stores and Star Decorators Wholesale operations were immaterial for segment reporting purposes. Therefore, we combine all operating segments into one reporting segment.

Subsequent to the Merger, our chief operating decision makers evaluate historical operating performance, plan and forecast future periods’ operating performance and base incentive compensation targets for certain management personnel on earnings before interest, income taxes, and depreciation and amortization (“EBITDA”). A reconciliation of income before income taxes and cumulative effect of accounting change to EBITDA is presented below. Segment income for the quarter ended April 29, 2006 was restated to conform to current year presentation.

	Quarter Ended
	May 5, 2007			April 29, 2006
	(in thousands)

(Loss) Income before income taxes	$	(33,472	)	$	83,053
Interest expense	95,352			172
Interest income	(225		)	(3,400		)
Depreciation and amortization	30,731			27,456
EBITDA	$	92,386		$	107,281

Our sales and assets by country are as follows:

	Net Sales		Total Assets
	(in thousands)
Quarter ended May 5, 2007:
United States	$	783,866	$	1,684,039
Canada	60,267		93,790
Consolidated Total	$	844,133	$	1,777,829

Quarter ended April 29, 2006:
United States	$	778,356	$	1,807,896
Canada	54,125		83,258
Consolidated Total	$	832,481	$	1,891,154

Note 9. Related Party Transactions

We pay annual management fees to the Sponsors in the amount of $12.0 million and an annual management fee to Highfields Capital Management LP in the amount of $1.0 million. During the quarter ended May 5, 2005, we recognized $3.4 million of expense related to annual management fees and related expenses.

In connection with the consummation of the Merger, the Company entered into a Separation Agreement with each of Charles Wyly and Sam Wyly, executive officers and directors of the Company prior to the Merger. Under the Separation Agreements, each of Charles Wyly and Sam Wyly received a lump sum payment of $3.0 million in exchange for his agreement to adhere to certain non-competition, non-solicitation and confidentiality restrictions. We amortize these Separation Agreements over two years, which resulted in $792,000 of expense for the quarter ended May 5, 2007.

During the fourth quarter of fiscal 2006, we executed a participation agreement with CoreTrust Purchasing Group (“CPG”), which designates CPG as our exclusive supplier of non-merchandise supplies and equipment. In exchange, we are offered non-merchandise supplies and equipment from a variety of vendors at a pre-determined price. We do not pay any fees to participate in this group arrangement, and we can terminate our participation prior to the expiration of the agreement without penalty. The vendors separately pay fees to CPG for access to its consortium of customers. The Blackstone Group, one of our Sponsors, entered into an agreement with CPG whereby The Blackstone Group receives a portion of the gross fees vendors pay to CPG based on the volume of purchases made by us and other participants.

During the first quarter of fiscal 2007, The Blackstone Group acquired a majority ownership stake in an external vendor we utilize to count our store inventory. Expenses associated with this vendor during the first quarter of fiscal 2007 were approximately $1.0 million.

During the first quarter of fiscal 2007, officers of Michaels Stores, Inc. and its subsidiaries were offered the opportunity to purchase shares of our Common Stock at a price of $15 per share. We sold approximately $4.3 million, or 289,334 shares of our Common Stock to certain officers, and such shares represent approximately 0.24% of the total outstanding shares of Michaels Stores, Inc.

Note 10. Subsequent Event

On June 4, 2007, the Board of Directors named Brian C. Cornell Chief Executive Officer of the Company effective that day. Mr. Cornell recently served as Executive Vice President and Chief Marketing Officer of Safeway, Inc., where he was responsible for the merchandising, marketing, manufacturing, supply chain, and online business. Mr. Cornell is also a director of OfficeMax Inc.

Pursuant to his employment contract, in addition to his base salary, Mr. Cornell received a sign-on bonus, was granted shares of restricted stock, was granted 2.3 million options to purchase shares of our Common Stock, which are divided into six tranches with exercise prices ranging from $15 to $52.50 per share, and is eligible to receive an annual bonus should the Company meet certain financial targets. The options vest 20% on each of the first five anniversaries of February 16, 2007 while the restricted shares vest 50% each on the first and second anniversaries of the grant date.

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 February 3, 2007. Specific examples of forward-looking statements include, but are not limited to, statements regarding our forecasts of financial performance, capital expenditures, and working capital requirements. 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 substantial leverage, which could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry, and expose us to interest rate risk to the extent of our variable rate debt;

· our ability to service the interest and principal payments of our debt;

· restrictions contained in our various debt agreements that limit our flexibility in operating our business, including compliance with the covenants contained therein;

· 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;

· the effectiveness of, or unexpected consumer responses to, our promotional programs;

· our ability to mitigate any continued declines in newspaper subscription rates, which affect the frequency in which our customers receive our circular advertisements;

· 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 delays in connection with either the manufacture or shipment of such merchandise;

· transportation delays (including dock strikes, other work stoppages, and shortages of truck drivers) 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 availability of certain merchandise from our foreign suppliers;

· changes in political, economic, and social conditions;

· significant fluctuations in exchange rates;

· significant fluctuations in interest 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 attract and retain qualified personnel, including management and senior executives, to successfully execute our operating plans;

· our ability to address any conflict between the interests of our controlling stockholders and our creditors;

· 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 February 3, 2007 (particularly in “Part I. Item 1A Risk Factors” and “Part II. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates”).

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
	May 5,			April 29,
	2007			2006
Michaels stores:
Retail stores open at beginning of period	920			885
Retail stores opened during the period	11			17
Retail stores opened (relocations) during the period	5			3
Retail stores closed during the period	(3		)	(3		)
Retail stores closed (relocations) during the period	(5		)	(3		)
Retail stores open at end of period	928			899

Aaron Brothers stores:
Retail stores open at beginning of period	166			166
Retail stores opened during the period	2			—
Retail stores closed during the period	—			(1		)
Retail stores open at end of period	168			165

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

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

Total store count at end of period	1,111			1,079

Other operating data:
Average inventory per Michaels store (1)	$	892		$	820
Comparable store sales (decrease) increase (2)	(0.5		)%	(3.0		)%

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

(2)	Comparable store sales increase represents the increase 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
	May 5,		April 29,
	2007		2006
Net sales	100.0	%	100.0	%
Cost of sales and occupancy expense	61.2		61.7
Gross profit	38.8		38.3
Selling, general, and administrative expense	30.3		28.5
Transaction expenses.	0.7		0.5
Related party expenses	0.6		—
Store pre-opening costs	0.2		0.2
Operating income	7.0		9.1
Interest expense	11.3		—
Other (income) and expense, net	(0.3	)	(0.9	)
(Loss) Income before income taxes	(4.0	)	10.0
Provision for income taxes	(1.3	)	3.8
Net (loss) income	(2.7	)%	6.2	%

Quarter Ended May 5, 2007 Compared to the Quarter Ended April 29, 2006

Net Sales—Net sales increased for the first quarter of fiscal 2007 by $11.7 million, or 1.4%, over the first quarter of fiscal 2006. At the end of the first quarter of fiscal 2007, we operated 928 Michaels, 168 Aaron Brothers, 11 Recollections, and four Star Decorators Wholesale stores. The results for the first quarter of fiscal 2007 include sales from 37 Michaels and three Aaron Brothers stores that were opened during the 12-month period ended May 5, 2007, more than offsetting lost sales from the closure of eight Michaels stores during the same period. Non-comparable sales increased $15.5 million, while comparable store sales decreased 0.5%, or $3.8 million.

Comparable store sales declined 0.5% in the first quarter of fiscal 2007 compared to the first quarter of fiscal 2006, reflecting a decrease in customer transactions of 4.2%, partially offset by increases in the average ticket of 3.5% and custom framing deliveries of 0.2%. Comparable store sales were negatively impacted by weakness in the domestic Yarn category, which we estimate adversely impacted same store sales by approximately 80 basis points. 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 and react to 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 $3.2 million primarily due to increases in the store base. Cost of sales and occupancy expense, as a percentage of net sales, decreased approximately 50 basis points in the first quarter of fiscal 2007 compared to the first quarter of fiscal 2006. Merchandise margins increased approximately 150 basis points primarily due to a reduction in depth of promotional programs in addition to benefits from ongoing product sourcing initiatives. Occupancy costs, as a percentage of sales, increased approximately 100 basis points primarily due to decreased leverage on the comparable store sales decline and a variety of increases in other costs, such as maintenance, utilities, and property taxes.

Selling, General, and Administrative Expense—Selling, general, and administrative expense was $255.9 million, or 30.3% of net sales, in the first quarter of fiscal 2007 compared to $237.0 million, or 28.5% of net sales, in the first quarter of fiscal 2006. The expense increase was primarily due to higher store operating expenses and costs associated with the development and implementation of certain strategic initiatives. These strategic initiatives include our pricing and promotion strategy, consumer insight research, and product sourcing, which are more fully described in our Fiscal 2006 Annual Report on Form 10-K.

As a percentage of net sales, selling, general, and administrative expense increased approximately 180 basis points. The 180 basis point increase was primarily due to an approximate 80 basis point increase in store operating expenses due to decreased leverage associated with the 0.5% decline in comparable store sales and approximately 60 basis points of incremental costs associated with our strategic initiatives.

Transaction Expenses—Transaction expenses incurred during the first quarter of fiscal 2007 relate primarily to bonus arrangements associated with the change in control that are ratably amortized for a period of one year following the Merger date.

Related Party Expenses—Related party expenses were $5.3 million in the first quarter of fiscal 2007 and consisted primarily of $3.4 million of management fees and associated expenses paid to our Sponsors and Highfields. Also included in related party expenses are $1.0 million of fees related to an external vendor we utilize to count store inventory in which The Blackstone Group acquired a majority ownership stake during the first quarter of fiscal 2007 as well as $0.8 million of amortization expense related to the Separation Agreements as more fully described in Note 9 to the consolidated financial statements. We expect to incur a similar amount of related party expenses in each of our quarters for the remainder of fiscal 2007.

Operating Income—Operating income decreased from $76.1 million, or 9.1% of sales, in the first quarter of fiscal 2006 to $59.4 million, or 7.0% of sales, in the first quarter of fiscal 2007.

Interest Expense—Interest expense increased $95.2 million to $95.4 million as a result of debt issued during the fourth quarter of fiscal 2006 to finance the Merger. We expect to incur a substantial amount of interest expense in future quarters as a result of our outstanding debt.

Other Income—Other income declined from $7.2 million in the first quarter of fiscal 2006 to $2.4 million during the first quarter of fiscal 2007 primarily as a result of lower interest income due to lower invested cash balances. Other income for the first quarter of fiscal 2006 also contained a $3.0 million favorable resolution of a civil lawsuit.

Provision for Income Taxes—The effective tax rate was 32.5% for the first quarter of fiscal 2007 and 37.8% for the first quarter of fiscal 2006. We expect the effective tax rate for fiscal 2007 to range from 38% - 42%.

Net (Loss) Income—As a result of the above, we reported a net loss of $22.6 million for the first quarter of fiscal 2007 as compared to net income of $51.7 million for the first quarter of fiscal 2006.

Liquidity and Capital Resources

We require cash principally for day-to-day operations and to finance capital investments, inventory for new stores, inventory replenishment for existing stores, service our outstanding debt, and seasonal working capital needs. In recent years prior to the Merger, we financed our operations, new store openings, old 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 Asset-based revolving credit facility will be sufficient to fund planned capital expenditures, working capital requirements, debt repayments, debt service requirements, and future growth throughout fiscal 2007.

Our cash and equivalents increased $15.0 million, or 49.9%, from $30.1 million at the end of fiscal 2006 to $45.1 million at the end of the first quarter of fiscal 2007. Compared to the end of the first quarter of fiscal 2006, cash and equivalents decreased $396.7 million, or 89.8%, as existing cash at the Merger date was used to help finance the Merger.

Cash Flow from Operating Activities

Cash flow used in operating activities during the first three months of fiscal 2007 was $51.2 million compared to cash provided by operating activities of $106.5 million during the first three months of fiscal 2006. The $157.7 million change was primarily due to lower net income and an increase in merchandise inventory in connection with the increase of store in-stock positions, net of accounts payable. During the first quarter of fiscal 2006, our working capital leverage with respect to merchandise inventories and accounts payable was unusually high.

Inventories per Michaels store (including supporting distribution centers) increased 8.8% from April 29, 2006 to May 5, 2007 primarily from higher levels of in-stock positions. We expect inventories per Michaels store at the end of fiscal 2007 to be flat to higher by approximately 2% as compared to the end of fiscal 2006.

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
	May 5,		April 29,
	2007 (1)		2006 (2)
	(In thousands)
New and relocated stores and stores not yet opened	$	6,237	$	8,590
Existing stores	7,214		15,159
Distribution system expansion	7,706		3,815
Information systems	6,238		10,343
Corporate and other	644		1,007
	$	28,039	$	38,914

(1)		In the first three months of fiscal 2007, we incurred capital expenditures related to the opening of 11 Michaels and two Aaron Brothers store in addition to the relocation of five Michaels stores.

(2)		In the first three months of fiscal 2006, we incurred capital expenditures related to the opening of 17 Michaels stores and the relocation of three Michaels stores.

Cash Flow provided by Financing Activities

During the first quarter of fiscal 2007, cash provided by financing activities was a result of incremental borrowings against our asset-based revolving credit facility. Prior to the Merger, proceeds from the exercise of outstanding stock options served as a source of cash for us. Proceeds from the exercise of stock options were $14.9 million for the three-month period ending April 29, 2006. During the first quarter of fiscal 2006, we repurchased $66.2 million of old Common Stock and paid dividends of $26.6 million. As a result of the Merger, we do not expect any material repurchases of our Common Stock and we do not expect that stock option exercise proceeds will serve as a material future source of cash so long as our equity is not listed on a public exchange.

Debt

To finance the completion of the Merger, we issued 10% Senior Notes due 2014, 11 3/8% Senior Subordinated Notes due 2016, and 13% Subordinated Discount Notes due 2016. We also executed an asset-based revolving credit facility as well as a senior secured term loan facility. Borrowings under our asset-based revolving credit facility are influenced by a number of factors as more fully described below.

Asset-based revolving credit facility

The Asset-based revolving credit facility provides senior secured financing of up to $1.0 billion, subject to a borrowing base. As of May 5, 2007, the borrowing base was $767.2 million with $433.3 million of unused availability.

Senior secured term loan facility

Recent Accounting Pronouncements

In September 2006, the FASB issued Statement of Financial Accounting Standard No. 158, Employers’ Accounting for Defined Benefit Pensions and Other Postretirement Plans, which requires an entity to recognize the overfunded or underfunded status of a defined benefit postretirement plan as an asset or liability in its balance sheet and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. It also requires an entity to measure the funded status of a plan as of the date of its year-end balance sheet. As we have no publicly traded securities (due to the Merger), FAS 158 is effective for us at the end of fiscal 2007, with early adoption permitted. We plan to adopt FAS 158 at the end of fiscal 2007, with no material impact expected on our consolidated income statement, balance sheet, shareholders’ equity, or cash flows statement.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

During the first quarter of fiscal 2007, we executed an interest rate collar to hedge our variability of cash flows associated with our interest payments on our Senior secured term loan that result from fluctuations in the three-month LIBOR rate. The interest rate collar provided a fixed interest rate, with respect to the three-month LIBOR rate, at a cap of 6.0% and a floor of 3.21% for a notional value of $1.755 billion from March 2, 2007 through May 10, 2007. We terminated the interest rate collar on May 10, 2007 in connection with the repricing of the Senior secured term loan described in Note 4 to our consolidated financial statements of this Quarterly Report on Form 10-Q. The termination of the interest rate collar resulted in an immaterial loss recorded in the second quarter of fiscal 2007.

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 SEC 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. Such controls and procedures are designed to ensure that information we are required to disclose in our reports is accumulated and communicated to our management, including our principal executive officers and principal financial officer, to allow timely disclosure decisions. 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 2007, we corrected our method of accounting for merchandise inventories under the retail inventory method, or RIM, for years prior to fiscal 2005 and restated our consolidated financial statements in our 2006 Annual Report on Form 10-K for years prior to fiscal 2006. The correction of our application of RIM in prior years and restatement of consolidated financial statements constituted a material change in our internal control over financial reporting. There were no other material changes 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 materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

MICHAELS STORES, INC.

Part II—OTHER INFORMATION

Item 1. Legal Proceedings.

Reference is made to the consolidated action described under “Part I. Item 3. Legal Proceedings — Shareholder Claims — Federal Court Litigation” in our Annual Report on Form 10-K for fiscal 2006. In that action, on May 21, 2007 the lead plaintiff, Massachusetts Laborers’ Annuity Fund, filed a motion for leave to file a first amended consolidated class action complaint (the “Amended Complaint”). As proposed, the Amended Complaint names Michaels and certain of its current and former officers and directors as defendants. The Amended Complaint alleges that the defendants misrepresented and/or omitted material facts in Michaels’ annual proxy statements for 2004, 2005 and 2006, including, among others, failing to disclose: (a) Michaels’ and the defendants’ alleged option backdating practices, (b) information regarding transactions and holdings of Michaels Common Stock by certain trusts owned by or for the benefit of two of Michaels’ former officers and directors and their family members; and (c) that Michaels and the defendants had reported false financial statements as a result of those practices. Further, the Amended Complaint makes allegations regarding the Company’s financial restatement of periods prior to 2006, as well as the recently completed merger with entities affiliated with Bain Capital Partners LLC and The Blackstone Group. In the Amended Complaint, the lead plaintiff asserts claims against all defendants for violations of Section 14(a) of the Securities Exchange Act of 1934 and Rule 14a-9 promulgated thereunder, and Section 20(a) of the Securities Exchange Act of 1934. The plaintiff seeks, among other relief, (a) an indeterminate amount of damages, (b) pre-judgment and post-judgment interest, (c) an award of attorneys fees and costs, and (d) equitable or injunctive relief, including the rescission of stock option grants.

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

On February 16, 2007, officers of Michaels Stores, Inc. and its subsidiaries purchased shares of our Common Stock at a price of $15 per share. We sold approximately $4.3 million, or 289,334 shares of our Common Stock to certain officers, and such shares represent approximately 0.24% of the total outstanding shares of Michaels Stores, Inc. The sale was made pursuant to the exemption provided by Section 4(2) of the Securities Act of 1933 and Regulation D of the rules of the SEC. The purchasers were either accredited investors under that regulation or unaccredited investors meeting the quantitative and knowledge and experience requirements of Rule 506 of Regulation D. The proceeds from the sale of the Common Stock were used for general corporate purposes.

During the first quarter of fiscal 2007, we also granted options for the purchase of up to 9.7 million shares of our Common Stock to key employees pursuant to the same exemption. See Note 3 to our Consolidated Financial Statements in this Quarterly Report on Form 10-Q.

Item 4. Submission of Matters to a Vote of Security Holders.

On February 15, 2007, approximately 93.6% of our shareholders, by written consent, approved the 2006 Equity Incentive Plan, with no votes against and 6.4% abstaining.

Item 6. Exhibits.

(a) Exhibits:

Exhibit Number		Description of Exhibit
3.1		Amended and Restated Certificate of Incorporation of Michaels Stores, Inc. (previously filed as Exhibit 3.1 to Form 10-K filed by Registrant on May 3, 2007, SEC File No. 001-09338).

3.2		Amended and Restated Bylaws of Michaels Stores, Inc. (previously filed as Exhibit 3.2 to Form 8-K filed by Registrant on November 6, 2006, SEC File No. 001-09338).

4.1		Senior Indenture, dated as of October 31, 2006, among Michaels Stores, Inc., the guarantors named therein and Wells Fargo Bank, National Association, as trustee (previously filed as Exhibit 4.1 to Form 10-Q filed by Registrant on December 7, 2006, SEC File No. 001-09338).

4.2		Senior Subordinated Indenture, dated as of October 31, 2006, among Michaels Stores, Inc., the guarantors named therein and Wells Fargo Bank, National Association, as trustee (previously filed as Exhibit 4.2 to Form 10-Q filed by Registrant on December 7, 2006, SEC File No. 001-09338).

4.3		Subordinated Discount Indenture, dated as of October 31, 2006, among Michaels Stores, Inc., the guarantors named therein and Wells Fargo Bank, National Association, as trustee (previously filed as Exhibit 4.3 to Form 10-Q filed by Registrant on December 7, 2006, SEC File No. 001-09338).

4.4		Registration Rights Agreement for the Senior Notes, dated as of October 31, 2006, among Michaels Stores, Inc., the guarantors named therein and Deutsche Bank Securities Inc., J.P. Morgan Securities Inc., Banc of America Securities LLC and Credit Suisse Securities (USA) LLC (previously filed as Exhibit 4.4 to Form 10-Q filed by Registrant on December 7, 2006, SEC File No. 001-09338).

4.5		Registration Rights Agreement for the Senior Subordinated Notes, dated as of October 31, 2006, among Michaels Stores, Inc., the guarantors named therein and Deutsche Bank Securities Inc., J.P. Morgan Securities Inc., Banc of America Securities LLC and Credit Suisse Securities (USA) LLC (previously filed as Exhibit 4.5 to Form 10-Q filed by Registrant on December 7, 2006, SEC File No. 001-09338).

4.6		Registration Rights Agreement for the Subordinated Discount Notes, dated as of October 31, 2006, among Michaels Stores, Inc., the guarantors named therein and Deutsche Bank Securities Inc., J.P. Morgan Securities Inc., Banc of America Securities LLC and Credit Suisse Securities (USA) LLC (previously filed as Exhibit 4.6 to Form 10-Q filed by Registrant on December 7, 2006, SEC File No. 001-09338).

4.7		Registration Rights Agreement, dated as of October 31, 2006, among Michaels Stores, Inc. and certain stockholders thereof (previously filed as Exhibit 4.7 to Form 10-Q filed by Registrant on December 7, 2006, SEC File No. 001-09338).

10.1		Second Amendment to Credit Agreement, dated as of May 10, 2007, to the Credit Agreement, dated as of October 31, 2006, among Michaels Stores, Inc., Deutsche Bank AG New York Branch, as administrative agent, the other lenders named therein, JPMorgan Chase Bank, N.A., as syndication agent, and Bank of America, N.A. and Credit Suisse, as co-documentation agents, and Deutsche Bank Securities Inc., J.P. Morgan Securities Inc. and Banc of America Securities LLC as co-lead arrangers and joint bookrunners (previously filed as Exhibit 10.1 to Form 8-K filed by Registrant on May 11, 2007, SEC File No. 001-09338).

10.2		Employment Agreement dated June 4, 2007, between Michaels Stores, Inc. and Brian C. Cornell (filed herewith).

10.3		Fiscal Year 2007 Bonus Plan for Chief Executive Officer (filed herewith).

10.4		Restricted Stock Award Agreement dated June 4, 2007, between Michaels Stores, Inc. and Brian C. Cornell (filed herewith).

10.5		Stock Option Agreement dated June 4, 2007, between Michaels Stores, Inc. and Brian C. Cornell (filed herewith).

31.1		Certifications of Brian C. Cornell pursuant to §302 of the Sarbanes-Oxley Act of 2002 (filed herewith).

31.2		Certifications of Jeffrey N. Boyer 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 11, 2007

INDEX TO EXHIBITS

Exhibit Number		Description of Exhibit
3.1		Amended and Restated Certificate of Incorporation of Michaels Stores, Inc. (previously filed as Exhibit 3.1 to Form 10-K filed by Registrant on May 3, 2007, SEC File No. 001-09338).

3.2		Amended and Restated Bylaws of Michaels Stores, Inc. (previously filed as Exhibit 3.2 to Form 8-K filed by Registrant on November 6, 2006, SEC File No. 001-09338).

4.1		Senior Indenture, dated as of October 31, 2006, among Michaels Stores, Inc., the guarantors named therein and Wells Fargo Bank, National Association, as trustee (previously filed as Exhibit 4.1 to Form 10-Q filed by Registrant on December 7, 2006, SEC File No. 001-09338).

4.2		Senior Subordinated Indenture, dated as of October 31, 2006, among Michaels Stores, Inc., the guarantors named therein and Wells Fargo Bank, National Association, as trustee (previously filed as Exhibit 4.2 to Form 10-Q filed by Registrant on December 7, 2006, SEC File No. 001-09338).

4.3		Subordinated Discount Indenture, dated as of October 31, 2006, among Michaels Stores, Inc., the guarantors named therein and Wells Fargo Bank, National Association, as trustee (previously filed as Exhibit 4.3 to Form 10-Q filed by Registrant on December 7, 2006, SEC File No. 001-09338).

4.4		Registration Rights Agreement for the Senior Notes, dated as of October 31, 2006, among Michaels Stores, Inc., the guarantors named therein and Deutsche Bank Securities Inc., J.P. Morgan Securities Inc., Banc of America Securities LLC and Credit Suisse Securities (USA) LLC (previously filed as Exhibit 4.4 to Form 10-Q filed by Registrant on December 7, 2006, SEC File No. 001-09338).

4.5		Registration Rights Agreement for the Senior Subordinated Notes, dated as of October 31, 2006, among Michaels Stores, Inc., the guarantors named therein and Deutsche Bank Securities Inc., J.P. Morgan Securities Inc., Banc of America Securities LLC and Credit Suisse Securities (USA) LLC (previously filed as Exhibit 4.5 to Form 10-Q filed by Registrant on December 7, 2006, SEC File No. 001-09338).

4.6		Registration Rights Agreement for the Subordinated Discount Notes, dated as of October 31, 2006, among Michaels Stores, Inc., the guarantors named therein and Deutsche Bank Securities Inc., J.P. Morgan Securities Inc., Banc of America Securities LLC and Credit Suisse Securities (USA) LLC (previously filed as Exhibit 4.6 to Form 10-Q filed by Registrant on December 7, 2006, SEC File No. 001-09338).

4.7		Registration Rights Agreement, dated as of October 31, 2006, among Michaels Stores, Inc. and certain stockholders thereof (previously filed as Exhibit 4.7 to Form 10-Q filed by Registrant on December 7, 2006, SEC File No. 001-09338).

10.1		Second Amendment to Credit Agreement, dated as of May 10, 2007, to the Credit Agreement, dated as of October 31, 2006, among Michaels Stores, Inc., Deutsche Bank AG New York Branch, as administrative agent, the other lenders named therein, JPMorgan Chase Bank, N.A., as syndication agent, and Bank of America, N.A. and Credit Suisse, as co-documentation agents, and Deutsche Bank Securities Inc., J.P. Morgan Securities Inc. and Banc of America Securities LLC as co-lead arrangers and joint bookrunners (previously filed as Exhibit 10.1 to Form 8-K filed by Registrant on May 11, 2007, SEC File No. 001-09338).

10.2		Employment Agreement dated June 4, 2007, between Michaels Stores, Inc. and Brian C. Cornell (filed herewith).

10.3		Fiscal Year 2007 Bonus Plan for Chief Executive Officer (filed herewith).

10.4		Restricted Stock Award Agreement dated June 4, 2007, between Michaels Stores, Inc. and Brian C. Cornell (filed herewith).

10.5		Stock Option Agreement dated June 4, 2007, between Michaels Stores, Inc. and Brian C. Cornell (filed herewith).

31.1		Certifications of Brian C. Cornell pursuant to §302 of the Sarbanes-Oxley Act of 2002 (filed herewith).

31.2		Certifications of Jeffrey N. Boyer 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-10.2 2 a07-16109_1ex10d2.htm EX-10.2

Exhibit 10.2

AGREEMENT

AGREEMENT made and entered into by and between Michaels Stores, Inc. (the “Company”) and Brian Cornell (the “Executive”), effective as of the 4th day of June, 2007 (the “Effective Date”).

WHEREAS, the operations of the Company and its Affiliates are a complex matter requiring direction and leadership;

WHEREAS, the Executive is possessed of certain experience and expertise that qualify him to provide the direction and leadership required by the Company and its Affiliates; and

WHEREAS, subject to the terms and conditions hereinafter set forth, the Company therefore wishes to employ the Executive as its Chief Executive Officer and the Executive wishes to accept such employment;

NOW, THEREFORE, in consideration of the foregoing premises and the mutual promises, terms, provisions and conditions set forth in this Agreement, the parties hereby agree:

1. Employment. Subject to the terms and conditions set forth in this Agreement, the Company hereby offers, and the Executive hereby accepts, employment.

2. Term. Subject to earlier termination as hereinafter provided, the Executive’s employment hereunder shall be for a term of five (5) years, commencing on the Effective Date, and shall renew automatically thereafter for successive terms of one year each. The term of this Agreement, as from time to time renewed, is hereafter referred to as “the term of this Agreement” or “the term hereof.”

3. Capacity and Performance.

(a) During the term hereof, the Executive shall serve the Company as its Chief Executive Officer (“CEO”). In addition, and without further compensation, the Executive agrees to serve as a director of the Company and as a director and/or officer of one or more of the Company’s Immediate Affiliates (as defined in Section 13 hereof), in each case if so elected or appointed from time to time.

(b) During the term hereof, the Executive shall report to the Board of Directors of the Company or its designees, currently Matthew Levin and Michael Chae.

(c) During the term hereof, the Executive shall be employed by the Company on a full-time basis and shall perform the duties and responsibilities of his position, including, without limitation, general oversight and direction of the operations of the Company and such

other duties and responsibilities on behalf of the Company consistent with the responsibilities of a Chief Executive Officer, as well as the duties and responsibilities reasonably related to other positions on behalf of the Immediate Affiliates, as may be designated from time to time by the Board or by its Chair or other designee.

(d) During the term hereof, the Executive shall devote substantially all of his business time and his best efforts, business judgment, skill and knowledge exclusively to the advancement of the business and interests of the Company and, if so elected or appointed, its Immediate Affiliates and to the discharge of his duties and responsibilities hereunder. The Company hereby agrees that the Executive may continue to serve as a director of OfficeMax, Inc. and may participate in appropriate trade associations. In addition, he may engage in appropriate civic, charitable, religious or personal activities that do not conflict or interfere with the proper performance of his duties hereunder. However, the Executive shall not engage in any other business activity or serve in any industry, professional, governmental or academic position during the term of this Agreement, except as may be expressly approved in advance by the Board in writing.

4. Compensation and Benefits. As compensation for all services performed by the Executive under and during the term hereof and subject to performance of the Executive’s duties and of the obligations of the Executive to the Company and its Immediate Affiliates, pursuant to this Agreement or otherwise:

(a) Base Salary. During the term hereof, the Company shall pay the Executive a base salary at the rate of One Million Dollars ($1,000,000) per annum, payable in accordance with the payroll practices of the Company for its executives and subject to increase from time to time by the Board, in its sole discretion. Such base salary, as from time to time increased, is hereafter referred to as the “Base Salary”.

(b) Bonuses. For each fiscal year completed during the term hereof, the Executive shall be eligible to earn an annual bonus, subject to the achievement of such performance targets as shall be determined in the discretion of the Board. The Executive’s target bonus shall be one hundred percent (100%) of Base Salary, with a maximum bonus potential of two hundred percent (200%) of Base Salary for performance in excess of the performance targets and with the actual amount of bonus, if any, to be determined by the Board in its sole discretion. Such bonus is hereafter referred to as the “Annual Bonus.” For the year ending December 31, 2007, the Annual Bonus will be prorated to reflect the actual commencement of the Executive’s employment.

(c) Vacations. During the term hereof, the Executive shall be entitled to earn vacation at the rate of five (5) weeks per year, to be taken at such times and intervals as shall be determined by the Executive, subject to the reasonable business needs of the Company and the approval of the person to whom the Executive reports. Vacation shall otherwise be governed by the policies of the Company, as in effect from time to time.

(d) Other Benefits. During the term hereof, the Executive shall be entitled to participate in any and all Employee Benefit Plans from time to time in effect for senior executives of the Company generally. Such participation shall be subject to the terms of the applicable plan documents and generally applicable Company policies. For purposes of this Agreement, “Employee Benefit Plan” shall have the meaning ascribed to such term in Section 3(3) of ERISA, as amended from time to time.

(e) Business Expenses. The Company shall pay or reimburse the Executive for all reasonable, customary and necessary business expenses incurred or paid by the Executive in the performance of his duties and responsibilities hereunder, subject to any maximum annual limit and other restrictions on such expenses set by the Board and to such reasonable substantiation and documentation as may be specified by the Company from time to time. Such expenses shall include, without limitation, the following:

(i) reasonable expenses associated with relocation of Executive, his family and household goods from California to Texas and with obtaining suitable housing in Texas, all in accordance with the Company’s current executive relocation plan.

(ii) reasonable legal fees incurred in connection with his negotiation with the Company of this Agreement and the option and restricted stock award documents described in (f) and (g) below, and

(iii) reasonable travel expenses, including business class airfare when available.

(f) Sign-On Benefits. On the Effective Date, the Company shall: (i) pay to Executive a bonus of $2,500,000, and (ii) provide Executive with a grant of 133,333 shares of restricted stock pursuant to the form of Restricted Stock Award Agreement attached as Exhibit A.

(g) Option Grant. On the Effective Date, the Company will grant to Executive an option to purchase 2,270,966 shares of common stock pursuant to the Stock Option Agreement attached as Exhibit B.

5. Termination of Employment and Severance Benefits. Notwithstanding the provisions of Section 2 hereof, the Executive’s employment hereunder shall terminate prior to the expiration of the term hereof under the following circumstances:

(a) Death. In the event of the Executive’s death prior to the expiration of the term hereof, the Executive’s employment hereunder shall immediately and automatically terminate. In such event, the Company shall pay to the Executive’s designated beneficiary or, if no beneficiary has been designated by the Executive in writing, to his estate, (i) any Base Salary earned but not paid during the final payroll period of the Executive’s employment through the date of termination, (ii) pay for any vacation time earned but not used through the date of

termination, (iii) a pro-rata bonus for the year in which termination occurs, based on the actual Annual Bonus that the Executive would have received for such year had he remained employed by the Company for the full year and determined based on the Company’s actual results for such year (payable promptly following the date such Annual Bonus is determined), (iv) any bonus compensation awarded for the fiscal year preceding that in which termination occurs, but unpaid on the date of termination and (v) any business expenses incurred by the Executive but un-reimbursed on the date of termination, provided that such expenses and required substantiation and documentation are submitted within sixty (60) days of termination and that such expenses are reimbursable under Company policy (all of the foregoing, “Final Compensation”). The Company shall have no further obligation to the Executive hereunder.

(b) Disability.

(i) The Company may terminate the Executive’s employment hereunder, upon notice to the Executive, in the event that the Executive becomes disabled during his employment hereunder through any illness, injury, accident or condition of either a physical or psychological nature and, as a result, is unable to perform substantially all of his duties and responsibilities hereunder, notwithstanding the provision of any reasonable accommodation, for one hundred and eighty (180) days during any period of three hundred and sixty-five (365) consecutive calendar days (“Disability”). In the event of such termination, the Company shall have no further obligation to the Executive, other than for payment of Final Compensation.

(ii) The Board may designate another employee to act in the Executive’s place during any period of the Executive’s disability. Notwithstanding any such designation, the Executive shall continue to receive the Base Salary in accordance with Section 4(a) and benefits in accordance with Section 4(e), to the extent permitted by the then-current terms of the applicable benefit plans, until the Executive becomes eligible for disability income benefits under the Company’s disability income plan or until the termination of his employment, whichever shall first occur.

(iii) While receiving disability income payments under the Company’s disability income plan, the Executive shall not be entitled to receive any Base Salary under Section 4(a) hereof, but shall continue to participate in Company benefit plans in accordance with Section 4(e) and the terms of such plans, until the termination of his employment.

(iv) If any question shall arise as to whether during any period the Executive is disabled through any illness, injury, accident or condition of either a physical or psychological nature so as to be unable to perform substantially all of his duties and responsibilities hereunder, the Executive may, and at the request of the Company shall, submit to a medical examination by a physician selected by the Company to whom the Executive or his duly appointed guardian, if any, has no reasonable objection to determine whether the Executive is so disabled and such determination shall for the purposes of this Agreement be conclusive of the issue. If such question shall arise

and the Executive shall fail to submit to such medical examination, the Company’s determination of the issue shall be binding on the Executive.

(c) By the Company for Cause. The Company may terminate the Executive’s employment hereunder for Cause at any time upon notice to the Executive setting forth in reasonable detail the nature of such Cause. “Cause” shall mean the following events or conditions, as determined by the Board in its reasonable judgment: (i) the Executive’s refusal or failure to perform (other than by reason of disability), or material negligence in the performance of, his duties and responsibilities to the Company or any of its Affiliates, or refusal or failure to follow or carry out any reasonable direction of the Board, and the continuance of such refusal, failure or negligence for a period of ten (10) days after notice to the Executive; (ii) the material breach by the Executive of any provision of any material agreement between the Executive and the Company or any of its Affiliates; (iii) fraud, embezzlement, theft or other dishonesty by the Executive with respect to the Company or any of its Affiliates; (iv) the conviction of, or a plea of nolo contendere by, the Executive to any felony or any other crime involving dishonesty or moral turpitude; and (v) any other conduct that involves a breach of fiduciary obligation on the part of the Executive. Upon the giving of notice of termination of the Executive’s employment hereunder for Cause, the Company shall have no further obligation to the Executive, other than for Final Compensation.

(d) By the Company Other than for Cause. The Company may terminate the Executive’s employment hereunder other than for Cause at any time upon notice to the Executive. In the event of such termination, in addition to Final Compensation, then for the period of two (2) years following the date of termination, the Company shall provide the Executive Severance Benefits as follows: (i) the Company will pay the Executive Severance Pay equal to the sum of (A) the Base Salary at the annual rate in effect on the date of termination and (B) the Executive’s target Annual Bonus determined in accordance with Section 4(b) hereof and (ii) subject to any employee contribution applicable to the Executive on the date of termination, the Company shall continue to contribute to the premium cost of the Executive’s participation in the Company’s group medical and dental plans, provided that the Executive is entitled to continue such participation under applicable law and plan terms and pays the remainder of such premium cost, and any required administrative fee, in a timely manner from month to month. Any obligation of the Company to the Executive hereunder is conditioned, however, on the Executive signing and returning to the Company a timely and effective release of claims in the form provided by the Company (the “Release of Claims”). The Release of Claims required for separation benefits in accordance with Section 5(d) or Section 5(e) hereof creates legally binding obligations on the part of the Executive and the Company and its Affiliates therefore advise the Executive to seek the advice of an attorney before signing the Release of Claims. Severance Pay to which the Executive is entitled hereunder shall be payable on a pro-rated basis at the Company’s regular payroll periods and in accordance with its normal payroll practices and will begin at the Company’s next regular payroll period which is at least five (5) business days following the later of the effective date of the Release of Claims or the date the Release of Claims, signed by the Executive, is received by the Company, but the first payment shall be retroactive to next business day following the date of termination. In the event that Executive is entitled to receive benefits upon termination under any other agreement with, or plan or policy

of, the Company, he shall be entitled to receive either the benefits under this Agreement or under such other agreement, but not both, on an individual benefit basis, as he selects (“No Duplication of Benefits”).

(e) By the Executive for Good Reason. The Executive may terminate his employment hereunder for Good Reason, upon notice to the Company setting forth in reasonable detail the nature of such Good Reason. The following shall constitute Good Reason for termination by the Executive:

(i) Removal of the Executive, without his consent, from the position of CEO of the Company (or a successor corporation);

(ii) Material diminution in the nature or scope of the Executive’s responsibilities, duties or authority which is not cured within ten (10) days following the Company’s receipt of notice from the Executive setting forth in reasonable detail the nature of such diminution; provided, however, that the Company’s failure to continue the Executive’s appointment or election as a director or officer of any of its Affiliates, a change in reporting relationships resulting from the direct or indirect control of the Company (or a successor corporation) by another corporation or other entity and any diminution of the business of the Company or any of its Affiliates or any sale or transfer of equity, property or other assets of the Company or any of its Affiliates shall not constitute “Good Reason”; or

(iii) Material failure of the Company to provide the Executive the Base Salary and benefits in accordance with the terms of Section 4 hereof, excluding an inadvertent failure which is cured within ten (10) days following the Company’s receipt of notice from the Executive specifying in reasonable detail the nature of such failure.

In the event of termination in accordance with this Section 5(e), and, in accordance with the No Duplication of Benefits principle contained in Section 5(d), then the Executive will be entitled to the Severance Benefits he would have been entitled to receive had the Executive been terminated by the Company other than for Cause in accordance with Section 5(d) above; provided that the Executive satisfies all conditions to such entitlement, including without limitation the signing of a timely and effective Release of Claims.

(f) By the Executive Other than for Good Reason. The Executive may terminate his employment hereunder at any time upon sixty (60) days’ notice to the Company. In the event of termination of the Executive pursuant to this Section 5(f), the Board may elect to waive the period of notice, or any portion thereof, and, if the Board so elects, the Company will pay the Executive his Base Salary for the initial sixty (60) days of the notice period (or for any remaining portion of such period). The Company shall have no further obligation to the Executive, other than for any Final Compensation due to him.

(g) Timing of Payments. If, at the time of the Executive’s separation from service, the Executive is a “specified employee,” as hereinafter defined, any and all amounts payable under this Section 5 in connection with such separation from service that constitute

deferred compensation subject to Section 409A of the Internal Revenue Code of 1986, as amended, (“Section 409A”), as determined by the Company in its sole discretion, and that would (but for this sentence) be payable within six months following such separation from service, shall instead be paid on the date that follows the date of such separation from service by six (6) months. For purposes of the preceding sentence, “separation from service” shall be determined in a manner consistent with subsection (a)(2)(A)(i) of Section 409A and the term “specified employee” shall mean an individual determined by the Company to be a specified employee as defined in subsection (a)(2)(B)(i) of Section 409A.

6. Effect of Termination. The provisions of this Section 6 shall apply to any termination, whether due to the expiration of the term hereof, pursuant to Section 5 or otherwise.

(a) In the event of the termination of the Executive’s employment hereunder, payment by the Company of any amounts due in accordance with the applicable termination provision of Section 5 hereof shall constitute the entire obligation of the Company to the Executive. The Executive shall promptly give the Company notice of all facts necessary for the Company to determine the amount and duration of its obligations in connection with any termination pursuant to Section 5(d) or 5(e) hereof.

(b) Except for any right of the Executive to continue medical and dental plan participation in accordance with applicable law, benefits shall terminate pursuant to the terms of the applicable benefit plans based on the date of termination of the Executive’s employment without regard to any continuation of Base Salary or other payment to the Executive following such date of termination.

(c) Provisions of this Agreement shall survive any termination or expiration of the term hereof, if so provided in this Agreement or if necessary or desirable to accomplish the purposes of other surviving provisions, including without limitation the obligations of the Executive under Sections 7, 8 and 9 hereof. Any obligation of the Company otherwise to make payments to or on behalf of the Executive under Section 5(d) or 5(e) hereof is expressly conditioned upon the Executive’s continued full performance of obligations under Sections 7, 8 and 9 hereof. The Executive recognizes that no compensation is earned after termination of his employment hereunder, except as otherwise expressly provided in accordance with Section 5(d), 5(e) or 5(f) (for any portion of the notice period waived).

7. Confidential Information.

(a) The Executive acknowledges that the Company and its Affiliates continually develop Confidential Information; that the Executive may develop Confidential Information for the Company or its Affiliates; and that the Executive may learn of Confidential Information during the course of employment. The Executive will comply with the policies and procedures of the Company and its Affiliates for protecting Confidential Information and shall not disclose to any Person or use any Confidential Information obtained by the Executive incident to his employment or other association with the Company or any of its Affiliates, other than as required for the proper performance of the Executive’s duties and responsibilities to the

Company and its Affiliates or as required by applicable law or legal process after notice to the Company and a reasonable opportunity for it to see protection of such Confidential Information prior to disclosure. The Executive understands that these restrictions shall continue to apply after his employment terminates, regardless of the reason for such termination. The confidentiality obligation under this Section 7 shall not apply to information which is generally known or readily available to the public at the time of disclosure or becomes generally known through no wrongful act on the part of the Executive or any other Person having an obligation of confidentiality to the Company or any of its Affiliates.

(b) All documents, records, tapes and other media of every kind and description relating to the business, present or otherwise, of the Company or its Affiliates and any copies, in whole or in part, thereof (the “Documents”), whether or not prepared by the Executive, shall be the sole and exclusive property of the Company and its Affiliates. The Executive shall safeguard all Documents and shall surrender to the Company at the time his employment terminates, or at such earlier time or times as the Board or its designee may specify, all Documents then in the Executive’s possession or control.

8. Assignment of Rights to Intellectual Property. The Executive shall promptly and fully disclose all Intellectual Property to the Company. The Executive hereby assigns and agrees to assign to the Company (or as otherwise directed by the Company) the Executive’s full right, title and interest in and to all Intellectual Property developed at any time during his employment with the Company, its Affiliates, successors or assigns. The Executive agrees to execute any and all applications for domestic and foreign patents, copyrights or other proprietary rights and to do such other acts (including without limitation the execution and delivery of instruments of further assurance or confirmation) requested by the Company to assign the Intellectual Property to the Company and to permit the Company to enforce any patents, copyrights or other proprietary rights to the Intellectual Property. The Executive will not charge the Company for time spent in complying with these obligations. All copyrightable works that the Executive creates shall be considered “work made for hire” and shall, upon creation, be owned exclusively by the Company.

9. Restricted Activities. The Executive acknowledges the importance to the Company and its Affiliates of protecting their trade secrets and other Confidential Information and their other legitimate business interests, including without limitation the valuable trade secrets, other Confidential Information and goodwill that they have developed or acquired and which they shall continue to develop and acquire while the Executive’s employment continues. The Company agrees, in consideration of the Executive’s acceptance of the restrictions set forth below, to grant the Executive access to trade secrets and other Confidential Information of the Company and its Immediate Affiliates and to their valuable business relationships and their goodwill. The Executive acknowledges and agrees that the restrictions on his activities during and after his employment set forth below are necessary to protect the goodwill, Confidential Information and other legitimate interests of the Company and its Affiliates:

(a) The Executive agrees that, during the his employment with the Company and for the period of twenty-four (24) months immediately following the termination of his

employment, regardless of the basis or timing of such termination, the Executive will not, directly or indirectly, alone or in association with others, anywhere in the Territory, own, manage, operate, control or participate in the ownership, management, operation or control of, or be connected as an officer, employee, investor, principal, joint venturer, shareholder, partner, director, consultant, agent or otherwise with, or have any financial interest (through stock or other equity ownership, investment of capital, the lending of money or otherwise) in, any business, venture or activity that directly or indirectly competes, or is in planning, or has undertaken any preparation, to compete, with the Business of the Company or any of its Immediate Affiliates (a “Competitor”), except that nothing contained in this Section 9(a) shall prevent the Executive’s wholly passive ownership of two percent (2%) or less of the equity securities of any Competitor that is a publicly-traded company. For the purposes of this Agreement, the “Business of the Company and its Immediate Affiliates” or “Business” is that of arts and crafts specialty retailer providing materials, ideas and education for creative activities and the “Territory” is those states within the United States and those provinces of Canada in which the Company or any of its Immediate Affiliates is doing or actively planning to do business at any time during the Executive’s employment or, with respect to his obligations hereunder following termination of his employment with the Company, at any time during the six (6) months immediately preceding such termination.

(b) The Executive agrees that, during his employment with the Company, he will comply with any and all codes of ethics or business conduct of the Company applicable to his position, as in effect from time to time, and will not undertake any outside activity, whether or not competitive with the business of the Company or its Affiliates, that could reasonably give rise to a conflict of interest or otherwise interfere with his duties and obligations to the Company or any of its Affiliates.

(c) The Executive agrees that, during his employment and during the period of twenty-four (24) months immediately following termination of his employment, regardless of the basis or timing of such termination, the Executive will not, and will not assist any other Person to, (a) hire or solicit for hire any employee of the Company or any of its Immediate Affiliates or seek to persuade any employee of the Company or any of its Immediate Affiliates to discontinue employment or (b) solicit or encourage any independent contractor providing services to the Company or any of its Immediate Affiliates to terminate or diminish its relationship with them; provided, however, that, after termination of the Executive’s employment with the Company, these restrictions shall apply only with respect to employees of, and independent contractors providing services to, the Company or any of its Immediate Affiliates on the date the Executive’s employment with the Company terminates or at any time during the preceding twelve (12) months.

(d) The Executive agrees that, during his employment and during the period of twenty-four (24) months immediately following termination of his employment, regardless of the basis or timing of such termination, the Executive will not directly or indirectly solicit or encourage any distributor or vendor to the Company or any of its Immediate Affiliates to terminate or breach any agreement with the Company or any of its Immediate Affiliates or to terminate or diminish its relationship with the Company or any of its Immediate Affiliates;

provided, however, that, after termination of the Executive’s employment with the Company, these restrictions shall apply only with respect to those distributors and vendors who were doing business with the Company or any of its Affiliates on the date the Executive’s employment terminates or at any time during the preceding twelve (12) months.

10. Notification Requirement. Until the conclusion of twenty-four (24) months following termination of his employment with the Company, the Executive shall give notice to the Company of each new business activity he plans to undertake, at least ten (10) business days prior to beginning any such activity. Such notice shall state the name and address of the Person for whom such activity is undertaken and the nature of the Executive’s business relationship(s) and position(s) with such Person. The Executive shall provide the Company with such other pertinent information concerning such business activity as the Company may reasonably request in order to determine the Executive’s continued compliance with his obligations under Sections 7, 8 and 9 hereof.

11. Enforcement of Covenants. The Executive acknowledges that he has carefully read and considered all the terms and conditions of this Agreement, including the restraints imposed upon him pursuant to Sections 7, 8 and 9 hereof. The Executive agrees without reservation that each of the restraints contained herein is necessary for the reasonable and proper protection of the goodwill, Confidential Information and other legitimate interests of the Company and its Affiliates; that each and every one of those restraints is reasonable in respect to subject matter, length of time and geographic area; and that these restraints, individually or in the aggregate, will not prevent him from obtaining other suitable employment during the period in which the Executive is bound by these restraints. The Executive further agrees that he will never assert, or permit to be asserted on his behalf, in any forum, any position contrary to the foregoing. The Executive further acknowledges that, were he to breach any of the covenants contained in Sections 7, 8 or 9 hereof, the damage to the Company and its Affiliates would be irreparable. The Executive therefore agrees that the Company, in addition to any other remedies available to it, shall be entitled to preliminary and permanent injunctive relief against any breach or threatened breach by the Executive of any of said covenants, without having to post bond. The parties further agree that, in the event that any provision of Section 7, 8 or 9 hereof shall be determined by any court of competent jurisdiction to be unenforceable by reason of its being extended over too great a time, too large a geographic area or too great a range of activities, such provision shall be deemed to be modified to permit its enforcement to the maximum extent permitted by law.

12. Conflicting Agreements. The Executive hereby represents and warrants that the execution of this Agreement and the performance of his obligations hereunder will not breach or be in conflict with any other agreement to which the Executive is a party or is bound and that the Executive is not now subject to any covenants against competition or similar covenants or any court order or other legal obligation that would affect the performance of his obligations hereunder. The Executive will not disclose to or use on behalf of the Company any proprietary information of a third party without such party’s consent.

13. Definitions. Words or phrases which are initially capitalized or are within quotation marks shall have the meanings provided in this Section and as provided elsewhere herein. For purposes of this Agreement, the following definitions apply:

(a) “Affiliates” means all persons and entities directly or indirectly controlling, controlled by or under common control with the Company, where control may be by either management authority, contract or equity interest.

(b) “Confidential Information” means any and all information of the Company and its Affiliates that is not generally known by those Persons with whom they compete or do business, or with whom any of them plans to compete or do business and any and all information, publicly known in whole or in part or not, which, if disclosed by the Company or its Affiliates would assist in competition against them. Confidential Information includes without limitation such information relating to (i) the development, research, testing, manufacturing, marketing and financial activities of the Company and its Affiliates, (ii) the products and services of the Company and its Affiliates, (iii) the costs, sources of supply, financial performance and strategic plans of the Company and its Affiliates, (iv) the identity and special needs of the customers of the Company and its Affiliates and (v) the people and organizations with whom the Company and its Affiliates have business relationships and those relationships. Confidential Information also includes any information that the Company or any of its Affiliates have received, or may receive hereafter, belonging to customers or others with any understanding, express or implied, that the information would not be disclosed.

(c) “Immediate Affiliates” means those Affiliates which are one of the following: (i) a direct or direct subsidiary of the Company, (ii) a parent to the Company or (iii) a direct or indirect subsidiary of such a parent.

(d) “Intellectual Property” means inventions, discoveries, developments, methods, processes, compositions, works, concepts and ideas (whether or not patentable or copyrightable or constituting trade secrets) conceived, made, created, developed or reduced to practice by the Executive (whether alone or with others, whether or not during normal business hours or on or off Company premises) during the Executive’s employment that relate to the Business of the Company or any of its Immediate Affiliates or to any prospective activity of the Company or any of its Immediate Affiliates or to any work performed by the Executive for the Company or any of its Immediate Affiliates or that make use of Confidential Information or any of the equipment or facilities or other resources of the Company or any of its Immediate Affiliates.

(e) “Person” means an individual, a corporation, a limited liability company, an association, a partnership, an estate, a trust and any other entity or organization, other than the Company or any of its Affiliates.

15. Withholding. All payments made by the Company under this Agreement shall be reduced by any tax or other amounts required to be withheld by the Company under applicable law.

16. Assignment. Neither the Company nor the Executive may make any assignment of this Agreement or any interest herein, by operation of law or otherwise, without the prior written consent of the other; provided, however, that the Company may assign its rights and obligations under this Agreement without the consent of the Executive in the event that the Executive is transferred to a position with any of the Affiliates or in the event that the Company shall hereafter effect a reorganization, consolidate with, or merge into, any Person or transfer all or substantially all of its properties or assets to any Person. This Agreement shall inure to the benefit of and be binding upon the Company and the Executive, their respective successors, executors, administrators, heirs and permitted assigns.

17. Severability. If any portion or provision of this Agreement shall to any extent be declared illegal or unenforceable by a court of competent jurisdiction, then the remainder of this Agreement, or the application of such portion or provision in circumstances other than those as to which it is so declared illegal or unenforceable, shall not be affected thereby, and each portion and provision of this Agreement shall be valid and enforceable to the fullest extent permitted by law.

18. Waiver. No waiver of any provision hereof shall be effective unless made in writing and signed by the waiving party. The failure of either party to require the performance of any term or obligation of this Agreement, or the waiver by either party of any breach of this Agreement, shall not prevent any subsequent enforcement of such term or obligation or be deemed a waiver of any subsequent breach.

19. Notices. Any and all notices, requests, demands and other communications provided for by this Agreement shall be in writing and shall be effective when delivered in person, consigned to a reputable national courier service or deposited in the United States mail, postage prepaid, registered or certified, and addressed to the Executive at his last known address on the books of the Company or, in the case of the Company, at its principal place of business, attention of the Chair of the Board, or to such other address as either party may specify by notice to the other actually received.

20. Entire Agreement. This Agreement constitutes the entire agreement between the parties and supersedes all prior communications, agreements and understandings, written or oral, with respect to the terms and conditions of the Executive’s employment.

21. Amendment. This Agreement may be amended or modified only by a written instrument signed by the Executive and by a expressly authorized representative of the Board.

22. Headings. The headings and captions in this Agreement are for convenience only and in no way define or describe the scope or content of any provision of this Agreement.

23. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be an original and all of which together shall constitute one and the same instrument.

24. Governing Law. This is a Texas contract and shall be construed and enforced under and be governed in all respects by the laws of the State of Texas, without regard to the conflict of laws principles thereof.

[Signature page follows immediately.]

IN WITNESS WHEREOF, this Agreement has been executed as a sealed instrument by the Company, by its duly authorized representative, and by the Executive, as of the date first above written.

THE EXECUTIVE:	THE COMPANY:


Brian Cornell	MICHAELS STORES, INC.


/s/ Brian Cornell	By:	/s/ Jeffrey N. Boyer

	Title:		President and Chief Financial Officer

EX-10.3 3 a07-16109_1ex10d3.htm EX-10.3

Exhibit 10.3

Brian C. Cornell

Chief Executive Officer

Michaels Stores, Inc.

Fiscal Year 2007

Bonus Plan

CONFIDENTIAL

Introduction

Your Fiscal Year 2007 Bonus Plan provides you financial incentives for your important contributions to our success. In your position as Chief Executive Officer, you have the potential to earn up to a maximum bonus payout of 200% of your eligible base salary.

Bonus Measures

Your bonus plan is based on the overall company performance, your personal performance, and your business unit performance (where applicable):

Fiscal Year 2007 Bonus Plan Measures, Definitions and Targets

Plan Measure	Measure Definition	Weight		Threshold Performance	Target Performance (PLAN)	Maximum Performance
Corporate Financial Performance: Michaels Stores Inc. EBITDA minus Inventory Charge *	Total Company Sales, Less Cost of Goods Sold, Less Selling, General and Administrative Expenses, Plus Depreciation and Amortization, Less Average Monthly Inventory times %	75	%	$ (94.0% of PLAN)	$ (100.0% of PLAN)	$ (106.0% of PLAN)
Your Performance	Your FY 2007 Performance Appraisal Rating	25	%	Mixed Performance	Solid Performance	Exceeds Expectations

* May exclude additional charges as approved by the Compensation Committee of the Board of Directors

EBITDA

EBITDA (“ee-bid-dah”) is short for “Earnings Before Interest, Taxes, Depreciation and Amortization”. It is a measure that indicates the Company’s operating profitability before non-operating expenses and non-cash charges, calculated by taking operating income and adding back depreciation and amortization expenses. Amortization refers to spreading an intangible asset’s value over that asset’s useful life. An example of an intangible asset would be leasehold improvements (changes we make to a store location to make the building setup consistent with a Michaels store layout). Depreciation, on the other hand, refers to the spreading of a tangible asset’s cost over that asset’s life, such as store fixtures or computer equipment.

EBITDA is intended to be a measure that is much more closely linked to the cash flow that the business generates from its operations – a measure of the profit and loss statement (P&L) based on the cash we take in each day (sales), less the ongoing cash we are spending (cost of sales and expenses).

EBITDA minus Inventory Charge

The inventory charge is much like an “interest charge” to cover the cost of buying and holding inventory, and is subtracted from the EBITDA number.

Minimum Company Performance Threshold

Before any Business Unit or Individual Performance portion can be earned, the actual results of the Corporate Financial Performance measure (Michaels Stores Inc. EBITDA minus inventory charge) must meet or exceed a minimum level of performance (“Threshold”). For Fiscal Year 2007, the Threshold level is $ .

Performance Levels and Bonus Payouts

For all company, business unit, and individual performance bonus plan measures, there are four major performance levels: Below Threshold, Threshold, Target and Maximum. Bonus payout percentages will be based upon the achieved level of performance for each of your bonus plan measures. To determine the actual payout percent, each bonus measure’s performance must be calculated (percent achieved between Threshold and Target, or Target and Maximum), weighted, multiplied by the eligible base salary as of February 2, 2008, and adjusted for any applicable proration. If you change positions during the year, resulting in a change in bonus plan, your base salary prior to your transfer will be used as the eligible base salary for your former position.

The performance of each bonus measure is evaluated independently, and the achieved bonus percentage for each measure is added together to arrive at the percentage of total bonus achieved.

Personal Bonus Calculation Worksheet - Brian C. Cornell

Threshold Bonus: 30%

Target Bonus: 100%

Maximum Bonus: 200%

Measure	Weight		Threshold Bonus %		Target Bonus %		Maximum Bonus %
MSI EBITDA minus inventory charge	75	%	22.50	%	75.00	%	150.00	%
Your Performance (FY 07 Performance Rating)	25	%	12.50	%	25.00	%	50.00	%

Scaling of Payout Percentage

When performance falls at any point between the threshold and maximum goals, your bonus payout will be scaled according to the performance above or below the target goal. The amount of bonus is scaled to the nearest hundredth of a percent when comparing plan to actual results. All calculations will be rounded to the nearest hundredth. The Individual Performance portion of the bonus has four bonus payout levels based upon the Annual FY 2007 Performance Appraisal Rating, and no scaling will be applied. (Needs Development Performance Rating equals zero bonus for the performance component).

Bonus Scaling Formulas

The following formulas illustrate how bonus scaling is applied in calculating the Actual Bonus percentages achieved for the corporate financial measure and any business unit measure:

Scenario 1: Actual performance is above target goal:

Wtd Achieved Bonus% = (Wtd Max Bonus% - Wtd Target Bonus%) x	Actual Perf - PLAN Perf Goal	+ Wtd Target Bonus %
	Max Perf Goal - PLAN Perf Goal

Scenario 2: Actual performance is below target goal:

Wtd Achieved Bonus% = (Wtd Target Bonus% - Wtd Threshold Bonus%) x	Actual Perf - Threshold Perf Goal	+ Wtd Threshold Bonus %
	PLAN Perf Goal - Threshold Perf Goal

Note: Wtd = Weighted; PLAN = Target

Eligibility

To be eligible for a bonus under the Fiscal Year 2007 Bonus Plan, the associate must meet all of the eligibility factors:

1. Must be in a bonus eligible position during Fiscal Year 2007. The Fiscal Year begins on February 4, 2007, and concludes on February 2, 2008. If an associate is not employed in a bonus eligible position at the beginning of the fiscal year, but assumes a bonus eligible position during the fiscal year, he/she will be eligible to earn a prorated bonus based upon the number of full months that he/she was in the bonus eligible position. Individuals who assume a bonus eligible position on or before the 15th of the month will receive credit for that entire month. Individuals who assume such a position after the 15th will not receive credit for that month. Individuals who change positions during the fiscal year will receive credit for bonus calculation purposes based upon the bonus level of the position he/she is in on the 15th of the month, in accordance with the bonus plan for the credited position (see #5).

2. An associate must be hired in a bonus eligible position on or before November 15, 2007.

3. An associate must have worked for at least three months in a bonus eligible position in Fiscal Year 2007.

4. An associate must be employed in a bonus eligible position at the end of the fiscal year, February 2, 2008, in order to be eligible to receive a bonus. All bonus payments payable under this Bonus Plan will normally occur between April 1st and April 30th, following the end of the fiscal year, provided that all eligibility criteria as set forth in this bonus plan document are met. Bonus eligible positions are defined as any regular full-time or regular part-time associates in one of the following store or corporate positions:

Store Positions		Corporate Positions
Store Manager and Assistant Manager		Corporate Manager through Executive Committee Member (Includes Artistree and Specialty Businesses)
		Distribution Center Coach, Manager, Assistant General Manager and General Manager

Note: Temporary employees and independent contractors are not bonus eligible positions.

5. If an associate is promoted or changes position during the fiscal year, the associate may be eligible for bonus earnings calculated using the number of full months (see #1) in each position, the respective base salaries, and the applicable target bonus amount(s).

6. An associate is not eligible for a bonus under this Bonus Plan if the associate received a Performance Improvement Plan during Fiscal Year 2007 and the associate remains on the Performance Improvement Plan at the time of bonus payout (check date).

How a Bonus is Earned

In order to earn a bonus under this Fiscal Year 2007 Bonus Plan, the associate must first satisfy all of the requirements in the Eligibility section of the Bonus Plan. In addition, and to the extent allowed by applicable law, the associate will not earn, and no bonus will be paid, unless the associate is employed in a bonus eligible position at the end of the fiscal year, February 2, 2008.

To the extent allowed by law, Michaels Stores, Inc. reserves the right to change or cancel any portion(s) of this Bonus Plan for any reason. This Bonus Plan does not constitute a contract or other agreement concerning the duration of any associate’s employment. To the extent allowed by law, the employment relationship remains “at will” and may be terminated at any time, with or without cause. This Bonus Plan shall be administered by the Compensation Committee of the Board of Directors, in its sole discretion.

EX-10.4 4 a07-16109_1ex10d4.htm EX-10.4

Exhibit 10.4

	Brian C. Cornell
	Name of Employee

MICHAELS STORES, INC.

2006 EQUITY INCENTIVE PLAN

Restricted Stock Award Agreement

Michaels Stores, Inc.
8000 Bent Branch Drive
Irving, Texas 75063

Attn: Jeffrey N. Boyer

Ladies and Gentlemen:

The undersigned (i) acknowledges that he has received an award (the “Award”) of restricted stock from Michaels Stores, Inc. (the “Company”) under the Michaels Stores, Inc. 2006 Equity Incentive Plan (the “Plan”), subject to the terms set forth below and in the Plan; (ii) further acknowledges receipt of a copy of the Plan as in effect on the date hereof; and (iii) agrees with the Company as follows:

1. Effective Date. This Agreement shall take effect as of June 4, 2007, which is the date of grant of the Award.

2. Shares Subject to Award. The Award consists of 133,333 shares (the “Shares”) of common stock of the Company (“Stock”). The undersigned’s rights to the Shares are subject to the restrictions described in this Agreement and the Plan (which is incorporated herein by reference with the same effect as if set forth herein in full) in addition to such other restrictions, if any, as may be imposed by law.

3. Meaning of Certain Terms. Except as otherwise expressly provided, all terms used herein shall have the same meaning as in the Plan. The term “vest” as used herein with respect to any Share means the lapsing of the restrictions described herein with respect to such Share.

4. Nontransferability of Shares. The Shares acquired by the undersigned pursuant to this Agreement shall not be sold, transferred, pledged, assigned or otherwise encumbered or disposed of except as provided below and in the Plan.

5. Vesting of Shares. The shares acquired hereunder shall vest in accordance with the provisions of this Paragraph 5 and applicable provisions of the Plan, as follows: 66,667 Shares on and after June 4, 2008, and 66,666 on and after June 4, 2009. Notwithstanding the foregoing, no shares shall vest on any vesting date specified above unless the undersigned is then, and since the date of grant has continuously been, employed by the Company or its subsidiaries. In the event that the undersigned’s employment is terminated due to his death, by the Company other than for “Cause” or for Disability, or by the undersigned for “Good Reason” (all terms as defined in the Employment Agreement dated June 4, 2007, between the undersigned and the Company), all then outstanding and unvested Shares acquired by the undersigned hereunder shall automatically and immediately vest.

6. Forfeiture Risk. Except as provided in Section 5 above, if the undersigned ceases to be employed by the Company and its subsidiaries for any reason, any then outstanding and unvested Shares acquired by the undersigned hereunder shall be automatically and immediately forfeited. The undersigned hereby (i) appoints the Company as the attorney-in-fact of the undersigned to take such actions as may be necessary or appropriate to effectuate a transfer of the record ownership of any such shares that are unvested and forfeited hereunder, (ii) agrees to deliver to the Company, as a precondition to the issuance of any certificate or certificates with respect to unvested Shares hereunder, one or more stock powers, endorsed in blank, with respect to such Shares, and (iii) agrees to sign such other powers and take such other actions as the Company may reasonably request to accomplish the transfer or forfeiture of any unvested Shares that are forfeited hereunder.

7. Retention of Certificates. Any certificates representing unvested Shares shall be held by the Company. If unvested Shares are held in book entry form, the undersigned agrees that the Company may give stop transfer instructions to the depository to ensure compliance with the provisions hereof.

8. Effect of Certain Transactions. In the event of a Change of Control (as defined in the Stockholders Agreement), all then outstanding and unvested Shares acquired by the undersigned hereunder shall automatically and immediately vest.

9. Joinder to Agreements. The undersigned acknowledges and agrees that the Shares acquired hereunder will be subject to the Stockholders Agreement and to the Registration Rights Agreement and the transfer and other restrictions, rights, and obligations set forth in those agreements. By executing this Agreement, the undersigned hereby becomes a party to and bound by the Stockholders Agreement and the Registration Rights Agreement as a Manager (as such term is defined in those agreements), without any further action on the part of the undersigned, the Company or any other Person.

10. Legend. Any certificates representing unvested Shares shall be held by the Company, and any such certificate shall contain a legend substantially in the following form:

THE TRANSFERABILITY OF THIS CERTIFICATE AND THE SHARES OF STOCK REPRESENTED HEREBY ARE SUBJECT TO THE TERMS AND CONDITIONS (INCLUDING FORFEITURE) OF THE MICHAELS STORES, INC. 2006 EQUITY INCENTIVE PLAN AND A RESTRICTED STOCK AWARD AGREEMENT ENTERED INTO BETWEEN THE REGISTERED OWNER AND MICHAELS STORES, INC. COPIES OF SUCH PLAN AND AGREEMENT ARE ON FILE IN THE OFFICES OF MICHAELS STORES, INC.

As soon as practicable following the vesting of any such Shares the Company shall cause a certificate or certificates covering such Shares, without the aforesaid legend, to be issued and delivered to the undersigned. If any Shares are held in book-entry form, the Company may take such steps as it deems necessary or appropriate to record and manifest the restrictions applicable to such Shares.

11. Dividends, etc.. The undersigned shall be entitled to (i) receive any and all dividends or other distributions paid with respect to those Shares of which he is the record owner on the record date for such dividend or other distribution, and (ii) vote any Shares of which he is the record owner on the record date for such vote; provided, however, that any property (other than cash) distributed with respect to a share of Stock (the “associated share”) acquired hereunder, including without limitation a distribution of Stock by reason of a stock dividend, stock split

or otherwise, or a distribution of other securities with respect to an associated share, shall be subject to the restrictions of this Agreement in the same manner and for so long as the associated share remains subject to such restrictions, and shall be promptly forfeited if and when the associated share is so forfeited; and further provided, that the Administrator may require that any cash distribution with respect to the Shares other than a normal cash dividend be placed in escrow or otherwise made subject to such restrictions as the Administrator deems appropriate to carry out the intent of the Plan. References in this Agreement to the Shares shall refer, mutatis mutandis, to any such restricted amounts.

12. Sale of Vested Shares. The undersigned understands that he will be free to sell any Share once it has vested, subject to (i) satisfaction of any applicable tax withholding requirements with respect to the vesting or transfer of such Share; (ii) the completion of any administrative steps (for example, but without limitation, the transfer of certificates) that the Company may reasonably impose; (iii) applicable requirements of federal and state securities laws, (iv) the Stockholders Agreement and (v) the Registration Rights Agreement.

13. Certain Tax Matters. The undersigned expressly acknowledges the following:

a. The undersigned has been advised to confer promptly with a professional tax advisor to consider whether the undersigned should make a so-called “83(b) election” with respect to the Shares. Any such election, to be effective, must be made in accordance with applicable regulations and within thirty (30) days following the date of this Award. The Company has made no recommendation to the undersigned with respect to the advisability of making such an election.

b. The award or vesting of the Shares acquired hereunder, and the payment of dividends with respect to such Shares, may give rise to “wages” subject to withholding. The undersigned expressly acknowledges and agrees that his rights hereunder are subject to his promptly paying to the Company in cash (or by such other means as may be acceptable to the Company in its discretion, including, if the Administrator so determines, by the delivery of previously acquired Stock or shares of Stock acquired hereunder or by the withholding of amounts from any payment hereunder) all taxes required to be withheld in connection with such award, vesting or payment.

	Very truly yours,


	/s/ Brian C. Cornell
	Brian C. Cornell

Dated: June 4, 2007

The foregoing Restricted Stock
Award Agreement is hereby accepted:

MICHAELS STORES, INC.

By:	/s/ Jeffrey N. Boyer
	Jeffrey N. Boyer
	President and Chief Financial Officer

EX-10.5 5 a07-16109_1ex10d5.htm EX-10.5

Exhibit 10.5

MICHAELS STORES, INC.

STOCK OPTION AGREEMENT

Optionee: Brian C. Cornell

No. of Shares: 2,270,966

Date of Grant: June 4, 2007

Expiration Date: June 4, 2014

This Option and any securities issued upon exercise of this Option are subject to restrictions on voting and transfer and other provisions as set forth in the Amended and Restated Stockholders Agreement among Michaels Stores, Inc. and certain investors, originally dated as of October 31, 2006, as amended and restated on January 31, 2007 and amended from time to time thereafter (the “Stockholders Agreement”) and the terms of the Registration Rights Agreement referred to therein (the “Registration Rights Agreement”). This Option and any securities issued upon exercise of this Option constitute an Option and Shares, respectively, as defined in the Stockholders Agreement.

This Stock Option Agreement (this “Agreement”) is hereby entered into between Michaels Stores, Inc., a Delaware corporation (the “Company”), and the Optionee named above pursuant to the Company’s 2006 Equity Incentive Plan, as amended from time to time (the “Plan”). For the purpose of this Agreement, the “Grant Date” shall mean the date hereof, June 4, 2007.

1. Grant of Option. This Agreement evidences the grant by the Company on the Grant Date to the Optionee of an option (the “Option”) to purchase, in whole or in part, on the terms provided herein and in the Plan, a total of 2,270,966 shares of Common Stock of the Company, par value $.10 per share (the “Shares”), at the following prices per Share:

(a) 756,989 Shares at $15.00 per Share (the “Tranche 1 Option”);

(b) 756,989 Shares at $22.50 per Share (the “Tranche 2 Option”);

(c) 189,247 Shares at $30.00 per Share (the “Tranche 3 Option”);

(d) 189,247 Shares at $37.50 per Share (the “Tranche 4 Option”);

(e) 189,247 Shares at $45.00 per Share (the “Tranche 5 Option”);

and

(f) 189,247 Shares at $52.50 per Share (the “Tranche 6 Option”).

The Option evidenced by this Agreement is not intended to qualify as an incentive stock option under Section 422 of the Internal Revenue Code (the “Code”).

2. Vesting. During the Optionee’s Employment, the Option will vest and become exercisable (i) with respect to 20% of the Shares subject to each of the Tranche 1 Option, Tranche 2 Option, Tranche 3 Option, Tranche 4 Option, Tranche 5 Option and Tranche 6 Option on each of the first through fifth anniversaries of February 16, 2007 or (ii) if earlier, with respect to any unvested portion of the Option, upon a Change of Control (as defined in the Stockholders Agreement).

3. Exercise of Option.

(a) Details of Exercise. Each election to exercise this Option shall be subject to the terms and conditions of the Plan and shall be in writing, signed by the Optionee or by his or her executor or administrator or by the Person or Persons to whom this Option is transferred by will or the applicable laws of descent and distribution (the “Legal Representative”), and made pursuant to and in accordance with the terms and conditions set forth in the Plan. The latest date on which this Option may be exercised (the “Final Exercise Date”) is the date which is the seventh (7th) anniversary of the Grant Date, subject to earlier termination in accordance with the terms and provisions of the Plan and this Agreement.

(b) Payment of Exercise Price. The following are permitted forms of payment for the exercise of this Option and for the remittance of withholding taxes pursuant to Section 8: (a) cash or check acceptable to the Administrator, (b) actual or constructive transfer to the Company of shares of Stock owned by the Optionee for at least six months (or, with the consent of the Administrator, for less than six months) having an aggregate Fair Market Value at the date of exercise equal to the aggregate exercise price of the Award, (c) authorization by the Optionee of the Company to withhold a number of shares of Stock otherwise issuable to the Optionee under this Option having an aggregate Fair Market Value on the date of exercise equal to the aggregate exercise price of this Option and, if applicable, the amount of any withholding tax, (d) at such time, if any, as the Stock is publicly traded through a broker-assisted “cashless” exercise program acceptable to the Administrator, and (e) by a combination of such methods of payment.

4. Effect of Certain Transactions. In the event of a Change of Control (as defined in the Stockholders Agreement), this Option will vest and become fully exercisable.

5. Representations and Warranties of Optionee.

Optionee represents and warrants that:

(a) Authorization. Optionee has full legal capacity, power, and authority to execute and deliver this Agreement and to perform Optionee’s obligations hereunder. This Agreement has been duly executed and delivered by Optionee and is the legal, valid, and binding obligation of Optionee enforceable against Optionee in accordance with the terms hereof.

(b) No Conflicts. The execution, delivery, and performance by Optionee of this Agreement and the consummation by Optionee of the transactions contemplated

hereby will not, with or without the giving of notice or lapse of time, or both (i) violate any provision of law, statute, rule or regulation to which Optionee is subject, (ii) violate any order, judgment or decree applicable to Optionee, or (iii) conflict with, or result in a breach of default under, any term or condition of any agreement or other instrument to which Optionee is a party or by which Optionee is bound.

(c) Thorough Review, etc. Optionee has thoroughly reviewed the Plan, this Agreement, the Stockholders Agreement and the Registration Rights Agreement in their entirety. Optionee has had an opportunity to obtain the advice of counsel (other than counsel to the Company or its Affiliates) prior to executing this Agreement, and fully understands all provisions of the Plan and this Agreement.

(d) Knowledge. Optionee has been advised that neither this Option or the Shares received upon this Option’s exercise have been registered under the Securities Act or any state securities laws and, therefore, none of those securities can be resold unless they are registered under the Securities Act and applicable state securities laws or unless an exemption from such registration requirements is available. Except to the extent provided in the Stockholders Agreement and the Registration Rights Agreement, such Optionee is aware that the Company is under no obligation to effect any such registration with respect to any such securities or to file for or comply with any exemption from registration. Such Optionee is acquiring and holding the Option and any Shares received upon the Option’s exercise for its own account and not with a view to, or for resale in connection with, the distribution thereof in violation of the Securities Act. Such Optionee is either an “accredited investor” as defined in Regulation D under the Securities Act or possesses such knowledge and experience in financial and business matters that he or she is capable of evaluating the merits and risks of an investment in the securities of the Company described in this Agreement.

6. Joinder to Agreements. Optionee acknowledges and agrees that the Shares received upon exercise of this Option will be subject to the Stockholders Agreement and to the Registration Rights Agreement and the transfer and other restrictions, rights, and obligations set forth in those agreements. By executing this Agreement, Optionee hereby becomes a party to and bound by the Stockholders Agreement and the Registration Rights Agreement as a Manager (as such term is defined in those agreements), without any further action on the part of Optionee, the Company or any other Person.

7. Legends. Certificates evidencing any Shares issued upon exercise of the Option granted hereby may bear the following legends, in addition to any legends which may be required by the Stockholders Agreement or by the Registration Rights Agreement:

“The securities represented by this certificate were issued in a private placement, without registration under the Securities Act of 1933, as amended (the “Act”), and may not be sold, assigned, pledged, or otherwise transferred in the absence of an effective registration under the Act covering the transfer or an opinion of counsel, satisfactory to the issuer, that registration under the Act is not required.”

8. Withholding. No Shares will be issued, sold or transferred pursuant to the exercise of this Option unless and until the Person exercising this Option shall have remitted to the Company an amount sufficient to satisfy any federal, state, or local withholding tax requirements, or shall have made other arrangements satisfactory to the Company with respect to such taxes.

9. Nontransferability of Option. This Option is not transferable by the Optionee other than by will or the applicable laws of descent and distribution, and is exercisable during the Optionee’s lifetime only by the Optionee.

10. Status Change. Upon the termination of the Optionee’s Employment, this Option shall continue or terminate as, and to the extent provided in the Plan.

11. Effect on Employment. Neither the grant of this Option, nor the issuance of Shares upon exercise of this Option, will give the Optionee any right to be retained in the employ of the Company or its Affiliates, affect the right of the Company or its Affiliates to discharge or discipline such Optionee at any time, or affect any right of such Optionee to terminate his or her Employment at any time.

12. Indemnity. Optionee hereby indemnifies and agrees to hold the Company harmless from and against all losses, damages, liabilities and expenses (including without limitation reasonable attorneys fees and charges) resulting from any breach of any representation, warranty, or agreement of Optionee in this Agreement or any misrepresentation of Optionee in this Agreement.

13. Provisions of the Plan. This Agreement is subject in its entirety to the provisions of the Plan, which are incorporated herein by reference. A copy of the Plan as in effect on the Grant Date has been furnished to the Optionee. By exercising all or any part of this Option, the Optionee agrees to be bound by the terms of the Plan and this Agreement. In the event of any conflict between the terms of this Agreement and the Plan, the terms of this Agreement shall control.

14. Definitions. Initially capitalized terms not otherwise defined herein have the meaning provided in the Plan.

15. General. For purposes of this Agreement and any determinations to be made by the Administrator hereunder, the determinations by the Administrator shall be binding upon the Optionee and any transferee.

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its duly authorized officer.

	MICHAELS STORES, INC.


	By:	/s/ Jeffrey N. Boyer
		Name: Jeffrey N. Boyer
		Title: President and Chief Financial Officer

Dated: June 4, 2007

The undersigned acknowledges and agrees to the terms of this Agreement and acknowledges and agrees that by the undersigned’s execution below, the undersigned is also joining and becoming a party to the Stockholders Agreement and the Registration Rights Agreement:

/s/ Brian C. Cornell
Brian C. Cornell

EX-31.1 6 a07-16109_1ex31d1.htm EX-31.1

Exhibit 31.1

CERTIFICATIONS

I, Brian C. Cornell, 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 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 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.

Date: June 11, 2007	/s/ Brian C. Cornell
	Brian C. Cornell
	Chief Executive Officer
	(Principal Executive Officer)

EX-31.2 7 a07-16109_1ex31d2.htm EX-31.2

Exhibit 31.2

CERTIFICATIONS

I, Jeffrey N. Boyer, 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.

Date: June 11, 2007	/s/ Jeffrey N. Boyer
	Jeffrey N. Boyer
	President and Chief Financial Officer
	(Principal Financial Officer)

EX-32.1 8 a07-16109_1ex32d1.htm EX-32.1

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 May 5, 2007, 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.

Date: June 11, 2007	/s/ BRIAN C. CORNELL
	Brian C. Cornell Chief Executive Officer (Principal Executive Officer)


	/s/ JEFFREY N. BOYER
	Jeffrey N. Boyer President and Chief Financial Officer (Principal Financial Officer)

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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