-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CxayoIx8KAeLeIsk+hosDMGCRcTlftb9bP/k2qXgkf9VPRFGwEPUckQApkX/D5N9 K8H5e8fM62e6WQd2M/UQjg== 0001104659-08-038568.txt : 20080606 0001104659-08-038568.hdr.sgml : 20080606 20080606164226 ACCESSION NUMBER: 0001104659-08-038568 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 20080503 FILED AS OF DATE: 20080606 DATE AS OF CHANGE: 20080606 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: 08886149 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 a08-16045_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 3, 2008

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, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated filer o
Non-accelerated filer x		Smaller reporting company o
(Do not check if a smaller reporting company)

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

As of May 31, 2008, 118,477,068 shares of the Registrant’s Common Stock were outstanding.

MICHAELS STORES, INC.

FORM 10-Q

	Part I—FINANCIAL INFORMATION	3
Item 1.	Financial Statements	3
	Consolidated Balance Sheets at May 3, 2008, February 2, 2008, and May 5, 2007 (unaudited)	3
	Consolidated Statements of Operations for the quarter ended May 3, 2008 and May 5, 2007 (unaudited)	4
	Consolidated Statements of Cash Flows for the quarter ended May 3, 2008 and May 5, 2007 (unaudited)	5
	Notes to Consolidated Financial Statements (unaudited)	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	24
Item 4.	Controls and Procedures	24
	Part II—OTHER INFORMATION	25
Item 1.	Legal Proceedings	25
Item 1A.	Risk Factors	25
Item 5.	Other Information	25
Item 6.	Exhibits	26
Signatures		27

MICHAELS STORES, INC.

Part I—FINANCIAL INFORMATION

Item 1. Financial Statements.

MICHAELS STORES, INC.
CONSOLIDATED BALANCE SHEETS

(In millions, except share data)
(Unaudited)

	May 3,			February 2,			May 5,
	2008			2008			2007
ASSETS
Current assets:
Cash and equivalents	$	42		$	29		$	45
Merchandise inventories	841			845			871
Prepaid expenses and other	70			70			76
Deferred income taxes	31			31			35
Income tax receivable	19			5			50
Current assets - discontinued operations	—			—			8
Total current assets	1,003			980			1,085
Property and equipment, at cost	1,168			1,155			1,129
Less accumulated depreciation	(748		)	(722		)	(682		)
	420			433			447
Goodwill	94			94			116
Debt issuance costs, net of accumulated amortization of $26 at May 3, 2008; $22 at February 2, 2008; and $9 at May 5, 2007	99			103			116
Other assets	3			4			8
Non-current assets - discontinued operations	—			—			6
	196			201			246
Total assets	$	1,619		$	1,614		$	1,778

LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable	$	191		$	221		$	238
Accrued liabilities and other	273			332			256
Current portion of long-term debt	235			122			345
Current liabilities - discontinued operations	2			4			—
Total current liabilities	701			679			839
Long-term debt	3,744			3,741			3,731
Deferred income taxes	4			4			16
Other long-term liabilities	79			80			81
Long-term liabilities - discontinued operations	1			2			1
Total long-term liabilities	3,828			3,827			3,829
	4,529			4,506			4,668
Commitments and contingencies
Stockholders’ deficit:
Common Stock, $0.10 par value, 220,000,000 shares authorized; 118,415,735 shares issued and outstanding at May 3, 2008; 118,421,069 shares issued and outstanding at February 2, 2008; 118,262,731 shares issued and outstanding at May 5, 2007	12			12			12
Additional paid-in capital	16			12			6
Accumulated deficit	(2,947		)	(2,926		)	(2,918		)
Accumulated other comprehensive income	9			10			10
Total stockholders’ deficit	(2,910		)	(2,892		)	(2,890		)
Total liabilities and stockholders’ deficit	$	1,619		$	1,614		$	1,778

See accompanying notes to consolidated financial statements.

MICHAELS STORES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS

(In millions)
(Unaudited)

	Quarter Ended
	May 3,			May 5,
	2008			2007
Net sales	$	847		$	839
Cost of sales and occupancy expense	521			513
Gross profit	326			326
Selling, general, and administrative expense	272			254
Transaction expenses	—			6
Related party expenses	4			4
Store pre-opening costs	2			2
Operating income	48			60
Interest expense	78			95
Other (income) and expense, net	—			(3		)
Loss before income taxes and discontinued operations	(30		)	(32		)
Income tax benefit	(10		)	(10		)
Loss before discontinued operations	(20		)	(22		)
Discontinued operations loss, net of income tax	—			(1		)
Net loss	$	(20	)	$	(23	)

See accompanying notes to consolidated financial statements.

MICHAELS STORES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)
(Unaudited)

	Quarter Ended
	May 3,			May 5,
	2008			2007
Operating activities:
Net loss	$	(20	)	$	(23	)
Adjustments:
Depreciation and amortization	31			31
Share-based compensation	3			1
Deferred financing costs amortization	4			4
Accretion of subordinated discount notes	9			8
Changes in assets and liabilities:
Merchandise inventories	4			(31		)
Prepaid expenses and other	—			(3		)
Deferred income taxes and other	1			(14		)
Accounts payable	(38		)	13
Accrued interest	(53		)	(29		)
Accrued liabilities and other	(9		)	2
Income taxes receivable	(13		)	(9		)
Other long-term liabilities	(2		)	(1		)
Net cash used in operating activities	(83		)	(51		)

Investing activities:
Additions to property and equipment	(21		)	(28		)
Net cash used in investing activities	(21		)	(28		)

Financing activities:
Borrowings on asset-based revolving credit facility	304			448
Payments on asset-based revolving credit facility	(193		)	(333		)
Repayments on senior secured term loan facility	(6		)	(6		)
Equity investment of Management	—			4
Repurchase of Common Stock	—			—
Payment of capital leases	(3		)	(4		)
Change in cash overdraft	14			(15		)
Other	1			—
Net cash provided by financing activities	117			94

Net increase in cash and equivalents	13			15
Cash and equivalents at beginning of period	29			30
Cash and equivalents at end of period	$	42		$	45

See accompanying notes to consolidated financial statements.

MICHAELS STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the Quarter Ended May 3, 2008
(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 the “Company”, “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. Therefore, these financial statements should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended February 2, 2008.

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 3, 2008 are not indicative of the results to be expected for the entire year.

The balance sheet at February 2, 2008 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 2, 2008.

We report on the basis of a 52 or 53-week fiscal year, which ends on the Saturday closest to January 31. All references herein to “fiscal 2008” relate to the 52 weeks ending January 31, 2009, and all references to “fiscal 2007” relate to the 52 weeks ended February 2, 2008. In addition, all references herein to “the first quarter of fiscal 2008” relate to the 13 weeks ended May 3, 2008, and all references to “the first quarter of fiscal 2007” relate to the 13 weeks ended May 5, 2007.

Reclassifications

Certain prior year amounts were reclassified to conform to the current year presentation. These reclassifications consist primarily of the presentation of discontinued operations.

Recent Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurements, which is intended to increase consistency and comparability in fair value measurements by defining fair value, establishing a framework for measuring fair value and expanding disclosures about fair value measurements. SFAS 157 was originally effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. In November 2007, the FASB placed a one year deferral for the implementation of SFAS 157 for nonfinancial assets and liabilities; however, SFAS 157 is effective for fiscal years beginning after November 15, 2007 for financial assets and liabilities, as well as for any other assets and liabilities that are carried at fair value on a recurring basis in financial statements. We adopted all requirements of SFAS 157 as they relate to financial assets and liabilities on February 3, 2008, with no impact on our consolidated financial statements. The requirements related to nonfinancial assets and liabilities will be adopted on February 1, 2009, as allowed by SFAS 157. We have not yet determined the impact, if any, on our consolidated financial statements for these nonfinancial assets and liabilities.

In February 2007, the FASB issued SFAS 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. We adopted SFAS 159 on February 3, 2008, and there was no impact on our consolidated financial statements as we did not choose to measure any eligible financial assets or liabilities at fair value.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (“SFAS 141R”). SFAS 141R replaces SFAS No. 141, Business Combinations. The statement retains the purchase method of accounting used in business combinations, but replaces SFAS 141 by establishing principles and requirements for the recognition and measurement of assets, liabilities and goodwill, including the requirement that most transaction costs and restructuring costs be expensed. In addition, the statement requires disclosures to enable users to evaluate the nature and financial effects of the business combination. SFAS 141R is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. We will adopt SFAS 141R on February 1, 2009 for acquisitions on or after this date.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133. SFAS 161 requires qualitative disclosures about objectives and strategies for using derivatives, quantitative data about the fair value of and gains and losses on derivative contracts, and details of credit-risk-related contingent features in hedged positions. The statement also requires enhanced disclosures regarding how and why entities use derivative instruments, how derivative instruments and related hedged items are accounted for in accordance with SFAS 133 and its related interpretation, and how derivative instruments and related hedged items affect entity’s financial position, financial performance, and cash flows. SFAS 161 is effective for fiscal years and interim periods beginning after November 15, 2008. We will adopt the new disclosure requirements of SFAS 161 in the first quarter of 2009.

Note 2. Discontinued Operations

On October 16, 2007, we announced plans to align resources around our core retail chains, Michaels and Aaron Brothers. As a result, we discontinued our concept businesses, Recollections and Star Decorators Wholesale. As of the end of fiscal 2007, we had closed 11 Recollections and three of the four Star locations. The remaining Star location has been converted to a Michaels store.

The unaudited consolidated financial statements, accompanying notes and other information provided in this Quarterly Report on Form 10-Q reflect these concept businesses as discontinued operations for all periods presented.

Summarized financial information with respect to the results of operations of these discontinued operations is as follows:

	Quarter Ended
	May 3, 2008		May 5, 2007
	(in millions)

Net sales	$	—	$	5

Loss from discontinued operations before income taxes	$	—	$	(1	)
Income tax benefit	—		—
Net loss from discontinued operations	$	—	$	(1	)

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. The table below sets forth a summary of stock option activity for the quarters ended May 3, 2008 and May 5, 2007. As of May 3, 2008,

there are 133,333 shares of restricted stock outstanding, 10.7 million share-based awards outstanding and up to 3.4 million shares of Common Stock remain available for grant.

	Quarter Ended
	May 3, 2008		May 5, 2007
	(in millions)

Outstanding at beginning of period	11.1		—
Grants	1.1		9.7
Cancellations	(1.4	)	—
Outstanding at end of period	10.8		9.7

Generally, 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 ranged from $15 per share to $52.50 per share. The fair value of the awards, for the purpose of calculating compensation expense, was determined after considering various factors, and using the Black-Scholes-Merton option valuation model. Share-based compensation expense associated with these awards was $3 million and $1 million for the first quarter of fiscal 2008 and 2007, respectively.

Note 4. Debt

Our outstanding debt is detailed in the table below. We were in compliance with the terms and conditions of all debt agreements for all periods presented.

	May 3, 2008		February 2, 2008		Interest Rate
	(In millions)

Senior notes	$	750	$	750	10.000	%
Senior subordinated notes	400		400		11.375	%
Subordinated discount notes	303		293		13.000	%
Senior secured term loan	2,315		2,321		Variable
Asset-based revolving credit facility	208		97		Variable
Other	3		2		Variable
Total debt	3,979		3,863
Less current portion	235		122
Long-term debt	$	3,744	$	3,741

Asset-based revolving credit facility

Our October 31, 2006 senior secured asset-based revolving credit facility with Banc of America, N.A. and other lenders (the “Asset-based revolving credit facility”) provides senior secured financing of up to $1.0 billion, subject to a borrowing base as described in our Annual Report on Form 10-K. As of May 3, 2008, the borrowing base was $711 million with $477 million of unused availability.

Senior secured term loan facility

Borrowings under our October 31, 2006 senior secured term loan facility with Deutsche Bank A.G. New York Branch, and other lenders, (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 at May 3, 2008 was 1.25% with respect to base rate borrowings and 2.25% with respect to LIBOR borrowings, subject to adjustments based on the leverage and ratings thresholds set forth in the Senior secured term loan facility agreement.

Note 5. Comprehensive Income

Our comprehensive income is as follows:

	Quarter Ended
	May 3, 2008			May 5, 2007
	(in millions)

Net loss	$	(20	)	$	(23	)
Other comprehensive income (loss):
Foreign currency translation adjustment and other	(1		)	3
Comprehensive loss	$	(21	)	$	(20	)

Note 6. Commitments and Contingencies

We are involved in ongoing legal and regulatory proceedings. Other than those described in the following paragraphs, there were no material changes to our disclosures of commitments and contingencies from our Annual Report on Form 10-K for the fiscal year ended February 2, 2008.

Shareholder Claims

The Company was a defendant in an action filed on September 6, 2006 by a former purported shareholder, Massachusetts Laborers’ Annuity Fund, which sought to represent a class of other former shareholders. This action was consolidated with two other actions filed by other purported former shareholders and was pending in the United States District Court, Northern District of Texas, Dallas Division. By an order dated December 8, 2006, Massachusetts Laborers’ Annuity Fund was named the lead plaintiff in this action. On July 5, 2007 the lead plaintiff filed a first amended consolidated class action complaint, which named Michaels and certain of its current and former officers and directors as defendants. The amended complaint alleged 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 made allegations regarding the Company’s financial restatement of periods prior to 2006, as well as the Merger (as defined in Note 8 to the Consolidated Financial Statements). In the amended complaint, the lead plaintiff asserted claims against all defendants for violations of Section 14(a) of the Securities Exchange Act of 1934, Rule 14a-9 promulgated thereunder, and Section 20(a) of the Securities Exchange Act of 1934. The lead plaintiff sought, 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. On April 18, 2008, the court dismissed with prejudice all of the claims against all of the defendants. The time for the lead plaintiff to file an appeal of that dismissal has now elapsed.

Employee Class Action Claims

Cotton Claim

On December 20, 2002, James Cotton, a former store manager of Michaels of Canada, ULC (“Michaels of Canada”), our wholly-owned subsidiary, and Suzette Kennedy, a former assistant manager of Michaels of Canada, commenced a purported class proceeding against Michaels of Canada and Michaels Stores, Inc. on behalf of themselves and current and former store managers and assistant store managers employed in Canada. The Cotton claim was filed in the Ontario Superior Court of Justice and alleges that the defendants violated employment standards legislation in Ontario and other provinces and territories of Canada by failing to pay overtime compensation as required by that legislation. The Cotton claim also alleges that this conduct was in breach of the contracts of employment of those individuals. The Cotton claim seeks a declaration that the defendants have acted in breach of applicable legislation, payment to current and former employees for overtime, damages for breach of contract, punitive, aggravated and exemplary damages, interest, and costs. In May of 2005, the plaintiffs delivered material in support of their request that this action be certified as a class proceeding. Michaels filed and

served its responding materials opposing class certification on January 31, 2006. The hearing with respect to class certification has been set for December 9-10, 2008. We intend to contest certification of this claim as a class action. Further, we believe we have certain defenses on the merits and intend to defend this lawsuit vigorously. We are unable to estimate a range of possible loss, if any, in this claim.

DeJoseph Claim

On December 29, 2006, John DeJoseph, a former Michaels store manager in Valencia, California, commenced a purported class action proceeding against Michaels Stores, Inc. on behalf of himself and current and former salaried store managers employed in California from May 10, 2002 to the present. The DeJoseph suit was filed in the Superior Court of California, County of Los Angeles. The DeJoseph suit alleges that Michaels failed to pay overtime wages, provide meal periods, accurately record hours worked, provide itemized employee wage statements, and that Michaels unlawfully made deductions from employees’ earnings. The DeJoseph suit additionally alleges that the foregoing conduct was in breach of California’s unfair competition law. The plaintiff seeks injunctive relief, damages for unpaid wages, penalties, restitution, interest, and attorneys’ fees and costs. In April 2008, the Court certified the class as to monetary relief for the overtime claim, but denied certification as to the wage statement and meal break claims plus the injunctive relief portion of the overtime claim. We believe we have meritorious defenses and intend to defend this lawsuit vigorously. We are unable to estimate a range of loss, if any, in this case.

Torgerson Claim

On January 26, 2007, Katherine Torgerson, a former “lead framer” for Aaron Brothers, Inc. (“Aaron Brothers”) in San Diego, California, filed a purported class action proceeding in the Superior Court of California, County of San Diego. Torgerson filed this action against Aaron Brothers on behalf of herself and all current and former California-based leads or keyholders. The Torgerson suit alleges that Aaron Brothers failed to provide its leads and keyholders with adequate meal and rest breaks (or compensation in lieu thereof) and accurate wage statements. The Torgerson suit additionally alleges that the foregoing conduct was in breach of California’s unfair competition law. The plaintiff sought injunctive relief, compensatory damages, meal and rest break penalties, waiting time penalties, interest, and attorneys’ fees and costs. The parties participated in voluntary mediation on July 10, 2007 and had reached a tentative settlement of the case. On April 25, 2008, the Court approved the settlement thereby requiring Aaron Brothers to make the settlement payments by August 8, 2008. These settlement payments will have no material impact on our statement of operations, balance sheet, or cash flows for any period presented.

Consumer Claims

Palmer Claim

On August 30, 2007, Rebecca Palmer, a consumer, filed a purported class action proceeding in Superior Court of California, County of San Diego. Palmer filed this action against Michaels Stores, Inc., on behalf of herself and all similarly-situated California consumers. The Palmer suit alleges that Michaels unlawfully requested and recorded personally identifiable information (i.e., her zip code) as part of a credit card transaction. The plaintiff seeks statutory penalties, interest, and attorneys’ fees. On March 28, 2008, the plaintiff submitted a brief in support of class certification. We contested class certification by filing responding materials on May 8, 2008. We also filed a motion for summary judgment on May 8, 2008. Plaintiff filed a reply brief in support of class certification on May 23, 2008. On May 30, 2008, the Court orally denied plaintiff’s motion for class certification. We anticipate a formal written opinion in this regard, but the Court retains the ability to reconsider its oral decision. If the case proceeds, we believe we have certain defenses on the merits and intend to defend this lawsuit vigorously. We are unable to estimate a range of possible loss, if any, in this claim.

Note 7. Segments

We consider our Michaels and Aaron Brothers 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. Therefore, we combine both operating segments into one reporting segment.

Our chief operating decision makers evaluate historical operating performance, plan and forecast future periods’

operating performance and an element of 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.

	Quarter Ended
	May 3, 2008			May 5, 2007
	(in millions)

Loss before income taxes and discontinued operations	$	(30	)	$	(32	)
Interest expense	78			95
Depreciation and amortization	31			30
EBITDA	$	79		$	93

Our sales and assets by country are as follows:

	Net Sales		Total Assets
	(in millions)

Quarter ended May 3, 2008:
United States	$	778	$	1,509
Canada	69		110
Consolidated Total	$	847	$	1,619

Quarter ended May 5, 2007:
United States	$	779	$	1,684
Canada	60		94
Consolidated Total	$	839	$	1,778

We present assets based on their physical, geographic location. Certain assets located in the United States are also used to support our Canadian operations, but we do not allocate these assets to Canada.

Note 8. Related Party Transactions

As previously disclosed, 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 Bain Capital Partners, LLC and The Blackstone Group. We pay annual management fees to Bain Capital Partners, LLC and The Blackstone Group (collectively, together with their applicable affiliates, the “Sponsors”) and Highfields Capital Management LP in the amount of $12 million and $1 million, respectively. We recognized $3 million of expense related to annual management fees during the first quarter of fiscal 2008 and fiscal 2007. These expenses are included in related party expenses on the statement of operations.

Bain Capital owns a majority ownership stake in an external vendor we utilize to print our circular advertisements. Expenses associated with this vendor during the first quarter of fiscal 2008 and fiscal 2007 were $10 million for each quarter. These expenses are included in selling, general and administrative expense on the consolidated statements of operations.

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 2008 and fiscal 2007 were $2 million and $1 million, respectively. These expenses are included in selling, general and administrative expense on the consolidated statements of operations.

During the third quarter of fiscal 2007, Bain Capital acquired an ownership stake in an external vendor we utilize for non-merchandise supplies. Expenses associated with this vendor during the first quarter of fiscal 2008 were approximately $1 million. These expenses are included in selling, general and administrative expense on the consolidated statements of operations.

We have a participation agreement with CoreTrust Purchasing Group (“CPG”), which designates CPG as our exclusive

supplier of certain 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 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 fiscal 2007, officers of Michaels Stores, Inc. and its subsidiaries were offered the opportunity to purchase shares of our Common Stock. There were no shares sold to officers of Michaels Stores, Inc. during the first quarter of fiscal 2008. Also, during the first quarter of 2008, we repurchased 5,334 shares from officers who are no longer with the Company.

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 are amortizing these Separation Agreements over two years. These expenses are included in related party expenses on the consolidated statements of operations.

Note 9. Condensed Consolidating Financial Information

All of the Company’s obligations under the Senior notes, Senior subordinated notes, Subordinated discount notes, Senior secured term loan, and Asset-based revolving credit facility are guaranteed by the Parent and Guarantor subsidiaries. Currently, there are no non-guarantor subsidiaries. The following condensed consolidating financial information represents the financial information of Michaels Stores, Inc. and its wholly-owned subsidiary guarantors, prepared on the equity basis of accounting. The information is presented in accordance with the requirements of Rule 3-10 under the SEC’s Regulation S-X. The financial information may not necessarily be indicative of results of operations, cash flows, or financial position had the subsidiary guarantors operated as independent entities.

Supplemental Condensed Consolidating Balance Sheet

	May 3, 2008
	Parent Company			Guarantor Subsidiaries		Eliminations			Consolidated
	(in millions)

ASSETS
Current assets:
Cash and equivalents	$	26		$	16	$	—		$	42
Merchandise inventories	622			219		—			841
Intercompany receivables	—			351		(351		)	—
Other	74			46		—			120
Total current assets	722			632		(351		)		1,003
Property and equipment, net	299			121		—			420
Goodwill, net	94			—		—			94
Investment in subsidiaries	463			—		(463		)	—
Other assets	87			15		—			102
Total assets	$	1,665		$	768	$	(814	)	$	1,619

LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable	$	26		$	165	$	—		$	191
Accrued liabilities and other	195			78		—			273
Current portion of long-term debt	235			—		—			235
Intercompany payable	351			—		(351		)	—
Other	(39		)	41		—			2
Total current liabilities	768			284		(351		)	701
Long-term debt	3,744			—		—			3,744
Other long-term liabilities	63			21		—			84
Total stockholders’ deficit	(2,910		)	463		(463		)	(2,910		)
Total liabilities and stockholders’ deficit	$	1,665		$	768	$	(814	)	$	1,619

Supplemental Condensed Consolidating Balance Sheet

	February 2, 2008
	Parent Company			Guarantor Subsidiaries		Eliminations			Consolidated
	(in millions)

ASSETS
Current assets:
Cash and equivalents	$	26		$	3	$	—		$	29
Merchandise inventories	622			223		—			845
Intercompany receivables	—			250		(250		)	—
Other	61			45		—			106
Total current assets	709			521		(250		)		980
Property and equipment, net	308			125		—			433
Goodwill, net	94			—		—			94
Investment in subsidiaries	325			—		(325		)	—
Other assets	91			16		—			107
Total assets	$	1,527		$	662	$	(575	)	$	1,614

LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable	$	29		$	192	$	—		$	221
Accrued liabilities and other	249			83		—			332
Current portion of long-term debt	122			—		—			122
Intercompany payable	250			—		(250		)	—
Other	(37		)	41		—			4
Total current liabilities	613			316		(250		)	679
Long-term debt	3,741			—		—			3,741
Other long-term liabilities	65			21		—			86
Total stockholders’ deficit	(2,892		)	325		(325		)	(2,892		)
Total liabilities and stockholders’ deficit	$	1,527		$	662	$	(575	)	$	1,614

Supplemental Condensed Consolidating Balance Sheet

	May 5, 2007
	Parent Company			Guarantor Subsidiaries		Eliminations			Consolidated
	(in millions)

ASSETS
Current assets:
Cash and equivalents	$	28		$	17	$	—		$	45
Merchandise inventories	671			200		—			871
Intercompany receivables	—			200		(200		)	—
Other	149			20		—			169
Total current assets	848			437		(200		)		1,085
Property and equipment, net	320			127		—			447
Goodwill, net	94			22		—			116
Investment in subsidiaries	334			—		(334		)	—
Other assets	116			14		—			130
Total assets	$	1,712		$	600	$	(534	)	$	1,778

LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable	$	65		$	173	$	—		$	238
Accrued liabilities and other	191			65		—			256
Current portion of long-term debt	345			—		—			345
Intercompany payable	200			—		(200		)	—
Other	(3		)	3		—			—
Total current liabilities	798			241		(200		)	839
Long-term debt	3,731			—		—			3,731
Other long-term liabilities	73			25		—			98
Total stockholders’ deficit	(2,890		)	334		(334		)	(2,890		)
Total liabilities and stockholders’ deficit	$	1,712		$	600	$	(534	)	$	1,778

Supplemental Condensed Consolidating Statement of Operations

	Quarter Ended May 3, 2008
	Parent Company			Guarantor Subsidiaries			Eliminations			Consolidated
	(in millions)

Net sales	$	743		442			$	(338	)	$	847
Cost of sales and occupancy expense	504			355			(338		)	521
Gross profit	239			87			—			326
Selling, general, and administrative expense	240			32			—			272
Transaction expenses	—			—			—			—
Related party expenses	4			—			—			4
Store pre-opening costs	2			—			—			2
Operating (loss) income	(7		)	55			—			48
Interest expense	78			—			—			78
Other (income) and expense, net	—			—			—			—
Intercompany charges (income)	17			(17		)	—			—
Equity in earnings of subsidiaries	72			—			(72		)	—
Income (loss) before income taxes and discontinued operations	(30		)	72			(72		)	(30		)
Provision (benefit) for income taxes	(10		)	24			(24		)	(10		)
Income (loss) before discontinued operations	(20		)	48			(48		)	(20		)
Discontinued operations loss, net of income tax	—			—			—			—
Net income (loss)	$	(20	)	$	48		$	(48	)	$	(20	)

Supplemental Condensed Consolidating Statement of Operations

	Quarter Ended May 5, 2007
	Parent Company			Guarantor Subsidiaries			Eliminations			Consolidated
	(in millions)

Net sales	$	742		408			$	(311	)	$	839
Cost of sales and occupancy expense	497			327			(311		)	513
Gross profit	245			81			—			326
Selling, general, and administrative expense	223			31			—			254
Transaction expenses	6			—			—			6
Related party expenses	4			—			—			4
Store pre-opening costs	1			1			—			2
Operating income	11			49			—			60
Interest expense	95			—			—			95
Other (income) and expense, net	—			(3		)	—			(3		)
Intercompany charges (income)	19			(19		)	—			—
Equity in earnings of subsidiaries	71			—			(71		)	—
Income (loss) before income taxes and discontinued operations	(32		)	71			(71		)	(32		)
Provision (benefit) for income taxes	(10		)	22			(22		)	(10		)
Income (loss) before discontinued operations	(22		)	49			(49		)	(22		)
Discontinued operations loss, net of income tax	(1		)	—			—			(1		)
Net income (loss)	$	(23	)	$	49		$	(49	)	$	(23	)

Supplemental Condensed Consolidating Statement of Cash Flows

	Quarter Ended May 3, 2008
	Parent Company			Guarantor Subsidiaries			Eliminations			Consolidated
	(in millions)

Operating activities:
Net cash used in operating activities	$	(100	)	$	53		$	(36	)	$	(83	)

Investing activities:
Cash paid for property and equipment	(16		)	(5		)	—			(21		)
Net cash used in investing activities	(16		)	(5		)	—			(21		)

Financing activities:
Net borrowings of long-term debt	105			—			—			105
Intercompany dividends	—			(36		)	36			—
Other financing activities	12			—			—			12
Net cash provided by financing activities	117			(36		)	36			117

Increase in cash and equivalents	1			12			—			13
Beginning cash and cash equivalents	26			3			—			29
Ending cash and cash equivalents	$	27		$	15		$	—		$	42

Supplemental Condensed Consolidating Statement of Cash Flows

	Quarter Ended May 5, 2007
	Parent Company			Guarantor Subsidiaries			Eliminations			Consolidated
	(in millions)

Operating Activities:
Net cash used in operating activities	$	(66	)	$	42		$	(27	)	$	(51	)

Investing Activities:
Cash paid for property and equipment	(27		)	(1		)	—			(28		)
Net cash used in investing activities	(27		)	(1		)	—			(28		)

Financing Activities:
Net borrowings of long-term debt	109			—			—			109
Equity investment of the Sponsors	4			—			—			4
Intercompany dividends	—			(27		)	27			—
Other financing activities	(19		)	—			—			(19		)
Net cash provided by financing activities	94			(27		)	27			94

Increase in cash and equivalents	1			14			—			15
Beginning cash and cash equivalents	27			3			—			30
Ending cash and equivalents	$	28		$	17		$	—		$	45

Note 10. Subsequent Event

On May 16, 2008, we executed a foreign currency cash flow hedge for a total notional value of $54.5 million to mitigate the effects of currency fluctuations, as the functional currency of our Canadian subsidiary is the Canadian dollar. The term of this hedge begins on June 1, 2008 and extends through the end of the first quarter of fiscal 2009.

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

All expressions of the “Company”, “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 2, 2008. Such forward-looking statements are based upon management’s current knowledge and assumptions about future events and involve risks and uncertainties that could cause actual results, performance or achievements to be materially different from anticipated results, prospects, performance or achievements expressed or implied by such forward-looking statements. Such risks and uncertainties include, but are not limited to:

· risks related to our substantial indebtedness, as our substantial leverage 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, expose us to interest rate risk to the extent of our variable rate debt and prevent us from meeting our obligations under our notes and credit facilities;

· restrictions in our debt agreements that limit our flexibility in operating our business, as our senior secured credit facilities and the indentures governing our notes contain various covenants that limit our ability to engage in specified types of transactions;

· our ability to open new stores, as our growth depends on our strategy of increasing our number of stores and if we are unable to continue this strategy, our ability to increase our sales, profitability, and cash flow could be impaired;

· how well we manage our business;

· we may fail to optimize or adequately maintain our perpetual inventory and automated replenishment systems;

· improvements to our supply chain may not be fully successful;

· changes in customer demands could materially adversely affect our sales, operating results, and cash flow;

· unexpected or unfavorable consumer responses to our promotional or merchandising programs could materially adversely affect our sales, operating results, and cash flow;

· changes in newspaper subscription rates may result in reduced exposure to our circular advertisements;

· changes in consumer confidence could result in a reduction in consumer spending on items perceived to be discretionary;

· failure to adequately maintain the security of our electronic and other confidential information could materially adversely affect our financial condition and operating results;

· our suppliers may fail us;

· our reliance on foreign suppliers increases our risk of obtaining adequate, timely, and cost-effective product supplies;

· product recalls and/or product liability may adversely impact our operations and merchandise offerings;

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

· our information systems may prove inadequate;

· a weak fourth quarter would materially adversely affect our operating results;

· competition could negatively impact our operations; and

· the interests of our controlling stockholders may conflict with the interests of our creditors.

For more details on factors that may cause actual results to differ materially from such forward-looking statements, please see Item 1A. Risk Factors of our Annual Report on Form 10-K for the fiscal year ended February 2, 2008, and other reports from time to time filed with or furnished to the SEC. We disclaim any intention to, and undertake no obligation to, update or revise any forward-looking statement.

General

We report on the basis of a 52 or 53-week fiscal year, which ends on the Saturday closest to January 31. All references herein to “fiscal 2008” relate to the 52 weeks ending January 31, 2009 and all references to “fiscal 2007” relate to the 52 weeks ended February 2, 2008. In addition, all references herein to “the first quarter of fiscal 2008” relate to the 13 weeks ended May 3, 2008 and all references to “the first quarter of fiscal 2007” relate to the 13 weeks ended May 5, 2007.

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

	Quarter Ended
	May 3,			May 5,
	2008			2007
Michaels stores:
Retail stores open at beginning of period	963			921
Retail stores opened during the period	17			11
Retail stores opened (relocations) during the period	3			5
Retail stores closed during the period	—			(3		)
Retail stores closed (relocations) during the period	(3		)	(5		)
Retail stores open at end of period	980			929

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	(2		)	—
Retail stores open at end of period	164			168

Total store count at end of period	1,144			1,097

Other operating data:
Average inventory per Michaels store (1)	$	808		$	893
Comparable store sales decrease (2)	(2.9		)%	(0.5		)%

(1)	Average inventory per Michaels store calculation excludes our Aaron Brothers stores.

(2)

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

Results of Operations

The following table sets forth the percentage relationship to net sales of each line item of our unaudited consolidated statements of operations. 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 3,		May 5,
	2008		2007
Net sales	100.0	%	100.0	%
Cost of sales and occupancy expense	61.5		61.1
Gross profit	38.5		38.9
Selling, general, and administrative expense	32.1		30.3
Transaction expenses	—		0.7
Related party expenses	0.5		0.5
Store pre-opening costs	0.2		0.2
Operating income	5.7		7.2
Interest expense	9.2		11.3
Other (income) and expense, net	—		(0.3	)
Loss before income taxes and discontinued operations	(3.5	)	(3.8	)
Income tax benefit	(1.1	)	(1.2	)
Loss before discontinued operations	(2.4	)	(2.6	)
Discontinued operations loss, net of income tax	—		(0.1	)
Net loss	(2.4	)%	(2.7	)%

Quarter Ended May 3, 2008 Compared to the Quarter Ended May 5, 2007

Net Sales—Net sales increased for the first quarter of fiscal 2008 by $8 million, or 1.0%, over the first quarter of fiscal 2007. The results for the first quarter of fiscal 2008 include sales from 51 Michaels stores that were opened during the 12-month period ended May 3, 2008. Non-comparable sales increased $32 million, while comparable store sales decreased $24 million.

Comparable store sales declined 2.9% in the first quarter of fiscal 2008 compared to the first quarter of fiscal 2007, reflecting a decrease in average ticket of 2.8% and a decrease in customer transactions of 0.1%. The fluctuation in the exchange rates between the United States and Canadian dollars positively impacted the average ticket change by 100 basis points. Comparable store sales were also negatively impacted by the current soft macroeconomic and retail environments, particularly in home décor categories such as floral and greenery.

We continue to develop a fully integrated pricing and promotion strategy and may refine our existing strategy in future periods. A significant component of our pricing and promotion strategy involves changes in the breadth and depth of our promotional programs. Given the current soft macroeconomic and retail environments, sales declines could adversely affect operations due to a deleveraging of operating expenses. As a result, our historical trends may not be indicative of future results.

We continue to evaluate all options available to us for our Aaron Brothers concept; which range from refining the concept to possible store rationalization. Certain of these options, if enacted, may result in material charges to our consolidated statement of operations in future periods.

Cost of Sales and Occupancy Expense—Cost of sales and occupancy expense, as a percentage of net sales, increased approximately 40 basis points in the first quarter of fiscal 2008 compared to the first quarter of fiscal 2007. Merchandise margins decreased approximately 40 basis points primarily due to a deleveraging of our distribution costs.

Selling, General, and Administrative Expense—Selling, general, and administrative expense was $272 million, or 32.1% of net sales, in the first quarter of fiscal 2008 compared to $254 million, or 30.3% of net sales, in the first quarter of fiscal 2007. As a percentage of net sales, selling, general and administrative expense increased approximately 180 basis points primarily due to planned in-store investments, decreased leverage associated with the decline in comparable store sales and an increase in severance expense, partially offset by a reduction in consulting costs.

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

Related Party Expenses—Related party expenses were $4 million in the first quarter of fiscal 2008 and fiscal 2007. These costs consist primarily of approximately $3 million of management fees and associated expenses paid to our Sponsors and Highfields. Also included in the related party expenses are approximately $1 million of amortization expense related to the Separation Agreements as more fully described in Note 7 to the consolidated financial statements.

Interest Expense—Interest expense for the quarter decreased $17 million to $78 million as a result of significant decreases in our interest rates related our variable-rate debt, and a $97 million reduction in our total debt outstanding.

Provision for Income Taxes—The effective tax rate was 34.1% for the first quarter of fiscal 2008 and 32.3% for the first quarter of fiscal 2007. We expect the effective tax rate for fiscal 2008 to range from 40% - 45%. The effective tax rate for the first quarter of fiscal 2008 was lower than our expected effective tax rate for the fiscal year due to non-deductible severance costs recorded during the quarter.

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. 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 2008.

Cash Flow from Operating Activities

Cash flow used in operating activities during the first quarter of fiscal 2008 was $83 million compared to cash used in operating activities of $51 million during the first quarter of fiscal 2007. The $32 million change was primarily due to greater reductions in our accounts payable and accrued interest accounts in the first quarter of 2008. The reduction in accounts payable is primarily attributable to the timing of merchandise resets and inventory purchases.

Average inventory per Michaels store (including supporting distribution centers) decreased 9.5% from May 5, 2007 to May 3, 2008 primarily due to appropriate management of inventory in light of the challenging sales environment, benefits from our Hybrid distribution method, and a favorable comparison against the timing of last year’s merchandise resets. We expect average inventory per Michaels store at the end of fiscal 2008 to be flat to higher by approximately 2% as compared to the end of fiscal 2007.

Cash Flow used in Investing Activities

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

	Quarter Ended
	May 3,		May 5,
	2008 (1)		2007 (2)
	(in millions)
New and relocated stores and stores not yet opened	$	7	$	6
Existing stores	4		7
Distribution system expansion	1		8
Information systems	8		6
Corporate and other	1		1
	$	21	$	28

(1)		In the first quarter of fiscal 2008, we incurred capital expenditures related to the opening of 17 Michaels stores and the relocation of three Michaels stores.

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

Cash Flow provided by Financing Activities

Cash flows from financing activities are related primarily to borrowings and repayments under our revolving credit facility. The borrowed amounts were primarily used to finance interest payments, accounts payable and capital expenditures. The Asset-based revolving credit facility provides senior secured financing of up to $1.0 billion, subject to a borrowing base. As of May 3, 2008, the borrowing base was $711 million with $477 million of unused availability.

Recent Accounting Pronouncements

In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (“SFAS 141R”). SFAS 141R replaces SFAS No. 141, Business Combinations. The statement retains the purchase method of accounting used in business combinations but replaces SFAS 141 by establishing principles and requirements for the recognition and measurement of assets, liabilities and goodwill, including the requirement that most transaction costs and restructuring costs be expensed. In addition, the statement requires disclosures to enable users to evaluate the nature and financial effects of the business combination. SFAS 141R is effective for business combinations for which the acquisition date is on or after the

beginning of the first annual reporting period beginning on or after December 15, 2008. We will adopt SFAS 141R on February 1, 2009 for acquisitions on or after this date.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

We are exposed to fluctuations in exchange rates between the US and Canadian dollars, as the functional currency of our Canadian subsidiary is the Canadian dollar. To mitigate the effects of currency fluctuations, on May 16, 2008, we executed a foreign currency cash flow hedge for a total notional value of $54.5 million. The term of this hedge begins on June 1, 2008 and extends through the end of the first quarter of fiscal 2009.

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 Chief Executive Officer and our Chief Financial 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 Chief Executive Officer and our Chief Financial 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

There has not been any change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) as promulgated by the SEC under the Securities Exchange Act of 1934) during the quarter covered by this Quarterly Report on Form 10-Q 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.

Information regarding legal proceedings is incorporated herein by reference from Note 6 to our Consolidated Financial Statements.

Item 1A. Risk Factors.

Information regarding the Company’s risk factors appears in Item 1A. Risk Factors disclosed in our Annual Report on Form 10-K for the fiscal year ended February 2, 2008.

There have been no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K for the fiscal year ended February 2, 2008 other than to the risk factor entitled “Our Success Will Depend on How Well We Manage Our Business.” The amended risk factor is set forth below:

Our Success Will Depend on How Well We Manage Our Business

Even if we are able to substantially continue our strategy of expanding our store base, or additionally, to expand our business through acquisitions or vertical integration opportunities, we may experience problems, which may prevent any significant increase in profitability or negatively impact our cash flow. For example:

· the costs of opening and operating new stores may offset the increased sales generated by the additional stores;

· the closure of unsuccessful stores may result in the retention of liability for expensive leases;

· a significant portion of our management’s time and energy may be consumed with issues unrelated to advancing our core business strategy, which could possibly result in a deterioration of our operating results;

· our expansion may outpace our planned technological advances and current systems with the possible consequences of breakdowns in our supply chain management and reduced effectiveness of our operational systems and controls;

· the implementation of future operational efficiency initiatives, which may include the consolidation of certain operations and/or the possible outsourcing of selected functions, may not produce the desired reduction in costs and may result in disruptions arising from such actions;

· we may be unable to hire, train, and retain qualified employees, including management and senior executives;

· failure to maintain stable relations with our labor force could possibly result in a deterioration of our operating results;

· our suppliers may be unable to meet the increased demand of additional stores in a timely manner; and

· we may be unable to expand our existing distribution centers or use third-party distribution centers on a cost-effective basis to provide merchandise for sale by our new stores.

Item 5. Other Information

On June 6, 2008, Michaels announced that Shelley G. Broader is joining the Company as its President & Chief Operating Officer effective June 23, 2008. Since March 2006, Ms. Broader, 44, has served as President and Chief Executive Officer of Sweetbay Supermarkets, Inc., formerly doing business as Kash n’ Karry Food Stores, Inc., part of the U.S. division of Brussels based Delhaize Group. Ms. Broader previously served as President and Chief Operating Officer of Sweetbay Supermarkets from June 2003 to March 2006. Prior to joining Sweetbay Supermarkets, Ms Broader served in various management positions at Hannaford Bros. Co. from April 1991 to June 2003, most recently as Senior Vice President,

Business Strategy, Marketing and Communications. She currently serves on the Board of Directors, and is a member of the Audit Committee, of Raymond James Financial, Inc., listed on the New York Stock Exchange. Ms. Broader holds a B.A. from Washington State University.

On May 19, 2008, Michaels entered into an offer letter agreement (the “Letter Agreement”) with Ms. Broader which provides for compensation and related benefits to Ms. Broader during her employment with the Company. Ms. Broader will receive an annualized base salary of $625,000, subject to increase, and will be eligible for a fiscal year 2008 bonus with a target equal to 70% and a maximum payout of 140% of her pro rated base salary. Ms. Broader’s bonus for fiscal year 2008 is guaranteed at the target level of $255,208. Ms. Broader will also receive a one-time (net) sign-on bonus of $500,000, and a restricted stock award of 54,134 shares of common stock with 20% vesting on each of the first five anniversaries from the date of grant (vesting would accelerate in the event of Ms. Broader’s death or disability). Under the Letter Agreement, Ms. Broader’s employment with the Company is at-will.

Ms. Broader will also receive an option to purchase 567,648 shares of common stock which will be divided into six tranches with exercise prices to be determined on the date of grant, each tranche vesting 20% on each of the first five anniversaries from the commencement date of her employment with Michaels.

The foregoing description of the Letter Agreement is qualified in its entirety by the terms of such Letter Agreement, which is filed as Exhibit 10.4 hereto and is incorporated by reference to this Quarterly Report on Form 10-Q.

No arrangement or understanding exists between Ms. Broader and any other person pursuant to which Ms. Broader was selected as an officer of the Company.

There is no family relationship between any director, executive officer, or person nominated or chosen by the Company to become a director or executive officer of the Company and Ms. Broader. In addition, except for execution of Letter Agreement, since the beginning of the Company’s last fiscal year, there has been no transaction (or series of transactions), and there is no currently proposed transaction (or series of transactions), to which the Company was or is to be a party, in which the amount involved exceeds $120,000 and in which Ms. Broader or any member of her immediate family had or will have a direct or indirect material interest.

Item 6. Exhibits.

(a) Exhibits:

Exhibit Number		Description of Exhibit
10.1		Form of Fiscal Year 2008 Bonus Plan (filed herewith).

10.2		Michaels Stores, Inc. Officer Severance Pay Plan (filed herewith).

10.3		Form of Restricted Stock Award Agreement under the Michaels Stores, Inc. 2006 Equity Incentive Plan (filed herewith).

10.4		Letter Agreement, dated May 19, 2008, between Michaels Stores, Inc. and Shelley G. Broader (filed herewith).

10.5		Separation and Release Agreement, dated May 27, 2008, between Michaels Stores, Inc. and Harvey S. Kanter (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 Lisa K. Klinger 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/ Lisa K. Klinger
		Lisa K. Klinger
		Senior Vice President – Finance and Treasurer, Acting Chief Financial Officer
		(Principal Financial Officer)

Dated: June 6, 2008

INDEX TO EXHIBITS

Exhibit Number		Description of Exhibit
10.1		Form of Fiscal Year 2008 Bonus Plan (filed herewith).

10.2		Michaels Stores, Inc. Officer Severance Pay Plan (filed herewith).

10.3		Form of Restricted Stock Award Agreement under the Michaels Stores, Inc. 2006 Equity Incentive Plan (filed herewith).

10.4		Letter Agreement, dated May 19, 2008, between Michaels Stores, Inc. and Shelley G. Broader (filed herewith).

10.5		Separation and Release Agreement, dated May 27, 2008, between Michaels Stores, Inc. and Harvey S. Kanter (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 Lisa K. Klinger pursuant to §302 of the Sarbanes-Oxley Act of 2002 (filed herewith).

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

EX-10.1 2 a08-16045_1ex10d1.htm EX-10.1

Exhibit 10.1

Fiscal Year 2008 Bonus Plan

INTRODUCTION

This Fiscal Year 2008 Bonus Plan (the “Plan”) is intended to provide executives and other eligible participants with financial incentives for their important contributions to our success. Executives in the Plan have the potential to earn a bonus payout equal to a maximum percentage of bonus eligible base salary as specified for each participant by the Compensation Committee. Michaels Stores Inc.’s top priority is to achieve its sales and earnings goals, and maximize company profitability.

BONUS MEASURES

To further the Company’s strategy of paying for performance, participant bonuses are generally based on the overall company performance, business unit metrics and individual performance as measured against established objectives. For Fiscal Year 2008, the Plan measures for each participant shall consist of: (a) a Corporate Financial Performance measure of EBITDA minus Inventory Charge (1), (b) a Business Unit performance measure, if applicable, and (c) an individual performance measure as established by the Compensation Committee. The Compensation Committee will establish the weight of each measure, and the threshold, target and maximum performance metrics.

(1)May exclude additional charges as approved by the Compensation Committee of the Board of Directors.

EBITDA

EBITDA 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). Since EBITDA is a key measure common to all Michaels’ corporate bonus plans, everything you and your co-workers do to support the stores in driving sales and controlling your work expenses will help maximize your bonus potential!

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 in order to give us an incentive as a company to not over-buy inventory, since too much inventory takes cash away from the company’s ability to fund initiatives and pay down debt. A percent charge per month on the cost of average monthly inventory the company carries of 12% per year is deducted from the EBITDA number. The resulting EBITDA minus inventory charge is then used as the key corporate financial performance measure in your bonus plan and all other corporate bonus plans to promote alignment of goal achievement throughout our incentive plans.

MINIMUM COMPANY THRESHOLD PERFORMANCE

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 at least meet a minimum level of performance (“Threshold”) established by the Compensation Committee.

MSI CONFIDENTIAL

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 the participant’s 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 January 31, 2009, and adjusted for any applicable proration.

If the participant changes positions during the fiscal year, resulting in a change in bonus plan: 1) his/her base salary prior to the change will be used as the eligible base salary for his/her former position; and 2) he/she will have separate performance appraisal ratings – one for the former position and one for the current position – used in the calculation of his/her year end bonus. (Ratings will be determined by the appropriate supervisor – with the year end rating determining eligibility for merit increase consideration.)

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. A bonus calculation worksheet will be provided to each participant.

SCALING OF PAYOUT PERCENTAGE

When performance falls at any point between the Threshold and Maximum goals, the participant’s bonus payout will be scaled according to the performance above or below the Target goal. The bonus amount 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 2008 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 and any business unit financial measure:

Scenario 1: Actual performance is above target goal:

Scenario 2: Actual performance is below target goal:

Note: Wtd = Weighted; PLAN = Target

ELIGIBILITY

To be eligible for a bonus under the Fiscal Year 2008 Bonus Plan, the participant must meet all of the eligibility factors:

· The Fiscal Year bonus eligibility dates begin on February 3, 2008, and conclude on January 31, 2009. If an associate is not employed in a bonus eligible position at the beginning of the fiscal year, February 3, 2008, but assumes a bonus eligible position on or before November 15, 2008, 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 15^th of the month will receive credit for that entire month. Individuals who assume such a position after the 15^th 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 15^th of the month, in accordance with the bonus plan for the credited position.

· An associate must have worked for at least three months in a bonus eligible position in Fiscal Year 2008.

· Bonus eligible positions are defined as any regular full-time associates in one of the following store or corporate positions:

Store Positions

Corporate Positions

Store Manager and Assistant Manager (excludes MITs)

Corporate Manager through Executive Committee Member or FY08 MIK Power eligible associates (Includes Artistree and Aaron Brothers)

Distribution Center Coach, Manager, Assistant General Manager and General Manager

· An associate must be employed in a bonus eligible position at the end of the fiscal year,

January 31, 2009, in order to be eligible to receive a bonus. In the event an associate terminates employment between February 1, 2009 and the bonus check date, the individual Performance Appraisal portion of the associate’s bonus will be calculated based upon a rating of one level higher than Needs Development (i.e., “Mixed Performance”). All bonus payments payable under this Bonus Plan will normally occur between April 1^st and April 30^th, following the end of the fiscal year, provided that all eligibility criteria as set forth in this bonus plan document are met.

· 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 in each position, the respective base salaries and performance ratings, and the applicable target bonus amount(s).

· An associate is not eligible for a bonus under this Bonus Plan if the associate received a Performance Improvement Plan during Fiscal Year 2008 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 2008 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, January 31, 2009.

The Company anticipates that this Bonus Plan will be part of an ongoing bonus program, but the Company does not guarantee that the program will in fact continue for future periods or that the terms, amounts or measures of the program will not change. 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-10.2 3 a08-16045_1ex10d2.htm EX-10.2

Exhibit 10.2

MICHAELS STORES, INC.

OFFICER SEVERANCE PAY PLAN

Established as of April 17, 2008

I. PURPOSE

This Plan has been established by Michaels Stores, Inc. (the “Company”) to provide certain severance benefits, subject to the terms and conditions set forth, to designated officers in the event that his/her employment is permanently terminated as a result of a Qualifying Termination, as described below. As a severance pay plan, this Plan is intended to comply with all applicable requirements of the Employee Retirement Income Security Act of 1974 (“ERISA”) and the regulations promulgated under ERISA for top hat employee welfare benefit plans and is to be interpreted in a manner consistent with those requirements. This document contains the provisions of the Plan and the Summary Plan Description. This Plan also is intended to comply with the applicable requirements of Section 409A of the Internal Revenue Code of 1986 as amended (“Section 409A”) and is to be interpreted and administered in a manner consistent with those requirements.

II. ELIGIBILITY TO PARTICIPATE

In order to be eligible to be a participant in this Plan (a ‘Participant’), an individual must be employed by the Company in a position with the title of Vice President (or equivalent, as approved by the Compensation Committee), Senior Vice President or Executive Vice President. No other individual will be considered a Participant.

III. QUALIFICATIONS FOR RECEIPT OF PLAN BENEFITS

In order to qualify for benefits under this Plan, a Participant must meet all of the following qualifications: (A) must have a Qualifying Termination, as defined in Section IV below, while continuing to be Participant; (B) must not be eligible for severance pay or other termination benefits under any other severance pay plan or under any employment agreement or other agreement with the Company or any of its Affiliates (including without limitation a change-of-control or like agreement) at the time of the Qualifying Termination; (C) must sign and return, following the Termination Date, a timely and effective separation agreement and release of claims in the form attached to this Plan and marked “Exhibit A” (the “Agreement and Release”); and (D) must comply with the post-employment obligations set forth in Section VII(B) of this Plan in accordance with its terms.

IV. QUALIFYING TERMINATION

A Participant’s termination of employment is a Qualifying Termination only if all of the following requirements are met and such termination is not enumerated in the list of exclusions in Section V:

A. The Participant is on the active payroll or is on an approved leave of absence with a right to reinstatement at the time employment terminates;

B. the Participant’s employment is terminated by the Company other than for “Cause” (as hereafter defined) and other than as a result of death or Disability;

C. the Participant is not offered other employment with (1) an Affiliate of the Company (as hereafter defined), (2) a successor of the Company (a “Successor”) or (3) a purchaser of some or all of the assets of the Company (a “Purchaser”) (a) in a position which the Participant is qualified to perform (b) that, when compared with the Participant’s last position with the Company, provides a comparable base salary and bonus opportunity; and (c) there is no change in Participant’s principal place of employment to a location more than 35 miles from the Participant’s principal place of employment immediately prior to the Qualifying Termination;

D. the Participant has not accepted employment, in any position, with an Affiliate, a Successor or a Purchaser at the time he or she otherwise qualifies for benefits under this Plan; and

E. the Participant continues employment until the termination date designated by the Company, or such earlier date to which the Company agrees; and, during the period from the date the Participant receives notice of termination until the Termination Date, the Participant continues to perform to the reasonable satisfaction of the Company.

V. EXCLUSIONS

The following are examples of events which would not be a Qualifying Termination under this Plan. This is not an exclusive list.

A. The Participant resigns, retires or otherwise voluntarily leaves his/her employment with the Company or the Participant’s employment terminates as a result of death or Disability; or

B. the Participant’s employment is terminated by the Company for Cause; or

C. the Participant is offered other employment with an Affiliate, Successor or a Purchaser in a position that he or she qualified to perform, with a comparable base

salary and bonus opportunity and there is no change in Participant’s principal place of employment to a location more than 35 miles from the Participant’s principal place of employment immediately prior to the Qualifying Termination; or

D. the Participant accepts any employment with an Affiliate, a Successor or a Purchaser.

VI. BENEFITS UNDER THE PLAN

A. As the sole benefits under this Plan and subject to all Plan terms and conditions, a Participant will be entitled to the following:

(1) Severance Pay:

(a) A Participant in the position of Vice President (or equivalent, as approved by the Compensation Committee) at the time of a Qualifying Termination who has less than two years of service from his/her most recent date of hire by the Company will be eligible for six (6) months of severance pay and such a Participant with two or more years of service from his/her most recent date of hire by the Company will be eligible for twelve (12) months of severance pay.

(b) A Participant in the position of Senior Vice President or Executive Vice President at the time of a Qualifying Termination who has less than two years of service from his/her most recent date of hire by the Company will be eligible for twelve (12) months of severance pay and such a Participant with two or more years of service from his/her most recent date of hire by the Company will be eligible for eighteen (18) months of severance pay.

(c) One month of severance pay is equal to one-twelfth of a Participant’s base salary at the annual rate in effect at the time termination occurs.

(d) Years of service means the total number of consecutive completed years of service with the Company.

(2) Pro-Rated Annual Bonus:

Provided that the Participant is participating in a Company executive annual bonus plan and has been assigned a target bonus under that plan for the fiscal year in which the Participant has a Qualified Termination hereunder, the Participant shall be entitled to a pro-rated annual bonus for that fiscal year determined by multiplying the Participant’s target bonus by a fraction, the numerator of which is the number of calendar days that the Participant was

employed during the fiscal year, through the date of termination, and the denominator of which is 365.

(3) Premium Welfare Benefits:

During the period of severance pay, and subject to any employee contribution applicable to the Participant on the date of termination, the Company shall continue to contribute to the premium cost of Participant’s participation in the Company’s group medical and dental plans, provided that the Participant 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, and further provided, however, that (A) if the Participant becomes reemployed with another employer-provided plan, the medical and dental benefits described herein shall be secondary to those provided under such other plan during such applicable period of eligibility. Nothing in this Section VI(A)(3) shall operate to reduce, or be construed as reducing, the Participant’s group health plan continuation rights under the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended (“COBRA”), in any manner and, upon the end of the period of severance pay, the Participant, if participating in one or more of the Company’s medical or dental plans and if otherwise eligible under COBRA, shall be entitled to elect COBRA continuation coverage at the Participant’s sole cost and expense for the full period applicable upon termination of the period of severance pay.

B. Benefits payable to a Participant under Section VI(A) shall be reduced by all taxes and other amounts that are required to be withheld under applicable law. Severance pay under Section VI(A)(1) shall be payable in the form of salary continuation at the Company’s regular payroll periods and in accordance with its regular payroll practices, commencing on the next regular payday which is at least five (5) business days following the effective date of the Agreement and Release, but the first payment shall be retroactive to the day immediately following the date of termination of the Participant’s employment. Any pro-rated annual bonus for which a Participant is eligible under Section VI(A)(2) shall be payable on the later of the date annual bonuses are payable to active participants in the bonus plan for the fiscal year in which Participant has a Qualified Termination or the next regular payday which is at least five (5) business days following the effective date of the Agreement and Release.

C. Notwithstanding the foregoing, if at the time of the Participant’s separation from service, the Participant is a “specified employee,” as hereinafter defined, any and all amounts payable under this Section VI in connection with such separation from service that constitute deferred compensation subject to 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.

VII. CONDITIONS OF RECEIVING PLAN BENEFITS

A. The Agreement and Release.

(1) A Participant who has been informed that he/she will be subject to a Qualifying Termination will be provided by the Company an Agreement and Release in the form of attached to this Plan as Exhibit A. In order to qualify for severance benefits under this Plan, the Participant must sign, date and return the Agreement and Release in a timely manner and it must become effective in accordance with its terms and this Plan. The Agreement and Release must be signed and returned no earlier than the day immediately following the Termination Date and no later than the 21st day following the Termination Date, except in the event that a Participant who is aged 40 or older has a Qualifying Termination that is part of a Termination Program, as provided in Section VII A(2), immediately below.

(2) In the event that a Participant who is aged 40 or older is subject to a Qualifying Termination in conjunction with one or more other Participants as a result of a reorganization or a reduction in force or other involuntary termination program (a “Termination Program”), the Company will provide the Participant a memorandum containing information regarding the job titles and ages of those selected, and those not selected, for the Termination Program in accordance with the federal Older Workers Benefit Protection Act (the “OWBPA Memorandum”). Such a Participant will be entitled to consider the Agreement and Release for 45 days following the later of the Participant’s Termination Date or the date the Participant receives the OWBPA Memorandum. In order to qualify for benefits under this Plan, the Participant must sign and return the Agreement and Release after both the Participant’s Termination Date and the Participant’s receipt of the OWBPA Memorandum have occurred, but no later than the 45th day following his/her Termination Date or the date s/he receives the OWBPA Memorandum, whichever occurs second.

(3) A Participant who is aged 40 or older on his/her Termination Date, regardless of whether the Participant is entitled to a 21-day consideration period under Section VII A(1) or a 45-day consideration period under Section VII A(2), may revoke the Agreement and Release at any time during the seven day period that

immediately follows the date the Participant signs the Agreement and Release, provided that the Participant sends a written notice of revocation to the Company during that seven day period. In the event the Participant revokes the Agreement and Release in writing in a timely manner, the Agreement and Release shall be void and of no force or effect and the Participant shall not be eligible to receive benefits of any kind under this Plan. If the Participant does not revoke the Agreement and Release, it will take effect on the eighth day following the date of the Participant’s signing.

(4) In the case of a Participant who is less than age 40 on his/her Termination Date, the Agreement and Release will take effect on the date the Participant signs and returns the Agreement and Release to the Company.

(5) Please Note: The Agreement and Release contains legally binding obligations and the Company advises each Participant to consult an attorney before signing the Agreement and Release.

B. Post-Employment Restrictions.

(1) Introduction. In order to qualify for receipt of severance benefits under this Plan, in addition to other qualifications set forth in this Plan, the Participant must comply fully with all of the obligations set forth in this Section VII(B) (the “Post-Employment Restrictions”) from and after the date the Participant is informed of the Company’s decision to terminate his/her employment in a Qualifying Termination.

(2) Restriction on Competition. From the date the Participant is notified of the Company’s decision to terminate his/her employment until the expiration of twelve (12) months immediately following the Termination Date, the Participant shall 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 here shall prevent the Participant’s 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 twelve (12) months immediately preceding the date of the Participant’s Qualifying Termination.

(3) Restriction on Solicitation of Employees and Independent Contractors. From the date the Participant is notified of the Company’s decision to terminate his/her employment until the expiration of twelve (12) months immediately following the Termination Date, the Participant shall not, and shall 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 these restrictions shall apply only with respect to employees of, and independent contractors providing services to, the Company or one of its Immediate Affiliates at any time during the twelve (12) months immediately preceding the date of the Participant’s Qualifying Termination.

(4) Restriction on Solicitation of Distributors and Vendors. From the date the Participant is notified of the Company’s decision to terminate his/her employment until the expiration of twelve (12) months immediately following the Termination Date, the Participant shall 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 which such distributor or vendor has 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 these restrictions shall apply only with respect to those distributors and vendors who are doing business with the Company or any of its Immediate Affiliates at any time during the twelve (12) months immediately preceding the date of the Participant’s Qualifying Termination.

VIII. TERMINATION OF PLAN BENEFITS

Notwithstanding anything to the contrary contained in this Plan, benefits for which a Participant has qualified and is receiving under this Plan shall terminate under the following circumstances:

A. If the Participant accepts employment with the Company or one of its Affiliates, a Successor or a Purchaser after qualifying for benefits under this Plan, all such benefits shall cease as of the date the Participant commences such employment.

B. All benefits under this Plan may be terminated by the Company in the event that it determines that the Participant has breached the Agreement and Release or the Final Release or has violated any obligation under Section VII hereof or

otherwise breached any material provision of any written agreement with the Company or any of its Affiliates.

IX. GENERAL INFORMATION CONCERNING THE PLAN

A. The Company pays the full cost of benefits provided under this Plan from its general assets and the right of a Participant to receive any payment hereunder shall be an unsecured claim against the general assets of the Company. The Plan at all times shall be entirely unfunded.

B. Notwithstanding anything to the contrary contained herein, benefits to which a Participant is otherwise entitled under this Plan shall be reduced by any other payments or benefits to which the Participant is entitled under applicable law as a result of termination of his/her employment, including without limitation any federal, state or local law with respect to plant closings, mass layoffs or the like, but exclusive of any unemployment benefits to which the Participant is entitled under applicable law.

C. Benefits under this Plan are not assignable or subject to alienation. Likewise, benefits are not subject to attachments by creditors or through legal process against the Company or any employee or any person claiming through an employee.

D. Notwithstanding anything to the contrary contained herein, any and all payments to be provided hereunder to or on behalf of any Participant are subject to reduction to the extent required by applicable statutes, regulations, rules and directives of federal, state and other governmental and regulatory bodies having jurisdiction over the Company.

E. This Plan does not constitute a contract of employment for a specific term or otherwise alter the at-will nature of the employment relationship between any employee and the Company or any of its Affiliates.

X. DEFINITIONS

Words or phrases, which are initially capitalized or within quotation marks shall have the meanings provided in this Section X and as provided elsewhere in this Plan. For purposes of this Plan, the following definition applies:

A. An “Affiliate” means an individual, corporation and other entity directly or indirectly controlling, controlled by or under common control with the Company, where control may be by management authority, equity interest or otherwise.

B. “Cause” shall mean the following events or conditions, as determined by the Board of Directors of the Company in its reasonable judgment: (i) the Participant’s refusal or failure to perform (other than by reason of disability), or material negligence in the performance of his or her 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 of Directors of the Company, and the continuance of such refusal, failure or negligence for a period of ten (10) days after written notice delivered by the Company to the Participant that specifically identifies the manner in which the Participant has failed to perform his or her duties; (ii) the material breach by the Participant of any provision of any material agreement between the Participant and the Company or any of its Affiliates; (iii) fraud, embezzlement, theft or other dishonesty by the Participant with respect to the Company or any of its Affiliates; (iv) the conviction of, or a plea of nolo contendere by, the Participant to any felony or any other crime involving dishonesty or moral turpitude; or
(v) any other conduct that involves a breach of fiduciary duty to the Company on the part of the Participant.

C. “Disability” means a Participant’s mental or physical impairment that has prevented the Participant from performing substantially all of the duties and responsibilities of his/her position for at least 180 days in any 365 consecutive days, as a result of which employment is terminated by the Company.

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

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.

F. “Termination Date” means the date on which the Participant’s employment with the Company terminates.

XI. ADMINISTRATION, CLAIMS PROCEDURE AND GENERAL INFORMATION

A. The Company reserves the right to amend, modify and terminate this Plan at any time by a written instrument signed by the Board or its designee. There are no vested benefits under this Plan. Also, the Company, as the Plan administrator within the meaning of ERISA, reserves full discretion to administer the Plan in all of its details, subject to the requirements of law.

Company shall have such discretionary powers as are necessary to discharge its duties. Any interpretation or determination that the Company makes regarding this Plan, including without limitation determinations of eligibility, participation and benefits, will be final and conclusive, in the absence of clear and convincing evidence that the Company acted arbitrarily and capriciously.

B. Anyone who believes he/she is being denied any rights under this Plan may file a claim in writing with the Company, as Plan administrator, addressed to the attention of the Senior Vice President, Human Resources. If the claim is denied, in whole or in part, the Plan administrator will notify the claimant in writing, giving the specific reasons for the decision, including specific reference to the pertinent Plan provisions and a description of any additional material or information necessary to perfect the claim and an explanation of why such material or information is necessary. The written notice will also advise the claimant of his/her right to request a review of the claim and the steps that need to be taken if the claimant wishes to submit the claim for review. If the Plan administrator does not notify the claimant of its decision within 90 days after it had received the claim (or within 180 days, if special circumstances exist requiring additional time, and if the claimant had been given a written explanation for the extension within the initial 90-day period), the claimant should consider the claim to have been denied. At this time the claimant may request a review of the denial of his/her claim.

C. A request for review must be made in writing by the claimant or his/her duly authorized representative to the Company, as Plan administrator, within 60 days after receipt of notice of denial. As part of the claimant’s request, the claimant may submit written issues and comments to the Plan administrator, review pertinent documents, and request a hearing. The Plan administrator’s written decision will be made within 60 days (or 120 days if a hearing is held or if other special circumstances exist requiring more than 60 days and written notice of the extension is provided to the claimant within the initial 60-day period) after the claimant’s request has been received. Again, the decision will include specific reasons, including references to pertinent Plan provisions.

[Signature page follows immediately.]

IN WITNESS WHEREOF, Michaels Stores, Inc. has caused this Plan to be executed as of the date first above written.

MICHAELS STORES, INC.


By

Name:

Title:

Exhibit A

AGREEMENT AND RELEASE

* Standard Under 40 Severance Agreement

SEVERANCE AGREEMENT AND RELEASE OF CLAIMS

I, , the undersigned, am entering into this Separation Agreement and Release of Claims (this “Agreement”) with Michaels Stores, Inc. (the “Company”) pursuant to the terms and conditions of the Michaels Stores, Inc. Officer Severance Pay Plan (the “Plan”).

WHEREAS, I was employed by the Company as and, in that position, was a Participant, as defined in the Plan; and

WHEREAS, the termination of my employment with the Company, which occurred on , 20 (the “Separation Date”), was a Qualifying Termination for purpose of the Plan; and

WHEREAS, my acceptance of this Agreement in a timely and effective manner and my meeting of my obligations under it are conditions to my eligibility to receive severance benefits under the Plan, to which I would not otherwise be entitled;

NOW, THEREFORE, in consideration of the foregoing premises and for the purpose of qualifying for severance benefits in accordance with the Plan, I agree with the Company as follows:

1. Definitions. Capitalized terms used in this Agreement shall have the meaning set forth below or elsewhere in this Agreement. Any capitalized term not defined in this Agreement shall have the meaning ascribed to it in the Plan. Certain definitions from the Plan are reproduced below for the convenience of the parties.

(a) An “Affiliate” means an individual, corporation and other entity directly or indirectly controlling, controlled by or under common control with the Company, where control may be by management authority, equity interest or otherwise.

(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. Confidential Information does not include information that has entered the public domain other than through my disclosure in violation of my obligations to the Company or its Affiliates under this Agreement or otherwise or through a third party in violation of a duty of confidentiality owed to the Company or any of its Affiliates.

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

(d) “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.

2. Severance Benefits under the Plan. Subject to the terms and conditions of Section VI of the Plan, I will be eligible for (a) severance pay, (b) a pro-rated bonus for the year in which termination of my employment occurred, and (c) Company contributions during the Severance Pay Period to the premium cost of my participation and that of my eligible beneficiaries, if any, in the Company’s group health plan and certain other welfare plans in which I and my eligible beneficiaries may continue participation. The period commencing on the Separation Date and continuing until the expiration of a number of months equal to the period of severance pay for which I may qualify under the Plan (as set forth in the immediately preceding sentence) is the “Severance Pay Period.”

3. Timing and Certain Conditions to Receipt of Severance Benefits:

(a) Commencement of Obligations under this Agreement. It is expressly understood and agreed that my obligations under Section 7 and Section 8 of this Agreement shall commence on the earlier to occur of the Separation Date or the date I first receive this Agreement (the “Commencement Date”), although the Commencement Date shall be no earlier that the date I am first informed of the termination of my employment. Without limiting the generality of the foregoing, I must comply with these obligations even before the effective date of this Agreement in order to be eligible to accept this Agreement and receive severance benefits under the Plan. If I fail to comply in full with any of my obligations under Section 7 or Section 8 of this Agreement at any time from the Commencement Date through the effective date of this Agreement, the offer of this Agreement shall automatically be withdrawn.

(b) Obligations as a Condition of Receipt of Severance Benefits. The obligation of the Company to make payments to me in accordance with this Agreement and the Plan is expressly conditioned on my continued full performance of my obligations under this Agreement, including without limitation under Section 7 and Section 8 hereof.

4. Acknowledgement of Full Payment.

(a) I acknowledge that I have been paid in full any and all compensation due me from the Company or any of its Affiliates, whether for services provided or otherwise, through the Separation Date and that, exclusive of any severance benefits for which I qualify in accordance with the terms and conditions of the Plan, as set forth in Section 2 of this Agreement, nothing further is owed to me. Without limiting the generality of the foregoing acknowledgement, I specifically acknowledge that I have received (i) all salary due through the Separation Date, (ii) pay in full for any vacation I had earned but not used through the Separation Date, (iii) reimbursement for any business expenses I had incurred through the Separation Date that are eligible for reimbursement under applicable Company policies, and (iv) payment of all bonus or other incentive compensation due me, exclusive only of any pro-rated bonus for which I may be eligible under the Plan for the year in which my employment with the Company terminated.

(b) I also represent and warrant that I am not entitled to any payments (in cash or equity) or any other benefits under any representation, agreement or understanding, whether oral or written, or any plan, program or arrangement of any kind, with the Company or any of its Affiliates as a result of the termination of my employment and I hereby waive irrevocably any such entitlement, should it exist.

5. Reduction of Severance Benefits for Certain Statutory Payments. I acknowledge that severance benefits to which I may otherwise be entitled under the Plan shall be reduced by any payments or benefits to which I may be entitled under applicable law as a result of termination of my employment, including without limitation any federal, state or local law with respect to plant closings, mass layoffs or group benefit plan continuation following termination or the like, but excluding any unemployment benefits to which I may be eligible under applicable law.

6. Status of Employee Benefits, Paid Time Off and Stock Options. Except for any right I may have under COBRA to continue my participation and that of my qualified beneficiaries in the Company’s medical plan or any other Company plan to which COBRA is applicable (such as, by way of example only, a dental or vision plan, if made available by the Company), my participation in all Company employee benefit plans has ended as of the Separation Date, in accordance with the terms of those plans. I also acknowledge that I will not continue to earn vacation or other paid time off after the Separation Date. My rights and obligations with respect to any equity granted to me by the Company or any of its Immediate Affiliates which had vested as of the Separation Date shall be governed by any applicable equity participation plans and any agreements and other requirements and limitations applicable to such equity or to Company employees who have been granted equity in connection with their employment. All equity granted me by the Company which remained unvested as of the Separation Date shall have been cancelled and shall have terminated as of that date.

7. Ancillary Covenants. The covenants set forth below are ancillary to this Agreement with the Company, which concerns the termination of my employment and my qualification for severance benefits under the Plan. My acceptance of these covenants and my complying with my obligations under them are a condition to my eligibility to receive severance benefits under the Plan.

(a) Acknowledgement of the Company’s Interest and the Adequacy of the Consideration for the Covenants. I acknowledge the importance to the Company and its Immediate Affiliates of protecting their legitimate business interests, including without limitation the valuable Confidential Information (as defined in Section 1 above) and goodwill that they have developed or acquired at considerable expense. I acknowledge that, in my employment with the Company, I have had access to Confidential Information that, if it were disclosed, would assist in competition against the Company and its Affiliates, including without limitation proprietary customer information, and that I also have generated goodwill for the Company and its Affiliates in the course of my employment. I further acknowledge and I agree that the restrictions on my activities set forth below are necessary to protect the goodwill, Confidential Information and other legitimate interests of the Company and its Affiliates and that my acceptance of these restrictions is a condition of my receipt of severance benefits under the Plan, to which I would not otherwise be entitled, and such severance benefits are good and sufficient consideration to support my agreement to and compliance with these covenants.

(b) Covenants of Non-Competition and Non-Solicitation

(i) Agreement Not to Compete. I agree that, during the twelve (12) months immediately following the Separation Date, I shall 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 here shall prevent my 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 the “Business” is that of arts and crafts specialty retailer providing materials, ideas and education for creative activities and the “Territory” is comprised of those states within the United States and those provinces of Canada in which the Company or any of its Immediate Affiliates was doing or actively planning to do business at any time during the twelve (12) months immediately preceding the Separation Date.

(ii) Restriction on Solicitation of Employees and Independent Contractors. I agree that, during the twelve (12) months immediately following the Separation Date, I shall not, and shall 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 these restrictions shall apply only with respect to employees of, and independent contractors providing services to, the Company or one of

its Immediate Affiliates who were such on the Separation Date or at any time during the nine (9) months immediately preceding the Separation Date.

(iii) Restriction on Solicitation of Distributors and Vendors. I agree that, during the twelve (12) months immediately following the Separation Date, I shall not directly or indirectly solicit or encourage any distributor or vendor to the Company or any of its Immediate Affiliates to terminate or diminish its relationship with the Company or any of its Immediate Affiliates; provided, however, that these restrictions shall apply only with respect to those distributors and vendors who are doing business with the Company or any of its Immediate Affiliates on the Separation Date or at any time during the twelve (12) months immediately preceding the Separation Date.

(c) Notification Requirement. I agree that, until the first anniversary of the Separation Date, I will provide the Company notice in writing of any change in my address and of each new job or other business activity in which I plan to engage if it is related to the Business of the Company and its Immediate Affiliates. I further agree to provide such notice at least fifteen (15) business days prior to beginning any such job or activity. Such notice shall state the name and address of the Person to whom I propose to provide services and the nature of my position with that Person. I agree to provide the Company with such other pertinent information concerning such new job or other business activity as the Company may reasonably request in order to determine my continued compliance with my obligations under this Agreement. I further agree to notify any Person to whom I intend to provide services, as an employee, independent contractor or otherwise, of my obligations under this Agreement and hereby consent to notification by the Company or its agents to any such Persons about my obligations under this Agreement.

8. Other Obligations.

(a) Agreement Not to Use or Disclose Confidential Information. I agree that I shall not at any time disclose to any Person or use any Confidential Information that I obtained incident to my service to, or any other association with, the Company or any of its Affiliates or any of their predecessors or successors, other than as required by applicable law or legal process (e.g., a subpoena or court order) after notice to the Company and a reasonable opportunity for the Company to seek protection of the Confidential Information prior to any such disclosure.

(b) Agreement of No Public Comment and Non-Disparagement. I agree that I will not make any public statement or comment concerning the Company or any of its Affiliates, their direct or indirect investors, their management or their businesses and agree that this restriction applies whether communication is oral or in writing, whether made directly or indirectly, and includes without limitation communication to or through the media (print, electronic or otherwise). I further agree that I will not disparage or criticize the Company or any of its Affiliates, their direct or indirect investors, management or businesses, not only through public statement or comment, but also to any of the employees of the Company or any of its Affiliates, or to any Person with whom the Company or any of its Affiliates is doing, or is planning to do, business.

(c) Return of Company Property. I represent and warrant that I have returned to the Company any and all documents, materials and information (whether in hardcopy, on electronic media or otherwise) related to the business (present or otherwise) of the Company or any of its Affiliates and all other property of the Company or any of its Affiliates in my possession or control, including without limitation keys, access cards, credit cards, computer, telephone and other office equipment. Further, I represent and warrant that I have not retained any copy of any document, material or information of the Company or any of its Affiliates (other than documentation provided expressly for my personal use and retention, such as, by way of example and not limitation, documentation concerning my participation in Company benefit plans). I also agree that I will not, for any purpose, attempt to access or use any computer or computer network or system of the Company or any of its Affiliates after the Separation Date, unless expressly requested to do so by an authorized representative of the Company. Further, I represent and warrant that I have disclosed to the Company all passwords necessary or desirable to enable the Company to access any information which I have password-protected on any of the computer equipment or computer network or system of the Company or any of its Affiliates.

(d) Employee Cooperation. I agree that, during the Severance Pay Period, and without additional compensation, I will provide to the Company, promptly on its request, advice and consultation with respect to my former duties and responsibilities. I also agree, during the Severance Pay Period and thereafter, to cooperate with the Company with respect to all matters arising during or related to my employment, including without limitation matters in connection with any governmental investigation, litigation or regulatory or other proceeding which may have arisen or which may arise following the signing of this Agreement. I understand that the Company will make reasonable efforts not to materially interfere with the timing of any employment or other business obligations I may have. While it is agreed that I will not be entitled to compensation for any such cooperation during the Severance Pay Period, the Company will reimburse my out-of-pocket expenses incurred in complying with the Company’s requests hereunder, provided such expenses are authorized by the Company in advance and the Company will pay me a reasonable hourly or per diem rate for any such cooperation requested by the Company after the Severance Pay Period ends, exclusive of any time spent in testifying as a fact witness in any legal proceeding.

9. Enforcement. I acknowledge that I have carefully read and considered all the terms and conditions of this Agreement, including the restraints imposed on me pursuant to Sections 7 and 8 of this Agreement. I agree that those restraints are necessary for the reasonable and proper protection of the Company and its Affiliates and that each and every one of the restraints is reasonable with respect to subject matter, length of time and geographic area. I further acknowledge that, were I to breach any of the covenants contained in Section 7 or Section 8 of this Agreement, the damage to the Company would be irreparable. Further, I freely acknowledge that the restrictions contained in Sections 7 and 8 will not, individually or in the aggregate, prevent me from earning a livelihood while they are in effect. I therefore agree that the Company, in addition to any other remedies available to it under this Agreement or at law, shall be entitled to preliminary and permanent injunctive relief against any breach or threatened breach by me of any of the obligations set forth in Section 7 or Section 8 of this Agreement, without having to post bond. I further agree with the Company that, in the event that any

provision of Section 7 or Section 8 of this Agreement 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. I also agree that each of the Affiliates shall have the right to enforce all of my obligations to the Affiliate under this Agreement.

10. Release of Claims. For and in consideration of the severance benefits to be made to me in connection with my separation from employment with the Company as set forth in the Plan and this Agreement, and as a condition of my receipt of those severance benefits, I, on my own behalf and on behalf of my heirs, beneficiaries, executors, administrators and representatives, and all others connected with or claiming through me, hereby release and forever discharge the Company and its Affiliates and all of the respective past, present and future shareholders, officers, directors, general and limited partners, members, managers, employees, agents, predecessors, successors and assigns of the foregoing, and all others connected with any of them, and any and all benefit plans maintained by the Company and its Affiliates and all present and former representatives, agents, trustees, fiduciaries and administrators of such plans, all of the foregoing, both individually and in their official capacities, from any and all liabilities, of any nature whatsoever, whether known or unknown, which I had in the past, now have or might now have, through the date on which I sign this Agreement, based on any federal, state or local law, regulation or other requirement, which may have arisen in connection with my employment with the Company or the cessation thereof. I acknowledge that signing this Agreement does not limit or otherwise interfere with my right to file a charge or participate in an investigation or proceeding conducted by the Equal Employment Opportunity Commission (the “EEOC”) or other appropriate state agency. I understand, however, that I am releasing the right to any monetary recovery or relief should the EEOC or any other agency pursue claims on my behalf. Excluded from the scope of this release, however, are any rights I have to indemnification under the charter, by-laws or other governing documents of the Company or any of its Affiliates; any vested benefits I have under the Company’s qualified retirement plan; and any rights arising under this Agreement or the Plan following the effective date of this Agreement.

11. Entire Agreement, Amendments, Waivers and Governing Law.

(a) This Agreement constitutes the entire agreement between me and the Company, and supersedes all prior and contemporaneous agreements and understandings, written or oral, concerning my employment, its termination and all related matters, excluding only any agreements between me and the Company or any of its Affiliates concerning protection of confidential information, assignment of rights to inventions or other intellectual property, or covenants against competition or solicitation of employees, independent contractors, customers, vendors, distributors or others, any outstanding loans or other financial obligations that I have to the Company or any of its Affiliates or under any benefit plan maintained by the Company or any of its Affiliates, my obligations under the Plan and my obligations, if any, with respect to the securities of the Company or any of its Immediate Affiliates, all of which shall remain in full force and effect in accordance with their terms.

(b) This Agreement may not be modified or amended and no breach shall be deemed to be waived unless in writing signed by me and an expressly authorized representative of the Company. I understand and agree that the obligation of the Company to make payments to me under this Agreement or the Plan is expressly conditioned on my continued full performance of my obligations under this Agreement and the Plan.

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

(d) This Agreement shall be governed by and construed in accordance with the laws of the State of Texas, without giving any effect to any choice or conflict of law provision or rule that would cause the application of the laws of any other jurisdiction.

12. Acceptance of this Agreement and Related Matters. I acknowledge that I may not sign this Agreement prior to the Separation Date. I further acknowledge that I understand I may take up to twenty-one (21) days from the later of the Separation Date or the date of my receipt of this Agreement to consider this Agreement before signing it. In signing this Agreement, I give the Company assurance that I have signed it voluntarily and with a full understanding of its terms; that I have had full and sufficient opportunity, before signing this Agreement, to consider its terms and to consult with any person of my choosing; and that, in signing this Agreement, I have not relied on any promises or representations, express or implied, that are not set forth expressly in this Agreement or the Plan.

[Signature page follows immediately.]

INTENDING TO BE LEGALLY BOUND, I have signed this Agreement under seal on the date indicated below.

Signature:

Name (Printed):

Date of signing:


ACCEPTED AND AGREED:
MICHAELS STORES, INC.


By:

Name (Printed)

Title:

Date of signing:

EX-10.3 4 a08-16045_1ex10d3.htm EX-10.3

Exhibit 10.3

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:

Ladies and Gentlemen:

The undersigned (i) acknowledges that [he/she] 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 , 20 , which is the date of grant of the Award.

2. Shares Subject to Award. The Award consists of 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: Shares on , 20 , Shares on , 20 , Shares on , 20 , Shares on , 20 , and on and after , 20 . 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 her death, by the Company other than for “Cause” or for “Disability,” all then outstanding and unvested Shares acquired by the undersigned hereunder shall automatically and immediately vest. “Cause” shall mean the following events or conditions, as determined by the Board in its

reasonable judgment: (i) the undersigned’s refusal or failure to perform (other than by reason of disability), or material negligence in the performance of, her 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 undersigned; (ii) the material breach by the undersigned of any provision of any material agreement between the undersigned and the Company or any of its Affiliates; (iii) fraud, embezzlement, theft or other dishonesty by the undersigned with respect to the Company or any of its Affiliates; (iv) the conviction of, or a plea of nolo contendere by, the undersigned 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 undersigned. “Disability” shall mean that the undersigned becomes disabled during her 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 her 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.

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/she] is the record owner on the record date for such dividend or other distribution, and (ii) vote any Shares of which [he/she] 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/she] 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 her rights hereunder are subject to her 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,




Dated:

The foregoing Restricted Stock
Award Agreement is hereby accepted:

MICHAELS STORES, INC.

EX-10.4 5 a08-16045_1ex10d4.htm EX-10.4

Exhibit 10.4

May 19, 2008

Shelley Broader

18134 Longwater Run Drive

Tampa, FL 33647

Dear Shelley,

Congratulations! On behalf of Michaels Stores Inc., I am pleased to confirm your offer for the position of President & Chief Operating Officer, reporting to Brian Cornell with the effective date of June 23, 2008, unless otherwise agreed upon. Pursuant to the successful completion of your background investigation and verification of information provided us in your employment application, and contingent upon approval by the Board of Directors, the following confirms the details of our offer:

Base Salary

Effective your first day of employment, your bi-weekly salary will be $24,038.47 ($625,000.22 annualized). Your salary increases will be consistent with our policy of advancement on an individual merit basis and will be prorated in accordance with your start date and company guidelines. Members of our corporate staff typically receive their annual performance appraisal in April, based upon their results during the prior fiscal year. Given the timing of your start date, your first formal appraisal and any prorated merit increase is expected to occur in April of 2009.

Bonus

Subject to Board approval of the Fiscal Year 2008 Bonus Plans, you will be eligible to participate in the President & Chief Operating Officer Bonus Plan in Fiscal Year 2008, which is based upon your results regarding established bonus criteria associated with the bonus plan for your position during Fiscal 2008. In this plan you have the potential to earn a max bonus payout up to 140% of your base salary. Of the 140% (max) potential, 70% (target) is for attaining plan results, and an additional 70% is allocated for attaining results above the plan. Bonus payments normally occur in April of each year and will be prorated at seven-twelfths in accordance with your start date.

As discussed, we are pleased to guarantee your Fiscal Year 2008 bonus at the Target level of $255,208.41 (gross) payable in April of 2009. In accordance with the FY 2008 bonus plan, you must be employed at fiscal year end to receive a bonus payout.

Sign-on Bonus

Payable within (30) days of your start date, you will receive a one-time sign-on bonus of $500,000.00 (net). Please note, in accordance with company policy, any associate who voluntarily leaves the company or is terminated for misconduct within 12 months from the start date will be required to reimburse the company for any and all monies paid for a sign-on bonus.

Long Term Incentive Plan and Co-Investment Opportunity

· As President & Chief Operating Officer, you will be eligible to participate in the 2006 Equity Incentive Plan at the President & Chief Operating Officer level. Attached is a Compensation Illustration which describes the proposed President & Chief Operating Officer stock option grant level and the equity potential of such option grant. This illustration is not and shall not be considered to be an offer of securities.

· As President & Chief Operating Officer, you will be eligible to participate in the Management Co-Investment Program at the President & Chief Operating Officer level, subject to satisfaction of the co-investment terms and conditions, including your qualification as an appropriate investor under securities laws. The attached Compensation Illustration sets forth the current President & Chief Operating Officer Participation level. This illustration is not and shall not be considered to be an offer of securities.

· Your first day of employment, you will be provided a one-time grant of 54,134 shares of restricted stock pursuant to the terms in the attached Restricted Stock Agreement.

Shelley Broader

May 19, 2008

Page 2 of 4

Executive Car Policy

In accordance with the Executive Car Policy, you are eligible to receive a new automobile leased by the Company, with a fair market value not to exceed $100,000, not more frequently than once every 24 months. Under this policy, upon the Company’s lease of any new automobile for you, any automobile previously leased by the Company shall be returned to the Company. A car leased for you by the Company shall be insured by and for the benefit of the Company, and the Company shall bear the cost of needed maintenance and repair. All other operational costs will be your responsibility.

Benefits

· You and your family will be eligible to participate in our comprehensive executive medical, dental and vision plans at no cost to you. The medical and dental plans provide for all medically necessary care without a deductible or coinsurance. Your coverage will begin on your first day of employment, after completing our enrollment process. Additionally, after 90 days, you will receive at no cost $50,000 of Basic Life Insurance and Accidental Death and Dismemberment coverage. You may also purchase group supplemental life insurance for yourself, your spouse and any dependents and participate in our flexible spending accounts.

· Through our Executive Life and Savings Program, you will be covered for $1,000,000 of company paid Group Variable Universal Life Insurance upon starting work for Michaels Stores. This coverage also provides a tax-advantaged opportunity for savings, including an employer match so that your contributions up through 6% of eligible earnings can be matched at 50% between this program and the 401(k) Plan.

· You will also be enrolled, at no cost to you, in our Executive Short Term Disability Plan and Executive Long Term Disability Coverage on your first day of active employment.

· You and your spouse are also eligible for an annual Executive Physical at the Cooper Clinic.

· After you have completed six months of active service, you will be eligible to participate in our 401(k) Plan. This plan offers you a 50% match on the first 6% of your earnings that you contribute to the Plan, a variety of investment options, and the flexibility to perform daily fund transfers. During calendar year 2008, the IRS allows you to contribute a maximum of $15,500 pre-tax dollars to the Plan; however, you may be limited to a lesser amount due to the IRC discrimination testing results each year. The Highly Compensated Employee (HCE) 401(k) contribution limit for 2008 is 2%. You may rollover any distribution from a prior employer’s qualified retirement plan immediately without waiting six months.

· You will be eligible to receive four (4) weeks of paid vacation in your first year of employment, following your 90^th day of employment. Additional vacation time will be earned in accordance with company policy.

· Sick days and personal days will be earned in accordance with company policy.

· With certain restrictions, you will be entitled to receive a 25% discount on merchandise purchased in our Michaels and Aaron Brothers stores.

Relocation

· You will be provided $10,000 net to cover all of your living expenses, any miscellaneous relocation expenses, and temporary housing expenses beyond the first 90-day period provided by the Company. This sum is considered income and must be taxed as personal income.

· During your interim living period, Michaels will pay for two trips a month for up to four months for home visits and/or house hunting trips in the Dallas-Fort Worth area.

· You will be provided up to 90 days of corporate apartment housing in the Dallas-Fort Worth area during the period of time before you have relocated your household to a local residence.

Shelley Broader

May 19, 2008

Page 3 of 4

· Michaels will cover reasonable and customary closing costs (excluding discount points, hazard insurance, deposits and other prepaid expenses) associated with the sale of your existing primary residence in Tampa, FL and the purchase of a new residence in the Dallas-Fort Worth area.

· You will be reimbursed for duplicate mortgage payments, excluding insurance, taxes, and utilities, up to $12,000 net.

· Michaels will arrange for and cover the costs of packing and transporting your household goods.

· Contact our Compensation Administrator at 972.409.1505 to initiate your move. The Compensation Administrator will make a copy of the Relocation policy available to you. All taxable relocation benefits will be grossed up in accordance with the Relocation policy.

· Please note an associate who voluntarily leaves the company or is terminated for gross misconduct within 12 months from the date of the last relocation payment on his/her behalf, will be required to reimburse the company for all related payments.

Confidentiality and At Will

· During your employment with Michaels you will receive confidential, proprietary and trade secret information. Michaels has a vital interest in maintaining its confidential information. Accordingly, we will rely upon you to protect the confidentiality such information obtained during your employment.

· This is an at-will employment relationship, and either you or Michaels may terminate the relationship for any reason, with or without cause, and with or without notice.

On your first day of employment you need to bring forms of identification with you that you may choose from the attached list of “acceptable documents”.

Shelley, it goes without saying that we look forward to having you join the Michaels team and look forward to receiving your positive response to this offer. If you have any questions, please contact me at 972-409-5200.

Sincerely,

Shawn Hearn

Senior Vice President – Human Resources

Attachments

cc	Brian Cornell
	Susann Fortney

RESPONSE TO OFFER FORM

Please indicate your agreement to the above by signing and dating below. Return the signed documents to Michelle Gadison via fax number (972) 409-1772 and US mail the original to:

Michaels, 8000 Bent Branch Drive, Irving, TX 75063 Attention: Michelle Gadison

I, Shelley G. Broader x accept or o decline the offer extended to me by Michaels under the terms outlined in this letter.

/s/ Shelley G. Broader		May 19, 2008
(SIGNATURE)		(DATE)

Please retain a copy of this document for your records.

Payment of compensation or benefits (other than base pay) is subject to the eligibility provisions, individual benefit elections and other terms of the plans as they apply. For clarification or details concerning any of the plans, refer to the Plan document. In the event of a conflict between this document and the Plan document, the Plan document will control, since this is an offer letter and is only considered a summary of Plan Features. Michaels Stores Inc. reserves the right to change or cancel any plan details outlined in this offer letter for any reason in accordance with federal, state or local laws.

Shelley Broader

May 19, 2008

Page 4 of 4

Lists of Acceptable Documents

On your first day of employment, you need to bring two forms of identification with you. You may choose from the following:

List A

List B

AND

List C

· U.S. Passport (unexpired or expired)

· Unexpired foreign passport, with a temporary I-551 stamp

· Permanent Resident Card or Alien Registration Receipt Card with photograph (Form I-551)

· Unexpired Employment Authorization Document that contains a photograph (Form I-776, I-688, I-688A, I-688B)

· An unexpired foreign Arrival-Departure Record, Form I-94, bearing the same name as the passport and containing and endorsement of the alien’s nonimmigrant status, if that status authorizes the alien to work for the employer

· Driver’s license or ID card issued by a state or outlying possession of the U.S. provided it contains a photograph or information such as name, date of birth, gender, height, eye color & address

· ID card issued by federal, state or local government agencies or entities, provided it contains a photograph or information such as name, date of birth, gender, height, eye color & address

· School ID card with a photograph

· Voter’s registration card

· U.S. Military card or draft record

· Military dependent’s ID card

· U.S. Coast Guard Merchant Mariner Card

· Native American tribal document

· Driver’s license issued by a Canadian government authority

For persons under age 18 who are unable to present a document listed above:

· School record or report card

· Clinic, doctor or hospital record

· Day-care or nursery school record

· U.S. social security card issued by the Social security Administration (other than a card stating it is not valid for employment)

· Certification of Birth Abroad issued by the Dept. of State (Form PS-545 or Form DS-1350)

· Original or certified copy of a birth certificate issued by a state, county municipal authority or outlying possession of the U.S. bearing an official seal

· Native American tribal document

· U.S. ID Card (INS Form I-197)

· ID Card for use of Resident Citizen in the U.S. (Form I-179)

· Unexpected employment authorization document issued by the DHS (other than those listed under List A)

EX-10.5 6 a08-16045_1ex10d5.htm EX-10.5

Exhibit 10.5

SEPARATION AGREEMENT AND RELEASE

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

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

The undersigned further declares and represents that he has carefully read and fully understands the terms of this Separation Agreement and Release; that he has been advised and had the opportunity to seek the advice and assistance of counsel with regard to this Separation Agreement and Release; that he may take up to and including twenty-one (21) calendar days from receipt of this Separation Agreement and Release to consider whether to sign it; that he may revoke this, Separation Agreement and Release within seven (7) calendar days after signing it by delivering to the Company written notification of revocation; and that he knowingly and voluntarily, of his own free will, without any duress, being fully informed and after due deliberate action, accepts the terms of and signs the same as his own free act.

II. Resignation and Severance Compensation. The termination of the undersigned is effective May 25, 2008 (“Termination Date”) and shall be treated as a resignation for good reason by Mr. Kanter. Accordingly, the undersigned hereby irrevocably and unconditionally resigns from any officer position he holds within Michaels or any of its subsidiaries or divisions effective on the Termination Date. It is stipulated and agreed that the undersigned’s separation from the Company is other than for “Cause” (as that term is defined in Section 1(i) of the Change in Control Severance Agreement). It is further stipulated and agreed that the Company shall pay, provide and/or grant the undersigned all compensation and benefits set forth under Section 6(b) and Section 7 of the Change in Control Severance Agreement.

III. Severance Pay. Pursuant to Section 6(b)(i) of the Change in Control Severance Agreement, the Company shall pay Mr. Kanter a lump-sum payment in the gross amount of One Million, One Hundred Forty-Three Thousand,

Four Hundred Fifty-Nine Dollars and 72/100 ($1,143,459.72), subject to all applicable or customary tax withholding requirements.

IV. Prorated Annual Bonus. Pursuant to Section 6(b)(ii) of the Change in Control Severance Agreement, the Company shall pay Mr. Kanter a lump-sum payment in the gross amount of Fifty Nine Thousand Dollars and 43/100 ($59,000.43), subject to all applicable or customary tax withholding requirements.

V. Continued Welfare and Fringe Benefits. The undersigned’s welfare and fringe benefits will continue in accordance with Section 6(b)(iii) of the Change in Control Severance Agreement. The undersigned agrees that he will notify the Company within seven calendar days of becoming eligible’ under another employer’s medical and/or welfare benefits plan. The Company will make a lump-sum payment in the amount of Two Thousand Seventy Five Dollars and 76/100 ($2,075.76) which is the equivalent of certain welfare benefits that are unavailable to the undersigned after the Termination Date.

VI. Savings and Retirement Plan Benefits. Pursuant to Section 6(b)(v) of the Change in Control Severance Agreement, the Company will pay a lump-sum payment in the gross amount of Thirty Six Thousand, Seventy Three Dollars and 80/100 ($36,073.80), subject to all applicable or customary tax withholding requirements.

VII. Outplacement Services. Pursuant to Section 6(b)(vi) of the Change in Control Severance Agreement, the Company agrees to reimburse him, or directly pay expenses, for outplacement services up to $50,000; provided he commences such services no later than six months following the Release Effective Date and stops using these services within one year after the Termination Date.

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

IX. Nonsolicitation/Non-Interference with Business Relationships. The undersigned further agrees that for one-year after the Termination Date, he will not, directly or indirectly, (i) solicit, recruit or hire any person who is at such time, or who at any time during the six-month period prior to such solicitation or hiring had been, an employee of, or exclusive consultant then under contract with, the Company, its subsidiaries, affiliates or divisions without the Company’s prior written consent; (ii) solicit or encourage any employee of the Company or its subsidiaries, affiliates and divisions to leave the employment of the Company or its subsidiaries; (iii) intentionally interfere with the relationship of the Company or any of its subsidiaries with any employee of, or exclusive consultant then under contract with, the Company or any such subsidiary; or (iv) intentionally interfere with, disrupt or attempt to disrupt any past, present or prospective relationship, contractual or otherwise, between the Company or any of its subsidiaries, on the one hand, and any of their respective customers or suppliers, on the other hand.

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

XI. Third-Party. The undersigned agrees to be available to the Company, its affiliates and their attorneys on a reasonable basis in connection with any pending or threatened claims, charges or litigation in which the Company or any of its affiliates is now or may become involved, or any other claims or demands made against

or upon the Company or any of its affiliates, regardless of whether or not the undersigned is a named defendant in any particular case.

XII. Return of Property. Unless expressly stated otherwise herein, the undersigned shall return to the Company on or before the Termination Date, all property of the Company in the undersigned’s possession or subject to the undersigned’s control, including without limitation any keys, credit cards, and files, including all copies. The undersigned shall not alter any of the Company’s records or computer files in any way after the Termination Date. The Company is allowing the undersigned to keep his cellular phone and laptop computer, except that all company files on such computer must be returned to the Company on or before the Termination Date.

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

XIV. Non-Disparagement. Mr. Kanter agrees not to make any disparaging comments or statements, whether orally, electronically, or in writing concerning the Company. The Company agrees that no director or officer shall make any disparaging comments, whether orally, electronically, or in writing, concerning Mr. Kanter.

XV. Reimbursement of Legal Fees. The Company shall reimburse Mr. Kanter for legal fees in connection with review of this Agreement in an amount not to exceed ten thousand dollars ($10,000.00).

XVI. Stock Options.. In accordance with the Company’s 2006 Equity Incentive Plan, upon the Termination Date, all unvested stock options granted to the undersigned by the Company will be forfeited without further action on the part of any party.

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

[Remaining portion intentionally left black]

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

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

MICHAELS STORES, INC. (“Company”)


By:	/s/ Shawn Hearn
Name:			Shawn Hearn
Title:		SVP, Human Resources
Date Signed: 5/23/08


EMPLOYEE (“undersigned” or “Mr. Kanter”)


/s/ Harvey S. Kanter
Harvey S. Kanter
Date Signed:				5/27/08


/s/ Audra Fower
Audra Fowler 5-27-08

[NOTARY SEAL]

I have identified & notarized the signature of
Mr. Harvey Kanter.

EX-31.1 7 a08-16045_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 6, 2008	/s/ Brian C. Cornell
	Brian C. Cornell
	Chief Executive Officer
	(Principal Executive Officer)

EX-31.2 8 a08-16045_1ex31d2.htm EX-31.2

Exhibit 31.2

CERTIFICATIONS

I, Lisa K. Klinger, 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 6, 2008	/s/ Lisa K. Klinger
	Lisa K. Klinger
	Senior Vice President – Finance and Treasurer, Acting Chief Financial Officer
	(Principal Financial Officer)

EX-32.1 9 a08-16045_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 3, 2008, 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.

Date: June 6, 2008	/s/ BRIAN C. CORNELL
	Brian C. Cornell Chief Executive Officer (Principal Executive Officer)


	/s/ LISA K. KLINGER
	Lisa K. Klinger Senior Vice President - Finance and Treasurer, Acting 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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