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o	Preliminary Proxy Statement
o	Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
þ	Definitive Proxy Statement
o	Definitive Additional Materials
o	Soliciting Material Pursuant to §240.14a-12

o	No fee required.
o	Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.

(1)	Title of each class of securities to which transaction applies:

(2)	Aggregate number of securities to which transaction applies:

(3)	Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):

(4)	Proposed maximum aggregate value of transaction:

(5)	Total fee paid:

þ	Fee paid previously with preliminary materials.
o	Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.

(1)	Amount Previously Paid:

(2)	Form, Schedule or Registration Statement No.:

(3)	Filing Party:

(4)	Date Filed:

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	On behalf of your Board of Directors,

	Charles J. Wyly, Jr.
	Chairman of the Board

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	1. Adoption of the Merger Agreement. To consider and vote on a proposal to adopt the Agreement and Plan of Merger, dated as of June 30, 2006, as amended, among Bain Paste Mergerco, Inc., Blackstone Paste Mergerco, Inc., Bain Paste Finco, LLC, Blackstone Paste Finco, LLC and Michaels Stores, Inc., pursuant to which, upon the merger becoming effective, each outstanding share of Michaels common stock, par value $0.10 per share (other than shares held in our treasury or owned by Bain Paste Mergerco, Inc., Blackstone Paste Mergerco, Inc., Bain Paste Finco, LLC or Blackstone Paste Finco, LLC, shares held by stockholders who properly demand statutory appraisal rights and rollover shares) will be converted into the right to receive $44.00 in cash, without interest.
	2. Adjournment or Postponement of the Special Meeting. To approve the adjournment or postponement of the special meeting, if necessary or appropriate, to solicit additional proxies if there are insufficient votes at the time of the meeting to adopt the merger agreement.
	3. Other Matters. To transact such other business as may properly come before the special meeting or any adjournment thereof.

		By order of the board of directors,
		Mark V. Beasley Secretary

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SUMMARY			1
QUESTIONS AND ANSWERS ABOUT THE SPECIAL MEETING AND THE MERGER			9
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS			12
THE PARTIES TO THE MERGER AGREEMENT			13
THE SPECIAL MEETING			14
	Time, Place and Purpose of the Special Meeting		14
	Record Date and Quorum		14
	Required Vote		14
	Proxies; Revocation		14
	Adjournments and Postponements		15
	Solicitation of Proxies		15
THE MERGER			16
	Background of the Merger		16
	Reasons for the Merger		19
	Recommendation of Our Board of Directors		21
	Opinion of JPMorgan		21
	Opinion of Goldman Sachs		27
	Financing		34
	Interests of Our Directors and Executive Officers in the Merger		36
	Appraisal Rights		41
	Delisting and Deregistration of Our Common Stock		41
	Material United States Federal Income Tax Consequences of the Merger		42
	Regulatory Approvals		43
	Litigation Concerning the Merger		43
THE MERGER AGREEMENT			45
	Effective Time; The Marketing Period		45
	Structure		46
	Treatment of Stock and Options		46
	Exchange and Payment Procedures		47
	Representations and Warranties		48
	Conduct of Our Business Pending the Merger		50
	Stockholders Meeting		52
	No Solicitation of Transactions		52
	Employee Benefits		54
	Agreement to Use Reasonable Best Efforts		55
	Financing Commitments; Cooperation of Michaels		56
	Conditions to the Merger		57
	Termination		58
	Fees and Expenses		59
	Amendment and Waiver		60
	Specific Performance		61
APPRAISAL RIGHTS			62
MARKET PRICE OF OUR STOCK			64
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT			65
MULTIPLE STOCKHOLDERS SHARING ONE ADDRESS			67
SUBMISSION OF STOCKHOLDER PROPOSALS			67
WHERE YOU CAN FIND MORE INFORMATION			68

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ANNEX A		Agreement and Plan of Merger, dated as of June 30, 2006, among Bain Paste Mergerco, Inc., Blackstone Paste Mergerco, Inc., Bain Paste Finco, LLC, Blackstone Paste Finco, LLC and Michaels Stores, Inc.
ANNEX B		First Amendment to Agreement and Plan of Merger, dated as of September 1, 2006, among Bain Paste Mergerco, Inc., Blackstone Paste Mergerco, Inc., Bain Paste Finco, LLC, Blackstone Paste Finco, LLC and Michaels Stores, Inc.
ANNEX C		Opinion of J.P. Morgan Securities Inc.
ANNEX D		Opinion of Goldman, Sachs & Co.
ANNEX E		Section 262 of the General Corporation Law of the State of Delaware

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	Time, Place and Date (page 14)

	Purpose (page 14)

	Record Date and Quorum (page 14)

	Required Vote (page 14)

	Share Ownership of Directors and Executive Officers (page 65)

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	Voting and Proxies (page 14)

	Revocability of Proxy (page 14)

	•	filing with Computershare Investor Services, L.L.C., 3020 Legacy Drive, Suite 100-307, Plano, Texas 75023, at or before the special meeting, a written notice of revocation that is dated a later date than the proxy;
	•	sending a later-dated proxy card relating to the same shares to Computershare Investor Services, L.L.C., at or before the special meeting; or
	•	attending the special meeting and voting in person.

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	•	our directors and executive officers will receive cash consideration for their vested and unvested stock options in connection with the merger;
	•	each of our current executive officers (other than those executive officers who are also members of our board of directors) is a party to a change in control severance agreement with us that provides for (1) continued employment in an equivalent position for two years following completion of the merger, unless earlier terminated, (2) base compensation, cash bonus awards, long-term incentive opportunities and retirement, welfare and fringe benefits at levels at least equal to the compensation and benefits received by the executive immediately prior to completion of the merger for two years following completion of the merger (unless earlier terminated), (3) comprehensive officer liability insurance coverage and continued indemnification rights, (4) severance benefits (including cash severance payments and continued welfare and fringe benefits or cash in lieu thereof) if the executive’s employment with us is terminated in anticipation of the completion of the merger or if, during the two-year period after completion of the merger, the executive is terminated without cause or resigns for good reason, (5) “gross-ups” in respect of certain golden parachute excise taxes payable by the executive and certain other taxes, interest and penalties that may be imposed on nonqualified deferred compensation and (6) reimbursement of certain legal fees and related expenses;
	•	each of our current executive officers (other than those executive officers who are also members of our board of directors) is eligible to receive a change in control retention bonus equal to $125,000 if he is still employed on the first anniversary of the completion of the merger or he is terminated without cause prior to such date;
	•	each of our current executive officers (other than those executive officers who are also members of our board of directors) will be entitled to a guaranteed payout under our Fiscal Year 2006 Bonus Plan at one level below target and will be eligible to receive an additional bonus payment of up to 75% of each individual’s target annual bonus, provided that he is still employed on the date that bonuses are paid;
	•	within 30 days following the completion of the merger, we will terminate our nonqualified deferred compensation plan and will cause all accounts thereunder to be paid out to participants in cash;

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	•	the merger agreement provides that, during the two-year period following completion of the merger, the surviving corporation will maintain certain benefit plans and will continue to provide certain compensation and benefits;
	•	the merger agreement provides for indemnification and liability insurance arrangements for each of our current and former directors and officers; and
	•	while no agreements, arrangements or understandings have been entered into as of the date of this proxy statement, members of our management may enter into employment agreements with the surviving corporation and may participate in the equity of the surviving corporation, as described more fully under “Merger Agreement — Arrangements with the Sponsor Entities” beginning on page 41.

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	•	the adoption of the merger agreement by our stockholders;
	•	the expiration or termination of the waiting period under the Hart-Scott-Rodino Act;
	•	the absence of governmental judgments or orders that have the effect of enjoining or otherwise prohibiting the consummation of the merger;
	•	performance by each of the parties of its material obligations under the merger agreement in all material respects;
	•	the accuracy of the representations and warranties of each of the parties to the merger agreement, except to the extent the failure of such representations and warranties to be true and correct would not constitute a material adverse effect; and
	•	the delivery of closing certificates by each of the parties with respect to the satisfaction of the conditions relating to its representations and warranties and material obligations.

	•	by mutual written consent of the Mergercos and Michaels;
	•	by either the Mergercos or Michaels, if:

	–	our stockholders do not adopt the merger agreement at the special meeting or any postponement or adjournment thereof;
	–	a final, non-appealable governmental order prohibits the merger;
	–	the merger has not been consummated on or before December 19, 2006, provided that if the closing shall not have occurred prior to such date solely as a result of the failure of the marketing period to have been completed prior to such date, then such date is extended to March 31, 2007; or
	–	there is a breach by the non-terminating party of any of its representations or warranties or failure to perform any of its covenants or agreements in the merger agreement such that the closing conditions would not be satisfied and which cannot be cured prior to the termination date set forth above;

	•	by the Mergercos, if our board of directors withdraws or adversely modifies its recommendation or approval of the merger agreement or recommends or approves another takeover proposal; or
	•	by Michaels, if

	–	prior to adoption of the merger agreement by our stockholders, our board of directors determines that the failure to take such action would be inconsistent with its fiduciary duties under applicable law, but only after our board of directors has given proper notice to the Mergercos and taken into account any changes to the financial terms of the merger agreement proposed by the Sponsor Entities to us in response to such notice or otherwise; or
	–	all of the mutual conditions to closing and all of the conditions to the Sponsor Entities’ obligations to close have been satisfied (other than those conditions that by their terms are to be satisfied at the closing) and, on or after the last day of the marketing period, neither the Fincos nor the surviving corporation has received the proceeds of the debt financing.

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Q:		What is the proposed transaction?
A:		The proposed transaction is the merger of Michaels with affiliates of Bain and Blackstone pursuant to the merger agreement. Once the merger agreement has been adopted by the Michaels stockholders and the other closing conditions under the merger agreement have been satisfied or waived, the Mergercos will merge with and into Michaels. Michaels will be the surviving corporation in the merger and will become wholly owned by entities sponsored by or co-investors with Bain and Blackstone.
Q:		What will I receive in the merger?
A:		Upon completion of the merger, you will receive $44.00 in cash, without interest and less any required withholding taxes, for each share of our common stock that you own. For example, if you own 100 shares of our common stock, you will receive $4,400.00 in cash in exchange for your shares of our common stock, less any required withholding taxes. You will not own shares in the surviving corporation.
Q:		Where and when is the special meeting?
A:		The special meeting will take place at 8000 Bent Branch Drive, Irving, Texas 75063, on October 5, 2006, at 9:30 a.m., central daylight time.
Q:		What vote of our stockholders is required to adopt the merger agreement?
A:		For us to complete the merger, holders of a majority of the outstanding shares of our common stock at the close of business on the record date must vote their shares “FOR” the adoption of the merger agreement. Accordingly, failure to vote or an abstention will have the same effect as a vote against adoption of the merger agreement.
Q:		How does our board of directors recommend that I vote on the merger agreement?
A:		Our board of directors unanimously recommends that our stockholders vote “FOR” the adoption of the merger agreement. You should read “The Merger — Reasons for the Merger” beginning on page 19 for a discussion of the factors that our board of directors considered in deciding to recommend the adoption of the merger agreement.
Q:		What do I need to do now?
A:		We urge you to read this proxy statement carefully, including its annexes, and to consider how the merger affects you. If you are a stockholder of record, then you can ensure that your shares are voted at the special meeting by completing, signing, dating and mailing each proxy card and returning it in the envelope provided. If you hold your shares in “street name”, you can ensure that your shares are voted at the special meeting by instructing to your broker on how to vote, as discussed below.
Q:		If my shares are held in “street name” by my broker, will my broker vote my shares for me?
A:		Yes, but only if you provide instructions to your broker on how to vote. You should follow the directions provided by your broker regarding how to instruct your broker to vote your shares. Without those instructions, your shares will not be voted, which will have the same effect as voting against adoption of the merger agreement.

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Q:		Can I change my vote?
A:		Yes. You can change your vote at any time before your proxy is voted at the special meeting. If you are a registered stockholder, you may revoke your proxy by notifying Computershare Investor Services, L.L.C., 3020 Legacy Drive, Suite 100-307, Plano, Texas 75023 in writing or by submitting by mail a new proxy dated after the date of the proxy being revoked. In addition, your proxy may be revoked by attending the special meeting and voting in person (you must vote in person, as simply attending the special meeting will not cause your proxy to be revoked).
		Please note that if you hold your shares in “street name” and you have instructed your broker to vote your shares, the above-described options for changing your vote do not apply, and instead you must follow the directions received from your broker to change your vote.
Q:		How do I vote my Michaels Stores, Inc. 401(k) Plan shares?
A:		If you participate in the Michaels Stores, Inc. Common Stock Fund under the Michaels Stores, Inc. Employees 401(k) Plan, which we refer to as the 401(k) Plan, you may give voting instructions to State Street Bank and Trust Company, as trustee of the 401(k) Plan, by completing and returning the 401(k) Plan instruction card accompanying this proxy statement. Your instructions will tell the trustee how to vote the number of shares of our common stock representing your proportionate interest in the Michaels Stores, Inc. Common Stock Fund which you are entitled to vote under the 401(k) Plan and any such instruction will be kept confidential. The trustee will vote your shares in accordance with your duly executed 401(k) Plan instruction card received by October 2, 2006. If you do not give the trustee of the 401(k) Plan voting instructions, the 401(k) Plan trustee will vote your shares of common stock in the same proportion as the shares for which the 401(k) Plan trustee receives voting instructions from other 401(k) Plan participants, unless doing so would not be consistent with certain federal employee benefit laws.
		You may also revoke previously given voting instructions by October 2, 2006, by filing with the trustee of the 401(k) Plan either a written notice of revocation or a properly completed and signed 401(k) Plan instruction card bearing a later date. Your voting instructions will be kept confidential by the trustee.
Q:		What does it mean if I get more than one proxy card or vote instruction card?
A:		If your shares are registered differently or are in more than one account, you will receive more than one proxy card or, if you hold your shares in “street name”, more than one vote instruction card. Please complete and return all of the proxy cards or vote instruction cards you receive to ensure that all of your shares are voted.
Q:		Should I send in my stock certificates now?
A:		No. Shortly after the merger is completed, you will receive a letter of transmittal with instructions informing you how to send in your stock certificates to the paying agent in order to receive the merger consideration. You should use the letter of transmittal to exchange stock certificates for the merger consideration to which you are entitled as a result of the merger. DO NOT SEND ANY STOCK CERTIFICATES WITH YOUR PROXY.
Q:		What happens if I sell my shares before the special meeting?
A:		The record date of the special meeting is earlier than the special meeting and the date that the merger is expected to be completed. If you transfer your shares of our common stock after the record date but before the special meeting, you will retain your right to vote at the special meeting, but will have transferred the right to receive $44.00 per share in cash to be received by our stockholders in the merger. In order to receive the $44.00 per share, you must hold your shares through completion of the merger.

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Q:		Am I entitled to exercise appraisal rights instead of receiving the merger consideration for my shares?
A:		Yes. As a holder of our common stock, you are entitled to appraisal rights under Delaware law in connection with the merger if you meet certain conditions, which conditions are described in this proxy statement under the caption “Appraisal Rights” beginning on page 62.
Q:		Who can help answer my other questions?
A:		If you have more questions about the merger, please contact our Investor Relations Department at (972) 409-1300. If you need assistance in submitting your proxy or voting your shares or need additional copies of this proxy statement or the enclosed proxy card, you should contact our proxy solicitation agent, Morrow & Co., Inc., at (631) 918-4031. If your broker holds your shares, you should call your broker for additional information.

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	•	the satisfaction of the conditions to consummation of the merger, including the adoption of the merger agreement by our stockholders;
	•	the occurrence of any event, change or other circumstance that could give rise to the termination of the merger agreement, including a termination under circumstances that could require us to pay a $120.0 million termination fee to the Mergercos;
	•	the amount of the costs, fees, expenses and charges related to the merger;
	•	the effect of the announcement of the merger on our business relationships, operating results and business generally, including our ability to retain key employees;
	•	the risk that the merger may not be completed in a timely manner or at all, which may adversely affect our business and the price of our common stock;
	•	the potential adverse effect on our business, properties and operations because of certain covenants we agreed to in the merger agreement;
	•	the risk that we may be subject to litigation, including the litigation described under “The Merger — Litigation Concerning the Merger” beginning on page 43, in connection with the merger;
	•	risks related to diverting management’s attention from our ongoing business operations; and
	•	other risks detailed in our filings with the Securities and Exchange Commission (the “SEC”), including “Item 1A. Risk Factors” in our Annual Report on Form 10-K for our fiscal year ended January 28, 2006. See “Where You Can Find More Information” on page 68.

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	•	the current and historical market prices of our common stock, and the fact that the $44.00 per share to be paid for each share of our common stock in the merger represents a premium of 29.6% to the closing price of our common stock on March 17, 2006, the last trading day before we announced exploration of our strategic alternatives, and a premium of 31.6% to the average closing price for the three months ended March 17, 2006;
	•	the possible alternatives to the sale of Michaels, including continuing to operate Michaels on a stand-alone basis, and the risks and uncertainties associated with such alternatives, including the risks associated with our ability to meet our projections for future results of operations, compared to the certainty of realizing in cash a fair value for their investment provided to our stockholders by the merger;
	•	the extensive sale process conducted by us, with the assistance of our financial and legal advisors, which involved engaging in discussions with approximately 37 parties to determine their interest in acquiring Michaels, entering into confidentiality agreements with 14 parties and the receipt of two definitive proposals to acquire Michaels;
	•	the price proposed by Bain and Blackstone reflected extensive negotiations between the parties and represented the highest price that we had received for the acquisition of Michaels;
	•	the presentation of JPMorgan and its opinion that, as of the date of its opinion and based upon and subject to the factors and assumptions set forth in such opinion, the consideration to be received by the holders of our common stock in the proposed merger is fair, from a financial point of view, to such holders (see “The Merger — Opinion of JPMorgan” beginning on page 21 and Annex C to this proxy statement);
	•	the presentation of Goldman Sachs and its opinion that, as of the date of its opinion and based upon and subject to the factors and assumptions set forth in such opinion, the consideration to be received by the holders of our common stock in the proposed merger is fair, from a financial point of view, to such holders (see “The Merger — Opinion of Goldman Sachs” beginning on page 27 and Annex D to this proxy statement);
	•	the terms of the merger agreement and the related agreements, including:

	–	the limited number and nature of the conditions to the Sponsor Entities’ obligation to consummate the merger;
	–	our ability, under certain limited circumstances, to furnish information to and conduct negotiations with third parties regarding other proposals;
	–	our ability to terminate the merger agreement in order to accept a financially superior proposal, subject to paying the Sponsor Entities a $120 million termination fee;
	–	the limited number and nature of the conditions to funding set forth in the debt financing commitment letters and the obligation of the Sponsor Entities to use their reasonable best efforts (1) to obtain the debt financing and (2) if the Sponsor Entities fail to effect the closing because of a failure to obtain the debt financing, to pay us a $200 million termination fee; and
	–	our ability to enforce specifically the terms and provisions of the merger agreement to prevent breaches of the merger agreement

	•	the fact that the non-financial terms of the proposal received from Bain and Blackstone was, in the aggregate, more favorable to us than the proposal from the other potential acquiror group; and
	•	the availability of appraisal rights to our stockholders who properly exercise their statutory rights (see “Appraisal Rights” beginning on page 62 and Annex E to this proxy statement).

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	•	the risk that the merger might not be completed, including as a result of a failure by the Sponsor Entities to obtain the debt financing;
	•	the fact that our stockholders will not participate in any future earnings or growth of Michaels;
	•	the fact that the merger consideration consists of cash and will therefore be taxable to our stockholders for U.S. federal income tax purposes;
	•	the restrictions on our ability to solicit or engage in discussions or negotiations with a third party regarding other proposals and the requirement that we pay the Sponsor Entities a $120 million termination fee if our board of directors accepts a superior proposal; and
	•	the possibility of disruption to our operations associated with the merger, and the resulting effect thereof on us if the merger does not close.

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	•	reviewed the merger agreement;
	•	reviewed certain publicly available business and financial information concerning Michaels and the industries in which we operate;
	•	compared the proposed financial terms of the merger with the publicly available financial terms of certain transactions involving companies JPMorgan deemed relevant and the consideration received for such companies;
	•	compared our financial and operating performance with publicly available information concerning certain other companies JPMorgan deemed relevant and reviewed the current and historical market prices of our common stock and certain publicly traded securities of such other companies;
	•	reviewed certain internal financial analyses and forecasts prepared by our management relating to our business; and
	•	performed such other financial studies and analyses and considered such other information as JPMorgan deemed appropriate for the purpose of its opinion.

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	Historical Stock Price Analyses

	Public Trading Multiples

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FV/2006

FV/2007

EBITDA

EBITDA

P/E 2006

P/E 2007

Direct Peers

Median

7.8

x

6.9

x

21.6

x

16.5x

Mean

7.8

x

6.9

x

21.6

x

16.5x

Hardline retail

Median

8.8

x

7.6

x

17.5

x

14.8x

Mean

8.6

x

7.6

x

17.5

x

14.8x

“Best in class” brands

Median

8.5

x

7.6

x

17.0

x

14.9x

Mean

9.0

x

7.9

x

17.7

x

15.3x

Overall Median

8.5

x

7.6

x

18.5

x

15.5x

Overall Mean

8.8

x

7.8

x

18.3

x

15.5x

	Selected Transaction Analysis

						Transaction value
Date Announced		Acquirer		Target		($ in millions)
Jan-06		Leonard Green & Partners LP		The Sports Authority		$	1,394
Jan-06		Bain Capital		Burlington Coat Factory			1,943
Nov-05		Apollo Management		Linens ’n Things			1,282
Oct-05		Sun Capital Partners		Shopko Stores			1,143
Sep-05		AAH Holdings Corporation		Party City			356
May-05		Texas Pacific Group/Warburg Pincus		Neiman Marcus			5,195
Apr-05		GameStop Corp.		Electronics Boutique			1,447
Apr-05		OSIM/JW Child/Temasek		Brookstone			343
Mar-05		Bain Capital/KKR/Vornado		Toys R Us			7,811
Nov-04		Kmart		Sears Roebuck			14,239
Jul-04		Sun Capital		Mervyn’s			1,650
Jun-04		May Department Stores		Marshall Field’s			3,240
Jul-03		Boise Cascade		OfficeMax Inc.			1,095

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Sales

EBITDA

EBIT

Median

0.58x

8.5x

13.1x

Mean

0.66x

9.4x

16.7x

	Discounted Cash Flow Analysis

	Recapitalization Analysis

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	Leveraged Buyout Analysis

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	•	the merger agreement;
	•	annual reports to stockholders and Annual Reports on Form 10-K of Michaels for the five fiscal years ended January 28, 2006;
	•	certain interim reports to stockholders and Quarterly Reports on Form 10-Q of Michaels;
	•	certain other communications from Michaels to its stockholders; and
	•	certain internal financial analyses and forecasts for Michaels prepared by its management.

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	Historical Stock Trading Analysis

	Selected Companies Analysis

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		Estimated 2006 P/E
Selected Company		Multiples
AC Moore Arts & Crafts, Inc.			23.3x
American Greetings Corporation			24.2x
Barnes & Noble, Inc.			15.8x
Bed Bath & Beyond Inc.			15.5x
Best Buy Co., Inc.			19.4x
Borders Group, Inc.			13.4x
Circuit City Stores, Inc.			25.1x
GameStop Corp.			18.7x
The Home Depot, Inc.			11.8x
Jo-Ann Stores, Inc.			NM
Lowe’s Companies, Inc.			14.8x
Office Depot, Inc.			21.3x
Staples, Inc.			19.4x
Radioshack Corporation			14.3x
Williams-Sonoma, Inc.			17.0x
Yankee Candle Company, Inc.			12.0x
High			25.1x
Median			18.0x
Low			11.8x
Michaels (based on closing price and estimated 2006 earnings as of March 17, 2006)			17.0x
Michaels (based on closing price and estimated 2006 earnings as of June 28, 2006)			19.3x
Michaels (based on $44.00 per share)			21.6x

	Present Value of Future Stock Price Analysis

	Discounted Cash Flow Analysis

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	Selected Transactions Analysis

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		Enterprise Value
		Multiple of
Acquiror/Target		LTM EBITDA
Supervalu Inc., CVS Corporation, Cerebus Capital Management, L.P./ Albertson’s, Inc. (January 2006)			7.3	x
Leonard Green & Partners, L.P./ The Sports Authority, Inc. (January 2006)			7.9
Bain Capital Partners, LLC/ Burlington Coat Factory Warehouse Corporation (January 2006)			6.7
Apollo Management V, L.P./ Linens’n Things, Inc. (November 2005)			8.7
The Bon-Ton Stores, Inc./ Northern Department Store Group of Saks Incorporated (October 2005)			7.3
Prentice Capital Management, LP, GMM Capital LLC/ Goody’s Family Clothing, Inc. (October 2005)			13.6
Sun Capital Partners, Inc./ Shopko Stores Inc. (October 2005)			6.2
Berkshire Partners LLC, Weston Presidio/ Party City Corporation (September 2005)			12.3
TPG Advisers III, Inc, TPG Advisers IV, Inc., Warburg Pincus & Co., Warburg Pincus LLC, Warburg Pincus Partners LLC/ The Neiman Marcus Group, Inc. (May 2005)			10.3
GameStop Corp./ Electronic Boutique Holdings Corp.(April 2005)			13.2
OSIM International Ltd, J.W. Childs Associates, L.P., Temasek Capital (Private) Limited/ Brookstone, Inc. (April 2005)			8.3
Kohlberg Kravis Roberts & Co., Bain Capital Partners LLC and Vornado Realty Trust/ Toy R’ Us, Inc. (March 2005)			9.7
Federated Department Stores, Inc./ The May Department Stores Company (February 2005)			8.7
Movie Gallery, Inc./ Hollywood Entertainment Corporation (November 2004)			N/A
Kmart Holding Corporation/ Sears, Roebuck and Co. (November 2004)			7.6
Jones Apparel Group, Inc./ Barneys New York, Inc. (November 2004)			8.1
Cerebus Capital Management, L.P., Sun Capital Partners Group, Inc./ Target Corporation, Mervyn’s Holdings, LLC (July 2004)			5.9
The May Department Stores Company/ Target Corporation, Marshall Field’s (June 2004)			14.4
Circuit City Stores, Inc./ InterTan, Inc. (May 2004)			N/A
Boise Cascade Corporation/ OfficeMax, Inc. (July 2003)			10.4
High			14.4	x
Median			8.7	x
Mean			9.4	x
Low			5.9	x

	Leveraged Buyout Analysis

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	Recapitalization Analysis

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	Equity Financing

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	Debt Financing

	•	the consummation of the merger;
	•	the absence of a material adverse change with respect to Michaels, to the extent such change constitutes a “material adverse change” for purposes of the merger agreement;
	•	the execution of definitive credit documentation consistent with the term sheets for the debt facilities;
	•	receipt of equity contributions in an amount equal to at least 20% of the total sources required to consummate the merger from one or more of Bain, Blackstone and co-investors reasonably acceptable to the lead arrangers for the debt financing;
	•	the absence of any amendments or waivers to the merger agreement to the extent material and adverse to the lenders which have not been approved by the lead arrangers for the debt financing;
	•	the receipt of specified financial statements of Michaels; and
	•	receipt of customary closing documents.

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	Treatment of Stock Options

	•	the number of shares of our common stock subject to the option as of the effective time of the merger, multiplied by
	•	the excess of $44.00 over the exercise price per share of common stock subject to such option.

		No. of Shares				Weighted Average
		Underlying				Per Share Exercise
		Vested and				Price of Vested and				Resulting
Name		Unvested Options				Unvested Options				Consideration
Directors
Charles J. Wyly, Jr.*			910,000			$	24.52			$	17,728,325
Sam Wyly*			592,500			$	23.12			$	12,374,325
Richard E. Hanlon			205,000			$	21.19			$	4,675,325
Richard C. Marcus			135,000			$	26.74			$	2,330,325
Liz Minyard			170,000			$	25.21			$	3,194,650
Cece Smith			135,000			$	27.04			$	2,289,900
Executive Officers
R. Michael Rouleau†			450,000			$	30.21			$	6,207,250
Jeffrey N. Boyer			248,096			$	22.54			$	5,323,611
Gregory A. Sandfort			152,264			$	30.60			$	2,040,580
Thomas M. Bazzone			168,750			$	29.44			$	2,457,500
Thomas C. DeCaro			148,750			$	25.35			$	2,773,925
Harvey S. Kanter			131,529			$	27.22			$	2,206,839
Edward F. Sadler			177,084			$	24.80			$	3,400,351

*	Messrs. Charles J. Wyly, Jr. and Sam Wyly also serve as our executive officers.

†	Mr. R. Michael Rouleau retired as our President and Chief Executive Officer on March 15, 2006.

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	Change in Control Severance Agreements

	•	a lump-sum cash severance payment equal to two times (three times, in the case of Messrs. Boyer and Sandfort) the sum of (1) the executive’s base salary in effect on the date of termination and (2) the greater of the average annual incentive award for the previous three fiscal years and the target annual bonus for the year of termination;
	•	a prorated target annual bonus, provided that in the event that Michaels or the surviving corporation makes payments under the annual incentive plan in which the executive participates immediately prior to termination to participants who remain actively employed at a level that exceeds the target level, Michaels or the surviving corporation will make an additional payment to the executive equal to the excess of the actual payout level over the executive’s target level bonus, prorated to reflect the period of the executive’s employment during the year of termination;
	•	the continuation of welfare and fringe benefits for two years (three years, in the case of Messrs. Boyer and Sandfort) after termination of employment or a lump-sum cash payment in lieu thereof;
	•	the accelerated vesting of all outstanding equity-based compensation awards and the termination of any restrictions and forfeiture provisions related to such awards;
	•	two additional years (three additional years, in the case of Messrs. Boyer and Sandfort) of retirement plan age and service credit for purposes of computing the executive’s accrued benefits under our retirement plans or a lump-sum cash payment in lieu thereof; and
	•	reimbursement for the cost of executive-level outplacement services (subject to a $50,000 ceiling).

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		Amount of Potential				Estimated Value of
		Cash Severance				Welfare and Fringe				Estimated 280G
Name		Payment*				Benefits				Gross-up Payment**
Jeffrey N. Boyer		$	2,539,719			$	47,815			$	1,166,973
Gregory A. Sandfort		$	2,529,213			$	122,094			$	1,295,871
Thomas M. Bazzone		$	1,106,625			$	82,172			$	653,038
Thomas C. DeCaro		$	943,223			$	86,240			$	0
Harvey S. Kanter		$	1,107,225			$	95,696			$	0
Edward F. Sadler		$	1,120,220			$	98,082			$	0

*	Includes two or three times (as applicable) the sum of base salary and current target bonus, a prorated target annual bonus for 2006, two or three years (as applicable) of service credit under our qualified and nonqualified retirement plans and $50,000 for outplacement services.

**

Estimates are subject to change based on the date of completion of the merger, date of termination of the executive officer, interest rates then in effect and certain other assumptions used in the calculation. Estimates include the estimated tax gross-up as a result of any acceleration of vesting of stock options as well as the potential cash severance payment and estimated value of benefits set forth in the preceding two columns. In addition, estimates include the estimated tax gross-ups required to be paid in connection with the change in control bonuses, which are described below.

	Change in Control Retention Bonus Plan

	Fiscal Year 2006 Bonus Enhancement

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		Maximum				Maximum 2006
		Regular 2006				Bonus				Maximum Total
Name		Bonus				Enhancement				2006 Bonus
		(a)				(b)				(a)+(b)
Jeffrey N. Boyer		$	318,750			$	178,125			$	496,875
Gregory A. Sandfort		$	315,000			$	176,250			$	491,250
Thomas M. Bazzone		$	171,750			$	85,875			$	257,625
Thomas C. DeCaro		$	165,000			$	82,500			$	247,500
Harvey S. Kanter		$	172,038			$	86,019			$	258,056
Edward F. Sadler		$	198,000			$	99,000			$	297,000

	Termination of the Deferred Compensation Plan and Distribution of Account Balances

Name		Account Balance
R. Michael Rouleau*		$	3,164,201
Jeffrey N. Boyer		$	55,694
Gregory A. Sandfort		$	0
Thomas M. Bazzone		$	126,894
Thomas C. DeCaro		$	110,553
Harvey S. Kanter		$	204,852
Edward F. Sadler		$	1,923,121

*	Mr. R. Michael Rouleau retired as our President and Chief Executive Officer on March 15, 2006.

	Benefit Arrangements with the Surviving Corporation

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	Directors’ and Officers’ Indemnification and Insurance

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	Arrangements with the Sponsor Entities

	Non-Competition Arrangements with the Surviving Corporation

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	•	an individual who is a citizen or resident of the United States;
	•	a corporation (or other entity taxable as a corporation) created or organized in or under the laws of the United States, any state of the United States or the District of Columbia;
	•	an estate the income of which is subject to U.S. federal income tax regardless of its source; or
	•	a trust if (1) a U.S. court is able to exercise primary supervision over the trust’s administration and one or more U.S. persons are authorized to control all substantial decisions of the trust; or (2) it was in existence on August 20, 1996 and has a valid election in place to be treated as a domestic trust for U.S. federal income tax purposes.

	•	The stockholder will recognize a capital gain or loss for U.S. federal income tax purposes upon the disposition of the stockholder’s shares of our common stock pursuant to the merger.
	•	The amount of capital gain or loss recognized by each stockholder will be measured by the difference, if any, between the amount of cash received by the stockholder in the merger and the stockholder’s adjusted tax basis in the shares of our common stock surrendered in the merger. Gain or loss will be determined separately for each block of shares (i.e., shares acquired at the same cost in a single transaction) surrendered for cash in the merger.
	•	The capital gain or loss, if any, will be long-term with respect to shares of our common stock that have a holding period for tax purposes in excess of one year at the time of the merger. Long-term capital

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		gains of individuals are eligible for reduced rates of taxation. There are limitations on the deductibility of capital losses.

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	•	a date during the marketing period specified by the Mergercos on no less than three business days’ notice to us; and
	•	the final day of the marketing period.

	•	the Fincos shall have financial and other pertinent information regarding Michaels as may be reasonably requested by them to consummate the debt financing, including all financial statements and financial data of the type required by Regulation S-X and Regulation S-K under the Securities Act of 1933, as amended (the “Securities Act”) (other than Rule 3-10 of Regulation S-X) and of type and form customarily included in private placements pursuant to Rule 144A promulgated under the Securities Act (collectively, the “required financial information”); and
	•	nothing has occurred and no condition exists that would cause any of the conditions to the Sponsor Entities’ obligations to close not to be satisfied assuming the closing were to be scheduled for any time during such consecutive 30-day period; and

	•	the Fincos shall have all financial statements for a high-yield financing during the marketing period of the type required in a registered offering by Regulation S-X and Regulation S-K under the Securities Act (other than Rule 3-10 of Regulation S-X) that are customarily included in private placements

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		pursuant to Rule 144A promulgated under the Securities Act, and, in the case of the annual financial statements, the auditors’ report thereon (collectively, the “core required financial information”); and
	•	nothing has occurred and no condition exists that would cause any of the conditions to the Sponsor Entities’ obligations to close not to be satisfied assuming the closing were to be scheduled for any time during such consecutive 30-day period; and

	•	to use reasonable best efforts to satisfy on a timely basis the conditions to obtaining the financing set forth in the debt financing commitments obtained in connection with the merger and to cause the lenders providing the debt financing to fund such financing; and
	•	in the event that any portion of the debt financing becomes unavailable on the terms and conditions contemplated in such commitments, to use reasonable best efforts to obtain as promptly as practicable alternative financing.

	Common Stock

	•	held in our treasury immediately prior to the effective time of the merger, which shares will be canceled without conversion or consideration;
	•	owned by any of the Sponsor Entities immediately prior to the effective time of the merger, which shares will be canceled without conversion or consideration;

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	•	held by stockholders who have properly demanded and perfected their appraisal rights in accordance with Delaware law, which shares shall be entitled to payment of the fair value of such shares in accordance with Delaware law; and
	•	retained by the Highfields Funds and members of our management as rollover shares.

	Stock Options and Restricted Stock

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	•	our and our subsidiaries’ proper organization, good standing and qualification to do business;
	•	our interests in our subsidiaries;
	•	our capitalization, including in particular the number of shares of our common stock, stock options and other equity-based interests;
	•	our outstanding indebtedness for borrowed money;
	•	our corporate power and authority to enter into the merger agreement and to consummate the transactions contemplated by the merger agreement;
	•	the approval and recommendation by our board of directors of the merger agreement, the merger and the other transactions contemplated by the merger agreement;
	•	the absence of violations of or conflicts with our and our subsidiaries’ governing documents, applicable law or certain agreements as a result of entering into the merger agreement and consummating the merger;
	•	the required consents and approvals of governmental entities in connection with the transactions contemplated by the merger agreement;
	•	our SEC filings since January 1, 2004, including the financial statements contained therein;
	•	the absence of undisclosed liabilities;
	•	the accuracy of this proxy statement;
	•	the absence of a “material adverse effect” and certain other changes or events related to us or our subsidiaries since January 28, 2006;
	•	legal proceedings and judgments;
	•	contracts to which we or our subsidiaries are a party;
	•	compliance with laws;
	•	possession of permits necessary to conduct our business;

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	•	employment and labor matters affecting us or our subsidiaries, including matters relating to our and our subsidiaries’ employee benefit plans;
	•	taxes and environmental matters;
	•	real property;
	•	intellectual property;
	•	our and our subsidiaries’ insurance policies;
	•	the required vote of our stockholders in connection with the adoption of the merger agreement;
	•	the inapplicability of anti-takeover statutes to the merger;
	•	the absence of undisclosed broker’s fees;
	•	the receipt by us of a fairness opinion from each of JPMorgan and Goldman Sachs; and
	•	affiliate transactions.

	•	relating to economic, financial market or geopolitical conditions in general;
	•	relating to changes in law or applicable accounting regulations or principles or interpretations thereof;
	•	relating to the specialty retail industry generally, to the extent such change, effect, event, occurrence or state of fact does not materially, disproportionately impact Michaels and our subsidiaries, taken as a whole;
	•	consisting of any change in our stock price or trading volume, in and of itself, or any failure, in and of itself, by us to meet published revenue or earnings projections (it being understood that the facts or occurrences giving rise or contributing to such change or failure may be deemed to constitute, or be taken into account in determining whether there has been or would reasonably be expected to be, a material adverse effect, and it being further understood that any such change or failure may be taken into account in determining whether the facts or occurrences giving rise or contributing to such change or failure are materially adverse to the business, financial condition or results of operations of Michaels and our subsidiaries, taken as a whole);
	•	relating to any outbreak or escalation of hostilities or war or any act of terrorism; and
	•	relating to the announcement of the merger agreement and the transactions contemplated thereby and performance of and compliance with the terms of the merger agreement.

	•	their organization, valid existence and good standing;
	•	their corporate or other power and authority to enter into the merger agreement and to consummate the transactions contemplated by the merger agreement;
	•	the absence of any violation of or conflict with their governing documents, applicable law or certain agreements as a result of entering into the merger agreement and consummating the merger;

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	•	the required consents and approvals of governmental entities in connection with the transactions contemplated by the merger agreement;
	•	the accuracy of information supplied for inclusion or incorporation by reference in this proxy statement;
	•	debt and equity financing commitments;
	•	their purpose of formation and prior activities;
	•	their lack of ownership of our common stock; and
	•	the absence of undisclosed broker’s fees.

	•	carry on business in the ordinary course; and
	•	to the extent consistent therewith, use reasonable best efforts to preserve substantially intact our and its current business organizations, to keep available the services of our and our subsidiaries’ current officers and employees and to preserve our and our subsidiaries’ relationships with significant customers, suppliers, licensors, licensees, distributors, wholesalers, lessors and others with which we and our subsidiaries’ have significant business dealings.

	•	declare, set aside or pay any dividends on, or make any other distributions (whether in cash, stock or property) in respect of, any of our or its capital stock, other than:

	–	dividends or distributions by a direct or indirect wholly owned subsidiary to its parent; and
	–	regular quarterly cash dividends on our common stock, not to exceed, in the case of any such quarterly dividend, $0.12 per share;

	•	split, combine or reclassify any of our or our subsidiaries’ capital stock or issue or authorize the issuance of any other securities in lieu of or in substitution for shares of our or our subsidiaries’ capital stock;
	•	purchase, redeem or otherwise acquire any shares of our or our subsidiaries’ capital stock or any rights, warrants or options to acquire any such shares, other than:

	–	the acquisition by us of shares of our common stock in connection with the surrender of shares of our common stock by holders of stock options in order to pay the exercise price of the stock options;
	–	the withholding of shares of our common stock to satisfy tax obligations with respect to awards granted pursuant to our stock plans;
	–	the acquisition by us of stock options and shares of our restricted stock in connection with the forfeiture of such awards; and
	–	the acquisition by the trustee of the 401(k) Plan of shares of our common stock in order to satisfy participant investment elections under the 401(k) Plan;

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	•	issue, deliver or sell any shares of our or our subsidiaries’ capital stock, any other voting securities or any securities convertible into, or any rights, warrants or options to acquire, any such shares, voting securities or convertible securities, or any “phantom” stock, “phantom” stock rights, stock appreciation rights or stock based performance units, other than:

	–	upon the exercise of stock options and rights under the ESPP outstanding on June 30, 2006, in each case in accordance with their then present terms;
	–	as required to comply with any benefit plan or benefit agreement of Michaels as in effect on June 30, 2006; and
	–	the issuance of shares of our common stock pursuant to our Dividend Reinvestment and Stock Purchase Plan;

	•	amend our or our subsidiaries’ certificate of incorporation or bylaws or comparable organizational documents;
	•	purchase an equity interest in or a substantial portion of the assets of, any person or any division or business thereof, if the aggregate amount of the consideration paid or transferred by us and our subsidiaries in connection with all such transactions would exceed $20.0 million or merge or consolidate with any person, in each case other than any such action solely between or among us and our subsidiaries;
	•	sell, lease or otherwise dispose of any of our or our subsidiaries’ properties or assets (including capital stock of any subsidiary) that are material, individually or in the aggregate, to us and our subsidiaries, taken as a whole, other than:

	–	sales or other dispositions of inventory and other assets in the ordinary course of business, including in connection with store relocations, closings, remodels and resets; and
	–	leases and subleases of real property, and voluntary terminations or surrenders of real property leases, in each case, in the ordinary course of business;

	•	pledge, encumber or otherwise subject to a lien any of our or our subsidiaries’ properties or assets (including capital stock of any subsidiary), other than in the ordinary course of business;
	•	incur any indebtedness for borrowed money, issue or sell any debt securities or warrants or other rights to acquire any debt securities of us or our subsidiaries, guarantee any such indebtedness or any debt securities of another person or enter into any “keep well” or other agreement to maintain any financial statement condition of another person, other than:

	–	indebtedness incurred in the ordinary course of business (including any borrowings under our existing revolving credit facilities and any trade letters of credit); and
	–	indebtedness incurred in connection with the refinancing of any indebtedness existing on June 30, 2006, or permitted to be incurred, assumed or otherwise entered into under the merger agreement;
	–	make any loans or capital contributions to, or investments in, any other person, other than:

	•	to any subsidiary; or
	•	in the ordinary course of business;

	•	make any capital expenditures, other than:

	–	in accordance with our capital expenditures plan made available to the Sponsor Entities in writing prior to June 30, 2006;
	–	in connection with the repair or replacement of facilities destroyed or damaged due to casualty or accident (whether or not covered by insurance); and

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	–	otherwise, in an aggregate amount for all such capital expenditures not covered above not to exceed $25 million;

	•	settle any material claim or material litigation, in each case made or pending against us or any of our subsidiaries, or any of our or their officers and directors in their capacities as such, other than the settlement of claims or litigation in the ordinary course of business which, in any event;

	–	is for an amount not to exceed, for any such settlement individually, $10 million; and
	–	would not be reasonably expected to prohibit or materially restrict us and our subsidiaries from operating our and their business in substantially the same manner as operated on June 30, 2006;

	•	settle any material claim or material litigation relating to the consummation of the transactions contemplated by the merger agreement;
	•	cancel any material indebtedness or waive any claims or rights of substantial value, in each case other than in the ordinary course of business;
	•	except (1) in the ordinary course of business, (2) as contemplated by the merger agreement or (3) as required pursuant to the terms of any benefit plan or benefit agreement or other written agreement in effect on June 30, 2006:

	–	grant to any of our or our subsidiaries’ officers, directors or employees any increase in compensation;
	–	grant to any of our or our subsidiaries’ officers, directors or employees any increase in severance or termination pay;
	–	enter into any employment, consulting, severance or termination agreement with any of our or our subsidiaries’ officers, directors or employees, other than any separation agreement pursuant to which the aggregate severance benefits do not exceed $300,000 with respect to any individual or $2 million in the aggregate with respect to all such individuals;
	–	establish, adopt, enter into or amend in any material respect any collective bargaining agreement or benefit plan; or
	–	accelerate any rights or benefits, or make any material determinations, under any benefit plan;

	•	make any change in accounting methods, principles or practices materially affecting our consolidated assets, liabilities or results of operations, other than as required by generally accepted accounting principles or regulatory requirements with respect thereto;
	•	make any material tax election, file any amended tax return with respect to any material tax or change any annual tax accounting period, in each case, other than in the ordinary course of business; or
	•	authorize any of, or commit or agree to take any of, the actions described above.

	•	solicit, initiate or knowingly encourage, or take any other action to knowingly facilitate, the making of any proposal that constitutes or is reasonably likely to lead to a “takeover proposal”; or

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	•	enter into, continue or otherwise participate in any discussions or negotiations regarding or furnish to any person any confidential information with respect to any “takeover proposal”.

	•	any direct or indirect acquisition or purchase, in a single transaction or a series of transactions, of:

	–	20% or more (based on the fair market value thereof, as determined by our board of directors) of assets (including capital stock of our subsidiaries) of us and our subsidiaries, taken as a whole; or
	–	20% or more of the outstanding shares of our common stock;

	•	any tender offer or exchange offer that, if consummated, would result in any person or group owning, directly or indirectly, 20% or more of the outstanding shares of our common stock; or
	•	any merger, consolidation, business combination, recapitalization, liquidation, dissolution, binding share exchange or similar transaction involving us pursuant to which any person or group (or the shareholders of any person) would own, directly or indirectly, 20% or more of any class of equity securities of us or of the surviving entity in a merger or the resulting direct or indirect parent of us or such surviving entity.

	•	after consultation with its financial advisor and outside counsel, that such takeover proposal constitutes or is reasonably likely to lead to a “superior proposal”; and
	•	after consultation with its outside counsel, that the failure to take such action would be inconsistent with its fiduciary duties under applicable law.

	•	if consummated, would result in a person or group (or the shareholders of any person) owning, directly or indirectly, (1) 50% or more of any class of equity securities of Michaels or of the surviving entity in a merger or the resulting direct or indirect parent of Michaels or such surviving entity or (2) 50% or more (based on the fair market value thereof, as determined by our board of directors) of the assets of Michaels and our subsidiaries, taken as a whole; and
	•	our board of directors determines (after consultation with its financial advisor and outside counsel) would result in greater value to our stockholders from a financial point of view than the merger, taking into account all financial, legal, regulatory and other aspects of such proposal and of the merger agreement (including any changes to the financial terms of the merger agreement proposed by the Sponsor Entities to Michaels in response to such proposal or otherwise).

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	•	after the second business day following the Mergercos’ receipt of written notice from us advising them that our board of directors intends to take such action and specifying the reasons therefor, including the material terms and conditions of any superior proposal that is the basis of the proposed action by our board of directors and a statement that our board of directors intends to terminate the merger agreement; and
	•	if, in determining whether to take such action, our board of directors takes into account any changes to the financial terms of the merger agreement proposed by the Sponsor Entities to us in response to such notice or otherwise.

	–	withdraws (or modifies in a manner adverse to the Mergercos), or publicly proposes to withdraw (or modify in a manner adverse to the Mergercos), the approval, recommendation or declaration of advisability by the board or any such committee of the merger agreement or the merger; or
	–	recommends the approval or adoption of, or approves or adopts, or publicly proposes to recommend, approve or adopt, any takeover proposal.

	•	to terminate, and to cause our subsidiaries and direct our representatives to terminate all, discussions and negotiations with any person conducted prior to signing the merger agreement with respect to any takeover proposal, and request the prompt return or destruction of all confidential information previously furnished in connection therewith;
	•	to advise the Mergercos as promptly as practicable orally and in writing of the receipt of any takeover proposal after June 30, 2006, the material terms and conditions of any such takeover proposal and the identity of the person making any such takeover proposal;
	•	subject to the fiduciary duties under applicable law of our board of directors, to keep the Mergercos reasonably informed of any material developments with respect to any takeover proposal (including any material changes thereto); and
	•	to provide to the Mergercos all information provided by us to a third party in connection with a takeover proposal.

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	•	the taking of all acts necessary to cause the conditions to closing to be satisfied as promptly as practicable;
	•	the obtaining of all necessary actions or nonactions, waivers, consents and approvals from governmental entities and the making of all necessary registrations and filings and the taking of all steps as may be necessary to obtain an approval or waiver from, or to avoid an action or proceeding by, any governmental entity;
	•	the obtaining of consents, approvals and waivers from third parties reasonably requested by the Mergercos to be obtained in connection with the merger under certain contracts and real property leases; and
	•	the execution and delivery of any additional instruments necessary to consummate the transactions contemplated by, and to fully carry out the purposes of, the merger agreement.

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	•	to negotiate and enter into the definitive agreements with respect to the debt financing on the terms and conditions contained in the debt financing commitments (or on other terms acceptable to the Fincos, so long as such terms do not contain any conditions to funding on the closing date that are not set forth in the debt financing commitments and would not otherwise reasonably be expected to impair or delay the consummation of the debt financing);
	•	to satisfy or to cause its affiliates to satisfy on a timely basis all conditions applicable to the Sponsor Entities set forth in such definitive agreements that are within the control of any of the Sponsor Entities; and
	•	to consummate the debt financing at the closing, including using reasonable best efforts to cause the lenders and the other persons providing such debt financing to fund the debt financing required to consummate the merger at the closing (including by taking enforcement action to cause such lenders and other persons providing such debt financing to fund such debt financing).

	•	all or any portion of the debt financing structured as high yield financing has not been consummated;
	•	subject to limited exceptions, all closing conditions contained in the merger agreement have been satisfied or waived; and
	•	the bridge facilities contemplated by the debt financing commitments or alternative bridge financing is available on terms and conditions described in the debt financing commitments (or replacements thereof contemplated by the merger agreement);

	•	participation in meetings, drafting sessions, presentations, road shows and due diligence;
	•	using reasonable best efforts to furnish the Fincos and the financing sources with financial and other pertinent information regarding Michaels as may be reasonably requested by the Fincos to consum-

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		mate the debt financing, including all financial statements and financial data of the type required by Regulation S-X and Regulation S-K under the Securities Act (other than Rule 3-10 of Regulation S-X) and of type and form customarily included in private placements pursuant to Rule 144A promulgated under the Securities Act;
	•	assisting the Fincos and the financing sources in the preparation of offering documents and other informational and marketing materials and documents for any portion of the debt financing and materials for rating agency presentations;
	•	reasonably cooperating with the marketing efforts of the Fincos and the financing sources for any portion of the debt financing;
	•	reasonably facilitating the pledging of collateral and execution and delivery of definitive financing documents and customary deliverables; and
	•	using reasonable best efforts to obtain accountants’ comfort letters, accountants’ consent letters, legal opinions, surveys and title insurance as reasonably requested by the Fincos.

	•	the adoption of the merger agreement by our stockholders;
	•	the expiration or termination of the waiting period (and any extension thereof) applicable to the merger under the Hart-Scott-Rodino Act; and
	•	no temporary restraining order, preliminary or permanent injunction or other judgment or order issued by any Federal or state court being in effect enjoining or otherwise prohibiting the consummation of the merger.

	•	(1) our representations and warranties regarding certain matters relating to our capital structure and authority to consummate the merger must be true and correct in all material respects as of the date of the merger agreement and as of the date the merger is completed, except to the extent that a representation or warranty expressly speaks as of an earlier date, in which case it need be true and correct in all material respects only as of that date, and (2) all other representations and warranties made by us (disregarding all materiality qualifications) must be true and correct as of the date of the merger agreement and as of the date the merger is completed, except to the extent that a representation or warranty expressly speaks as of an earlier date, in which case it need be true and correct only as of that date, and except where the failure of such other representations and warranties to be so true and correct would not, individually or in the aggregate, reasonably be expected to have a material adverse effect;
	•	the performance, in all material respects, by us of all of our material obligations under the merger agreement; and
	•	our delivery to the Sponsor Entities at closing of a certificate with respect to the satisfaction of the conditions relating to our representations and warranties and material obligations.

	•	the representations and warranties made by the Sponsor Entities (disregarding all materiality qualifications) must be true and correct as of the date of the merger agreement and as of the date the merger is completed, except to the extent that a representation or warranty expressly speaks as of an

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		earlier date, in which case it need be true only as of that date, and except where the failure of such representations and warranties to be so true and correct would not, individually or in the aggregate, reasonably be expected to have a sponsor material adverse effect;
	•	the performance, in all material respects, by the Sponsor Entities of all of their material obligations under the merger agreement; and
	•	the delivery to us at closing by each Sponsor Entity of a certificate with respect to the satisfaction of the conditions relating to its representations and warranties and material obligations.

	•	by mutual written consent of the Mergercos and Michaels;
	•	by either the Mergercos or Michaels, if:

	–	our stockholders do not adopt the merger agreement at the special meeting or any postponement or adjournment thereof;
	–	any temporary restraining order, preliminary or permanent injunction or other judgment or order issued by any Federal or state court shall have become final and non-appealable, so long as the terminating party shall have used reasonable best efforts to prevent the entry of and to remove such judgment or order;
	–	the merger has not been consummated on or before December 19, 2006; provided that if the closing shall not have occurred prior to such date solely as a result of the failure of the marketing period to have been completed prior to such date, then such date is extended to March 31, 2007; provided further that this right to terminate the merger agreement is not available to any party if the failure of such party (or, in the case of the Mergercos, any other Sponsor Entity) to perform any of its obligations under the merger agreement, to act in good faith or to use its reasonable best efforts to consummate the merger and the other transactions contemplated by the merger agreement has been a principal cause of or resulted in the failure of the merger to be consummated on or before such date; or
	–	if the terminating party (or, in the case of the Mergercos, any other Sponsor Entity) is not then in material breach and there is a breach by the non-terminating party of any of its representations or warranties or failure to perform any of its covenants or agreements in the merger agreement such that the closing conditions would not be satisfied and which cannot be cured prior to the termination date set forth above;

	•	by the Mergercos, if our board of directors withdraws or adversely modifies its recommendation or approval of the merger agreement or recommends or approves another takeover proposal; or
	•	by Michaels, if:

	–	prior to adoption of the merger agreement by our stockholders, our board of directors, after consultation with its outside counsel, determines that the failure to take such action would be inconsistent with its fiduciary duties under applicable law, but only after (1) the second business day following the Mergercos’ receipt of written notice from us advising them that our board of directors intends to take such action and specifying the reasons therefor, including the material terms and conditions of any superior proposal that is the basis of the proposed action by our board of directors,

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		and (2) our board of directors has taken into account any changes to the financial terms of the merger agreement proposed by the Sponsor Entities to us in response to such notice or otherwise (the right to terminate in these circumstances is referred to as the “fiduciary out right to terminate”); or
	–	all of the mutual conditions to closing and all of the conditions to the Sponsor Entities’ obligations to close have been satisfied (other than those conditions that by their terms are to be satisfied at the closing) and, on or after the last day of the marketing period, neither the Fincos nor the surviving corporation has received the proceeds of the debt financing.

	Payable by Michaels

	•	the merger agreement is terminated by the Mergercos upon the occurrence of an adverse recommendation change by our board of directors;
	•	the merger agreement is terminated by Michaels pursuant to the exercise of its fiduciary out right to terminate described above;
	•	the merger agreement is terminated by the Mergercos or Michaels due to the failure to receive the approval of our stockholders at the special meeting or any postponement or adjournment thereof; and

	–	after June 30, 2006, and prior to the termination, a takeover proposal has been publicly made to Michaels generally or has been made directly to our stockholders or has otherwise become publicly known; and
	–	within 12 months after the termination, we consummate or enter into a definitive agreement to consummate the transactions contemplated by any takeover proposal; or

	•	the merger agreement is terminated by the Mergercos or Michaels because the merger is not completed prior to December 19, 2006 (or, if applicable, March 31, 2007); and

	–	the special meeting of our stockholders to approve the merger has not been held;
	–	after June 30, 2006 and prior to the termination, a takeover proposal has been publicly made to Michaels generally or has been made directly to our stockholders or has otherwise become publicly known; and
	–	within 12 months after the termination, we consummate or enter into a definitive agreement to consummate the transactions contemplated by any takeover proposal.

	•	any direct or indirect acquisition or purchase, in a single transaction or a series of transactions, of:

	–	50% or more (based on the fair market value thereof, as determined by our board of directors) of assets (including capital stock of our subsidiaries) of us and our subsidiaries, taken as a whole; or
	–	50% or more of the outstanding shares of our common stock;

	•	any tender offer or exchange offer that, if consummated, would result in any person or group owning, directly or indirectly, 50% or more of the outstanding shares of our common stock; or
	•	any merger, consolidation, business combination, recapitalization, liquidation, dissolution, binding share exchange or similar transaction involving us pursuant to which any person or group (or the shareholders of any person) would own, directly or indirectly, 50% or more of any class of equity

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		securities of us or of the surviving entity in a merger or the resulting direct or indirect parent of us or such surviving entity.

	Payable by the Sponsor Entities

	Liability Cap

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	•	extend the time for the performance of any of the obligations or other acts of the other parties to the merger agreement;
	•	to the extent permitted by law, waive any inaccuracies in the representations and warranties contained in the merger agreement or in any document delivered pursuant to the merger agreement; or
	•	to the extent permitted by law, waive compliance with any of the agreements or conditions contained in the merger agreement, provided that after the merger agreement has been adopted by our stockholders, there shall be no waiver that by law would require the further approval of our stockholders without such approval having been obtained.

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			High				Low
Fiscal Year Ended January 29, 2005
	First Quarter		$	29.58			$	22.16
	Second Quarter			28.15				22.29
	Third Quarter			30.76				25.23
	Fourth Quarter			31.39				26.70
Fiscal Year Ended January 28, 2006
	First Quarter		$	36.85			$	30.37
	Second Quarter			43.61				33.03
	Third Quarter			41.95				30.38
	Fourth Quarter			38.75				32.10
Fiscal Year Ending February 3, 2007
	First Quarter		$	38.35			$	31.70
	Second Quarter			42.50				35.26
	Third Quarter (through September 5, 2006)			43.36				42.34

			Dividends per Share
			of Common Stock
Fiscal Year Ended January 29, 2005
	First Quarter		$	0.06
	Second Quarter			0.06
	Third Quarter			0.07
	Fourth Quarter			0.07
Fiscal Year Ended January 28, 2006
	First Quarter		$	0.07
	Second Quarter			0.10
	Third Quarter			0.10
	Fourth Quarter			0.10
Fiscal Year Ending February 3, 2007
	First Quarter		$	0.10
	Second Quarter			0.12

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	•	each person who is known to us to be the beneficial owner of more than five percent of our common stock;
	•	each director;
	•	our chief executive officer at the end of our last completed fiscal year and our four most highly compensated executive officers who were serving as executive officers at the end of our last completed fiscal year; and
	•	all current directors and executive officers as a group.

			Amount and
			Nature of
			Beneficial				Percent
Name and Address of Beneficial Owners(1)			Ownership(2)				of Class
Charles J. Wyly, Jr.				5,515,285	(3)			4.1	%
Sam Wyly				4,610,927	(4)			3.4	%
Richard E. Hanlon				267,600	(5)			*
Richard C. Marcus				149,000	(6)			*
Liz Minyard				170,000	(7)			*
Cece Smith				135,000	(8)			*
R. Michael Rouleau				1,064,138	(9)			*
Jeffrey N. Boyer				177,082	(10)			*
Edward F. Sadler				131,250	(11)			*
Gregory A. Sandfort				66,815	(12)			*
Capital Research and Management Company				11,520,000	(13)			8.6	%
	333 South Hope Street
	Los Angeles, California 90071
Wellington Management Company, LLP				5,724,535	(14)			4.3	%
	75 State Street
	Boston, Massachusetts 02109
Putnam, LLC d/b/a Putnam Investments				10,163,526	(15)			7.6	%
	One Post Office Square
	Boston, Massachusetts 02109
Highfields Capital Management LP				8,353,200	(16)			6.3	%
	200 Clarendon Street, 51st Floor
	Boston, Massachusetts 02116
All current directors and executive officers as a group (12 persons)				11,521,755	(17)			8.5	%

	*	Less than one percent.

	(1)	The address of each of our directors and executive officers is c/o Michaels Stores, Inc., 8000 Bent Branch Drive, Irving, TX 75063.
	(2)	Pursuant to Rule 13d-3 under the Exchange Act, a person has beneficial ownership of any securities as to which such person, directly or indirectly, through any contract, arrangement, undertaking, relationship or otherwise, has or shares voting power and/or investment power or as to which such person has the right to acquire such voting and/or investment power within 60 days. Percentage of beneficial

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		ownership by a person as of a particular date is calculated by dividing the number of shares beneficially owned by such person by the sum of the number of shares outstanding as of such date and the number of unissued shares as to which such person has the right to acquire voting and/or investment power within 60 days. Unless otherwise indicated, the number of shares shown includes outstanding shares of common stock owned as of July 21, 2006 by the person indicated and shares underlying options owned by such person on July 21, 2006 that are exercisable within 60 days of that date. Persons holding shares of common stock pursuant to the Michaels Stores, Inc. Employees 401(k) Plan, as amended and restated, have sole voting power and investment power with respect to such shares.
	(3)	Includes 726,666 shares under options; 570,039 shares held of record by Stargate, Ltd. (a Texas limited partnership, the general partner of which is a trust of which Mr. Wyly and his spouse are co-trustees); 360,208 shares held of record by Shadywood USA, Ltd. (a Texas limited partnership of which Mr. Wyly is a general partner); and 990,268 shares held of record by family trusts of which Mr. Wyly is the trustee. The number of shares in the table also includes 2,867,204 shares held by subsidiaries of certain non-U.S. trusts of which Mr. Charles J. Wyly, Jr. and/or certain of his family members are direct or contingent beneficiaries. Mr. Wyly filed an amended Schedule 13D with the Securities and Exchange Commission on April 8, 2005 stating that he may be deemed to be the beneficial owner of the shares held in the subsidiaries of those non-U.S. trusts. It is unclear in the Schedule 13D whether or to what extent Mr. Wyly exercises voting and/or investment power with respect to the shares held in the subsidiaries of the non-U.S.  trusts.
	(4)	Includes 500,832 shares under options; 400,000 shares held of record by Tallulah, Ltd. (a Texas limited partnership of which Mr. Wyly is the general partner); and 299,144 shares held of record by family trusts of which Mr. Wyly is the trustee. 27,740 shares of Michaels common stock held by Mr. Wyly’s spouse are not included in the total number of shares beneficially owned by Mr. Wyly. The number of shares in the table also includes 2,142,600 shares held by subsidiaries of certain non-U.S. trusts of which Mr. Sam Wyly and/or certain of his family members are direct or contingent beneficiaries. Mr. Wyly filed an amended Schedule 13D with the Securities and Exchange Commission on April 8, 2005 stating that he may be deemed to be the beneficial owner of the shares held in the subsidiaries of those non-U.S. trusts. It is unclear in the Schedule 13D whether or to what extent Mr. Wyly exercises voting and/or investment power with respect to the shares held in the subsidiaries of the non-U.S. trusts.
	(5)	Includes 205,000 shares under options; 20,334 shares held of record by a family trust of which Mr. Hanlon is a co-trustee; and 30,000 shares held of record by HanFam, LLC (a Virginia limited liability company of which Mr. Hanlon is the sole manager).
	(6)	Includes 135,000 shares under options.
	(7)	Includes 170,000 shares under options.
	(8)	Includes 135,000 shares under options.
	(9)	Mr. Rouleau’s beneficial ownership information is as of March 15, 2006, the date he retired as the President and Chief Executive Officer of Michaels Stores, Inc. Amount includes 925,000 shares under options.

(10)	Includes 177,082 shares under options.
(11)	Includes 131,250 shares under options.
(12)	Includes 64,583 shares under options.
(13)	Based on an amendment to a Schedule 13G filed with the Securities and Exchange Commission, dated August 10, 2006, Capital Research and Management Company, an investment advisor, has the sole power to vote or direct the vote and to dispose or direct the disposition of 8,170,000 shares of common stock and has the sole power to dispose or direct the disposition of 3,350,000 shares of common stock.
(14)	Based on an amendment to a Schedule 13G filed with the Securities and Exchange Commission, dated May 10, 2006, Wellington Management Company, LLP, an investment advisor, shares the power to vote or direct the vote and to dispose or direct the disposition of 4,632,995 shares of common stock and shares the power to dispose or direct the disposition of 1,091,540 shares of common stock.

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(15)	Based on an amendment to a Schedule 13G filed with the Securities and Exchange Commission, dated February 10, 2006, Putnam, LLC d/b/a Putnam Investments, an investment advisor, along with its parent and certain of its affiliates in their various capacities, shares the power to vote or direct the vote and to dispose or direct the disposition of 826,998 shares of common stock and shares the power to dispose or direct the disposition of 9,336,528 shares of common stock.
(16)	Based on an amendment to a Schedule 13G filed with the Securities and Exchange Commission, dated July 11, 2006, Highfields Capital Management LP, an investment advisor, along with its parent and certain of its affiliates in their various capacities, has the sole power to vote or direct the vote and to dispose or direct the disposition of 8,353,200 shares of common stock.
(17)	Includes 2,736,939 shares under options. The number of shares also includes (i) 2,867,204 shares held by subsidiaries of certain non-U.S. trusts of which Mr. Charles J. Wyly, Jr. and/or certain of his family members are direct or contingent beneficiaries, and (ii) 2,142,600 shares held by subsidiaries of certain non-U.S. trusts of which Mr. Sam Wyly and/or certain of his family members are direct or contingent beneficiaries.

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				Page
ARTICLE I The Merger
SECTION 1.01.		The Merger			2
SECTION 1.02.		Closing			2
SECTION 1.03.		Effective Time			2
SECTION 1.04.		Effects of the Merger			2
SECTION 1.05.		Certificate of Incorporation and Bylaws			2
SECTION 1.06.		Directors			3
SECTION 1.07.		Officers			3
ARTICLE II Effect of the Merger on the Capital Stock of the Constituent Corporations; Exchange Fund; Company Equity Awards
SECTION 2.01.		Effect on Capital Stock			3
SECTION 2.02.		Exchange Fund			4
SECTION 2.03.		Company Equity Awards			7
ARTICLE III Representations and Warranties
SECTION 3.01.		Representations and Warranties of the Company			7
SECTION 3.02.		Representations and Warranties of the Sponsor Entities			22
ARTICLE IV Covenants Relating to Conduct of Business
SECTION 4.01.		Conduct of Business			25
SECTION 4.02.		No Solicitation			28
ARTICLE V Additional Agreements
SECTION 5.01.		Preparation of the Proxy Statement; Stockholders’ Meeting			31
SECTION 5.02.		Access to Information; Confidentiality			32
SECTION 5.03.		Reasonable Best Efforts			32
SECTION 5.04.		Benefit Plans			33
SECTION 5.05.		Indemnification, Exculpation and Insurance			35
SECTION 5.06.		Fees and Expenses			37
SECTION 5.07.		Public Announcements			38
SECTION 5.08.		Stockholder Litigation			39
SECTION 5.09.		Financing			39
ARTICLE VI Conditions Precedent
SECTION 6.01.		Conditions to Each Party’s Obligation to Effect the Merger			42
SECTION 6.02.		Conditions to Obligations of the Sponsor Entities			42
SECTION 6.03.		Conditions to Obligation of the Company			43
SECTION 6.04.		Frustration of Closing Conditions			43

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ARTICLE VII Termination, Amendment and Waiver
SECTION 7.01.		Termination			43
SECTION 7.02.		Effect of Termination			45
SECTION 7.03.		Amendment			45
SECTION 7.04.		Extension; Waiver			45
SECTION 7.05.		Procedure for Termination or Amendment			45
ARTICLE VIII General Provisions
SECTION 8.01.		Nonsurvival of Representations and Warranties			46
SECTION 8.02.		Notices			46
SECTION 8.03.		Definitions			47
SECTION 8.04.		Interpretation			48
SECTION 8.05.		Consents and Approvals			49
SECTION 8.06.		Counterparts			49
SECTION 8.07.		Entire Agreement; No Third-Party Beneficiaries			49
SECTION 8.08.		GOVERNING LAW			49
SECTION 8.09.		Assignment			49
SECTION 8.10.		Specific Enforcement; Consent to Jurisdiction			49
SECTION 8.11.		Severability			50
Index of Defined Terms

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AGREEMENT AND PLAN OF MERGER (this “Agreement”) dated as of June 30, 2006, among BAIN PASTE MERGERCO, INC., a Delaware corporation (“Bain MergerCo”), BLACKSTONE PASTE MERGERCO, INC., a Delaware corporation (“Blackstone MergerCo” and, together with Bain MergerCo, “MergerCos”), BAIN PASTE FINCO, LLC, a Delaware limited liability company (“Bain FinCo”), BLACKSTONE PASTE FINCO, LLC, a Delaware limited liability company (“Blackstone FinCo” and, together with Bain FinCo, “FinCos”; MergerCos and FinCos, collectively, the “Sponsor Entities”), and MICHAELS STORES, INC., a Delaware corporation (the “Company”).

	(a) The Amended and Restated Bylaws of the Company (the “Company Bylaws”) shall be amended at the Effective Time to be in the form of Exhibit B, with such changes thereto as may be agreed to by the Company and MergerCos, and, as so amended, shall be the Bylaws of the Surviving Corporation until thereafter changed or amended as provided therein or by applicable Law.

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	(a) Capital Stock of MergerCos. Each share of capital stock of each MergerCo issued and outstanding immediately prior to the Effective Time shall be converted into and become one validly issued, fully paid and nonassessable share of common stock, par value $0.01 per share, of the Surviving Corporation.
	(b) Cancelation of Treasury Stock and Certain Other Stock. Each share of Company Common Stock that is directly owned by the Company, as treasury stock, or by any of the Sponsor Entities immediately prior to the Effective Time shall automatically be canceled and shall cease to exist, and no consideration shall be delivered in exchange therefor.
	(c) Conversion of Company Common Stock. Each share of Company Common Stock issued and outstanding immediately prior to the Effective Time (including shares of Company Restricted Stock, but excluding shares to be canceled in accordance with Section 2.01(b) and, except as provided in Section 2.01(d), the Appraisal Shares) shall be converted into the right to receive $44.00 in cash, without interest (the “Merger Consideration”). At the Effective Time, all such shares of Company Common Stock shall no longer be outstanding and shall automatically be canceled and shall cease to exist, and each holder of a certificate that immediately prior to the Effective Time represented any such shares of Company Common Stock (each, a “Certificate”) shall cease to have any rights with respect thereto, except the right to receive the Merger Consideration and any dividends declared in accordance with Section 4.01(a) with a record date prior to the Effective Time that remain unpaid at the Effective Time and that are due to such holder.
	(d) Appraisal Rights. Notwithstanding anything in this Agreement to the contrary, shares (the “Appraisal Shares”) of Company Common Stock issued and outstanding immediately prior to the Effective Time that are held by any holder who is entitled to demand and properly demands appraisal of such shares pursuant to, and who complies in all respects with, the provisions of Section 262 of the DGCL (“Section 262”) shall not be converted into the right to receive the Merger Consideration as provided in Section 2.01(c), but instead such holder shall be entitled to payment of the fair value of such shares in accordance with the provisions of Section 262. At the Effective Time, the Appraisal Shares shall no longer be outstanding and shall automatically be canceled and shall cease to exist, and each holder of Appraisal Shares shall cease to have any rights with respect thereto, except the right to receive the fair value of such shares in accordance with the provisions of Section 262. Notwithstanding the foregoing, if any such holder shall fail to perfect or otherwise shall waive, withdraw or lose the right to appraisal under Section 262 or a court of competent jurisdiction shall determine that such holder is not entitled to the relief provided by Section 262, then the right of such holder to be paid the fair value of such holder’s Appraisal Shares under Section 262 shall cease and such Appraisal Shares shall be deemed to have been converted at the Effective Time into, and shall have become, the right to receive the Merger Consideration as provided in Section 2.01(c). The Company shall give prompt notice to MergerCos of any demands for appraisal of any shares of Company Common Stock, withdrawals of such demands and any other instruments served pursuant to the DGCL received by the Company, and MergerCos shall have the right to participate in and direct all negotiations and proceedings with respect to such demands. Prior to the Effective Time, the Company shall not, without the prior written consent of MergerCos (which consent shall not be unreasonably withheld or delayed), voluntarily make any payment with respect to, or settle or offer to settle, any such demands, or agree to do or commit to do any of the foregoing.

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	(a) Organization, Standing and Corporate Power. Each of the Company and its Subsidiaries is duly organized and validly existing under the Laws of its jurisdiction of organization and has all requisite corporate, company or partnership power and authority to carry on its business as presently conducted. Each of the Company and its Subsidiaries is duly qualified or licensed to do business and is in good standing (where such concept is recognized under applicable Law) in each jurisdiction where the nature of its business or the ownership, leasing or operation of its properties makes such qualification or licensing necessary, other than where the failure to be so qualified, licensed or in good standing has not had and would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect. The Company has made available to the Sponsor Entities prior to the execution of this Agreement a true and complete copy of the Company Certificate of Incorporation and the Company Bylaws and the comparable organizational documents of each of its Subsidiaries, in each case as in effect on the date of this Agreement.
	(b) Subsidiaries. Section 3.01(b) of the Company Disclosure Letter lists each Subsidiary of the Company and the jurisdiction of organization thereof. All the outstanding shares of capital stock of, or other equity interests in, each Subsidiary of the Company have been validly issued and are fully paid and nonassessable and are owned, directly or indirectly, by the Company free and clear of all pledges, liens, charges, mortgages, encumbrances or security interests of any kind or nature whatsoever (collectively, “Liens”), other than Permitted Liens. Except for its interests in its Subsidiaries, the Company does not own, directly or indirectly, any capital stock of, or other equity interests in, any corporation, partnership, joint venture, association or other entity.
	(c) Capital Structure. The authorized capital stock of the Company consists of 350,000,000 shares of Company Common Stock and 2,000,000 shares of preferred stock, par value $0.10 per share (the “Company Preferred Stock”). At the close of business on June 27, 2006, (i) 134,937,396 shares of Company Common Stock were issued and outstanding (which number includes (A) 2,766,400 shares of Company Common Stock held by the Company in its treasury and (B) 12,955 shares of Company Common Stock subject to vesting or other forfeiture conditions or repurchase by the Company (such shares, together with any similar shares issued after June 27, 2006, the “Company Restricted Stock”)), (ii) 22,487,703 shares of Company Common Stock were reserved and available for issuance pursuant to the Company’s Amended and Restated 1997 Stock Option Plan, Second Amended and Restated 2001 Employee Stock Option Plan, Second Amended and Restated 2001 General Stock Option Plan, 2005 Incentive Compensation Plan and Second Amended and Restated 1997 Employees Stock Purchase Plan (such plan, the “ESPP”; the foregoing plans, collectively, the “Company Stock Plans”), of which (A) 10,847,294 shares of Company Common Stock were subject to outstanding options (other than rights under the ESPP) to acquire shares of Company Common Stock from the Company (such options, together with any similar options granted after June 27, 2006, the “Company Stock Options”) and

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	(B) 6,188 shares of Company Common Stock were subject to outstanding rights under the ESPP (assuming that the closing price for the Company Common Stock as reported on the New York Stock Exchange on the last day of the offering period in effect under the ESPP on June 27, 2006 was equal to the Merger Consideration), (iii) 8,087,082 shares of Company Common Stock were reserved and available under the Company’s Dividend Reinvestment and Stock Purchase Plan (the “Company DRIP”) and (iv) no shares of Company Preferred Stock were issued or outstanding or held by the Company in its treasury. Except as set forth above, at the close of business on June 27, 2006, no shares of capital stock or other voting securities of the Company were issued, reserved for issuance or outstanding. Since June 27, 2006 to the date of this Agreement, (x) there have been no issuances by the Company of shares of capital stock or other voting securities of the Company, other than issuances of shares of Company Common Stock pursuant to the exercise of the Company Stock Options or rights under the ESPP, in each case outstanding as of June 27, 2006, and (y) there have been no issuances by the Company of options, warrants, other rights to acquire shares of capital stock of the Company or other rights that give the holder thereof any economic interest of a nature accruing to the holders of Company Common Stock, except for rights under the ESPP. All outstanding shares of Company Common Stock (other than Company Restricted Stock) are, and all such shares that may be issued prior to the Effective Time will be when issued, duly authorized, validly issued, fully paid and nonassessable and not subject to preemptive rights. There are no bonds, debentures, notes or other indebtedness of the Company having the right to vote (or convertible into, or exchangeable for, securities having the right to vote) on any matters on which holders of Company Common Stock may vote (“Voting Company Debt”). Except for any obligations pursuant to this Agreement, any Company Stock Plan or as otherwise set forth above, as of June 27, 2006, there are no options, warrants, rights, convertible or exchangeable securities, stock-based performance units, Contracts or undertakings of any kind to which the Company or any of its Subsidiaries is a party or by which any of them is bound (1) obligating the Company or any such Subsidiary to issue, deliver or sell, or cause to be issued, delivered or sold, additional shares of capital stock or other equity interests in, or any security convertible or exchangeable for any capital stock of or other equity interest in, the Company or of any of its Subsidiaries or any Voting Company Debt, other than pursuant to (x) the Michaels Stores, Inc. Employees 401(k) Plan (the “Company 401(k) Plan”) and (y) the Company DRIP, (2) obligating the Company or any such Subsidiary to issue, grant or enter into any such option, warrant, right, security, unit, Contract or undertaking or (3) that give any person the right to receive any economic interest of a nature accruing to the holders of Company Common Stock. As of the date of this Agreement, there are no outstanding contractual obligations of the Company or any of its Subsidiaries to repurchase, redeem or otherwise acquire any shares of capital stock of the Company or any such Subsidiary, other than pursuant to the Company Stock Plans and the Company 401(k) Plan. Section 3.01(c) of the Company Disclosure Letter sets forth a true and complete list of all Indebtedness for borrowed money of the Company and its Subsidiaries (other than any such Indebtedness owed to the Company or any of its Subsidiaries, trade letters of credit and any other such Indebtedness with a principal amount not in excess of $10.0 million individually) outstanding on the date of this Agreement.
	(d) Authority; Noncontravention. The Company has all requisite corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated by this Agreement, subject, in the case of the Merger, to receipt of the Stockholder Approval. The execution and delivery of this Agreement by the Company and the consummation by the Company of the transactions contemplated by this Agreement have been duly authorized by all necessary corporate action on the part of the Company, subject, in the case of the Merger, to receipt of the Stockholder Approval. This Agreement has been duly executed and delivered by the Company and, assuming the due authorization, execution and delivery by each of the other parties hereto, constitutes a legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, subject, as to enforceability, to bankruptcy, insolvency and other Laws of general applicability relating to or affecting creditors’ rights and to general equity principles. The Board of Directors of the Company, at a meeting duly called and held at which all directors of the Company were present, duly adopted resolutions (i) approving and declaring advisable this Agreement, the Merger and the other transactions contem-

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	plated by this Agreement, (ii) declaring that it is in the best interests of the stockholders of the Company that the Company enter into this Agreement and consummate the Merger and the other transactions contemplated by this Agreement on the terms and subject to the conditions set forth herein, (iii) directing that the adoption of this Agreement be submitted to a vote at a meeting of the stockholders of the Company and (iv) recommending that the stockholders of the Company adopt this Agreement, which resolutions, as of the date of this Agreement, have not been rescinded, modified or withdrawn in any way. The execution and delivery by the Company of this Agreement do not, and the consummation of the Merger and the other transactions contemplated by this Agreement and compliance with the provisions of this Agreement will not, conflict with, or result in any violation of, or default (with or without notice or lapse of time, or both) under, or give rise to a right of termination, cancellation or acceleration of any obligation or to the loss of a benefit under, or result in the creation of any Lien upon any of the properties or assets of the Company or any of its Subsidiaries under (other than any such Lien created in connection with the Financing or otherwise from any action taken by any of the Sponsor Entities), any provision of (A) the Company Certificate of Incorporation, the Company Bylaws or the comparable organizational documents of any of its Subsidiaries or (B) subject to the filings and other matters referred to in the immediately following sentence, (1) any contract, lease, indenture, note, bond or other agreement that is in force and effect (a “Contract”) to which the Company or any of its Subsidiaries is a party or by which any of their respective properties or assets are bound, other than any lease of real property under which the Company or any of its Subsidiaries is a tenant or a subtenant, or (2) any statute, law, ordinance, rule or regulation of any Governmental Entity (“Law”) or any judgment, order or decree of any Governmental Entity (“Judgment”), in each case applicable to the Company or any of its Subsidiaries or their respective properties or assets, other than, in the case of clause (B) above, any such conflicts, violations, defaults, rights, losses or Liens that have not had and would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect. No consent, approval, order or authorization of, or registration, declaration or filing with, or notice to, any Federal, state, local or foreign government, any court of competent jurisdiction or any administrative, regulatory (including any stock exchange) or other governmental agency, commission or authority (each, a “Governmental Entity”) is required to be obtained or made by or with respect to the Company or any of its Subsidiaries in connection with the execution and delivery of this Agreement by the Company or the consummation by the Company of the Merger or the other transactions contemplated by this Agreement, except for (I) the filing of a premerger notification and report form by the Company under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “HSR Act”), and the filings and receipt, termination or expiration, as applicable, of such other approvals or waiting periods as may be required under any other applicable competition, merger control, antitrust or similar Law, (II) the filing with the SEC of (x) a proxy statement relating to the adoption by the stockholders of the Company of this Agreement (as amended or supplemented from time to time, the “Proxy Statement”) and (y) such reports under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as may be required in connection with this Agreement and the transactions contemplated by this Agreement, (III) the filing of the Certificate of Merger with the Secretary of State of the State of Delaware and of appropriate documents with the relevant authorities of other jurisdictions in which the Company or any of its Subsidiaries is qualified to do business, (IV) any filings required under the rules and regulations of the New York Stock Exchange and (V) such other consents, approvals, orders, authorizations, registrations, declarations, filings and notices the failure of which to be obtained or made has not had and would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect.
	(e) SEC Documents. The Company has filed all reports, schedules, forms, statements and other documents with the SEC required to be filed by the Company since January 1, 2004 (the “SEC Documents”). As of their respective dates of filing, the SEC Documents complied as to form in all material respects with the requirements of the Securities Act of 1933, as amended (the “Securities Act”), or the Exchange Act, as the case may be, and the rules and regulations of the SEC promulgated thereunder applicable thereto, and none of the SEC Documents contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. The

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	Company has made available to the Sponsor Entities copies of all comment letters received by the Company from the SEC since January 1, 2004 and relating to the SEC Documents, together with all written responses of the Company thereto. As of the date of this Agreement, to the Knowledge of the Company there are no outstanding or unresolved comments in such comment letters received by the Company from the SEC. As of the date of this Agreement, to the Knowledge of the Company, none of the SEC Documents is the subject of any ongoing review by the SEC. The audited consolidated financial statements and the unaudited quarterly financial statements (including, in each case, the notes thereto) of the Company included in the SEC Documents when filed complied as to form in all material respects with the published rules and regulations of the SEC with respect thereto, have been prepared in all material respects in accordance with generally accepted accounting principles (“GAAP”) (except, in the case of unaudited quarterly statements, as permitted by Form 10-Q of the SEC or other rules and regulations of the SEC) applied on a consistent basis during the periods involved (except as may be indicated in the notes thereto) and fairly present in all material respects the consolidated financial position of the Company and its consolidated Subsidiaries as of the dates thereof and the consolidated results of their operations and cash flows for the periods then ended (subject, in the case of unaudited quarterly statements, to normal year-end adjustments). Except for matters reflected or reserved against in the audited consolidated balance sheet of the Company as of January 28, 2006 (or the notes thereto) included in the Filed SEC Documents, neither the Company nor any of its Subsidiaries has any liabilities or obligations (whether absolute, accrued, contingent, fixed or otherwise) of any nature that would be required under GAAP, as in effect on the date of this Agreement, to be reflected on a consolidated balance sheet of the Company (including the notes thereto), except liabilities and obligations that (i) were incurred since January 28, 2006 in the ordinary course of business consistent with past practice, (ii) are incurred in connection with the transactions contemplated by this Agreement or (iii) have not had and would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect.
	(f) Information Supplied. The Proxy Statement will not, at the date it is first mailed to the stockholders of the Company and at the time of the Stockholders’ Meeting, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading, except that no representation or warranty is made by the Company with respect to statements made or incorporated by reference therein based on information supplied by any of the Sponsor Entities for inclusion or incorporation by reference in the Proxy Statement.
	(g) Absence of Certain Changes or Events. Since January 28, 2006, there has not been any change, effect, event, occurrence or state of facts that has had or would reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect. From such date through the date of this Agreement, the Company and its Subsidiaries have conducted their businesses only in the ordinary course of business consistent with past practice, and during such period there has not been:

	(i) any declaration, setting aside or payment of any dividend on, or making of any other distribution (whether in cash, stock or property) with respect to, any capital stock of the Company, except for the regular quarterly cash dividends on Company Common Stock;
	(ii) any split, combination or reclassification of any capital stock of the Company or any issuance or the authorization of any issuance of any other securities in lieu of or in substitution for shares of capital stock of the Company;
	(iii) any purchase, redemption or other acquisition by the Company or any of its Subsidiaries of any shares of capital stock of the Company or any of its Subsidiaries or any rights, warrants or options to acquire any such shares, other than (A) the acquisition by the Company of shares of Company Common Stock in connection with the surrender of shares of Company Common Stock by holders of options to acquire such stock in order to pay the exercise price thereof, (B) the withholding of shares of Company Common Stock to satisfy tax obligations with respect to awards granted pursuant to the Company Stock Plans, (C) the acquisition by the Company of Company

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	Stock Options and shares of Company Restricted Stock in connection with the forfeiture of such awards and (D) the acquisition by the trustee of the Company 401(k) Plan of shares of Company Common Stock in order to satisfy participant investment elections under the Company 401(k) Plan;
	(iv) except (A) in the ordinary course of business consistent with past practice or (B) as required pursuant to the terms of any Company Benefit Plan or Company Benefit Agreement or other written agreement, in each case, in effect as of January 28, 2006, (1) any granting to any director or executive officer of the Company or any of its Subsidiaries of any material increase in compensation, (2) any granting to any director or executive officer of the Company or any of its Subsidiaries of any increase in severance or termination pay or (3) any entry by the Company or any of its Subsidiaries into any employment, consulting, severance or termination agreement with any director, executive officer or employee of the Company or any of its Subsidiaries pursuant to which the total annual compensation or the aggregate severance benefits exceed $500,000 per person;
	(v) any change in accounting methods, principles or practices by the Company or any of its Subsidiaries materially affecting the consolidated assets, liabilities or results of operations of the Company, except as required (A) by GAAP (or any interpretation thereof), including as may be required by the Financial Accounting Standards Board or any similar organization, or (B) by Law, including Regulation S-X under the Securities Act; or
	(vi) any material tax election by the Company or any of its Subsidiaries, other than in the ordinary course of business.

	(h) Litigation. There is no suit, action or proceeding pending or, to the Knowledge of the Company, threatened against the Company or any of its Subsidiaries that has had or would reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect. There is no Judgment outstanding against the Company or any of its Subsidiaries that has had or would reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect. As of the date of this Agreement, to the Knowledge of the Company, no director or officer of the Company is a defendant in any suit, action or proceeding in connection with his or her status as a director or officer of the Company. This Section 3.01(h) does not relate to environmental matters, which are the subject of Section 3.01(j)(ii).
	(i) Contracts. Except for this Agreement, Contracts filed as exhibits to the Filed SEC Documents and purchase orders entered into in the ordinary course of business, Section 3.01(i) of the Company Disclosure Letter sets forth a true and complete list, as of the date of this Agreement, and the Company has made available to the Sponsor Entities true and complete copies, of:

	(i) each Contract that would be required to be filed by the Company as a “material contract” pursuant to Item 601(b)(10) of Regulation S-K under the Securities Act;
	(ii) each Contract to which the Company or any of its Subsidiaries is a party that materially restricts the ability of the Company or any of its Subsidiaries to compete in any business or with any person in any geographical area, except for any such Contract that may be canceled, without any material penalty or other liability to the Company or any of its Subsidiaries, upon notice of 90 days or less;
	(iii) each loan and credit agreement, note, debenture, bond, indenture and other similar Contract pursuant to which any Indebtedness of the Company or any of its Subsidiaries, in each case in excess of $10.0 million, is outstanding or may be incurred, other than any such Contract between or among any of the Company and any of its Subsidiaries and any letters of credit;
	(iv) each Contract to which the Company or any of its Subsidiaries is a party that by its terms calls for aggregate payments by the Company or any of its Subsidiaries of more than $20.0 million over the remaining term of such Contract, except for any such Contract that may be canceled, without any material penalty or other liability to the Company or any of its Subsidiaries, upon notice of 90 days or less; and

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(v) each Contract to which the Company or any of its Subsidiaries is a party for the acquisition or disposition by the Company or any of its Subsidiaries of properties or assets for, in each case, aggregate consideration of more than $20.0 million, except for acquisitions and dispositions of properties and assets in the ordinary course of business (including acquisitions of supplies and acquisitions and dispositions of inventory).

	Each such Contract described in clauses (i) through (v) above is referred to herein as a “Specified Contract”. Each of the Specified Contracts is valid and binding on the Company or the Subsidiary of the Company party thereto and, to the Knowledge of the Company, each other party thereto, and is in full force and effect, except for such failures to be valid and binding or to be in full force and effect that have not had and would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect. There is no default under any Specified Contract by the Company or any of its Subsidiaries or, to the Knowledge of the Company, by any other party thereto, and no event has occurred that with the lapse of time or the giving of notice or both would constitute a default thereunder by the Company or any of its Subsidiaries or, to the Knowledge of the Company, by any other party thereto, in each case except as have not had and would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect. This Section 3.01(i) does not relate to real property leases, which are the subject of Section 3.01(n).
	(j) Compliance with Laws; Environmental Matters. (i) Each of the Company and its Subsidiaries is and since January 1, 2004 has been in compliance with all Laws applicable to its business or operations (including the Sarbanes-Oxley Act of 2002), except for instances of possible noncompliance that have not had and would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect. Each of the Company and its Subsidiaries has in effect all approvals, authorizations, certificates, franchises, licenses, permits and consents of Governmental Entities (collectively, “Permits”) necessary for it to conduct its business as presently conducted, and all such Permits are in full force and effect, except for such Permits the absence of which, or the failure of which to be in full force and effect, have not had and would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect. This Section 3.01(j)(i) does not relate to environmental matters, which are the subject of Section 3.01(j)(ii), employee benefit matters, which are the subject of Section 3.01(l), and taxes, which are the subject of Section 3.01(m).

(ii) Except for those matters that have not had and would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect, (A) each of the Company and its Subsidiaries is in compliance with all applicable Environmental Laws, and neither the Company nor any of its Subsidiaries has received any written communication alleging that the Company is in violation of, or has any liability under, any Environmental Law, (B) each of the Company and its Subsidiaries validly possesses and is in compliance with all Permits required under Environmental Laws to conduct its business as presently conducted, and all such Permits are valid and in good standing, (C) there are no Environmental Claims pending or, to the Knowledge of the Company, threatened against the Company or any of its Subsidiaries and (D) none of the Company or any of its Subsidiaries has Released any Hazardous Materials at, on, under or from any of the Owned Real Property, the Leased Real Property or any other property in a manner that would reasonably be expected to result in an Environmental Claim against the Company or any of its Subsidiaries.

The term “Environmental Claims” means any administrative or judicial actions, suits, orders, claims, proceedings or written notices of noncompliance by or from any person alleging liability arising out of the Release of any Hazardous Material or the failure to comply with any Environmental Law. The term “Environmental Law” means any Law relating to pollution, the environment or natural resources. The term “Hazardous Materials” means (1) petroleum and petroleum by-products, asbestos in any form that is or could reasonably become friable, radioactive materials, medical or infectious wastes, or polychlorinated biphenyls, and (2) any other material, substance or waste that is prohibited, limited or regulated because of its hazardous, toxic or deleterious properties or characteristics. The term “Release” means any release, spill, emission, leaking, pumping, emitting, discharging, injecting, escaping, leaching, dumping, disposing or migrating into or through the environment.

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	(k) Labor and Employment Matters. Neither the Company nor any of its Subsidiaries is a party to any collective bargaining agreement, and there are not, to the Knowledge of the Company, any union organizing activities concerning any employees of the Company or any of its Subsidiaries that, in each case, has had or would reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect. There are no labor strikes, slowdowns, work stoppages or lockouts pending or, to the Knowledge of the Company, threatened in writing, against the Company or any of its Subsidiaries that have had or would reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect.
	(l) Employee Benefit Matters. (i) Section 3.01(l) of the Company Disclosure Letter contains a true and complete list, as of the date of this Agreement, of each material Company Benefit Plan that is an “employee pension benefit plan” (as defined in Section 3(2) of ERISA) (a “Company Pension Plan”), each material Company Benefit Plan that is an “employee welfare benefit plan” (as defined in Section 3(1) of ERISA) and all other material Company Benefit Plans and all material Company Benefit Agreements. Each Company Benefit Plan has been administered in compliance with its terms and with applicable Law (including ERISA and the Code), other than instances of noncompliance that have not had and would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect. The Company has made available to the Sponsor Entities true and complete copies of (A) each material Company Benefit Plan and each material Company Benefit Agreement, other than any Company Benefit Plan or Company Benefit Agreement that the Company or any of its Subsidiaries is prohibited from making available to the Sponsor Entities as the result of applicable Law relating to the safeguarding of data privacy, (B) the most recent annual report on Form 5500 filed with the Internal Revenue Service with respect to each Company Benefit Plan (if any such report was required by applicable Law) and (C) the most recent summary plan description for each Company Benefit Plan for which a summary plan description is required by applicable Law.

	(ii) All Company Pension Plans that are intended to be qualified for Federal income tax purposes have been the subject of determination letters from the Internal Revenue Service to the effect that such Company Pension Plans are so qualified and exempt from Federal income taxes under Sections 401(a) and 501(a), respectively, of the Code, and no such determination letter has been revoked nor, to the Knowledge of the Company, has revocation been threatened.
	(iii) None of the Company Benefit Plans is subject to Section 302 or Title IV of ERISA or Section 412 of the Code. None of the Company, any of its Subsidiaries or any other person or entity under common control with the Company within the meaning of Section 414(b), (c), (m) or (o) of the Code participates in, or is required to contribute to, any Multiemployer Plan.
	(iv) Except as individually or in the aggregate has not had and would not reasonably be expected to have a Material Adverse Effect, none of the Company, any of its Subsidiaries, any officer of the Company or any such Subsidiary or any Company Benefit Plan that is subject to ERISA, including any Company Pension Plan, or, to the Knowledge of the Company, any trust created thereunder or any trustee or administrator thereof, has engaged in a “prohibited transaction” (as such term is defined in Section 406 of ERISA or Section 4975 of the Code) or any other breach of fiduciary responsibility that could subject the Company, any of its Subsidiaries or any officer of the Company or any such Subsidiary to the tax or penalty on prohibited transactions imposed by such Section 4975 of the Code or to any liability under Section 502(i) or 502(1) of ERISA.
	(v) No Company Benefit Plan provides health benefits (whether or not insured) with respect to employees or former employees (or any of their beneficiaries) of the Company or any of its Subsidiaries after retirement or other termination of service (other than coverage or benefits (A) required to be provided under Part 6 of Title I of ERISA or any other similar applicable Law or (B) the full cost of which is borne by the employee or former employee (or any of their beneficiaries)).
	(vi) Other than payments that may be made to the persons listed in Section 3.01(l)(vi) of the Company Disclosure Letter, any amount that could be received (whether in cash or property or the

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	vesting of property) as a result of the Merger or any other transaction contemplated by this Agreement by any employee, officer or director of the Company or any of its affiliates who is a “disqualified individual” (as such term is defined in Treasury Regulation Section 1.280G-1) under any employment, severance or termination agreement, other compensation arrangement or Company Benefit Plan or Company Benefit Agreement currently in effect would not be characterized as an “excess parachute payment” (as defined in Section 280G(b)(1) of the Code).
	(vii) The term “Company Benefit Agreement” means each employment, consulting, indemnification, severance or termination agreement or arrangement between the Company or any of its Subsidiaries, on the one hand, and any current or former employee, officer or director of the Company or any of its Subsidiaries, on the other hand, other than any agreement or arrangement mandated by applicable Law. The term “Company Benefit Plan” means each bonus, pension, profit sharing, deferred compensation, incentive compensation, stock ownership, stock purchase, stock option, phantom stock or other equity-based compensation, retirement, vacation, severance, disability, death benefit, hospitalization, medical or other employee benefits plan, policy, program, arrangement or understanding, whether formal or informal, oral or written (but excluding any Company Benefit Agreement), in each case sponsored, maintained or contributed to, or required to be sponsored, maintained or contributed to, by the Company or any of its Subsidiaries for the benefit of any current or former employee, officer or director of the Company or any of its Subsidiaries, other than (A) any “multiemployer plan” (within the meaning of Section 3(37) of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”)) (a “Multiemployer Plan”) or (B) any plan, policy, program, arrangement or understanding mandated by applicable Law.

(m) Taxes. (i) Each of the Company and its Subsidiaries has filed or has caused to be filed all material tax returns required to be filed by it (or requests for extensions, which requests have been granted and have not expired), and all such returns are complete and accurate in all material respects. Each of the Company and its Subsidiaries has either paid or caused to be paid all material taxes due and owing by the Company and its Subsidiaries to any Governmental Entity, or the most recent financial statements contained in the Filed SEC Documents reflect an adequate reserve (excluding any reserves for deferred taxes), if such a reserve is required by GAAP, for all material taxes payable by the Company and its Subsidiaries, for all taxable periods and portions thereof ending on or before the date of such financial statements.

	(ii) No deficiencies, audit examinations, refund litigation, proposed adjustments or matters in controversy for any material taxes (other than taxes that are not yet due and payable or for amounts being contested in good faith) have been proposed, asserted or assessed in writing against the Company or any of its Subsidiaries which have not been settled and paid. All assessments for material taxes due and owing by the Company or any of its Subsidiaries with respect to completed and settled examinations or concluded litigation have been paid. There is no currently effective agreement or other document with respect to the Company or any of its Subsidiaries extending the period of assessment or collection of any material taxes.
	(iii) Neither the Company nor any of its Subsidiaries has constituted either a “distributing corporation” or a “controlled corporation” in a distribution of stock qualifying for tax-free treatment under Section 355 of the Code (A) in the two years prior to the date of this Agreement or (B) which could otherwise constitute part of a “plan” or “series of related transactions” (within the meaning of Section 355(e) of the Code) in conjunction with the Merger.
	(iv) None of the Company or any of its Subsidiaries has entered into any transaction defined in Treasury Regulation Sections 1.6011-4(b)(2), -4(b)(3) or -4(b)(4), or has entered into a “potentially abusive tax shelter” (as defined in Treasury Regulation Section 301.6112-1(b)).
	(v) The term “taxes” means all income, profits, capital gains, goods and services, branch, payroll, unemployment, customs duties, premium, compensation, windfall profits, franchise, gross receipts, capital, net worth, sales, use, withholding, turnover, value added, ad valorem, registration, general business, employment, social security, disability, occupation, real property, personal property

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(tangible and intangible), stamp, transfer (including real property transfer or gains), conveyance, severance, production, excise, withholdings, duties, levies, imposts, license, registration and other taxes (including any and all fines, penalties and additions attributable to or otherwise imposed on or with respect to any such taxes and interest thereon) imposed by or on behalf of any Governmental Entity. The term “tax return” means any return, statement, report, form, filing, customs entry, customs reconciliation and any other entry or reconciliation, including in each case any amendments, schedules or attachments thereto, required to be filed with any Governmental Entity or with respect to taxes of the Company or its Subsidiaries.

	(n) Title to Properties. (i) Section 3.01(n)(i) of the Company Disclosure Letter sets forth, as of the date of this Agreement, a true and complete list of all real property owned by the Company and its Subsidiaries (individually, an “Owned Real Property”).

	(ii) Section 3.01(n)(ii) of the Company Disclosure Letter sets forth, as of the date of this Agreement, a true and complete list of all material leases of real property (the “Real Property Leases”) under which the Company or any of its Subsidiaries is a tenant or a subtenant (individually, a “Leased Real Property”).
	(iii) Except as has not had and would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect, the Company or a Subsidiary of the Company has good and valid fee title to each Owned Real Property, in each case free and clear of all Liens and defects in title, except for (A) mechanics’, carriers’, workmen’s, warehousemen’s, repairmen’s or other like Liens arising or incurred in the ordinary course of business, (B) Liens for taxes, assessments and other governmental charges and levies that are not due and payable or that may thereafter be paid without interest or penalty, (C) Liens affecting the interest of the grantor of any easements benefiting Owned Real Property, (D) Liens (other than liens securing Indebtedness), defects or irregularities in title, easements, rights-of-way, covenants, restrictions, and other, similar matters that would not, individually or in the aggregate, reasonably be expected to materially impair the continued use and operation of the assets to which they relate in the business of the Company and its Subsidiaries as presently conducted, (E) zoning, building and other similar codes and regulations and (F) any conditions that would be disclosed by a current, accurate survey or physical inspection (collectively, “Permitted Liens”).
	(iv) Except as has not had and would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect, the Company or a Subsidiary of the Company has a good and valid title to a leasehold estate in each Leased Real Property, all Real Property Leases are in full force and effect, and neither the Company nor any of its Subsidiaries that is party to such leases has received or given any written notice of any material default thereunder which default continues on the date of this Agreement.
	(v) Section 3.01(n)(v) of the Company Disclosure Letter sets forth, as of the date of this Agreement, a true and complete list of all material leases, subleases or similar agreements under which the Company or any of its Subsidiaries is the landlord or the sublandlord (such leases, subleases and similar agreements, collectively, the “Real Property Subleases”).
	(vi) The Company has made available to the Sponsor Entities true and complete copies of the Real Property Leases and the Real Property Subleases.

(o) Intellectual Property. Section 3.01(o) of the Company Disclosure Letter sets forth, as of the date of this Agreement, a true and complete list of all patents, patent applications, trademarks, trademark applications, trade names, service marks, service mark applications and registered copyrights and applications therefor (collectively, “Intellectual Property Rights”) that, in each case, are material to the conduct of the business of the Company and its Subsidiaries, taken as a whole, as presently conducted and, except as has not had and would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect, the Company or a Subsidiary of the Company owns, or is licensed or otherwise has the right to use, each such Intellectual Property Right. No claims are pending or, to the

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	Knowledge of the Company, threatened that the Company or any of its Subsidiaries is infringing the rights of any person with regard to any Intellectual Property Right, which claims have had or would reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect. To the Knowledge of the Company, as of the date of this Agreement, no person is infringing the rights of the Company or any of its Subsidiaries with respect to any Intellectual Property Right, in a manner that has had or would reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect.
	(p) Insurance. Except as has not had and would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect, (i) the Company and its Subsidiaries maintain insurance in such amounts and against such risks as is sufficient to comply with applicable Law, (ii) all material insurance policies of the Company and its Subsidiaries are in full force and effect, except for any expiration thereof in accordance with the terms thereof, (iii) neither the Company nor any of its Subsidiaries is in breach of, or default under, any such material insurance policy and (iv) no written notice of cancellation or termination has been received with respect to any such material insurance policy, other than in connection with ordinary renewals.
	(q) Voting Requirements. Assuming the accuracy of the representations and warranties set forth in Section 3.02(f), the affirmative vote of holders of a majority of the outstanding shares of Company Common Stock entitled to vote thereon at the Stockholders’ Meeting or any adjournment or postponement thereof to adopt this Agreement (the “Stockholder Approval”) is the only vote of the holders of any class or series of capital stock of the Company necessary for the Company to adopt this Agreement and approve the transactions contemplated hereby.
	(r) State Takeover Statutes. Assuming the accuracy of the representations and warranties set forth in Section 3.02(f), the approval of the Board of Directors of the Company of this Agreement, the Merger and the other transactions contemplated by this Agreement represents all the action necessary to render inapplicable to this Agreement, the Merger and the other transactions contemplated by this Agreement, the provisions of Section 203 of the DGCL to the extent, if any, such Section would otherwise be applicable to this Agreement, the Merger and the other transactions contemplated by this Agreement, and no other state takeover statute applies to this Agreement, the Merger or the other transactions contemplated by this Agreement.
	(s) Brokers and Other Advisors. No broker, investment banker, financial advisor or other person, other than J.P. Morgan Securities Inc. and Goldman, Sachs & Co., the fees and expenses of which will be paid by the Company, is entitled to any broker’s, finder’s or financial advisor’s fee or commission in connection with the Merger and the transactions contemplated by this Agreement based upon arrangements made by or on behalf of the Company. The Company has made available to the Sponsor Entities complete and correct copies of the letter agreements between the Company and (i) J.P. Morgan Securities Inc. and (ii) Goldman Sachs & Co. pursuant to which such parties could be entitled to any payment from the Company or any of its Subsidiaries in connection with the Merger.
	(t) Opinions of Financial Advisors. The Company has received the opinion of each of J.P. Morgan Securities Inc. and Goldman, Sachs & Co., in each case dated the date of this Agreement, to the effect that, as of such date, the Merger Consideration is fair, from a financial point of view, to the holders of shares of Company Common Stock, a signed copy of each of which opinions has been or will promptly be delivered to the Sponsor Entities.
	(u) Affiliate Transactions. To the Knowledge of the Company, no executive officer or director of the Company or any of its Subsidiaries or any person who beneficially owns 5% or more of the Company Common Stock is a party to any contract with or binding upon the Company or any of its Subsidiaries or any of their respective properties or assets or has any material interest in any material property owned by the Company or any of its Subsidiaries or has engaged in any material transaction with any of the foregoing within the period of 12 months preceding the date of this Agreement, in each case, that is of the type that would be required to be disclosed under Item 404 of Regulation S-K under the Securities Act.

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(v) No Other Representations or Warranties. Except for the representations and warranties contained in this Section 3.01 or in any certificates delivered by the Company in connection with the Closing, each of the Sponsor Entities acknowledges that neither the Company nor any person on behalf of the Company makes any other express or implied representation or warranty with respect to the Company or any of its Subsidiaries or with respect to any other information provided or made available to any of the Sponsor Entities in connection with the transactions contemplated by this Agreement. Neither the Company nor any other person will have or be subject to any liability or indemnification obligation to any of the Sponsor Entities or any other person resulting from the distribution to any Sponsor Entity, or any Sponsor Entity’s use of, any such information, including any information, documents, projections, forecasts or other material made available to the Sponsor Entities in certain “data rooms” or management presentations in expectation of the transactions contemplated by this Agreement, unless and then only to the extent that any such information is expressly included in a representation or warranty contained in this Section 3.01 or in a certificate delivered by the Company in connection with the Closing. Notwithstanding the foregoing or any other provision of this Agreement or otherwise, nothing herein shall relieve the Company or any other person from liability for fraud.

	(a) Organization, Standing and Corporate Power. Each of the Sponsor Entities is duly organized, validly existing and in good standing under the Laws of its jurisdiction of organization and has all requisite corporate or limited liability company, as applicable, power and authority to carry on its business as presently conducted.
	(b) Authority; Noncontravention. Each of the Sponsor Entities has all requisite corporate or limited liability company, as applicable, power and authority to execute and deliver this Agreement and to consummate the transactions contemplated by this Agreement, including the Merger and the Financing. The execution and delivery of this Agreement and the consummation of the transactions contemplated by this Agreement, including the Merger and the Financing, have been duly authorized by all necessary corporate or limited liability company, as applicable, action on the part of each of the Sponsor Entities, and no other corporate proceedings (including no shareholder action) on the part of any Sponsor Entity are necessary to authorize this Agreement or to consummate the transactions contemplated hereby, including the Merger and the Financing. This Agreement has been duly executed and delivered by each of the Sponsor Entities and, assuming the due authorization, execution and delivery by the Company, constitutes a legal, valid and binding obligation of each of the Sponsor Entities, enforceable against each of them in accordance with its terms, subject, as to enforceability, to bankruptcy, insolvency and other Laws of general applicability relating to or affecting creditors’ rights and to general equity principles. The execution and delivery of this Agreement do not, and the consummation of the Merger and the other transactions contemplated by this Agreement, including the Financing, and compliance with the provisions of this Agreement will not, conflict with, or result in any violation or breach of, or default (with or without notice or lapse of time, or both) under, or give rise to a right of termination, cancellation or acceleration of any obligation or to the loss of a benefit under, or result in the creation of any Lien upon any of the properties or assets of any Sponsor Entity under, any provision of (i) the certificate of incorporation, bylaws or comparable organizational documents of any Sponsor Entity or (ii) subject to the filings and other matters referred to in the immediately following sentence, (A) any Contract to which any Sponsor Entity is a party or by which any of its properties or assets are bound or (B) any Law or Judgment, in each case applicable to any Sponsor Entity or its respective properties or assets, other than, in the case of clause (ii), any such conflicts, violations, breaches, defaults, rights, losses or Liens that have not had and would not reasonably be expected to have, individually or in the aggregate, a Sponsor Material Adverse Effect. No consent, approval, order or authorization of, registration, declaration or filing with, or notice to, any Governmental Entity is required to be obtained or made by or with respect to the Sponsor Entities in connection with the execution and delivery of this Agreement by the Sponsor Entities or the consummation by the Sponsor Entities of the Merger or the other transactions contemplated by this Agreement, including the Financing, except for (I) the filing of a

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	premerger notification and report form under the HSR Act and the filings and receipt, termination or expiration, as applicable, of such other approvals or waiting periods as may be required under any other applicable competition, merger control, antitrust or similar Law, (II) the filing of the Certificate of Merger with the Secretary of State of the State of Delaware and (III) such other consents, approvals, orders, authorizations, registrations, declarations, filings and notices the failure of which to be obtained or made has not had and would not reasonably be expected to have, individually or in the aggregate, a Sponsor Material Adverse Effect.
	(c) Information Supplied. None of the information supplied or to be supplied by any Sponsor Entity for inclusion or incorporation by reference in the Proxy Statement will, at the date it is first mailed to the stockholders of the Company and at the time of the Stockholders’ Meeting, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading.
	(d) Available Funds. The financing of the transactions contemplated hereby will consist of a combination of equity financing provided to MergerCos (the “Equity Financing”) and debt financing provided to FinCos (or loaned directly to the Company or one of its Subsidiaries) (the “Debt Financing” and, together with the Equity Financing, the “Financing”). The Sponsor Entities have delivered to the Company true and complete copies of fully executed commitment letters pursuant to which the parties thereto have committed to provide the Financing (such agreements, as modified pursuant to Section 5.09(a), the “Equity Financing Commitments” and the “Debt Financing Commitment,” respectively, and together the “Financing Commitments”). Each of the Equity Financing Commitments, in the form so delivered, is in full force and effect and is a legal, valid and binding obligation of Bain MergerCo or Blackstone MergerCo, as the case may be, and the other parties thereto, and the financing commitments thereunder have not been withdrawn or terminated. As of the date of this Agreement, the Debt Financing Commitment is in full force and effect and is a legal, valid and binding obligation of each FinCo and, to the Knowledge of the Sponsor Entities, the other parties thereto, and the financing commitments thereunder have not been withdrawn or terminated. The Financing Commitments have not been amended, supplemented or otherwise modified in any respect, except, in each case, as permitted by Section 5.09(a). No event has occurred that, with or without notice, lapse of time or both, would constitute a default or breach on the part of any Sponsor Entity under any term of the Financing Commitments. Assuming the satisfaction of the conditions set forth in Section 6.02, (i) none of the Sponsor Entities has any reason to believe that it will not be able to satisfy on a timely basis any term or condition of closing to be satisfied by it or its Affiliates set forth in the Financing Commitments and (ii) none of the Sponsor Entities has any reason to believe, as of the date of this Agreement, that any portion of the Financing to be made thereunder will otherwise not be available to the applicable Sponsor Entity or the Surviving Corporation on a timely basis to consummate the Merger and the other transactions contemplated hereby. FinCos have fully paid any and all commitment fees or other fees required by the Debt Financing Commitment to be paid by them on or prior to the date of this Agreement and shall in the future pay any such fees as they become due. Assuming the satisfaction of the conditions set forth in Section 6.02, the Financing, when funded in accordance with the Financing Commitments, will provide the Sponsor Entities and the Surviving Corporation with funds sufficient to satisfy all of their obligations under this Agreement, including the payment of the Merger Consideration, the Option Amounts and all associated costs and expenses. The obligations to make the Financing available to the Sponsor Entities or the Surviving Corporation pursuant to the terms of the Financing Commitments are not subject to any conditions other than the conditions set forth in the Financing Commitments. Each of the Guarantees is in full force and effect and is a legal, valid and binding obligation of the Bain Fund or the Blackstone Fund, as the case may be.
	(e) Operations and Assets of the Sponsor Entities. Each of the Sponsor Entities has been formed solely for the purpose of engaging in the transactions contemplated hereby and, prior to the Effective Time, will not have incurred liabilities or obligations of any nature, other than pursuant to or in

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	connection with this Agreement and the Merger, the Debt Financing and the other transactions contemplated by this Agreement.
	(f) Ownership of Company Common Stock. None of the Sponsor Entities beneficially own (within the meaning of Section 13 of the Exchange Act and the rules and regulations promulgated thereunder), or will prior to the Closing Date beneficially own, any shares of Company Common Stock, or are a party, or will prior to the Closing Date become a party, to any Contract, arrangement or understanding (other than this Agreement) for the purpose of acquiring, holding, voting or disposing of any shares of Company Common Stock.
	(g) Brokers and Other Advisors. No broker, investment banker, financial advisor or other person is entitled to any broker’s, finder’s or financial advisor’s fee or commission in connection with the Merger and the transactions contemplated by this Agreement based upon arrangements made by or on behalf of any of the Sponsor Entities, other than pursuant to a customary management agreement to be entered into by the Surviving Corporation at or following the Effective Time.
	(h) No Other Representations or Warranties. Except for the representations and warranties contained in this Section 3.02, the Company acknowledges that none of the Sponsor Entities or any other person on behalf of any Sponsor Entity makes any other express or implied representation or warranty with respect to the Sponsor Entities or with respect to any other information provided or made available to the Company in connection with the transactions contemplated hereby.

	(i) declare, set aside or pay any dividends on, or make any other distributions (whether in cash, stock or property) in respect of, any of its capital stock, other than (A) dividends or distributions by a direct or indirect wholly owned Subsidiary of the Company to its parent and (B) regular quarterly cash dividends on the Company Common Stock, not to exceed, in the case of any such quarterly dividend, $0.12 per share;
	(ii) split, combine or reclassify any of its capital stock or issue or authorize the issuance of any other securities in lieu of or in substitution for shares of its capital stock;
	(iii) purchase, redeem or otherwise acquire any shares of its capital stock or any rights, warrants or options to acquire any such shares, other than (A) the acquisition by the Company of shares of Company Common Stock in connection with the surrender of shares of Company Common Stock by holders of Company Stock Options in order to pay the exercise price of the Company Stock Options, (B) the withholding of shares of Company Common Stock to satisfy tax obligations with respect to awards granted pursuant to the Company Stock Plans, (C) the acquisition by the Company of Company Stock Options and shares of Company Restricted Stock in connection with the forfeiture of such awards and

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	(D) the acquisition by the trustee of the Company 401(k) Plan of shares of Company Common Stock in order to satisfy participant investment elections under the Company 401(k) Plan;
	(iv) issue, deliver or sell any shares of its capital stock, any other voting securities or any securities convertible into, or any rights, warrants or options to acquire, any such shares, voting securities or convertible securities, or any “phantom” stock, “phantom” stock rights, stock appreciation rights or stock based performance units, other than (A) upon the exercise of Company Stock Options and rights under the ESPP outstanding on the date of this Agreement, in each case in accordance with their present terms, (B) as required to comply with any Company Benefit Plan or Company Benefit Agreement as in effect on the date of this Agreement and (C) the issuance of shares of Company Common Stock pursuant to the Company DRIP;
	(v) amend the Company Certificate of Incorporation or the Company Bylaws or the comparable organizational documents of any Subsidiary of the Company;
	(vi) purchase an equity interest in or a substantial portion of the assets of, any person or any division or business thereof, if the aggregate amount of the consideration paid or transferred by the Company and its Subsidiaries in connection with all such transactions would exceed $20.0 million or merge or consolidate with any person, in each case other than any such action solely between or among the Company and its Subsidiaries;
	(vii) sell, lease or otherwise dispose of any of its properties or assets (including capital stock of any Subsidiary of the Company) that are material, individually or in the aggregate, to the Company and its Subsidiaries, taken as a whole, other than (A) sales or other dispositions of inventory and other assets in the ordinary course of business, including in connection with store relocations and closings set forth on Section 4.01(a)(vii) of the Company Disclosure Letter and store remodels and resets, and (B) leases and subleases of Owned Real Properties and Leased Real Properties, and voluntary terminations or surrenders of Real Property Leases, in each case, in the ordinary course of business;
	(viii) pledge, encumber or otherwise subject to a Lien (other than a Permitted Lien) any of its properties or assets (including capital stock of any Subsidiary of the Company), other than in the ordinary course of business;
	(ix) (A) incur any indebtedness for borrowed money, issue or sell any debt securities or warrants or other rights to acquire any debt securities of the Company or any of its Subsidiaries, guarantee any such indebtedness or any debt securities of another person or enter into any “keep well” or other agreement to maintain any financial statement condition of another person (collectively, “Indebtedness”), other than (1) Indebtedness incurred in the ordinary course of business (including any borrowings under the Company’s existing revolving credit facilities and any trade letters of credit) and (2) Indebtedness incurred in connection with the refinancing of any Indebtedness existing on the date of this Agreement or permitted to be incurred, assumed or otherwise entered into hereunder; or (B) make any loans or capital contributions to, or investments in, any other person, other than (1) to any of the Subsidiaries of the Company or (2) in the ordinary course of business;
	(x) make any capital expenditures, other than (A) in accordance with the Company’s capital expenditures plan previously made available to the Sponsor Entities in writing, (B) in connection with the repair or replacement of facilities destroyed or damaged due to casualty or accident (whether or not covered by insurance) and (C) otherwise in an aggregate amount for all such capital expenditures made pursuant to this clause (C) not to exceed $25.0 million;
	(xi) settle any material claim or material litigation, in each case made or pending against the Company or any of its Subsidiaries, or any of their officers and directors in their capacities as such, other than the settlement of claims or litigation in the ordinary course of business which, in any event (A) is for an amount not to exceed, for any such settlement individually, $10.0 million and (B) would not be reasonably expected to prohibit or materially restrict the Company and its subsidiaries from operating their business in substantially the same manner as operated on the date of this Agreement; provided that

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	in no event shall the Company settle any material claim or material litigation relating to the consummation of the transactions contemplated by this Agreement;
	(xii) cancel any material Indebtedness or waive any claims or rights of substantial value, in each case other than in the ordinary course of business;
	(xiii) except (A) in the ordinary course of business or (B) as required pursuant to the terms of any Company Benefit Plan or Company Benefit Agreement or other written agreement in effect on the date of this Agreement, (1) grant to any officer, director or employee of the Company or any of its Subsidiaries any increase in compensation, (2) grant to any officer, director or employee of the Company or any of its Subsidiaries any increase in severance or termination pay, (3) enter into any employment, consulting, severance or termination agreement with any officer, director or employee of the Company or any of its Subsidiaries, other than any separation agreement pursuant to which the aggregate severance benefits do not exceed $300,000 with respect to any individual or $2.0 million in the aggregate with respect to all such individuals, (4) establish, adopt, enter into or amend in any material respect any collective bargaining agreement or Company Benefit Plan or (5) accelerate any rights or benefits, or make any material determinations, under any Company Benefit Plan; provided, however, that the foregoing clauses (1), (2), and (3) shall not restrict the Company or any of its Subsidiaries from entering into or making available to newly hired employees or to employees in the context of promotions based on job performance or workplace requirements, in each case in the ordinary course of business, plans, agreements, benefits and compensation arrangements (including incentive grants) that have a value that is consistent with the past practice of making compensation and benefits available to newly hired or promoted employees in similar positions;
	(xiv) make any change in accounting methods, principles or practices materially affecting the consolidated assets, liabilities or results of operations of the Company, other than as required (A) by GAAP (or any interpretation thereof), including as may be required by the Financial Accounting Standards Board or any similar organization, or (B) by Law, including Regulation S-X under the Securities Act;
	(xv) make any material tax election, file any amended tax return with respect to any material tax or change any annual tax accounting period, in each case, other than in the ordinary course of business; or
	(xvi) authorize any of, or commit or agree to take any of, the foregoing actions.

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	(a) Stockholder Approval. The Stockholder Approval shall have been obtained.
	(b) HSR Act. The waiting period (and any extension thereof) applicable to the Merger under the HSR Act shall have been terminated or shall have expired.
	(c) No Injunctions or Restraints. No temporary restraining order, preliminary or permanent injunction or other judgment or order issued by any Federal or state court of competent jurisdiction (collectively, “Restraints”) shall be in effect enjoining or otherwise prohibiting the consummation of the Merger.

	(a) Representations and Warranties. The representations and warranties of the Company set forth in this Agreement shall be true and correct (disregarding all qualifications or limitations as to “materiality”, “Material Adverse Effect” and words of similar import set forth therein) as of the date of this Agreement and as of the Closing Date as though made on the Closing Date (except to the extent such representations and warranties expressly relate to an earlier date, in which case as of such earlier date), except where the failure of such representations and warranties to be so true and correct would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect, provided, however, that, notwithstanding the foregoing, the representations and warranties contained in Section 3.01(c) (Capital Structure), other than the last sentence thereof, and the first four sentences of Section 3.01(d) (Authority; Noncontravention) shall be true and correct in all material respects. The Sponsor Entities shall have received a certificate signed on behalf of the Company by the chief financial officer of the Company to such effect.
	(b) Performance of Obligations of the Company. The Company shall have, in all material respects, performed or complied with all material obligations required to be performed or complied with by it under this Agreement by the time of the Closing, and the Sponsor Entities shall have received a certificate signed on behalf of the Company by the chief financial officer of the Company to such effect.

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	(a) by mutual written consent of MergerCos and the Company;
	(b) by either MergerCos or the Company:

	(i) if the Merger shall not have been consummated on or before December 19, 2006 (such date, as it may be extended pursuant to the immediately following proviso, the “Outside Date”); provided however, that if the Closing shall not have occurred prior to such date solely as a result of the failure of the Marketing Period to have been completed prior to such date, then the Outside Date shall be extended to March 31, 2007; provided further, however, that the right to terminate this Agreement under this Section 7.01(b)(i) shall not be available to any party if the failure of such party (or in the case of MergerCos, any other Sponsor Entity) to perform any of its obligations under this Agreement, the failure to act in good faith or the failure to use its reasonable best efforts to consummate the Merger and the other transactions contemplated by this Agreement, including the Financing, as required by and subject to Sections 5.03 and 5.09, has been a principal cause of or resulted in the failure of the Merger to be consummated on or before such date;
	(ii) if any Restraint having any of the effects set forth in Section 6.01(c) shall have become final and nonappealable; provided that the party seeking to terminate this Agreement pursuant to this Section 7.01(b)(ii) shall have used reasonable best efforts to prevent the entry of and to remove such Restraint; or
	(iii) if the Stockholder Approval shall not have been obtained at the Stockholders’ Meeting duly convened therefor or at any adjournment or postponement thereof;

	(c) by MergerCos, if the Company shall have breached any of its representations or warranties or failed to perform any of its covenants or agreements set forth in this Agreement, which breach or failure to perform (i) would give rise to the failure of a condition set forth in Section 6.02(a) or 6.02(b) and (ii) is incapable of being cured prior to the Outside Date; provided that MergerCos shall not have the right to terminate this Agreement pursuant to this Section 7.01(c) if any Sponsor Entity is then in material breach of any of its representations, warranties, covenants or agreements hereunder;
	(d) by the Company, if any Sponsor Entity shall have breached any of its representations or warranties or failed to perform any of its covenants or agreements set forth in this Agreement, which breach or failure to perform (i) would give rise to the failure of a condition set forth in Section 6.03(a) or 6.03(b) and (ii) is incapable of being cured prior to the Outside Date; provided that the Company shall not have the right to terminate this Agreement pursuant to this Section 7.01(d) if the Company is then in material breach of any of its representations, warranties, covenants or agreements hereunder;
	(e) by MergerCos, in the event that an Adverse Recommendation Change shall have occurred;
	(f) by the Company, in accordance with Section 4.02(b); or
	(g) by the Company, if (i) all of the conditions set forth in Section 6.01 and Section 6.02 have been satisfied (other than those conditions that by their terms are to be satisfied at the Closing) and (ii) on or after the last day of the Marketing Period neither FinCos nor the Surviving Corporation shall have received the proceeds of the Debt Financing.

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	c/o Bain Capital, LLC
	111 Huntington Avenue
	Boston, MA 02199
	Fax: (617) 516-2010

	Attention:	Matthew S. Levin

	Todd M. Cook

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	and
	c/o Blackstone Management Associates V, LLC
	345 Park Avenue, 31st Floor
	New York, NY 10154
	Fax: (212) 583-5712

	Attention:	Michael Chae

	Matthew S. Kabaker
	with a copy to:
	Ropes & Gray LLP
	One International Place
	Boston, MA 02110
	Fax No.: (617) 951-7050

	Attention:	David C. Chapin, Esq.

	R. Newcomb Stillwell, Esq.

	Michaels Stores, Inc.
	8000 Bent Branch Drive
	Irving, TX 75261
	Fax No.: (972) 409-1901

	Attention:	Jeffrey N. Boyer

	Mark V. Beasley, Esq.
	with a copy to:
	Cravath, Swaine & Moore LLP
	Worldwide Plaza
	825 Eighth Avenue
	New York, New York 10019
	Fax No.: (212) 474-3700

	Attention:	Robert I. Townsend, III, Esq.

	James C. Woolery, Esq.

	(a) an “Affiliate” of any person means another person that directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with, such first person;
	(b) “business day” means any day on which banks are not required or authorized to be closed in the City of New York;
	(c) “Company Disclosure Letter” means the letter dated as of the date of this Agreement delivered by the Company to the Sponsor Entities;
	(d) “Knowledge” means (i) with respect to the Company, the actual knowledge, of any of the persons set forth in Section 8.03(d) of the Company Disclosure Letter and (ii) with respect to the Sponsor Entities, the actual knowledge of any of the officers of any of the Sponsor Entities;
	(e) “Material Adverse Effect” means any change, effect, event, occurrence or state of facts that (i) is materially adverse to the business, financial condition or results of operations of the Company and its Subsidiaries, taken as a whole or (ii) prevents or materially impedes, interferes with, hinders or delays beyond the Outside Date the consummation by the Company of the Merger or the other transactions contemplated by this Agreement, in each case, other than any change, effect, event, occurrence or state of facts (A) relating to economic, financial market or geopolitical conditions in general, (B) relating to changes in Law or applicable accounting regulations or principles or interpretations thereof, (C) relating to the specialty retail industry generally, to the extent such change, effect, event, occurrence or state of fact does not materially, disproportionately impact the Company and its Subsidiaries, taken as a whole, (D) consisting of any change in the Company’s stock price or trading volume, in and of itself, or any

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	failure, in and of itself, by the Company to meet published revenue or earnings projections (it being understood that the facts or occurrences giving rise or contributing to such change or failure may be deemed to constitute, or be taken into account in determining whether there has been or would reasonably be expected to be, a Material Adverse Effect, and it being further understood that any such change or failure may be taken into account in determining whether the facts or occurrences giving rise or contributing to such change or failure are materially adverse to the business, financial condition or results of operations of the Company and its Subsidiaries, taken as a whole), (E) relating to any outbreak or escalation of hostilities or war or any act of terrorism, and (F) relating to the announcement of this Agreement and the transactions contemplated hereby and performance of and compliance with the terms of this Agreement;
	(f) “person” means an individual, corporation, partnership, limited liability company, joint venture, association, trust, unincorporated organization or other entity;
	(g) “Sponsor Material Adverse Effect” means any change, effect, event, occurrence or state of facts that prevents or materially impedes, interferes with, hinders or delays beyond the Outside Date the consummation by the Sponsor Entities of the Merger or the other transactions contemplated by this Agreement; and
	(h) a “Subsidiary” of any person means another person, an amount of the voting securities, other voting rights or voting partnership interests of which is sufficient to elect at least a majority of its board of directors or other governing body (or, if there are no such voting interests, more than 50% of the equity interests of which) is owned directly or indirectly by such first person.

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	BAIN PASTE MERGERCO, INC.,

	By	/s/ Matthew S. Levin

	Name: Matthew S. Levin

	Title:	President

	BLACKSTONE PASTE MERGERCO, INC.,

	By	/s/ Michael Chae

	Name: Michael Chae

	Title:	President

	BAIN PASTE FINCO, LLC,

	By	/s/ Matthew S. Levin

	Name: Matthew S. Levin

	Title:	President

	BLACKSTONE PASTE FINCO, LLC,

	By	/s/ Michael Chae

	Name: Michael Chae

	Title:	President

	MICHAELS STORES, INC.,

	By	/s/ Jeffrey N. Boyer

	Name: Jeffrey N. Boyer

	Title:	President and Chief Financial Officer

	By	/s/ Gregory A. Sandfort

	Name: Gregory A. Sandfort

	Title:	President and Chief Operating Officer

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Term
Adverse Recommendation Change		Section 4.02(b)
Affiliate		Section 8.03(a)
Agreement		Preamble
Alternative Financing		Section 5.09(a)
Annual Amount		Section 5.05(c)
Appraisal Shares		Section 2.01(d)
Bain FinCo		Preamble
Bain Fund		Preamble
Bain Limited Guaranty		Preamble
Bain MergerCo		Preamble
Blackstone Limited Guaranty		Preamble
Blackstone FinCo		Preamble
Blackstone Fund		Preamble
Blackstone MergerCo		Preamble
business day		Section 8.03(b)
Certificate		Section 2.01(c)
Certificate of Merger		Section 1.03
Claim		Section 5.05(b)
Closing		Section 1.02
Closing Date		Section 1.02
Code		Section 2.02(h)
Company		Preamble
Company 401(k) Plan		Section 3.01(c)
Company Benefit Agreement		Section 3.01(l)(vii)
Company Benefit Plan		Section 3.01(l)(vii)
Company Bylaws		Section 1.05(b)
Company Certificate of Incorporation		Section 1.05(a)
Company Common Stock		Recitals
Company Disclosure Letter		Section 8.03(c)
Company DRIP		Section 3.01(c)
Company Employees		Section 5.04(a)
Company Pension Plan		Section 3.01(l)(i)
Company Preferred Stock		Section 3.01(c)
Company Restricted Stock		Section 3.01(c)
Company Stock Options		Section 3.01(c)
Company Stock Plans		Section 3.01(c)
Confidentiality Agreements		Section 5.02
Contract		Section 3.01(d)
Core Required Financial Information		Section 5.09(a)
Debt Financing		Section 3.02(d)
Debt Financing Commitments		Section 3.02(d)
DGCL		Section 1.01

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Term
Effective Time		Section 1.03
Environmental Claims		Section 3.01(j)(ii)
Environmental Law		Section 3.01(j)(ii)
Equity Financing		Section 3.02(d)
Equity Financing Commitments		Section 3.02(d)
ERISA		Section 3.01(l)(vii)
ESPP		Section 3.01(c)
Exchange Act		Section 3.01(d)
Exchange Fund		Section 2.02(a)
Filed SEC Documents		Section 3.01
Financing		Section 3.02(d)
Financing Commitments		Section 3.02(d)
Funds		Preamble
GAAP		Section 3.01(e)
Governmental Entity		Section 3.01(d)
Guarantees		Preamble
Hazardous Materials		Section 3.01(j)(ii)
HSR Act		Section 3.01(d)
Incentive Plans		Section 5.04(c)
Indebtedness		Section 4.01(a)(ix)
Indemnified Party		Section 5.05(a)
Intellectual Property Rights		Section 3.01(o)
Judgment		Section 3.01(e)
Knowledge		Section 8.03(d)
Law		Section 3.01(d)
Leased Real Property		Section 3.01(n)(ii)
Liens		Section 3.01(b)
Marketing Period		Section 5.09(a)
Material Adverse Effect		Section 8.03(e)
Merger		Recitals
Merger Consideration		Section 2.01(c)
MergerCos		Preamble
Multiemployer Plan		Section 3.01(l)(vii)
Non-Breach Financing Failure		Section 5.06(d)
Notice of Superior Proposal		Section 4.02(b)
Option Amount		Section 2.03(a)
Outside Date		Section 7.01(b)(i)
Owned Real Property		Section 3.01(n)(i)
Paying Agent		Section 2.02(a)
Permits		Section 3.01(j)(i)
Permitted Liens		Section 3.01(n)(iii)
person		Section 8.03(f)
Proxy Statement		Section 3.01(d)
Real Property Leases		Section 3.01(n)(ii)

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Term
Real Property Subleases		Section 3.01(n)(v)
Release		Section 3.01(j)(ii)
Representatives		Section 4.02(a)
Required Financial Information		Section 5.09(b)
Restraints		Section 6.01(c)
SEC		Section 3.01
SEC Documents		Section 3.01(e)
Section 262		Section 2.01(d)
Securities Act		Section 3.01(e)
Specified Contract		Section 3.01(i)
Specified Person		Section 5.06(d)
Sponsor Entities		Preamble
Sponsor Material Adverse Effect		Section 8.03(g)
Sponsor Termination Fee		Section 5.06(c)
Stockholder Approval		Section 3.01(q)
Stockholders’ Meeting		Section 5.01(b)
Subsidiary		Section 8.03(h)
Superior Proposal		Section 4.02(a)
Surviving Corporation		Section 1.01
Takeover Proposal		Section 4.02(a)
tax return		Section 3.01(m)(v)
taxes		Section 3.01(m)(v)
Termination Fee		Section 5.06(b)
Voting Company Debt		Section 3.01(c)

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	2.1.     Amendment of First Recital. The first recital to the Merger Agreement is hereby amended and restated in its entirety as follows:
	“WHEREAS, the Board of Directors of the Company and each MergerCo has approved and declared advisable, and the Board of Managers of each Finco has approved, this Agreement and the merger of each MergerCo with and into the Company (the “Merger”), upon the terms and subject to the conditions set forth in this Agreement, whereby each issued and outstanding share of common stock, par value $0.10 per share, of the Company (“Company Common Stock”), other than (a) shares of Company Common Stock directly owned by the Company, as treasury stock, or by any Sponsor Entity, (b) the Appraisal Shares and (c) the Rollover Shares will be converted into the right to receive $44.00 in cash ;”

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	2.2.     Amendment of Section 2.01(a). Section 2.01(a) of the Merger Agreement is hereby amended and restated in its entirety as follows:

	“(a) Capital Stock of MergerCos. Each share of capital stock of each MergerCo (the “MergerCo Shares”) issued and outstanding immediately prior to the Effective Time shall be converted into and become one validly issued, fully paid and nonassessable share of the common stock, par value $0.10 per share, of the Surviving Corporation (the “Surviving Corporation Common Stock”).”

	2.3.     Amendment of Section 2.01(c). Section 2.01(c) of the Merger Agreement is hereby amended and restated in its entirety as follows:

“(c) Conversion of Company Common Stock. Each share of Company Common Stock issued and outstanding immediately prior to the Effective Time (including shares of Company Restricted Stock, but excluding (i) shares to be canceled in accordance with Section 2.01(b), (ii) except as provided in Section 2.01(d), the Appraisal Shares and (iii) the Rollover Shares) shall be converted into the right to receive $44.00 in cash, without interest (the “Merger Consideration”). At the Effective Time, all such shares of Company Common Stock shall no longer be outstanding and shall automatically be canceled and shall cease to exist, and each holder of a certificate that immediately prior to the Effective Time represented any such shares of Company Common Stock (each, a “Certificate”) shall cease to have any rights with respect thereto, except the right to receive the Merger Consideration and any dividends declared in accordance with Section 4.01(a) with a record date prior to the Effective Time that remain unpaid at the Effective Time and that are due to such holder.”

	2.4.     Addition of Section 2.01(e). A new Section 2.01(e) is hereby added to the Merger Agreement as follows:

“(e) Rollover Shares. Each share of Company Common Stock that is issued and outstanding immediately prior to the Effective Time and that (i) is owned, beneficially or of record, by any person that is a party to the Rollover Agreement, in the form previously agreed upon by the Company and MergerCos (a “Non-Employee Rollover Agreement”), or, with respect to any person that is an employee of the Company or any of its Subsidiaries, an Employee Rollover Agreement, in the form to be agreed upon by the Company and MergerCos (an “Employee Rollover Agreement”), and (ii) is contemplated by any Non-Employee Rollover Agreement or any Employee Rollover Agreement, as the case may be, to continue outstanding as a share of the Surviving Corporation Common Stock (a ‘Rollover Share”), shall remain outstanding as a validly issued, fully paid and nonassessable share of the Surviving Corporation Common Stock.”

	2.5.     Amendment of Section 2.02. Section 2.02 of the Merger Agreement is hereby amended and restated in its entirety as follows:

	“SECTION 2.02. Exchange Fund. (a) Paying Agent. Prior to the Closing Date, the Sponsor Entities shall appoint a bank or trust company reasonably acceptable to the Company to act as paying agent (the “Paying Agent”) for the payment of the Merger Consideration and the Option Amounts in accordance with this Article II and, in connection therewith, shall enter into an agreement with the Paying Agent in a form reasonably acceptable to the Company. At or prior to the Effective Time, the Sponsor Entities shall deposit, or shall cause the Surviving Corporation to deposit, with the Paying Agent, cash in an amount sufficient to pay the aggregate Merger Consideration and the aggregate Option Amount, in each case as required to be paid pursuant to this Agreement (such cash being hereinafter referred to as the “Exchange Fund”).
	(b) Certificate Exchange Procedures. As promptly as practicable after the Effective Time, but in any event within two business days thereafter, the Surviving Corporation shall cause the Paying Agent to mail to each holder of record of a Certificate (i) a letter of transmittal (which shall specify that delivery shall be effected, and risk of loss and title to the Certificates shall pass, only upon proper delivery of the Certificates to the Paying Agent and which shall otherwise be in

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	customary form) and (ii) instructions for use in effecting the surrender of the Certificates in exchange for the Merger Consideration. Each holder of record of a Certificate shall, upon surrender to the Paying Agent of such Certificate, together with such letter of transmittal, duly executed, and such other documents as may reasonably be required by the Paying Agent, be entitled to receive in exchange therefor the amount of cash which the number of shares of Company Common Stock previously represented by such Certificate shall have been converted into the right to receive pursuant to Section 2.01(c), and the Certificate so surrendered shall forthwith be canceled. In the event of a transfer of ownership of Company Common Stock which is not registered in the transfer records of the Company, payment of the Merger Consideration may be made to a person other than the person in whose name the Certificate so surrendered is registered if such Certificate shall be properly endorsed or otherwise be in proper form for transfer and the person requesting such payment shall pay any fiduciary or surety bonds or any transfer or other similar taxes required by reason of the payment of the Merger Consideration to a person other than the registered holder of such Certificate or establish to the reasonable satisfaction of the Surviving Corporation that such tax has been paid or is not applicable. Until surrendered as contemplated by this Section 2.02(b), each Certificate shall be deemed at any time after the Effective Time to represent only the right to receive upon such surrender the Merger Consideration which the holder thereof has the right to receive in respect of such Certificate pursuant to this Article II and any dividends declared in accordance with Section 4.01(a) with a record date prior to the Effective Time that remain unpaid at the Effective Time and that are due to such holder. No interest shall be paid or will accrue on any cash payable to holders of Certificates pursuant to the provisions of this Article II.
	(c) Surrender of Rollover Shares and MergerCo Shares. Each holder of a certificate representing the Rollover Shares or the MergerCo Shares, upon surrender to the Surviving Corporation of such certificate and such other documents as may reasonably be required by the Surviving Corporation, shall be entitled to receive a certificate or certificates representing the number of shares of Surviving Corporation Common Stock to which such holder is entitled pursuant to Section 2.01(a) or 2.01(e), as applicable, and the certificates so surrendered shall forthwith be canceled.
	(d) No Further Ownership Rights in Company Common Stock. All cash paid upon the surrender of Certificates in accordance with the terms of this Article II shall be deemed to have been paid in full satisfaction of all rights pertaining to the shares of Company Common Stock formerly represented by such Certificates, subject, however, to the Surviving Corporation’s obligation to pay all dividends that may have been declared by the Company in accordance with Section 4.01(a) and that remain unpaid at the Effective Time. At the close of business on the day on which the Effective Time occurs, the stock transfer books of the Company shall be closed and there shall be no further registration of transfers on the stock transfer books of the Surviving Corporation of the shares of Company Common Stock that were outstanding immediately prior to the Effective Time. If, after the close of business on the day on which the Effective Time occurs, any Certificate or any certificate representing any Rollover Shares is presented to the Surviving Corporation for transfer, it shall be canceled and exchanged as provided in this Article II.
	(e) Termination of the Exchange Fund. Any portion of the Exchange Fund that remains undistributed to the holders of the Certificates for 12 months after the Effective Time shall be delivered to the Surviving Corporation, upon demand, and any holders of the Certificates who have not theretofore complied with this Article II shall thereafter look only to the Surviving Corporation for, and the Surviving Corporation shall remain liable for, payment of their claims for the Merger Consideration pursuant to the provisions of this Article II.
	(f) No Liability. None of the Company, the Surviving Corporation, the Sponsor Entities or the Paying Agent shall be liable to any person in respect of any cash from the Exchange Fund delivered to a public official in compliance with any applicable state, Federal or other abandoned property, escheat or similar Law. If any Certificate shall not have been surrendered prior to the date on which the related Merger Consideration would escheat to or become the property of any

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	Governmental Entity, any such Merger Consideration shall, to the extent permitted by applicable Law, immediately prior to such time become the property of the Surviving Corporation, free and clear of all claims or interest of any person previously entitled thereto.
	(g) Investment of Exchange Fund. The Paying Agent shall invest the cash in the Exchange Fund as directed by the Surviving Corporation; provided, however, that such investments shall be in obligations of or guaranteed by the United States of America or any agency or instrumentality thereof and backed by the full faith and credit of the United States of America, in commercial paper obligations rated A-1 or P-1 or better by Moody’s Investors Service, Inc. or Standard & Poor’s Corporation, respectively, or in certificates of deposit, bank repurchase agreements or banker’s acceptances of commercial banks with capital exceeding $1.0 billion (based on the most recent financial statements of such bank that are then publicly available). Any interest and other income resulting from such investments shall be paid solely to the Surviving Corporation. Nothing contained herein and no investment losses resulting from investment of the Exchange Fund shall diminish the rights of any holder of Certificates to receive the Merger Consideration or any holder of a Company Stock Option to receive the Option Amount, in each case as provided herein.
	(h) Lost Certificates. If any Certificate or certificate representing any Rollover Shares shall have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming such certificate to be lost, stolen or destroyed and, if required by the Surviving Corporation, the posting by such person of a bond or surety in such reasonable amount as the Surviving Corporation may direct as indemnity against any claim that may be made against it with respect to such certificate, (i) the Paying Agent shall deliver in exchange for such lost, stolen or destroyed Certificate the applicable Merger Consideration with respect thereto or (ii) the Surviving Corporation shall issue a certificate or certificates representing the number of shares of Surviving Corporation Common Stock as provided in Section 2.01(e) represented by such lost, stolen or destroyed certificate representing Rollover Shares.
	(i) Withholding Rights. The Surviving Corporation or the Paying Agent shall be entitled to deduct and withhold from the consideration otherwise payable pursuant to this Agreement to any holder of shares of Company Common Stock or any holder of a Company Stock Option such amounts as the Surviving Corporation or the Paying Agent are required to deduct and withhold with respect to the making of such payment under the Internal Revenue Code of 1986, as amended (the “Code”), or any provision of state, local or foreign tax Law. To the extent that amounts are so withheld and paid over to the appropriate taxing authority by the Surviving Corporation or the Paying Agent, such withheld amounts shall be treated for all purposes of this Agreement as having been paid to the holder of the shares of Company Common Stock or the holder of the Company Stock Option, as the case may be, in respect of which such deduction and withholding was made by the Surviving Corporation or the Paying Agent.”

	2.6.     Amendment of Section 2.03(a). Section 2.03(a) of the Merger Agreement is hereby amended by inserting “(other than the Rollover Options)” after the first reference therein to “Company Stock Options”.
	2.7.     Addition of Section 2.03(c). A new Section 2.03(c) is hereby added to the Merger Agreement as follows:

“(c) Rollover Options. Each unexercised Company Stock Option that is outstanding immediately prior to the Effective Time and that (i) is held by any person that is a party to an Employee Rollover Agreement and (ii) is contemplated by such Employee Rollover Agreement to remain outstanding as an option to acquire shares of the Surviving Corporation Common Stock (a “Rollover Option”) shall not be converted into the right to receive cash pursuant to Section 2.03(a) and shall remain outstanding as an option to acquire shares of the Surviving Corporation Common Stock, with such changes thereto as are described in such Employee Rollover Agreement.”

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	2.8.     Amendment of Section 5.09(a). Section 5.09(a) of the Merger Agreement is hereby amended by inserting the following sentence at the end thereof:
	“MergerCos shall take all actions to ensure that each Rollover Share represents, immediately after the Effective Time, value per share equivalent to the Merger Consideration and, in furtherance of the foregoing, that portion of the shares of the Surviving Corporation Common Stock issued and outstanding immediately after the Effective Time equal to a quotient obtained by dividing $44.00 by the aggregate amount of the equity financing of the Merger (including the Rollover Shares, valued at the Merger Consideration) and the other transactions contemplated hereby.”

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	BAIN PASTE MERGERCO, INC.

	By:	/s/ Matthew S. Levin

	Name: Matthew S. Levin
	Title:   President
	BLACKSTONE PASTE MERGERCO, INC.

	By:	/s/ Matthew S. Kabaker

	Name: Matthew S. Kabaker
	Title:   Vice President, Secretary & Treasurer
	BAIN PASTE FINCO, LLC

	By:	/s/ Matthew S. Levin

	Name: Matthew S. Levin
	Title:   President
	BLACKSTONE PASTE FINCO, LLC

	By:	/s/ Matthew S. Kabaker

	Name: Matthew S. Kabaker
	Title:   Vice President, Secretary & Treasurer
	MICHAELS STORES, INC.

	By:	/s/ Jeffrey N. Boyer

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

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	(1) Provided, however, that no appraisal rights under this section shall be available for the shares of any class or series of stock, which stock, or depository receipts in respect thereof, at the record date fixed to determine the stockholders entitled to receive notice of and to vote at the meeting of stockholders to act upon the agreement of merger or consolidation, were either (i) listed on a national securities exchange or designated as a national market system security on an interdealer quotation system by the National Association of Securities Dealers, Inc. or (ii) held of record by more than 2,000 holders; and further provided that no appraisal rights shall be available for any shares of stock of the constituent corporation surviving a merger if the merger did not require for its approval the vote of the stockholders of the surviving corporation as provided in subsection (f) of § 251 of this title.
	(2) Notwithstanding paragraph (1) of this subsection, appraisal rights under this section shall be available for the shares of any class or series of stock of a constituent corporation if the holders thereof are required by the terms of an agreement of merger or consolidation pursuant to §§ 251, 252, 254, 257, 258, 263 and 264 of this title to accept for such stock anything except:

	a. Shares of stock of the corporation surviving or resulting from such merger or consolidation, or depository receipts in respect thereof;
	b. Shares of stock of any other corporation, or depository receipts in respect thereof, which shares of stock (or depository receipts in respect thereof) or depository receipts at the effective date of the merger or consolidation will be either listed on a national securities exchange or designated as a national market system security on an interdealer quotation system by the National Association of Securities Dealers, Inc. or held of record by more than 2,000 holders;
	c. Cash in lieu of fractional shares or fractional depository receipts described in the foregoing subparagraphs a. and b. of this paragraph; or
	d. Any combination of the shares of stock, depository receipts and cash in lieu of fractional shares or fractional depository receipts described in the foregoing subparagraphs a., b. and c. of this paragraph.

	(3) In the event all of the stock of a subsidiary Delaware corporation party to a merger effected under § 253 of this title is not owned by the parent corporation immediately prior to the merger, appraisal rights shall be available for the shares of the subsidiary Delaware corporation.

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	(1) If a proposed merger or consolidation for which appraisal rights are provided under this section is to be submitted for approval at a meeting of stockholders, the corporation, not less than 20 days prior to the meeting, shall notify each of its stockholders who was such on the record date for such meeting with respect to shares for which appraisal rights are available pursuant to subsection (b) or (c) hereof that appraisal rights are available for any or all of the shares of the constituent corporations, and shall include in such notice a copy of this section. Each stockholder electing to demand the appraisal of such stockholder’s shares shall deliver to the corporation, before the taking of the vote on the merger or consolidation, a written demand for appraisal of such stockholder’s shares. Such demand will be sufficient if it reasonably informs the corporation of the identity of the stockholder and that the stockholder intends thereby to demand the appraisal of such stockholder’s shares. A proxy or vote against the merger or consolidation shall not constitute such a demand. A stockholder electing to take such action must do so by a separate written demand as herein provided. Within 10 days after the effective date of such merger or consolidation, the surviving or resulting corporation shall notify each stockholder of each constituent corporation who has complied with this subsection and has not voted in favor of or consented to the merger or consolidation of the date that the merger or consolidation has become effective; or
	(2) If the merger or consolidation was approved pursuant to § 228 or § 253 of this title, then either a constituent corporation before the effective date of the merger or consolidation or the surviving or resulting corporation within 10 days thereafter shall notify each of the holders of any class or series of stock of such constituent corporation who are entitled to appraisal rights of the approval of the merger or consolidation and that appraisal rights are available for any or all shares of such class or series of stock of such constituent corporation, and shall include in such notice a copy of this section. Such notice may, and, if given on or after the effective date of the merger or consolidation, shall, also notify such stockholders of the effective date of the merger or consolidation. Any stockholder entitled to appraisal rights may, within 20 days after the date of mailing of such notice, demand in writing from the surviving or resulting corporation the appraisal of such holder’s shares. Such demand will be sufficient if it reasonably informs the corporation of the identity of the stockholder and that the stockholder intends thereby to demand the appraisal of such holder’s shares. If such notice did not notify stockholders of the effective date of the merger or consolidation, either (i) each such constituent corporation shall send a second notice before the effective date of the merger or consolidation notifying each of the holders of any class or series of stock of such constituent corporation that are entitled to appraisal rights of the effective date of the merger or consolidation or (ii) the surviving or resulting corporation shall send such a second notice to all such holders on or within 10 days after such effective date; provided, however, that if such second notice is sent more than 20 days following the sending of the first notice, such second notice need only be sent to each stockholder who is entitled to appraisal rights and who has demanded appraisal of such holder’s shares in accordance with this subsection. An affidavit of the secretary or assistant secretary or of the transfer agent of the corporation that is required to give either notice that such notice has been given shall, in the absence of fraud, be prima facie evidence of the facts stated therein. For purposes of determining the stockholders entitled to receive either notice, each constituent corporation may fix, in advance, a record date that shall be not more than 10 days prior to the date the notice is given, provided, that if the notice is given on or after the effective date of the merger or consolidation, the record date shall be such effective date. If no record date is fixed and the notice is given prior to the effective date, the record date shall be the close of business on the day next preceding the day on which the notice is given.

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