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Michaels Stores, Inc.

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

 

May 4, 2006

 

Dear Stockholder:

 

You are cordially invited to attend the Annual Meeting of Stockholders of Michaels Stores, Inc. to be held at the Four Seasons Resort and Club, 4150 North MacArthur Boulevard, Irving, Texas 75038 on Tuesday, June 20, 2006, at 10:30 a.m., central daylight savings time.

 

The attached Notice of Annual Meeting of Stockholders and Proxy Statement describe fully the formal business to be transacted at the Annual Meeting. During the Annual Meeting, stockholders will consider and vote upon the election of six members to the Board of Directors and the ratification of the selection of Ernst & Young LLP as our independent registered public accounting firm.

 

Certain directors and officers will be present at the Annual Meeting and will be available to respond to any questions you may have. I hope you will be able to attend.

 

We urge you to review carefully the accompanying material and to return the enclosed proxy card promptly. Please sign, date and return the enclosed proxy card without delay. If you attend the Annual Meeting, you may vote in person even if you have previously mailed a proxy.

 

Sincerely,

 

Charles J. Wyly, Jr.

Chairman of the Board

 

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

 

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

 

To Be Held On June 20, 2006

 

NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders (the “Annual Meeting”) of Michaels Stores, Inc. will be held at the Four Seasons Resort and Club, 4150 North MacArthur Boulevard, Irving, Texas 75038 on Tuesday, June 20, 2006, at 10:30 a.m., central daylight savings time, for the following purposes:

 

 

Information concerning the matters to be acted upon at the Annual Meeting is set forth in the accompanying Proxy Statement.

 

The close of business on April 24, 2006 has been fixed as the record date for determining the stockholders entitled to notice of, and to vote at, the Annual Meeting or any adjournments thereof. For a period of at least 10 days prior to the Annual Meeting, a complete list of stockholders entitled to vote at the Annual Meeting will be open for examination by any stockholder during ordinary business hours at our offices located at 8000 Bent Branch Drive, Irving, Texas 75063.

 

We urge stockholders to complete, date, sign and return the enclosed proxy card in the accompanying envelope, which does not require postage if mailed in the United States.

 

By Order of the Board of Directors,

 

Mark V. Beasley

Secretary

 

Irving, Texas

May 4, 2006

 

PROXY STATEMENT
TABLE OF CONTENTS

 

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

 

PROXY STATEMENT
For
ANNUAL MEETING OF STOCKHOLDERS
To Be Held On June 20, 2006

 

 

 

 

 

 

 

Our Board of Directors has six members, a majority of whom are independent directors. All directors serve until the next annual meeting of stockholders and until their successors are duly elected and qualified or until the earlier of their resignation, death or removal. In order to be elected as a director, a nominee must receive a plurality of the votes of the shares of common stock having voting power present or represented by proxy at the Annual Meeting.

 

Our Governance and Nominating Committee has recommended, and our Board has approved, the nomination of the six nominees listed below. The nominees have indicated their willingness to serve as members of the Board if elected; however, in case any nominee becomes unavailable for election to the Board for any reason not presently known or contemplated, the proxy holders have discretionary authority to vote proxies for a substitute nominee or nominees. Proxies cannot be voted for more than six nominees.

 

Set forth below is information as to the nominees for election at the Annual Meeting, including their ages, present principal occupations, other business experiences during the last five years, membership on committees of the Board and directorships in other public companies.

 

 

 

 

Mr. Charles J. Wyly, Jr. is the Chairman of the Board and a co-founder of Michaels Stores, Inc. He became a director in 1984 and served as Vice Chairman of the Board of Michaels from 1985 until 2001 when he was elected Chairman of the Board. He co-founded Sterling Software, Inc., a worldwide supplier of software products, in 1981 and, until its acquisition in 2000 by another company, had served as a director and since 1984 as Vice Chairman of the Board. Mr. Wyly served as a director of Sterling Commerce, Inc., a worldwide provider of electronic commerce software and services, from December 1995 until its acquisition in 2000 by another company. Mr. Wyly was a director of Scottish Annuity & Life Holdings, Ltd., a variable life insurance and reinsurance company, from October 1998 until November 2000. Mr. Wyly served from 1964 to 1975 as an officer and director, including serving as President from 1969 to 1973, of University Computing Company. Mr. Wyly and his brother, Sam Wyly, founded Earth Resources Company, an oil refining and silver mining company, and Charles J. Wyly, Jr. served as Chairman of the Board of that company from 1968 to 1980. He was also a founding partner of Maverick Capital, Ltd., a manager of equity hedge funds.

 

Mr. Sam Wyly has served as Vice Chairman of the Board of Michaels since 2001 and a director of Michaels since 1984. He co-founded Michaels Stores, Inc. and served as Chairman from 1984 until 2001. Mr. Wyly is an entrepreneur and investor who has created and managed several public and private companies. He was a manager of Ranger Capital, a Dallas-based hedge fund management company, from November 2001 until June 2004. He founded Maverick Capital, another hedge fund manager, in 1990, and was portfolio manager from 1990 until 1995. He founded University Computing Company, which became one of the first computer utility networks and one of the first software product companies and which merged into Computer Associates in 1987. He was a founder in 1981 and Chairman and a director of Sterling Software, an enterprise software company, until it merged into Computer Associates in 2000. He also was Chairman of the Executive

Committee and a director of Sterling Commerce, an electronic commerce company, until its acquisition in 2000 by SBC Communications, now AT&T, and was Chairman and a director of Scottish Annuity & Life Holdings from October 1998 until June 2000.

 

Mr. Hanlon is a former Senior Vice President of AOL Time Warner, a position held when the media and communications company was formed in January 2001 until late 2002. From February 1995 until that time he was a senior executive of AOL, Inc., prior to which he consulted in the fields of investor relations and corporate communications for several publicly-held corporations. For nearly six years until 1993, he was Vice President — Corporate Communications and Secretary of Legent Corporation. He has served as a director of Michaels since April 1990.

 

Mr. Marcus became a director of Michaels in July 1999. He currently serves as a management consultant to various organizations and, from January 1997 until March 2006, served as Senior Advisor to Peter J. Solomon Company, an investment banking company. From December 1994 through December 1995, Mr. Marcus served as Chief Executive Officer of Plaid Clothing Group, a manufacturer of men’s tailored clothing. Prior to these activities, Mr. Marcus was with Neiman Marcus for 27 years and served as Chairman and Chief Executive Officer from 1979 through 1988. He currently serves as the non-executive Chairman of the Board of Zale Corporation.

 

Ms. Minyard became a director of Michaels in March 2002. From 1988 to 2004, Ms. Minyard served as Co-Chairman of the Board and, from 1998 to 2004, as Co-Chief Executive Officer of Minyard Food Stores, Inc., a family-owned regional retail grocer. She is currently an advisory director to TXU Corp.

 

Ms. Smith became a director of Michaels in October 2002. She is Managing General Partner of Phillips-Smith-Machens Venture Partners, a venture capital firm that invests in retail and consumer businesses and that she co-founded in 1986. She is currently on the board of directors of Brinker International, Inc. Ms. Smith served as a director from 1992 to 1997 and as Chairman from 1994 to 1996 of the Federal Reserve Bank of Dallas.

 

The following table presents information regarding the number of shares of Michaels common stock beneficially owned as of March 31, 2006 (unless otherwise indicated) by each of Michaels’ directors and Named Executives (as defined in the section of this Proxy Statement entitled “Management Compensation — Summary Compensation Table”), and the current directors and executive officers of Michaels as a group. In addition, the table presents information about each person or entity known to Michaels to beneficially own 5% or more of Michaels common stock. Unless otherwise indicated by footnote, the beneficial owner exercises sole voting and investment power over the shares noted below. The percentage of beneficial ownership for our directors and executive officers, both individually and as a group, is calculated based on 132,068,710 shares of Michaels common stock outstanding as of March 31, 2006.

 

 

 

 

Our Board is responsible for providing effective governance over Michaels’ affairs. Michaels’ corporate governance practices are designed to align the interests of the Board and management with those of Michaels’ stockholders and to promote honesty and integrity throughout the company. Highlights of Michaels’ corporate governance practices are described below.

 

A copy of the current charter, as approved by our Board, for each of our Audit Committee, Governance and Nominating Committee and Compensation Committee and a copy of our Corporate Governance Guidelines and Code of Business Conduct and Ethics are available on our Internet website at www.michaels.com under “Corporate Information.” Copies are also available to stockholders upon request from our Investor Relations Department. Furthermore, we will post any amendments to our Code of Business Conduct and Ethics, or waivers of the Code for our directors or executive officers, on our Internet website at www.michaels.com under “Corporate Information.”

 

Stockholders may communicate with the Board by mail, with the envelope containing the communication addressed as follows: Board Communication, c/o Secretary, Michaels Stores, Inc., 8000 Bent Branch Drive, Irving, Texas 75063. Michaels’ Secretary will review all such communications and will, within a reasonable period of time after receiving the communications, forward all such communications to the Chairman of the Board, other than those communications that are merely solicitations for products or services or relate to matters that are of a type which render them improper or irrelevant to the functioning of the Board and Michaels. The Chairman of the Board will relay to the full Board those communications that have been forwarded to him.

 

During fiscal 2005, our Board held eight meetings and acted by unanimous written consent seven times. In addition to meetings of the full Board, directors attended meetings of Board committees. Each incumbent director attended at least 87% of the aggregate number of meetings of the Board and the committees on which he or she served. Michaels expects its directors to attend its annual meetings of stockholders. In 2005, all members of the Board attended the annual meeting of stockholders.

 

Our Corporate Governance Guidelines require that a majority of the members of our Board of Directors satisfy the independence requirements set forth in the rules of the New York Stock Exchange. Our Board has adopted categorical independence standards for determining the independence of our directors. For purposes of these standards, our Board of Directors considers an “immediate family member” to include a spouse, parents, children, siblings, mothers and fathers-in-law, sons and daughters-in-law, brothers and sisters-in-law, and anyone (other than domestic employees) who shares the director’s home. The standards provide that an independent director is a director who:

 

 

 

The categorical independence standards also provide that, in making a determination regarding a director’s independence, any interest or relationship of a director of a type described in Item 404 of Regulation S-K that is not required to be disclosed pursuant to Item 404 shall be presumed not to be inconsistent with the independence of such director, except to the extent otherwise expressly provided with respect to a particular interest or relationship in the rules established by the New York Stock Exchange.

 

Our Board has determined that each of our four independent directors, Richard E. Hanlon, Richard C. Marcus, Liz Minyard and Cece Smith, meets the categorical independence standards set forth above.

 

Our Corporate Governance Guidelines require our non-management directors to meet at regularly scheduled executive sessions without management. The Guidelines further provide that the position of presiding director for executive sessions of non-management directors shall be rotated for each meeting among the non-management directors on an alphabetical basis. If one or more non-management directors do not satisfy applicable independence requirements set forth in the rules of the New York Stock Exchange and under applicable law, then at least once each year an executive session including only independent directors will be held. Stockholders may communicate with the non-management directors by mail, with the envelope containing the communication addressed as follows: Non-Management Directors, c/o Secretary, Michaels Stores, Inc., 8000 Bent Branch Drive, Irving, Texas 75063. Michaels’ Secretary will review all such communications and will, within a reasonable period of time after receiving the communications, forward all such communications to the non-management directors, other than those communications that are merely solicitations for products or services or relate to matters that are of a type which render them improper or irrelevant to the functioning of the Board and Michaels.

 

As required by our Corporate Governance Guidelines, our Board has three active standing committees, each of which is required by its charter to consist of no fewer than three directors satisfying the applicable current independence criteria of the New York Stock Exchange. The three members of the Governance and Nominating Committee are Richard C. Marcus (Chairman), Richard E. Hanlon and Cece Smith. The three members of the Compensation Committee are Richard E. Hanlon (Chairman), Richard C. Marcus and Liz Minyard. The three members of the Audit Committee are Cece Smith (Chairman), Richard C. Marcus and Liz Minyard.

 

Michaels believes that placing the responsibility for nominating directors in the hands of an independent committee, along with charging that committee with the responsibility of taking a leadership role in shaping Michaels’ corporate governance matters, enhances the independence and quality of its Board and of its corporate governance practices. Therefore, under the terms of its amended and restated charter, the Governance and Nominating Committee is charged with the responsibility of identifying individuals qualified to become Board members by recommending to the Board candidates to fill vacancies and newly-created positions on the Board and recommending to the Board director nominees for election by the stockholders at the annual meeting of stockholders, including recommendations as to whether incumbent members of the Board should be nominated for re-election to the Board. The Governance and Nominating Committee reviews the qualifications of, and makes recommendations to the Board concerning, director nominees submitted by stockholders. At any annual meeting, stockholders may nominate a person for election as a director but only upon notice to the Secretary of Michaels given in accordance with the notice provisions in Michaels’ Restated Certificate of Incorporation.

 

The Governance and Nominating Committee has also adopted policies and procedures by which Michaels’ stockholders may submit director candidates to the Governance and Nominating Committee for consideration. If the Governance and Nominating Committee receives, by a date not later than the 120th calendar day before the anniversary of the date that Michaels’ proxy statement was released to its stockholders in connection with its previous year’s annual meeting, a recommendation for a director nominee (a “Director Candidate”) from a stockholder or group of stockholders that beneficially owned more than 5% of Michaels’ outstanding common stock for at least one year as of the date of the recommendation, then such Director Candidate will be considered and evaluated by the Governance and Nominating Committee for the annual meeting immediately succeeding the date that proper written notice was timely delivered to and received by the Governance and Nominating Committee. Where the date of Michaels’ annual meeting of stockholders changes by more than 30 calendar days from the previous year’s annual meeting, such written notice of the recommendation for the Director Candidate will be considered timely if, and only if, it is received by the Governance and Nominating Committee no later than the close of business on the 10th calendar day following the first day on which notice of the date of the upcoming annual meeting is publicly disclosed by Michaels, unless such notice specifies a different date for stockholder recommendations for a Director Candidate to be timely.

 

Written notice from an eligible stockholder or group of eligible stockholders to the Governance and Nominating Committee recommending a Director Candidate must contain or be accompanied by:

 

 

 

To ensure flexibility with respect to the director nominee evaluation process, the Governance and Nominating Committee has not established specific, minimum qualifications that an individual must meet in order to become a member of the Board. However, the Governance and Nominating Committee believes that Michaels is best served when the members of the Board:

 

 

The Governance and Nominating Committee is also charged with the responsibility of developing and recommending corporate governance principles applicable to Board members and Michaels’ employees. The Governance and Nominating Committee Charter requires the committee to develop and recommend guidelines for that purpose consistent with federal and state law and the rules of the Securities and Exchange Commission and the New York Stock Exchange, giving appropriate attention to “best corporate governance practices.” In response to that requirement, the Governance and Nominating Committee developed and recommended, and the Board has adopted, the amended and restated Corporate Governance Guidelines available on our Internet website. The Governance and Nominating Committee also (i) oversees the evaluation of the performance of the Board and Michaels’ management against the Corporate Governance Guidelines, and (ii) reviews possible conflicts of interest. During fiscal 2005, the Governance and Nominating Committee met five times.

 

To further enhance the effectiveness of Michaels’ corporate policies and practices, under the terms of its amended and restated charter, the Compensation Committee reviews, approves and administers Michaels’ policies, programs, procedures and objectives for compensating its executive officers. The Compensation Committee is responsible for determining and approving the compensation of Michaels’ Chief Executive Officer and reporting that determination to the Board. The Compensation Committee also reviews and approves the compensation levels of all other executive officers. In addition to these compensation determinations, the Compensation Committee makes recommendations to the Board with respect to the approval and adoption of all cash- and equity-based incentive compensation plans in which any of Michaels’ executive officers participate. The Compensation Committee reviews Board compensation policies, but only the Board may determine compensation for directors, although in approving the 2005 Incentive Compensation Plan the Board delegated to the Compensation Committee the authority to grant awards to directors under that plan.

The Compensation Committee acts as the committee of the Board that administers the 1997 Employees Stock Purchase Plan, 1997 Stock Option Plan, 2001 Employee Stock Option Plan, 2001 General Stock Option Plan and 2005 Incentive Compensation Plan. With respect to the 2005 Incentive Compensation Plan, the Compensation Committee has the power to grant equity-based awards under that plan and to determine, subject to limitations in that plan, when options or other awards will vest or become exercisable under that plan. Since the adoption of the 2005 Incentive Compensation Plan in June 2005, options are no longer granted under the 1997 Stock Option Plan, the 2001 Employee Stock Option Plan or the 2001 General Stock Option Plan. During fiscal 2005, the Compensation Committee met five times and acted by unanimous written consent fourteen times.

 

 

During fiscal 2005, Richard E. Hanlon, Richard C. Marcus and Liz Minyard served as members of the Compensation Committee. None of the members of the Compensation Committee (i) was an officer or employee of Michaels during the fiscal year, (ii) was formerly an officer of Michaels, or (iii) had any relationships requiring disclosure by Michaels under the Securities and Exchange Commission’s rules with respect to certain relationships and related party transactions. Furthermore, none of our executive officers serves as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving on our Board or Compensation Committee.

 

 

Our Audit Committee Charter requires that all members of the Audit Committee satisfy the independence criteria of the New York Stock Exchange and the Securities Exchange Act of 1934 and all rules and applicable standards promulgated by the New York Stock Exchange or the Securities and Exchange Commission. The charter also requires that the Audit Committee members meet the financial literacy requirements of the New York Stock Exchange rules, that at least one Audit Committee member satisfies the accounting or related financial management expertise standards of the New York Stock Exchange rules and that at least one Audit Committee member satisfies the criteria for an “audit committee financial expert,” as that term is defined in Securities and Exchange Commission rules. All three members of the Audit Committee meet (i) the independence requirements and the financial literacy requirements of the New York Stock Exchange and (ii) the independence requirements of the Securities Exchange Act of 1934. Our Board has determined that Cece Smith, the Chairman of the Audit Committee, satisfies the accounting or related financial management expertise standards of the New York Stock Exchange and satisfies the criteria adopted by the Securities and Exchange Commission to serve as the “audit committee financial expert” of Michaels.

 

Under its charter, the Audit Committee is generally responsible for overseeing Michaels’ financial reporting process and assists the Board in fulfilling the Board’s oversight responsibilities with respect to: (i) the integrity of Michaels’ financial statements; (ii) Michaels’ compliance with legal and regulatory requirements; (iii) the qualifications and independence of Michaels’ independent registered public accounting firm; and (iv) the performance of the independent registered public accounting firm and of Michaels’ internal audit function. In fulfilling its obligations, the Audit Committee directly appoints, retains, terminates and determines the compensation of Michaels’ independent registered public accounting firm. The Audit Committee is also responsible for the resolution of disagreements between management and the independent registered public accounting firm along with the pre-approval and approval of all audit and non-audit engagement fees, terms and services with the independent registered public accounting firm in a manner consistent with the Sarbanes-Oxley Act of 2002 and all rules and applicable standards promulgated by the Securities and Exchange Commission or the New York Stock Exchange. Michaels’ independent registered public accounting firm is required to report directly to the Audit Committee concerning, among other things, the independent registered public accounting firm’s internal quality control procedures, the independence of the accountants and the plans for, and the scope and conduct of, annual audits. The Audit Committee has developed procedures for (i) receiving and dealing with complaints regarding accounting, internal accounting controls or auditing matters and (ii) the confidential submission by employees of concerns regarding questionable accounting or auditing matters. These procedures are disclosed on Michaels’ website at www.michaels.com under “Corporate Information.” During fiscal 2005, the Audit Committee met sixteen times.

 

Pursuant to the Audit Committee Charter, the Audit Committee has the sole authority to retain Michaels’ independent registered public accounting firm. The Board requests that the stockholders ratify the Audit Committee’s selection of Ernst & Young LLP as Michaels’ independent registered public accounting firm for fiscal 2006.

 

The Audit Committee will not be bound by the ratification of, or failure to ratify, the selection of Ernst & Young LLP, but the Audit Committee will consider any failure to ratify the selection of Ernst & Young LLP in connection with the appointment of our independent registered public accounting firm in the following fiscal year.

 

The Board recommends a vote “FOR” ratification of the Audit Committee’s selection of Ernst & Young LLP as Michaels’ independent registered public accounting firm for fiscal 2006.

 

The Audit Committee Charter requires our Audit Committee to undertake a variety of activities designed to assist our Board in fulfilling its oversight role regarding our independent registered public accounting firm’s independence, our financial reporting process, our systems of internal controls and our compliance with applicable laws, rules and regulations. These activities are briefly summarized in this Proxy Statement under the caption “Corporate Governance — Audit Committee.” The Audit Committee Charter also makes it clear that the independent registered public accounting firm is ultimately accountable to the Board and the Audit Committee, not management.

 

The internal accountants of Michaels prepare Michaels’ consolidated financial statements and Michaels’ independent registered public accounting firm is responsible for auditing those financial statements. The Audit Committee monitors and reviews the financial reporting processes implemented by management but does not conduct any auditing or accounting reviews. The members of the Audit Committee are not employees of Michaels and do not represent themselves as experts in the field of accounting or auditing. Instead, the Audit Committee relies, without independent verification, on management’s representation that the financial statements have been prepared in conformity with generally accepted accounting principles and on the representations of our independent registered public accounting firm included in its report on our financial statements. The Audit Committee’s oversight does not provide them with an independent basis for determining whether management has maintained appropriate accounting and financial reporting principles or policies or appropriate internal controls and procedures designed to assure compliance with accounting standards and applicable laws and regulations. Furthermore, the Audit Committee’s discussions with management and its accountants do not ensure that the financial statements are presented in accordance with generally accepted accounting principles, that the audit of the financial statements has been carried out in accordance with generally accepted auditing standards or that our independent registered public accounting firm is in fact “independent.”

 

We have engaged Ernst & Young LLP as our independent registered public accounting firm to audit and report to our stockholders on our financial statements for fiscal 2006 and on our management’s assessment of, and the effectiveness of, our internal controls over financial reporting. The Audit Committee has discussed with management and Ernst & Young LLP significant accounting policies applied by the Company in its financial statements as well as alternative treatments, including (i) the transition from the retail inventory method for accounting for merchandise inventories to the weighted average cost method, (ii) the early adoption of SFAS No. 123(R), Share-Based Payment, and (iii) the refinements made to our calculation for deferring costs related to preparing inventory for sale and for vendor allowance recognition. For a more detailed discussion of these accounting items, see our “Annual Report on Form 10-K for the fiscal year ended January 28, 2006 — Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” During fiscal 2005, there were no disagreements with Ernst & Young LLP on any matter of accounting principle or practice, financial statement disclosure or auditing scope or procedure, which, if not resolved to the satisfaction of Ernst & Young LLP, would have caused them to make a reference to the subject matter of the disagreement in connection with its reports.

The Audit Committee has reviewed and discussed with our management and Ernst & Young LLP the audited financial statements of Michaels contained in our Annual Report on Form 10-K for the fiscal year ended January 28, 2006, as well as the report of our management and Ernst & Young LLP’s opinion thereon regarding the effectiveness of our management’s assessment of Michaels’ internal control over financial reporting. The Audit Committee has also discussed with our independent registered public accounting firm the matters required to be discussed pursuant to SAS No. 61 (Codification of Statements on Auditing Standards, Communication with Audit Committees).

 

The Audit Committee has also received and reviewed the written disclosures and the letter from Ernst & Young LLP required by Independence Standards Board Standard No. 1 (Independence Discussions with Audit Committees) and has discussed with Ernst & Young LLP its independence.

 

The Audit Committee discussed with our internal accountants and Ernst & Young LLP the overall scope and plans for their respective audits. The Audit Committee meets with the internal accountants and our independent registered public accounting firm, with and without management present, to discuss the results of their examinations, their evaluations of Michaels’ internal controls, and the overall quality of Michaels’ financial reporting.

 

Based on the review and discussions referred to above, the Audit Committee recommended to the Board that the audited financial statements be included in our Annual Report on Form 10-K for the fiscal year ended January 28, 2006, as filed with the Securities and Exchange Commission.

 

The Audit Committee considered whether, and concluded that, the provision by Ernst & Young LLP of the services referred to under “Tax Fees” and “All Other Fees” below is compatible with maintaining the independence of Ernst & Young LLP.

 

This report is submitted by the members of the Audit Committee of the Board of Directors.

 

Audit Committee

Cece Smith (Chairman)

Richard C. Marcus

Liz Minyard

 

The Audit Committee Report does not constitute soliciting material and shall not be deemed filed or incorporated by reference into any other Company filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that the Company specifically incorporates the Audit Committee Report by reference therein.

The following table presents fees for professional audit services rendered by Ernst & Young LLP for the audit of Michaels’ annual financial statements for each of fiscal 2004 and 2005, and fees billed for other services rendered by Ernst & Young LLP.

 

 

 

 

The Audit Committee Charter requires that the Audit Committee pre-approve all audit and non-audit engagements, fees, terms and services in a manner consistent with the Sarbanes-Oxley Act of 2002 and all rules and applicable listing standards promulgated by the Securities and Exchange Commission and the New York Stock Exchange, except that such non-audit services need not be pre-approved if (i) the aggregate amount of all such non-audit services provided to Michaels constitutes not more than 5% of the total amount of fees paid by Michaels to its independent registered public accounting firm during the fiscal year in which the non-audit services are provided, (ii) such services were not recognized by Michaels at the time of engagement to be non-audit services, and (iii) such services were promptly brought to the attention of the Audit Committee and approved by the Audit Committee or by one or more members of the Audit Committee to whom authority to grant such approvals has been delegated by the Audit Committee. The Audit Committee may delegate the authority to grant any pre-approvals to one or more members of the Audit Committee, provided that such member(s) reports any pre-approvals to the Audit Committee at its next scheduled meeting. The Audit Committee has delegated pre-approval authority to its chairman.

 

Representatives of Ernst & Young LLP are expected to be present at the Annual Meeting and will have the opportunity to make a statement if they desire to do so and will be available to respond to appropriate questions.

 

During fiscal 2005, Michaels compensated Charles J. Wyly, Jr., for his service as Chairman of the Board, as indicated under “Management Compensation — Summary Compensation Table” and “Management Compensation — Option Grants During Fiscal 2005.” During fiscal 2005, Michaels compensated Sam Wyly for his service as Vice Chairman of the Board with (i) $18,750 per month, (ii) options to purchase 117,500 shares of common stock (including the grant of 30,000 shares of common stock made to each director as described below), and (iii) $17,764 for the personal use of a company-owned automobile. Michaels also provided the services of an administrative assistant employed by the company to each of Charles J. Wyly, Jr. and Sam Wyly in order to support them in their respective roles as Chairman and Vice Chairman of our Board of Directors.

 

Mr. Hanlon, Mr. Marcus, Ms. Minyard and Ms. Smith each receive an annual fee of $48,000 as members of the Board and a fee of $1,500 for attendance at each regular or special Board meeting and for attendance at each meeting of a committee of which they are a member. We also reimburse directors for expenses incurred in attending meetings.

 

Effective upon adoption of our 2005 Incentive Compensation Plan, the Compensation Committee granted each director stock options exercisable for 30,000 shares of common stock under our 2005 Incentive Compensation Plan.

 

What is our compensation philosophy?

 

The objectives of our executive officer compensation program are to:

 

 

We believe in a total compensation approach, with an emphasis on variable components of pay including bonus and equity-based awards. Executive officers performing at a high level should be well compensated through cash compensation sufficient to retain such executives and through equity-based awards that align the interests of such executives with the interests of the stockholders and stimulate focus on long-term stockholder value enhancement.

 

How is compensation determined?

 

Overview

 

The Compensation Committee is responsible for determining our Chief Executive Officer’s compensation level, an office that is currently vacant as a result of Mr. Rouleau’s retirement on March 15, 2006. On the recommendation of Michaels’ senior management, the Compensation Committee also reviews, determines and approves the compensation level of all other executive officers of Michaels. In determining compensation levels for Michaels’ executive officers, the Compensation Committee considers the scope of an individual’s responsibilities, external competitiveness of total compensation, an individual’s performance and prior experience, the performance of the company and the attainment of planned financial and strategic initiatives. These factors are evaluated by the Compensation Committee with no particular weight given to any one factor. The Compensation Committee also considers the prevailing compensation levels in relevant markets for executive-level employees when considering the compensation levels of our executive officers; however, this compensation data is merely used as a guide by the committee in making its compensation determinations. In connection with making its 2006 compensation determinations, a customized study analyzing the total compensation elements for a specific retail peer group was prepared for and reviewed by the Compensation Committee. The Compensation Committee also consulted executive compensation experts in the course of evaluating the compensation levels for our executive officers.

 

Base Salaries

 

Base salaries for our executive officers are established based on the scope of their responsibilities, individual performance and prior experience, Michaels’ operating and financial performance and the attainment of planned financial and strategic initiatives, taking into account competitive market compensation paid by similar companies for similar positions. The Compensation Committee sets base salaries at a level designed to attract and retain highly qualified individuals who make contributions that result in Michaels meeting its operating and financial goals. Base salaries are reviewed annually and adjusted as deemed appropriate by the Compensation Committee.

 

Annual Bonuses

 

In approving the annual plans for executive officer bonuses, the Compensation Committee provides financial incentives to those members of management who can make an important contribution to our success by tying the bonuses to the attainment of certain financial, operational and strategic objectives. These

objectives may be different from individual to individual. Each participating executive officer is entitled to a bonus equal to a certain percentage of that executive officer’s salary based upon the attainment of the established objectives.

 

Equity-Based Compensation

 

In compensating executive officers through equity-based awards, the Compensation Committee, pursuant to certain established guidelines, makes discretionary awards based upon the level of responsibility and performance of the individual receiving the award and, beginning in 2006, upon the dollar value the awards are expected to deliver over a three-year period. The Compensation Committee reviews and approves the guidelines used for such discretionary awards.

 

Other Benefits and Perquisites

 

Our executive compensation also includes certain other benefits and perquisites. These benefits include annual matching contributions to executive officers’ deferred compensation and 401(k) accounts, the payment of life insurance premiums, company-paid medical benefits and, in some cases, reimbursement for income taxes on taxable benefits. The perquisites for our most senior executives may also include the personal use of company-owned automobiles and payment of or reimbursement for club membership dues. For more detailed information regarding benefits and perquisites provided to our Named Executive Officers, please see the section of this Proxy Statement entitled “Management Compensation — Summary Compensation Table.”

 

How are our incentive compensation programs used to focus management on increasing stockholder value?

 

In June of 2005, Michaels’ stockholders approved the Michaels Stores, Inc. 2005 Incentive Compensation Plan. Prior to this plan’s adoption, Michaels maintained stock option plans for its directors, officers and key employees. The 2005 Incentive Compensation Plan permits the grant of various types of incentive compensation, including options, appreciation rights, restricted stock, restricted stock units, performance shares and performance units, thereby providing Michaels with greater flexibility to create incentives for and compensate its directors, executive officers and key employees. Since the adoption and approval of the 2005 Incentive Compensation Plan, Michaels may not issue stock options under any other prior existing plan. Accordingly, all incentive awards to directors, executive officers and key employees since June 2005 have been, and all future awards will be, made under the 2005 Incentive Compensation Plan.

 

We believe that the grant of equity-based awards aligns executive and stockholder long-term interests by creating a strong and direct link between executive compensation and stockholder return.

 

How have we responded to the IRS limits on deductibility of compensation?

 

Section 162(m) of the Code limits the deductibility of compensation in excess of $1 million paid to the Chief Executive Officer or any of the four other most highly compensated executive officers, unless such compensation qualifies as “performance based compensation.” Options granted under our 1997 Stock Option Plan and 2001 General Stock Option Plan prior to the adoption of our 2005 Incentive Compensation Plan are intended to meet the performance based compensation exception to the annual $1 million limitation on the tax deduction we may claim for compensation of certain executive officers. Although our executive officer bonus program does not currently meet the exception to the IRS deduction limitation, awards and bonuses under our 2005 Incentive Compensation Plan are intended to satisfy this exception. While the Compensation Committee is cognizant of the tax deduction limitations applicable to our executive officer compensation program, the committee may from time to time set compensation levels outside the deduction limitations if it deems such departure is warranted.

How has our Chief Executive Officer been compensated?

 

The Compensation Committee is charged with determining the compensation level of our Chief Executive Officer, formerly Mr. Rouleau. As our Chief Executive Officer, Mr. Rouleau received a base salary of $808,100 in 2005, and the Compensation Committee believes this level of base salary was necessary in order to retain a qualified Chief Executive Officer for a company the size of Michaels. Mr. Rouleau’s incentive compensation bonus for fiscal 2005 was based upon the attainment of specified performance goals and objectives. With respect to fiscal 2005, Mr. Rouleau received $427,350 in a cash bonus. In fiscal 2005, Mr. Rouleau also received stock options which are exercisable for 200,000 shares of common stock. In determining whether to award such options, the Compensation Committee considered not only his contribution to Michaels’ success in past years, but also all outstanding options held by Mr. Rouleau.

 

Mr. Rouleau’s compensation package for fiscal 2005 also included other compensation under an employment agreement with Michaels. Such compensation included matching contributions to his deferred compensation and 401(k) accounts, life insurance premiums paid by Michaels, company-paid medical benefits and reimbursement for income taxes paid by Mr. Rouleau relating to certain taxable benefits provided to him. Mr. Rouleau also received the use of a company-owned automobile. A tally sheet for Mr. Rouleau, setting forth the material components of his overall compensation and affixing dollar amounts relating to the compensation components (to the extent the benefit to Mr. Rouleau was reasonably quantifiable), was prepared for and reviewed by the Compensation Committee in connection with making a determination regarding Mr. Rouleau’s compensation level for fiscal 2006.

 

In connection with Mr. Rouleau’s retirement on March 15, 2006 from the offices of President and Chief Executive Officer, the Board elected Jeffrey N. Boyer and Gregory A. Sandfort co-Presidents of Michaels. Mr. Boyer will continue to serve as our Chief Financial Officer, and Mr. Sandfort was elected to the position of Chief Operating Officer. Currently, the office of Chief Executive Officer is vacant. In recognition of their increased responsibilities as co-Presidents, the Compensation Committee increased the base salary for each of Messrs. Boyer and Sandfort to $500,000 for fiscal 2006, which increase became effective on March 24, 2006. On April 7, 2006, each of Messrs. Boyer and Sandfort also received stock options exercisable for 25,180 shares of common stock in connection with their promotions.

 

How are the other executive officers compensated?

 

Our other executive officers usually receive base salaries, annual cash bonuses, long-term incentive compensation in the form of stock options and various other benefits. On the recommendation of Michaels’ senior management, the Compensation Committee reviews, determines and approves the compensation level for our executive officers. In determining the compensation levels for our Named Executives (as defined in the section of this Proxy Statement entitled “Management Compensation — Summary Compensation Table”) for fiscal 2006, a tally sheet for each Named Executive, setting forth the material components of each Named Executive’s overall compensation and affixing dollar amounts relating to the compensation components (to the extent each such benefit was reasonably quantifiable), was prepared for and reviewed by the Compensation Committee. The Compensation Committee, in administering the 2005 Incentive Compensation Plan, may also evaluate the executive officers’ performance in the Compensation Committee’s determination of incentive awards.

 

Recently proposed rules on disclosure of executive compensation.

 

The Securities and Exchange Commission has proposed new rules on disclosure of executive officer compensation. The proposals provide for more detailed disclosure than current rules require. They are, in many ways, responsive to suggestions in the corporate governance reform community to require compensation committees to adopt approaches and procedures that may differ in some respects from those the Compensation Committee presently observes. The Compensation Committee continues to monitor the proposals’ process for the purpose not only of ensuring the Company will be prepared to comply with any rules that are adopted but also to keep abreast of best practices in the executive compensation area.

This report is submitted by the members of the Compensation Committee, which also performs the additional duties of administering Michaels’ 1997 Employees Stock Purchase Plan, 1997 Stock Option Plan, 2001 Employee Stock Option Plan, 2001 General Stock Option Plan and 2005 Incentive Compensation Plan.

 

Compensation Committee

Richard E. Hanlon (Chairman)

Richard C. Marcus

Liz Minyard

 

The Compensation Committee Report does not constitute soliciting material and shall not be deemed filed or incorporated by reference into any other Company filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that the Company specifically incorporates the Compensation Committee Report by reference therein.

 

The following table sets forth certain information regarding compensation paid or accrued by Michaels to our former Chief Executive Officer and each of our four other most highly compensated executive officers employed by Michaels at the end of the fiscal year, based on salary and bonus earned during fiscal 2005 (collectively, the “Named Executives”).

 

Although the Securities and Exchange Commission has established thresholds that must be exceeded before certain company-provided perquisites received by our Named Executives are required to be specifically disclosed in the table below, we have, in the interest of greater transparency, included information regarding perquisites in the table regardless of whether they exceed the established disclosure thresholds.

 

 

 

 

The following table provides information related to options granted to the Named Executives during fiscal 2005.

 

 

 

 

The following table provides information related to options exercised by the Named Executives during fiscal 2005 and the number and value of options held at fiscal year-end. Michaels does not have any outstanding stock appreciation rights.

 

 

 

 

Amendment to Mr. Rouleau’s Employment Agreement

 

On March 15, 2006, Michaels entered into an amendment to employment agreement with R. Michael Rouleau, the then President and Chief Executive Officer of Michaels, pursuant to which Mr. Rouleau retired from Michaels. Under the amendment, Mr. Rouleau will continue to receive his current base salary of $840,000 through January 31, 2008 and will receive a bonus for fiscal 2006, prorated to March 31, 2006. Mr. Rouleau and his spouse will continue to participate in our medical, dental and vision care plan on the same basis as that available from time to time to our senior executive officers and their eligible dependents. Mr. Rouleau’s current life insurance and disability insurance benefits will continue in effect until January 31, 2008. Mr. Rouleau’s company-paid automobile will be transferred to him in connection with his retirement and Michaels is to make a tax gross-up payment to Mr. Rouleau for the income tax effect of this transfer. In addition, each outstanding option to purchase common stock of Michaels granted to Mr. Rouleau prior to August 5, 2005 became fully vested and exercisable, and the exercise period of such options was extended to March 14, 2011. Options granted to Mr. Rouleau after August 4, 2005 are to vest and expire in accordance with their terms.

 

Employment, Severance and Change in Control Agreements

 

Michaels has entered into a change in control severance agreement, referred to as the Change in Control Agreements, with each of our executive officers (other than those executive officers who are also members of our Board of Directors). Under the Change in Control Agreements, if a change in control (as defined in the Change in Control Agreements) occurs, the executive would become immediately entitled to the following benefits:

 

 

Executives who are party to a Change in Control Agreement will also be entitled to additional benefits if the executive’s employment is terminated under certain circumstances. An executive is entitled to those severance benefits if the executive’s employment with Michaels is terminated in anticipation of a change in control or if, during the two-year period after a change in control, the executive is terminated without cause or resigns for good reason (which includes significant changes in an executive’s duties, responsibilities or reporting relationships, failure to provide equivalent compensation and benefits and being required to relocate 50 or more miles). If terminated or separated from Michaels under those circumstances, the executive would be entitled to the following additional benefits under the Change in Control Agreement:

 

 

 

In order to obtain severance benefits under a Change of Control Agreement, an executive must first execute a separation agreement with Michaels that includes a waiver and release of any and all claims against Michaels and a commitment that, for one year following termination, the executive will not solicit or hire any employee of Michaels or its subsidiaries and will not interfere with any relationship between Michaels and its employees, customers or suppliers. In addition to the foregoing, in accordance with the Change in Control Agreements, Michaels will make certain tax “gross-up” payments to address taxes, interest and penalties that may be imposed under applicable tax laws in connection with golden parachute payments and non-qualified deferred compensation and will reimburse the executive for certain legal fees and related expenses.

 

Michaels has also adopted a change in control bonus plan, referred to as the Change in Control Bonus Plan, in which each of our executive officers (other than those executive officers who are also members of our Board of Directors) and certain other key employees can participate. Under the Change in Control Bonus Plan, if a change in control occurs prior to December 31, 2007, each executive officer will receive a $125,000 bonus on the one-year anniversary of the change in control. If an executive’s employment is terminated without cause after the change in control but prior to the one-year anniversary, the executive will continue to be eligible to receive the change in control bonus.

 

Additionally, participants (including our executive officers) in our Fiscal Year 2006 Bonus Plan program will be eligible to receive a one-time bonus enhancement. Under the terms of the bonus plan enhancement, Michaels has guaranteed a 2006 cash bonus for each participant at a minimum level of one payment tier below the participant’s target annual bonus. Each participant will also be eligible to receive an additional bonus payment of up to 75% of the participant’s target annual bonus, based on the participant’s individual performance in fiscal 2006.

 

The following table provides information as of January 28, 2006 with respect to shares of Michaels common stock that may be issued under our existing equity compensation plans, including the 1997 Employees Stock Purchase Plan, the 1997 Stock Option Plan, the 2001 Employee Stock Option Plan, the 2001 General Stock Option Plan and the 2005 Incentive Compensation Plan.

 

 

 

 

The following chart compares the yearly changes in the total stockholder return on our common stock against two other measures of performance. The comparison is on a cumulative basis for our last five fiscal years. The two other performance measures are the Dow Jones US Total Market Index (previously known as the Dow Jones Equity Market Index) and the Dow Jones US Specialty Retailers Index (previously known as the Dow Jones Retail — Other Specialty Index). In each case, we assumed an initial investment of $100 on February 2, 2001 and reinvestment of all dividends. Dates on the following chart represent the last trading day of the indicated fiscal year.

 

Stock Performance

Comparison of Five Fiscal Year Total Return

 

 

 

In fiscal 2005, we paid $263,654 in salary to Donald R. Miller, Jr., Vice President — Market Development. In connection with his employment with Michaels in fiscal 2005, Mr. Miller also (i) earned a cash bonus of $116,100, (ii) received $24,239 for the personal use of a company-owned automobile, (iii) was transferred the ownership of an older company-owned automobile, valued at $53,405, and (iv) received $3,884 in other employee benefits. In addition, Michaels (i) reimbursed Mr. Miller $16,867 for golf/health club membership dues and the related tax gross-up, and (ii) paid life insurance premiums for Mr. Miller in the amount of $599. In fiscal 2005, Michaels granted options to Mr. Miller which are exercisable for 43,750 shares of common stock at an exercise price of $37.96 per share, the fair market value of a share of our common stock on the date of grant. Mr. Miller is the son-in-law of Charles J. Wyly, Jr.

 

The compensation paid by Michaels to Sam Wyly, Vice Chairman of the Board, during fiscal 2005 is set forth in the section of this Proxy Statement entitled “Compensation of Directors.” Sam Wyly is the brother of Charles J. Wyly, Jr.

 

Section 16(a) of the Securities Exchange Act of 1934 requires our officers and directors and persons who own more than 10% of a registered class of our equity securities to file initial reports of ownership and reports of changes in ownership with the Securities and Exchange Commission. Such persons are required by regulation of the Securities and Exchange Commission to furnish us with copies of all Section 16(a) forms they file. Based solely on our review of the copies of such forms or written representations from certain reporting persons received by us with respect to fiscal 2005, we believe that our officers and directors and persons who own more than 10% of a registered class of our equity securities have complied with all applicable filing requirements, except that each of Mr. Charles J. Wyly, Jr. and Mr. Sam Wyly has informed Michaels that he will file a late Statement of Changes in Beneficial Ownership of Securities on Form 4 reporting transactions in our common stock and related derivative securities by certain non-U.S. entities of which securities he may be deemed to be the beneficial owner.

 

We do not know of any other matters to be presented or acted upon at the Annual Meeting. If any other matter is presented at the Annual Meeting on which a vote may properly be taken, the shares represented by proxies will be voted in accordance with the judgment of the proxy holders.

 

Copies of our Annual Report on Form 10-K (excluding exhibits) filed with the Securities and Exchange Commission are available, without charge, upon written request to Michaels Stores, Inc., 8000 Bent Branch Drive, Irving, Texas 75063, Attention: Investor Relations Department. Exhibits to the Form 10-K will be furnished upon payment of a fee of $0.50 per page to cover our expenses in furnishing the exhibits.

 

To be considered for inclusion in our proxy statement for our 2007 annual meeting of stockholders, proposals of stockholders must be in writing and received by us no later than January 4, 2007. To be presented at the 2007 annual meeting of stockholders without inclusion in our proxy statement for such meeting, proposals of stockholders must be in writing and received by us no later than March 2, 2007 and no earlier than February 5, 2007, in accordance with procedures set forth in our bylaws. Such proposals should be mailed to Michaels Stores, Inc., P.O. Box 619566, DFW, Texas 75261-9566 and directed to the Secretary of Michaels.

 

By Order of the Board of Directors,

 

Mark V. Beasley

Secretary

 

Irving, Texas

May 4, 2006

PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FOR THE 2006 ANNUAL MEETING OF STOCKHOLDERS
JUNE 20, 2006

The undersigned hereby appoints Jeffrey N. Boyer and Mark V. Beasley, each with power to act without the other and with full power of substitution, as proxies to vote, as designated below, all stock of Michaels Stores, Inc. owned by the undersigned at the 2006 Annual Meeting of Stockholders to be held at the Four Seasons Resort and Club, 4150 North MacArthur Boulevard, Irving, Texas 75038 on Tuesday, June 20, 2006, at 10:30 a.m. central daylight savings time, or any adjournment thereof, upon such business as may properly come before the meeting or any adjournment thereof.

UNLESS OTHERWISE MARKED, THIS PROXY WILL BE VOTED FOR THE ELECTION OF EACH OF THE NOMINEES NAMED, FOR THE RATIFICATION OF THE AUDIT COMMITTEE’S SELECTION OF ERNST & YOUNG LLP AS OUR INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FOR FISCAL 2006 AND IN THE DISCRETION OF THE PROXY HOLDERS ON ANY OTHER MATTER THAT MAY PROPERLY COME BEFORE THE MEETING OR ANY ADJOURNMENT THEREOF.

YOUR VOTE IS IMPORTANT!

PLEASE VOTE, SIGN, DATE AND RETURN THIS PROXY CARD PROMPTLY USING THE ENCLOSED ENVELOPE.

(Continued and to be signed and dated on reverse side)

A		Business Submitted For Vote

The Board of Directors recommends voting FOR the election of each of the nominees listed below and FOR the ratification of the Audit Committee’s selection of Ernst & Young LLP as our independent registered public accounting firm for fiscal 2006.

1. Election of Directors.
		For		Withhold				For		Withhold
01 — Charles J. Wyly, Jr.		o		o		04 — Richard C. Marcus		o		o
02 — Sam Wyly		o		o		05 — Liz Minyard		o		o
03 — Richard E. Hanlon		o		o		06 — Cece Smith		o		o

				For		Against		Abstain or Withhold
2.		Ratification of the Audit Committee’s selection of Ernst & Young LLP as our independent registered public accounting firm for fiscal 2006.		o		o		o
3.		In their discretion on any other matter that may properly come before the meeting or any adjournment thereof.

B		Authorized Signatures — Sign Here — This section must be completed for your instructions to be executed.

Please sign exactly as your name appears hereon and mail promptly this proxy card in the enclosed envelope. Joint owners should each sign. When signing as attorney, administrator, executor, guardian or trustee, please give your full title as such. If executed by a corporation, the proxy should be signed by a duly authorized officer. If executed by a partnership, please sign in partnership name by an authorized person.

CONFIDENTIAL VOTING INSTRUCTIONS

TO THE INVESTMENT COMMITTEE (“COMMITTEE”)

UNDER THE MICHAELS STORES, INC. EMPLOYEES 401(K) PLAN (“PLAN”)

FOR THE 2006 ANNUAL MEETING OF STOCKHOLDERS

JUNE 20, 2006

The undersigned hereby instructs the Committee to direct the Trustee of the Plan to vote in person or by proxy all shares of Common Stock of Michaels Stores, Inc. credited to my account which are entitled to vote under the Plan at the 2006 Annual Meeting of Stockholders to be held at the Four Seasons Resort and Club, 4150 North MacArthur Boulevard, Irving, Texas 75038 on Tuesday, June 20, 2006, at 10:30 a.m. central daylight savings time, or any adjournment thereof, upon such business as may properly come before the meeting or any adjournment thereof.

UNLESS OTHERWISE MARKED, THIS INSTRUCTION CARD WILL BE VOTED FOR THE ELECTION OF EACH OF THE NOMINEES NAMED, FOR THE RATIFICATION OF THE AUDIT COMMITTEE’S SELECTION OF ERNST & YOUNG LLP AS OUR INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FOR FISCAL 2006 AND IN THE DISCRETION OF THE COMMITTEE ON ANY OTHER MATTER THAT MAY PROPERLY COME BEFORE THE MEETING OR ANY ADJOURNMENT THEREOF.

YOUR VOTE IS IMPORTANT!

PLEASE VOTE, SIGN, DATE AND RETURN THIS INSTRUCTION CARD PROMPTLY USING THE ENCLOSED ENVELOPE.

(Continued and to be signed and dated on reverse side)

A		Business Submitted For Vote

The Board of Directors recommends voting FOR the election of each of the nominees listed below and FOR the ratification of the Audit Committee’s selection of Ernst & Young LLP as our independent registered public accounting firm for fiscal 2006.

1. Election of Directors.
		For		Withhold				For		Withhold
01 — Charles J. Wyly, Jr.		o		o		04 — Richard C. Marcus		o		o
02 — Sam Wyly		o		o		05 — Liz Minyard		o		o
03 — Richard E. Hanlon		o		o		06 — Cece Smith		o		o

				For		Against		Abstain or Withhold
2.		Ratification of the Audit Committee’s selection of Ernst & Young LLP as our independent registered public accounting firm for fiscal 2006.		o		o		o
3.		In their discretion on any other matter that may properly come before the meeting or any adjournment thereof.

B		Authorized Signatures — Sign Here — This section must be completed for your instructions to be executed.

Please sign exactly as your name appears hereon and mail promptly this instruction card in the enclosed envelope.