<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
FORM 11-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 [NO FEE REQUIRED]
FOR THE CALENDAR YEAR ENDING DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _____ to _____
Commission file number 0-11822
------------------
A. Full title of the plan and the address of the plan, if different
from that of the issuer named below:
MICHAELS STORES, INC. EMPLOYEES 401(K) PLAN
B. Name of issuer of the securities held pursuant to the plan and the
address of its principal executive office:
MICHAELS STORES, INC.
8000 BENT BRANCH DRIVE, IRVING, TEXAS 75063
P.O. BOX 619566, DFW, TEXAS 75261-9566
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Administration Committee has duly caused this annual report to be signed on
behalf of the Plan by the undersigned thereunto duly authorized.
MICHAELS STORES, INC.
EMPLOYEES 401(K) PLAN
Date: June 29, 1999 By: /s/ H. Kevin Rutherford
-------------------------
H. Kevin Rutherford
Senior Vice President-
Human Resources and
member of Administration
Committee
<PAGE>
MICHAELS STORES, INC. EMPLOYEES 401(K) PLAN
In February 1987, Michaels Stores, Inc. (the "Employer" or the
"Company") established the Michaels Stores, Inc. Employees 401(k) Plan (the
"Plan"). The name of the issuer of the securities held pursuant to the Plan and
the address of its principal executive office is Michaels Stores, Inc., 8000
Bent Branch Drive, Irving, Texas 75063, P.O. Box 619566, DFW, Texas 75261-9566.
CONTRIBUTIONS UNDER THE PLAN. The Company makes biweekly employer
matching contributions to the Plan to the account of each participating employee
in an amount equal to $.50 for each $1.00 of salary reduction contributed by
such employee, up to a maximum Company contribution equal to 3% of the
employee's compensation.
PARTICIPATING EMPLOYEES. As of December 31, 1998, there were 3,015
employees participating in the Plan.
ADMINISTRATION OF THE PLAN. The Plan is administered by an
Administration Committee currently consisting of two members, both employees of
the Employer, appointed by the Employer's Board of Directors. The members of the
Administration Committee serve at the discretion of the Board of Directors
without compensation for services on such Committee. The members of the
Administration Committee are:
Evan A. Wyly Director
H. Kevin Rutherford Senior Vice President of Human Resources
The address of the members of the Administration Committee listed above
is Michaels Stores, Inc., 8000 Bent Branch Drive, Irving, Texas 75063, P.O. Box
619566, DFW, Texas 75261-9566. The Administration Committee directs the
operation of the Plan and may make administrative and procedural regulations.
Certain administrative functions may be delegated to officers or employees of
the Company. Administration Committee members, officers and employees do not
receive compensation from the Plan.
CUSTODIAN OF INVESTMENTS. The assets of the Plan are held in a trust
and managed by a trustee ("Trustee"), who may be an employee of the Company. At
present, Wachovia Bank of North Carolina, N.A. serves as the Trustee. The
Company pays the fees and expenses of the Trustee.
REPORTS TO PARTICIPATING EMPLOYEES. Each participant and retired
participant having an interest in the Plan receives quarterly statements of
their accounts each plan year.
-2-
<PAGE>
<TABLE>
<CAPTION>
INDEX TO FINANCIAL STATEMENTS
PAGE
<S> <C>
REPORT OF INDEPENDENT AUDITORS F-1
AUDITED FINANCIAL STATEMENTS:
Statements of Net Assets Available for Plan Benefits F-2 to F-3
Statements of Changes in Net Assets Available for Plan Benefits F-4 to F-5
Notes to Financial Statements F-6 to F-10
SUPPLEMENTAL SCHEDULES: SCHEDULE
Line 27a-Schedule of Assets Held for Investment Purposes 1 F-11
Line 27b-Schedule of Loans or Fixed Income Obligations 2 F-12
Line 27d-Schedule of Reportable Transactions 3 F-13
CONSENT OF INDEPENDENT AUDITORS F-14
</TABLE>
-3-
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Administration Committee
Michaels Stores, Inc. Employees 401(k) Plan
We have audited the accompanying statements of net assets available for plan
benefits of the Michaels Stores, Inc. Employees 401(k) Plan as of December 31,
1998 and December 31, 1997, and the related statements of changes in net assets
available for plan benefits for the years then ended. These financial statements
are the responsibility of the Plan's Administration Committee. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the net assets available for plan benefits of the Plan at
December 31, 1998 and December 31, 1997, and the changes in its net assets
available for plan benefits for the years then ended, in conformity with
generally accepted accounting principles.
Our audits were performed for the purpose of forming an opinion on the basic
financial statements taken as a whole. The accompanying supplemental schedules
of Assets Held for Investment Purposes as of December 31, 1998 (Schedule 1),
Loans or Fixed Income Obligations as of December 31, 1998 (Schedule 2), and
Reportable Transactions for the year ended December 31, 1998 (Schedule 3), are
presented for purposes of additional analysis and are not a required part of the
financial statements but are supplementary information required by the
Department of Labor's Rules and Regulations for Reporting and Disclosure under
the Employee Retirement Income Security Act of 1974. These supplemental
schedules are the responsibility of the Plan's management. The Fund Information
in the statements of net assets available for plan benefits and the statements
of changes in net assets available for plan benefits is presented for purposes
of additional analysis rather than to present the net assets available for plan
benefits and changes in net assets available for plan benefits of each fund. The
supplemental schedules and Fund Information have been subjected to the auditing
procedures applied in our audits of the basic financial statements and, in our
opinion, are fairly stated in all material respects in relation to the basic
financial statements taken as a whole.
/s/ Ernst & Young LLP
---------------------
ERNST & YOUNG LLP
Dallas, Texas
June 25, 1999
F-1
<PAGE>
MICHAELS STORES, INC. EMPLOYEES 401(K) PLAN
STATEMENT OF
NET ASSETS AVAILABLE FOR PLAN BENEFITS
December 31, 1998
(In thousands)
<TABLE>
<CAPTION>
Fund Information
---------------------------------------------------------
American Growth Intermediate
General Balanced Fund of Bond Fund
Fund Fund America of America Subtotal
--------- --------- --------- ------------ ---------
<S> <C> <C> <C> <C> <C>
ASSETS
Investment in Michaels Stores, Inc.
common stock $ 8,015 $ 8,015
Investment in mutual funds - $ 3,393 $ 6,948 $ 2,746 13,087
Participant loans receivable - - - - -
Contributions receivable:
Participants 14 - - - 14
Employer - - - - -
--------- --------- --------- ------------ ---------
14 - - - 14
--------- --------- --------- ------------ ---------
Cash and equivalents 651 - - - 651
--------- --------- --------- ------------ ---------
Net assets available for plan benefits $ 8,680 $ 3,393 $ 6,948 $ 2,746 $ 21,767
========= ========= ========= ============ =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-2 (1 of 2)
<PAGE>
MICHAELS STORES, INC. EMPLOYEES 401(K) PLAN
STATEMENT OF
NET ASSETS AVAILABLE FOR PLAN BENEFITS
December 31, 1998
(In thousands)
<TABLE>
<CAPTION>
Fund Information
---------------------------------------------------------
Previous Investment New Participant
Page Company of Perspective Loans
Subtotal America Fund Fund Receivable Total
--------- ------------ ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
ASSETS
Investment in Michaels Stores, Inc.
common stock $ 8,015 $ 8,015
Investment in mutual funds 13,087 $ 6,285 $ 3,952 23,324
Participant loans receivable - - - $ 1,563 1,563
Contributions receivable:
Participants 14 - - - 14
Employer - - - - -
--------- ------------ ----------- ----------- ---------
14 - - - 14
--------- ------------ ----------- ----------- ---------
Cash and equivalents 651 - - - 651
--------- ------------ ----------- ----------- ---------
Net assets available for plan benefits $ 21,767 $ 6,285 $ 3,952 $ 1,563 $ 33,567
========= ============ =========== =========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-2 (2 of 2)
<PAGE>
MICHAELS STORES, INC. EMPLOYEES 401(K) PLAN
STATEMENT OF
NET ASSETS AVAILABLE FOR PLAN BENEFITS
December 31, 1997
(In thousands)
<TABLE>
<CAPTION>
Fund Information
---------------------------------------------------------
American Growth Intermediate
General Balanced Fund of Bond Fund
Fund Fund America of America Subtotal
--------- --------- --------- ------------ ---------
<S> <C> <C> <C> <C> <C>
ASSETS
Investment in Michaels Stores, Inc.
common stock $ 13,427 $ 13,427
Investment in mutual funds - $ 2,823 $ 4,802 $ 2,415 10,040
Participant loans receivable - - - - -
Contributions receivable:
Participants 46 20 33 11 110
Employer 12 8 12 5 37
--------- --------- --------- ------------ ---------
58 28 45 16 147
--------- --------- --------- ------------ ---------
Cash and equivalents 815 - - - 815
--------- --------- --------- ------------ ---------
Net assets available for plan benefits $ 14,300 $ 2,851 $ 4,847 $ 2,431 $ 24,429
========= ========= ========= ============ =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3 (1 of 2)
<PAGE>
MICHAELS STORES, INC. EMPLOYEES 401(K) PLAN
STATEMENT OF
NET ASSETS AVAILABLE FOR PLAN BENEFITS
December 31, 1997
(In thousands)
<TABLE>
<CAPTION>
Fund Information
--------------------------------------------------------
Previous Investment New Participant
Page Company of Perspective Loans
Subtotal America Fund Fund Receivable Total
--------- ------------ ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
ASSETS
Investment in Michaels Stores, Inc.
common stock $ 13,427 $ 13,427
Investment in mutual funds 10,040 $ 4,895 $ 2,773 17,708
Participant loans receivable - - - $ 1,546 1,546
Contributions receivable:
Participants 110 28 20 - 158
Employer 37 10 7 - 54
--------- ------------ ----------- ----------- ---------
147 38 27 - 212
--------- ------------ ----------- ----------- ---------
Cash and equivalents 815 - - - 815
--------- ------------ ----------- ----------- ---------
Net assets available for plan benefits $ 24,429 $ 4,933 $ 2,800 $ 1,546 $ 33,708
========= ============ =========== =========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3 (2 of 2)
<PAGE>
MICHAELS STORES, INC. EMPLOYEES 401(K) PLAN
STATEMENT OF CHANGES IN
NET ASSETS AVAILABLE FOR PLAN BENEFITS
Year Ended December 31, 1998
(In thousands)
<TABLE>
<CAPTION>
Fund Information
------------------------------------------------------
American Growth Intermediate
General Balanced Fund of Bond Fund
Fund Fund America of America Subtotal
--------- ---------- --------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Investment income:
Interest $ 76 $ 14 $ 27 $ 15 $ 132
Dividends - 108 26 154 288
Capital gain distributions - 207 617 - 824
Net appreciation (depreciation) in
fair value of investments (4,253) 9 954 13 (3,277)
--------- ---------- --------- ------------- ----------
(4,177) 338 1,624 182 (2,033)
Contributions:
Participants 956 643 1,167 532 3,298
Employer 119 196 301 109 725
Interfund transfers (492) (51) 100 (80) (523)
--------- ---------- --------- ------------- ----------
Total additions (3,594) 1,126 3,192 743 1,467
--------- ---------- --------- ------------- ----------
Distributions to participants (2,026) (584) (1,091) (428) (4,129)
--------- ---------- --------- ------------- ----------
Net increase (decrease) (5,620) 542 2,101 315 (2,662)
Net assets available for plan benefits:
Beginning of year 14,300 2,851 4,847 2,431 24,429
--------- ---------- --------- ------------- ----------
End of year $ 8,680 $ 3,393 $ 6,948 $ 2,746 $ 21,767
========= ========== ========= ============= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4 (1 of 2)
<PAGE>
MICHAELS STORES, INC. EMPLOYEES 401(K) PLAN
STATEMENT OF CHANGES IN
NET ASSETS AVAILABLE FOR PLAN BENEFITS
Year Ended December 31, 1998
(In thousands)
<TABLE>
<CAPTION>
Fund Information
------------------------------------------------------------
Previous Investment New Participant
Page Company of Perspective Loans
Subtotal America Fund Fund Receivable Total
---------- -------------- ------------- ------------- --------
<S> <C> <C> <C> <C> <C>
Investment income:
Interest $ 132 $ 23 $ 15 $ - $ 170
Dividends 288 93 41 - 422
Capital gain distributions 824 534 249 - 1,607
Net appreciation (depreciation) in
fair value of investments (3,277) 504 535 - (2,238)
---------- -------------- ------------- ------------- --------
(2,033) 1,154 840 - (39)
Contributions:
Participants 3,298 1,064 641 - 5,003
Employer 725 260 169 - 1,154
Interfund transfers (523) (144) 133 534 -
---------- -------------- ------------- ------------- --------
Total additions 1,467 2,334 1,783 534 6,118
Distributions to participants (4,129) (982) (631) (517) (6,259)
---------- -------------- ------------- ------------- --------
Net increase (decrease) (2,662) 1,352 1,152 17 (141)
Net assets available for plan benefits:
Beginning of year 24,429 4,933 2,800 1,546 33,708
---------- -------------- ------------- ------------- --------
End of year $ 21,767 $ 6,285 $ 3,952 $ 1,563 $ 33,567
========== ============== ============= ============= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4 (2 of 2)
<PAGE>
MICHAELS STORES, INC. EMPLOYEES 401(K) PLAN
STATEMENT OF CHANGES IN
NET ASSETS AVAILABLE FOR PLAN BENEFITS
Year Ended December 31, 1997
(In thousands)
<TABLE>
<CAPTION>
Fund Information
-----------------------------------------------------
American Growth Intermediate
General Balanced Fund of Bond Fund
Fund Fund America of America Subtotal
--------- ---------- --------- -------------- ----------
<S> <C> <C> <C> <C> <C>
Investment income:
Interest $ 50 $ 10 $ 18 $ 16 $ 94
Dividends - 88 30 153 271
Capital gain distributions - 213 478 - 691
Net appreciation in fair value
of investments 8,552 167 453 10 9,182
--------- ---------- --------- -------------- ----------
8,602 478 979 179 10,238
--------- ---------- --------- -------------- ----------
Contributions:
Participants 804 587 931 307 2,629
Employer 74 230 307 117 728
Interfund transfers (101) (64) (70) (77) (312)
--------- ---------- --------- -------------- ----------
Total additions 9,379 1,231 2,147 526 13,283
--------- ---------- --------- -------------- ----------
Distributions to participants (1,776) (411) (676) (420) (3,283)
--------- ---------- --------- -------------- ----------
Net increase 7,603 820 1,471 106 10,000
Net assets available for plan benefits:
Beginning of year 6,697 2,031 3,376 2,325 14,429
--------- ---------- --------- -------------- ----------
End of year $ 14,300 $ 2,851 $ 4,847 $ 2,431 $ 24,429
========= ========== ========= ============== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5 (1 of 2)
<PAGE>
MICHAELS STORES, INC. EMPLOYEES 401(K) PLAN
STATEMENT OF CHANGES IN
NET ASSETS AVAILABLE FOR PLAN BENEFITS
Year Ended December 31, 1997
(In thousands)
<TABLE>
<CAPTION>
Fund Information
------------------------------------------------------------
Previous Investment New Participant
Page Company of Perspective Loans
Subtotal America Fund Fund Receivable Total
---------- -------------- ------------- ------------- -------
<S> <C> <C> <C> <C> <C>
Investment income:
Interest $ 94 $ 18 $ 9 $ - $ 121
Dividends 271 78 39 - 388
Capital gain distributions 691 413 161 - 1,265
Net appreciation in fair value
of investments 9,182 619 164 - 9,965
---------- -------------- ------------- ------------- --------
10,238 1,128 373 - 11,739
Contributions:
Participants 2,629 771 609 - 4,009
Employer 728 262 176 - 1,166
Interfund transfers (312) 21 (190) 481 -
---------- -------------- ------------- ------------- --------
Total additions 13,283 2,182 968 481 16,914
Distributions to participants (3,283) (842) (445) (236) (4,806)
---------- -------------- ------------- ------------- --------
Net increase 10,000 1,340 523 245 12,108
Net assets available for plan benefits:
Beginning of year 14,429 3,593 2,277 1,301 21,600
---------- -------------- ------------- ------------- --------
End of year $ 24,429 $ 4,933 $ 2,800 $ 1,546 $ 33,708
========== ============== ============= ============= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5 (2 of 2)
<PAGE>
MICHAELS STORES, INC. EMPLOYEES 401(K) PLAN
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. DESCRIPTION OF THE PLAN AND BASIS OF PRESENTATION.
The Michaels Stores, Inc. Employees 401(k) Plan (the "Plan") became
effective on February 1, 1987, for eligible employees of Michaels Stores,
Inc. (the "Employer" or the "Company") and its subsidiaries. The Plan is a
defined contribution plan designed to comply with the Employee Retirement
Income Security Act of 1974, as amended ("ERISA").
The following is a brief description of the Plan. Participants should refer
to the plan document for complete information regarding the Plan.
PARTICIPATION - Employees become eligible to participate in the Plan
once they have reached the age of 21 and have completed 500 hours of
service to the Company during the previous six months. The Administration
Committee has developed and implemented a system to notify each employee
upon his or her initial eligibility to participate in the Plan. Eligible
employees who desire to participate in the Plan must elect to participate
by phoning the voice response system maintained by the Plan's recordkeeper
to authorize the Employer to make payroll deductions for contributions to
the Plan.
CONTRIBUTIONS - Each participant may elect to have his or her
compensation reduced, in increments of whole percents, at a minimum of 1%
up to a maximum of 15% of the participant's considered compensation, as
defined by the Plan, and have the Employer contribute to the Plan the
amount of such reduction ("Salary Reduction Contribution"). A participant's
Salary Reduction Contribution may not exceed an amount determined by the
Internal Revenue Service each calendar year ($10,000 in 1998 and $9,500 in
1997). Each participant may also elect to make voluntary, after-tax
contributions at a minimum of 1% up to a maximum of 10% of the
participant's considered compensation ("Employee Contributions"). In
addition, the Employer is required to make a biweekly contribution
("Employer Matching Contribution") to the account of each participant in an
amount equal to 50% of the participant's Salary Reduction Contribution.
However, Employer Matching Contributions may not exceed 3% of each
participant's total considered compensation for the year.
Employer Matching Contributions are net of forfeitures, as defined in the
Plan, and are to be deposited as soon as administratively feasible after
the end of each payroll period. All Employer Matching Contributions are
invested based upon the participants' investment elections. Forfeitures of
$318,000 and $221,000 were applied against Employer Matching Contributions
to the Plan for 1998 and 1997, respectively.
Participants may elect investment of their entire Plan account in one of,
or in any combination of, the following investment options, which have been
selected by the Plan's Investment Committee:
(a) General Fund - investments in the common stock of the Employer
and idle cash utilized to facilitate the daily processing of
investment transactions in all investment options.
(b) American Balanced Fund - a mutual fund investing in both domestic
growth and income producing securities seeking conservation of
capital, current income, and long term growth of both capital and
income.
F-6
<PAGE>
(c) Growth Fund of America - a mutual fund investing in domestic
growth equities seeking growth of capital.
(d) Intermediate Bond Fund of America - a mutual fund investing in
intermediate term investment grade corporate bonds and government
instruments seeking current income and preservation of capital.
(e) Investment Company of America Fund - a mutual fund investing in
common stocks seeking long term growth of capital and income.
(f) New Perspective Fund - a mutual fund investing in both domestic
and foreign securities, including both equity and debt
instruments seeking long-term growth of capital.
ADMINISTRATION OF THE PLAN - The Plan is administered by an Administration
Committee consisting of two people, both employees of the Employer,
appointed by the Employer's Board of Directors. The members of the
Administration Committee serve at the discretion of the Board of Directors
without compensation for their services.
A separate account is maintained in the Plan for each participant. The
account balances for participants are adjusted periodically as follows:
(a) All contributions are allocated to participants' accounts
biweekly with each Company payroll.
(b) Daily withdrawal requests are processed weekly.
(c) Income and gains and losses from investments are allocated to the
participants' accounts daily.
(d) Transfers are processed on a daily basis.
VESTING - Participants become partially vested in the Employer Matching
Contributions (including investment income and gains and losses thereon) at the
rate of: 20% after two years of service; 40% after three years; 60% after four
years; and 80% after five years. Employer Matching Contributions vest 100% upon
the participant completing six years of service (five years of service for
individuals employed before May 1, 1992); attaining the age of 65; or dying.
Salary Reduction Contributions and Employee Contributions are 100% vested and
nonforfeitable at all times.
WITHDRAWALS - Upon death or termination of employment with the Company,
participants are entitled to, and may withdraw from the Plan, the vested portion
of Employer Matching Contributions and 100% of Salary Reduction Contributions
and Employee Contributions. In-service withdrawal provisions of the Plan allow
for early withdrawal of Employee Contributions and rollover contributions at any
time and for any reason. Hardship withdrawals of Salary Reduction Contributions
may be made under certain limited circumstances while employed by the Company.
However, in-service withdrawals may be subject to ordinary income taxes and
early distribution penalty taxes. Participants may request distribution of their
account any time after their employee termination date, and must begin receiving
payments from their account balance by April 1 of the calendar year following
the later of the year of employment termination or the year in which they reach
age 70-1/2.
F-7
<PAGE>
LOANS - Active participants of the Plan may obtain loans from their account
balance subject to certain requirements without incurring income taxes or
penalty taxes. Participant loans are repaid, with interest, on an after-tax
basis through payroll deductions. Loan repayments (including interest) are
deposited to each participant's account and invested according to their
investment elections in effect at the time of repayment. Participants may borrow
the lesser of 50% of their vested accounted balance or $50,000.
INCOME TAX STATUS - The Internal Revenue Service ruled on February 20, 1997 that
the Plan is qualified under Section 401 (a) of the Internal Revenue Code, (IRC)
and, therefore, the related trust is not subject to tax under present income tax
law. Once qualified, the Plan is required to operate in conformity with the IRC
to maintain its qualification. The Administration Committee believes that the
Plan is designed and currently operated in compliance with the applicable
requirements of the IRC.
Salary Reduction Contributions and Employer Matching Contributions are not
included in the participant's gross income for federal income tax purposes in
the year such contributions are made. A participant will not be subject to
federal income taxes with respect to these contributions until the amounts are
withdrawn or distributed.
TERMINATION OF THE PLAN - While the Employer has not expressed any intent to
discontinue the Plan, the Employer may terminate the Plan at any time. In the
event the Plan is terminated, the Plan accounts of all participants would become
fully vested.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
Investments in the common stock of the Employer are valued at the last reported
sales price on the last business day of the Plan year as quoted through The
Nasdaq Stock Market. Investments in the mutual funds of American Funds Service
Company are valued based on quoted market prices of the underlying securities
comprising the investment funds on the last business day of the Plan year.
Participant loans receivable are recorded at cost which approximates fair value.
Security transactions are recorded on a trade date basis.
Contributions and interest income are recorded on an accrual basis.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires the use of estimates that affect the amounts
reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
F-8
<PAGE>
3. INVESTMENTS.
Investments at December 31, 1998, are as follows:
<TABLE>
<CAPTION>
Number Fair Value
of Shares (In thousands)
--------- --------------
<S> <C> <C>
Michaels Stores, Inc. common stock* 442,965 $ 8,015
American Mutual Funds:
American Balanced Fund* 215,302 3,393
The Growth Fund of America* 310,174 6,948
Intermediate Bond Fund of America* 202,762 2,746
The Investment Company of America Fund* 202,289 6,285
New Perspective Fund* 172,201 3,952
-------
$31,339
=======
Investments at December 31, 1997, are as follows:
<CAPTION>
Number Fair Value
of Shares (In thousands)
--------- --------------
<S> <C> <C>
Michaels Stores, Inc. common stock* 459,038 $13,427
American Mutual Funds:
American Balanced Fund* 180,034 2,823
The Growth Fund of America* 255,683 4,802
Intermediate Bond Fund of America* 179,328 2,415
The Investment Company of America Fund* 173,285 4,895
New Perspective Fund* 143,148 2,773
-------
$31,135
=======
</TABLE>
* Investment represents 5 percent or more of Plan's net assets available for
benefits.
4. RELATED PARTY TRANSACTIONS.
Under the terms of the Plan, all administrative expenses and fees of the Plan
are paid by the Employer. The Employer paid approximately $323,000 and $321,000,
respectively, for administrative expenses and fees on behalf of the Plan for
1998 and 1997, respectively.
F-9
<PAGE>
5. DIFFERENCES BETWEEN FINANCIAL STATEMENTS AND FORM 5500.
The following is a reconciliation of net assets available for plan benefits per
the financial statements to the Form 5500:
<TABLE>
<CAPTION>
1998 1997
------- -------
(In thousands)
<S> <C> <C>
Net assets available for plan benefits per the financial statements $33,567 $33,708
Amounts allocated to withdrawn participants (75) (149)
------- -------
Net assets available for plan benefits per the Form 5500 $33,492 $33,559
======= =======
</TABLE>
The following is a reconciliation of distributions paid to participants per the
financial statements to the Form 5500:
<TABLE>
<CAPTION>
1998
-------
(In thousands)
<S> <C>
Distributions to participants per the financial statements $6,259
Add: Amounts allocated to withdrawn participants at December 31, 1998 75
Less: Amounts allocated to withdrawn participants at December 31, 1997 (149)
------
Distributions to participants per the Form 5500 $6,185
======
</TABLE>
Amounts allocated to withdrawn participants are recorded on the Form 5500 for
termination distributions that have been processed and approved for payment
prior to year-end but not yet paid.
6. YEAR 2000 ISSUE.
The Company had determined that it was necessary to take certain steps in order
to ensure that the Plan's information systems were prepared to handle year 2000
dates. The Company took a two phase approach. The first phase addressed internal
systems that had to be modified or replaced to function properly. The Company
has completed the modifications to existing software applications. Costs
associated with modifying software and equipment were not significant and were
paid by the Company.
For the second phase of the project, Plan management established formal
communications with its third party service providers, including the
administrator and trustee that will be providing services to the Plan effective
August 1, 1999, to determine that they had developed plans to address their own
year 2000 problems as they relate to the Plan's operations. All third party
service providers have indicated that they are year 2000 compliant as of the
date of this report.
F-10
<PAGE>
SCHEDULE 1
EIN 75-1943604
PLAN #1
MICHAELS STORES, INC. EMPLOYEES 401(K) PLAN
LINE 27a - SCHEDULE OF ASSETS HELD FOR INVESTMENT PURPOSES
As of December 31, 1998
<TABLE>
<CAPTION>
c. Description of
Investment Including
b. Identity of Issuer, Maturity Date, Rate
Borrower, Lessor of Interest, Collateral, e. Current
a. or Similar Party Par or Maturity Value d. Cost Value
- -- ----------------------- ------------------------ ------- ----------
<S> <C> <C> <C> <C>
* Michaels Stores, Inc. Common Stock $ 6,722 $ 8,015
American Funds Group American Balanced
Fund: invests in
growth and income
securities 3,312 3,393
American Funds Group Growth Fund
of America: invests
in growth equities 5,825 6,948
American Funds Group Intermediate Bond
Fund of America:
invests in corporate
bonds and government
instruments 2,728 2,746
American Funds Group Investment Company
of America Fund:
invests in common
stocks 5,423 6,285
American Funds Group New Perspective Fund:
invests in equity
and debt securities 3,403 3,952
Wachovia Bank Short Term
Investment Fund 651 651
* Participant Loans
Receivable 7% to 10% - 1,563
------- -------
$28,064 $33,553
======= =======
</TABLE>
* Indicates party-in-interest to the Plan
F-11
<PAGE>
SCHEDULE 2
EIN 75-1943604
PLAN #1
MICHAELS STORES, INC. EMPLOYEES 401(K) PLAN
SCHEDULE 27b - SCHEDULE OF LOANS OR FIXED INCOME OBLIGATIONS
Year Ended December 31, 1998
<TABLE>
<CAPTION>
Amounts Received Amount
During the Year Description of Loan Overdue
---------------------------- ------------------------------ ----------------
Unpaid
Balance
Original As of Date Loan Int.
SSN Participant Loan Amt Principal Int. 12/31/98 Of Loan Duration Rate Principal Int.
- ----------- ------------ -------- --------- ---- -------- -------- -------- ----- --------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
###-##-#### Baker, S $ 4,689 $ 615 $161 $ 2,197 7/20/95 5yr 9.75% $ 2,197 $ 0
###-##-#### Kralowski, D 11,000 1,262 654 9,269 8/29/97 5yr 9.50% 9,269 0
###-##-#### Brennan, D 5,400 131 78 5,234 4/20/98 5yr 9.50% 5,234 0
###-##-#### Gould, N 20,000 363 218 19,637 7/27/98 5yr 9.50% 19,637 0
###-##-#### Hollabaugh, R 8,724 1,299 231 2,512 10/31/94 5yr 8.75% 2,512 0
###-##-#### Smole, D 9,500 1,105 449 6,872 11/25/96 5yr 9.25% 6,872 0
###-##-#### Hollabaugh, R 6,000 701 344 4,856 6/16/97 5yr 9.50% 4,856 0
</TABLE>
F-12
<PAGE>
SCHEDULE 3
EIN 75-1943604
Plan #1
MICHAELS STORES, INC. EMPLOYEES 401(K) PLAN
LINE 27d - SCHEDULE OF REPORTABLE TRANSACTIONS
Year Ended December 31, 1998
(In thousands)
<TABLE>
<CAPTION>
a. Identity of party involved and c. Purchase d. Sales g. Cost of i. Net
b. Description of assets price (1) price (2) assets sold gain
- ---------------------------------- ------------ --------- ----------- ------
<S> <C> <C> <C> <C>
Category (iii) - Series of securities transactions in excess of 5% of the Plan
assets at January 1, 1998
- ------------------------------------------------------------------------------------------
American Mutual Funds:
American Balanced Fund $1,568 $1,007 $ 959 $ 48
Growth Fund of America 3,025 1,834 1,608 226
Intermediate Bond Fund of America 1,841 1,523 1,510 13
Investment Company of America Fund 2,512 1,625 1,386 239
New Perspective Fund 1,635 991 856 135
Michaels Stores, Inc. 3,047 4,198 1,679 2,519
Wachovia Bank DTF Short Term
Investment Fund 8,791 9,098 9,098 -
</TABLE>
There were no category (i), (ii) or (iv) reportable transactions during fiscal
1998.
(1) Cost (column g.) and current value of asset on transaction date (column h.)
are the same amount as the purchase price.
(2) Current value of asset on transaction date (column h.) is the same amount as
the selling price.
Note: Columns e. and f. are not applicable.
F-13
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration
Statement (Form S-8 No. 33-61055) and related Prospectus pertaining to the
Michaels Stores, Inc. Employees 401(k) Plan of our report dated June 25, 1999,
with respect to the financial statements and supplemental schedules of the
Michaels Stores, Inc. Employees 401(k) Plan included in this Annual Report
(Form 11-K) for the year ended December 31, 1998.
/s/ Ernst & Young LLP
--------------------------
ERNST & YOUNG LLP
Dallas, Texas
June 25, 1999
F-14