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-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HHAC/84MAzxrmF84s8LSHxHxekEU8puqo3WGySvxEeAnd4V5oDGxt2OH7b2aguXM KIVUqeB912CJ4oF7CfzdpA== 0000912057-01-543819.txt : 20020413 0000912057-01-543819.hdr.sgml : 20020413 ACCESSION NUMBER: 0000912057-01-543819 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20011103 FILED AS OF DATE: 20011218 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MICHAELS STORES INC CENTRAL INDEX KEY: 0000740670 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-HOBBY, TOY & GAME SHOPS [5945] IRS NUMBER: 751943604 STATE OF INCORPORATION: DE FISCAL YEAR END: 0201 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-09338 FILM NUMBER: 1816725 BUSINESS ADDRESS: STREET 1: 8000 BENT BRANCH DR STREET 2: PO BOX 619566 CITY: IRVING STATE: TX ZIP: 75063 BUSINESS PHONE: 2147147000 MAIL ADDRESS: STREET 1: PO BOX 619566 CITY: DFW STATE: TX ZIP: 75261 10-Q 1 a2066050z10-q.htm 10-Q Prepared by MERRILL CORPORATION

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MICHAELS STORES, INC. FORM 10-Q Part I—FINANCIAL INFORMATION

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

/x/	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)

For the quarterly period ended November 3, 2001

/ /	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)

For the transition period from to

Commission file number 0-11822

MICHAELS STORES, INC.
(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)		75-1943604 (I.R.S. employer identification number)
8000 Bent Branch Drive Irving, Texas 75063 P.O. Box 619566 DFW, Texas 75261-9566 (Address of principal executive offices, including zip code)
(972) 409-1300 (Registrant's telephone number, including area code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /x/ No / /

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

Title		Shares Outstanding as of December 11, 2001
Common Stock, par value $.10 per share		65,646,980

MICHAELS STORES, INC.

FORM 10-Q

Part I—FINANCIAL INFORMATION

Item 1.	Financial Statements
	Consolidated Balance Sheets at November 3, 2001 (unaudited) and February 3, 2001	3
	Consolidated Statements of Income for the three months ended November 3, 2001 and October 28, 2000 (unaudited)	4
	Consolidated Statements of Income for the nine months ended November 3, 2001 and October 28, 2000 (unaudited)	5
	Consolidated Statements of Cash Flows for the nine months ended November 3, 2001 and October 28, 2000 (unaudited)	6
	Notes to Consolidated Financial Statements (unaudited)	7
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	12
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	19
Part II—OTHER INFORMATION
Item 1.	Legal Proceedings	20
Item 4.	Submission of Matters to a Vote of Security Holders	21
Item 6.	Exhibits and Reports on Form 8-K	22
Signatures		23

MICHAELS STORES, INC.

Part I—FINANCIAL INFORMATION

Item 1. Financial Statements.

MICHAELS STORES, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

			November 3, 2001			February 3, 2001
			(Unaudited)
ASSETS
Current assets:
	Cash and equivalents		$	45,991		$	28,191
	Merchandise inventories			900,311			663,700
	Prepaid expenses and other			16,084			24,572
	Deferred income taxes and income taxes receivable			18,203			13,353

		Total current assets		980,589			729,816

Property and equipment, at cost				589,869			543,312
Less accumulated depreciation				(277,345	)		(242,307	)

				312,524			301,005

Costs in excess of net assets of acquired operations, net				118,428			121,256
Other assets				8,383			6,359

				126,811			127,615

Total assets			$	1,419,924		$	1,158,436

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
	Accounts payable		$	194,848		$	143,224
	Accrued liabilities and other			181,401			144,121
	Borrowings under line of credit			45,000			—
	Income taxes payable			—			1,663

		Total current liabilities		421,249			289,008

9¹/4% Senior Notes due 2009				200,000			—
10⁷/8% Senior Notes due 2006				—			125,000
Deferred income taxes				18,269			18,269
Other long-term liabilities				22,468			21,513

		Total long-term liabilities		240,737			164,782

				661,986			453,790

Commitments and contingencies
Stockholders' equity:
	Common stock, $.10 par value, 150,000,000 shares authorized; shares issued and outstanding of 65,608,896 at November 3, 2001 and 63,673,680 at February 3, 2001			6,561			6,367
	Additional paid-in capital			456,267			426,505
	Retained earnings			295,110			271,774

		Total stockholders' equity		757,938			704,646

Total liabilities and stockholders' equity			$	1,419,924		$	1,158,436

See accompanying notes to consolidated financial statements.

MICHAELS STORES, INC.

CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data)

(Unaudited)

		Three Months Ended
		November 3, 2001			October 28, 2000
Net sales		$	611,911		$	525,735
Cost of sales and occupancy expense			396,060			344,506

Gross profit			215,851			181,229
Selling, general, and administrative expense			172,612			148,258
Store pre-opening costs			5,298			3,643

Operating income			37,941			29,328
Interest expense			6,064			3,794
Other (income) and expense, net			(33	)		(622	)

Income before income taxes and extraordinary loss			31,910			26,156
Provision for income taxes			13,090			10,462

Income before extraordinary loss			18,820			15,694
Extraordinary loss for early extinguishment of debt, net of income tax of $3,695			5,318			—

Net income		$	13,502		$	15,694

Earnings per common share excluding the extraordinary loss:
	Basic	$	0.29		$	0.22

	Diluted	$	0.28		$	0.22

Earnings per common share including the extraordinary loss:
	Basic	$	0.21		$	0.22

	Diluted	$	0.20		$	0.22

See accompanying notes to consolidated financial statements.

MICHAELS STORES, INC.

CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data)

(Unaudited)

		Nine Months Ended
		November 3, 2001			October 28, 2000
Net sales		$	1,622,709		$	1,433,946
Cost of sales and occupancy expense			1,070,065			950,102

Gross profit			552,644			483,844
Selling, general, and administrative expense			472,896			412,987
Store pre-opening costs			9,023			8,591
Litigation settlement			3,153			—

Operating income			67,572			62,266
Interest expense			15,796			14,172
Other (income) and expense, net			(409	)		(2,458	)

Income before income taxes, extraordinary loss, and cumulative effect of accounting change			52,185			50,552
Provision for income taxes			21,403			20,222

Income before extraordinary loss and cumulative effect of accounting change			30,782			30,330
Extraordinary loss for early extinguishment of debt, net of income tax of $3,695			5,318			—
Cumulative effect of accounting change for revenue recognition, net of income tax of $1,235			—			1,852

Net income		$	25,464		$	28,478

Earnings per common share excluding the extraordinary loss and cumulative effect of accounting change:
	Basic	$	0.48		$	0.45

	Diluted	$	0.47		$	0.44

Earnings per common share including the extraordinary loss and cumulative effect of accounting change:
	Basic	$	0.40		$	0.43

	Diluted	$	0.39		$	0.41

See accompanying notes to consolidated financial statements.

MICHAELS STORES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

					Nine Months Ended
					November 3, 2001			October 28, 2000
Operating activities:
	Net income				$	25,464		$	28,478
	Adjustments:
		Depreciation				47,580			45,450
		Amortization				3,091			3,085
		Extraordinary loss for early extinguishment of debt				9,014			—
		Other				642			874
		Change in assets and liabilities, excluding acquisitions:
			Merchandise inventories			(236,611	)		(149,859	)
			Prepaid expenses and other			8,488			(3,633	)
			Deferred income taxes and other			(3,064	)		245
			Accounts payable			51,624			65,237
			Income taxes payable			2,560			1,520
			Accrued liabilities and other			34,887			29,798

				Net change in assets and liabilities		(142,116	)		(56,692	)

				Net cash (used in) provided by operating activities		(56,325	)		21,195

Investing activities:
	Additions to property and equipment					(85,661	)		(68,185	)
	Proceeds from sale/leaseback transaction					26,886			—
	Net proceeds from sales of property and equipment					52			108
	Acquisitions					—			(2,182	)

				Net cash used in investing activities		(58,723	)		(70,259	)

Financing activities:
	Proceeds from issuance of 9¹/4% Senior Notes due 2009					194,457			—
	Redemption of 10⁷/8% Senior Notes due 2006					(131,798	)		—
	Redemption of convertible subordinated notes					—			(4,206	)
	Net borrowings under line of credit					45,000			10,200
	Acquisition of treasury stock					—			(95,575	)
	Proceeds from stock options exercised					24,973			89,027
	Proceeds from issuance of common stock and other					760			640
	Payment of other long-term liabilities					(544	)		(4,341	)

				Net cash provided by (used in) financing activities		132,848			(4,255	)

Net increase (decrease) in cash and equivalents						17,800			(53,319	)
Cash and equivalents at beginning of period						28,191			77,398

Cash and equivalents at end of period					$	45,991		$	24,079

See accompanying notes to consolidated financial statements.

MICHAELS STORES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the Nine Months Ended November 3, 2001

(Unaudited)

Note 1. Basis of Presentation

The consolidated financial statements include the accounts of Michaels Stores, Inc. and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. All expressions of "us," "we," "our," and all similar expressions are references to Michaels Stores, Inc. and its consolidated wholly-owned subsidiaries, unless otherwise expressly stated or the context otherwise requires.

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals and other items, as disclosed) considered necessary for a fair presentation have been included. Because of the seasonal nature of the Company's business, the results of operations for the 13 and 39 weeks ended November 3, 2001 are not indicative of the results to be expected for the entire year.

The balance sheet at February 3, 2001 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K for the fiscal year ended February 3, 2001.

All references herein to "fiscal 2001" relate to the 52 weeks ending February 2, 2002, and all references to "fiscal 2000" relate to the 53 weeks ended February 3, 2001. In addition, all references herein to "the third quarter of fiscal 2001" and "the first nine months of fiscal 2001" relate to the 13 and 39 weeks ended November 3, 2001, respectively, and all references to "the third quarter of fiscal 2000" and "the first nine months of fiscal 2000" relate to the 13 and 39 weeks ended October 28, 2000, respectively.

Note 2. Common Stock and Earnings per Share

On October 31, 2001, our Board of Directors declared a two-for-one common stock split effected in the form of a stock dividend to stockholders of record as of the close of business on November 12, 2001, payable on November 26, 2001. An amount equal to the par value of shares issued in the split has been transferred from paid-in capital to the common stock account. All references to the number of shares of Common Stock (except for shares authorized), per share prices, and earnings per share amounts in the consolidated financial statements and accompanying notes included in this Quarterly Report on Form 10-Q have been adjusted to reflect the split on a retroactive basis.

The following table sets forth the computation of basic and diluted earnings per common share:

			Three Months Ended					Nine Months Ended
			November 3, 2001			October 28, 2000		November 3, 2001			October 28, 2000
			(In thousands, except per share data)
Numerator:
	Income before extraordinary loss and cumulative effect of accounting change		$	18,820		$	15,694	$	30,782		$	30,330
	Extraordinary loss, net of income tax			5,318			—		5,318			—
	Cumulative effect of accounting change, net of income tax			—			—		—			1,852

	Net income		$	13,502		$	15,694	$	25,464		$	28,478

Denominator:
	Denominator for basic earnings per share-weighted average shares			65,052			71,346		64,459			66,870
	Effect of dilutive securities:
		Employee stock options		1,854			1,620		1,645			2,608

	Denominator for diluted earnings per share-weighted average shares adjusted for dilutive securities			66,906			72,966		66,104			69,478

Basic earnings per common share:
	Income before extraordinary loss and cumulative effect of accounting change		$	0.29		$	0.22	$	0.48		$	0.45
	Extraordinary loss			(0.08	)		—		(0.08	)		—
	Cumulative effect of accounting change			—			—		—			(0.02	)

	Net income		$	0.21		$	0.22	$	0.40		$	0.43

Diluted earnings per common share:
	Income before extraordinary loss and cumulative effect of accounting change		$	0.28		$	0.22	$	0.47		$	0.44
	Extraordinary loss			(0.08	)		—		(0.08	)		—
	Cumulative effect of accounting change			—			—		—			(0.03	)

	Net income		$	0.20		$	0.22	$	0.39		$	0.41

Note 3. Senior Notes

In July 2001, we issued $200 million in principal amount of 9¹/4% Senior Notes due July 1, 2009 in a private placement under Securities and Exchange Commission Rule 144A to a limited number of qualified institutional buyers. The Senior Notes due 2009 are unsecured and interest thereon is payable semi-annually on each January 1 and July 1, beginning on January 1, 2002. In August 2001, as required by the contract with the purchasers of the Senior Notes due 2009, we made an offer to exchange all of the privately placed Senior Notes due 2009 for an equal principal amount of Senior Notes due 2009, which are registered with the Securities and Exchange Commission and have substantially identical terms. As of October 1, 2001, all of the privately placed Senior Notes due 2009 were exchanged for registered Senior Notes due 2009.

On August 6, 2001, we used a portion of the proceeds of the Senior Notes due 2009 offering described above to redeem our 10⁷/8% Senior Notes due June 15, 2006, of which $125 million in aggregate principal amount was then outstanding. The redemption price was $1,054.38 per $1,000 principal amount of the Senior Notes due 2006, plus accrued interest through August 6, 2001. We incurred an extraordinary loss from the early extinguishment of debt in the amount of $5.3 million, net of income tax, in the third quarter of fiscal 2001.

Note 4. Change in Accounting Principle

Effective October 29, 2000, we changed our method of accounting for custom frame sales in accordance with guidance provided in the Securities and Exchange Commission's Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements. Historically, we recognized sales for custom frame orders at the time the customer placed the order. Under the new accounting method adopted retroactive to January 30, 2000, we now effectively recognize revenue for custom frame orders at the time of delivery. The cumulative effect of the change on fiscal years prior to fiscal 2000 resulted in a non-cash charge to income of $1.9 million (after reduction for income taxes of $1.2 million), which is included in the results of operations for the first quarter of fiscal 2000. In addition, we have given retroactive effect to this change in accounting principle by restatement of our previously published financial statements for the third quarter and the first nine months of fiscal 2000. The effect of the change on the third quarter and the first nine months of fiscal 2000 was to reduce net sales by $769,000 and $3.5 million, respectively, and reduce income before the cumulative effect of the accounting change by $266,000 and $993,000, respectively.

Note 5. Credit Agreement

Effective May 1, 2001, we completed a new $200 million unsecured bank credit facility with Fleet National Bank and other lending institutions, which replaced the previous $100 million unsecured bank credit facility. The Credit Agreement has a term of three years (with a maturity extension for one additional year available under certain conditions) and contains a $25 million competitive bid feature and a $70 million letter of credit sub-facility.

The Credit Agreement contains certain financial covenants, including a balance sheet leverage ratio, a cash flow coverage ratio, a cash flow leverage ratio, and a capital expenditure limitation. Interest on all borrowings varies based upon the type of borrowing, the fixed charge coverage ratio, and whether we elect to utilize the competitive bid feature available under the Credit Agreement. If the competitive bid feature is not utilized, the interest rate on borrowings under the Credit Agreement is generally (a) the higher of (i) an annual rate of interest announced from time to time by Fleet National Bank, as agent, as its "base rate" or (ii) one-half of one percent (¹/2%) above the Federal Funds Effective Rate or (b) the Eurodollar Rate, as defined by the Credit Agreement, plus an applicable margin based on our fixed charge coverage ratio. If the competitive bid feature is utilized, loans up to $25 million may be made under the Credit Agreement at competitively bid interest rates offered by lending institutions participating in the facility, which may have the effect of decreasing the amount of interest we would otherwise be obligated to pay on such borrowings. We are required to pay a facility

fee from 0.20% to 0.35% per annum on the unused portion of the revolving line of credit as well as letter of credit fees that vary depending on the fixed charge coverage ratio.

We are in compliance with all terms and conditions of the Credit Agreement. Borrowings outstanding under the Credit Agreement were $45.0 million as of November 3, 2001. Borrowings available under the Credit Agreement are reduced by the aggregate amount of letters of credit outstanding under the Credit Agreement ($8.7 million as of November 3, 2001). Borrowings under the Credit Agreement and the previous $100 million bank credit facility in the first nine months of fiscal 2001 were outstanding for 230 days, with average outstanding borrowings of $11.1 million and a weighted average interest rate of 5.2%.

Note 6. Legal Proceedings

Raniwala Proceeding

On May 2, 2000, Taiyeb Raniwala, a former assistant manager of a Michaels store, filed a purported class action complaint against us, on behalf of Michaels stores' former and current assistant store managers. The Raniwala Complaint was filed in the Alameda County Superior Court, California and alleges that we violated various California laws by erroneously treating Michaels stores' assistant store managers as "exempt" employees who are not entitled to overtime compensation. Based on these allegations, the Raniwala Complaint asserts that we: (1) violated various California Wage Orders; (2) violated Section 17200 of the California Business and Professions Code; and (3) engaged in conversion. The Raniwala Complaint seeks back wages, interest, penalties, and attorneys' fees.

On July 20, 2000, Raniwala filed an amended complaint to correct certain deficiencies in the original Raniwala Complaint. On September 25, 2000, we filed our answer to the Amended Raniwala Complaint.

On June 6, 2001, we negotiated a tentative settlement of the purported class action with Raniwala. As a result, we recorded a litigation settlement charge of $3.2 million in the first quarter of fiscal 2001, covering all claims, attorneys' fees, and estimated payroll taxes. The settlement, in exchange for a full release of claims, received final approval from the Alameda County Superior Court on November 20, 2001. The distribution of the settlement proceeds must be made by January 19, 2002. The Alameda County Superior Court has dismissed the case against us, effective November 20, 2001.

Collins Proceeding

On April 14, 1999, Suzanne Collins, a former assistant manager of our subsidiary, Aaron Brothers, Inc., filed a class action complaint against Aaron Brothers on behalf of Aaron Brothers' former store managers, assistant store managers, and managers-in-training. The Collins Complaint was filed in the Los Angeles County Superior Court, California and alleges that Aaron Brothers violated various California laws by erroneously treating its store managers, assistant store managers, and managers-in-training as "exempt" employees who are not entitled to overtime compensation. Based on these allegations, the Collins Complaint asserts that Aaron Brothers: (1) violated various California Labor Codes; (2) violated Section 17200 of the California Business and Professions Code; and

(3) engaged in conversion. The Collins Complaint seeks back wages, interest, penalties, punitive damages, and attorneys' fees.

On June 25, 2001, Collins filed an amended complaint which expanded the purported class to include all current Aaron Brothers' salaried store managers, assistant store managers, and managers-in-training based in California; added a new plaintiff as a class representative; and added two additional causes of action for injunctive and declaratory relief.

On November 28, 2001, the court established January 31, 2002 as the deadline, by which time the plaintiff must either file a motion for class certification or file a motion for preliminary approval of any settlement which may be agreed to by the parties. A trial date has not yet been scheduled.

There can be no assurance that Aaron Brothers will be successful in defending this litigation or that future operating results will not be materially adversely affected by the final resolution of the lawsuit.

General

We are a defendant from time to time in lawsuits incidental to our business. Based on currently available information, we believe that resolution of all known contingencies, including the litigation described above, is uncertain, and there can be no assurance that future costs of such litigation would not be material to our financial position or results of operations.

Note 7. Recent Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets, effective for fiscal years beginning after December 15, 2001. Under the provisions of SFAS No. 141 and No. 142, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests. Other intangible assets with finite useful lives will continue to be amortized over their useful lives. We will adopt these provisions in the first quarter of fiscal 2002. Application of these non-amortization provisions in fiscal 2001 would have resulted in an increase in net income of $566,000, or $0.01 per diluted share, in the third quarter of fiscal 2001 and $1.7 million, or $0.03 per diluted share, for the first nine months of fiscal 2001. During fiscal 2002, we will perform the first of the required impairment tests of goodwill and indefinite lived intangible assets as of February 2, 2002 and have not yet determined what the effect of these tests will be. However, we believe the adoption of the provisions of SFAS No. 141 and No. 142 will not have a materially adverse impact on our operating results or financial position.

In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, which requires all derivatives to be recorded on the balance sheet at fair value and establishes accounting treatment for certain types of hedging activities. We adopted the requirements of SFAS No. 133 beginning in fiscal 2001. The adoption of SFAS No. 133 had no material impact on our operating results or financial position for the third quarter or the first nine months of fiscal 2001.

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

Certain statements contained in this discussion and analysis (or elsewhere in this Quarterly Report on Form 10-Q), which are not historical facts, are forward looking statements that involve risks and uncertainties, including, but not limited to, customer demand and trends in the arts and crafts industry, impact of competitors' locations, pricing, and products, related inventory risks due to shifts in customer demand, impact of economic conditions, the availability of acceptable locations for new stores, difficulties implementing information system technologies, supply constraints, results of financing efforts, effectiveness of advertising strategies, and other risks detailed in our Securities and Exchange Commission filings.

All expressions of "us," "we," "our," and all similar expressions are references to Michaels Stores, Inc. and its consolidated wholly-owned subsidiaries, unless otherwise expressly stated or the context otherwise requires.

Unless otherwise noted, discussions relating to Common Stock reflect the effects of the two-for-one common stock split effected in the form of a stock dividend to stockholders of record as of the close of business on November 12, 2001.

General

The following table sets forth certain of our unaudited operating data (dollar amounts in thousands):

	Three Months Ended						Nine Months Ended
	November 3, 2001			October 28, 2000			November 3, 2001			October 28, 2000
Michaels stores:
Retail stores open at end of period		694			621			694			621
Retail stores opened during the period		37			25			66			64
Retail stores closed during the period		—			—			—			2
Retail stores relocated during the period		9			8			16			17
Aaron Brothers stores:
Retail stores open at end of period		134			113			134			113
Retail stores opened during the period		6			9			15			18
Retail stores relocated during the period		3			2			3			3
Star Wholesale store:
Wholesale store open at end of period		1			1			1			1
Wholesale store acquired during the period		—			—			—			1
Other Operating Data:
EBITDA(1)	$	55,171		$	46,228		$	118,652		$	113,259
Adjusted EBITDA(2)		55,171			46,228			122,805			113,259
Working capital		559,340			460,075			559,340			460,075
Comparable store sales increase(3)		7	%		3	%		4	%		6	%

(Notes on following page.)

(Notes from table on preceding page.)

(1): EBITDA is calculated as income before income taxes, extraordinary loss, and cumulative effect of accounting change plus interest, depreciation, and amortization. EBITDA is presented because it is a widely accepted financial indicator of a company's ability to incur and service debt, but is not a financial measurement recognized by generally accepted accounting principles, and therefore, may not be comparable to similarly titled measures used by other entities. EBITDA should not be considered by an investor as an alternative to net income, as an indicator of our operating performance, or as an alternative to cash flow as a measure of liquidity.
(2): Adjusted EBITDA is calculated as income before income taxes, extraordinary loss, and cumulative effect of accounting change plus interest, depreciation, amortization, and unusual, non-recurring charges. The adjusted EBITDA for the first nine months of fiscal 2001 excludes costs of $1.0 million related to senior executive severance and litigation settlement charges of approximately $3.2 million.
(3): For purposes of calculating comparable store sales, a store is deemed to become comparable in its 14th full month of operation in order to eliminate grand opening sales distortions.

Results of Operations

The following table sets forth the percentage relationship to net sales of each line item of our unaudited Consolidated Statements of Income. This table should be read in conjunction with the following discussion and with our Consolidated Financial Statements and related notes, included herein.

	Three Months Ended				Six Months Ended
	November 3, 2001		October 28, 2000		November 3, 2001		October 28, 2000
Net sales	100.0	%	100.0	%	100.0	%	100.0	%
Cost of sales and occupancy expense	64.7		65.5		65.9		66.3

Gross profit	35.3		34.5		34.1		33.7
Selling, general, and administrative expense	28.2		28.2		29.1		28.8
Store pre-opening costs	0.9		0.7		0.6		0.6
Litigation settlement	—		—		0.2		—

Operating income	6.2		5.6		4.2		4.3
Interest expense	1.0		0.7		1.0		1.0
Other (income) and expense, net	(0.0	)	(0.1	)	(0.0	)	(0.2	)

Income before income taxes, extraordinary loss, and cumulative effect of accounting change	5.2		5.0		3.2		3.5
Provision for income taxes	2.1		2.0		1.3		1.4

Income before extraordinary loss and cumulative effect of accounting change	3.1		3.0		1.9		2.1
Extraordinary loss for early extinguishment of debt, net of income tax	0.9		—		0.3		—
Cumulative effect of accounting change for revenue recognition, net of income tax	—		—		—		0.1

Net income	2.2	%	3.0	%	1.6	%	2.0	%

Quarter Ended November 3, 2001 Compared to the Quarter Ended October 28, 2000

Net sales for the third quarter of fiscal 2001 increased $86.2 million, or 16%, over the third quarter of fiscal 2000. At the end of the third quarter of fiscal 2001, we operated 694 Michaels and 134

Aaron Brothers retail stores. The results for the third quarter of fiscal 2001 included sales from 74 Michaels and 22 Aaron Brothers retail stores that were opened during the 12-month period ended November 3, 2001, more than offsetting lost sales from one Michaels and one Aaron Brothers store closures. Sales at the new stores (net of closures) during the third quarter of fiscal 2001 accounted for $52.6 million of the increase in net sales. Comparable store sales increased 7% in the third quarter of fiscal 2001 compared to the third quarter of fiscal 2000, which contributed $37.8 million to the net sales increase. The improvement in comparable store sales was due to a strong performance in our core categories of Fall, Halloween, and Christmas seasonal products as well as general crafts, ribbon, party, kids crafts, framing, and needlework. Going forward, we expect to achieve comparable store sales increases for the remainder of fiscal 2001, taken as a whole. Our ability to continue to generate comparable store sales increases is dependent, in part, on our ability to continue to maintain store in-stock positions on the top-selling items, to properly allocate seasonal merchandise to the stores based upon anticipated sales trends utilizing point-of-sale rate of sale information, and the success of our sales promotion efforts. The above increases in net sales were partially offset by the net deferral of revenue related to the sale of custom frames, which accounted for a $4.2 million decrease in net sales over the third quarter of fiscal 2000. This decrease was due to the fluctuation in custom frame sales volume during the last two weeks of each fiscal quarter as a result of, but not limited to, seasonal trends and the timing of custom framing promotional activities.

Cost of sales and occupancy expense, as a percentage of net sales, for the third quarter of fiscal 2001 was 64.7%, a decrease of 0.8% compared to the third quarter of fiscal 2000. This decrease was primarily attributable to improved merchandise margins compared to the third quarter of fiscal 2000.

Selling, general, and administrative expense remained relatively constant as a percentage of net sales for the third quarter of fiscal 2000 compared to the third quarter of fiscal 2001. Advertising costs in the third quarter of fiscal 2001 were higher as a percentage of net sales compared with the third quarter of fiscal 2000, offset by the leveraging of store payroll and related expenses on increased sales.

Store pre-opening costs, as a percentage of net sales, increased by 0.2% in the third quarter of fiscal 2001 compared to the third quarter of fiscal 2000. In the third quarter of fiscal 2001, we opened or relocated 46 Michaels and nine Aaron Brothers stores compared to 33 Michaels and 11 Aaron Brothers stores opened or relocated in the third quarter of fiscal 2000.

Operating income increased by 0.6%, as a percentage of net sales, to $37.9 million in the third quarter of fiscal 2001 compared to $29.3 million for the third quarter of fiscal 2000, on a 16% increase in net sales during the same period.

Interest expense (net of interest income), as a percentage of net sales, increased by 0.4% in the third quarter of fiscal 2001 compared to the third quarter of fiscal 2000. This increase resulted principally from an increased debt level related to the 9¹/4% Senior Notes due July 1, 2009, which were issued in July 2001, and interest on higher outstanding borrowings against the Credit Agreement during the third quarter of fiscal 2001.

The effective tax rate was 41% for the third quarter of fiscal 2001 and 40% for the third quarter of fiscal 2000.

On August 6, 2001, we redeemed our 10⁷/8% Senior Notes due June 15, 2006 in aggregate principal amount of $125 million. As a result, we recorded an extraordinary loss from the early extinguishment of debt in the amount of $5.3 million, net of income tax of $3.7 million, in the third quarter of fiscal 2001.

Net income for the third quarter of fiscal 2001 was $13.5 million, or $0.20 per diluted share, compared to $15.7 million, or $0.22 per diluted share, for the third quarter of fiscal 2000. Excluding the extraordinary loss from the early extinguishment of debt, net income for the third quarter of fiscal 2001 was $18.8 million, or $0.28 per diluted share.

First Nine Months Ended November 3, 2001 Compared to the First Nine Months Ended October 28, 2000

Net sales for the first nine months of fiscal 2001 increased $188.8 million, or 13%, over the first nine months of fiscal 2000. Sales at the new stores (net of closures) during the first nine months of fiscal 2001 accounted for $138.1 million of the increase in net sales. Comparable store sales increased 4% in the first nine months of fiscal 2001 compared to the first nine months of fiscal 2000, which contributed $55.6 million to the net sales increase. The improvement in comparable store sales was due to a strong performance in our core categories of Christmas and seasonal products as well as ribbon, general crafts, framing, and décor accents. The above increases in net sales were partially offset by the net deferral of revenue related to the sale of custom frames, which accounted for a $4.9 million decrease in net sales over the first nine months of fiscal 2000. This decrease was due to the fluctuation in custom frame sales volume during the last two weeks of each fiscal quarter as a result of, but not limited to, seasonal trends and the timing of custom framing promotional activities.

Cost of sales and occupancy expense, as a percentage of net sales, for the first nine months of fiscal 2001 was 65.9%, a decrease of 0.4% compared to the first nine months of fiscal 2000. Improvements in merchandise margins for the first nine months of fiscal 2001 compared with the first nine months of fiscal 2000 were partially offset by higher occupancy costs associated with new and relocated stores and higher utilities costs compared to the first nine months of fiscal 2000.

Selling, general, and administrative expense, as a percentage of net sales, increased by 0.3% from the first nine months of fiscal 2000 to the first nine months of fiscal 2001. This increase resulted principally from increased store payroll and related expenses, as a percentage of net sales, and costs of $1.0 million recorded in the first nine months of fiscal 2001 related to senior executive severance.

Store pre-opening costs remained relatively constant as a percentage of net sales in the first nine months of fiscal 2001 compared to the first nine months of fiscal 2000. In the first nine months of fiscal 2001, we opened or relocated 82 Michaels and 18 Aaron Brothers stores compared to 81 Michaels and 21 Aaron Brothers stores opened or relocated in the first nine months of fiscal 2000.

On June 6, 2001, we negotiated a tentative settlement of the purported class action with one of our former assistant managers, Taiyeb Raniwala. As a result, we recorded a litigation settlement charge of $3.2 million in the first quarter of fiscal 2001, covering all claims, attorneys' fees, and estimated payroll taxes. The settlement, in exchange for a full release of claims, received final approval from the court on November 20, 2001.

Operating income decreased by 0.1%, as a percentage of net sales, to $67.6 million in the first nine months of fiscal 2001 compared to $62.3 million for the first nine months of fiscal 2000. Operating income for the first nine months of fiscal 2001 was negatively impacted by one-time severance costs of $1.0 million and the litigation settlement charge of $3.2 million. Excluding the effects of the one-time severance charge and the litigation settlement charge, operating income increased 15% from $62.3 million in the first nine months of fiscal 2000 to $71.7 million in the first nine months of fiscal 2001, on a 13% increase in net sales during the same period.

Interest expense (net of interest income), as a percentage of net sales, increased by 0.1% from the first nine months of fiscal 2000 to the first nine months of fiscal 2001. This increase resulted principally from non-recurring incremental interest expense of $1.5 million incurred while the Senior Notes due 2009 and the Senior Notes due 2006 were both outstanding for a 30-day period. In addition, interest expense increased due to interest on higher outstanding borrowings against the Credit Agreement and lower interest income on lower average cash balances during the first nine months of fiscal 2001. These increases in net interest expense were partially offset by interest savings of $2.5 million related to the conversion and redemption of our convertible subordinated notes in June 2000, as discussed under "Liquidity and Capital Resources" below.

The effective tax rate was 41% for the first nine months of fiscal 2001 and 40% for the first nine months of fiscal 2000.

We changed our accounting policy with respect to revenue recognition related to the sale of custom frames effective retroactively as of the beginning of fiscal 2000. As a result, we recorded a non-cash charge of $1.9 million, net of income tax, in the first quarter of fiscal 2000 for the cumulative effect of the change on fiscal years prior to fiscal 2000.

Net income for the first nine months of fiscal 2001 was $25.5 million, or $0.39 per diluted share, compared to $28.5 million, or $0.41 per diluted share, for the first nine months of fiscal 2000. Excluding the one-time severance charges, litigation settlement, incremental interest, and extraordinary loss from the early extinguishment of debt, net income for the first nine months of fiscal 2001 was $34.1 million, or $0.52 per diluted share. For the first nine months of fiscal 2000, net income was $30.3 million, or $0.44 per diluted share, excluding the cumulative effect of the change in accounting.

Liquidity and Capital Resources

Changes in Cash and Equivalents

Cash flow used in operating activities during the first nine months of fiscal 2001 was $56.3 million, compared to cash provided by operating activities of $21.2 million during the first nine months of fiscal 2000. The increase in cash flow used in operating activities was principally the result of higher investments in merchandise inventories, net of accounts payable, in the amount of $185.0 million in the first nine months of fiscal 2001 compared with $84.6 million in the first nine months of fiscal 2000. The increased inventories resulted from purchases made in the first nine months of fiscal 2001 to improve our in-stock position and receiving core merchandise for the holiday season earlier in the year than in the prior fiscal year. Inventories per Michaels store of $1.243 million at November 3, 2001 increased 6% from $1.178 million at October 28, 2000. In connection with our continuing supply chain management initiatives, our plans are to continue to increase the number of items carried in our distribution centers in an effort to reduce the number of direct vendor shipments to our stores, thereby reducing the safety stock required at the store level.

Cash flow used in investing activities in the first nine months of fiscal 2001 was $58.7 million compared to $70.3 million in the first nine months of fiscal 2000. Cash flow from investing activities in the first nine months of fiscal 2001 was due in part to capital expenditures related to the opening of 66 Michaels and 15 Aaron Brothers stores and the relocation of 16 Michaels and three Aaron Brothers stores in the first nine months of fiscal 2001. In addition, we received proceeds in the amount of $26.9 million from the completion of a sale/leaseback transaction in July 2001 for two distribution center properties which we purchased in December 2000. The gain from the sale/leaseback transaction was deferred and will be amortized over the life of the sale/leaseback contract, which was accounted for as an operating lease.

The following table sets forth capital expenditures for the first nine months of fiscal 2001 and the first nine months of fiscal 2000, net of the sale/leaseback transaction discussed above (unaudited):

	Nine Months Ended
	November 3, 2001			October 28, 2000
	(in thousands)
New and relocated stores and stores not yet opened	$	46,645		$	45,785
Existing stores		18,226			6,748
Distribution system expansion		8,461			1,676
Information systems		7,541			11,779
Corporate and other		4,788			2,197

		85,661			68,185
Proceeds from sale/leaseback transaction		(26,886	)		—

	$	58,775		$	68,185

The increase in capital expenditures for existing stores was primarily due to fixture costs for planogram resets at the stores during the second and third quarters of fiscal 2001. We anticipate capital expenditures for fiscal 2001 to total approximately $125.0 million, which amount is net of proceeds of $26.9 million from the June 2001 sale/leaseback transaction.

Cash flow provided by financing activities in the first nine months of fiscal 2001 was $132.8 million compared to cash used in financing activities of $4.3 million in the first nine months of fiscal 2000. The increase in cash provided by financing activities was primarily due to proceeds of $194.5 million from the issuance of the Senior Notes due 2009, increased borrowings under the Credit Agreement, and a decrease in the acquisition of treasury stock. These cash flow increases were partially offset by the early redemption of the Senior Notes due 2006 and a decrease in the proceeds from the exercise of stock options. Proceeds from the exercise of stock options were $25.0 million for approximately 944,000 shares of our Common Stock, unadjusted for the stock split, in the first nine months of fiscal 2001 and $89.0 million for approximately 4.4 million shares of Common Stock, unadjusted for the stock split, in the first nine months of fiscal 2000.

Bank Credit Facility

fee from 0.20% to 0.35% per annum on the unused portion of the revolving line of credit as well as letter of credit fees that vary depending on the fixed charge coverage ratio.

We are in compliance with all terms and conditions of the Credit Agreement. Borrowings outstanding under the Credit Agreement were $45.0 million as of November 3, 2001. Borrowings available under the Credit Agreement are reduced by the aggregate amount of letters of credit outstanding under the Credit Agreement ($8.7 million as of November 3, 2001). Borrowings under the Credit Agreement and our previous $100 million bank credit facility in the first nine months of fiscal 2001 were outstanding for 230 days, with average outstanding borrowings of $11.1 million and a weighted average interest rate of 5.2%.

General

On October 31, 2001, our Board of Directors declared a two-for-one common stock split effected in the form of a stock dividend to stockholders of record as of the close of business on November 12, 2001, payable on November 26, 2001. Stock options and all other agreements payable in our Common Stock have been adjusted to reflect the split. An amount equal to the par value of shares issued in the split has been transferred from paid-in capital to the common stock account.

In July 2001, we issued $200 million in principal amount of the Senior Notes due 2009 in a private placement under Securities and Exchange Commission Rule 144A to a limited number of qualified institutional buyers. The Senior Notes due 2009 are unsecured and interest thereon is payable semi-annually on each January 1 and July 1, beginning on January 1, 2002. In August 2001, as required by the contract with the purchasers of the Senior Notes due 2009, we made an offer to exchange all of the privately placed Senior Notes due 2009 for an equal principal amount of Senior Notes due 2009, which are registered with the Securities and Exchange Commission and have substantially identical terms. As of October 1, 2001, all of the privately placed Senior Notes due 2009 were exchanged for registered Senior Notes due 2009.

On August 6, 2001, we used a portion of the proceeds of the Senior Notes due 2009 offering described above to redeem our Senior Notes due 2006, of which $125 million aggregate principal amount was then outstanding. The redemption price was $1,054.38 per $1,000 principal amount of the Senior Notes due 2006, plus accrued interest to August 6, 2001. We incurred an extraordinary loss from the early extinguishment of debt in the amount of $5.3 million, net of income tax, in the third quarter of fiscal 2001.

On December 14, 2000, our Board of Directors authorized the repurchase of 2.0 million shares of outstanding Common Stock. In the fourth quarter of fiscal 2000, we repurchased and retired 1,050,000 shares under this plan at an aggregate price of $17.2 million (average cost of $16.34 per share). No additional shares of Common Stock were repurchased in the first nine months of fiscal 2001. We may continue our stock repurchases provided that market prices of our Common Stock make it advantageous. Securities and Exchange Commission regulations restrict us from making repurchases during specified time periods. Finally, under the agreements governing our outstanding indebtedness, we can only repurchase shares of our Common Stock if we maintain or comply with specified financial ratios. As a result, we can give no assurance that we will repurchase any additional shares under the December 2000 stock repurchase plan.

On June 9, 2000, we called for the redemption on June 29, 2000 of our convertible Subordinated Notes due January 15, 2003. The aggregate principal amount of the Subordinated Notes outstanding was $96,935,000. The holders had the option to convert their Subordinated Notes into shares of Common Stock by June 22, 2000 at a price of $38.00 per share, unadjusted for the stock split. Alternatively, holders could have their Subordinated Notes redeemed on June 29, 2000 at a total redemption price of $1,051.25 per $1,000 principal amount of Subordinated Notes, which included a premium for early redemption and accrued interest. As a result, the majority of the Subordinated

Notes was surrendered by the June 22, 2000 conversion date and was converted into 2,445,565 shares of Common Stock, unadjusted for the stock split. The remaining Subordinated Notes were redeemed at a total redemption price of $4.2 million on June 29, 2000. The loss from the redemption was not material.

We believe that our available cash, funds generated by operating activities, funds available under the Credit Agreement, net proceeds from the Senior Notes due 2009, and proceeds from the exercise of stock options will be sufficient to fund anticipated capital expenditures, working capital requirements, and any stock repurchases for the foreseeable future.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

We have market risk exposure arising from changes in interest rates. In July 2001, we issued $200 million of the Senior Notes due 2009 with a fixed interest rate of 9¹/4%. Using a portion of the proceeds from the Senior Notes due 2009, in August 2001, we redeemed the Senior Notes due 2006. Generally, the fair market value of our fixed interest rate long-term debt will increase as interest rates fall and decrease as interest rates rise. Our market risk is described in more detail in our Annual Report on Form 10-K for the fiscal year ended February 3, 2001.

MICHAELS STORES, INC.

Part II—OTHER INFORMATION

Item 1. Legal Proceedings.

Raniwala Proceeding

On May 2, 2000, Taiyeb Raniwala, a former assistant manager of a Michaels store, filed a purported class action complaint against us, on behalf of Michaels stores' former and current assistant store managers. The Raniwala Complaint was filed in the Alameda County Superior Court, California and alleges that we violated various California laws by erroneously treating Michaels stores' assistant store managers as "exempt" employees who are not entitled to overtime compensation. Based on these allegations, the Raniwala Complaint asserts we: (1) violated various California Wage Orders; (2) violated Section 17200 of the California Business and Professions Code; and (3) engaged in conversion. The Raniwala Complaint seeks back wages, interest, penalties, and attorneys' fees.

On July 20, 2000, Raniwala filed an amended complaint to correct certain deficiencies in the original Raniwala Complaint. On September 25, 2000, we filed our answer to the Amended Raniwala Complaint.

Collins Proceeding

On November 28, 2001, the court established January 31, 2002 as the deadline, by which time the plaintiff must either file a motion for class certification or file for preliminary approval of any settlement which may be agreed to by the parties. A trial date has not yet been scheduled.

General

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

Our 2001 Annual Meeting of Stockholders was held on October 5, 2001. The following items of business, as proposed in the Proxy Statement dated August 31, 2001, were presented to the stockholders. The number of votes or abstentions below have not been adjusted to reflect the stock split.

Election of Directors

The two director nominees, information with respect to which was set forth in the Proxy Statement under the caption titled "Proposal No. 1: Election of Two Directors," were elected. The vote with respect to the election of these directors was as follows:

Name		Total Vote for Each Director		Total Vote Withheld From Each Director		Abstentions		Broker Non-Votes
Charles J. Wyly, Jr.		30,003,078		677,936		—		—
Richard E. Hanlon		29,003,283		1,677,731		—		—

Richard C. Marcus, Elizabeth A. VanStory, and Sam Wyly will continue to serve as directors.

Amendment to the Restated Certificate of Incorporation

The amendment to the Restated Certificate of Incorporation eliminating the division of our Board of Directors into three classes, as described in more detail in the Proxy Statement under the caption titled "Proposal No. 2: Adoption of an Amendment to the Restated Certificate of Incorporation," was adopted. The vote on such proposal was as follows:

For		28,336,180
Against		188,229
Abstentions		26,051

		28,550,460

Stock Option Plan

The Michaels Stores, Inc. 2001 General Stock Option Plan, as described in more detail in the Proxy Statement under the caption titled "Proposal No. 3: Approval of the Michaels Stores, Inc. 2001 General Stock Option Plan," was approved. The vote on such proposal was as follows:

For		20,380,169
Against		10,257,340
Abstentions		43,505

		30,681,014

Item 6. Exhibits and Reports on Form 8-K.

(a)	Exhibits:
	4.1	Restated Certificate of Incorporation of Michaels Stores, Inc. (filed herewith).
	4.2	Certificate of Amendment to Restated Certificate of Incorporation of Michaels Stores, Inc. (filed herewith).
	4.3	Certificate of Amendment to Restated Certificate of Incorporation of Michaels Stores, Inc., as amended (filed herewith).
	4.4	Amended and Restated Bylaws of Michaels Stores, Inc. (previously filed as Exhibit 4.4 to Michaels Stores, Inc. Registration Statement on Form S-8, Commission File No. 33-71054, filed October 5, 2001, and incorporated herein by reference).
(b)	Reports on Form 8-K:
	1.	Report on Form 8-K filed with the Securities and Exchange Commission on September 20, 2001, reporting Items 5 and 7 and filing Michaels Stores, Inc. Press Release dated September 20, 2001.
	2.	Report on Form 8-K filed with the Securities and Exchange Commission on October 31, 2001, reporting Items 5 and 7 and filing Michaels Stores, Inc. Press Release dated October 31, 2001.

MICHAELS STORES, INC.
SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		MICHAELS STORES, INC.
		By:		/s/ BRYAN M. DECORDOVA Bryan M. DeCordova Executive Vice President and Chief Financial Officer (Principal Financial Officer)

Dated: December 18, 2001

INDEX TO EXHIBITS

Exhibits
4.1		Restated Certificate of Incorporation of Michaels Stores, Inc. (filed herewith).
4.2		Certificate of Amendment to Restated Certificate of Incorporation of Michaels Stores, Inc. (filed herewith).
4.3		Certificate of Amendment to Restated Certificate of Incorporation of Michaels Stores, Inc., as amended (filed herewith).
4.4		Amended and Restated Bylaws of Michaels Stores, Inc. (previously filed as Exhibit 4.4 to Michaels Stores, Inc. Registration Statement on Form S-8, Commission File No. 33-71054, filed October 5, 2001, and incorporated herein by reference).

EX-4.1 3 a2066050zex-4_1.htm EXHIBIT 4.1 Prepared by MERRILL CORPORATION
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Exhibit 4.1

RESTATED CERTIFICATE OF INCORPORATION
OF
MICHAELS STORES, INC.

Under Sections 242 and 245
of the
Delaware General Corporation Law

Michaels Stores, Inc., a corporation organized and existing under the laws of the State of Delaware (the "Corporation"), hereby certifies as follows:

First: The name of the Corporation is Michaels Stores, Inc.

Second: The Corporation was originally incorporated under the name Michaels Arts & Crafts, Inc. and the original Certificate of Incorporation of the Corporation was filed with the Secretary of State, Dover, Delaware, on the 18th day of November, 1983.

Third: Pursuant to Sections 242 and 245 of the General Corporation Law of the State of Delaware, this Restated Certificate of Incorporation restates and integrates and further amends the provisions of the Certificate of Incorporation of the Corporation. The amendment to the Certificate of Incorporation effected by this certificate is as follows:

To amend Article Four to increase the number of shares of common stock issuable to Fifty Million Shares.

Fourth: The amendment and the restatement of the Certificate of Incorporation have been approved by the Corporation's Board of Directors and have been duly adopted in accordance with the provisions of the General Corporation Law of the State of Delaware by an affirmative vote of the holders of a majority of all outstanding shares entitled to vote at a meeting of stockholders.

Fifth: The text of the Restated Certificate of Incorporation of Michaels Stores, Inc., as amended, is hereby restated and further amended to read in its entirety as follows:

RESTATED CERTIFICATE OF INCORPORATION
OF
MICHAELS STORES, INC.

ARTICLE ONE

The name of the Corporation is Michaels Stores, Inc.

ARTICLE TWO

The location of the Corporation's registered office is Corporation Trust Center, 1209 Orange Street in the City of Wilmington, County of New Castle, Delaware 19801. The name of the registered agent at such address is The Corporation Trust Company.

ARTICLE THREE

The purpose for which the Corporation is organized is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware.

ARTICLE FOUR

The aggregate number of shares of all classes of stock which the Corporation shall have the authority to issue is Fifty-Two Million (52,000,000), consisting of Fifty Million (50,000,000) shares of

common stock (the "Common Stock") having a par value of $.10 per share, and Two Million (2,000,000) shares of preferred stock (the "Preferred Stock"), having a par value of $.10 per share.

The Preferred Stock may be issued in one or more series as may be determined from time to time by the Board of Directors. Subject to the provisions of this Article Four, the Board of Directors is expressly authorized to fix the relative preferences, priorities and restrictions of the Preferred Stock or any series thereof by resolution and by filing a Certificate thereof as provided in the General Corporation Law of the State of Delaware or succeeding legislation. Without limiting the generality of the foregoing, the Board of Directors is expressly authorized, in its absolute discretion, to confer upon the holders of any series of the Preferred Stock the right, voting separately as a class, to approve or disapprove any of the actions referred to in Article Eight of this Certificate of Incorporation by the same percentage of such series of Preferred Stock as said Article requires for action in the case of the holders of the Common Stock, in which event the provisions of said Article shall apply, with such changes as the context may require, separately to such series of Preferred Stock.

Subject to the provisions of law and the preferences of the Preferred Stock, dividends may be paid on the Common Stock at such time and in such amounts as the Board of Directors may deem advisable; and each holder of Common Stock will have one vote for each share of Common Stock held by him on all matters voted upon by the stockholders.

No approval by class or series vote or otherwise of the holders of the Preferred Stock or any series thereof will be required for the issue by the Board of Directors of any other series of Preferred Stock, whether or not in any respect senior to or on a parity with any such outstanding series, provided, however, that the Board of Directors may condition the issue of such additional series of Preferred Stock on the approval, by such proportion as the Board of Directors may specify, of any such outstanding series.

No holder of any of the shares of any class or series of stock, or of options, warrants or other rights to purchase shares of any class or series of stock or other securities of the Corporation, will have any preemptive or preferential right to purchase or subscribe for any unissued stock of any class or series or any additional shares of any class or series to be issued by reason of any increase of the authorized capital stock of the Corporation of any class or series, nor notes, bonds, certificates of indebtedness, debentures or other securities convertible into or exchangeable for stock of the Corporation of any class or series, or carrying any right to purchase stock of any class or series of stock or securities convertible into or exchangeable for stock, or carrying any right to purchase stock. Shares of stock of any class or series, or any notes, bonds, debentures and other securities convertible into or carrying warrants, rights or options to purchase shares of stock of any class or series may be issued and disposed of pursuant to resolution of the Board of Directors to such persons, firms, corporations or associations, whether such holders or otherwise, and upon such terms as may be deemed by the Board of Directors in the exercise of its sole discretion.

Shares of Common Stock and, subject to the provisions of this Article, shares of any series of Preferred Stock, may be issued from time to time as the Board of Directors determines and on such terms and for such consideration as may be fixed by the Board of Directors.

The authorized amount of shares of Common Stock and of Preferred Stock may, without a class or series vote, be increased or decreased from time to time by the affirmative vote of the holders of a majority of the stock of the Corporation entitled to vote thereon.

ARTICLE FIVE

The stockholders of the Corporation shall not have cumulative voting rights for the election of directors or for any other purpose.

ARTICLE SIX

The Board of Directors of the Corporation may make, alter or repeal the Bylaws of the Corporation from time to time.

ARTICLE SEVEN

The property, business and affairs of the Corporation will be managed and controlled by the Board of Directors.

The number of directors (exclusive of any directors elected by class vote of any series of Preferred Stock pursuant to the terms thereof) will be fixed from time to time by a vote of a majority of the entire Board of Directors. The phrase "entire Board of Directors", when used in this Certificate of Incorporation refers to the total number of directors, determined as if there were no vacancies.

The directors shall be divided into three classes, each consisting of one-third of such directors as nearly as may be. At each annual meeting of stockholders, successors to the class of directors whose term expires that year shall be elected for a three-year term. If the number of such directors is changed, any increase or decrease in such directors shall be apportioned among the classes so as to maintain the classes as nearly equal in number as possible, and any additional director to any class shall hold office for a term which shall coincide with the terms of such class.

Any vacancies in the Board of Directors for any reason, and any newly created directorships resulting from any increase in the number of directors, will be filled by the Board of Directors, acting by a majority of the directors then in office, although less than a quorum, and any directors so chosen will hold office until the next election of the class for which such directors will have been chosen and until their successors are duly elected and qualified. No decrease in the number of directors will shorten the term of any incumbent director. Notwithstanding the foregoing, and except as otherwise required by law, whenever the holders of any one or more series of Preferred Stock have the right, voting separately as a class, to elect one or more directors of the Corporation, the terms of the director or directors elected by such holders will be as provided in the terms of such series. Subject to the foregoing, at each annual meeting of stockholders, the successors to the class of directors whose term then expires will be elected to hold office for a term expiring at the third succeeding annual meeting.

Nominations for the election of directors may be made by the Board of Directors or by any stockholder entitled to vote for the election of directors. Nominations by stockholders must be made by notice in writing, delivered or mailed by first class United States mail, postage prepaid, to the Secretary of the Corporation not less than 14 days nor more than 50 days prior to any meeting of the stockholders called for the election of directors; provided, however, that if less than 21 days' notice of the meeting is given to stockholders, such written notice may be delivered or mailed, as prescribed, to the Secretary of the Corporation not later than the close of the seventh day following the day on which notice of the meeting was mailed to stockholders.

Each notice required by the foregoing paragraph will set forth (i) the name, age, business address and, if known, residence address of each such nominee proposed in such notice, (ii) the principal occupation or employment of each such nominee, and (iii) the number of shares of stock of the Corporation as to which voting power is held or shared by each such nominee, the stockholder(s) giving such notice, and any person, firm, or entity acting in concert with any of them for the purpose of electing such nominee.

The Chairman of the meeting may, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the foregoing procedure, and, if he should so determine, he will so declare to the meeting and the defective nomination will be disregarded.

Except as expressly required by any provision of the General Corporation Law of the State of Delaware, by a provision of any series of Preferred Stock fixed by the Board of Directors or by a provision of the Certificate of Incorporation of the Corporation adopted by a vote of the holders of stock sufficient to amend this paragraph, no act or determination of the Board of Directors will require an approval or other authorization whatsoever by the stockholders or any class of them.

A majority of the entire Board of Directors or of any committee thereof constitutes a quorum for the transaction of business by the Board of Directors or such committee, as the case may be. The vote of a majority of the directors or members of any committee thereof present at a meeting at which a quorum is present is the act of the Board of Directors or such committee unless a greater vote is expressly required by any provisions of the General Corporation Law of the State of Delaware, by a provision of any series of Preferred Stock fixed by the Board of Directors, or by a provision of the Certificate of Incorporation of the Corporation adopted by a vote of the holders of stock sufficient to amend this paragraph. The Board of Directors and any committee thereof may hold meetings, and have an office or offices within or without the State of Delaware, as the Board or such committee may determine from time to time.

Any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting if all members of the Board or committee, as the case may be, consent thereto in writing, and the writings are filed with the minutes of proceedings of the Board or committee.

Any director may be removed either for or without cause, at any special meeting of stockholders by the affirmative vote of not less than two-thirds (²/3) of all of the votes which the holders of the issued and outstanding Common Stock of the Corporation are entitled to vote at an election of directors, unless at the time any such removal is submitted to a vote of the stockholders of the Corporation entitled to vote there is no Person (as defined in Article Eight) beneficially owning or controlling five percent (5%) or more of the Common Stock of the Corporation in which event such removal may be approved by the vote of not less than a majority of all the votes which the holders of the issued and outstanding Common Stock of the Corporation are entitled to vote at an election of directors.

ARTICLE EIGHT

In the event that the holders of the Common Stock of the Corporation are entitled to vote on (i) a merger or consolidation with any Person (as hereinafter defined) or on a proposal that the Corporation sell, lease or exchange substantially all of its assets and property to or with any Person or that any Person sell, lease or exchange substantially all of its assets and property to or with the Corporation, and such Person beneficially owns or controls, directly or indirectly, Common Stock representing five percent (5%) or more of the voting power of the Corporation at the record date for determining stockholders entitled to vote or (ii) any reclassification of securities, recapitalization or other transaction (except redemptions permitted by the terms of the security redeemed or repurchases of the securities for cancellation or the Corporation's treasury) designed to decrease the number of holders of the Corporation's Common Stock remaining after any Person has acquired beneficial ownership of five percent (5%) or more of the Common Stock of the Corporation, the favorable vote of not less than two-thirds (²/3) of all of the votes which the holders of the issued and outstanding Common Stock of the Corporation are entitled to cast thereon shall be required for the approval of any such action; provided that the foregoing shall not apply to any such merger, consolidation or such sale, lease or exchange of assets and property or such reclassification or recapitalization which was approved by the Board of Directors of the Corporation prior to the acquisition of beneficial ownership or control of Common Stock representing at least five percent (5%) of the voting power of the Corporation by any such Person.

For the purpose hereof, a "Person" shall mean any corporation, partnership, association, trust (other than any trust holding stock of the employees of the Corporation pursuant to any stock purchase, ownership or employee benefit plan of the Corporation), business entity, estate or individual or any Affiliate (as hereinafter defined) of any of the foregoing, and the term "Person" shall include a "group" of persons (a "Group"), as that term is defined for purposes of Section 13 of the Securities Exchange Act of 1934, as amended, and the Rules and Regulations promulgated by the Securities and Exchange Commission thereunder, and any member of such a Group. An "Affiliate" shall mean any corporation, partnership, association, trust, business entity, estate or individual who, directly or indirectly, through one or more intermediaries, controls, or is controlled by, or is under common control with, a Person. "Control" shall mean the possession, directly or indirectly, of power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract, or otherwise. "Beneficial ownership" shall be defined for purposes of Section 13 of the Securities Exchange Act of 1934, as amended, and the Rules and Regulations promulgated by the Securities and Exchange Commission thereunder.

A majority of the Board of Directors of the Corporation shall have the authority to determine for the purposes of this Article Eight on the basis of information known to them (i) whether a Person beneficially owns more than any specified percentage of the Common Stock, (ii) whether a Person is an Affiliate of another and (iii) the existence and composition of a Group.

This Article Eight may not be amended, nor may it be repealed in whole or in part, until authorized by a favorable vote of not less than two-thirds (²/3) of all the votes entitled to be cast thereon by the holders of the issued and outstanding Common Stock of the Corporation entitled to vote unless at the time any such proposed amendment or repeal is submitted to a vote of the stockholders of the Corporation entitled to vote there is no Person beneficially owning or controlling five percent (5%) or more of the Common Stock of the Corporation, in which event this Article Eight may be so amended or repealed by the favorable vote of not less than such number of votes as shall otherwise be required by law at such time to effect such amendment or repeal.

ARTICLE NINE

(a) Each person who was or is made a party or is threatened to be made a party to or is involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter a 'proceeding'), by reason of the fact that he or she, or a person of whom he or she is the legal representative, is or was a director or officer, of the Corporation or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, whether the basis of such proceeding is alleged action in an official capacity as a director, officer, employee or agent or in any other capacity while serving as a director, officer, employee or agent, shall be indemnified and held harmless by the Corporation to the fullest extent authorized by the General Corporation Law of the State of Delaware, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than said law permitted the Corporation to provide prior to such amendment), against all expense, liability and loss (including without limitation attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts paid or to be paid in settlement) reasonably incurred or suffered by such person in connection therewith and such indemnification shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of his or her heirs, executors and administrators: provided, that, except as provided in paragraph (b) hereof, the Corporation shall indemnify any such person seeking indemnification in connection with a proceeding (or part thereof) initiated by such person only if such proceeding (or part thereof) was authorized by the Board of Directors of the Corporation. The right to indemnification conferred in this Article shall be a contract right and shall include the right to be paid by the

Corporation the expenses incurred in defending any such proceeding in advance of its final disposition; provided, that, if the General Corporation Law of the State of Delaware requires, the payment of such expenses incurred by a director or officer in his or her capacity as a director or officer (and not in any other capacity in which service was or is rendered by such person while a director or officer, including, without limitation, service to an employee benefit plan) in advance of the final disposition of a proceeding shall be made only upon delivery to the Corporation of an undertaking, by or on behalf of such director or officer, to repay all amounts so advanced if it shall ultimately be determined that such director or officer is not entitled to be indemnified under this Article Nine or otherwise. The Corporation may, by action of its Board of Directors, provide indemnification to employees and agents of the Corporation with the same scope and effect as the foregoing indemnification of directors and officers.

(b) If a claim under paragraph (a) of this Article Nine is not paid in full by the Corporation within thirty (30) days after a written claim has been received by the Corporation, the claimant may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim and, if successful in whole or in part, the claimant shall be entitled to be paid also the expense of prosecuting such claim. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in defending any proceeding in advance of its final disposition where the required undertaking, if any is required, has been tendered to the Corporation) that the claimant has not met the standards of conduct which make it permissible under the General Corporation Law of the State of Delaware for the Corporation to indemnify the claimant for the amount claimed, but the burden of proving such defense shall be on the Corporation. Neither the failure of the Corporation (including its Board of Directors, independent legal counsel, or its stockholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he or she has met the applicable standard of conduct set forth in the General Corporation Law of the State of Delaware, nor an actual determination by the Corporation (including its Board of Directors, independent legal counsel, or its stockholders) that the claimant has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that the claimant has not met the applicable standard of conduct.

(c) The right to indemnification and the payment of expenses incurred in defending a proceeding in advance of its final disposition conferred in this Article shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, provision of the Certificate of Incorporation, bylaw, agreement, vote of stockholders or disinterested directors or otherwise.

(d) The Corporation may maintain insurance, at its expense, to protect itself and any director, officer, employee or agent of the Corporation or another corporation, partnership, joint venture, trust or other enterprise against any such expense, liability or loss, whether or not the Corporation would have the power to indemnify such person against such expense, liability or loss under the General Corporation Law of the State of Delaware.

ARTICLE TEN

To the fullest extent permitted by the General Corporation Law of the State of Delaware as the same exists or may hereafter be amended, a director of the Corporation shall not be liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director.

In Witness Whereof, the Corporation has caused this Restated Certificate of Incorporation to be signed and attested by its duly authorized officers, this 24th day of July, 1992.

	MICHAELS STORES, INC.
	By:	/s/ JACK E. BUSH Jack E. Bush President
Attest:
/s/ MARK V. BEASLEY Mark V. Beasley Secretary

State of Texas		§
		§
County of Dallas		§

Be it remembered that on this 24th day of July, 1992, personally came before me, Leilani Jackson, notary public in and for the State of Texas, Jack E. Bush and Mark V. Beasley, parties to the foregoing certificate, known to me personally to be such, and duly acknowledged such certificate to be their act and deed, and that the facts therein stated are true.

Given under my hand and seal of office the day and year aforesaid.

		/s/ LEILANI JACKSON
My commission expires:
9-14-94		Leilani Jackson Printed Name of Notary

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Exhibit 4.1

RESTATED CERTIFICATE OF INCORPORATION OF MICHAELS STORES, INC.
RESTATED CERTIFICATE OF INCORPORATION OF MICHAELS STORES, INC.
ARTICLE ONE
ARTICLE TWO
ARTICLE THREE
ARTICLE FOUR
ARTICLE FIVE
ARTICLE SIX
ARTICLE SEVEN
ARTICLE EIGHT
ARTICLE NINE
ARTICLE TEN
EX-4.2 4 a2066050zex-4_2.htm EXHIBIT 4.2 Prepared by MERRILL CORPORATION
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Exhibit 4.2

CERTIFICATE OF AMENDMENT
TO THE
RESTATED CERTIFICATE OF INCORPORATION

Michaels Stores, Inc., a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware,

DOES HEREBY CERTIFY:

First: The Board of Directors of Michaels Stores, Inc., duly adopted resolutions setting forth a proposed amendment to the Restated Certificate of Incorporation of the corporation, declaring the amendment to be advisable and directing the amendment to be considered at the 1998 Annual Meeting of the Stockholders. The resolution setting forth the proposed amendment is as follows:

Resolved, that the Board hereby adopts, approves and declares advisable a proposal to amend the Certificate to increase the authorized Common Stock of the Company from 50 million shares to 150 million shares which amendment (the "Amendment") would be in substantially the form as follows:

"Paragraph One of Article Four of the Restated Certificate of Incorporation of the Corporation is hereby amended and restated in its entirety as follows:

The aggregate number of shares of all the classes of stock which the Corporation shall have authority to issue is 152,000,000, consisting of 150,000,000 shares of Common Stock (the "Common Stock") having a par value of $.10 per share, and 2,000,000 shares of Preferred Stock (the "Preferred Stock") having a par value of $.10 per share."

Second: At the 1998 Annual Meeting of the Stockholders of the corporation, duly called and held on September 22, 1998 upon notice in accordance with Section 222 of the General Corporation Law of the State of Delaware, the necessary number of shares as required by statute were voted in favor of the amendment.

Third: The amendment was duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware.

IN WITNESS WHEREOF, Michaels Stores, Inc. has caused this certificate to be signed by Mark V. Beasley, its Secretary, on November 13, 1998.

By:

/s/ MARK V. BEASLEY

Mark V. Beasley

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Exhibit 4.2

CERTIFICATE OF AMENDMENT TO THE RESTATED CERTIFICATE OF INCORPORATION
EX-4.3 5 a2066050zex-4_3.htm EXHIBIT 4.3 Prepared by MERRILL CORPORATION
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Exhibit 4.3

CERTIFICATE OF AMENDMENT
TO THE
RESTATED CERTIFICATE OF INCORPORATION
OF
MICHAELS STORES, INC.

Michaels Stores, Inc., a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware,

DOES HEREBY CERTIFY:

	FIRST:		The name of the Corporation is Michaels Stores, Inc.
	SECOND:		At a meeting of the Board of Directors of the Corporation held on July 23, 2001, resolutions were duly adopted by the Board of Directors of the Corporation effective July 26, 2001 setting forth a proposed amendment to the Restated Certificate of Incorporation of the Corporation, as amended (the "Certificate"), declaring the amendment to be advisable and directing that the amendment be considered at the 2001 Annual Meeting of Stockholders of the Corporation. The resolution setting forth the proposed amendment is as follows:

"RESOLVED, that Paragraphs Three and Four of Article Seven of the Certificate be amended and restated in their entirety to read as follows:

Each director shall hold office for a term expiring at the next annual meeting of the stockholders of the Corporation and until his successor is duly elected and qualified or until the earlier of his resignation, death or removal.

Any vacancies in the Board of Directors for any reason, and any newly created directorships resulting from any increase in the number of directors, will be filled by the Board of Directors, acting by a majority of the directors then in office, although less than a quorum, and any director so chosen will hold office until the next annual meeting of stockholders and until his successor is duly elected and qualified or until the earlier of his resignation, death or removal. No decrease in the number of directors will shorten the term of any incumbent director. Notwithstanding the foregoing, and except as otherwise required by law, whenever the holders of any one or more series of Preferred Stock have the right, voting separately as a class, to elect one or more directors of the Corporation, the terms of the director or directors elected by such holders will be as provided in the terms of such series."

	THIRD:		At the 2001 Annual Meeting of Stockholders of the Corporation, duly called and held on October 5, 2001, upon notice in accordance with Section 222 of the General Corporation Law of the State of Delaware, the necessary number of shares as required by statute were voted in favor of the amendment.
	FOURTH:		The amendment was duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware.

IN WITNESS WHEREOF, the Corporation has caused this certificate to be signed by Mark V. Beasley, its Secretary, on this 5th day of October, 2001.

		MICHAELS STORES, INC.
		By:		/s/ MARK V. BEASLEY Mark V. Beasley, Secretary

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Exhibit 4.3

CERTIFICATE OF AMENDMENT TO THE RESTATED CERTIFICATE OF INCORPORATION OF MICHAELS STORES, INC.
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