-----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, Mq5S1Gx8ucDssZiTJlwP28E+s7clCb2h/q8S3XvcMog4ZBHFbUe6QD9gcKGRcT7y X7T3iEvj9wi7BJ0sXLW9NQ== 0000912057-02-035750.txt : 20020917 0000912057-02-035750.hdr.sgml : 20020917 20020917150827 ACCESSION NUMBER: 0000912057-02-035750 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20020803 FILED AS OF DATE: 20020917 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: 02765894 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 a2089299z10-q.htm FORM 10-Q

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TABLE OF CONTENTS

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended August 3, 2002

o	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 001-09338

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 ý No o

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 September 10, 2002
Common Stock, par value $.10 per share		67,084,314

MICHAELS STORES, INC.
FORM 10-Q

Part I—FINANCIAL INFORMATION

Item 1.		Financial Statements
	Consolidated Balance Sheets at August 3, 2002 (unaudited) and February 2, 2002
	Consolidated Statements of Income for the quarter ended August 3, 2002 and August 4, 2001 (unaudited)
	Consolidated Statements of Income for the six months ended August 3, 2002 and August 4, 2001 (unaudited)
	Consolidated Statements of Cash Flows for the six months ended August 3, 2002 and August 4, 2001 (unaudited)
	Notes to Consolidated Financial Statements (unaudited)
Item 2.		Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3.		Quantitative and Qualitative Disclosures About Market Risk
Item 4.		Controls and Procedures
Part II—OTHER INFORMATION
Item 1.		Legal Proceedings
Item 4.		Submission of Matters to a Vote of Security Holders
Item 6.		Exhibits and Reports on Form 8-K
Signatures
Certifications

MICHAELS STORES, INC.

Part I—FINANCIAL INFORMATION

Item 1. Financial Statements.

MICHAELS STORES, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

			August 3, 2002			February 2, 2002
			(Unaudited)
ASSETS
Current assets:
	Cash and equivalents		$	16,528		$	193,025
	Merchandise inventories			959,702			714,309
	Prepaid expenses and other			20,103			21,720
	Deferred and prepaid income taxes			27,008			21,009

		Total current assets		1,023,341			950,063

Property and equipment, at cost				691,181			628,192
Less accumulated depreciation				(320,510	)		(289,881	)

				370,671			338,311

Goodwill, net				115,839			115,839
Other assets				10,369			10,420

				126,208			126,259

Total assets			$	1,520,220		$	1,414,633

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
	Accounts payable		$	210,770		$	128,212
	Accrued liabilities and other			174,779			186,280
	Borrowings under the Credit Agreement			20,400			—
	Income taxes payable			—			36,715

		Total current liabilities		405,949			351,207

9¹/4% Senior Notes due 2009				200,000			200,000
Deferred income taxes				15,542			15,870
Other long-term liabilities				26,567			22,992

		Total long-term liabilities		242,109			238,862

				648,058			590,069

Commitments and contingencies
Stockholders' equity:
	Common Stock, $0.10 par value, 150,000,000 shares authorized; shares issued and outstanding of 66,080,973 at August 3, 2002 and 65,697,393 at February 2, 2002			6,608			6,570
	Additional paid-in capital			464,776			459,235
	Retained earnings			400,778			358,759

		Total stockholders' equity		872,162			824,564

Total liabilities and stockholders' equity			$	1,520,220		$	1,414,633

See accompanying notes to consolidated financial statements.

MICHAELS STORES, INC.

CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data)

(Unaudited)

		Quarter Ended
		August 3, 2002			August 4, 2001
Net sales		$	576,580		$	486,078
Cost of sales and occupancy expense			368,351			326,566

Gross profit			208,229			159,512
Selling, general, and administrative expense			165,027			143,856
Store pre-opening costs			2,123			2,109

Operating income			41,079			13,547
Interest expense			5,145			5,954
Other (income) and expense, net			(429	)		(328	)

Income before income taxes			36,363			7,921
Provision for income taxes			14,909			3,248

Net income		$	21,454		$	4,673

Earnings per common share:
	Basic	$	0.32		$	0.07

	Diluted	$	0.30		$	0.07

See accompanying notes to consolidated financial statements.

MICHAELS STORES, INC.

CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data)

(Unaudited)

		Six Months Ended
		August 3, 2002			August 4, 2001
Net sales		$	1,179,800		$	1,010,798
Cost of sales and occupancy expense			765,202			674,005

Gross profit			414,598			336,793
Selling, general, and administrative expense			330,430			300,284
Store pre-opening costs			3,807			3,725
Litigation settlement			—			3,153

Operating income			80,361			29,631
Interest expense			10,229			9,732
Other (income) and expense, net			(1,283	)		(376	)

Income before income taxes			71,415			20,275
Provision for income taxes			29,280			8,313

Net income		$	42,135		$	11,962

Earnings per common share:
	Basic	$	0.64		$	0.19

	Diluted	$	0.60		$	0.18

See accompanying notes to consolidated financial statements.

MICHAELS STORES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

					Six Months Ended
					August 3, 2002			August 4, 2001
Operating activities:
	Net income				$	42,135		$	11,962
	Adjustments:
		Depreciation				39,291			31,412
		Amortization				201			2,062
		Other				538			387
		Change in assets and liabilities:
			Merchandise inventories			(245,393	)		(137,680	)
			Prepaid expenses and other			1,617			6,977
			Deferred and prepaid income taxes and other			2,740			(5,518	)
			Accounts payable			82,558			(7,653	)
			Income taxes payable			(36,715	)		325
			Accrued liabilities and other			(11,853	)		(3,791	)

				Net change in assets and liabilities		(207,046	)		(147,340	)

				Net cash used in operating activities		(124,881	)		(101,517	)

Investing activities:
	Additions to property and equipment					(71,362	)		(47,681	)
	Proceeds from sale/leaseback transaction					—			26,886
	Net proceeds from sales of property and equipment					14			52

				Net cash used in investing activities		(71,348	)		(20,743	)

Financing activities:
	Net borrowings under the Credit Agreement					20,400			—
	Proceeds from issuance of 9¹/4% Senior Notes due 2009					—			194,491
	Repurchase of Common Stock					(12,821	)		—
	Proceeds from stock options exercised					11,581			13,175
	Proceeds from issuance of Common Stock and other					772			544
	Payment of other long-term liabilities					(200	)		(404	)

				Net cash provided by financing activities		19,732			207,806

Net (decrease) increase in cash and equivalents						(176,497	)		85,546
Cash and equivalents at beginning of period						193,025			28,191

Cash and equivalents at end of period					$	16,528		$	113,737

See accompanying notes to consolidated financial statements.

MICHAELS STORES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the Six Months Ended August 3, 2002

(Unaudited)

Note 1. Basis of Presentation

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

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals and other items, as disclosed) considered necessary for a fair presentation have been included. Because of the seasonal nature of our business, the results of operations for the quarter and six months ended August 3, 2002 are not indicative of the results to be expected for the entire year.

The balance sheet at February 2, 2002 has been derived from the audited financial statements at that date but does not include all of the information and notes required by generally accepted accounting principles for complete financial statements. For further information, refer to the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended February 2, 2002.

All references herein to "fiscal 2002" relate to the 52 weeks ending February 1, 2003 and all references to "fiscal 2001" relate to the 52 weeks ended February 2, 2002. In addition, all references herein to "the second quarter of fiscal 2002" and "the first six months of fiscal 2002" relate to the 13 and 26 weeks ended August 3, 2002, respectively, and all references to "the second quarter of fiscal 2001" and "the first six months of fiscal 2001" relate to the 13 and 26 weeks ended August 4, 2001, 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:

			Quarter Ended				Six Months Ended
			August 3, 2002		August 4, 2001		August 3, 2002		August 4, 2001
			(In thousands, except per share data)
Numerator:
	Net income		$	21,454	$	4,673	$	42,135	$	11,962

Denominator:
	Denominator for basic earnings per common share-weighted average shares			66,355		64,582		66,157		64,163
	Effect of dilutive securities:
		Employee stock options		4,236		1,770		4,226		1,540

	Denominator for diluted earnings per common share-weighted average shares adjusted for dilutive securities			70,591		66,352		70,383		65,703

Earnings per common share:
	Basic		$	0.32	$	0.07	$	0.64	$	0.19

	Diluted		$	0.30	$	0.07	$	0.60	$	0.18

Our purchase and subsequent retirement of 392,100 shares of our Common Stock in the second quarter of fiscal 2002 reduced the number of weighted average shares outstanding by 24,330 shares for the second quarter of fiscal 2002 and 12,165 shares for the first six months of fiscal 2002.

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 having substantially identical terms, the sale of which was registered under the Securities Act of 1933. As of October 1, 2001, all of the privately placed Senior Notes due 2009 were exchanged for the Senior Notes due 2009 having substantially identical terms.

Note 4. Credit Agreement

$25 million competitive bid feature and a $70 million letter of credit sub-facility. Effective May 24, 2002, pursuant to the terms of the Credit Agreement, our lenders agreed to extend the term of the Credit Agreement from April 30, 2004 to April 30, 2005.

We are in compliance with all terms and conditions of the Credit Agreement. Borrowings outstanding under the Credit Agreement were $20.4 million as of August 3, 2002 with no borrowings outstanding as of August 4, 2001. Borrowings available under the Credit Agreement are reduced by the aggregate amount of letters of credit outstanding under the Credit Agreement ($16.7 million as of August 3, 2002). In the first six months of fiscal 2002, borrowings under the Credit Agreement were outstanding for five days, with average outstanding borrowings of $16.4 million and a weighted average interest rate of 4.75%.

Note 5. 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 alleged that we violated various California laws by erroneously treating Michaels stores' assistant store managers as "exempt" employees who were not entitled to overtime compensation. Based on these allegations, the Raniwala Complaint asserted 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 sought back wages, interest, penalties, and attorneys' fees.

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, and as a result, the case against us was dismissed effective November 20, 2001. The distribution of the settlement proceeds was made on January 19, 2002.

Collins Proceeding

On April 16, 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 alleged that Aaron Brothers violated various California laws by erroneously treating its store managers, assistant store managers, and managers-in-training as "exempt" employees who were not entitled to overtime compensation. Based on these allegations, the Collins Complaint asserted 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 sought back wages, interest, penalties, punitive damages, and attorneys' fees.

On March 15, 2002, Aaron Brothers negotiated a definitive settlement of the purported class action with Collins, subject to final court approval. The Court granted preliminary approval of the settlement on March 29, 2002. As a result, Aaron Brothers recorded a litigation settlement charge of $5.0 million in the fourth quarter of fiscal 2001, covering all claims, attorneys' fees, and estimated payroll taxes. On June 12, 2002, the Court approved the settlement and the judgment was entered. The appeal period expired on August 12, 2002. No appeals were filed with the Court. The settlement payments were delivered to the settlement administrator on August 16, 2002 for distribution.

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 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 6. Recent Accounting Pronouncements

In October 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144 addresses the accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of, and Accounting Principles Board Opinion No. 30, Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions. SFAS No. 144 establishes a single accounting model for long-lived assets to be disposed of by sale and resolves implementation issues related to SFAS No. 121. SFAS No. 144 is effective for financial statements issued for fiscal years beginning after December 15, 2001. In the first quarter of fiscal 2002, we adopted the provisions of SFAS No. 144, and they had no material impact on our consolidated operating results or financial position.

In June 2001, the FASB issued SFAS 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 adopted these provisions in the first quarter of fiscal 2002. During the first quarter of fiscal 2002, we performed the first of the required impairment tests of goodwill and indefinite lived intangible assets, and the tests did not result in an impairment charge.

The following pro forma financial information reflects net income and diluted earnings per common share as if goodwill were not subject to amortization in the second quarter and first six months of fiscal 2001:

		Quarter Ended				Six Months Ended
		August 3, 2002		August 4, 2001		August 3, 2002		August 4, 2001
		(In thousands, except per share data)
Net income as reported		$	21,454	$	4,673	$	42,135	$	11,962
Add back:
	Goodwill amortization, net of income taxes		—		553		—		1,106

Pro forma net income		$	21,454	$	5,226	$	42,135	$	13,068

Pro forma earnings per common share:
	Basic	$	0.32	$	0.08	$	0.64	$	0.20

	Diluted	$	0.30	$	0.08	$	0.60	$	0.20

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 reflect our plans, estimates, and beliefs. Words such as "anticipates," "plans," "expects," "believes," and similar expressions often identify forward-looking statements. Our actual results could materially differ from those discussed in these forward-looking statements, which 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 in 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.

Discussions relating to our 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):

		Quarter Ended						Six Months Ended
		August 3, 2002			August 4, 2001			August 3, 2002			August 4, 2001
Michaels stores:
	Retail stores open at end of period		729			657			729			657
	Retail stores opened during the period		18			13			37			29
	Retail stores closed during the period		2			—			3			—
	Retail stores relocated during the period		1			3			9			7
Aaron Brothers stores:
	Retail stores open at end of period		147			128			147			128
	Retail stores opened during the period		7			5			10			9
	Retail stores closed during the period		2			—			2			—
	Retail stores relocated during the period		1			—			1			—
Star Wholesale store:
	Wholesale store open at end of period		1			1			1			1
Other operating data:
	EBITDA(1)	$	62,291		$	30,851		$	121,136		$	63,481
	Adjusted EBITDA(2)		62,291			30,504			121,136			67,634
	Working capital		617,392			674,311			617,392			674,311
	Comparable store sales increase(3)		9	%		1	%		7	%		2	%

(Notes on following page)

(Notes from table on preceding page)

(1): EBITDA is calculated as income before income taxes 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 plus interest, depreciation, amortization, and unusual, non-recurring charges. Adjusted EBITDA for the second quarter of fiscal 2001 excludes a $347,000 adjustment to reduce the one-time charge recorded in the first quarter of fiscal 2001 related to senior executive severance. Adjusted EBITDA for the first six months of fiscal 2001 excludes costs of approximately $1.0 million related to senior executive severance and a litigation settlement charge of $3.2 million.
(3): Comparable store sales increase represents the increase in net sales for stores open the same number of months in the indicated and comparable period of the previous year, including stores that were relocated or expanded during either period, adjusted for unusual circumstances year over year such as inclement weather and natural disasters. A store is deemed to become comparable in its 14^th full month of operation in order to eliminate grand opening sales distortions. The calculation of comparable store sales increases excludes the effect of deferring the recognition of custom frame sales for orders that have not been picked up by the customer at the end of the period.

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, including the related notes, contained herein.

	Quarter Ended				Six Months Ended
	August 3, 2002		August 4, 2001		August 3, 2002		August 4, 2001
Net sales	100.0	%	100.0	%	100.0	%	100.0	%
Cost of sales and occupancy expense	63.9		67.2		64.9		66.7

Gross profit	36.1		32.8		35.1		33.3
Selling, general, and administrative expense	28.6		29.6		28.0		29.7
Store pre-opening costs	0.4		0.4		0.3		0.4
Litigation settlement	—		—		—		0.3

Operating income	7.1		2.8		6.8		2.9
Interest expense	0.9		1.2		0.8		1.0
Other (income) and expense, net	(0.1	)	(0.0	)	(0.1	)	(0.1	)

Income before income taxes	6.3		1.6		6.1		2.0
Provision for income taxes	2.6		0.6		2.5		0.8

Net income	3.7	%	1.0	%	3.6	%	1.2	%

Quarter Ended August 3, 2002 Compared to the Quarter Ended August 4, 2001

Net sales for the second quarter of fiscal 2002 increased $90.5 million, or 19%, over the second quarter of fiscal 2001. At the end of the second quarter of fiscal 2002, we operated 729 Michaels and 147 Aaron Brothers retail stores. The results for the second quarter of fiscal 2002 included sales from 83 Michaels and 21 Aaron Brothers retail stores that were opened during the 12-month period ended August 3, 2002, more than offsetting lost sales from the closure of 11 Michaels and two Aaron Brothers stores. Sales at the new stores (net of closures) during the second quarter of fiscal 2002 accounted for $47.9 million of the increase in net sales. Comparable store sales increased 9% in the second quarter of fiscal 2002 compared to the second quarter of fiscal 2001, which contributed $40.9 million to the net sales increase. The improvement in comparable store sales was due to a strong performance in our core categories of books, general crafts, ribbon, apparel crafts, art supplies, seasonal, kids crafts, and party. Going forward, we expect to achieve comparable store sales increases for the remainder of fiscal 2002, 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 our stores, and to be successful in our sales promotion efforts.

Cost of sales and occupancy expense, as a percentage of net sales, for the second quarter of fiscal 2002 was 63.9%, a decrease of 3.3% compared to the second quarter of fiscal 2001. This decrease was primarily attributable to improved merchandise margins and a leveraging of store occupancy expense on higher average net sales per store compared to the second quarter of fiscal 2001.

In addition, in the second quarter of fiscal 2002, we fully utilized the $14.8 million markdown reserve originally recorded in the fourth quarter of fiscal 2001 to offset the liquidation of certain merchandise that did not conform to each store's specific plan-o-gram SKU program.

Selling, general, and administrative expense was $165.0 million, or 28.6% of net sales, in the second quarter of fiscal 2002 compared with $143.9 million, or 29.6% of net sales, in the second quarter of fiscal 2001, which includes an adjustment of $347,000 to reduce the one-time charge recorded in the first quarter of fiscal 2001 related to senior executive severance. Excluding this severance adjustment, selling, general, and administrative expense was $144.2 million, or 29.7% of net sales, in the second quarter of fiscal 2001. The decrease as a percentage of net sales to 28.6% in the second quarter of fiscal 2002 from 29.7% in the second quarter of fiscal 2001 was due in part to a decrease in store payroll and related expenses, on a percentage of net sales basis, resulting from higher average net sales per store in the second quarter of fiscal 2002 compared with the second quarter of fiscal 2001. In addition, net advertising expense decreased, as a percentage of net sales, in the second quarter of fiscal 2002 as a result of a leveraging of advertising expense on higher average net sales per store and higher co-op advertising income compared to the second quarter of fiscal 2001. Furthermore, as a result of our adoption of the provisions of SFAS No. 142 in the first quarter of fiscal 2002, amortization expense decreased $921,000 in the second quarter of fiscal 2002 compared with the second quarter of fiscal 2001.

Store pre-opening costs remained relatively constant at 0.4% of net sales for both the second quarter of fiscal 2002 and the second quarter of fiscal 2001. In the second quarter of fiscal 2002, we opened or relocated 19 Michaels and eight Aaron Brothers stores compared to 16 Michaels and five Aaron Brothers stores opened or relocated in the second quarter of fiscal 2001.

Operating income increased 203% to $41.1 million, or 7.1% of net sales, in the second quarter of fiscal 2002 from $13.5 million, or 2.8% of net sales, in the second quarter of fiscal 2001. Operating income for the second quarter of fiscal 2001 includes a $347,000 adjustment related to senior executive severance. Excluding the effects of the severance adjustment in the second quarter of fiscal 2001, operating income increased 211% from $13.2 million, or 2.7% of net sales, in the second quarter of fiscal 2001.

Interest expense (net of interest income) decreased to $4.8 million, or 0.8% of net sales, in the second quarter of fiscal 2002 from $5.6 million, or 1.1% of net sales, in the second quarter of fiscal 2001, due in part to lower interest expense in the second quarter of fiscal 2002 on outstanding borrowings against the Credit Agreement. Borrowings were outstanding under the Credit Agreement for five days in the second quarter of fiscal 2002 compared to 61 days in the second quarter of fiscal 2001. In addition, interest expense for the second quarter of fiscal 2001 includes 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 29-day period during the second quarter of fiscal 2001.

The effective tax rate was 41% for both the second quarter of fiscal 2002 and the second quarter of fiscal 2001.

Net income for the second quarter of fiscal 2002 was $21.5 million, or $0.30 per diluted share, compared to $4.7 million, or $0.07 per diluted share, for the second quarter of fiscal 2001. Excluding the effects of the severance adjustment and the incremental interest expense, net income for the second quarter of fiscal 2001 was $5.4 million, or $0.08 per diluted share.

First Six Months Ended August 3, 2002 Compared to the First Six Months Ended August 4, 2001

Net sales for the first six months of fiscal 2002 increased $169.0 million, or 17%, over the first six months of fiscal 2001. Sales at the new stores (net of closures) during the first six months of fiscal 2002 accounted for $99.2 million of the increase in net sales. Comparable store sales increased 7% in the first six months of fiscal 2002 compared to the first six months of fiscal 2001, which contributed $66.9 million to the net sales increase. The improvement in comparable store sales was due to a strong performance in our core categories of books, apparel crafts, art supplies, ribbon, general crafts, kids crafts, and party.

Cost of sales and occupancy expense, as a percentage of net sales, for the first six months of fiscal 2002 was 64.9%, a decrease of 1.8% compared to the first six months of fiscal 2001. This decrease was primarily attributable to improved merchandise margins and a leveraging of store occupancy expense on higher average net sales per store compared to the first six months of fiscal 2001.

Selling, general, and administrative expense was $330.4 million, or 28.0% of net sales, in the first six months of fiscal 2002 compared with $300.3 million, or 29.7% of net sales, in the first six months of fiscal 2001, which includes one-time costs of approximately $1.0 million related to senior executive severance. Excluding this one-time severance charge, selling, general, and administrative expense was $299.3 million, or 29.6% of net sales, in the first six months of fiscal 2001. The decrease as a percentage of net sales to 28.0% in the first six months of fiscal 2002 from 29.6% in the first six months of fiscal 2001 was due in part to a decrease in store and corporate payroll and related expenses, on a percentage of net sales basis, resulting from higher average net sales per store in the first six months of fiscal 2002 compared with the first six months of fiscal 2001. In addition, net advertising expense decreased, as a percentage of net sales, in the first six months of fiscal 2002 as a result of a leveraging of advertising expense on higher average net sales per store and higher co-op advertising income compared to the first six months of fiscal 2001. Furthermore, as a result of our adoption of the provisions of SFAS No. 142 in the first quarter of fiscal 2002, amortization expense decreased $1.8 million in the first six months of fiscal 2002 compared with the first six months of fiscal 2001.

Store pre-opening costs remained relatively constant as a percentage of net sales for both the first six months of fiscal 2002 and the first six months of fiscal 2001. In the first six months of fiscal 2002,

we opened or relocated 46 Michaels and 11 Aaron Brothers stores compared to 36 Michaels and nine Aaron Brothers stores opened or relocated in the first six months of fiscal 2001.

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, and distribution of the settlement proceeds was made on January 19, 2002.

Operating income increased 171% to $80.4 million, or 6.8% of net sales, in the first six months of fiscal 2002 from $29.6 million, or 2.9% of net sales, in the first six months of fiscal 2001. Operating income for the first six 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 in the first six months of fiscal 2001, operating income increased 138% from $33.8 million, or 3.3% of net sales, in the first six months of fiscal 2001.

Interest expense (net of interest income) decreased to $9.0 million, or 0.8% of net sales, in the first six months of fiscal 2002 from $9.2 million, or 0.9% of net sales, in the first six months of fiscal 2001 due in part to lower interest expense in the first six months of fiscal 2002 on outstanding borrowings against the Credit Agreement. Borrowings were outstanding under the Credit Agreement for five days in the first six months of fiscal 2002 compared to 140 days in the first six months of fiscal 2001. In addition, interest income was higher in the first six months of fiscal 2002 as a result of larger invested cash balances compared to the first six months of fiscal 2001. These decreases were partially offset by higher interest expense on the $200 million of 9¹/4% Senior Notes due July 1, 2009, which were issued in July 2001, compared to the $125 million of 10⁷/8% Senior Notes due 2006, which were redeemed in August 2001.

The effective tax rate was 41% for both the first six months of fiscal 2002 and the first six months of fiscal 2001.

Net income for the first six months of fiscal 2002 was $42.1 million, or $0.60 per diluted share, compared to $12.0 million, or $0.18 per diluted share, for the first six months of fiscal 2001. Excluding the effects of the one-time severance charge, the litigation settlement charge, and the incremental interest expense, net income for the first six months of fiscal 2001 was $15.3 million, or $0.23 per diluted share.

Liquidity and Capital Resources

Changes in Cash and Equivalents

Cash flow used in operating activities during the first six months of fiscal 2002 was $124.9 million, compared to $101.5 million during the first six months of fiscal 2001. The increase in cash used in operating activities of $23.4 million in the first six months of fiscal 2002 compared to the first six months of fiscal 2001 was primarily attributable to an increase in the change in merchandise inventories net of the change in accounts payable of $17.5 million and an increase in the change in income taxes payable and accrued liabilities of $45.1 million, partially offset by an increase in net income of $30.2 million. Inventories per Michaels store of $1.262 million at August 3, 2002 increased 8.4% from $1.164 million at August 4, 2001. We anticipate average inventory per Michaels store to increase 5% to 7% by the end of fiscal 2002.

Cash flow used in investing activities in the first six months of fiscal 2002 was $71.3 million compared to $20.7 million in the first six months of fiscal 2001. Cash flow used in investing activities in the first six months of fiscal 2002 was due in part to capital expenditures related to the completion of our new Hazleton, Pennsylvania distribution center, the expansion of our Lancaster, California

distribution center, and the opening of 37 Michaels and 10 Aaron Brothers stores and the relocation of nine Michaels stores and one Aaron Brothers store in the first six months of fiscal 2002.

The following table sets forth capital expenditures for the first six months of fiscal 2002 and the first six months of fiscal 2001 (unaudited):

	Six Months Ended
	August 3, 2002		August 4, 2001
	(In thousands)
New and relocated stores and stores not yet opened	$	21,865	$	25,935
Existing stores		12,676		11,338
Distribution system expansion		24,652		1,943
Information systems		9,156		5,527
Corporate and other		3,013		2,938

		71,362		47,681
Proceeds from sale/leaseback transaction		—		(26,886	)

	$	71,362	$	20,795

We anticipate capital expenditures for fiscal 2002 to total approximately $147.0 million. In fiscal 2002, we plan to open approximately 65 Michaels and 13 Aaron Brothers stores.

Cash flow provided by financing activities in the first six months of fiscal 2002 was $19.7 million compared to $207.8 million in the first six months of fiscal 2001. The decrease in cash provided by financing activities was primarily due to the issuance of the 9¹/4% Senior Notes due 2009 in the second quarter of fiscal 2001 totaling $194.5 million, net of expenses, compared to the repurchase and subsequent retirement of 392,100 shares of our Common Stock totaling $12.8 million in the second quarter of fiscal 2002. This decrease in cash provided by financing activities was partially offset by borrowings under the Credit Agreement in the first six months of fiscal 2002 totaling $20.4 million. Proceeds from the exercise of stock options were $11.6 million for approximately 751,000 shares of our Common Stock in the first six months of fiscal 2002 and $13.2 million for approximately 1.1 million shares of our Common Stock in the first six months of fiscal 2001.

Bank Credit Facility

Effective May 1, 2001, we signed a new $200 million unsecured revolving bank credit facility with Fleet National Bank and other lending institutions, which replaced the previous $100 million unsecured revolving bank credit facility. The Credit Agreement had an original 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. Effective May 24, 2002, pursuant to the terms of the Credit Agreement, our lenders agreed to extend the term of the Credit Agreement from April 30, 2004 to April 30, 2005.

We are in compliance with all terms and conditions of the Credit Agreement. Borrowings outstanding under the Credit Agreement were $20.4 million as of August 3, 2002, with no borrowings outstanding as of August 4, 2001. Borrowings available under the Credit Agreement are reduced by the aggregate amount of letters of credit outstanding under the Credit Agreement ($16.7 million as of August 3, 2002). In the first six months of fiscal 2002, borrowings under the Credit Agreement were outstanding for five days, with average outstanding borrowings of $16.4 million and a weighted average interest rate of 4.75%.

General

In July 2001, we issued $200 million in principal amount of the 9¹/4% 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 having substantially identical terms, the sale of which was registered under the Securities Act of 1933. As of October 1, 2001, all of the privately placed Senior Notes due 2009 were exchanged for the Senior Notes due 2009 having substantially identical terms.

On December 5, 2000, our Board of Directors authorized the repurchase of 2.0 million shares of our outstanding Common Stock. On September 11, 2002, our Board of Directors approved the repurchase of up to an additional 1.0 million shares of our outstanding Common Stock. During the second quarter of fiscal 2002, we repurchased and subsequently retired 392,100 shares of our Common Stock. As of August 3, 2002, we have repurchased and retired 1.44 million shares under this plan at an average cost of $20.79 per share. As of September 11, 2002, we have approximately 1.56 million shares of our Common Stock available for repurchase. The repurchase plan also provides that the proceeds of the exercise of options under our 2001 General Stock Option Plan may be used to repurchase shares under the repurchase plan and that the maximum number of shares authorized to be repurchased under the repurchase plan will be increased to the extent necessary, if any, to so use the proceeds from such option exercises. 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 and other covenants. We may also be restricted by regulations of the Securities and Exchange Commission from making future repurchases during certain time periods.

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. The interest rates on the Credit Agreement are repriced frequently, at market prices, which would result in carrying amounts that approximate fair value. We had borrowings outstanding of $20.4 million under the Credit Agreement at August 3, 2002. In July 2001, we issued $200 million of the Senior Notes due 2009 with a fixed interest rate of 9¹/4%. In August 2001, we used a portion of the proceeds from the Senior Notes due 2009 to redeem 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 2, 2002.

Item 4. Controls and Procedures

In the second quarter of fiscal 2002, there were no significant changes in internal controls or in other factors that could significantly affect these controls.

MICHAELS STORES, INC.

Part II—OTHER INFORMATION

Item 1. Legal Proceedings.

Reference is made to Part I, Item 3. Legal Proceedings, of our Annual Report on Form 10-K for the fiscal year ended February 2, 2002, filed on April 12, 2002, and Part II, Item 1. Legal Proceedings, of our Quarterly Report on Form 10-Q for the period ended May 4, 2002, filed on June 18, 2002, which reported during the fiscal year the legal proceedings referenced below.

Collins Proceeding

General

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

Our 2002 Annual Meeting of Stockholders was held on June 20, 2002. The following item of business, as proposed in the Proxy Statement dated May 6, 2002, was presented to the stockholders:

Election of Directors

The six director nominees, information with respect to which was set forth in the Proxy Statement under the caption titled "Proposal for Election of Directors," were elected. The vote with respect to the election of these directors was as follows:

	Total Vote for Each Director	Total Vote Withheld From Each Director	Abstentions	Broker Non-Votes
Charles J. Wyly, Jr.	61,244,452	807,362	—	—
Sam Wyly	61,244,296	807,518	—	—
Richard E. Hanlon	61,238,149	813,665	—	—
Richard C. Marcus	61,238,340	813,474	—	—
Liz Minyard	61,809,589	242,225	—	—
Elizabeth A. VanStory	61,233,299	818,515	—	—

Each elected director will serve until the next annual meeting of stockholders and until his or her successor is duly elected and qualified or until the earlier of his or her resignation, death, or removal.

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

(a)

Exhibits:

10.1: Amendment to Employment Agreement between Michaels Stores, Inc. and R. Michael Rouleau, dated July 16, 2002 (filed herewith).
10.2: Agreement between Michaels Stores, Inc. and Bryan M. DeCordova, dated effective as of June 7, 2002 (filed herewith).
10.3: Amendment to Agreement among Michaels Stores, Inc., Michaels Management Services, LP, and Bryan M. DeCordova, dated effective as of August 2, 2002 (filed herewith).
10.4: Michaels Stores, Inc. Amended and Restated 2001 Employee Stock Option Plan (previously filed as Exhibit 99.1 to Form 8-K, filed by Registrant on July 29, 2002, SEC File No. 001-09338).
99.1: Certification pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002 (filed herewith).

(b)

Reports on Form 8-K:

1.: Report on Form 8-K, dated June 20, 2002 and filed with the Securities and Exchange Commission on July 29, 2002, reporting Items 5 and 7.

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.

CERTIFICATIONS

I, R. Michael Rouleau, certify that:

1.: I have reviewed this quarterly report on Form 10-Q of Michaels Stores, Inc.;
2.: Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; and
3.: Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report.

Date: September 17, 2002		/s/ R. MICHAEL ROULEAU R. Michael Rouleau President and Chief Executive Officer

CERTIFICATIONS

I, Bryan M. DeCordova, certify that:

1.: I have reviewed this quarterly report on Form 10-Q of Michaels Stores, Inc.;
2.: Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; and
3.: Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report.

Date: September 17, 2002		/s/ BRYAN M. DECORDOVA Bryan M. DeCordova Executive Vice President— Chief Financial Officer

INDEX TO EXHIBITS

Exhibit Number		Description of Exhibit
10.1		Amendment to Employment Agreement between Michaels Stores, Inc. and R. Michael Rouleau, dated July 16, 2002 (filed herewith).
10.2		Agreement between Michaels Stores, Inc. and Bryan M. DeCordova, dated effective as of June 7, 2002 (filed herewith).
10.3		Amendment to Agreement among Michaels Stores, Inc., Michaels Management Services, LP, and Bryan M. DeCordova, dated effective as of August 2, 2002 (filed herewith).
10.4		Michaels Stores, Inc. Amended and Restated 2001 Employee Stock Option Plan (previously filed as Exhibit 99.1 to Form 8-K, filed by Registrant on July 29, 2002, SEC File No. 001-09338).
99.1		Certification pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002 (filed herewith).

EX-10.1 3 a2089299zex-10_1.htm EXHIBIT 10.1

Exhibit 10.1

AMENDMENT
TO
EMPLOYMENT AGREEMENT

This Amendment is made as of July 16, 2002, by and between Michaels Management Services, LP, a Texas limited partnership (the "Company"), and R. Michael Rouleau ("Executive").

WHEREAS, Michaels Stores, Inc., a Delaware corporation and the ultimate parent of the Company ("Michaels"), and Executive entered into an Employment Agreement dated as of March 20, 2001 (the "Agreement"); and

WHEREAS, on December 21, 2001, Michaels assigned the Agreement to the Company, and Executive consented to such assignment; and

WHEREAS, the Company and Executive wish to amend the Agreement as set forth below.

NOW, THEREFORE, the parties agree as follows:

1. Paragraph 1(d) of the Agreement is amended in its entirety to read as follows:

(d) Termination; Severance Pay. The term of this Agreement will terminate upon the first to occur of (i) January 31, 2006, (ii) Executive's death or permanent disability (as determined by the Board of Directors in its good faith judgment) or (iii) the date on which the Company's Board of Directors terminates Executive's employment for Cause (as defined below). In the event that the Company shall terminate Executive's employment prior to January 31, 2006, otherwise than pursuant to clause (ii) or (iii) above, the Company shall pay severance pay to Executive by continuing the Base Salary, as well as all additional benefits described in Paragraph 1(b) and in effect at the time of such termination (other than medical, dental and vision benefits, which will be provided only on the terms set forth in Paragraph 1(e)), until January 31, 2006, and by paying Executive a prorated bonus for the fiscal year of the Company in which such termination occurs, if Executive would have earned any bonus under the Company's bonus plan for such fiscal year. Such payments of Base Salary shall be made in bi-weekly installments, and such prorated bonus, if any, shall be paid when bonuses for such fiscal year are paid to Company employees in the ordinary course of business. For purposes of this Agreement, "Cause" shall mean by determination of the Company's Board of Directors in its good faith judgment that Executive has: (1) knowingly committed gross misconduct in the performance of his duties, (2) knowingly committed gross negligence or gross nonfeasance in the performance of his duties, (3) committed an act of financial dishonesty against the Company or any of its subsidiaries, parents or affiliates, or (4) committed any felony involving moral turpitude.

In the event this Agreement is terminated at any time and for any reason (i) any unvested portion of Executive's 401(k) savings plan interest will automatically accelerate and become immediately 100% vested on the date of such termination or, if such accelerated vesting is not permitted by any law, regulation or governmental ruling applicable to the 401(k) savings plan, the Company will pay to Executive the value of his unvested interest in the 401(k) savings plan; (ii) Executive will have the option to purchase the Company-paid automobile in his possession at the depreciated book value of said automobile; and (iii) Executive will automatically become the owner of his Company-paid whole life insurance policy.

2. Paragraph 1 of the Agreement is amended by the addition of the following subparagraphs:

(e) Medical Benefits after Termination of Employment. If, at or before the termination of this Agreement (including any extensions of the term of this Agreement), Executive retires from the Company or his employment is terminated by the Company without Cause or his employment terminates by reason of permanent disability (within the meaning of that term under Paragraph 1(d)), Executive and his current spouse will continue to participate in the Michaels Stores, Inc. Medical, Dental and Vision Care Plan (the "Plan") on the same basis as that available

from time to time to senior executive officers of the Company and their eligible dependents, except as otherwise provided in this Paragraph 1(e). When Executive or his spouse becomes eligible for Medicare, post-termination benefits provided under the Plan will be coordinated with Medicare coverage as if Executive or his spouse, as applicable, had applied for and were receiving benefits under both Medicare Part A and Medicare Part B, with Medicare providing primary coverage and the Plan providing secondary or supplemental coverage. Post-termination benefits will be provided under the Plan to Executive until the earlier of his death or the date he becomes entitled to medical benefits from another employer and will be provided to Executive's spouse until the earliest of her death, Executive's death, the date she becomes entitled to medical benefits from another employer or the date she no longer qualifies as an eligible dependent under the Plan; provided, however, that if Executive's spouse is receiving post-termination benefits under the Plan at the time of Executive's death but has not attained age 65, such post-termination benefits will continue to be provided to Executive's spouse until her 65^th birthday. The Company will bear the full cost of post-termination benefits provided to Executive and his spouse under the Plan (other than the cost of Medicare premiums). If the Plan is unable to provide Executive and his spouse with the post-termination coverage provided in this Paragraph 1(e), the Company will purchase health insurance for Executive and his spouse that provides, to the extent practicable, reasonably comparable benefits. Notwithstanding the foregoing provisions, neither Executive nor his spouse will be entitled to the benefits provided by this Paragraph 1(e) in the event the Company terminates Executive's employment for Cause.

If, at or before the termination of this Agreement (including any extensions of the term of this Agreement), Executive's employment terminates by reason of his death, Executive's current spouse will continue to participate in the Plan on the same basis described in the preceding paragraph of this Paragraph 1(e) as if Executive's death had occurred after his retirement from the Company.

(f) Stock Options. In the event this Agreement is terminated at any time and for any reason, each outstanding option to purchase common stock of the Company held by Executive at such termination will become 100% vested and exercisable and (provided that Executive's employment has not been terminated for Cause) will expire, notwithstanding the stated expiration date of such option, one day prior to the fifth anniversary of such termination. In the event of any conflict between the terms of this Paragraph 1(f) and the terms contained in any document evidencing any such option, the terms of this Paragraph 1(f) will control.

3. The address for delivering notices to the Company under Paragraph 4 of the Agreement is amended to read as follows:

To the Company:

Michaels Management Services, LP.
8000 Bent Branch Drive
Irving, Texas 75063

Attention: Senior Vice President, Human Resources

IN WITNESS WHEREOF, the parties have executed this Amendment as of the date first written above.

		MICHAELS MANAGEMENT SERVICES, LP
		By:		MICHAELS GP, INC., Its General Partner
		By:		/s/ CHARLES J. WYLY, JR. Name: Charles J. Wyly, Jr. Title: Chairman
		/s/ R. MICHAEL ROULEAU R. Michael Rouleau

CONSENT OF MICHAELS STORES, INC.

Michaels Stores, Inc., a Delaware corporation, as guarantor of the Company's obligations to Executive under the Agreement and as sponsor of the Plan, consents and agrees to the terms of the foregoing Amendment to Employment Agreement.

		MICHAELS STORES, INC.
		By:		/s/ CHARLES J. WYLY, JR. Name: Charles J. Wyly, Jr. Title: Chairman

EX-10.2 4 a2089299zex-10_2.htm EXHIBIT 10.2
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Exhibit 10.2

AGREEMENT

THIS Agreement ("Agreement") is entered into effective as of June 7, 2002, between MICHAELS STORES, INC. ("Michaels") and BRYAN M. DECORDOVA ("Employee").

WHEREAS, Employee has been an employee and an executive officer of Michaels, and in such capacity has performed services for Michaels; and

WHEREAS, Michaels and Employee wish to amicably dissolve Employee's employment with Michaels; and

WHEREAS, Michaels and Employee wish for Employee to continue to perform services for Michaels in his current role under his current job description until August 31, 2002; and

WHEREAS, the parties wish to set forth in full their agreement regarding certain matters;

NOW, THEREFORE, in consideration of the covenants contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties do hereby agree as follows:

Section 1. Resignation. Employee hereby irrevocably and unconditionally resigns from any position he holds with Michaels or any subsidiary or affiliate of Michaels effective on the earlier to occur of (a) August 31, 2002; or (b) the date, if any, upon which Employee is terminated "for Cause," as defined in Section 4 below (the earlier of the possible dates actually taking place being referred to herein as the "Termination Date").

Section 2. Continued Employment. Employee shall continue to serve in his current capacity through, but only through, the Termination Date, and for his services for such period shall be compensated at a rate equal to his current gross base salary, subject to all applicable or customary withholding requirements, and in accordance with Michaels' customary payroll practices. In providing such services, Employee shall be at all times subject to his current job requirements under the direction and supervision of the Chief Executive Officer of Michaels.

Section 3. Payments. In consideration of Employee's releases and covenants stated in this Agreement, Michaels agrees to make bi-weekly payments (the "Payments") to Employee following the Termination Date in amounts equivalent to Employee's current rate of base salary and in accordance with Michaels' regular payroll practices from the Termination Date until the earlier to occur of (a) the date which is twelve (12) months from the Termination Date, or (b) the date upon which Employee first violates any term of this Agreement. All Payments will be subject to all applicable or customary withholding requirements. Except as expressly provided herein, Employee's right and entitlement to, or eligibility for, employee benefits (including without limitation eligibility for matching contributions by Michaels under Michaels' Deferred Compensation Plan or Employees 401(k) Plan) shall cease effective on the Termination Date; however, on or promptly after the Termination Date, Employee shall receive a payment, subject to all applicable or customary withholding requirements, in respect of Employee's earned, unused vacation time.

Section 4. Definition of Cause. For purposes of this Agreement only, termination "for Cause" shall mean termination for one or more of the following infractions: (a) willful malfeasance or willful misconduct by Employee in connection with Employee's employment, (b) Employee's continued refusal or failure to perform Employee's duties after written notice with reasonable time to cure, or to comply with a reasonable direction of Employee's supervisor, (c) an act or acts of personal dishonesty taken by Employee and which could be expected to result in Employee's personal enrichment or which could be expected to adversely affect Michaels or any of its subsidiaries or affiliates, (d) Employee's gross negligence in performing any of Employee's duties, (e) Employee's commission of any crime (other than a traffic violation), (f) Employee's use of narcotics, liquor or illicit drugs that has a detrimental effect on the performance of Employee's employment responsibilities at Michaels, (g) Employee's

breach of any policy adopted by Michaels concerning conflicts of interest, standards of business conduct, fair employment practices, procedures with respect to compliance with securities laws and any other similar matters, or (h) Employee's material breach of this Agreement.

Section 5. Health Care Benefits. Through the Termination Date, Employee will remain entitled to benefits under Michaels' officer health insurance plan under the same terms and conditions as other Michaels officers of similar rank; provided, however, that such benefits shall be limited to those that are consistent with Employee's past practice. Upon the termination of such health care benefits hereunder, Employee shall be eligible to elect health care continuation coverage under the Consolidated Omnibus Budget Reconciliation Act of 1985.

Section 6. Bonus. Despite Employee's resignation effective as of the Termination Date, in addition to the payments provided for in Section 3 above, Michaels agrees that Employee shall remain eligible to receive a prorated bonus for Michaels' 2002 fiscal year, if any, per the terms of Michaels' 2002 Bonus Plan to be paid when 2002 bonuses are paid to corporate employees in the normal course of business.

Section 7. Stock Options. Employee acknowledges and agrees that all options to purchase shares of Michaels Common Stock granted to him pursuant to the terms of Michaels' 1997 Stock Option Plan (the "Options") shall expire on the 30th calendar day following the Termination Date and that no further vesting of any such Option shall occur after the Termination Date.

Section 8. Prohibition on Insider Trading. Employee acknowledges that Employee's legal obligation to refrain from trading in Company securities while in possession of material non-public information regarding the Company or its securities will continue after leaving the Company and that after the Termination Date any transactions by Employee in Company securities will be effected by Employee independently of the Company.

Section 9. Section 16 Reporting and Liability. Employee acknowledges that, even though, effective as of the Termination Date, Employee will no longer be an executive officer of the Company, any transaction by Employee in Company securities executed within a period of less than six months of an opposite-way transaction that occurred while Employee was an executive officer of the Company will continue to be subject to the reporting and liability provisions of Section 16 of the Securities Exchange Act of 1934 and the rules promulgated thereunder, and that Employee will remain responsible for complying with such provisions. Employee further acknowledges that, within 45 days after the end of the Company's fiscal year, all former executive officers who conducted unreported transactions in Company securities during the fiscal year may be required to file a year-end report with the Securities and Exchange Commission, the Company and the New York Stock Exchange, and that Employee's failure to respond on a timely basis to a request from the Company for a written representation that no such filing is due may result in disclosure in the Company's Proxy Statement and Annual Report on Form 10-K that Employee is delinquent with respect to a required report.

Section 10. Taxes. Employee shall pay and be solely liable for all income and other taxes and charges imposed as a result of payments made or other benefits provided to him pursuant to this Agreement.

Section 11. Effectiveness. Upon the expiration of the 7-day revocation period described in Section 35 below, this Agreement will become effective as of the date first set forth above, unless Employee revokes this Agreement during such revocation period. If this Agreement becomes effective, it may not thereafter be revoked by either party.

Section 12. Third-Party Litigation. Employee agrees to make himself reasonably available to Michaels and its subsidiaries and affiliates in connection with any pending or threatened claims, charges or litigation in which Michaels or any of its subsidiaries or affiliates is now or may become involved, or any other claims or demands made against or upon Michaels or any of its subsidiaries or affiliates, regardless of whether or not Employee is a named defendant in any particular case.

Section 13. Return of Property. Employee shall return to Michaels all property of Michaels in Employee's possession or subject to his control, including without limitation any keys, credit cards and files, on or before the Termination Date, or upon request by Michaels prior to the Termination Date, except as provided in Section 14 below, and except that Employee shall not be required to return, and may retain thereafter as his personal property, the laptop computer assigned to him by Michaels and its current software and accessories and the office equipment issued to Employee prior to the date hereof for use at his home. Employee shall not alter any Michaels computer files in any way after the Termination Date, or such earlier date as may be requested by Michaels.

Section 14. Cellular Phone. Michaels hereby transfers and assigns to Employee, effective as of the Termination Date, the portable cellular phone (the "Phone") currently in use by Employee in connection with his employment with Michaels. Michaels agrees to cooperate with Employee to have the phone number for the Phone transferred to Employee's name and for his account. Employee agrees that he will be solely responsible for all charges associated with the Phone or the use thereof incurred after the Termination Date.

Section 15. Advice in Writing. Employee represents and agrees that Employee was advised by Michaels in writing, by the letter to Employee enclosing this Agreement, to consult with an attorney of Employee's choice prior to signing this Agreement.

Section 16. Period of Consideration. Employee represents and agrees that Michaels has given Employee at least twenty-one (21) days to consider whether to execute this Agreement and during that time Employee has had this Agreement in Employee's possession. Employee may choose to execute this Agreement prior to the expiration of such 21-day period.

Section 17. Voluntary Act. Employee represents and agrees that he is fully aware of his right to discuss any and all aspects of this matter with an attorney of his choice, that he has carefully read and fully understands all of the provisions of this Agreement, and that he is voluntarily entering into this Agreement.

Section 18. Mutual Release. As a material inducement to Michaels to enter into this Agreement, Employee hereby irrevocably and unconditionally releases, acquits, and forever discharges Michaels and each of Michaels' present and former stockholders, predecessors, successors, assigns, agents, directors, officers, employees, representatives, attorneys, divisions, subsidiaries and affiliates (and agents, directors, officers, employees, representatives and attorneys of such divisions, subsidiaries and affiliates), and all persons acting by, through, under or in concert with any of them (collectively, "Releasees"), or any of them, from any and all charges, complaints, claims, liabilities, obligations, promises, agreements, controversies, damages, actions, causes of action, suits, rights, demands, costs, losses, debts and expenses (including without limitation attorney's fees and costs actually incurred), of any nature whatsoever (other than (a) liabilities, claims, obligations and other rights arising solely under this Agreement or incurred prior to the date hereof under Michaels' Deferred Compensation Plan, or (b) claims to workers compensation benefits to which Employee would have otherwise been entitled), known or unknown ("Claim" or "Claims"), which Employee now has, owns, or holds, or claims to have, own, or hold, or which Employee at any time heretofore had, owned, or held, or claimed to have, own, or hold, against each or any of the Releasees, which are (y) related to Employee's employment with Michaels or any subsidiary or affiliate of Michaels; (z) related to the termination of Employee's employment with Michaels or any subsidiary or affiliate of Michaels, or (c) claims of age discrimination under the Age Discrimination in Employment Act of 1967, as amended (the "ADEA"). Employee understands and acknowledges that this Agreement does not waive rights or claims under the ADEA or comparable state law that may arise after the date this Agreement is executed and does not waive his right to challenge this Agreement's waiver of ADEA claims under the Older Workers Benefit Protection Act. Employee represents and warrants to Michaels that Employee has not heretofore assigned or transferred, or purported to assign or transfer, to any person or entity, any Claim or any portion thereof or interest therein. As a material inducement to Employee to enter into this Agreement, Michaels hereby irrevocably and unconditionally releases, acquits, and forever discharges Employee and each of Employee's heirs, assigns, agents, representatives and attorneys, and

all persons acting by, through, under or in concert with any of them (collectively, "Employee Releasees"), or any of them, from any and all Claims (other than Claims arising solely under this Agreement or from any fraud or criminal misconduct by Employee), which Michaels now has, owns, or holds, or claims to have, own, or hold, or which Michaels at any time heretofore had, owned, or held, or claimed to have, own, or hold, against each or any of the Employee Releasees arising by or before the date this Agreement is executed by Employee. Michaels represents and warrants to Employee that Michaels has not heretofore assigned or transferred, or purported to assign or transfer, to any person or entity, any Claim or any portion thereof or interest therein.

Section 19. Consideration. Employee acknowledges and agrees that the consideration to be provided to Employee under this Agreement in exchange for Employee's execution of this Agreement is in addition to anything of value to which Employee already is entitled.

Section 20. Protected Rights. Michaels and Employee agree that nothing in this Agreement is intended to or shall be construed to affect, limit or otherwise interfere with the protected right of Employee to file a charge or participate in an investigation or proceeding conducted by the Equal Employment Opportunity Commission (the "EEOC"). Employee is releasing, however, his right to any monetary recovery or relief should the EEOC or any other agency pursue claims on his behalf.

Section 21. Confidential Information. Employee agrees to hold confidential, and not to disclose to any person, firm, corporation, partnership or other entity, any trade secret or Confidential Information (as defined below) gained in the course of his employment with Michaels or any subsidiary or affiliate of Michaels concerning Michaels and/or any of its subsidiaries, affiliates, divisions, parents, predecessors or related entities, except if such disclosure is required by law or legal process. "Confidential Information" shall include, without limitation, information concerning strategic plans, financial affairs, operating policies and procedures, vendor information, product or pricing information, marketing plans, supply chain strategies, store sales, e-commerce plans or results, personnel policies and practices, business or market development plans, forecasts, proprietary statistics, reports or merchandising or inventory-related strategies, programs or processes. Employee agrees not to remove any trade secret or Confidential Information from Michaels, not to request that others do so on his behalf, and promptly to return any trade secret or Confidential Information in his possession on or before the Termination Date (or earlier upon request) to Michaels.

Section 22. Nondisclosure of Agreement. Employee agrees that the contents of this Agreement, including without limitation its terms and any monetary or other consideration provided for herein, shall not be disclosed, released or communicated by Employee to any person, firm, corporation, partnership or other entity, and that all terms of this Agreement shall remain confidential, except (a) for the purpose of enforcing this Agreement, (b) with respect to disclosures to members of Employee's immediate family and his attorneys, accountants and potential employers, and (c) to the extent disclosure may be compelled by court order or legal process. In the event that such a disclosure is sought to be compelled from Employee by court order or legal process, whether by subpoena or otherwise, Employee shall immediately provide written notice to Michaels of such request and shall also provide any assistance which is reasonably necessary in order to insure compliance with this provision of this Agreement. Employee agrees and understands that this nondisclosure provision is a material provision of this Agreement.

Section 23. Non-Interference with Business Relationships. Employee agrees that, until the expiration of a full twelve (12) months from the Termination Date, Employee will not solicit, entice or otherwise induce any employee of Michaels (or of any subsidiary, division or affiliate of Michaels) to leave the employ of Michaels (or any such subsidiary, division or affiliate) for any reason whatsoever, nor will Employee directly or indirectly hire or aid, assist or abet any other person or entity in soliciting or hiring any employee of Michaels (or of any such subsidiary, division or affiliate), nor will Employee otherwise interfere with any contractual or other business relationship between Michaels (or any such subsidiary, division or affiliate) and any other person or entity. Employee acknowledges and agrees that this Section 23 is a material term of this Agreement.

Section 24. No Reemployment. Employee agrees not to seek or apply for reemployment with Michaels or any subsidiary, division or affiliate of Michaels.

Section 25. Equitable Remedies. Employee expressly affirms and recognizes that this Agreement contains obligations which, in the event of his breach thereof, afford Michaels no adequate remedy at law. As a result thereof, in the event of Employee's breach, or threatened breach, of any term or provision contained in this Agreement, Employee agrees that Michaels shall be entitled to both temporary and permanent injunctive relief. The right of Michaels to such relief shall not be construed to prevent Michaels from pursuing, either consecutively or concurrently, any and all other legal or equitable remedies available to it for such breach or threatened breach, specifically including without limitation the recovery of monetary damages.

Section 26. Expenses of Counsel. In the event any party breaches the terms and conditions of this Agreement, or threatens to do the same, and in the event that it becomes necessary for either party to employ legal counsel to enforce any provision of this Agreement or to seek or obtain relief through legal proceedings on account of such breach or threatened breach of this Agreement, the prevailing party shall be entitled to recover reasonable and necessary attorneys' fees, as well as all court costs, disbursements and other expenses of any nature whatsoever, which the prevailing party may expend or incur in connection with the enforcement of this Agreement or of any rights and remedies provided by this Agreement. However, Employee understands that nothing in this Agreement is intended to interfere with or deter his right to challenge the waiver of an ADEA claim or the filing of an ADEA charge or ADEA complaint with the EEOC or to participate in any investigation or proceeding conducted by that agency.

Section 27. Amendment. This Agreement may be amended, modified or supplemented only by an instrument in writing executed by both of the parties hereto.

Section 28. Assignment. Neither this Agreement nor any right or obligation created hereby shall be assignable by either party hereto, without the express written permission of the other party, except by operation of law, including, but not limited to, the applicable laws of descent and distribution.

Section 29. Entire Agreement. This Agreement contains the entire agreement of the parties and supersedes any and all other agreements between the parties hereto with respect to the subject matter hereof.

Section 30. GOVERNING LAW. THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HERETO SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE SUBSTANTIVE LAWS (BUT NOT THE RULES GOVERNING CONFLICTS OF LAWS) OF THE STATE OF TEXAS. THE PARTIES AGREE THAT THIS AGREEMENT SHALL BE PERFORMABLE IN DALLAS COUNTY, TEXAS.

Section 31. Enforceability/Reformation. If any court of competent jurisdiction determines that any of the provisions hereof, or any parts thereof, are invalid or unenforceable, the other provisions and the remainder of any of the provisions so impaired shall not thereby be affected and shall be given full effect, without regard to the invalid provisions or portions of provisions. Notwithstanding the foregoing, it is the intent of each of the parties that the provisions of this Agreement be enforced to the fullest extent permitted by applicable law. If any court of competent jurisdiction determines that any of the provisions of this Agreement, or any parts thereof, are unenforceable under applicable laws or public policies, it is the intent of the parties, and the parties hereby request, that the court reform such provisions in such manner as such court may determine is necessary to make such provisions enforceable.

Section 32. Headings. The headings, captions and arrangements used herein are for convenience only and shall not be deemed to limit, amplify or modify the terms hereof, nor affect the meaning thereof.

Section 33. Multiple Counterparts. This Agreement has been executed in a number of identical counterparts, all of which constitute, collectively, one agreement; but in making proof of this Agreement, it shall not be necessary to produce or account for more than one such counterpart.

Section 34. Parties Bound. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective representatives, heirs, successors and permitted assigns.

Section 35. Revocation Period. It is expressly agreed that for seven (7) days following execution of this Agreement by Employee, Employee may revoke this Agreement; it is further expressly agreed by the parties that this Agreement shall not become effective and/or fully made and enforceable until the seven (7) day revocation period described above has expired.

Section 36. Effectiveness. On the first calendar day after the expiration of the 7-day revocation period described in Section 35 above, and if Employee has not revoked his acceptance during the revocation period, this Agreement will become effective. If the Agreement becomes effective, it may not thereafter be revoked by either party.

EXECUTED effective as of the date first set forth above.

		MICHAELS STORES, INC.
		By:		/s/ R. MICHAEL ROULEAU
		Title: CEO
		/s/ BRYAN M. DECORDOVA Bryan M. DeCordova

ACKNOWLEDGMENTS

STATE OF TEXAS		§
		§
COUNTY OF DALLAS		§

BEFORE ME, the undersigned authority, on this day personally appeared Michael Rouleau, CEO of MICHAELS STORES, INC., a Delaware corporation, known to me to be the person whose name is subscribed to the foregoing instrument and acknowledged to me that he executed the same for the purposes and consideration therein expressed, in the capacity therein stated and as the act and deed of said corporation.

GIVEN UNDER MY HAND AND SEAL on this 7^th day of June, 2002.

		/s/ VERONICA LARSEN Notary Public in and for the State of Texas
		Veronica Larsen October 7, 2005 Notary's Printed Name and Commission Expiration

STATE OF TEXAS		§
		§
COUNTY OF DALLAS		§

BEFORE ME, the undersigned authority, on this day personally appeared BRYAN M. DECORDOVA, known to me to be the person whose name is subscribed to the foregoing instrument, and acknowledged to me that he executed the same for the purposes and consideration therein expressed.

GIVEN UNDER MY HAND AND SEAL on this 10^th day of June, 2002.

		/s/ VERONICA LARSEN Notary Public in and for the State of Texas
		Veronica Larsen October 7, 2005 Notary's Printed Name and Commission Expiration

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AGREEMENT
EX-10.3 5 a2089299zex-10_3.htm EXHIBIT 10.3

Exhibit 10.3

AMENDMENT
TO
AGREEMENT

THIS Amendment ("Amendment") to the Agreement between Michaels Stores, Inc. ("Michaels") and Bryan M. DeCordova ("Employee") dated effective as of June 7, 2002 ("Agreement") is entered into by and among Michaels, Michaels Management Services, LP (the "Company") and Employee effective as of August 2, 2002.

WHEREAS, the original Agreement provided for Employee to continue to perform certain services for Michaels and its subsidiaries until August 31, 2002; and

WHEREAS, Employee is employed by the Company (which is a subsidiary of Michaels); and

WHEREAS, Michaels, the Company and Employee wish to extend the time for which Employee will perform services for Michaels and its subsidiaries until September 30, 2002; and

WHEREAS, the Company wishes to execute this Amendment to evidence its ratification and adoption of and consent to the Agreement, as amended by the Amendment;

Section 1. Amended Resignation Date. Section 1 of the Agreement is hereby amended to read in its entirety as follows:

Section 1. Resignation. Employee hereby irrevocably and unconditionally resigns from any position he holds with Michaels or any subsidiary or affiliate of Michaels effective on the earlier to occur of (a) September 30, 2002; or (b) the date, if any, upon which Employee is terminated "for Cause," as defined in Section 4 of this Agreement (the earlier of the possible dates actually taking place being referred to herein as the "Termination Date").

Section 2. Certain References. All references in the Agreement to: (a) "this Agreement" shall mean the Agreement as amended by this Amendment; (b) "the parties" shall mean Michaels, the Company and Employee; (c) "either party" shall mean "any of the parties"; (d) "both of the parties" shall mean "all of the parties"; and (e) "other party" shall mean "other parties".

Section 3. Effect of Amendment. Except as amended by this Amendment, the Agreement will be unamended and remain in full force and effect.

Section 4. Headings. The headings, captions and arrangements used in this Amendment are for convenience only and shall not be deemed to limit, amplify or modify the terms hereof, nor affect the meaning thereof.

Section 5. GOVERNING LAW. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HERETO SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE SUBSTANTIVE LAWS (BUT NOT THE RULES GOVERNING CONFLICTS OF LAWS) OF THE STATE OF TEXAS. THE PARTIES AGREE THAT THIS AMENDMENT SHALL BE PERFORMABLE IN DALLAS COUNTY, TEXAS.

Section 6. Multiple Counterparts. This Amendment has been executed in a number of counterparts, all of which constitute, collectively, one agreement; but in making proof of this Amendment, it shall not be necessary to produce or account for more than one such counterpart.

EXECUTED effective as of August 2, 2002.

MICHAELS STORES, INC.
By:	/s/ SUE ELLIOTT Name: Sue Elliott
	Title:	Senior Vice President—Human Resources
MICHAELS MANAGEMENT SERVICES, LP
By:	MICHAELS GP, INC.
By:	/s/ SUE ELLIOTT Name: Sue Elliott
	Title:	Senior Vice President—Human Resources
/s/ BRYAN M. DECORDOVA Bryan M. DeCordova

ACKNOWLEDGMENTS

STATE OF TEXAS		§
		§
COUNTY OF DALLAS		§

BEFORE ME, the undersigned authority, on this day personally appeared Sue Elliott, Senior Vice President—Human Resources of MICHAELS STORES, INC., a Delaware corporation, known to me to be the person whose name is subscribed to the foregoing instrument and acknowledged to me that he executed the same for the purposes and consideration therein expressed, in the capacity therein stated and as the act and deed of said corporation.

GIVEN UNDER MY HAND AND SEAL on this 2nd day of August, 2002.

		/s/ VERONICA LARSEN Notary Public in and for the State of Texas
		Veronica Larsen October 7, 2005 Notary's Printed Name and Commission Expiration

STATE OF TEXAS		§
		§
COUNTY OF DALLAS		§

BEFORE ME, the undersigned authority, on this day personally appeared Sue Elliott, Senior Vice President—Human Resources of MICHAELS GP, INC., a Delaware corporation, general partner of MICHAELS MANAGEMENT SERVICES, LP, a Texas limited partnership, known to me to be the person whose name is subscribed to the foregoing instrument and acknowledged to me that he executed the same for the purposes and consideration therein expressed, in the capacity therein stated and as the act and deed of said limited partnership.

GIVEN UNDER MY HAND AND SEAL on this 2nd day of August, 2002.

		/s/ VERONICA LARSEN Notary Public in and for the State of Texas
		Veronica Larsen October 7, 2005 Notary's Printed Name and Commission Expiration

STATE OF TEXAS		§
		§
COUNTY OF DALLAS		§

GIVEN UNDER MY HAND AND SEAL on this 2nd day of August, 2002.

		/s/ VERONICA LARSEN Notary Public in and for the State of Texas
		Veronica Larsen October 7, 2005 Notary's Printed Name and Commission Expiration

EX-99.1 6 a2089299zex-99_1.htm EXHIBIT 99.1
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Exhibit 99.1

CERTIFICATION PURSUANT TO 18 U.S.C. §1350,
AS ADOPTED PURSUANT TO §906
OF THE SARBANES-OXLEY ACT OF 2002

In connection with the filing of the Quarterly Report on Form 10-Q of Michaels Stores, Inc., a Delaware corporation (the "Company"), for the period ended August 3, 2002, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), each of the undersigned officers of the Company certifies, that, to such officer's knowledge:

(1): The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2): The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods expressed in the Report.

		/s/ R. MICHAEL ROULEAU R. Michael Rouleau President and Chief Executive Officer
		/s/ BRYAN M. DECORDOVA Bryan M. DeCordova Executive Vice President—Chief Financial Officer

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CERTIFICATION PURSUANT TO 18 U.S.C. §1350, AS ADOPTED PURSUANT TO §906 OF THE SARBANES-OXLEY ACT OF 2002
-----END PRIVACY-ENHANCED MESSAGE-----

MICHAELS STORES, INC.

/s/ BRYAN M. DECORDOVA
Bryan M. DeCordova
Executive Vice President—Chief Financial Officer (Principal Financial and Accounting Officer)

Dated: September 17, 2002