Note 14. Condensed Consolidating Financial Information

All obligations of Michaels Stores, Inc. under the Senior notes, Senior Subordinated Notes, Subordinated Discount Notes, Restated Term Loan Credit Facility, and Restated Revolving Credit Facility are guaranteed by each of our subsidiaries other than Aaron Brothers Card Services, LLC, Artistree of Canada, ULC, and Michaels Stores of Puerto Rico, LLC. As of February 2, 2013, the financial statements of Aaron Brothers Card Services, LLC, Artistree of Canada, ULC, and Michaels Stores of Puerto Rico, LLC were immaterial. Each subsidiary guarantor is 100% owned by the parent and all guarantees are joint and several and full and unconditional.

The following condensed consolidating financial information represents the financial information of Michaels Stores, Inc. and its wholly-owned subsidiary guarantors, prepared on the equity basis of accounting. The information is presented in accordance with the requirements of Rule 3-10 under the SEC’s Regulation S-X. The financial information may not necessarily be indicative of results of operations, cash flows, or financial position had the subsidiary guarantors operated as independent entities.

Supplemental Condensed Consolidating Statement of Comprehensive Income

	Fiscal Year 2012
	Parent Company		Guarantor Subsidiaries			Eliminations			Consolidated
	(In millions)

Net sales	$	3,848	$	2,544		$	(1,984	)	$	4,408
Cost of sales and occupancy expense	2,474		2,142			(1,984		)	2,632
Gross profit	1,374		402			—			1,776
Selling, general, and administrative expense	983		152			—			1,135
Impairment of intangible assets	8		—			—			8
Related party expenses	13		—			—			13
Store pre-opening costs	4		1			—			5
Operating income	366		249			—			615
Interest expense	245		—			—			245
Refinancing costs and losses on early extinguishments of debt	33		—			—			33
Other (income) and expense, net	—		(1		)	—			(1		)
Intercompany charges (income)	76		(76		)	—			—
Equity in earnings of subsidiaries	326		—			(326		)	—
Income before income taxes	338		326			(326		)	338
Provision for income taxes	124		120			(120		)	124
Net income	$	214	$	206		$	(206	)	$	214

Comprehensive income	$	214	$	206		$	(206	)	$	214

Supplemental Condensed Consolidating Statement of Comprehensive Income

	Fiscal Year 2011
	Parent Company			Guarantor Subsidiaries			Eliminations			Consolidated
	(In millions)

Net sales	$	3,684		$	2,369		$	(1,843	)	$	4,210
Cost of sales and occupancy expense	2,390			1,979			(1,843		)	2,526
Gross profit	1,294			390			—			1,684
Selling, general, and administrative expense	953			145			—			1,098
Related party expenses	13			—			—			13
Store pre-opening costs	3			1			—			4
Operating income	325			244			—			569
Interest expense	254			—			—			254
Refinancing costs and losses on early extinguishments of debt	18			—			—			18
Other (income) and expense, net	5			4			—			9
Intercompany charges (income)	73			(73		)	—			—
Equity in earnings of subsidiaries	313			—			(313		)	—
Income before income taxes	288			313			(313		)	288
Provision for income taxes	112			121			(121		)	112
Net income	$	176		$	192		$	(192	)	$	176

Other comprehensive income, net of tax:
Foreign currency translation adjustment	(1		)	—			—			(1		)
Comprehensive income	$	175		$	192		$	(192	)	$	175

Supplemental Condensed Consolidating Statement of Comprehensive Income

	Fiscal Year 2010
	Parent Company		Guarantor Subsidiaries			Eliminations			Consolidated
	(In millions)

Net sales	$	3,530	$	2,294		$	(1,793	)	$	4,031
Cost of sales and occupancy expense	2,341		1,919			(1,793		)	2,467
Gross profit	1,189		375			—			1,564
Selling, general, and administrative expense	919		140			—			1,059
Related party expenses	14		—			—			14
Store pre-opening costs	3		—			—			3
Operating income	253		235			—			488
Interest expense	276		—			—			276
Refinancing costs and losses on early extinguishments of debt	53		—			—			53
Other (income) and expense, net	12		(2		)	—			10
Intercompany charges (income)	73		(73		)	—			—
Equity in earnings of subsidiaries	310		—			(310		)	—
Income before income taxes	149		310			(310		)	149
Provision for income taxes	46		107			(107		)	46
Net income	$	103	$	203		$	(203	)	$	103

Other comprehensive income, net of tax:
Foreign currency translation adjustment			—			—			1
Comprehensive income	$	104	$	203		$	(203	)	$	104

Supplemental Condensed Consolidating Balance Sheet

	February 2, 2013
	Parent Company			Guarantor Subsidiaries		Eliminations			Consolidated
	(In millions)
ASSETS
Current assets:
Cash and equivalents	$	37		$	19	$	—		$	56
Merchandise inventories	590			275		—			865
Intercompany receivables	—			323		(323		)	—
Other	105			21		—			126
Total current assets	732			638		(323		)	1,047
Property and equipment, net	271			67		—			338
Goodwill, net	94			—		—			94
Investment in subsidiaries	301			—		(301		)	—
Other assets	59			3		—			62
Total assets	$	1,457		$	708	$	(624	)	$	1,541

LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable	$	5		$	258	$	—		$	263
Accrued liabilities and other	235			132		—			367
Current portion of long-term debt	150			—		—			150
Intercompany payable	323			—		(323		)	—
Other	39			5		—			44
Total current liabilities	752			395		(323		)	824
Long-term debt	2,891			—		—			2,891
Other long-term liabilities	73			12		—			85
Total stockholders’ deficit	(2,259		)	301		(301		)	(2,259		)
Total liabilities and stockholders’ deficit	$	1,457		$	708	$	(624	)	$	1,541

Supplemental Condensed Consolidating Balance Sheet

	January 28, 2012
	Parent Company			Guarantor Subsidiaries		Eliminations			Consolidated
	(In millions)
ASSETS
Current assets:
Cash and equivalents	$	363		$	8	$	—		$	371
Merchandise inventories	554			286		—			840
Intercompany receivables	—			466		(466		)	—
Other	103			20		—			123
Total current assets	1,020			780		(466		)	1,334
Property and equipment, net	249			63		—			312
Goodwill, net	95			—		—			95
Investment in subsidiaries	410			—		(410		)	—
Other assets	78			3		—			81
Total assets	$	1,852		$	846	$	(876	)	$	1,822

LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable	$	9		$	292	$	—		$	301
Accrued liabilities and other	257			132		—			389
Current portion of long-term debt	127			—		—			127
Intercompany payable	466			—		(466		)	—
Other	19			1		—			20
Total current liabilities	878			425		(466		)	837
Long-term debt	3,363			—		—			3,363
Other long-term liabilities	85			11		—			96
Total stockholders’ deficit	(2,474		)	410		(410		)	(2,474		)
Total liabilities and stockholders’ deficit	$	1,852		$	846	$	(876	)	$	1,822

Supplemental Condensed Consolidating Statement of Cash Flows

	Fiscal Year 2012
	Parent Company			Guarantor Subsidiaries			Eliminations			Consolidated
	(In millions)
Operating activities:
Net cash provided by operating activities	$	272		$	453		$	(423	)	$	302

Investing activities:
Cash paid for property and equipment	(105		)	(19		)	—			(124		)
Net cash used in investing activities	(105		)	(19		)	—			(124		)

Financing activities:
Net repayments of long-term debt	(457		)	—			—			(457		)
Intercompany dividends	—			(423		)	423			—
Other financing activities	(36		)	—			—			(36		)
Net cash provided by financing activities	(493		)	(423		)	423			(493		)

Increase in cash and equivalents	(326		)	11			—			(315		)
Beginning cash and equivalents	363			8			—			371
Ending cash and equivalents	$	37		$	19		$	—		$	56

Supplemental Condensed Consolidating Statement of Cash Flows

	Fiscal Year 2011
	Parent Company			Guarantor Subsidiaries			Eliminations			Consolidated
	(In millions)
Operating activities:
Net cash provided by operating activities	$	394		$	234		$	(215	)	$	413

Investing activities:
Cash paid for property and equipment	(88		)	(21		)	—			(109		)
Net cash used in investing activities	(88		)	(21		)	—			(109		)

Financing activities:
Net repayments of long-term debt	(227		)	—			—			(227		)
Intercompany dividends	—			(215		)	215			—
Other financing activities	(25		)	—			—			(25		)
Net cash provided by financing activities	(252		)	(215		)	215			(252		)

Increase in cash and equivalents	54			(2		)	—			52
Beginning cash and equivalents	309			10			—			319
Ending cash and equivalents	$	363		$	8		$	—		$	371

Supplemental Condensed Consolidating Statement of Cash Flows

	Fiscal Year 2010
	Parent Company			Guarantor Subsidiaries			Eliminations			Consolidated
	(In millions)
Operating Activities:
Net cash provided by operating activities	$	426		$	301		$	(289	)	$	438

Investing Activities:
Cost of business acquisition	(2		)	—			—			(2		)
Cash paid for property and equipment	(69		)	(12		)	—			(81		)
Net cash used in investing activities	(71		)	(12		)	—			(83		)

Financing Activities:
Net repayments of long-term debt	(225		)	—			—			(225		)
Intercompany dividends	—			(289		)	289			—
Other financing activities	(28		)	—			—			(28		)
Net cash used in financing activities	(253		)	(289		)	289			(253		)

Increase in cash and equivalents	102			—			—			102
Beginning cash and equivalents	207			10			—			217
Ending cash and equivalents	$	309		$	10		$	—		$	319

MICHAELS STORES, INC.

UNAUDITED SUPPLEMENTAL QUARTERLY FINANCIAL DATA

(In millions)

	First		Second		Third		Fourth
	Quarter		Quarter		Quarter		Quarter
Fiscal 2012:
Net sales	$	978	$	892	$	1,014	$	1,524
Cost of sales and occupancy expense	566		553		611		902
Gross profit	412		339		403		622
Selling, general, and administrative expense	260		252		278		345
Operating income	148		82		119		266
Refinancing costs and losses on early extinguishments of debt (1)	—		—		3		30
Net income	53		13		36		112

	First		Second		Third		Fourth
	Quarter		Quarter		Quarter		Quarter
Fiscal 2011:
Net sales	$	953	$	857	$	996	$	1,404
Cost of sales and occupancy expense	560		529		594		843
Gross profit	393		328		402		561
Selling, general, and administrative expense	254		241		279		324
Operating income	135		82		118		234
Refinancing costs and losses on early extinguishments of debt (2)	11		4		1		2
Net income	37		10		32		97

We report on the basis of a 52 or 53-week fiscal year, which ends on the Saturday closest to January 31. Our interim periods each contain 13 weeks, with the first quarter ending on a Saturday 13 weeks after the end of our previous fiscal year. For fiscal years that contain 53 weeks, our fourth quarter contains 14 weeks.

(1) The refinancing costs and losses on early extinguishments of debt relates to our senior secured term loan facility and prepayment of our B-1 Term Loans, the redemption of our remaining outstanding Subordinated Discount Notes, and our asset-based revolving credit facility.

(2) The refinancing costs and losses on early extinguishments of debt relates to the early extinguishment of $163 million face value, or $155 million accreted value of our outstanding Subordinated Discount Notes and $7 million face value of our Senior Subordinated Notes.