10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended August 3, 2013

OR

oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from           to          

Commission file number 001-09338

MICHAELS STORES, INC.

(Exact name of registrant as specified in its charter)

Delaware	75-1943604
(State or other jurisdiction of	(I.R.S. employer
incorporation or organization)	identification number)

8000 Bent Branch Drive

Irving, Texas 75063

(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 o  No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x  No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o	Accelerated filer o
Non-accelerated filer x	Smaller reporting company o
(Do not check if a smaller reporting company)

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No x

As of August 26, 2013, 100 shares of the Registrant’s Common Stock were outstanding.

*The Registrant has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934, but is not required to file such reports under such sections.

MICHAELS STORES, INC.

FORM 10-Q

Part I—FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Balance Sheets as of August 3, 2013, February 2, 2013, and July 28, 2012 (unaudited)	3
	Consolidated Statements of Comprehensive Income for the quarters and six months ended August 3, 2013 and July 28, 2012 (unaudited)	4
	Consolidated Statements of Cash Flows for the quarters and six months ended August 3, 2013 and July 28, 2012 (unaudited)	5
	Notes to Consolidated Financial Statements for the quarter and six months ended August 3, 2013 (unaudited)	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	30
Item 4.	Controls and Procedures	31
Part II—OTHER INFORMATION
Item 1.	Legal Proceedings	31
Item 5.	Other Information	32
Item 6.	Exhibits	33
Signatures		34

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MICHAELS STORES, INC.

Part I—FINANCIAL INFORMATION

Item 1.  Financial Statements.

MICHAELS STORES, INC.

CONSOLIDATED BALANCE SHEETS

(in millions, except share data)

(Unaudited)

	August 3,			February 2,			July 28,
	2013			2013			2012
ASSETS
Current assets:
Cash and equivalents	$	51		$	56		$	113
Merchandise inventories	905			865			922
Prepaid expenses and other	96			86			89
Deferred income taxes	37			37			42
Income tax receivable	34			3			27
Total current assets	1,123			1,047			1,193
Property and equipment, at cost	1,542			1,502			1,438
Less accumulated depreciation and amortization	(1,195		)	(1,164		)	(1,112		)
Property and equipment, net	347			338			326
Goodwill	94			94			95
Debt issuance costs, net of accumulated amortization of $54, $54, and $82, respectively	40			46			51
Deferred income taxes	13			13			18
Other assets	5			3			3
Total non-current assets	152			156			167
Total assets	$	1,622		$	1,541		$	1,686
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable	$	289		$	263		$	277
Accrued liabilities and other	338			367			351
Current portion of long-term debt	238			150			1
Deferred income taxes	4			4			1
Income taxes payable	1			40			2
Total current liabilities	870			824			632
Long-term debt	2,882			2,891			3,363
Deferred income taxes	2			2			11
Other long-term liabilities	81			83			86
Total long-term liabilities	2,965			2,976			3,460
Total liabilities	3,835			3,800			4,092
Commitments and contingencies
Stockholders’ deficit:
Common Stock, $0.10 par value, 100 shares authorized; 100 shares issued and outstanding	—			—			—
Additional paid-in capital	60			61			62
Accumulated deficit	(2,277		)	(2,326		)	(2,474		)
Accumulated other comprehensive income	4			6			6
Total stockholders’ deficit	(2,213		)	(2,259		)	(2,406		)
Total liabilities and stockholders’ deficit	$	1,622		$	1,541		$	1,686

See accompanying notes to consolidated financial statements.

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MICHAELS STORES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in millions)

(Unaudited)

	Quarter Ended						Six Months Ended
	August 3,			July 28,			August 3,			July 28,
	2013			2012			2013			2012
Net sales	$	904		$	892		$	1,897		$	1,870
Cost of sales and occupancy expense	567			553			1,153			1,119
Gross profit	337			339			744			751
Selling, general, and administrative expense	258			252			529			512
Related party expenses	3			4			7			7
Store pre-opening costs	1			1			3			2
Operating income	75			82			205			230
Interest expense	45			61			92			127
Refinancing costs and losses on early extinguishment of debt	—			—			7			—
Other (income) and expense, net	1			—			1			(1		)
Income before income taxes	29			21			105			104
Provision for income taxes	9			8			38			38
Net income	20			13			67			66
Other comprehensive income, net of tax:
Foreign currency translation adjustment	(2		)	(2		)	(2		)	—
Actuarial gain on pension plan	1			—			—			—
Comprehensive income	$	19		$	11		$	65		$	66

See accompanying notes to consolidated financial statements.

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MICHAELS STORES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions)

(Unaudited)

	Six Months Ended
	August 3,			July 28,
	2013			2012
Operating activities:
Net income	$	67		$	66
Adjustments:
Depreciation and amortization	50			46
Share-based compensation and other	1			3
Debt issuance costs amortization	4			8
Refinancing costs and losses on early extinguishment of debt	7			—
Changes in assets and liabilities:
Merchandise inventories	(40		)	(82		)
Prepaid expenses and other	(13		)	(9		)
Accounts payable	43			(23		)
Accrued interest	(2		)	(4		)
Accrued liabilities and other	(38		)	(42		)
Income taxes	(71		)	(43		)
Other long-term liabilities	(2		)	1
Net cash provided by (used in) operating activities	6			(79		)
Investing activities:
Additions to property and equipment	(50		)	(45		)
Net cash used in investing activities	(50		)	(45		)
Financing activities:
Redemption of senior subordinated notes due 2016	(142		)	—
Repurchase of subordinated discount notes due 2016	—			(127		)
Repayments on senior secured term loan facility	(4		)	—
Borrowings on asset-based revolving credit facility	375			—
Payments on asset-based revolving credit facility	(154		)	—
Repurchase of common stock	(45		)	(3		)
Proceeds from stock options exercised	25			2
Payment of capital leases	(2		)	(1		)
Change in cash overdraft	(14		)	(5		)
Net cash provided by (used in) financing activities	39			(134		)
Net decrease in cash and equivalents	(5		)	(258		)
Cash and equivalents at beginning of period	56			371
Cash and equivalents at end of period	$	51		$	113
Supplemental Cash Flow Information:
Cash paid for interest	$	89		$	122
Cash paid for income taxes	$	109		$	80

See accompanying notes to consolidated financial statements.

5

MICHAELS STORES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the Quarter and Six Months Ended August 3, 2013

(Unaudited)

Note 1.   Summary of Significant Accounting Policies

Basis of Presentation

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

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) 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 GAAP for complete financial statements. Therefore, these financial statements should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended February 2, 2013.

The balance sheet at February 2, 2013 has been derived from the audited financial statements at that date, but does not include all of the information and notes required by GAAP for complete financial statements.

In the opinion of management, all adjustments (consisting of normal recurring accruals and other items) considered necessary for a fair presentation have been included.

Because of the seasonal nature of our business, the results of operations for the quarter ended August 3, 2013 are not indicative of the results to be expected for the entire year.

We report on the basis of a 52- or 53-week fiscal year, which ends on the Saturday closest to January 31. All references herein to “fiscal 2013” relate to the 52 weeks ending February 1, 2014, and all references to”fiscal 2012” relate to the 53 weeks ended February 2, 2013.  In addition, all references herein to “the second quarter of fiscal 2013” relate to the 13 weeks ended August 3, 2013, and all references to “the second quarter of fiscal 2012” relate to the 13 weeks ended July 28, 2012. Finally, all references to “the six months ended August 3, 2013” relate to the 26 weeks ended August 3, 2013, and “the six months ended July 28, 2012” relate to the 26 weeks ended July 28, 2012.

Recent Accounting Pronouncements

In July 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss or a Tax Credit Carryforward Exists.” ASU 2013-11 requires unrecognized tax benefits to be presented as a decrease in a net operating loss, similar tax loss or tax credit carryforward  if certain criteria are met.    ASU 2013-11, which is prospective, is effective for reporting periods beginning after December 15, 2013, with earlier adoption permitted.  Retrospective application is also permitted. We are still evaluating the standard to determine when we will adopt the standard but we do not believe the implementation of this standard will result in a material impact to our financial statements.

6

Note 2.   Debt

Our outstanding debt is detailed in the table below.  We were in compliance with the terms and conditions of all debt agreements for all periods presented.

	August 3, 2013		February 2, 2013		July 28, 2012		Interest Rate
	(in millions)
Senior secured term loan	$	1,636	$	1,640	$	1,996	Variable
Senior notes	1,007		1,007		795		7.750%
Senior subordinated notes	255		393		393		11.375%
Subordinated discount notes	—		—		180		13.000%
Asset-based revolving credit facility	222		1		—		Variable
Total debt	3,120		3,041		3,364
Less current portion	238		150		1
Long-term debt	$	2,882	$	2,891	$	3,363

113/8% Senior Subordinated Notes due 2016

On January 28, 2013, we caused to be delivered to the holders of our outstanding 113/8% Senior Subordinated Notes due November 1, 2016 (the “Senior Subordinated Notes”) an irrevocable notice relating to the redemption of $137 million in aggregate principal amount of the Senior Subordinated Notes. On February 27, 2013, we redeemed the $137 million of Senior Subordinated Notes at a redemption price equal to 103.792%.  In accordance with Accounting Standards Codification (“ASC”) 470 Debt, we recorded a loss on early extinguishment of debt of approximately $7 million related to the partial redemption of our Senior Subordinated Notes. The $7 million loss is comprised of a $5 million redemption premium and $2 million to write off related debt issuance costs.

Restated Revolving Credit Facility

As of August 3, 2013, the borrowing base of our restated senior secured asset-based revolving credit facility (“the Restated Revolving Credit Facility”) was $650 million, of which we had $222 million in borrowings, $61 million of outstanding letters of credit and the unused borrowing capacity was $367 million.

Restated Term Loan Credit Facility

The Company is required to make scheduled quarterly payments, each equal to 0.25% of the original principal amount of the term loans, subject to adjustments relating to the incurrence of additional term loans under the Restated Term Loan Credit Facility, for the first six years and three quarters, with the balance paid on January 28, 2020.  The Company paid $4 million for the quarter ended August 3, 2013 and the current portion of debt includes $16 million that will be paid during the next four quarters.

Note 3.   Comprehensive Income

Accumulated other comprehensive income, net of tax, is reflected in the Consolidated Balance Sheets as follows:

7

	Foreign Currency Translation and Other
	(in millions)
Balance at February 2, 2013	$	6
Foreign currency translation adjustment	(2		)
Balance at August 3, 2013	$	4

Note 4.   Fair Value Measurements

As defined in ASC 820, Fair Value Measurements and Disclosures, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  ASC 820 establishes a three-level valuation hierarchy for fair value measurements. These valuation techniques are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect less transparent active market data, as well as internal assumptions. These two types of inputs create the following fair value hierarchy:

·Level 1 — Quoted prices for identical instruments in active markets;

·Level 2 — Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose significant inputs are observable; and

·Level 3 — Instruments with significant unobservable inputs.

We apply fair value techniques on a non-recurring basis for the establishment of potential impairment loss related to goodwill pursuant to ASC 350, Intangibles—Goodwill and Other and determining the fair value of long-lived assets pursuant to ASC 360, Property, Plant, and Equipment. During the quarter and six months ended August 3, 2013, there were no material events or changes in circumstances indicating the carrying amounts of our goodwill or long-lived assets may not be recoverable.

The table below provides the carrying and fair values of our senior secured term loan facility (“Restated Term Loan Credit Facility”), our 7 3/4% Senior Notes that mature in 2018 (“2018 Senior Notes”) and our Senior Subordinated Notes, (together, with our 2018 Senior Notes, “our notes” ) as of August 3, 2013. The fair value of our Restated Term Loan Credit Facility was determined based on quoted market prices of similar instruments which are considered Level 2 inputs within the fair value hierarchy. The fair value of our notes was determined based on recent trades which are considered Level 1 inputs within the fair value hierarchy.

	Carrying Value		Fair Value
	(in millions)
Senior secured term loan	$	1,636	$	1,645
Senior notes	1,007		1,079
Senior subordinated notes	255		267

Note 5.   Income Taxes

The effective tax rate was 31.0% for the second quarter of fiscal 2013. The effective tax rate was 40.1% for the second quarter of fiscal 2012. The current year tax rate is lower than the prior year tax rate due primarily to the realization of state tax credits this year.

The effective tax rate was 36.2% for the first six months of fiscal 2013. The effective tax rate was 36.6% for the first six months of fiscal 2012. The rate was lower than the prior year six month tax rate due primarily to the realization of state tax credits this year partly offset by the prior year favorable impact related to our reserve for uncertain tax positions. We currently estimate our annualized effective tax rate for fiscal 2013 to be 37.4%.

Note 6.   Commitments and Contingencies

We are involved in ongoing legal and regulatory proceedings.  Other than those described in the following paragraphs, there were no material changes to our disclosures of commitments and contingencies from our Annual Report on Form 10-K for the fiscal year ended February 2, 2013 and our Quarterly Report on Form 10-Q for the quarterly period ended May 4, 2013.

8

Consumer Class Action Claims

Massachusetts Zip Code Claims

Relying in part on the California Supreme Court decision, an additional purported class action lawsuit was filed on May 20, 2011 against the Company: Melissa Tyler v. Michaels Stores, Inc. in the U.S. District Court-District of Massachusetts, alleging violation of a Massachusetts statute regarding the collection of personally identification information in connection with a credit card transaction.   On March 11, 2013, the Massachusetts Supreme Judicial Court ruled on certified questions on the interpretation of the statute and remanded the case to the U.S. District Court for further proceedings.  Following the Judicial Court’s decision, an additional purported class action lawsuit asserting the same allegations in Tyler was filed in the U.S. District Court-District of Massachusetts by Susan D’Esposito, and the two cases have been consolidated.   On August 12, 2013, a tentative settlement that is subject to Court approval was reached for an amount that will not have a material effect on our Consolidated Financial Statements.

Governmental inquiries and related matters

Non-U.S. trust inquiry

In early 2005, the District Attorney’s office of the County of New York and the SEC opened inquiries concerning non-U.S. trusts that directly or indirectly held shares of Michaels common stock and common stock options. On July 29, 2010, the SEC filed a civil enforcement action in federal district court for the Southern District of New York against Charles Wyly, Sam Wyly, the Wylys’ attorney—Michael French, and others alleging, among other things, violations of various federal securities laws, including those governing ownership reporting and trading of securities, in connection with the non-U.S. trusts and their subsidiaries. Additional information may be obtained at the SEC’s website. Sam Wyly, the estate of Charles Wyly and Mr. French, also a former director of the Company, have requested indemnification from the Company for certain legal costs with respect to these matters. The Company has resolved all claims with regards to Sam Wyly and the estate of Charles Wyly for an immaterial amount.

On April 12, 2012, Mr. French filed a lawsuit against the Company and the non-U.S. trusts in the District Court of Dallas County, Texas. The matter was dismissed as to the non-U.S. trusts. Mr. French seeks damages from the Company for breach of contract, attorneys’ fees and costs related to the Company’s alleged indemnification obligations to Mr. French and attorneys’ fees and costs related to the lawsuit. On August 9, 2013, the dispute was settled for an amount that will not have a material effect on our Consolidated Financial Statements.

General

In addition to the litigation discussed above, we are, and in the future, may be involved in various other lawsuits, claims and proceedings incident to the ordinary course of business. The results of litigation are inherently unpredictable. Any claims against us, whether meritorious or not, could be time consuming, result in costly litigation, require significant amounts of management time and result in diversion of significant resources.

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ASC 450, Contingencies, governs the disclosure and recognition of loss contingencies, including potential losses from litigation and regulatory matters. It imposes different requirements for the recognition and disclosure of loss contingencies based on the likelihood of occurrence of the contingent future event or events. It distinguishes among degrees of likelihood using the following three terms: “probable”, meaning that “the future event or events are likely to occur”; “remote”, meaning that “the chance of the future event or events occurring is slight”; and “reasonably possible”, meaning that “the chance of the future event or events occurring is more than remote but less than likely”. In accordance with ASC 450, the Company accrues for a loss contingency when we conclude that the likelihood of a loss is probable and the amount of the loss can be reasonably estimated. When the loss cannot be reasonably estimated we estimate the range of amounts, and if no amount in the range constitutes a better estimate than any other amount, we accrue for the amount at the low end of the range. We adjust our accruals from time to time as we receive additional information, but the loss we incur may be significantly greater than or less than the amount we have accrued. We disclose loss contingencies if there is at least a reasonable possibility that a material loss has been incurred. No accrual or disclosure is required for losses that are remote.

For some of the matters disclosed above, as well as other matters previously disclosed in the Company’s filings with the Securities and Exchange Commission (“SEC”), the Company is currently able to estimate a reasonably possible loss or range of loss in excess of amounts accrued (if any). For some of the matters included within this estimation, an accrual has been made because a loss is believed to be both probable and reasonably estimable, but an exposure to loss exists in excess of the amount accrued; in these cases, the estimate reflects the reasonably possible range of loss in excess of the accrued amount. For other matters included within this estimation, no accrual has been made because a loss, although estimable, is believed to be reasonably possible, but not probable; in these cases the estimate reflects the reasonably possible loss or range of loss within the ranges identified. For the various ranges identified, the aggregate of these estimated amounts is approximately $10 million, which is also inclusive of amounts accrued by the Company.

For other matters disclosed above or as previously disclosed in the Company’s filings with the SEC, the Company is not currently able to estimate the reasonably possible loss or range of loss, and has indicated such. Many of these matters remain in preliminary stages (even in some cases where a substantial period of time has passed since the commencement of the matter), with few or no substantive legal decisions by the court defining the scope of the claims, the class (if any), or the potentially available damages, and fact discovery is still in progress or has not yet begun. For all these reasons, the Company cannot at this time estimate the reasonably possible loss or range of loss, if any, for these matters.

It is the opinion of the Company’s management, based on current knowledge and after taking into account its current legal accruals, the eventual outcome of all matters described in this Note would not be likely to have a material impact on the consolidated financial condition of the Company. Nonetheless, given the substantial or indeterminate amounts sought in certain of these matters, and the inherent unpredictability of such matters, an adverse outcome in certain of these matters could, from time to time, have a material effect on the Company’s consolidated results of operations or cash flows in particular quarterly or annual periods.

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Note 7.   The Michaels Companies and its Subsidiaries

In July 2013, Michaels was reorganized into a holding company structure (“Reorganization”).  The Michaels Companies, Inc. (“Parent”), Michaels FinCo Holdings, LLC (“FinCo Holdings”), Michaels FinCo, Inc. (“ FinCo Inc”) and Michaels Funding, Inc. (“Holdings”) and Michaels Stores Merger Co, Inc. (“MergerCo”) were formed in connection with the Reorganization: (i) MergerCo was merged with and into Michaels with Michaels being the surviving corporation; (ii) each share of Michaels’ common stock was converted into the right to receive one share of Parent common stock, subject to the same vesting conditions, if any, as applied to the share so converted, and each such share of Michaels’ common stock was cancelled and retired and ceased to exist; and (iii)  each option to purchase one or more shares of common stock of Michaels was assumed by Parent and converted into an option to purchase an equivalent number of shares of common stock of Parent with the remaining terms of each such option remaining unchanged except as was necessary to reflect the Reorganization. Approximately 118 million shares of Michaels’ common stock were converted into Parent common stock. The Michaels’ shares were then cancelled and retired and an amount equal to the par value of the original shares was transferred from the common stock account to paid-in capital. Michaels then issued 100 shares of stock with a $0.10 par value to Holdings. In addition, common stock issued and outstanding and additional paid-in capital for February 2, 2013 and July 28, 2012 on the Consolidated Balance Sheets have been adjusted to reflect this transaction as if it happened prior to those dates.

As a result of the Reorganization, FinCo Holdings is wholly owned by the Parent.  FinCo Inc and Holdings are wholly owned by FinCo Holdings.  Michaels is wholly owned by Holdings.

Subsequent to the Reorganization, on July 29, 2013, FinCo Holdings and FinCo Inc issued $800 million aggregate principal amount of 7.50%/8.25% PIK Toggle Notes due 2018 (“PIK Notes”). The PIK Notes were issued in a private transaction.  Interest payments on the PIK Notes are due February 1 and August 1 of each year until maturity.  The first two interest payments and the last interest payment are required to be paid entirely in cash.  All other interest payments must be made in cash, except that all or a portion of the interest on the PIK Notes may be paid by increasing the principal amount of the outstanding PIK Notes or by issuing additional PIK Notes depending on the amount of cash dividends that can be paid by the Company under our credit agreements governing our Senior Secured Credit Facilities, the terms of the indentures governing our outstanding notes and the terms of our other indebtedness outstanding at the time.  The proceeds from the debt issuance were about $782 million, after deducting the initial purchasers’ discount and estimated fees and expenses.  FinCo Holdings distributed the net proceeds to Parent and the proceeds were used to fund a cash dividend to the Parent’s equity and equity-award holders and pay related fees and expenses.

The PIK Notes are senior unsecured obligations of FinCo Holdings and FinCo Inc and are not guaranteed by the Company or any of the Company’s subsidiaries.  In addition, neither the PIK Notes nor the dividend transaction is reflected in the financial statements of the Company.  If interest on the PIK Notes is paid in cash, annual interest payments will total $60 million or a total of approximately $301 million from July 29, 2013 until August, 1, 2018, the maturity date.  Any cash interest payments will be funded by the Company through a cash dividend to Holdings.

Note 8.   Segments and Geographic Information

We consider our Michaels — U.S., Michaels — Canada, Aaron Brothers and online scrapbooking business operations to be our operating segments for purposes of determining reportable segments based on the criteria of ASC 280, Segment Reporting. We determined that our Michaels — U.S., Michaels — Canada, and Aaron Brothers operating segments have similar economic characteristics and meet the aggregation criteria set forth in ASC 280. Therefore, we combine those operating segments into one reporting segment.  During the second quarter of 2013, the online scrapbooking business was discontinued; as an operating segment, it is immaterial to the financial statements as a whole.

Our sales and assets by country are as follows:

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	Quarter Ended				Six Months Ended
	August 3, 2013		July 28, 2012		August 3, 2013		July 28, 2012
	(in millions)
Net Sales:
United States	$	819	$	812	$	1,717	$	1,703
Canada	85		80		180		167
Consolidated Total	$	904	$	892	$	1,897	$	1,870
	August 3, 2013		February 2, 2013		July 28, 2012
	(in millions)
Total Assets:
United States	$	1,499	$	1,432	$	1,569
Canada	123		109		117
Consolidated Total	$	1,622	$	1,541	$	1,686

Our chief operating decision makers evaluate historical operating performance, plan and forecast future periods’ operating performance based on earnings before interest, income taxes, depreciation, amortization, and refinancing costs and losses on early extinguishment of debt (“EBITDA (excluding refinancing costs and losses on early extinguishment of debt)”). We believe EBITDA (excluding refinancing costs and losses on early extinguishment of debt) represents the financial measure that more closely reflects the operating effectiveness of factors over which management has control. As such, an element of base incentive compensation targets for certain management personnel are based on EBITDA (excluding refinancing costs and losses on early extinguishment of debt). A reconciliation of EBITDA (excluding refinancing costs and losses on early extinguishment of debt) to Net income is presented below.

	Quarter Ended				Six Months Ended
	August 3, 2013		July 28, 2012		August 3, 2013		July 28, 2012
	(in millions)
Net income	$	20	$	13	$	67	$	66
Interest expense	45		61		92		127
Refinancing costs and losses on early extinguishments of debt	—		—		7		—
Provision for income taxes	9		8		38		38
Depreciation and amortization	25		22		50		46
EBITDA (excluding refinancing costs and losses on early extinguishments of debt)	$	99	$	104	$	254	$	277

Note 9.   Related Party Transactions

We pay annual management fees to Bain Capital Partners, LLC (“Bain Capital”) and The Blackstone Group L.P. (“The Blackstone Group” and, together with Bain Capital, the “Sponsors”) and Highfields Capital Management LP in the amount of $12 million and $1 million, respectively. We recognized $3 million and $4 million of expense related to annual management fees during the second quarter of fiscal 2013 and fiscal 2012, respectively and $7 million during the six months ended August 3, 2013 and July 28, 2012, respectively. These expenses are included in related party expenses on the Consolidated Statements of Comprehensive Income.

Bain Capital owns a majority equity position in LogicSource, an external vendor we utilize for print procurement services.  Payments associated with this vendor during the second quarters of fiscal 2013 and fiscal 2012 were $1 million and were $2 million and $3 million during the six months ended August 3, 2013 and July 28, 2012, respectively.  These expenses are included in Selling, general and administrative expense on the Consolidated Statements of Comprehensive Income.

12

The Blackstone Group owns a majority equity position in Brixmor Properties Group, a vendor we utilize to lease certain properties. Payments associated with this vendor during each of the second quarters of fiscal 2013 and fiscal 2012 were $1 million and were $2 million during the six months ended August 3, 2013 and July 28, 2012.  These expenses are included in Cost of sales and occupancy expense in the Consolidated Statements of Comprehensive Income.

The Blackstone Group owns a majority equity position in RGIS, an external vendor we utilize to count our store inventory. Payments associated with this vendor during the second quarters of fiscal 2013 and fiscal 2012 were $2 million and $1 million, respectively and were $3 million during the six months ended August 3, 2013 and July 28, 2012. These expenses are included in Selling, general and administrative expense on the Consolidated Statements of Comprehensive Income.

The Blackstone Group owns a majority equity position in Vistar, an external vendor we utilize for all of the candy-type items in our stores.  Payments associated with this vendor during the second quarter of fiscal 2013 and fiscal 2012 were $6 million and were $12 million and $11 million during the six months ended August 3, 2013 and July 28, 2012, respectively. These expenses are recognized in cost of sales as the sales are recorded.

Our current directors (other than Jill A. Greenthal and Carl S. Rubin) are affiliates of Bain Capital or The Blackstone Group.  As such, some or all of such directors may have an indirect material interest in payments with respect to debt securities of the Company that have been purchased by affiliates of Bain Capital and The Blackstone Group.  As of August 3, 2013, affiliates of The Blackstone Group held $38 million of our Restated Term Loan Credit Facility.

As a result of the Reorganization discussed in Note 7, at August 3, 2013, the Company has recorded a receivable from Parent of  $4 million for payments made by the Company related to the repurchase of stock issued by Parent as a result of a stock option exercise by an employee of the Company. Amounts paid by the Company on Parent’s behalf related to the dividend payment discussed in Note 7 and the stock option exercise discussed above were $20 million for the six months ended August 3, 2013.

Note 10.  Condensed Consolidating Financial Information

All obligations of the Company under its notes, the Restated Revolving Credit Facility and the Restated Term Loan Credit Facility are guaranteed by each of its subsidiaries other than Aaron Brothers Card Services, LLC, Artistree of Canada, ULC and Michaels Stores of Puerto Rico, LLC and will be guaranteed by its direct parent, Holdings. As of August 3, 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, directly or indirectly, by the Company and such guarantees of each subsidiary guarantor are (and the guarantee of Holdings will be) 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.

13

Supplemental Condensed Consolidating Balance Sheet

	August 3, 2013
	Parent  Company			Guarantor  Subsidiaries		Eliminations			Consolidated
	(in millions)
ASSETS
Current assets:
Cash and equivalents	$	28		$	23	$	—		$	51
Merchandise inventories	615			290		—			905
Intercompany receivables	—			481		(481		)	—
Other	139			28		—			167
Total current assets	782			822		(481		)	1,123
Property and equipment, net	274			73		—			347
Goodwill	94			—		—			94
Investment in subsidiaries	472			—		(472		)	—
Other assets	56			2		—			58
Total assets	$	1,678		$	897	$	(953	)	$	1,622
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable	$	5		$	284	$	—		$	289
Accrued liabilities and other	208			130		—			338
Current portion of long-term debt	238			—		—			238
Intercompany payable	481			—		(481		)	—
Other	5			—		—			5
Total current liabilities	937			414		(481		)	870
Long-term debt	2,882			—		—			2,882
Other long-term liabilities	72			11		—			83
Total stockholders’ deficit	(2,213		)	472		(472		)	(2,213		)
Total liabilities and stockholders’ deficit	$	1,678		$	897	$	(953	)	$	1,622

14

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	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

15

Supplemental Condensed Consolidating Balance Sheet

	July 28, 2012
	Parent  Company			Guarantor  Subsidiaries		Eliminations			Consolidated
	(in millions)
ASSETS
Current assets:
Cash and equivalents	$	93		$	20	$	—		$	113
Merchandise inventories	600			322		—			922
Intercompany receivables	—			556		(556		)	—
Other	135			23		—			158
Total current assets	828			921		(556		)	1,193
Property and equipment, net	265			61		—			326
Goodwill	95			—		—			95
Investment in subsidiaries	586			—		(586		)	—
Other assets	69			3		—			72
Total assets	$	1,843		$	985	$	(1,142	)	$	1,686
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable	$	8		$	269	$	—		$	277
Accrued liabilities and other	232			119		—			351
Current portion of long-term debt	1			—		—			1
Intercompany payable	556			—		(556		)	—
Other	3			—		—			3
Total current liabilities	800			388		(556		)	632
Long-term debt	3,363			—		—			3,363
Other long-term liabilities	86			11		—			97
Total stockholders’ deficit	(2,406		)	586		(586		)	(2,406		)
Total liabilities and stockholders’ deficit	$	1,843		$	985	$	(1,142	)	$	1,686

16

Supplemental Condensed Consolidating Statement of Comprehensive Income

	Quarter Ended August 3, 2013
	Parent  Company			Guarantor  Subsidiaries			Eliminations			Consolidated
	(in millions)
Net sales	$	783		$	534		$	(413	)	$	904
Cost of sales and occupancy expense	522			458			(413		)	567
Gross profit	261			76			—			337
Selling, general, and administrative expense	225			33			—			258
Related party expenses	3			—			—			3
Store pre-opening costs	1			—			—			1
Operating income	32			43			—			75
Interest expense	45			—			—			45
Refinancing costs and losses on early extinguishment of debt	—			—			—			—
Other (income) and expense, net	—			1			—			1
Intercompany charges (income)	12			(12		)	—			—
Equity in earnings of subsidiaries	54			—			(54		)	—
Income before income taxes	29			54			(54		)	29
Provision for income taxes	9			17			(17		)	9
Net income	20			37			(37		)	20
Other comprehensive income, net of tax:
Foreign currency translation adjustment	(2		)	—			—			(2		)
Actuarial gain on pension plan	1			—			—			1
Comprehensive income	$	19		$	37		$	(37	)	$	19

17

Supplemental Condensed Consolidating Statement of Comprehensive Income

	Quarter Ended July 28, 2012
	Parent  Company			Guarantor  Subsidiaries			Eliminations			Consolidated
	(in millions)
Net sales	$	777		$	521		$	(406	)	$	892
Cost of sales and occupancy expense	515			444			(406		)	553
Gross profit	262			77			—			339
Selling, general, and administrative expense	219			33			—			252
Related party expenses	4			—			—			4
Store pre-opening costs	1			—			—			1
Operating income	38			44			—			82
Interest expense	61			—			—			61
Other (income) and expense, net	—			—			—			—
Intercompany charges (income)	15			(15		)	—			—
Equity in earnings of subsidiaries	59			—			(59		)	—
Income before income taxes	21			59			(59		)	21
Provision for income taxes	8			22			(22		)	8
Net income	13			37			(37		)	13
Other comprehensive income, net of tax:
Foreign currency translation adjustment	(2		)	—			—			(2		)
Comprehensive income	$	11		$	37		$	(37	)	$	11

18

Supplemental Condensed Consolidating Statement of Comprehensive Income

	Six Months Ended August 3, 2013
	Parent Company			Guarantor Subsidiaries			Eliminations			Consolidated
	(in millions)
Net sales	$	1,652		$	1,081		$	(836	)	$	1,897
Cost of sales and occupancy expense	1,077			912			(836		)	1,153
Gross profit	575			169			—			744
Selling, general, and administrative expense	458			71			—			529
Related party expenses	7			—			—			7
Store pre-opening costs	3			—			—			3
Operating income	107			98			—			205
Interest expense	92			—			—			92
Refinancing costs and losses on early extinguishment of debt	7			—			—			7
Other (income) and expense, net	—			1			—			1
Intercompany charges (income)	25			(25		)	—			—
Equity in earnings of subsidiaries	122			—			(122		)	—
Income before income taxes	105			122			(122		)	105
Provision for income taxes	38			44			(44		)	38
Net income	67			78			(78		)	67
Other comprehensive income, net of tax:
Foreign currency translation adjustment	(2		)	—			—			$	(2	)
Comprehensive income	$	65		$	78		$	(78	)	$	65

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Supplemental Condensed Consolidating Statement of Comprehensive Income

	Six Months Ended July 28, 2012
	Parent Company		Guarantor Subsidiaries			Eliminations			Consolidated
	(in millions)
Net sales	$	1,638	$	1,070		$	(838	)	$	1,870
Cost of sales and occupancy expense	1,051		906			(838		)	1,119
Gross profit	587		164			—			751
Selling, general, and administrative expense	444		68			—			512
Related party expenses	7		—			—			7
Store pre-opening costs	2		—			—			2
Operating income	134		96			—			230
Interest expense	127		—			—			127
Other (income) and expense, net	—		(1		)	—			(1		)
Intercompany charges (income)	32		(32		)	—			—
Equity in earnings of subsidiaries	129		—			(129		)	—
Income before income taxes	104		129			(129		)	104
Provision for income taxes	38		47			(47		)	38
Net income	66		82			(82		)	66
Comprehensive income	$	66	$	82		$	(82	)	$	66

Supplemental Condensed Consolidating Statement of Cash Flows

	Six Months Ended August 3, 2013
	Parent Company			Guarantor Subsidiaries			Eliminations			Consolidated
	(in millions)
Operating activities:
Net cash (used in) provided by operating activities	$	(13	)	$	66		$	(47	)	$	6
Investing activities:
Cash paid for property and equipment	(35		)	(15		)	—			(50		)
Net cash used in investing activities	(35		)	(15		)	—			(50		)
Financing activities:
Net repayments of short-term debt	75			—			—			75
Intercompany dividends	—			(47		)	47			—
Other financing activities	(36		)	—			—			(36		)
Net cash provided by (used in) financing activities	39			(47		)	47			39
Decrease in cash and equivalents	(9		)	4			—			(5		)
Beginning cash and equivalents	37			19			—			56
Ending cash and equivalents	$	28		$	23		$	—		$	51

20

Supplemental Condensed Consolidating Statement of Cash Flows

	Six Months Ended July 28, 2012
	Parent			Guarantor
	Company			Subsidiaries			Eliminations			Consolidated
	(in millions)
Operating activities:
Net cash used in operating activities	$	(98	)	$	68		$	(49	)	$	(79	)
Investing activities:
Cash paid for property and equipment	(38		)	(7		)	—			(45		)
Net cash used in investing activities	(38		)	(7		)	—			(45		)
Financing activities:
Net repayment of long term debt	(127		)							(127		)
Intercompany dividends	—			(49		)	49			—
Other financing activities	(7		)	—			—			(7		)
Net cash used in financing activities	(134		)	(49		)	49			(134		)
Decrease in cash and equivalents	(270		)	12			—			(258		)
Beginning cash and equivalents	363			8			—			371
Ending cash and equivalents	$	93		$	20		$	—		$	113

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

All expressions of the “Company”, “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.

Disclosure Regarding Forward-Looking Information

The following discussion should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q. The following discussion, as well as other portions of this Quarterly Report on Form 10-Q, contains forward-looking statements that reflect our plans, estimates, and beliefs. Any statements contained herein (including, but not limited to, statements to the effect that Michaels or its management “anticipates,” “plans,” “estimates,” “expects,” “believes,” and other similar expressions) that are not statements of historical fact should be considered forward-looking statements and should be read in conjunction with our consolidated financial statements and related notes in our Annual Report on Form 10-K for the fiscal year ended February 2, 2013. Such forward-looking statements are based upon management’s current knowledge and assumptions about future events and involve risks and uncertainties that could cause actual results, performance or achievements to be materially different from anticipated results, prospects, performance or achievements expressed or implied by such forward-looking statements. Such risks and uncertainties include, but are not limited to:

·risks related to general economic conditions; if recovery from the economic downturn continues to be slow or prolonged, it could continue to adversely affect consumer confidence and retail spending, decrease demand for our merchandise and adversely impact our results of operations, cash flows and financial condition;

·risks related to our substantial indebtedness, as our leverage could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry, expose us to interest rate risk to the extent of our variable rate debt and prevent us from meeting our obligations under our notes and credit facilities;

·our ability to open new stores and increase comparable store sales growth, as our growth depends on our strategy of expanding our base of retail stores; and if we are unable to continue this strategy, our ability to increase our sales, profitability, and cash flow could be impaired;

·our reliance on foreign suppliers increases our risk of obtaining adequate, timely, and cost-effective product supplies;

·damage to the reputation of the Michaels brand or our private and exclusive brands could adversely affect our sales;

·significant increases in inflation or commodity prices such as petroleum, natural gas, electricity, steel, wood and paper may adversely affect our costs, including cost of merchandise;

·our suppliers may fail us;

·risks associated with the vendors from whom our products are sourced could materially adversely affect our revenue and gross profit;

·product recalls and/or product liability, as well as changes in product safety and other consumer protection laws, may adversely impact our operations, merchandise offerings, reputation, results of operation, cash flow, and financial condition;

·unexpected or unfavorable consumer responses to our promotional or merchandising programs could materially adversely affect our sales, results of operations, cash flow and financial condition;

·improvements to our supply chain may not be fully successful;

·changes in customer demand could materially adversely affect our sales, results of operations, and cash flow;

·how well we manage our business;

·competition could negatively impact our business;

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·failure to adequately maintain security and prevent unauthorized access to electronic and other confidential information and data breaches could materially adversely affect our financial condition and operating results;

·our information systems may prove inadequate;

·failure to attract or retain senior management could adversely affect our operations;

·a weak fourth quarter would materially adversely affect our results of operations;

·changes in newspaper subscription rates may result in reduced exposure to our circular advertisements;

·changes in regulations or enforcement may adversely impact our business;

·restrictions in our debt agreements that limit our flexibility in operating our business, as our senior secured credit facilities and the indentures governing our notes contain various covenants that limit our ability to engage in specified types of transactions and require that we maintain specified financial ratios upon the occurrence of certain events;

·disruptions in the capital markets could increase our costs of doing business;

·our real estate leases generally obligate us for long periods, which subjects us to various financial risks;

·we have co-sourced certain of our information technology, accounts payable, payroll, accounting and human resources functions, and may co-source other administrative functions, which makes us more dependent upon third parties;

·we are exposed to fluctuations in exchange rates between the U.S. and Canadian dollar, which is the functional currency of our Canadian subsidiaries;

·failure to attract and retain quality sales, distribution center and other associates in appropriate numbers as well as experienced buying and management personnel could adversely affect our performance;

·our results may be adversely affected by serious disruptions or catastrophic events, including geo-political events and weather; and

·the interests of our indirect parent, FinCo Holding, and our Sponsors may conflict with the interests of our debt holders.

For more details on factors that may cause actual results to differ materially from such forward-looking statements, please see Item 1A. Risk Factors of our Annual Report on Form 10-K for the fiscal year ended February 2, 2013, and other reports from time to time filed with or furnished to the Securities and Exchange Commission (“SEC”). We disclaim any intention to, and undertake no obligation to, update or revise any forward-looking statement.

General

We report on the basis of a 52- or 53-week fiscal year, which ends on the Saturday closest to January 31.  All references herein to “fiscal 2013” relate to the 52 weeks ending February 1, 2014 and all references to “fiscal 2012” relate to the 53 weeks ended February 2, 2013. In addition, all references herein to “the second quarter of fiscal 2013” relate to the 13 weeks ended August 3, 2013 and all references to “the second quarter of fiscal 2012” relate to the 13 weeks ended July 28, 2012. Finally, all references to “the six months ended August 3, 2013” relate to the 26 weeks ended August 3, 2013, and “the six months ended July 28, 2012” relate to the 26 weeks ended July 28, 2012.

23

The following table sets forth certain of our unaudited operating data:

	Quarter Ended						Six Months Ended
	August 3,			July 28,			August 3,		July 28,
	2013			2012			2013		2012
Michaels stores:
Retail stores open at beginning of period	1,113			1,066			1,099		1,064
Retail stores opened during the period	6			8			21		10
Retail stores opened (relocations) during the period	4			4			8		10
Retail stores closed during the period	—			—			(1	)	—
Retail stores closed (relocations) during the period	(4		)	(4		)	(8	)	(10		)
Retail stores open at end of period	1,119			1,074			1,119		1,074
Aaron Brothers stores:
Retail stores open at beginning of period	122			130			125		134
Retail stores opened (relocations) during the period	1			—			2		—
Retail stores closed during the period	(1		)	(2		)	(4	)	(6		)
Retail stores closed (relocations) during the period	—			—			(1	)	—
Retail stores open at end of period	122			128			122		128
Total store count at end of period	1,241			1,202			1,241		1,202
Other operating data:
Average inventory per Michaels store (in thousands) (1)	$	774		$	823		774		$	823
Comparable store sales (decrease) increase (2)	(1.3		)%	2.9		%	(1.0	)%	2.1		%

(1)The calculation of average inventory per Michaels store excludes our Aaron Brothers stores.

(2)Comparable store sales (decrease) increase represents the (decrease) increase in Net sales for Michaels and Aaron Brothers stores open the same number of months in the indicated period and the comparable period of the previous year, including stores that were relocated or expanded during either period. A store is deemed to become comparable in its 14th month of operation in order to eliminate grand opening sales distortions. A store temporarily closed more than two weeks is not considered comparable during the month it closed. If a store is closed longer than two weeks but less than two months, it becomes comparable in the month in which it reopens, subject to a mid-month convention. A store closed longer than two months becomes comparable in its 14th month of operation after its reopening.

Results of Operations

The following table sets forth the percentage relationship to Net sales of each line item of our unaudited Consolidated Statements of Comprehensive Income. This table should be read in conjunction with the following discussion and with our consolidated financial statements, including the related notes, contained herein.

24

	Quarter Ended				Six Months Ended
	August 3,		July 28,		August 3,		July 28,
	2013		2012		2013		2012
Net sales	100.0	%	100.0	%	100.0	%	100.0	%
Cost of sales and occupancy expense	62.7		62.0		60.8		59.8
Gross profit	37.3		38.0		39.2		40.2
Selling, general, and administrative expense	28.5		28.3		27.9		27.4
Related party expenses	0.3		0.5		0.4		0.4
Store pre-opening costs	0.1		0.1		0.2		0.1
Operating income	8.4		9.1		10.7		12.3
Interest expense	5.0		6.8		4.8		6.8
Refinancing costs and losses on early extinguishment of debt	—		—		0.4		—
Other (income) and expense, net	0.1		—		—		—
Income before income taxes	3.3		2.3		5.5		5.5
Provision for income taxes	1.0		0.9		2.0		2.0
Net income	2.3	%	1.4	%	3.5	%	3.5	%

Quarter Ended August 3, 2013 Compared to the Quarter Ended July 28, 2012

Net Sales—Net sales increased for the second quarter of fiscal 2013 by $12 million, or 1.3%, over the second quarter of fiscal 2012 due primarily to $24 million of incremental revenue from our non-comparable store sales, partially offset by a $12 million decrease in comparable store sales. Comparable store sales decreased 1.3% due to a 3.6% decrease in customer transactions and a 0.4% negative impact from deferred custom framing revenue, which was partially offset by a 2.7% increase in the average ticket.  The fluctuation in the exchange rates between the United States and Canadian dollars adversely impacted the average ticket by 10 basis points.  Two of our strongest categories were home accents and yarn.  The increase in home accents was due to positive customer response to our expanded assortment and improved presentation.  Our yarn growth is primarily driven by positive customer response to trend products.

Cost of Sales and Occupancy Expense—Cost of sales and occupancy expense increased $14 million to $567 million in the second quarter of fiscal 2013 from $553 million in the second quarter of fiscal 2012.  Cost of sales increased $4 million due to lower recognition of vendor allowances, $2 million due to the timing of the recognition of capitalized inventory costs and $3 million due primarily to increased merchandise costs for higher sales compared to the prior year.   This is partly offset by $4 million due to favorable shrink experience and by $3 million due to improved efficiencies and new product offerings in our vertically integrated framing operations.  In addition, we had a $13 million increase in rent and related expenses, including $5 million from opening new stores, a $6 million increase in store remodel and improvement expenses and a $1 million increase due to the timing of maintenance costs.

Cost of sales and occupancy expense increased 70 basis points as a percentage of Net sales to 62.7% for the second quarter of fiscal 2013 from 62.0% for the second quarter of fiscal 2012. Occupancy costs increased 120 basis points due to increased remodel expenses, pre-opening lease expenses on new stores and the timing of maintenance costs. Merchandise costs decreased 80 basis points driven by our direct import and private brand initiatives, as well as improved pricing and promotion management.  In addition, cost of sales decreased due to a 30 basis point improvement in efficiencies and new product offerings in our vertically integrated framing operation.  These amounts were partially offset by a 70 basis point increase in freight and distribution costs.

Selling, General and Administrative Expense— Selling, general and administrative expense was $258 million in the second quarter of fiscal 2013 compared to $252 million in the second quarter of fiscal 2012. Selling, general and administrative expense increased by $7 million due to incremental store costs related to operating an additional 45 additional Michaels stores at the end of the second quarter of fiscal 2013 compared to the end of the second quarter of fiscal 2012.  Additionally, payroll-related costs for existing stores increased by $2 million for the comparable periods. These increases were partially offset by $6 million in savings for bonus expense. As a percentage of Net sales, Selling, general and administrative expense increased 20 basis points for the reasons indicated above.

25

Related Party Expenses—Related  party expenses were $3 million and $4 million in the second quarter of fiscal 2013 and fiscal 2012, respectively, consisting of management fees and associated expenses paid to affiliates of two investment firms: Bain Capital Partners, LLC and The Blackstone Group, L.P. (collectively, together with their applicable affiliates, the “Sponsors”) and Highfields Capital Management, LP.

Interest Expense—Interest expense decreased $16 million to $45 million in the second quarter of fiscal 2013 from $61 million in the second quarter of fiscal 2012. The decrease is attributable to a $244 million reduction in our total debt outstanding and by a lower average interest rate associated with our amended senior secured term loan facility.

Provision for Income Taxes—The effective tax rate was 31.0% for the second quarter of fiscal 2013. The effective tax rate was 40.1% for the second quarter of fiscal 2012. The current year tax rate is lower than the prior year tax rate primarily due to the realization of state tax credits this year.  We currently estimate our annualized effective tax rate for fiscal 2013 to be 37.4%.

Six Months Ended August 3, 2013 Compared to the Six Months Ended July 28, 2012

Net Sales—Net sales increased for the first six months of fiscal 2013 by $27 million, or 1.4%, over the first six months of fiscal 2012 due primarily to $45 million of incremental revenue from our non-comparable store sales, partially offset by a $18 million decrease in comparable store sales. Comparable store sales decreased 1.0% driven by a 3.4% decrease in customer transactions, partially offset by a 2.3% increase in the average ticket.  The fluctuation in the exchange rates between the United States and Canadian dollars adversely impacted the average ticket by 20 basis points.  Two of our strongest categories were yarn and custom framing.  Our yarn growth is primarily driven by positive customer response to trend products. The increase in custom framing is driven by product mix and visualization capabilities in our stores.

Cost of Sales and Occupancy Expense—Cost of sales and occupancy expense increased $34 million to $1,153 million for the first six months of fiscal 2013 from $1,119 million for the first six months of fiscal 2012.  We had a $24 million increase in rent and related expenses, including $10 million from opening new stores, a $7 million increase in store remodel and improvement expenses and a $5 million increase due to the timing of maintenance costs. In addition, cost of sales increased $10 million due to a $12 million increase in merchandise costs associated with higher sales, a $5 million increase in inventory markdowns due to an increase in discontinued stock keeping units associated with planned merchandise resets and a slower sell through of this merchandise and a $4 million reduction in the recognition of vendor allowances compared to the prior year. This was partially offset by a $6 million decrease due to improved efficiencies and new product offerings in our vertically integrated framing operations, $3 million decrease due to our direct import penetration  and private brand initiatives and $3 million of favorable shrink experience in the current year compared to the prior year.

Cost of sales and occupancy expense increased 100 basis points as a percentage of Net sales to 60.8% for the first six months of fiscal 2013 from 59.8% for the first six months of fiscal 2012.  Occupancy costs increased 110 basis points due to increased remodel expenses and lease expenses on new stores as well as the timing of repairs and maintenance expenses compared to the prior year. In addition, cost of sales decreased by 10 basis points due to 30 basis points related to improved efficiencies and new product offerings in our vertically integrated framing operations, partially offset by a 20 basis point increase related to the reduction in the recognition of vendor allowances compared to the prior year.

Selling, General, and Administrative Expense— Selling, general and administrative expense was $529 million for the first six months of fiscal 2013 compared to $512 million for the first six months of fiscal 2012. The $17 million increase was driven primarily by $14 million of incremental costs related to operating 45 additional Michaels stores.  Additionally, Selling, general and administrative expense increased by $4 million for payroll and payroll-related costs, $3 million for increased advertising, $3 million for higher strategic initiative consulting fees and $2 million for executive signing costs. These amounts were partially offset by $11 million in savings for bonus and share-based compensation expenses.

As a percentage of Net sales, Selling, general and administrative expense increased 50 basis points due to an 80 basis point increase in new store costs and a 20 basis point increase in strategic initiative consulting fees. These percentages were partially offset by a 50 basis point decrease in bonus and share-based compensation.

Related Party Expenses—Related party expenses were $7 million for the first six months of each of fiscal 2013 and fiscal 2012, consisting of management fees and associated expenses paid to our Sponsors and Highfields Capital Management, LP.

Interest Expense— Interest expense decreased $35 million to $92 million in the second quarter of fiscal 2013 from $127 million in the second quarter of fiscal 2012. The decrease is attributable to a $244 million reduction in our total debt outstanding and by a lower average interest rate associated with our amended senior secured term loan facility.

Refinancing Costs and Losses on Early Extinguishment of Debt— We recorded a loss on the early extinguishment of debt of $7 million during the first six months of fiscal 2013, consisting of a $5 million redemption premium and $2 million to write off debt issuance costs related to the redemption of $137 million in aggregate principal amount of our 113/8% Senior Subordinated Notes due November 1, 2016 (the “Senior Subordinated Notes”).  See Note 2 to the consolidated financial statements for further discussion.

Other (Income) and Expense, net—Other  (income) and expense is related primarily to a $1 million foreign exchange rate loss for the first six months of fiscal 2013 and a $1 million foreign exchange rate gain for the first six months of fiscal 2012.

Provision for Income Taxes—The effective tax rate was 36.2% for the first six months of fiscal 2013. The effective tax rate was 36.6% for the first six months of fiscal 2012. The rate was lower than the prior year six month tax rate due primarily to the realization of state tax credits this year partly offset by the prior year favorable impact related to our reserve for uncertain tax positions. We currently estimate our annualized effective tax rate for fiscal 2013 to be 37.4%.

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Liquidity and Capital Resources

We require cash principally for day-to-day operations, to finance capital investments, to purchase inventory, to service our outstanding debt, and for seasonal working capital needs. We expect that our available cash, cash flow generated from operating activities, and funds available under our restated senior secured asset-based revolving credit facility (“Restated Revolving Credit Facility”) will be sufficient to fund planned capital expenditures, working capital requirements, debt repayments, debt service requirements and anticipated growth for the foreseeable future. Our ability to satisfy our liquidity needs and continue to refinance or reduce debt could be adversely affected by the occurrence of any of the events described under Item 1A. Risk Factors of our Annual Report on Form 10-K for the fiscal year ended February 2, 2013 or our failure to meet our debt covenants as described in “—Liquidity and Capital Resources—Cash Flow from Financing Activities”. Our Restated Revolving Credit Facility provides senior secured financing of up to $650 million, subject to a borrowing base. As of August 3, 2013, the borrowing base was $650 million, of which we had $222 million in outstanding borrowings, $61 million of outstanding letters of credit and $367 million of unused borrowing capacity. Our cash and equivalents decreased $5 million from $56 million at February 2, 2013 to $51 million at August 3, 2013.

Our substantial indebtedness could adversely affect our ability to raise additional capital, limit our ability to react to changes in the economy or our industry, expose us to interest rate risk, and prevent us from meeting our obligations. Management reacts strategically to changes in economic conditions and monitors compliance with debt covenants to seek to mitigate any potential material impacts to our financial condition and flexibility.

The Company intends to use excess operating cash flows to repay portions of its indebtedness, pay dividends to its parent and fund growth opportunities, depending on market conditions. If the Company uses its excess cash flows to pay dividends or repay its debt, it will reduce the amount of excess cash available for additional capital expenditures.  The Company intends to make a dividend to its parent to fund the February 1 payment due on the PIK Notes, as defined below.

As of February 2, 2013, we had an aggregate principal amount of $393 million of our Senior Subordinated Notes scheduled to mature in November 2016.  On February 27, 2013, we redeemed $137 million in aggregate principal amount of the outstanding Senior Subordinated Notes with cash on hand and borrowings made under our senior secured term loan facility (“Restated Term Loan Credit Facility”) for an aggregate redemption price (including the applicable redemption premium and accrued and unpaid interest) of $147 million.  The 7 3/4% Senior Notes mature in 2018 (“2018 Senior Notes”), and the Restated Term Loan Credit Facility matures in or after 2018. Although no assurance can be given, depending on market conditions and other factors, we plan to repay or refinance such indebtedness prior to maturity.

We and our subsidiaries, affiliates, and significant shareholders may continue from time to time to seek to retire or purchase our outstanding debt through cash purchases and/or exchanges, in open market purchases, privately negotiated transactions, by tender offer or otherwise.  Such repurchases or exchanges, if any, will depend on prevailing market conditions, liquidity requirements, contractual restrictions and other factors.

Cash Flow from Operating Activities

Cash flow provided by operating activities during the first six months of fiscal 2013 was $6 million compared to cash flow used in operating activities of $79 million during the first six months of fiscal 2012. The $85 million change was primarily due to a $66 million increase for the timing of vendor payments and a $42 million increase due to the timing of inventory purchases. These amounts were partially offset by the $28 million decrease due to the timing of income tax payments.

Average inventory per Michaels store (including supporting distribution centers) decreased 6.0% from $823,000 at July 28, 2012 to $774,000 at August 3, 2013, primarily driven by decreasing inventory in the distribution centers.

Cash Flow from Investing Activities

Cash flow used in investing activities represents the following capital expenditure activities:

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	Six Months Ended
	August 3,		July 28,
	2013		2012
	(in millions)
New and relocated stores and stores not yet opened (1)	$	19	$	15
Existing stores	11		8
Information systems	13		16
Corporate and other	7		6
	$	50	$	45

(1)In the first six months of fiscal 2013, we incurred capital expenditures related to the opening of 21 Michaels stores in addition to the relocation of 8 Michaels stores. In the first six months of fiscal 2012, we incurred capital expenditures related to the opening of 10 Michaels stores in addition to the relocation of 10 Michaels stores.

Cash Flow from Financing Activities

Cash flow provided by financing activities during the first six months of fiscal 2013 was $39 million compared to cash used in financing activities of $134 million during the first six months of fiscal 2012. Cash flow used in financing activities for the first six months of fiscal 2013 was impacted by the redemption of the $137 million of Senior Subordinated Notes at a redemption price of 103.792%, or a total of $142 million, and net borrowings of $221 million under our Restated Revolving Credit Facility and was impacted  by the exercise of stock options by certain former associates of the Company and  the subsequent repurchase of the shares of common stock issued as a result of the stock option exercise.

Other

In July 2013, Michaels was reorganized into a holding company structure (“Reorganization”).  The Michaels Companies, Inc. (“Parent”), Michaels FinCo Holdings, LLC (“FinCo Holdings”), Michaels FinCo, Inc. (“ FinCo Inc”) and Michaels Funding, Inc. (“Holdings”) and Michaels Stores Merger Co, Inc. (“MergerCo”) were formed in connection with the Reorganization: (i) MergerCo was merged with and into Michaels with Michaels being the surviving corporation; (ii) each share of Michaels’ common stock was converted into the right to receive one share of Parent common stock, subject to the same vesting conditions, if any, as applied to the share so converted, and each such share of Michaels’ common stock was cancelled and retired and ceased to exist; and (iii)  each option to purchase one or more shares of common stock of Michaels was assumed by Parent and converted into an option to purchase an equivalent number of shares of common stock of Parent with the remaining terms of each such option remaining unchanged except as was necessary to reflect the Reorganization.

As a result, FinCo Holdings is wholly owned by the Parent.  FinCo Inc and Holdings are wholly owned by FinCo Holdings.  Michaels is wholly owned by Holdings.

Subsequent to the Reorganization, FinCo Holdings and FinCo Inc issued $800 million aggregate principal amount of 7.50%/8.25% PIK Toggle Notes due 2018 (“PIK Notes”). The PIK Notes were issued in a private transaction.  Interest payments on the PIK Notes are due February 1 and August 1 of each year until maturity.  The first two interest payments and the last interest payment are required to be paid entirely in cash.  Otherwise, under certain circumstances, all or a portion of the interest on the PIK Notes may be paid by increasing the principal amount of the outstanding PIK Notes or by issuing additional PIK Notes.  The PIK Notes are not guaranteed by the Company or any of its subsidiaries.  The proceeds from the debt issuance were about $782 million, after deducting the initial purchasers’ discount and estimated fees and expenses.  FinCo Holdings distributed the net proceeds to Parent and the proceeds were used to fund a cash dividend to the Parent’s equity and equity-award holders and pay related fees and expenses.

While not required, the Company intends to make a dividend to its parent to fund the February 1, 2014 interest payment of approximately $31 million on the PIK Notes and, to the extent that such dividends can be made consistent with covenants applicable to the Company, future interest payments on the PIK Notes.  If interest on the PIK Notes is paid in cash, annual interest payments will total $60 million or a total of approximately $301 million from July 29, 2013 until August, 1, 2018, the maturity date.

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Non-GAAP Measures

The following table sets forth the Company’s Earnings before Interest, Taxes, Depreciation, Amortization, and Loss on early extinguishment of debt (“EBITDA excluding refinancing costs and losses on early extinguishment of debt”). The Company defines EBITDA (excluding refinancing costs and losses on early extinguishment of debt) as Net income before interest, income taxes, depreciation, amortization and loss on early extinguishment of debt. Additionally, the table presents Adjusted Earnings before Interest, Taxes, Depreciation and Amortization (“Adjusted EBITDA”).  The Company defines Adjusted EBITDA as EBITDA (excluding refinancing costs and losses on early extinguishment of debt) adjusted for certain defined amounts that are added to, or subtracted from, EBITDA (excluding refinancing costs and losses on early extinguishment of debt)  (collectively, the “Adjustments”) in accordance with the Company’s Restated Term Loan Credit Facility and Restated Revolving Credit Facility. The Adjustments are described in further detail in the table and the footnotes to the table below.

The Company has presented EBITDA (excluding refinancing costs and losses on early extinguishment of debt) and Adjusted EBITDA to provide investors with additional information to evaluate our operating performance and our ability to service our debt.  The Company uses EBITDA (excluding refinancing costs and losses on early extinguishment of debt), among other metrics, to evaluate operating performance, to plan and forecast future periods’ operating performance and as an element of its incentive compensation targets. Adjusted EBITDA is a required calculation under the Company’s Restated Term Loan Credit Facility and its Restated Revolving Credit Facility. As it relates to the Restated Term Loan Credit Facility, Adjusted EBITDA is used in the calculations of fixed charge coverage and leverage ratios, which, under certain circumstances may result in limitations on the Company’s ability to make restricted payments as well as the determination of mandatory repayments of the loans. Under the Restated Term Loan Credit Facility, Adjusted EBITDA is used in the calculation of fixed charge coverage ratios, which under certain circumstances, may restrict the Company’s ability to make certain payments (characterized as restricted payments), investments (including acquisitions) and debt repayments.

As EBITDA (excluding refinancing costs and losses on early extinguishment of debt) and Adjusted EBITDA are not measures of operating performance or liquidity calculated in accordance with U.S. generally accepted accounting principles (“GAAP”), these measures should not be considered in isolation of, or as a substitute for, Net income, as an indicator of operating performance, or net cash provided by operating activities as an indicator of liquidity.  Our computation of EBITDA (excluding refinancing costs and losses on early extinguishment of debt) and Adjusted EBITDA may differ from similarly titled measures used by other companies. As EBITDA (excluding refinancing costs and losses on early extinguishment of debt) and Adjusted EBITDA exclude certain financial information compared with Net income and Net cash provided by operating activities, the most directly comparable GAAP financial measures, users of this financial information should consider the types of events and transactions which are excluded.

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The table below shows a reconciliation of EBITDA (excluding refinancing costs and losses on early extinguishment of debt) and Adjusted EBITDA to Net income and Net cash used in operating activities.

	Quarter Ended						Six Months Ended
	August 3,			July 28,			August 3,			July 28,
	2013			2012			2013			2012
	(in millions)
Net cash used in operating activities	$	4		$	(120	)	$	6		$	(79	)
Depreciation and amortization	(25		)	(22		)	(50		)	(46		)
Share-based compensation	(2		)	(2		)	(1		)	(3		)
Debt issuance costs amortization	(2		)	(4		)	(4		)	(8		)
Refinancing costs and losses on early extinguishment of debt	—			—			(7		)	—
Changes in assets and liabilities	45			161			123			202
Net income	20			13			67			66
Interest expense	45			61			92			127
Refinancing costs and losses on early extinguishment of debt	—			—			7			—
Provision for income taxes	9			8			38			38
Depreciation and amortization	25			22			50			46
EBITDA (excluding refinancing costs and losses on early extinguishment of debt)	99			104			254			277
Adjustments:
Share-based compensation	2			2			1			3
Sponsor fees	3			4			7			7
Termination expense	1			—			1			—
Store pre-opening costs	1			1			3			2
Store remodel costs	4			—			4
Foreign currency transaction losses (gains)	1			—			1			(1		)
Store closing costs	1			2			1			2
Other (1)	2			2			4			2
Adjusted EBITDA	$	114		$	115		$	276		$	292

(1) Other adjustments relate to items such as moving & relocation expenses, franchise taxes, certain signing bonuses and certain legal settlements.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk.

We are exposed to fluctuations in exchange rates between the U.S. and Canadian dollar, which is the functional currency of our Canadian subsidiaries. Our sales, costs and expenses of our Canadian subsidiaries, when translated into U.S. dollars, can fluctuate due to exchange rate movement. As of August 3, 2013, a 10% increase or decrease in the exchange rate of the U.S. and Canadian dollar would have a minimal impact on Net income.

We have market risk exposure arising from changes in interest rates on our Restated Term Loan Credit Facility and our Restated Revolving Credit Facility, together the (“Senior Secured Credit Facilities”). The interest rates on our Senior Secured Credit Facilities will reprice periodically, which will impact our earnings and cash flow. The interest rates on our 2018 Senior Notes and Senior Subordinated Notes are fixed.  Based on our overall interest rate exposure to variable rate debt outstanding as of August 3, 2013, a 1% increase or decrease in interest rates would increase or decrease income before income taxes by $19 million. A 1% increase in interest rates would decrease the fair value of our long-term fixed rate debt by $13 million. A 1% decrease in interest rates would increase the fair value of our long-term fixed rate debt by $14 million. A change in interest rates would not materially affect the fair value of our variable rate debt as the debt reprices periodically.

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Item 4.  Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

We maintain a set of disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated by the SEC under the Securities Exchange Act of 1934 that are designed to provide reasonable assurance that information, which is required to be timely disclosed, is accumulated and communicated to management in a timely fashion.  We note that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

An evaluation was carried out under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls are effective to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Securities and Exchange Act of 1934, as amended, is accumulated and communicated to management, including our Chief Executive Officer and our Chief Financial Officer, to allow timely decisions regarding required disclosure and are effective to provide reasonable assurance that such information is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms.

Change in Internal Control Over Financial Reporting

There has not been any change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) as promulgated by the SEC under the Securities Exchange Act of 1934) during the quarter covered by this Quarterly Report on Form 10-Q that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

MICHAELS STORES, INC.

Part II—OTHER INFORMATION

Item 1.  Legal Proceedings.

Information regarding legal proceedings is incorporated herein by reference from Note 6 to our Consolidated Financial Statements.

Item 1A. Risk Factors

Information regarding the Company’s risk factors appears in Item 1A. Risk Factors disclosed in our Annual Report on Form 10-K for the fiscal year ended February 2, 2013.

There have been no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K for the fiscal year ended February 2, 2013 other than the risk factors set forth below:

Damage to the reputation of the Michaels brand or our private and exclusive brands could adversely affect our sales.

We believe the Michaels brand name and many of our private and exclusive brand names are powerful sales and marketing tools and we devote significant resources to promoting and protecting them. To be successful in the future, we must continue to preserve, grow and utilize the value of Michaels’ reputation. Reputational value is based in large part on perceptions of subjective qualities, and even isolated incidents may erode trust and confidence. In addition, we develop and promote private and exclusive brands, which we believe have generated national recognition. Our private label brands amounted to approximately 49% of total Net sales in fiscal 2012, and represent a growing portion of our overall sales. Damage to the reputations (whether or not justified) of our brand names could arise from product failures, litigation or various forms of adverse publicity (including, adverse publicity generated as a result of a vendor’s or a supplier’s failure to comply with general social accountability practices), especially in social media outlets, and may generate negative customer sentiment, potentially resulting in a reduction in our sales and earnings.

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We are controlled by our indirect parent, FinCo Holdings, and the Sponsors, whose interests as equity holders may conflict with those of our debt investors and those of our Company.

We are controlled by our indirect parent, FinCo Holdings, which is controlled by our Sponsors, who currently indirectly own approximately 93% of our common stock in the aggregate. FinCo Holdings and the Sponsors control the election of our directors and thereby have the power to control our affairs and policies, including the appointment of management, the issuance of additional equity and the declaration and payment of dividends if allowed under the terms of the credit agreements governing our Senior Secured Credit Facilities, the terms of the indentures governing our outstanding notes and the terms of our other indebtedness outstanding at the time. Neither FinCo Holdings nor the Sponsers have any liability for any obligations under or relating to our Senior Secured Credit Facilities, our outstanding notes or our other indebtedness, and their respective interests may be in conflict with those of our debt investors. For example, if we encounter financial difficulties or are unable to pay our debts as they mature, the Sponsors may pursue strategies that favor equity investors over debt investors. In addition, our equity holders may have an interest in pursuing acquisitions, divestitures, financing or other transactions that, in their judgment, could enhance their equity investments, even though such transactions may involve risk to our debt investors. FinCo Holdings is a holding company, and its only material assets are the capital stock of Holdings and FinCo Inc. FinCo Holdings has no operations of its own. Accordingly, repayment of FinCo Holdings’ indebtedness, including the PIK Notes, is dependent, to a significant extent, on the generation of cash flow by the Company and its ability to make such cash available to FinCo Holdings, by dividend, debt repayment or otherwise.  FinCo Holdings and FinCo Inc are required to pay cash dividends on the PIK Notes, unless certain conditions set forth in the indenture governing the PIK Notes are satisfied, in which case, all or a portion of the interest on the PIK Notes may be paid by increasing the principal amount of the outstanding PIK Notes or by issuing additional PIK Notes. Additionally, the Sponsors may make investments in businesses that directly or indirectly compete with us, or may pursue acquisition opportunities that may be complementary to our business and, as a result, those acquisition opportunities may not be available to us. For information concerning our arrangements with the Sponsors, see “Item 10. Directors, Executive Officers and Corporate Governance” and “Item 13. Certain Relationships and Related Transactions, and Director Independence of our Annual Report on Form 10-K for the fiscal year ended February 2, 2013.”

ITEM 5.  Other Information

Submission of Matters to a Vote of Security Holders

By a written consent dated July 22, 2013, holders of 92.90% of the common stock of the Company voted their shares to approve the merger between MergerCo and the Company and to amend the Company’s Amended and Restated Certificate of Incorporation in order to, among other things, change the authorized number of shares of common stock from 220,000,000 shares to 100 shares, and  include any additional changes required by Section 251(g) of the Delaware General Corporation Law. The affirmative vote of more than 50% of the stockholders was required to take such action.

Iran Sanctions Related Disclosure

Under the Iran Threat Reduction and Syrian Human Rights Act of 2012, which added Section 13(r) of the Securities Exchange Act of 1934, we are required to include certain disclosures in our periodic reports if we or any of our “affiliates” knowingly engaged in certain specified activities during the period covered by this Quarterly Report on Form 10-Q. Because the SEC defines the term “affiliate” broadly, it includes any entity controlled by us as well as any person or entity that controls us or is under common control with us (“control” is also construed broadly by the SEC). We do not believe we and our consolidated subsidiaries have knowingly engaged in any transaction or dealing reportable under Section 13(r) of the Exchange Act during the quarter ended August 3, 2013.

The Blackstone Group L.P., one of our Sponsors, informed us of disclosures publicly filed and/or provided to them by Hilton Worldwide, Inc., and Travelport Limited, which may be considered their affiliates. These disclosures are included in, and the Company hereby incorporates by reference herein, Exhibit 99.1 to this this Quarterly Report on Form 10-Q.

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Item 6.  Exhibits.

(a) Exhibits:

Exhibit Number	Description of Exhibit
2.1	Agreement and Plan of Merger, dated as of July 22, 2013, by and among Michaels Stores, Inc., The Michaels Companies, Inc., Michaels FinCo Holdings, LLC, Michaels Funding, Inc., and Michaels Stores MergerCo. Inc. (filed herewith).
3.1	Amended and Restated Certificate of Incorporation of Michaels Stores, Inc. (filed herewith).
4.1	Amendment No. 1 to Registration Rights Agreement, dated as of July 22, 2013, among Michaels Stores, Inc. and certain stockholders thereof (filed herewith).
10.1	The Michaels Companies, Inc. Equity Incentive Plan (filed herewith).*
10.2	Form of Stock Option Agreement under the Michaels Companies, Inc. Equity Incentive Plan (filed herewith).*
10.3	Form of Restricted Stock Award Agreement under the Michaels Companies, Inc. Equity Incentive Plan (filed herewith).*
10.4	Amendment No. 1 to Amended and Restated Shareholders Agreement, dated as of July 22, 2013, among Michaels Stores, Inc. and certain stockholders thereof (filed herewith).
31.1	Certifications of Carl S. Rubin pursuant to §302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
31.2	Certifications of Charles M. Sonsteby pursuant to §302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
32.1	Certification pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
99.1	Section 13 (r) Disclosure.
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema
101.CAL	XBRL Taxonomy Extension Calculation Linkbase
101.DEF	XBRL Taxonomy Extension Definition Linkbase
101.LAB	XBRL Taxonomy Extension Label Linkbase
101.PRE	XBRL Taxonomy Extension Presentation Linkbase

*Management contract or compensatory plan or arrangement.

33

MICHAELS STORES, INC.

SIGNATURES

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

	MICHAELS STORES, INC.
	By:	/s/ Carl S. Rubin
		Carl S. Rubin
		Chief Executive Officer
		(Principal Executive Officer)
	By:	/s/ Charles M. Sonsteby
		Charles M. Sonsteby
		Chief Administrative Officer & Chief Financial Officer
		(Principal Financial Officer)
Dated: August 30, 2013

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INDEX TO EXHIBITS

Exhibit Number	Description of Exhibit
2.1	Agreement and Plan of Merger, dated as of July 22, 2013, by and among Michaels Stores, Inc., The Michaels Companies, Inc., Michaels FinCo Holdings, LLC, Michaels Funding, Inc., and Michaels Stores MergerCo. Inc. (filed herewith).
3.1	Amended and Restated Certificate of Incorporation of Michaels Stores, Inc. (filed herewith).
4.1	Amendment No. 1 to Registration Rights Agreement, dated as of July 22, 2013, among Michaels Stores, Inc. and certain stockholders thereof (filed herewith).
10.1	The Michaels Companies, Inc. Equity Incentive Plan (filed herewith).*
10.2	Form of Stock Option Agreement under the Michaels Companies, Inc. Equity Incentive Plan (filed herewith).*
10.3	Form of Restricted Stock Award Agreement under the Michaels Companies, Inc. Equity Incentive Plan (filed herewith).*
10.4	Amendment No. 1 to Amended and Restated Shareholders Agreement, dated as of July 22, 2013, among Michaels Stores, Inc. and certain stockholders thereof (filed herewith).
31.1	Certifications of Carl S. Rubin pursuant to §302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
31.2	Certifications of Charles M. Sonsteby pursuant to §302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
32.1	Certification pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
99.1	Section 13 (r) Disclosure.
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema
101.CAL	XBRL Taxonomy Extension Calculation Linkbase
101.DEF	XBRL Taxonomy Extension Definition Linkbase
101.LAB	XBRL Taxonomy Extension Label Linkbase
101.PRE	XBRL Taxonomy Extension Presentation Linkbase

*Management contract or compensatory plan or arrangement.

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EX-2.1

EXHIBIT 2.1

AGREEMENT AND PLAN OF MERGER

THIS AGREEMENT AND PLAN OF MERGER (this “Agreement”), is dated as of July 22, 2013, by and among Michaels Stores, Inc., a Delaware corporation (“Michaels”), The Michaels Companies, Inc., a Delaware corporation (“Topco”), Michaels FinCo Holdings, LLC, a Delaware limited liability company (“LLC Holdco”), Michaels Funding, Inc., a Delaware corporation (“Corp Holdco”), and Michaels Stores MergerCo, Inc., a Delaware corporation (“Merger Sub”).

W I T N E S S E T H:

WHEREAS, Michaels wishes to reorganize its corporate structure into a holding company structure consisting of a holding company, a holding limited liability company which will be a wholly-owned subsidiary of such holding company, a holding company which will be a wholly-owned subsidiary of such holding limited liability company and a merger company, which will be a wholly-owned subsidiary of such holding company;

WHEREAS, in connection with this reorganization: (i) Michaels has formed Topco as a direct wholly-owned subsidiary of Michaels; (ii) Topco has formed LLC Holdco as a direct wholly-owned subsidiary of Topco; (iii) LLC Holdco has formed Corp Holdco as a direct wholly-owned subsidiary LLC Holdco; and (iv) Corp Holdco has formed Merger Sub as a direct wholly-owned subsidiary of Corp Holdco;

WHEREAS, the board of directors and the sole member manager of the respective parties hereto deem it advisable and in the best interests of Michaels and its stockholders and the other parties party hereto to merge Merger Sub with and into Michaels, with Michaels as the survivor of such merger (the “Merger”) in accordance with Section 251(g) of the Delaware General Corporation Law (the “DGCL”), and pursuant to this Agreement and the Certificate of Merger attached hereto as Annex I and incorporated herein (the “Certificate of Merger”);

WHEREAS, Topco is authorized to issue a total of 100 shares of common stock, par value $0.10 per share (“Topco Common Stock”), and immediately prior to the Effective Time (as defined below) will be authorized to issue a total of 220,000,000 shares of common stock, par value $0.10 per share, identical to the shares of common stock of Michaels prior to the Effective Time;

WHEREAS, in connection with the Merger: (i) each share of Michaels’ common stock is converted into the right to receive one share of Topco Common Stock, subject to the same vesting conditions, if any, as applied to the share so converted, and each such share of Michaels’ common stock is cancelled and retired and shall cease to exist; (ii) each share of Topco Common Stock held by Michaels is cancelled without consideration; (iii) each option to purchase one or more shares of Michaels’ common stock is assumed by Topco and converted into an option to purchase an equivalent number of shares of Topco Common Stock with the remaining terms of each such option remaining unchanged except as is necessary to reflect the Merger;

WHEREAS, as of the date hereof, Michaels holds of record each outstanding share of Topco Common Stock and no shares of Topco Common Stock are issued and not outstanding; and

WHEREAS, it is intended that the Merger shall be a tax-free transaction for U.S. federal income tax purposes.

NOW, THEREFORE, in consideration and furtherance of the foregoing, the parties hereto agree as follows:

ARTICLE I

THE MERGER

Section 1.1.Merger Of Michaels With Merger Sub.  Pursuant to Section 251(g) of the DGCL, and in accordance with and subject to the terms and conditions of this Agreement, the Certificate of Merger shall be executed and delivered to the Secretary of State of Delaware for filing as provided in Section 251 of the DGCL and at the Effective Time (as hereinafter defined) the following shall be deemed to occur simultaneously:

(a)Merger Sub shall merge with Michaels, with Michaels to be the surviving corporation of the Merger, such that as a result of the Merger, Michaels shall become an indirect wholly-owned subsidiary of Topco.

(b)In connection with the Merger, the name of the surviving corporation shall be Michaels Stores, Inc.

(c)The Merger shall have the effects set forth in Section 259 of the DGCL.

(d)Each share of common stock of Michaels shall be converted into one (1) share of common stock of Topco, subject, in the case of any such share granted under the Michaels Stores, Inc. 2006 Equity Plan (the “Plan”), mutatis mutandis to the same vesting conditions, if any, as applied under the terms of the Plan to the share so converted.

(e)Each share of Topco Common Stock held by Michaels shall be cancelled without payment of any consideration for such cancellation.

(f)Each option granted under the Plan to purchase one or more shares of Michaels’ common stock that is outstanding as of immediately prior to the Effective Time shall be assumed by Topco and converted into an option to purchase an equivalent number of shares of Topco Common Stock with the remaining terms of each such option remaining unchanged except as is necessary to reflect the Merger.

Section 1.2.Effective Time.  The Merger shall be effective for all purposes at the time (the “Effective Time”) (i) when all conditions precedent to the Merger set forth in Article III hereof have been satisfied and (ii) when the Certificate of Merger is filed as required by law with the Secretary of State of the State of Delaware in accordance with Section 103 of the DGCL.

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ARTICLE II

CONSTITUENT CORPORATIONS TO THIS AGREEMENT AND CONSTITUENT CORPORATIONS TO THE MERGER

Section 2.1.Michaels.

(a)Organization.  Michaels is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware.

(b)Capitalization of Michaels.  Immediately prior to the Effective Time, Michaels will have authorized capital consisting of 220,000,000 shares of common stock, $0.10 par value per share, of which 118,813,861 shares are issued and outstanding.

(c)Stock Options And Plan.  Michaels has entered into, adopted or is otherwise subject to the Plan pursuant to which it is or may be obligated to issue additional shares of its capital stock.

Section 2.2.Topco.

(a)Organization.  Topco is a corporation duly organized, validly existing, and in good standing under the laws of the State of Delaware.

(b)Capitalization Of Topco.  Topco has authorized capital consisting of 100 shares of common stock, $0.001 par value per share, of which 100 shares have been issued and are outstanding.  Topco has no options, warrants or other rights to purchase or convert any shares of its common stock pursuant to which it is obligated to issue or sell additional shares of its common stock.

(c)Ownership Of Capital Stock Of Topco.  Immediately prior to the Effective Time, all of the issued and outstanding shares of Topco Common Stock are owned by Michaels.

Section 2.3.LLC Holdco.

(a)Organization.  LLC Holdco is a limited liability company duly organized, validly existing, and in good standing under the laws of the State of Delaware.

(b)Capitalization of LLC Holdco.  Immediately prior to the Effective Time, LLC Holdco will have one member that holds 100% of the membership interests in LLC Holdco.  LLC Holdco has no options, warrants, or other instruments for which it is obligated to issue any units or grant additional membership interests.

(c)Ownership Of Membership Interests In LLC Holdco.  Immediately prior to the Effective Time, all membership interests in LLC Holdco are owned by Topco.

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Section 2.4.Corp Holdco.

(a)Organization.  Corp Holdco is a corporation duly organized, validly existing, and in good standing under the laws of the State of Delaware.

(b)Capitalization Of Corp Holdco.  Corp Holdco has authorized capital consisting of 100 shares of common stock, $0.001 par value per share, of which 100 shares have been issued and are outstanding.  Corp Holdco has no options, warrants or other rights to purchase or convert any shares of its common stock pursuant to which it is obligated to issue or sell additional shares of its common stock.

(c)Ownership Of Capital Stock Of Corp Holdco.  Immediately prior to the Effective Time, all of the issued and outstanding shares of common stock of Corp Holdco are owned by LLC Holdco.

Section 2.5.Merger Sub.

(a)Organization.  Merger Sub is a corporation duly organized, validly existing, and in good standing under the laws of the State of Delaware.

(b)Capitalization Of Merger Sub.  Merger Sub has authorized capital consisting of 100 shares of common stock, $0.001 par value per share, of which 100 shares have been issued and are outstanding.  Merger Sub has no options, warrants or other rights to purchase or convert any shares of its common stock pursuant to which it is obligates to issue or sell additional shares of its common stock.

(c)Ownership Of Capital Stock Of Merger Sub.  All of the issued and outstanding shares of common stock of Merger Sub are owned by Corp Holdco.

ARTICLE III

CONDITIONS PRECEDENT TO MERGER; TERMINATION OF AGREEMENT

Section 3.1.Action By Directors.  This Agreement has been submitted for approval by the respective Board of Directors of each of Merger Sub, and Michaels as required by Section 251(g) of the DGCL, and by the Boards of Directors of Topco and Corp Holdco and the sole member manager of LLC Holdco.  Each of the Board of Directors of Merger Sub, Michaels, Topco and Corp Holdco and the sole member manager of LLC Holdco has approved the Merger and this Agreement.

Section 3.2.Action by Stockholders. This Agreement has been submitted to Michaels Holdings LLC, the majority holder of common stock of Michaels, for its approval or rejection pursuant to Section 7.2.8 of the second amended and restated certificate of incorporation of Michaels.

Section 3.3.Filing Of Certificate of Merger.  Upon satisfaction of all conditions precedent set forth in Section 3.1 above, the Certificate of Merger shall be executed and delivered to the Secretary of State of the State of Delaware in accordance with Section 103 of the DGCL.

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ARTICLE IV

CONVERSION OF SHARES AND CONTRIBUTION OF
SHARES OF CONSTITUENT CORPORATIONS; ASSUMPTION AND CONVERSION OF OPTIONS

Section 4.1.Conversion Of The Outstanding Shares Of Michaels.  At the Effective Time, each share of common stock of Michaels that is issued and outstanding immediately prior to the Effective Time shall, without further act or deed by Michaels or its stockholders, be converted into one (1) share of Topco Common Stock, subject, in the case of any such share granted under the Plan, mutatis mutandis to the same vesting conditions, if any, as applied under the terms of the Plan to the share so converted.  The Topco Common Stock, into which shares of common stock of Michaels are so converted, shall, to the extent such shares are fully vested, be represented by common stock certificates of Topco that will be distributed to each holder upon receipt of such holder’s common stock certificate(s) of Michaels.

Section 4.2.Assumption and Conversion Of The Outstanding Michaels Options.  At the Effective Time, each option to purchase one or more shares of common stock of Michaels granted under the Plan that is outstanding immediately prior to the Effective Time shall be assumed by Topco and converted into an option to purchase an equivalent number of shares of Topco Common Stock with the remaining terms of each such option remaining unchanged except as is necessary to reflect the Merger.

Section 4.3.Surrender And Cancellation Of Shares Of Merger Sub.  At the Effective Time, each share of common stock of Merger Sub that is issued and outstanding immediately prior to the Effective Time shall be converted into one share of common stock of Michaels and the certificate(s) evidencing ownership of all issued and outstanding shares of common stock of Merger Sub shall be surrendered to the Secretary of the Surviving Corporation in exchange for shares of common stock of Michaels the surviving corporation into which they are converted pursuant to this Section 4.3.

Section 4.4.Surrender And Cancellation Of Shares Of Topco Owned By Michaels.  At the Effective Time, each share of Topco Common Stock owned by Michaels immediately prior to the Effective Time shall be cancelled without payment of any consideration for such cancellation.

ARTICLE V

OFFICERS AND DIRECTORS

Section 5.1.Topco.  At the Effective Time (i) the Board of Directors of Topco shall consist of all the persons serving as members of the Board of Directors of Michaels immediately prior to the Effective Time; and (ii) the officers of Topco shall be the persons serving as officers of Michaels immediately prior to the Effective Time.

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Section 5.2.Michaels.  The officers and directors of Michaels holding office immediately prior to the Effective Time shall serve in the same capacities as officers and directors of Michaels (which survived merger with Merger Sub).

ARTICLE VI

CERTIFICATES OF INCORPORATION AND BYLAWS

Section 6.1.Michaels Certificate of Incorporation.  From and after the Effective Time, and until thereafter amended as provided by law, the Certificate of Incorporation of Michaels (which survived the Merger with Merger Sub) shall be the Second Amended and Restated Certificate of Incorporation attached hereto as Exhibit A (the “Michaels Charter”).

Section 6.2.Michaels Bylaws. From and after the Effective Time, the Bylaws of Michaels (the “Michaels Bylaws”) shall be and continue to be the Bylaws of Michaels, the surviving corporation, until amended in accordance with law.

Section 6.3.Topco Certificate of Incorporation.  From and after the Effective Time, the certificate of incorporation of Topco (the “Topco Charter”) shall contain provisions identical to the Michaels Charter immediately prior to the Effective Time, except that the name of the corporation set forth in the Topco Charter shall be “The Michaels Companies, Inc.”.

Section 6.4.Topco Bylaws. From and after the Effective time, the bylaws of Topco shall contain provisions identical to the Michaels Bylaws immediately prior to the Effective Time (the “Topco Bylaws”). To that end, prior to the Effective Time, to the extent necessary to give effect to the intent of the preceding sentence, Topco shall take all requisite action to cause the Topco Bylaws, as the same theretofore may have been amended, altered, changed and/or supplemented, to be duly amended and restated in accordance with the DGCL to contain provisions identical to the Michaels Bylaws immediately prior to the Effective Time, and as so amended and restated such Topco Bylaws shall be and remain the Topco Bylaws upon and after the Effective Time, unless and until thereafter duly amended, altered, changed, repealed and/or supplemented in accordance with the DGCL (which power and right to amend, alter, change, repeal, and/or supplement, at any time and from time to time after the Effective Time, are hereby expressly reserved).

ARTICLE VII

NO STOCKHOLDER CONSENT

Section 7.1.No Michaels Stockholder Meeting; Merger Sub Stockholder Written Consent. The parties understand and acknowledge that it is contemplated that the Merger will be effected in accordance with Section 251(g) of the DGCL and that no vote of Michaels’ stockholders adopting, approving or authorizing this Agreement and the transactions contemplated hereby, including the Merger, will be required under the DGCL. Corp Holdco, in its capacity as the sole stockholder of Merger Sub, as promptly as practicable on or after the date hereof, shall execute and deliver to Merger Sub a written consent in lieu of a stockholder meeting adopting, approving and authorizing this Agreement and the transactions contemplated hereby, including the Merger, in accordance with Section 228 of the DGCL.

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ARTICLE VIII

MISCELLANEOUS

Section 8.1.Severability. In the event that any provision hereof would, under applicable law, be invalid or unenforceable in any respect, such provision shall be construed by modifying or limiting it so as to be valid and enforceable to the maximum extent compatible with, and possible under, applicable law. The provisions hereof are severable, and in the event any provision hereof should be held invalid or unenforceable in any respect, it shall not invalidate, render unenforceable or otherwise affect any other provision hereof.

Section 8.2.Descriptive Headings. The descriptive headings of this Agreement are for convenience of reference only, are not to be considered a part hereof and shall not be construed to define or limit any of the terms or provisions hereof.

Section 8.3.Counterparts. This Agreement may be executed in multiple counterparts, each of which shall be deemed an original, but all of which taken together shall constitute one instrument.

Section 8.4.Governing Law. This Agreement and all claims arising out of or based upon this Agreement or relating to the subject matter hereof shall be governed by and construed in accordance with the domestic substantive laws of the State of New York without giving effect to any choice or conflict of laws provision or rule that would cause the application of the domestic substantive laws of any other jurisdiction.

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IN WITNESS HEREOF, each of Merger Sub, Michaels, Topco, LLC Holdco and Corp Holdco have caused this Agreement to be signed by their respective officers thereunto duly authorized as of the date first written above.

MICHAELS STORES MERGERCO, INC.
By:	/s/ Charles M. Sonsteby
	Name:	Charles M. Sonsteby
	Title:	Chief Administrative Officer and Chief Financial Officer
MICHAELS STORES, INC.
By:	/s/ Charles M. Sonsteby
	Name:	Charles M. Sonsteby
	Title:	Chief Administrative Officer and Chief Financial Officer
THE MICHAELS COMPANIES, INC.
By:	/s/ Charles M. Sonsteby
	Name:	Charles M. Sonsteby
	Title:	Chief Administrative Officer and Chief Financial Officer
MICHAELS FINCO HOLDINGS, LLC
By:	/s/ Charles M. Sonsteby
	Name:	Charles M. Sonsteby
	Title:	Chief Administrative Officer and Chief Financial Officer
MICHAELS FUNDING, INC.
By:	/s/ Charles M. Sonsteby
	Name:	Charles M. Sonsteby
	Title:	Chief Administrative Officer and Chief Financial Officer

Agreement and Plan of Merger

CERTIFICATE OF MERGER

of

MICHAELS STORES MERGERCO, INC.

a Delaware corporation

with and into

MICHAELS STORES, INC.

a Delaware corporation

Pursuant to Section 251 of the General Corporation Law of the State of Delaware (the “DGCL”), Michaels Stores, Inc., a Delaware corporation (the “Surviving Corporation”), hereby certifies to the following information relating to the merger of Michaels Stores MergerCo, Inc., a Delaware corporation (the “Merging Corporation”), with and into the Surviving Corporation (the “Merger”):

FIRST:  The names and states of incorporation of the Surviving Corporation and the Merging Corporation, which are the constituent companies in the Merger (the “Constituent Companies”), are as follows:

Name	State
Michaels Stores, Inc.	Delaware
Michaels Stores MergerCo, Inc.	Delaware

SECOND:  The Agreement and Plan of Merger, dated as of July 22, 2013 (the “Merger Agreement”), by and among Michaels Stores MergerCo, Inc., Michaels Stores, Inc., Michaels FinCo Holdings, LLC, The Michaels Companies, Inc. and Michaels Funding, Inc., setting forth the terms and conditions of the Merger, has been approved, adopted, executed and acknowledged by each of the Constituent Companies in accordance with Section 251 and Section 103 of the DGCL.

THIRD:  The name of the corporation surviving the Merger is “Michaels Stores, Inc.”.

FOURTH:  Upon the effectiveness of the Merger and by reason of the Merger, the Certificate of Incorporation of Michaels Stores, Inc. shall be amended and restated in its entirety in the form attached hereto as Exhibit A.

FIFTH:  The Merger is to become effective immediately upon the filing of this Certificate of Merger with the Secretary of State of the State of Delaware.

SIXTH:  The executed Merger Agreement is on file at 8000 Bent Branch Drive, Irving, Texas 75063 a place of business of the Surviving Corporation.

SEVENTH:  A copy of the Merger Agreement will be furnished by the Surviving Corporation, on request and without cost, to any stockholder of the Constituent Companies.

[remainder of page intentionally left blank]

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IN WITNESS WHEREOF, the Surviving Corporation has caused this Certificate of Merger to be signed by an authorized officer this 22nd day of July, 2013.

MICHAELS STORES, INC.
By:	/s/ Charles M. Sonsteby
	Name:	Charles M. Sonsteby
	Title:	Chief Administrative Officer and Chief Financial Officer

SECOND AMENDED AND RESTATED

CERTIFICATE OF INCORPORATION

OF

MICHAELS STORES, INC.

(Pursuant to Sections 242 and 245 of the

General Corporation Law of the State of Delaware)

EX-3.1

EXHIBIT 3.1

AMENDED AND RESTATED

CERTIFICATE OF INCORPORATION

OF

MICHAELS STORES, INC.

Michaels Stores, Inc. (the “Corporation”), a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware (the “DGCL”), hereby certifies as follows:

A.The name of the Corporation is Michaels Stores, Inc.

B.The current Amended and Restated Certificate of Incorporation of the Corporation (the “Existing Certificate of Incorporation”) was filed with the Secretary of State of the State of Delaware on January 22, 2007.

C.This Amended and Restated Certificate of Incorporation (this “Restated Certificate of Incorporation”):

1.amends Article 4 of the Existing Certificate of Incorporation to decrease the number of authorized shares of common stock of the Corporation from 220,000,000 shares to 100 shares;

2.adds an Article 16; and

3.integrates the remaining provisions of the Existing Certificate of Incorporation.

D.This Restated Certificate of Incorporation, including the amendments to the Existing Certificate of Incorporation set forth herein, was duly adopted in accordance with the provisions of Sections 242 and 245 of the DGCL, and was approved by written consent of the stockholders of the Corporation in accordance with the provisions of Section 228 of the DGCL.

E.The text of the certificate of incorporation of the Corporation is hereby restated to read it its entirety as follows:

AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION

OF

MICHAELS STORES, INC.

1.Name.  The name of this Corporation is Michaels Stores, Inc.

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

3.Purpose.  The purpose for which the Corporation is organized is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware (the “DGCL”).

4.Stock.  The total number of shares of stock that this Corporation shall have authority to issue is one hundred (100) shares of Common Stock, $0.10 par value per share.  Each share of Common Stock shall be entitled to one vote.

5.Change in Number of Shares Authorized.  Except as otherwise provided in the provisions establishing a class of stock, the number of authorized shares of any class or series of stock may be increased or decreased (but not below the number of shares thereof then outstanding) by the affirmative vote of the holders of a majority of the voting power of the Corporation entitled to vote irrespective of the provisions of Section 242(b)(2) of the General Corporation Law of the State of Delaware.

6.Election of Directors.  The election of directors need not be by written ballot unless the Bylaws shall so require.

7.Actions Requiring Approval of Stockholder Majority.

7.1.Definitions.  As used in this Paragraph 7 and Paragraph 8, the following terms have the following definitions:

7.1.1.“Affiliate” shall mean, with respect to any Person, another Person that directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with the Corporation (for purposes of this definition, “control” (including, with correlative meanings, the terms “controlling,” “controlled by” and “under common control with”), as used with respect to the Corporation, means the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of the Corporation, whether through the ownership of voting securities, by agreement or otherwise).

7.1.2.“Affiliated Fund” shall mean, with respect to any Investor, each corporation, trust, limited liability company, general or limited partnership or other entity under common control with that Investor (including any such entity with the same general partner or principal investment advisor as that Investor or with a general partner or principal investment advisor that is an Affiliate of the general partner or principal investment advisor of that Investor), and, in the case of Michaels Holdings LLC, Affiliated Fund shall include each member of Michaels Holdings LLC and the Affiliated Funds of such members.

7.1.3.“Change of Control” shall mean the occurrence of any of the following: (i) any consolidation or merger of the Corporation with or into any other corporation or other Person, or any other corporate reorganization or transaction (including the acquisition of stock of the Corporation), whether or not the Corporation is a party thereto, in which the stockholders of the Corporation immediately prior to such consolidation, merger, reorganization or transaction, own stock either (A) representing directly, or indirectly through one or more entities, less than 50% of the economic interests in or voting power of the Corporation or other surviving entity immediately after such consolidation, merger, reorganization or transaction or (B) that does not directly, or indirectly through one or more entities, have the power to elect a majority of the entire Board of Directors of the Corporation or other surviving entity immediately after such consolidation, merger, reorganization or transaction, (ii) any stock sale or other transaction or series of related transactions, whether or not the Corporation is a party thereto, after giving effect to which in excess of 50% of the Corporation’s voting power is owned directly, or indirectly through one or more entities, by any Person and its “affiliates” or “associates” (as such terms are defined in the rules adopted by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as in effect from time to time), other than the Investors and their respective Affiliated Funds, excluding, in any case referred to in clause (i) or (ii) the Initial Public Offering or any bona fide primary or secondary public offering following the occurrence of the Initial Public Offering; or (iii) a sale, lease or other disposition of all or substantially all of the assets of the Corporation.

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7.1.4.“Initial Public Offering” shall mean the initial public offering and sale of Common Stock for cash registered on Form S-1 (or any successor form under the Securities Act of 1933, as in effect from time to time).

7.1.5.“Investors” shall mean Michaels Holdings LLC, Highfields Capital I LP, Highfields Capital II LP, Highfields Capital III LP and their Affiliated Funds.

7.1.6.“Person” shall mean any individual, partnership, corporation, company, association, trust, joint venture, limited liability company, unincorporated organization, entity or division, or any government, governmental department or agency or political subdivision thereof.

7.2.Restricted Actions.  Prior to an Initial Public Offering or the consummation of a Change of Control, the Corporation shall not and shall cause its subsidiaries not to take any of the following actions unless it shall have first obtained the consent of the holders of a majority of the outstanding shares of Common Stock of the Corporation:

7.2.1.Acquisition or Disposition Transactions.  Enter into or effect any transaction or series of related transactions in any calendar year involving the purchase, rent, license, exchange or other acquisition, or the sale, lease, exchange or other disposal, by the Corporation or any of its subsidiaries of any assets, other than any transaction or series of related transactions in the ordinary course of business for consideration having a fair market value that is less than $100,000,000.

7.2.2.Issuance of Stock or Other Equity Securities.  Authorize, create or issue any equity securities of the Corporation or any of its subsidiaries (except as may be issued to the Corporation or any of its subsidiaries), issue any options or rights to acquire any equity securities of the Corporation or any of its subsidiaries or grant any registration rights in respect of any such securities, options or rights.

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7.2.3.Incurrence or Prepayment of Debt.

(a)Other than draws under any debt agreement, the execution of which has been approved by the stockholders, incur any indebtedness, assume, guarantee, endorse or otherwise as an accommodation become responsible for the obligations of any other Person (other than cross-guarantees for any indebtedness that has been approved under this Paragraph), enter into any agreement under which it may incur indebtedness in the future, or make any loan, advance or capital contribution to any Person or enter into or effect any transaction or series of related transactions involving the issuance by the Corporation of any debt securities, including rights to acquire any debt securities, in each case in an aggregate amount in excess of $500,000,000, or

(b)effect any voluntary prepayment of indebtedness of the Corporation or any of its subsidiaries in an aggregate amount in excess of $500,000,000.

7.2.4.Issuance of Dividends or Distributions.  Declare or pay dividends from the Corporation or any of its subsidiaries or make any other distributions by the Corporation or any of its subsidiaries in respect of its equity securities.

7.2.5.Redemption or Repurchase.  Enter into or effect any transaction or series of related transactions in connection with or involving the redemption or repurchase of stock of the Corporation (other than redemptions or repurchases in an aggregate amount of up to $5,000,000 of stock held by employees or former employees of the Corporation).

7.2.6.Initial Public Offering.  Register the offer or sale of any equity securities of the Corporation or any of its subsidiaries under the Securities Act of 1933, as in effect from time to time, in connection with, or consummate, an Initial Public Offering; provided, however, that no such approval shall be required for an Initial Public Offering that is demanded by any Person pursuant to an agreement that has been approved by the stockholders.

7.2.7.Change of Control.  Enter into or effect any transaction or series of related transactions that would constitute a Change of Control.

7.2.8.Merger.  Enter into or effect any transaction or series of related transactions, involving the merger or consolidation of the Corporation with or into any Person.

7.2.9.Transactions with Affiliates.   Enter into any transactions or series of transactions with any of the Corporation’s Affiliates other than (i) Affiliates controlled by the Corporation, or (ii) compensation arrangements with officers and employees (who are not also Affiliates of a stockholder of the Corporation owning more than 10% of the Corporation’s outstanding voting securities at the time of such transaction) of the Corporation or its subsidiaries.

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7.2.10.Amendment or Waiver of Charter or Bylaws.  Amend or waive any provision of this Amended and Restated Certificate of Incorporation or the Bylaws.

8.Fair Transactions with Affiliates.  Prior to an Initial Public Offering or the consummation of a Change of Control, the Corporation shall not and shall cause its subsidiaries not to enter into any transaction or series of related transactions with any of the Corporation’s Affiliates other than (i) Affiliates controlled by the Corporation, or (ii) transactions involving compensation arrangements with officers and employees (who are not also Affiliates of a stockholder of the Corporation owning more than 10% of the Corporation’s outstanding voting securities at the time of such transaction), unless the Board of Directors shall have first determined that the transaction or series of related transactions is fair to the stockholders of the Corporation.

9.Amendments.  Notwithstanding any vote required to be taken by the stockholders of the Corporation pursuant to any other provision in this Amended and Restated Certificate of Incorporation or the DGCL, any amendment or waiver of any provision of this Amended and Restated Certificate of Incorporation shall require the approval of each stockholder of the Corporation who would be disproportionately and adversely affected by such amendment or waiver.

10.Liability of Directors.  A director of this Corporation shall not be liable to this Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except to the extent that exculpation from liability is not permitted under the General Corporation Law of the State of Delaware as in effect at the time such liability is determined.  No amendment or repeal of this Paragraph 10 shall apply to or have any effect on the liability or alleged liability of any director of this Corporation for or with respect to any acts or omissions of such director occurring prior to such amendment or repeal.

11.Indemnification.  This Corporation shall, to the maximum extent permitted from time to time under the law of the State of Delaware, indemnify any person who is or was a party or is threatened to be made a party to any threatened, pending or completed action, suit, proceeding or claim, whether civil, criminal, administrative or investigative, by reason of the fact that such person is or was or has agreed to be a director or officer of this Corporation or while a director or officer is or was serving at the request of this Corporation as a director, officer, partner, trustee, employee or agent of any corporation, partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, against judgments, fines, penalties, amounts paid in settlement and expenses (including attorney’s fees and expenses), which expenses shall be advanced to such person upon request, in each case incurred (and not otherwise recovered) in connection with the investigation, preparation to defend or defense of such action, suit, proceeding or claim; provided, however, that the foregoing shall not require this Corporation to indemnify or advance expenses to any person in connection with any action, suit, proceeding, claim or counterclaim initiated by or on behalf of such person.  Such indemnification shall not be exclusive of other indemnification rights arising under any Bylaw, agreement, vote of directors or stockholders or otherwise and shall inure to the benefit of the heirs and legal representatives of such person.  Any person seeking indemnification under this Paragraph 11 shall be deemed to have met the standard of conduct required for such indemnification unless the contrary shall be established.  No amendment or repeal of this Paragraph 11 shall adversely affect any right or protection of a director or officer of this Corporation with respect to any acts or omissions of such director or officer occurring prior to such amendment or repeal.

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12.Survival of Rights Previously Granted.  To the extent this Amended and Restated Certificate of Incorporation amends, repeals, or otherwise modifies the Corporation’s Certificate of Incorporation (the “Prior Certificate”) as in effect immediately prior to the adoption (the “Adoption”) of this Amended and Restated Certificate of Incorporation, and such amendment, repeal, or other modification would adversely affect any right under the Prior Certificate of any person who at any time prior to the Adoption was a director, officer, employee, or agent (including as a fiduciary with respect to an employee benefit plan) of the Corporation, then to that extent the Prior Certificate shall survive the Adoption, and any such person shall have all rights to indemnification and exculpation from liabilities for acts or omissions occurring at or prior to the Adoption and rights to advancement of expenses relating thereto existing in favor of such person immediately prior to the Adoption as provided in the Prior Certificate.

13.Records.  The books of this Corporation may (subject to any statutory requirements) be kept outside the State of Delaware as may be designated by the Board of Directors or in the Bylaws of this Corporation.

14.Renunciation of Business Opportunities Doctrine.  To the maximum extent permitted from time to time under the law of the State of Delaware, this Corporation renounces any interest or expectancy of the Corporation in, or in being offered an opportunity to participate in, business opportunities that are from time to time presented to its officers, directors or stockholders, other than those officers, directors or stockholders who are employees of this Corporation. No amendment or repeal of this Paragraph 14 shall apply to or have any effect on the liability or alleged liability of any officer, director or stockholder of the Corporation for or with respect to any opportunities of which such officer, director or stockholder becomes aware prior to such amendment or repeal.

15.Opt Out of DGCL 203.  This Corporation shall not be governed by Section 203 of the General Corporation Law of the State of Delaware.

16.DGCL 251(g). Notwithstanding anything to the contrary in this Amended and Restated Certificate of Incorporation, any act or transaction by or involving the Corporation, other than the election or removal of directors, that requires for its adoption under the Delaware General Corporation Law or under this Amended and Restated Certificate of Incorporation the approval of the stockholders of the Corporation, shall by specific reference to Section 251(g) of the Delaware General Corporation Law, require, in addition, that the approval of the stockholders of The Michaels Companies, Inc. (or any successor by merger) be obtained by the same vote as is required by the Delaware General Corporation Law and/or by this Amended and Restated Certificate of Incorporation.

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IN WITNESS WHEREOF, the Corporation has caused this Amended and Restated Certificate of Incorporation to be executed by a duly authorized person on July 22, 2013.

MICHAELS STORES, INC.
	By:	/s/ Charles M. Sonsteby
	Name:	Charles M. Sonsteby
	Title:	Chief Administrative Officer and Chief Financial Officer

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EX-4.1

Exhibit 4.1

AMENDMENT NO. 1

TO

REGISTRATION RIGHTS AGREEMENT

This Amendment No. 1 to the Registration Rights Agreement among Michaels Stores, Inc., a Delaware corporation (the “Company”) and certain Stockholders of the Company dated as of October 31, 2006 (the “Agreement”), is entered into as of July 22, 2013 (this “Amendment”).  Capitalized terms used but not defined herein shall have the meanings given to such terms in the Agreement.

RECITALS

WHEREAS, the Company and each of the Stockholders executing this Amendment are parties to the Agreement and, the Company and such Stockholders, who collectively hold a majority of the Shares held by all Stockholders, wish to amend the Agreement pursuant to Section 6.2 thereof in order to address the merger of Michaels Stores MergerCo, Inc., with and into the Company to be effected pursuant to Section 251(g) of the Delaware General Corporation Law (the “Merger”); and

WHEREAS, in connection with the Merger, (i) all shares of Common Stock of the Company held by the Stockholders immediately prior to the consummation of the Merger will be exchanged for shares of common stock of The Michaels Companies, Inc., a Delaware corporation (“Topco”), the indirect parent of the Company, and (ii) all Options, Warrants and Convertible Securities held by the Stockholders immediately prior to the consummation of the Merger will be exchanged for options, warrants and convertible securities of Topco which can be exercised for, converted into or exchanged for shares of common stock of Topco.

NOW, THEREFORE, the parties hereby agree as follows:

1.Successor. As a result of the Merger, Topco shall be considered the successor of the Company pursuant to Section 8.3 of the Agreement and the rights and obligations of the Company under the Agreement shall become those of Topco in all respects.

2.Miscellaneous.

2.1.This Amendment and all claims arising out of or based upon this Amendment or relating to the subject matter hereof shall be governed by and construed in accordance with the domestic substantive laws of the State of New York without giving effect to any choice or conflict of laws provision or rule that would cause the application of the domestic substantive laws of any other jurisdiction.

2.2.This Amendment may be executed in any number of counterparts, each of which shall be deemed an original and all of which together shall constitute a single instrument.

2.3Except to the extent specifically amended hereby, the provisions of the Agreement shall remain unmodified and the Agreement is hereby confirmed as being in full force and effect.

IN WITNESS WHEREOF, each of the undersigned has executed this Amendment No. 1 to Registration Rights Agreement effective as of the date first set forth above.

MICHAELS STORES, INC.
By:	/s/ Charles M. Sonsteby
Name:	Charles M. Sonsteby
Title:	Chief Administrative Officer and Chief Financial Officer
THE MICHAELS COMPANIES, INC.
By:	/s/ Charles M. Sonsteby
Name:	Charles M. Sonsteby
Title:	Chief Administrative Officer and Chief Financial Officer

Signature Page to Amendment No. 1 to

Registration Rights Agreement

INVESTORS:

MICHAELS HOLDINGS LLC			MICHAELS HOLDINGS LLC
By:	/s/ Peter F. Wallace		By:	/s/ Matthew S. Levin
	Name:	Peter F. Wallace		Name:	Matthew S. Levin
	Title:	Manager		Title:	Manager

Signature Page to Amendment No. 1 to

Registration Rights Agreement

EX-10.1

Exhibit 10.1

THE MICHAELS COMPANIES, INC.

EQUITY INCENTIVE PLAN

1.DEFINED TERMS

Exhibit A, which is incorporated by reference, defines the terms used in the Plan and sets forth certain operational rules related to those terms.

2.PURPOSE

The Plan is the continuation on the terms provided herein of the Michaels Stores, Inc. 2006 Equity Incentive Plan, which was originally adopted February 15, 2007 and which the Company assumed in connection with the reorganization effective July 22, 2013 whereby Michaels Stores, Inc. became an indirect wholly-owned subsidiary of the Company (the “Reorganization”).  The Administrator shall construe all provisions of the Plan and Awards thereunder, including without limitation Awards assumed and converted in connection with the Reorganization, in a manner consistent with the foregoing.  The Plan has been established to advance the interests of the Company and its Affiliates by providing for the grant to Participants of stock-based and other incentive Awards.  Awards under the Plan are intended to align the incentives of the Company’s executives and investors and to improve the performance of the Company.  Unless the Administrator determines otherwise, Awards under the Plan are intended to be exempt from registration under the Securities Act of 1933, as amended.

3.ADMINISTRATION

The Administrator has discretionary authority, subject only to the express provisions of the Plan and the Award Agreements, to interpret the Plan; determine eligibility for and grant Awards; determine, modify or waive the terms and conditions of any Award; prescribe forms, rules and procedures; and otherwise do all things necessary to carry out the purposes of the Plan.  Except as otherwise provided by the express terms of an Award Agreement, all determinations of the Administrator made under the Plan will be final and conclusive and will bind all parties.

4.LIMITS ON AWARDS UNDER THE PLAN

(a)Number of Shares.  A maximum of 14,156,966 shares of Stock may be delivered in satisfaction of Awards under the Plan (subject to adjustment as provided in Section 7(b) of the Plan).  Of such maximum, the number of shares of Stock delivered in satisfaction of Awards to Non-Employee Participants shall not exceed 2,359,494 (subject to adjustment as provided in Section 7(b) of the Plan).  The limits set forth in this Section 4(a) shall be construed to comply with Section 422 of the Code and the regulations thereunder.  To the extent consistent with the requirements of Section 422 of the Code and regulations thereunder, Stock issued under awards of an acquired company that are converted, replaced or adjusted in connection with the acquisition shall not reduce the number of shares of Stock available for Awards under the Plan.  Any shares of Stock which are subject to an Award that is terminated unexercised, forfeited or surrendered, or expires for any reason, will again be available for issuance under the Plan.  For purposes of the Plan, the term “surrendered” shall be construed to include Awards (or portions thereof) exercisable for shares of Stock that a Participant authorizes the Company to withhold in connection with the exercise price of an Award (or a portion thereof) or to satisfy a withholding obligation in accordance with the terms of the Plan.  For the avoidance of doubt and without limiting the generality of Section 2, the provisions of this Section 4(a) shall be construed as the Administrator deems appropriate to take into account shares of common stock of Michaels Stores, Inc. in respect of periods prior to the Reorganization.

(b)Type of Shares.  Stock delivered under the Plan may be authorized but unissued Stock or previously issued Stock acquired by the Company or any of its subsidiaries.  No fractional shares of Stock will be delivered under the Plan.

5.ELIGIBILITY AND PARTICIPATION

The Administrator will select Participants from among those key Employees and directors of, and consultants and advisors to, the Company or its Affiliates who, in the opinion of the Administrator, are in a position to make a significant contribution to the success of the Company and its Affiliates.  Eligibility for ISOs is limited to employees of the Company or of a “parent corporation” or “subsidiary corporation” of the Company as those terms are defined in Section 424 of the Code.

6.RULES APPLICABLE TO AWARDS

(a)All Awards

(1)Award Provisions.  The Administrator will determine the terms of all Awards, subject to the limitations provided herein, and shall furnish to each Participant an Award Agreement setting forth the terms applicable to the Participant’s Award.  By entering into an Award Agreement, the Participant agrees to the terms of the Award and of the Plan, to the extent not inconsistent with the express terms of the Award Agreement.  Notwithstanding any provision of this Plan to the contrary, awards of an acquired company that are converted, replaced or adjusted in connection with the acquisition may contain terms and conditions that are inconsistent with the terms and conditions specified herein, as determined by the Administrator.   Consistent with the foregoing and without limiting the generality of Section 2, Awards assumed and converted in connection with the Reorganization shall be governed by their prior terms but with such adjustments, if any, as are consistent (as determined by the Administrator) with applicable tax rules and as the Administrator deems necessary or appropriate to effectuate such assumption and conversion.

(2)Transferability.  Neither ISOs, nor, except as the Administrator otherwise expressly provides, other Awards may be transferred other than by will or by the laws of descent and distribution, and during a Participant’s lifetime ISOs (and, except as the Administrator otherwise expressly provides, other non-transferable Awards requiring exercise) may be exercised only by the Participant.

(3)Vesting, Etc.  The Administrator may determine the time or times at which an Award will vest or become exercisable and the terms on which an Award requiring exercise will remain exercisable.  Without limiting the foregoing, the Administrator may at any time accelerate the vesting or exercisability of an Award, regardless of any adverse or potentially adverse tax consequences resulting from such acceleration.  Unless the Administrator expressly provides otherwise, however, the following rules will apply if a Participant’s Employment ceases:  Immediately upon the cessation of Employment, an Award requiring exercise will cease to be exercisable and will terminate, and all other Awards to the extent not already vested will be forfeited, except that:

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(A)subject to (B) and (C) below, all Stock Options and other Awards requiring exercise held by the Participant or the Participant’s permitted transferees, if any, immediately prior to the cessation of the Participant’s Employment, to the extent then exercisable, will remain exercisable for the shorter of (i) a period of 60 days or (ii) the period ending on the latest date on which such Award could have been exercised without regard to this Section 6(a)(3), and will thereupon terminate;

(B)all Stock Options and other Awards requiring exercise held by a Participant or the Participant’s permitted transferees, if any, immediately prior to the Participant’s death or disability, to the extent then exercisable, will remain exercisable for the shorter of (i) the one year period ending with the first anniversary of the Participant’s death or disability, as the case may be, or (ii) the period ending on the latest date on which such Award could have been exercised without regard to this Section 6(a)(3), and will thereupon terminate; and

(C)all Stock Options and other Awards requiring exercise held by a Participant or the Participant’s permitted transferees, if any, immediately prior to the cessation of the Participant’s Employment will immediately terminate upon such cessation if such cessation of Employment has resulted in connection with an act or failure to act constituting Cause.

(4)Taxes.  The Administrator will make such provision for the withholding of taxes as it deems necessary.  The Administrator may, but need not, hold back shares of Stock from an Award or permit a Participant to tender previously owned shares of Stock in satisfaction of tax withholding requirements (but not in excess of the applicable minimum statutory withholding rate).

(5)Rights Limited.  Nothing in the Plan will be construed as giving any Person the right to continued Employment with the Company or its Affiliates, or any rights as a stockholder except as to shares of Stock actually issued under the Plan.  The loss of potential post-termination appreciation in Awards will not constitute an element of damages in the event of termination of Employment for any reason, even if the termination is in violation of an obligation of the Company or its Affiliate to the Participant.

(6)Stockholders Agreement and Registration Rights Agreement. Unless otherwise specifically provided, all Awards issued under the Plan and all Stock issued thereunder will be subject to the Stockholders Agreement and the Registration Rights Agreement.

(7)Section 409A.  Awards under the Plan are intended either to be exempt from the rules of Section 409A of the Code or to satisfy those rules, and the Plan and such Awards shall be construed accordingly.  Notwithstanding the preceding, neither the Company nor the Administrator nor any employee, director, or Affiliate of either shall have any liability to any Participant, beneficiary, any spouse of a Participant or beneficiary, or any other holder of an Award, with respect to any adverse tax consequences under Section 409A of the Code.  Granted Awards may be modified at any time, in the Administrator’s discretion, so as to increase the likelihood of exemption from or compliance with the rules of Section 409A of the Code.

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(b)Awards Requiring Exercise

(1)Time And Manner Of Exercise.  Unless the Administrator expressly provides otherwise, an Award requiring exercise by the holder will not be deemed to have been exercised until the Administrator receives a notice of exercise (in form acceptable to the Administrator) signed by the appropriate Person and accompanied by any payment required under the Award.  If the Award is exercised by any Person other than the Participant, the Administrator may require satisfactory evidence that the Person exercising the Award has the right to do so.

(2)Exercise Price.  The Administrator will determine the exercise price, if any, of each Award requiring exercise.  Unless the Administrator determines otherwise, and in all events in the case of a Stock Option (except as otherwise permitted pursuant to Section 7(b)(1) hereof), the exercise price of an Award requiring exercise will not be less than the fair market value of the Stock subject to the Award, determined as of the date of grant, and in the case of an ISO granted to a ten-percent shareholder within the meaning of Section 422(b)(6) of the Code, the exercise price will not be less than 110% of the fair market value of the Stock subject to the Award, determined as of the date of grant.

(3)Payment Of Exercise Price.  Where the exercise of an Award is to be accompanied by payment, the Administrator may determine the required or permitted forms of payment, subject to the following: (a) all payments will be by cash or check acceptable to the Administrator, or (b) if so permitted by the Administrator or otherwise expressly set forth in an Award, (i) by actual or constructive transfer to the Company of shares of Stock owned by the Participant for at least six months (or, with the consent of the Administrator, for less than six months) having an aggregate Fair Market Value at the date of exercise equal to the aggregate exercise price of the Award, (ii) by authorizing the Company to withhold a number of shares of Stock otherwise issuable to the Participant under the Award being exercised having an aggregate Fair Market Value on the date of exercise equal to the aggregate exercise price of the Award, (iii) at such time, if any, as the Stock is publicly traded through a broker-assisted “cashless” exercise program acceptable to the Administrator, (iv) by other means acceptable to the Administrator or (v) by a combination of such methods of payment.  The delivery of shares in payment of the exercise price under clause (b)(i) or (b)(ii) above may be accomplished either by actual delivery or by constructive delivery through attestation of ownership, subject to such rules as the Administrator may prescribe.

(4)ISOs.  No ISO may be granted under the Plan after February 14, 2017 but ISOs previously granted may extend beyond that date.

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(c)Awards Not Requiring Exercise

Awards of Restricted Stock and Unrestricted Stock, whether delivered outright or under Awards of Stock Units or other Awards that do not require exercise, may be made in exchange for such lawful consideration, including services, as the Administrator determines.

7.EFFECT OF CERTAIN TRANSACTIONS

(a)Except as otherwise provided in an Award Agreement:

(1)Assumption or Substitution.  In the event of a Corporate Transaction in which there is an acquiring or surviving entity, the Administrator may provide for the continuation or assumption of some or all outstanding Awards, or for the grant of new awards in substitution therefor, by the acquiror or survivor or any entity controlling, controlled by or under common control with the acquiror or survivor, in each case on such terms and subject to such conditions (including vesting or other restrictions) as the Administrator determines are appropriate.  Unless the Administrator determines otherwise, the continuation or assumption shall be done on terms and conditions consistent with Section 409A of the Code.

(2)Acceleration of Certain Awards.  In the event of a Corporate Transaction (whether or not there is an acquiring or surviving entity) in which there is no assumption or substitution as to some or all outstanding Awards, the Administrator may provide (unless the Administrator determines otherwise, on terms and conditions consistent with Section 409A of the Code) for (i) treating as satisfied any vesting condition on any such Award or for (ii) the accelerated delivery of shares of Stock issuable under each such Award consisting of Restricted Stock Units, in each case on a basis that gives the holder of the Award a reasonable opportunity, as determined by the Administrator, following exercise of the Award or the issuance of the shares, as the case may be, to participate as a stockholder in the Corporate Transaction.

(3)Termination of Awards.  Each Award (unless assumed pursuant to the Section 7(a)(1)), will terminate upon consummation of the Corporate Transaction, provided that any Restricted Stock Units accelerated pursuant to clause (ii) of Section 7(a)(2) shall be treated in the same manner as other shares of Stock (subject to Section 7(a)(4)).

(4)Additional Limitations.  Any share of Stock delivered pursuant to Section 7(a)(2) above with respect to an Award, other than an Award requiring exercise, may, in the discretion of the Administrator, contain such restrictions, if any, as the Administrator deems appropriate to reflect any performance or other vesting conditions to which the Award was subject and that did not lapse in connection with the Corporate Transaction.  In the case of Restricted Stock, the Administrator may require that any amounts delivered, exchanged or otherwise paid in respect of Stock in connection with the Corporate Transaction be placed in escrow or otherwise made subject to such restrictions as the Administrator deems appropriate to carry out the intent of the Plan.

(b)Changes In, Distributions With Respect To And Redemptions Of The Stock

(1)Basic Adjustment Provisions. In the event of any stock dividend or other similar distribution of stock or other securities of the Company, stock split or combination of shares (including a reverse stock split), recapitalization, conversion, reorganization, consolidation, split-up, spin-off, combination, merger, exchange of stock, redemption or repurchase of all or part of the shares of any class of stock or any change in the capital structure of the Company or an Affiliate, the Administrator shall, as it deems appropriate in order to prevent enlargement or dilution of benefits intended to be made available under the Plan, make proportionate adjustments to the maximum number of shares of Stock that may be delivered under the Plan under Section 4(a) and shall also, as it deems appropriate, make proportionate adjustments to the number and kind of shares of stock or securities subject to Awards then outstanding or subsequently granted, any exercise prices relating to Awards and any other provision of Awards affected by such change.  Unless the Administrator determines otherwise, any adjustments hereunder shall be done on terms and conditions consistent with Section 409A of the Code.

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(2)Certain Other Adjustments.  The Administrator may also make adjustments of the type described in paragraph (1) above to take into account distributions to stockholders or any other event, if the Administrator determines that adjustments are appropriate to avoid distortion in the operation of the Plan and to preserve the value of Awards made hereunder, having due regard for the qualification of ISOs under Section 422 of the Code, where applicable.  In the event that an extraordinary dividend or distribution is paid by the Company to its stockholders, the Administrator shall make adjustments of the type described in paragraph (1) above to avoid distortion in the operation of the Plan and to preserve the value of Awards made hereunder, having due regard for the qualification of ISOs under Section 422 of the Code, where applicable.  Notwithstanding the foregoing, no adjustment shall be made to an Award under this paragraph (2) if, as a result of such adjustment, the Award would not qualify for exclusion from coverage under Section 409A of the Code.  For purposes of this Plan, “extraordinary dividend” shall mean any dividend or distribution paid by the Company to its stockholders, other than regularly planned dividends or distributions by the Company made in accordance with an established quarterly or annual dividend program.

(3)Continuing Application of Plan Terms.  References in the Plan to shares of Stock will be construed to include any stock or securities resulting from an adjustment pursuant to this Section 7.

8.LEGAL CONDITIONS ON DELIVERY OF STOCK

The Company shall use best efforts to ensure, prior to delivering shares of Stock pursuant to the Plan or removing any restriction from shares of Stock previously delivered under the Plan, that (a) all legal matters in connection with the issuance and delivery of such shares have been addressed and resolved, and (b) if the outstanding Stock is at the time of delivery listed on any stock exchange, the shares to be delivered have been listed or authorized to be listed on such exchange upon official notice of issuance.  Neither the Company nor any Affiliate will be obligated to deliver any shares of Stock pursuant to the Plan or to remove any restriction from shares of Stock previously delivered under the Plan until the conditions set forth in the preceding sentence have been satisfied and all other conditions of the Award have been satisfied or waived.  If the sale of Stock has not been registered under the Securities Act of 1933, as amended, the Company may require, as a condition to exercise of the Award, such representations or agreements as counsel for the Company may consider appropriate to avoid violation of such Act.  The Company may require that certificates evidencing Stock issued under the Plan bear an appropriate legend reflecting any restriction on transfer applicable to such Stock, and the Company may hold the certificates pending lapse of the applicable restrictions.  In no event will the Company be required to register the sale of shares of Stock in order to comply with the first sentence of this Section 8.

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9.AMENDMENT AND TERMINATION

The Administrator may at any time or times amend the Plan or any outstanding Award for any purpose which may at the time be permitted by law, and may at any time terminate the Plan as to any future grants of Awards; provided, that except as otherwise expressly provided in the Plan the Administrator may not, without the Participant’s consent, alter the terms of an Award so as to affect adversely the Participant’s rights under the Award, unless the Administrator expressly reserved the right to do so at the time of the Award.  The Administrator expressly reserves the right to amend or alter the terms of any Award if such Award or a portion thereof would be reasonably likely to be treated as a “liability award” under guidance issued or provided by the Financial Accounting Standards Board (FASB), provided that the Administrator may not make any such amendment or alteration unless the Chief Executive Officer of the Company has provided prior written consent thereto.  Any amendments to the Plan shall be conditioned upon stockholder approval only to the extent, if any, such approval is required by applicable law (including the Code), as determined by the Administrator.  The termination of the Plan will not adversely affect the terms of any outstanding Award.

10.OTHER COMPENSATION ARRANGEMENTS

The existence of the Plan or the grant of any Award will not in any way affect the right of the Company or an Affiliate to Award a Person bonuses or other compensation in addition to Awards under the Plan.

11.WAIVER OF JURY TRIAL

(a)Waiver of Jury Trial.  By accepting an Award under the Plan, each Participant waives any right to a trial by jury in any action, proceeding or counterclaim concerning any rights under the Plan and any Award, or under any amendment, waiver, consent, instrument, document or other agreement delivered or which in the future may be delivered in connection therewith, and agrees that any such action, proceedings or counterclaim shall be tried before a court and not before a jury.  By accepting an Award under the Plan, each Participant certifies that no officer, representative or attorney of the Company or any Affiliate has represented, expressly or otherwise, that the Company would not, in the event of any action, proceeding or counterclaim, seek to enforce the foregoing waivers.

(b)Arbitration.  In the event the waiver in Section 11(a) is held to be invalid or unenforceable, if requested by the Company, the parties shall attempt in good faith to resolve any controversy or claim arising out of or relating to this Plan or any Award hereunder promptly by negotiations between themselves or their representatives who have authority to settle the controversy.  If the matter has not been resolved within sixty (60) days of the initiation of such procedure, the Company may require that the parties submit the controversy to arbitration by one arbitrator mutually agreed upon by the Parties, and if no agreement can be reached within 30 days after names of potential arbitrators have been proposed by the American Arbitration Association (the “AAA”), then by one arbitrator having reasonable experience in corporate incentive plans of the type provided for in this Plan and who is chosen by the AAA.  The arbitration shall be governed by the Federal Arbitration Act, 9 U.S.C. Section 1, et seq., and judgment upon the award rendered by the arbitrator may be entered in any court having jurisdiction thereof. The place of arbitration shall be Dallas, Texas, or any other location mutually agreed to between the parties. The arbitrator shall apply the law as established by decisions of the Delaware federal and/or state courts in deciding the merits of claims and defenses under federal law or any state or federal anti-discrimination law. The arbitrator is required to state, in writing, the reasoning on which the award rests.  Notwithstanding the foregoing, this paragraph shall not preclude either party from pursuing a court action for the sole purpose of obtaining a temporary restraining order or a preliminary injunction in circumstances in which such relief is appropriate.

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12.GOVERNING LAW

Except as otherwise provided by the express terms of an Award Agreement, the provisions of the Plan and of Awards under the Plan shall be governed by and interpreted in accordance with the laws of the State of Delaware, but without giving effect to the principles of conflicts of laws.

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EXHIBIT A

Definitions of Terms

The following terms, when used in the Plan, will have the meanings and be subject to the provisions set forth below:

“Administrator”:  The Board or, if one or more has been appointed, a committee of the Board to which the Board has delegated its responsibilities hereunder. The Administrator may delegate ministerial tasks to such Persons as it deems appropriate.

“Affiliate”:  Any Person that directly or indirectly through one or more intermediaries controls, or is controlled by, or is under common control with, the Company (for the purposes of this definition, “control” (including, with correlative meanings, the terms “controlling,” “controlled by” and “under common control with”), as used with respect to any Person, means the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person, whether through the ownership of voting securities, by agreement or otherwise).

“Award”:  Any or a combination of the following:

(i)Stock Options;

(ii)Restricted Stock;

(iii)Unrestricted Stock;

(iv)Stock Units, including Restricted Stock Units;

(v)Awards (other than Awards described in (i) through (iv) above) that are convertible into or exchangeable for Stock on such terms and conditions as the Administrator determines;

(vi)Performance Awards; and

(vii)Current or deferred grants of cash (which the Company may make payable by any of its direct or indirect subsidiaries) or loans, made in connection with other Awards.

“Award Agreement”:  A written agreement between the Company and the Participant evidencing the Award.

“Board”:  The Board of Directors of the Company.

“Cause”:  With respect to any Participant, the following events or conditions, as determined by the Board in its reasonable judgment:  (i) the refusal or failure to perform (other than by reason of disability), or material negligence in the performance of such Participant’s duties and responsibilities to the Company or any of its Affiliates, or refusal or failure to follow or carry out any reasonable direction of the Board, and the continuance of such refusal, failure or negligence for a period of 10 days after written notice delivered by the Company to such Participant that specifically identifies the manner in which the Participant has failed to perform his or her duties; (ii) the material breach by such Participant of any provision of any material agreement between such Participant and the Company or any of its Affiliates; (iii) fraud, embezzlement, theft or other dishonesty by such Participant with respect to the Company or any of its Affiliates; (iv) the conviction of, or a plea of nolo contendere by, such Participant to any felony or any other crime involving dishonesty or moral turpitude; and (v) any other conduct that involves a breach of fiduciary duty to the Company on the part of such Participant.

“Code”:  The U.S. Internal Revenue Code of 1986 as from time to time amended and in effect, or any successor statute as from time to time in effect.  For the avoidance of doubt, any reference to any section of the Code includes reference to any regulations (including proposed or temporary regulations) promulgated under that section and any Internal Revenue Service guidance thereunder.

“Company”:  The Michaels Companies, Inc., a Delaware corporation.

“Company Employee”:  Any individual who is employed by the Company or a subsidiary of the Company.

“Corporate Transaction”: Any of the following: any sale of all or substantially all of the assets of the Company, change in the ownership of the capital stock of the Company, reorganization, recapitalization, merger (whether or not the Company is the surviving entity), consolidation, exchange of capital stock of the Company or other restructuring involving the Company,  provided, that, in each case, to the extent any amount constituting “nonqualified deferred compensation” subject to Section 409A of the Code would become payable under an Award by reason of a Corporate Transaction, it shall become payable only if the event or circumstances constituting the Corporate Transaction would also constitute a change in the ownership or effective control of the Company, or a change in the ownership of a substantial portion of the Company’s assets, within the meaning of subsection (a)(2)(A)(v) of Section 409A of the Code.

“Employee”:  Any individual who is employed by the Company or an Affiliate.

“Employment”:  A Participant’s employment or other service relationship with the Company and its Affiliates.  Unless the Administrator provides otherwise, a change in the capacity in which a Participant is employed by or renders services to the Company and/or its Affiliates, whether as an Employee, director, consultant or advisor, or a change in the entity by which the Participant is employed or to which the Participant rendered services, will not be deemed a termination of Employment so long as the Participant continues providing services in a capacity and to an entity described in Section 5.  If a Participant’s relationship is with an Affiliate and that entity ceases to be an Affiliate, the Participant will be deemed to cease Employment when the entity ceases to be an Affiliate unless the Participant transfers Employment to the Company or its remaining Affiliates.

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“Fair Market Value”:  As of any date, as to any share of Stock, the Board’s reasonable, good faith determination of the fair value of such share as of the applicable reference date (which determination is absent manifest error), taking into account and giving due consideration to such factors as the Board determines are appropriate, including without limitation: (i) amounts paid for shares in recently completed arms-length transactions, (ii) valuations of companies comparable to the Company and its subsidiaries and (iii) the financial performance and expected financial performance of the Company and its subsidiaries.

“ISO”:  A Stock Option intended to be an “incentive stock option” within the meaning of Section 422 of the Code.  Each option granted pursuant to the Plan will be treated as providing by its terms that it is to be a non-incentive stock option unless, as of the date of grant, it is expressly designated as an ISO.

“Non-Employee Participant”:  Any Participant that is not a Company Employee.

 “Participant”:  An individual who is granted an Award under the Plan.

“Performance Award”:  An Award subject to Performance Criteria.

“Performance Criteria”:  Specified criteria the satisfaction of which is a condition for the grant, exercisability, vesting or full enjoyment of an Award.  If a Performance Award so provides, such criteria may be made subject to appropriate adjustments taking into account the effect of significant corporate transactions or similar events for the purpose of maintaining the probability that the specified criteria will be satisfied.  Such adjustments shall be made only in the amount deemed reasonably necessary, after consultation with the Company’s accountants, to reflect accurately the direct and measurable effect of such event on such criteria.

“Person”:  Any individual, partnership, corporation, company, association, trust, joint venture, limited liability company, unincorporated organization, entity or division, or any government, governmental department or agency or political subdivision thereof.

“Plan”:  The Michaels Companies, Inc. Equity Incentive Plan as from time to time amended and in effect.  For the avoidance of doubt and without limiting the generality of Section 2, references in any Award to the Michaels Stores, Inc. 2006 Equity Incentive Plan shall be deemed for all purposes to refer to the Plan.

“Registration Rights Agreement”: The Registration Rights Agreement, dated as of October 31, 2006, among Michaels Stores, Inc. and certain its affiliates, stockholders and Participants, as amended by that certain Amendment No. 1 to the Registration Rights Agreement, dated as of July 22, 2013, among the Company, Michaels Stores, Inc., stockholders and Participants, as from time to time amended and in effect.

“Reorganization”:  The reorganization referred to in Section 2 of the Plan, whereby Michaels Stores, Inc. became an indirect wholly-owned subsidiary of the Company.

“Restricted Stock”:  An Award of Stock for so long as the Stock remains subject to restrictions under this Plan or such Award requiring that it be redelivered or offered for sale to the Company if specified conditions are not satisfied.

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“Restricted Stock Unit”:  A Stock Unit that is, or as to which the delivery of Stock or cash in lieu of Stock is, subject to the satisfaction of specified performance or other vesting conditions.

 “Stock”:  Except as otherwise expressly provided herein, common stock, $.10 par value per share, of the Company.

“Stockholders Agreement”:  The Amended and Restated Stockholders Agreement, originally dated as of October 31, 2006 (as amended and restated on February 16, 2007), among Michaels Stores, Inc. and certain of its affiliates, stockholders and Participants, as amended by that certain Amendment No. 1 to the Amended and Restated Stockholders Agreement, dated as of July 22, 2013, among the Company, Michaels Stores, Inc., stockholders and Participants, as a from time to time amended and in effect.

“Stock Option”:  An option entitling the recipient to acquire Stock upon payment of the per share exercise price set forth in the applicable Award Agreement.

“Stock Unit”:  An unfunded and unsecured promise, denominated in shares of Stock, to deliver Stock or cash measured by the value of the Stock in the future.

 “Unrestricted Stock”:  An Award of Stock not subject to any restrictions under the Plan.

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EX-10.2

EXHIBIT 10.2

THE MICHAELS COMPANIES, INC.

FORM OF STOCK OPTION AGREEMENT

Optionee:                                 

This Option and any securities issued upon exercise of this Option are subject to restrictions on voting and transfer and other provisions as set forth in the Amended and Restated Stockholders Agreement among The Michaels Companies, Inc. and certain investors, originally dated as of October 31, 2006, as amended and restated on February 16, 2007, as amended on July 22, 2013, and amended from time to time thereafter (the “Stockholders Agreement”), and the terms of the Registration Rights Agreement referred to therein (the “Registration Rights Agreement”).  This Option and any securities issued upon exercise of this Option constitute an Option and Shares, respectively, as defined in the Stockholders Agreement.

This Stock Option Agreement (this “Agreement”) is hereby entered into between The Michaels Companies, Inc., a Delaware corporation (the “Company”), and the Optionee named above pursuant to the Company’s Equity Incentive Plan, as amended from time to time (the “Plan”).  For the purpose of this Agreement, the “Grant Date” shall mean           , 201    .

1.Grant of Option.  This Agreement evidences the grant by the Company on the Grant Date to the Optionee of an option (the “Option”) to purchase, in whole or in part, on the terms provided herein and in the Plan, a total of                    shares of Common Stock of the Company, par value $.10 per share (the “Shares”), at $           per Share.

The Option evidenced by this Agreement is not intended to qualify as an incentive stock option under Section 422 of the Internal Revenue Code (the “Code”).

2.Vesting.  During the Optionee’s Employment, the Option will vest and become exercisable (i) with respect to 25% of the Shares on each of the first through fourth anniversaries of the Grant Date or (ii) if earlier, with respect to any unvested portion of the Option, upon a Change of Control (as defined in the Stockholders Agreement).

3.Exercise of Option.

(a)Details of Exercise.  Each election to exercise this Option shall be subject to the terms and conditions of the Plan and shall be in writing, signed by the Optionee or by his or her executor or administrator or by the Person or Persons to whom this Option is transferred by will or the applicable laws of descent and distribution (the “Legal Representative”), and made pursuant to and in accordance with the terms and conditions set forth in the Plan.  The latest date on which this Option may be exercised is               , 202   , subject to earlier termination in accordance with the terms and provisions of the Plan and this Agreement.

(b)Payment of Exercise Price.  The following are permitted forms of payment for the exercise of this Option and for the remittance of withholding taxes pursuant to Section 8: (a) cash or check acceptable to the Administrator, (b) actual or constructive transfer to the Company of shares of Stock owned by the Optionee for at least six months (or, with the consent of the Administrator, for less than six months) having an aggregate Fair Market Value at the date of exercise equal to the aggregate exercise price of the Award, (c) authorization by the Optionee of the Company to withhold a number of shares of Stock otherwise issuable to the Optionee under this Option having an aggregate Fair Market Value on the date of exercise equal to the aggregate exercise price of this Option and, if applicable, the amount of any withholding tax, (d) at such time, if any, as the Stock is publicly traded through a broker-assisted “cashless” exercise program acceptable to the Administrator, and (e) by a combination of such methods of payment.

4.Effect of Certain Transactions.  In the event of a Corporate Transaction (as defined in the Plan) or a Change of Control (as defined in the Stockholders Agreement), the terms of Article 7 of the Plan shall control.

5.Representations and Warranties of Optionee.

The Optionee represents and warrants that:

(a)Authorization.  The Optionee has full legal capacity, power, and authority to execute and deliver this Agreement and to perform the Optionee’s obligations hereunder.  This Agreement has been duly executed and delivered by the Optionee and is the legal, valid, and binding obligation of the Optionee enforceable against the Optionee in accordance with the terms hereof.

(b)No Conflicts.  The execution, delivery, and performance by the Optionee of this Agreement and the consummation by the Optionee of the transactions contemplated hereby will not, with or without the giving of notice or lapse of time, or both (i) violate any provision of law, statute, rule or regulation to which the Optionee is subject, (ii) violate any order, judgment or decree applicable to the Optionee, or (iii) conflict with, or result in a breach of default under, any term or condition of any agreement or other instrument to which the Optionee is a party or by which the Optionee is bound.

(c)Thorough Review, etc.  The Optionee has thoroughly reviewed the Plan, this Agreement, the Stockholders Agreement and the Registration Rights Agreement in their entirety.  The Optionee has had an opportunity to obtain the advice of counsel (other than counsel to the Company or its Affiliates) prior to executing this Agreement, and fully understands all provisions of the Plan and this Agreement.

(d)Knowledge.  The Optionee has been advised that neither this Option or the Shares received upon this Option’s exercise have been registered under the Securities Act or any state securities laws and, therefore, none of those securities can be resold unless they are registered under the Securities Act and applicable state securities laws or unless an exemption from such registration requirements is available.  Except to the extent provided in the Stockholders Agreement and the Registration Rights Agreement, the Optionee is aware that the Company is under no obligation to effect any such registration with respect to any such securities or to file for or comply with any exemption from registration.  The Optionee is acquiring and holding the Option and any Shares received upon the Option’s exercise for its own account and not with a view to, or for resale in connection with, the distribution thereof in violation of the Securities Act.  The Optionee is either an “accredited investor” as defined in Regulation D under the Securities Act or possesses such knowledge and experience in financial and business matters that he or she is capable of evaluating the merits and risks of an investment in the securities of the Company described in this Agreement.

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6.Non-Competition/Non-Solicitation.  The Optionee hereby acknowledges that the Company and its Affiliates have invested and continue to invest considerable resources in developing Company Information (as defined below) and trade secrets, and in establishing and maintaining relationships with customers, employees, and vendors.  The Optionee hereby further acknowledges that the Option is being furnished to the Optionee as good and valuable consideration, among other consideration, in exchange for the below covenants, which are necessary to protect the Company Information, trade secrets, and goodwill of the Company and its Affiliates:

(a)Non-Competition.  The Optionee covenants and agrees that during the Optionee’s Employment and for a period of twelve (12) months (and such period shall be tolled on a day-to-day basis for each day during which the Optionee participates in any activity in violation of the restrictions set forth in this Section 6(a)) following the Optionee’s termination of Employment, whether such termination occurs at the insistence of the Company or its Affiliates or the Optionee (for whatever reason), the Optionee will not, directly or indirectly, alone or in association with others, anywhere in the Territory, own, manage, operate, control or participate in the ownership, management, operation or control of, or be connected as an officer, employee (in a position or at a level similar to or above that performed by the Optionee during his/her Employment), investor, principal, joint venturer, shareholder, partner, director, consultant, agent or otherwise with, or have any financial interest (through stock or other equity ownership, investment of capital, the lending of money or otherwise) in, any business, venture or activity that directly or indirectly competes, or is in planning, or has undertaken any preparation, to compete, with the Business of the Company or any of its Immediate Affiliates (a “Competitor”), except that nothing contained in this Section 6(a) shall prevent the Optionee’s wholly passive ownership of two percent (2%) or less of the equity securities of any Competitor that is a publicly-traded company.  For purposes of this Section 6(a), the “Business of the Company or any of its Immediate Affiliates” is that of arts and crafts specialty retailer providing materials, ideas and education for creative activities; provided, that the term “Competitor” shall not include any business, venture or activity whose gross receipts derived from the retail sale of arts and crafts products (aggregated with the gross receipts derived from the retail sale of arts and crafts projects of any related business, venture or activity) are less than ten percent (10%) of the aggregate gross receipts of such businesses, ventures or activities. For purposes of this Section 6(a), the “Territory” is comprised of those states within the United States and those provinces of Canada in which the Company or any of its Immediate Affiliates was doing business at any time during the Optionee’s Employment, or with respect to the Optionee’s obligations following his or her termination of Employment the twelve (12) months immediately preceding the Optionee’s termination of Employment.  For purposes of this Section, “Immediate Affiliates” means those Affiliates which are one of the following: (i) a direct or indirect subsidiary of the Company, (ii) a parent to the Company or (iii) a direct or indirect subsidiary of such a parent.

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(b)Non-Solicitation. The Optionee covenants and agrees that during the Optionee’s Employment and for a period of twelve (12) months (and such period shall be tolled on a day-to-day basis for each day during which the Optionee participates in any activity in violation of the restrictions set forth in this Section 6(b)) after the termination of the Optionee’s Employment, whether such termination occurs at the insistence of the Company or the Optionee (for whatever reason), the Optionee shall not, and shall not assist any other person to, (i) hire or solicit for hire any employee of the Company or any of its Immediate Affiliates or seek to persuade any employee of the Company or any of its Immediate Affiliates to discontinue employment or (ii) solicit or encourage any independent contractor providing services to the Company or any of its Immediate Affiliates to terminate or diminish its relationship with them; provided, however, that after termination of the Optionee’s Employment, these restrictions shall apply only with respect to employees of, and independent contractors providing services to, the Company or one of its Immediate Affiliates who were such on the date that the Optionee’s Employment terminated or at any time during the nine (9) months immediately preceding such termination date.

(c)Goodwill and Company Information. The Optionee acknowledges the importance to the Company and its Affiliates of protecting their legitimate business interests, including without limitation the valuable Company Information and goodwill that they have developed or acquired at considerable expense.  The Optionee acknowledges and agrees that in the course of the Optionee’s Employment, the Optionee has acquired: (i) confidential information including without limitation information received by the Company (or any of its Affiliates) from third parties, under confidential conditions, (ii) other technical, product, business, financial or development information from the Company (or any of its Affiliates), the use or disclosure of which reasonably might be construed to be contrary to the interest of the Company (or any of its Affiliates), or (iii) any other proprietary information or data, including but not limited to identities, responsibilities, contact information, performance and/or compensation levels of employees, costs and methods of doing business, systems, processes, computer hardware and software, compilations of information, third-party IT service providers and other Company or its Affiliates’ vendors, records, sales reports, sales procedures, financial information, customer requirements and confidential negotiated terms, pricing techniques, customer lists, price lists, information about past, present, pending and/or planned Company or its Affiliates’ transactions not publically disclosed and other confidential information which the Optionee may have acquired during the Optionee’s Employment (hereafter collectively referred to as “Company Information”) which are owned by the Company or  its Affiliates and regularly used in the operation of its business, and as to which precautions are taken to prevent dissemination to persons other than certain directors, officers and employees and if disclosed, would assist in competition against the Company or any of its Affiliates.  Optionee understands and agrees that such Company Information was and will be disclosed to Optionee in confidence and for use only in performing work for the Company or its Affiliates.  Optionee understands and agrees that Optionee: (x) will keep such Company Information confidential at all times, (y) will not disclose or communicate Company Information to any third party, and (z) will not make use of Company Information on Optionee’s own behalf, or on behalf of any third party.  In view of the nature of Optionee’s Employment and the nature of Company Information Optionee receives during the course of Optionee’s Employment, Optionee agrees that any unauthorized disclosure to third parties of Company Information would cause irreparable damage to the confidential or trade secret status of Company Information. Optionee further acknowledges and agrees that the restrictions on my activities set forth above are necessary to protect the goodwill, Company Information and other legitimate interests of the Company and its Affiliates and that Optionee’s acceptance of these restrictions is a condition of receipt of the Award, to which Optionee would not otherwise be entitled, and the Award is good and sufficient consideration to support Optionee’s agreement to and compliance with these covenants.

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(d)Remedies.  In the event of a breach or threatened breach by the Optionee of any of the covenants contained in Section 6(a), 6(b) or 6(c):

(i)any vested portion of the Option that is unexercised, shall be forfeited effective as of the date of such breach or threatened breach, unless sooner terminated by operation of another term or condition of this Agreement or the Plan;

(ii)the Optionee hereby consents and agrees that the Company shall be entitled to a “claw back” of (x) shares of Stock issued upon exercise of the Option, and (y) the cash gain value received by Optionee pursuant to any sale of shares of Stock issued upon exercise of the Option; and

(iii)the Optionee hereby consents and agrees that the Company shall be entitled to seek, in addition to other available remedies, a temporary or permanent injunction or other equitable relief against such breach or threatened breach from any court of competent jurisdiction, without the necessity of showing any actual damages or that money damages would not afford an adequate remedy, and without the necessity of posting any bond or other security. The aforementioned equitable relief shall be in addition to, not in lieu of, legal remedies, monetary damages or other available forms of relief.

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(e)General.  Optionee agrees that the above restrictive covenants are completely severable and independent agreements supported by good and valuable consideration and, as such, shall survive the termination of this Agreement for whatever reason.  The Company and Optionee agree that any invalidity or unenforceability of any one or more of such restrictions on competition shall not render invalid or unenforceable any remaining restrictive covenants. Should a court of competent jurisdiction determine that the scope of any provision of this Section 6 is too broad to be enforced as written, the Company and Optionee intend that the court reform the provision to such narrower scope as it determines to be reasonable and enforceable.

7.Other Agreements.  Optionee acknowledges and agrees that the Shares received upon exercise of this Option will be subject to the Stockholders Agreement and to the Registration Rights Agreement and the transfer and other restrictions, rights, and obligations set forth in those agreements.  By executing this Agreement, the Optionee hereby becomes a party to and bound by the Stockholders Agreement and the Registration Rights Agreement as a Manager (as such term is defined in those agreements), without any further action on the part of the Optionee, the Company or any other Person.

8.Legends.  Certificates evidencing any Shares issued upon exercise of the Option granted hereby may bear the following legends, in addition to any legends which may be required by the Stockholders Agreement or by the Registration Rights Agreement:

“THE SECURITIES REPRESENTED BY THIS CERTIFICATE WERE ISSUED IN A PRIVATE PLACEMENT, WITHOUT REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), AND MAY NOT BE SOLD, ASSIGNED, PLEDGED, OR OTHERWISE TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION UNDER THE ACT COVERING THE TRANSFER OR AN OPINION OF COUNSEL, SATISFACTORY TO THE ISSUER, THAT REGISTRATION UNDER THE ACT IS NOT REQUIRED.”

9.Withholding.  No Shares will be issued, sold or transferred pursuant to the exercise of this Option unless and until the Person exercising this Option shall have remitted to the Company an amount sufficient to satisfy any federal, state, or local withholding tax requirements, or shall have made other arrangements satisfactory to the Company with respect to such taxes.

10.Nontransferability of Option.  This Option is not transferable by the Optionee other than by will or the applicable laws of descent and distribution, and is exercisable during the Optionee’s lifetime only by the Optionee.

11.Status Change.  Upon the termination of the Optionee’s Employment, this Option shall continue or terminate as, and to the extent, provided in the Plan.

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12.Effect on Employment.  Neither the grant of this Option, nor the issuance of Shares upon exercise of this Option, will give the Optionee any right to be retained in the employ of the Company or its Affiliates, affect the right of the Company or its Affiliates to discharge or discipline the Optionee at any time, or affect any right of the Optionee to terminate his or her Employment at any time.

13.Indemnity.  Optionee hereby indemnifies and agrees to hold the Company harmless from and against all losses, damages, liabilities and expenses (including without limitation reasonable attorneys fees and charges) resulting from any breach of any representation, warranty, or agreement of the Optionee in this Agreement or any misrepresentation of the Optionee in this Agreement.

14.Provisions of the Plan.  This Agreement is subject in its entirety to the provisions of the Plan, which are incorporated herein by reference.  A copy of the Plan as in effect on the Grant Date has been furnished to the Optionee.  By exercising all or any part of this Option, the Optionee agrees to be bound by the terms of the Plan and this Agreement.  In the event of any conflict between the terms of this Agreement and the Plan, the terms of this Agreement shall control.

15.Definitions.  Initially capitalized terms not otherwise defined herein have the meaning provided in the Plan.

16.Governing Law; Jurisdiction.  Notwithstanding anything to the contrary in the Plan, Section 6 of this Agreement shall be governed by and construed in accordance with the laws of the State of Texas, without giving any effect to any choice or conflict of law provision or rule that would cause the application of the laws of any other jurisdiction, except where preempted by federal law. Both parties hereby consent and submit to the jurisdiction of the state and federal courts in Dallas County, Texas in all questions and controversies arising out of this Agreement.

17.General.  For purposes of this Agreement and any determinations to be made by the Administrator hereunder, the determinations by the Administrator shall be binding upon the Optionee and any transferee.

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IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its duly authorized officer.

DATED:
	THE MICHAELS COMPANIES, INC.
	By:
		Michael J. Veitenheimer
		Senior Vice President and Secretary

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The undersigned acknowledges and agrees to the terms of this Stock Option Agreement and acknowledges and agrees that by the undersigned’s execution below, the undersigned is also joining and becoming a party to the Amended and Restated Stockholders Agreement and the Registration Rights Agreement.

[NAME]

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EX-10.3

Exhibit 10.3

[NAME]

THE MICHAELS COMPANIES, INC.

EQUITY INCENTIVE PLAN

Restricted Stock Award Agreement

The Michaels Companies, Inc.

8000 Bent Branch Drive

Irving, Texas 75063

Attn:       Michael J. Veitenheimer

Ladies and Gentlemen:

The undersigned (i) acknowledges that he/she has received an award (the “Award”) of restricted stock from The Michaels Companies, Inc. (the “Company”) under The Michaels Companies, Inc. Equity Incentive Plan (the “Plan”), subject to the terms set forth below and in the Plan; (ii) further acknowledges receipt of a copy of the Plan as in effect on the date hereof; and (iii) agrees with the Company as follows:

1.Effective Date.  This Agreement shall take effect as of                         , 201 , which is the date of grant of the Award.

2.Shares Subject to Award.  The Award consists of                      shares (the “Shares”) of common stock of the Company (“Stock”).  The undersigned’s rights to the Shares are subject to the restrictions described in this Agreement and the Plan (which is incorporated herein by reference with the same effect as if set forth herein in full) in addition to such other restrictions, if any, as may be imposed by law.

3.Meaning of Certain Terms.  Except as otherwise expressly provided, all terms used herein shall have the same meaning as in the Plan.  The term “vest” as used herein with respect to any Share means the lapsing of the restrictions described herein with respect to such Share.

4.Nontransferability of Shares.  The Shares acquired by the undersigned pursuant to this Agreement shall not be sold, transferred, pledged, assigned or otherwise encumbered or disposed of except as provided below and in the Plan.

5.Vesting of Shares.  The shares acquired hereunder shall vest in accordance with the provisions of this Paragraph 5 and applicable provisions of the Plan, as follows:           Shares on         , 201 ,                Shares on             , 201 ,              Shares on             , 201 , and              Shares on             , 201 .  Notwithstanding the foregoing, no shares shall vest on any vesting date specified above unless the undersigned is then, and since the date of grant has continuously been, employed by the Company or its subsidiaries.

6.Forfeiture Risk.  Except as provided in Section 5 above, if the undersigned ceases to be employed by the Company and its subsidiaries for any reason, any then outstanding and

unvested Shares acquired by the undersigned hereunder shall be automatically and immediately forfeited.  The undersigned hereby (i) appoints the Company as the attorney-in-fact of the undersigned to take such actions as may be necessary or appropriate to effectuate a transfer of the record ownership of any such shares that are unvested and forfeited hereunder, (ii) agrees to deliver to the Company, as a precondition to the issuance of any certificate or certificates with respect to unvested Shares hereunder, one or more stock powers, endorsed in blank, with respect to such Shares, and (iii) agrees to sign such other powers and take such other actions as the Company may reasonably request to accomplish the transfer or forfeiture of any unvested Shares that are forfeited hereunder.

7.Non-Competition/Non-Solicitation.  The undersigned hereby acknowledges that the Company and its Affiliates have invested and continue to invest considerable resources in developing Company Information (as defined below) and trade secrets, and in establishing and maintaining relationships with customers, employees, and vendors.  The undersigned hereby further acknowledges that the Award is being furnished to the undersigned as good and valuable consideration, among other consideration, in exchange for the below covenants, which are necessary to protect the Company Information, trade secrets, and goodwill of the Company and its Affiliates:

a.Non-Competition.  Undersigned covenants and agrees that during the undersigned’s Employment and for a period of twelve (12) months (and such period shall be tolled on a day-to-day basis for each day during which the undersigned participates in any activity in violation of the restrictions set forth in this Section 7(a)) following the undersigned’s termination of Employment, whether such termination occurs at the insistence of the Company or its Affiliates or the undersigned (for whatever reason), the undersigned will not, directly or indirectly, alone or in association with others, anywhere in the Territory, own, manage, operate, control or participate in the ownership, management, operation or control of, or be connected as an officer, employee (in a position or at a level similar to or above that performed by the undersigned during his/her Employment), investor, principal, joint venturer, shareholder, partner, director, consultant, agent or otherwise with, or have any financial interest (through stock or other equity ownership, investment of capital, the lending of money or otherwise) in, any business, venture or activity that directly or indirectly competes, or is in planning, or has undertaken any preparation, to compete, with the Business of the Company or any of its Immediate Affiliates (a “Competitor”), except that nothing contained in this Section 7(a) shall prevent the undersigned’s wholly passive ownership of two percent (2%) or less of the equity securities of any Competitor that is a publicly-traded company.  For purposes of this Section 7(a), the “Business of the Company or any of its Immediate Affiliates” is that of arts and crafts specialty retailer providing materials, ideas and education for creative activities; provided, that the term “Competitor” shall not include any business, venture or activity whose gross receipts derived from the retail sale of arts and crafts products (aggregated with the gross receipts derived from the retail sale of arts and crafts projects of any related business, venture or activity) are less than ten percent (10%) of the aggregate gross receipts of such businesses, ventures or activities. For purposes of this Section 7(a), the “Territory” is comprised of those states within the United States and those provinces of Canada in which the Company or any of its Immediate Affiliates was doing business at any time during the undersigned’s Employment, or with respect to the undersigned’s obligations following his/her termination of Employment the twelve (12) months immediately preceding undersigned’s termination of Employment.   For purposes of this Section, “Immediate Affiliates” means those Affiliates which are one of the following: (i) a direct or indirect subsidiary of the Company, (ii) a parent to the Company or (iii) a direct or indirect subsidiary of such a parent.

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b.Non-Solicitation. The undersigned covenants and agrees that during the undersigned’s Employment and for a period of twelve (12) months (and such period shall be tolled on a day-to-day basis for each day during which the undersigned participates in any activity in violation of the restrictions set forth in this Section 7(b)) after the termination of undersigned’s Employment, whether such termination occurs at the insistence of the Company or undersigned (for whatever reason), undersigned shall not, and shall not assist any other person to, (i) hire or solicit for hire any employee of the Company or any of its Immediate Affiliates or seek to persuade any employee of the Company or any of its Immediate Affiliates to discontinue employment or (ii) solicit or encourage any independent contractor providing services to the Company or any of its Immediate Affiliates to terminate or diminish its relationship with them; provided, however, that after termination of the undersigned’s Employment, these restrictions shall apply only with respect to employees of, and independent contractors providing services to, the Company or any of its Immediate Affiliates who were such on the date that the undersigned’s Employment terminated or at any time during the nine (9) months immediately preceding such termination date.

c.Goodwill and Company Information.  The undersigned acknowledges the importance to the Company and its Affiliates of protecting their legitimate business interests, including without limitation the valuable Company Information and goodwill that they have developed or acquired at considerable expense.  The undersigned acknowledges and agrees that in the course of the undersigned’s Employment, the undersigned has acquired: (i) confidential information including without limitation information received by the Company (or any of its Affiliates) from third parties, under confidential conditions, (ii) other technical, product, business, financial or development information from the Company (or any of its Affiliates), the use or disclosure of which reasonably might be construed to be contrary to the interest of the Company (or any of its Affiliates), or (iii) any other proprietary information or data, including but not limited to identities, responsibilities, contact information, performance and/or compensation levels of employees, costs and methods of doing business, systems, processes, computer hardware and software, compilations of information, third-party IT service providers and other Company or its Affiliates’ vendors, records, sales reports, sales procedures, financial information, customer requirements and confidential negotiated terms, pricing techniques, customer lists, price lists, information about past, present, pending and/or planned Company or its Affiliates’ transactions not publically disclosed and other confidential information which Undersigned may have acquired during the undersigned’s Employment (hereafter collectively referred to as “Company Information”) which are owned by the Company or  its Affiliates and regularly used in the operation of its business, and as to which precautions are taken to prevent dissemination to persons other than certain directors, officers and employees and if disclosed, would assist in competition against the Company or any of its Affiliates.  The undersigned understands and agrees that such Company Information was and will be disclosed to the undersigned in confidence and for use only in performing work for the Company or its Affiliates.  The undersigned understands and agrees that undersigned: (x) will keep such Company Information confidential at all times, (y) will not disclose or communicate Company Information to any third party, and (z) will not make use of Company Information on the undersigned’s own behalf, or on behalf of any third party.  In view of the nature of the undersigned’s Employment and the nature of Company Information undersigned receives during the course of the undersigned’s Employment, the undersigned agrees that any unauthorized disclosure to third parties of Company Information would cause irreparable damage to the confidential or trade secret status of Company Information. The undersigned further acknowledges and agrees that the restrictions on my activities set forth above are necessary to protect the goodwill, Company Information and other legitimate interests of the Company and its Affiliates and that the undersigned’s acceptance of these restrictions is a condition of receipt of the Award, to which the undersigned would not otherwise be entitled, and the Award is good and sufficient consideration to support the undersigned’s agreement to and compliance with these covenants.

3

d.Remedies.  In the event of a breach or threatened breach by the undersigned of any of the covenants contained in in Section 7(a), 7(b) or 7(c):

ithe undersigned hereby consents and agrees that any unvested Shares shall be forfeited effective as of the date of such breach or threatened breach, unless sooner terminated by operation of another term or condition of this Agreement or the Plan;

iithe undersigned hereby consents and agrees that the Company shall be entitled to a “claw back” of any vested Shares or the cash value of any vested Shares; and

iiithe undersigned hereby consents and agrees that the Company shall be entitled to seek, in addition to other available remedies, a temporary or permanent injunction or other equitable relief against such breach or threatened breach from any court of competent jurisdiction, without the necessity of showing any actual damages or that money damages would not afford an adequate remedy, and without the necessity of posting any bond or other security. The aforementioned equitable relief shall be in addition to, not in lieu of, legal remedies, monetary damages or other available forms of relief.

e.General.  The undersigned agrees that the above restrictive covenants are completely severable and independent agreements supported by good and valuable consideration and, as such, shall survive the termination of this Agreement for whatever reason.  The Company and undersigned agree that any invalidity or unenforceability of any one or more of such restrictions on competition shall not render invalid or unenforceable any remaining restrictive covenants. Should a court of competent jurisdiction determine that the scope of any provision of this Section 7 is too broad to be enforced as written, the Company and undersigned intend that the court reform the provision to such narrower scope as it determines to be reasonable and enforceable.

8.Retention of Certificates.  Any certificates representing unvested Shares shall be held by the Company.  If unvested Shares are held in book entry form, the undersigned agrees that the Company may give stop transfer instructions to the depository to ensure compliance with the provisions hereof.

9.Effect of Certain Transactions.  In the event of a Change of Control (as defined in the Stockholders Agreement), all then outstanding and unvested Shares acquired by the undersigned hereunder shall automatically and immediately vest.

10.Joinder to Agreements.  The undersigned acknowledges and agrees that the Shares acquired hereunder will be subject to the Stockholders Agreement and to the Registration Rights Agreement and the transfer and other restrictions, rights, and obligations set forth in those agreements.  By executing this Agreement, the undersigned hereby becomes a party to and bound by the Stockholders Agreement and the Registration Rights Agreement as a Manager (as such term is defined in those agreements), without any further action on the part of the undersigned, the Company or any other Person.

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11.Legend.  Any certificates representing unvested Shares shall be held by the Company, and any such certificate shall contain a legend substantially in the following form:

THE TRANSFERABILITY OF THIS CERTIFICATE AND THE SHARES OF STOCK REPRESENTED HEREBY ARE SUBJECT TO THE TERMS AND CONDITIONS (INCLUDING FORFEITURE) OF THE MICHAELS COMPANIES, INC. EQUITY INCENTIVE PLAN AND A RESTRICTED STOCK AWARD AGREEMENT ENTERED INTO BETWEEN THE REGISTERED OWNER AND THE MICHAELS COMPANIES, INC.  COPIES OF SUCH PLAN AND AGREEMENT ARE ON FILE IN THE OFFICES OF THE MICHAELS COMPANIES, INC.

As soon as practicable following the vesting of any such Shares the Company shall cause a certificate or certificates covering such Shares, without the aforesaid legend, to be issued and delivered to the undersigned.  If any Shares are held in book-entry form, the Company may take such steps as it deems necessary or appropriate to record and manifest the restrictions applicable to such Shares.

12.Dividends, etc.  The undersigned shall be entitled to (i) receive any and all dividends or other distributions paid with respect to those Shares of which he/she is the record owner on the record date for such dividend or other distribution, and (ii) vote any Shares of which he/she is the record owner on the record date for such vote; provided, however, that any property (other than cash) distributed with respect to a share of Stock (the “associated share”) acquired hereunder, including without limitation a distribution of Stock by reason of a stock dividend, stock split or otherwise, or a distribution of other securities with respect to an associated share, shall be subject to the restrictions of this Agreement in the same manner and for so long as the associated share remains subject to such restrictions, and shall be promptly forfeited if and when the associated share is so forfeited;  and further provided, that the Administrator may require that any cash distribution with respect to the Shares other than a normal cash dividend be placed in escrow or otherwise made subject to such restrictions as the Administrator deems appropriate to carry out the intent of the Plan.  References in this Agreement to the Shares shall refer, mutatis mutandis, to any such restricted amounts.

13.Sale of Vested Shares.  The undersigned understands that he/she will be free to sell any Share once it has vested, subject to (i) satisfaction of any applicable tax withholding requirements with respect to the vesting or transfer of such Share; (ii) the completion of any administrative steps (for example, but without limitation, the transfer of certificates) that the Company may reasonably impose; (iii) applicable requirements of federal and state securities laws, (iv) the Stockholders Agreement and (v) the Registration Rights Agreement.

14.Certain Tax Matters.  The undersigned expressly acknowledges the following:

a.The undersigned has been advised to confer promptly with a professional tax advisor to consider whether the undersigned should make a so-called “83(b) election” with respect to the Shares.  Any such election, to be effective, must be made in accordance with applicable regulations and within thirty (30) days following the date of this Award.  The Company has made no recommendation to the undersigned with respect to the advisability of making such an election.

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b.The award or vesting of the Shares acquired hereunder, and the payment of dividends with respect to such Shares, may give rise to “wages” subject to withholding.  The undersigned expressly acknowledges and agrees that his/her rights hereunder are subject to him/her promptly paying to the Company all taxes required to be withheld in connection with such award, vesting or payment. Unless the undersigned elects otherwise, with respect to a particular vesting date under the Award, the Company shall withhold a number of Shares otherwise issuable to the undersigned having an aggregate Fair Market Value on such vesting date equal to the aggregate taxes required to be withheld in connection with the vesting of the Award (but not in excess of the applicable minimum statutory withholding rate).  If the undersigned elects not to have Shares withheld to cover the applicable tax withholding, the undersigned shall satisfy the applicable tax withholding by such other means as may be acceptable to the Company in its discretion, including, if the Administrator so determines, by the delivery of previously acquired Stock (including any Stock previously acquired hereunder) or by the withholding of amounts from any payments otherwise owed to the undersigned hereunder or otherwise or by the delivery of cash by the undersigned to the Company).

15.Governing Law; Jurisdiction.  Notwithstanding anything to the contrary in the Plan, Section 7 of this Agreement shall be governed by and construed in accordance with the laws of the State of Texas, without giving any effect to any choice or conflict of law provision or rule that would cause the application of the laws of any other jurisdiction, except where preempted by federal law. Both parties hereby consent and submit to the jurisdiction of the state and federal courts in Dallas County, Texas in all questions and controversies arising out of this Agreement.

	Very truly yours,
	[NAME]
Dated:                            201
The foregoing Restricted Stock
Award Agreement is hereby accepted:
THE MICHAELS COMPANIES, INC.
Michael J. Veitenheimer
SVP & Secretary

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EX-10.4

Exhibit 10.4

AMENDMENT NO. 1

TO

AMENDED AND RESTATED SHAREHOLDERS AGREEMENT

This Amendment No. 1 to the Amended and Restated Shareholders Agreement among Michaels Stores, Inc., a Delaware corporation (the “Company”) and certain Stockholders of the Company originally dated as of October 31, 2006 and amended and restated on January 31, 2007 (the “Agreement”), is entered into as of July 22, 2013 (this “Amendment”).  Capitalized terms used but not defined herein shall have the meanings given to such terms in the Agreement.

RECITALS

WHEREAS, the Company and each of the Stockholders executing this Amendment are parties to the Agreement and, the Company and such Stockholders, who collectively hold a majority of the Shares held by all Stockholders, wish to amend the Agreement pursuant to Section 8.2 thereof in order to address the merger of Michaels Stores MergerCo, Inc., with and into the Company to be effected pursuant to Section 251(g) of the Delaware General Corporation Law (the “Merger”); and

WHEREAS, in connection with the Merger, (i) all shares of Common Stock of the Company held by the Stockholders immediately prior to the consummation of the Merger will be exchanged for shares of common stock of The Michaels Companies, Inc., a Delaware corporation (“Topco”), the indirect parent of the Company, and (ii) all Options, Warrants and Convertible Securities held by the Stockholders immediately prior to the consummation of the Merger will be exchanged for options, warrants and convertible securities of Topco which  can be exercised for, converted into or exchanged for shares of common stock of Topco.

NOW, THEREFORE, the parties hereby agree as follows:

1.             Successor. As a result of the Merger, Topco shall be considered the successor of the Company pursuant to Section 10.3 of the Agreement and the rights and obligations of the Company under the Agreement shall become those of Topco in all respects.

2.             Miscellaneous.

2.1.         This Amendment and all claims arising out of or based upon this Amendment or relating to the subject matter hereof shall be governed by and construed in accordance with the domestic substantive laws of the State of New York without giving effect to any choice or conflict of laws provision or rule that would cause the application of the domestic substantive laws of any other jurisdiction.

2.2.         This Amendment may be executed in any number of counterparts, each of which shall be deemed an original and all of which together shall constitute a single instrument.

2.3          Except to the extent specifically amended hereby, the provisions of the Agreement shall remain unmodified and the Agreement is hereby confirmed as being in full force and effect.

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IN WITNESS WHEREOF, each of the undersigned has executed this Amendment No. 1 to Amended and Restated Shareholders Agreement effective as of the date first set forth above.

MICHAELS STORES, INC.
By:	/s/ Charles M. Sonsteby
Name:	Charles M. Sonsteby
Title:	Chief Administrative Officer and
	Chief Financial Officer
THE MICHAELS COMPANIES, INC.
By:	/s/ Charles M. Sonsteby
Name:	Charles M. Sonsteby
Title:	Chief Administrative Officer and
	Chief Financial Officer

Signature Page to Amendment No. 1 to

Amended and Restated Shareholders Agreement

INVESTORS:

MICHAELS HOLDINGS LLC			MICHAELS HOLDINGS LLC
By:	/s/ Peter F. Wallace		By:	/s/ Matthew S. Levin
	Name:	Peter F. Wallace		Name:	Matthew S. Levin
	Title:	Manager		Title:	Manager

Signature Page to Amendment No. 1 to

Amended and Restated Shareholders Agreement

EX-31.1

Exhibit 31.1

CERTIFICATIONS

I, Carl S. Rubin, certify that:

1.I have reviewed this quarterly report on Form 10-Q of Michaels Stores, Inc.;

2.Based on my knowledge, this 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 report;

3.Based on my knowledge, the financial statements, and other financial information included in this 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 report;

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 30, 2013	/s/ Carl S. Rubin
	Carl S. Rubin
	Chief Executive Officer
	(Principal Executive Officer)

EX-31.2

Exhibit 31.2

CERTIFICATIONS

I, Charles M. Sonsteby, certify that

1.I have reviewed this quarterly report on Form 10-Q of Michaels Stores, Inc.;

2.Based on my knowledge, this 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 report;

3.Based on my knowledge, the financial statements, and other financial information included in this 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 report;

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 30, 2013	/s/ Charles M. Sonsteby
	Charles M. Sonsteby
	Chief Administrative Officer & Chief Financial Officer
	( Principal Financial Officer)

EX-32.1

Exhibit 32.1

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, 2013, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), each of the undersigned officers of the Company certifies, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, 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.

Date: August 30, 2013	/s/ Carl S. Rubin
	Carl S. Rubin
	Chief Executive Officer
	(Principal Executive Officer)

/s/ Charles M. Sonsteby

Charles M. Sonsteby

Chief Administrative Officer & Chief Financial Officer

(Principal Financial Officer)

The foregoing certification is being furnished solely pursuant to 18 U.S.C. § 1350 and is not being filed as part of the Report or as a separate disclosure document.

EX-99.1

Exhibit 99.1

SECTION 13(r) DISCLOSURE

Hilton Worldwide Inc., which may be considered an affiliate of The Blackstone Group L.P., provided the disclosure reproduced below in connection with activities during the second fiscal quarter of 2013. We have no involvement in or control over the activities of Hilton Worldwide Inc., any of its predecessor companies or any of its subsidiaries, and we have not independently verified or participated in the preparation of this disclosure.

“As previously disclosed, during the reporting period, certain individual employees at two Hilton-branded hotels in the United Arab Emirates received routine wage payments as direct deposits to their personal accounts at Bank Melli, an entity identified on the Specially Designated Nationals and Blocked Persons List (“SDN List”) maintained by the Office of Foreign Assets Control in the U.S. Department of the Treasury. Both of these hotels are owned by a third party, staffed by employees of the third-party owner and operated pursuant to a management agreement between the owner and a Hilton affiliate. In each case, these payments originated from the third-party owner’s account to the personal accounts of the employees at their chosen bank. During the reporting period, both hotels discontinued making direct deposits to accounts at Bank Melli. No revenues or net profits are associated with these transactions.

Also as previously disclosed. during the reporting period, several individuals stayed at the DoubleTree Kuala Lumpur, Malaysia, pursuant to a rate agreement between the hotel and Mahan Air, an entity identified on the SDN List. The rate agreement was terminated as of May 2, 2013. This hotel is staffed by employees of the third-party owner and operated pursuant to a management agreement between the owner and a Hilton affiliate. Under the rate agreement, which was entered into in the name of the owner, the hotel reserved a number of rooms for Mahan Air crew members at the DoubleTree Kuala Lumpur several times each week. Revenue and net profit received by Hilton attributable to Mahan Air crew hotel stays during the reporting period was approximately $430.”

Travelport Limited, which may be considered as an affiliate of The Blackstone Group, L.P., provided the disclosure reproduced below in connection with activities during the second fiscal quarter of 2013. We have no involvement in or control over the activities of Travelport Limited, any of its predecessor companies or any of its subsidiaries, and we have not independently verified or participated in the preparation of this disclosure.

“As part of our global business in the travel industry, we provide certain passenger travel related GDS and airline IT services to Iran Air. We also provide certain airline IT Solutions services to Iran Air Tours. All of these services are either exempt from applicable sanctions prohibitions pursuant to a statutory exemption in the International Emergency Economic Powers Act permitting transactions ordinarily incident to travel or, to the extent not otherwise exempt, specifically licensed by the U.S. Office of Foreign Assets Control (“OFAC”). Subject to any changes in the exempt/licensed status of such activities, we intend to continue these business activities, which are directly related to and promote the arrangement of travel for individuals.

Prior to and during the reporting period, we also provided airline IT Solutions services to Syrian Arab Airlines. These services were generally understood to be permissible under the same statutory travel exemption. The services were terminated following the May 2013 action by OFAC to designate this airline as a Specially Designated Global Terrorist pursuant to the Global Terrorism Sanctions Regulations.

The gross revenue and net profit attributable to these activities in the quarter ended June 30, 2013 were approximately $248,000 and $176,000, respectively.”

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Debt (Tables)

6 Months Ended

Aug. 03, 2013

Debt

Schedule of outstanding debt

	August 3, 2013		February 2, 2013		July 28, 2012		Interest Rate
	(in millions)
Senior secured term loan	$	1,636	$	1,640	$	1,996	Variable
Senior notes	1,007		1,007		795		7.750%
Senior subordinated notes	255		393		393		11.375%
Subordinated discount notes	—		—		180		13.000%
Asset-based revolving credit facility	222		1		—		Variable
Total debt	3,120		3,041		3,364
Less current portion	238		150		1
Long-term debt	$	2,882	$	2,891	$	3,363

XML

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (USD $) In Millions, unless otherwise specified	3 Months Ended		6 Months Ended
	Aug. 03, 2013	Jul. 28, 2012	Aug. 03, 2013	Jul. 28, 2012
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Net sales	$ 904	$ 892	$ 1,897	$ 1,870
Cost of sales and occupancy expense	567	553	1,153	1,119
Gross profit	337	339	744	751
Selling, general, and administrative expense	258	252	529	512
Related party expenses	3	4	7	7
Store pre-opening costs	1	1	3	2
Operating income	75	82	205	230
Interest expense	45	61	92	127
Refinancing costs and losses on early extinguishment of debt			7
Other (income) and expense, net	1		1	(1)
Income before income taxes	29	21	105	104
Provision for income taxes	9	8	38	38
Net income	20	13	67	66
Other comprehensive income, net of tax:
Foreign currency translation adjustment	(2)	(2)	(2)
Actuarial gain on pension plan	1
Comprehensive income	$ 19	$ 11	$ 65	$ 66

XML

Income Taxes

6 Months Ended

Aug. 03, 2013

Income Taxes

Income Taxes

Note 5.   Income Taxes

The effective tax rate was 31.0% for the second quarter of fiscal 2013. The effective tax rate was 40.1% for the second quarter of fiscal 2012. The current year tax rate is lower than the prior year tax rate due primarily to the realization of state tax credits this year.

The effective tax rate was 36.2% for the first six months of fiscal 2013. The effective tax rate was 36.6% for the first six months of fiscal 2012. The rate was lower than the prior year six month tax rate due primarily to the realization of state tax credits this year partly offset by the prior year favorable impact related to our reserve for uncertain tax positions. We currently estimate our annualized effective tax rate for fiscal 2013 to be 37.4%.

XML

Debt (Details 2) (USD $) In Millions, unless otherwise specified	6 Months Ended	0 Months Ended
	Aug. 03, 2013	Feb. 27, 2013 11 3/8% Senior Subordinated Notes due 2016	Aug. 03, 2013 11 3/8% Senior Subordinated Notes due 2016	Jan. 28, 2013 11 3/8% Senior Subordinated Notes due 2016
Debt
Stated interest rate (as a percent)			11.375%	11.375%
Aggregate principal amount of debt instrument for which the entity delivered an irrevocable notice relating to the redemption				$ 137
Principal amount of notes repurchased		137
Redemption price of debt instrument as a percentage of principal amount		103.792%
Loss related to the early extinguishment of the repurchased notes	7	7
Redemption premiums included in loss on extinguishment of debt		5
Unamortized debt issuance costs written-off related to loss on early extinguishment of debt		$ 2

XML

Comprehensive Income (Tables)

6 Months Ended

Aug. 03, 2013

Comprehensive Income

Schedule of accumulated other comprehensive income, net of tax

	Foreign Currency Translation and Other
	(in millions)
Balance at February 2, 2013	$	6
Foreign currency translation adjustment	(2		)
Balance at August 3, 2013	$	4

XML

Fair Value Measurements (Details) (USD $) In Millions, unless otherwise specified	Aug. 03, 2013
Senior notes
Fair Value Measurements
Interest rate (as a percent)	7.75%
Carrying Value | Senior secured term loan
Fair Value Measurements
Long-term loans and notes	$ 1,636
Carrying Value | Senior notes
Fair Value Measurements
Long-term loans and notes	1,007
Carrying Value | Senior subordinated notes
Fair Value Measurements
Long-term loans and notes	255
Fair Value | Senior secured term loan
Fair Value Measurements
Long-term loans and notes	1,645
Fair Value | Senior notes
Fair Value Measurements
Long-term loans and notes	1,079
Fair Value | Senior subordinated notes
Fair Value Measurements
Long-term loans and notes	$ 267

XML

Comprehensive Income (Details) (USD $) In Millions, unless otherwise specified	3 Months Ended		6 Months Ended
	Aug. 03, 2013	Jul. 28, 2012	Aug. 03, 2013
Comprehensive Income
Balance at the beginning of the period			$ 6
Foreign currency translation adjustment	(2)	(2)	(2)
Balance at the end of the period	$ 4	$ 6	$ 4

XML

Condensed Consolidating Financial Information (Details) (USD $) In Millions, unless otherwise specified	Aug. 03, 2013	Feb. 02, 2013	Jul. 28, 2012	Jan. 28, 2012
Current assets:
Cash and equivalents	$ 51	$ 56	$ 113	$ 371
Merchandise inventories	905	865	922
Other	167	126	158
Total current assets	1,123	1,047	1,193
Property and equipment, net	347	338	326
Goodwill	94	94	95
Other assets	58	62	72
Total assets	1,622	1,541	1,686
Current liabilities:
Accounts payable	289	263	277
Accrued liabilities and other	338	367	351
Current portion of long-term debt	238	150	1
Other	5	44	3
Total current liabilities	870	824	632
Long-term debt	2,882	2,891	3,363
Other long-term liabilities	83	85	97
Total stockholders' deficit	(2,213)	(2,259)	(2,406)
Total liabilities and stockholders' deficit	1,622	1,541	1,686
Parent Company
Current assets:
Cash and equivalents	28	37	93	363
Merchandise inventories	615	590	600
Other	139	105	135
Total current assets	782	732	828
Property and equipment, net	274	271	265
Goodwill	94	94	95
Investment in subsidiaries	472	301	586
Other assets	56	59	69
Total assets	1,678	1,457	1,843
Current liabilities:
Accounts payable	5	5	8
Accrued liabilities and other	208	235	232
Current portion of long-term debt	238	150	1
Intercompany payable	481	323	556
Other	5	39	3
Total current liabilities	937	752	800
Long-term debt	2,882	2,891	3,363
Other long-term liabilities	72	73	86
Total stockholders' deficit	(2,213)	(2,259)	(2,406)
Total liabilities and stockholders' deficit	1,678	1,457	1,843
Guarantor Subsidiaries
Percentage of equity ownership owned	100.00%
Current assets:
Cash and equivalents	23	19	20	8
Merchandise inventories	290	275	322
Intercompany receivables	481	323	556
Other	28	21	23
Total current assets	822	638	921
Property and equipment, net	73	67	61
Other assets	2	3	3
Total assets	897	708	985
Current liabilities:
Accounts payable	284	258	269
Accrued liabilities and other	130	132	119
Other		5
Total current liabilities	414	395	388
Other long-term liabilities	11	12	11
Total stockholders' deficit	472	301	586
Total liabilities and stockholders' deficit	897	708	985
Eliminations
Current assets:
Intercompany receivables	(481)	(323)	(556)
Total current assets	(481)	(323)	(556)
Investment in subsidiaries	(472)	(301)	(586)
Total assets	(953)	(624)	(1,142)
Current liabilities:
Intercompany payable	(481)	(323)	(556)
Total current liabilities	(481)	(323)	(556)
Total stockholders' deficit	(472)	(301)	(586)
Total liabilities and stockholders' deficit	$ (953)	$ (624)	$ (1,142)

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Segments and Geographic Information (Details) (USD $) In Millions, unless otherwise specified	3 Months Ended		6 Months Ended
	Aug. 03, 2013	Jul. 28, 2012	Aug. 03, 2013 item	Jul. 28, 2012	Feb. 02, 2013
Segments and Geographic Information
Number of reportable segments			1
Sales and assets by country
Net sales	$ 904	$ 892	$ 1,897	$ 1,870
Total Assets	1,622	1,686	1,622	1,686	1,541
United States
Sales and assets by country
Net sales	819	812	1,717	1,703
Total Assets	1,499	1,569	1,499	1,569	1,432
Canada
Sales and assets by country
Net sales	85	80	180	167
Total Assets	$ 123	$ 117	$ 123	$ 117	$ 109

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Debt (Details 3) (USD $) In Millions, unless otherwise specified					3 Months Ended	6 Months Ended
	Aug. 03, 2013	Feb. 02, 2013	Jul. 28, 2012	Aug. 03, 2013 Restated Revolving Credit Facility	Aug. 03, 2013 Restated Term Loan Credit Facility	Aug. 03, 2013 Restated Term Loan Credit Facility
Asset-based Revolving Credit Facility
Borrowing base amount				$ 650
Outstanding borrowings				222
Outstanding letters of credit				61
Unused borrowing capacity				367
Scheduled quarterly payments as a percentage of the original principal amount of the term loans						0.25%
Period of incurrence of additional term loans to make scheduled quarterly payments						6 years 9 months
Scheduled quarterly payments of the original principal amount of the term loans					4
Current portion of long-term debt	$ 238	$ 150	$ 1		$ 16	$ 16
Period of scheduled quarterly payments					12 months

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Summary of Significant Accounting Policies

6 Months Ended

Aug. 03, 2013

Summary of Significant Accounting Policies

Summary of Significant Accounting Policies

Note 1.   Summary of Significant Accounting Policies

Basis of Presentation

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

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) 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 GAAP for complete financial statements. Therefore, these financial statements should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended February 2, 2013.

The balance sheet at February 2, 2013 has been derived from the audited financial statements at that date, but does not include all of the information and notes required by GAAP for complete financial statements.

In the opinion of management, all adjustments (consisting of normal recurring accruals and other items) considered necessary for a fair presentation have been included.

Because of the seasonal nature of our business, the results of operations for the quarter ended August 3, 2013 are not indicative of the results to be expected for the entire year.

We report on the basis of a 52- or 53-week fiscal year, which ends on the Saturday closest to January 31. All references herein to “fiscal 2013” relate to the 52 weeks ending February 1, 2014, and all references to”fiscal 2012” relate to the 53 weeks ended February 2, 2013.  In addition, all references herein to “the second quarter of fiscal 2013” relate to the 13 weeks ended August 3, 2013, and all references to “the second quarter of fiscal 2012” relate to the 13 weeks ended July 28, 2012. Finally, all references to “the six months ended August 3, 2013” relate to the 26 weeks ended August 3, 2013, and “the six months ended July 28, 2012” relate to the 26 weeks ended July 28, 2012.

Recent Accounting Pronouncements

In July 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss or a Tax Credit Carryforward Exists.” ASU 2013-11 requires unrecognized tax benefits to be presented as a decrease in a net operating loss, similar tax loss or tax credit carryforward  if certain criteria are met.    ASU 2013-11, which is prospective, is effective for reporting periods beginning after December 15, 2013, with earlier adoption permitted.  Retrospective application is also permitted. We are still evaluating the standard to determine when we will adopt the standard but we do not believe the implementation of this standard will result in a material impact to our financial statements.

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Comprehensive Income

6 Months Ended

Aug. 03, 2013

Comprehensive Income

Comprehensive Income

Note 3.   Comprehensive Income

Accumulated other comprehensive income, net of tax, is reflected in the Consolidated Balance Sheets as follows:

	Foreign Currency Translation and Other
	(in millions)
Balance at February 2, 2013	$	6
Foreign currency translation adjustment	(2		)
Balance at August 3, 2013	$	4

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Commitments and Contingencies

6 Months Ended

Aug. 03, 2013

Commitments and Contingencies

Commitments and Contingencies

Note 6.   Commitments and Contingencies

We are involved in ongoing legal and regulatory proceedings.  Other than those described in the following paragraphs, there were no material changes to our disclosures of commitments and contingencies from our Annual Report on Form 10-K for the fiscal year ended February 2, 2013 and our Quarterly Report on Form 10-Q for the quarterly period ended May 4, 2013.

Consumer Class Action Claims

Massachusetts Zip Code Claims

Relying in part on the California Supreme Court decision, an additional purported class action lawsuit was filed on May 20, 2011 against the Company: Melissa Tyler v. Michaels Stores, Inc. in the U.S. District Court-District of Massachusetts, alleging violation of a Massachusetts statute regarding the collection of personally identification information in connection with a credit card transaction.   On March 11, 2013, the Massachusetts Supreme Judicial Court ruled on certified questions on the interpretation of the statute and remanded the case to the U.S. District Court for further proceedings.  Following the Judicial Court’s decision, an additional purported class action lawsuit asserting the same allegations in Tyler was filed in the U.S. District Court-District of Massachusetts by Susan D’Esposito, and the two cases have been consolidated.   On August 12, 2013, a tentative settlement that is subject to Court approval was reached for an amount that will not have a material effect on our Consolidated Financial Statements.

Governmental inquiries and related matters

Non-U.S. trust inquiry

In early 2005, the District Attorney’s office of the County of New York and the SEC opened inquiries concerning non-U.S. trusts that directly or indirectly held shares of Michaels common stock and common stock options. On July 29, 2010, the SEC filed a civil enforcement action in federal district court for the Southern District of New York against Charles Wyly, Sam Wyly, the Wylys’ attorney—Michael French, and others alleging, among other things, violations of various federal securities laws, including those governing ownership reporting and trading of securities, in connection with the non-U.S. trusts and their subsidiaries. Additional information may be obtained at the SEC’s website. Sam Wyly, the estate of Charles Wyly and Mr. French, also a former director of the Company, have requested indemnification from the Company for certain legal costs with respect to these matters. The Company has resolved all claims with regards to Sam Wyly and the estate of Charles Wyly for an immaterial amount.

On April 12, 2012, Mr. French filed a lawsuit against the Company and the non-U.S. trusts in the District Court of Dallas County, Texas. The matter was dismissed as to the non-U.S. trusts. Mr. French seeks damages from the Company for breach of contract, attorneys’ fees and costs related to the Company’s alleged indemnification obligations to Mr. French and attorneys’ fees and costs related to the lawsuit. On August 9, 2013, the dispute was settled for an amount that will not have a material effect on our Consolidated Financial Statements.

General

In addition to the litigation discussed above, we are, and in the future, may be involved in various other lawsuits, claims and proceedings incident to the ordinary course of business. The results of litigation are inherently unpredictable. Any claims against us, whether meritorious or not, could be time consuming, result in costly litigation, require significant amounts of management time and result in diversion of significant resources.

ASC 450, Contingencies, governs the disclosure and recognition of loss contingencies, including potential losses from litigation and regulatory matters. It imposes different requirements for the recognition and disclosure of loss contingencies based on the likelihood of occurrence of the contingent future event or events. It distinguishes among degrees of likelihood using the following three terms: “probable”, meaning that “the future event or events are likely to occur”; “remote”, meaning that “the chance of the future event or events occurring is slight”; and “reasonably possible”, meaning that “the chance of the future event or events occurring is more than remote but less than likely”. In accordance with ASC 450, the Company accrues for a loss contingency when we conclude that the likelihood of a loss is probable and the amount of the loss can be reasonably estimated. When the loss cannot be reasonably estimated we estimate the range of amounts, and if no amount in the range constitutes a better estimate than any other amount, we accrue for the amount at the low end of the range. We adjust our accruals from time to time as we receive additional information, but the loss we incur may be significantly greater than or less than the amount we have accrued. We disclose loss contingencies if there is at least a reasonable possibility that a material loss has been incurred. No accrual or disclosure is required for losses that are remote.

For some of the matters disclosed above, as well as other matters previously disclosed in the Company’s filings with the Securities and Exchange Commission (“SEC”), the Company is currently able to estimate a reasonably possible loss or range of loss in excess of amounts accrued (if any). For some of the matters included within this estimation, an accrual has been made because a loss is believed to be both probable and reasonably estimable, but an exposure to loss exists in excess of the amount accrued; in these cases, the estimate reflects the reasonably possible range of loss in excess of the accrued amount. For other matters included within this estimation, no accrual has been made because a loss, although estimable, is believed to be reasonably possible, but not probable; in these cases the estimate reflects the reasonably possible loss or range of loss within the ranges identified. For the various ranges identified, the aggregate of these estimated amounts is approximately $10 million, which is also inclusive of amounts accrued by the Company.

For other matters disclosed above or as previously disclosed in the Company’s filings with the SEC, the Company is not currently able to estimate the reasonably possible loss or range of loss, and has indicated such. Many of these matters remain in preliminary stages (even in some cases where a substantial period of time has passed since the commencement of the matter), with few or no substantive legal decisions by the court defining the scope of the claims, the class (if any), or the potentially available damages, and fact discovery is still in progress or has not yet begun. For all these reasons, the Company cannot at this time estimate the reasonably possible loss or range of loss, if any, for these matters.

It is the opinion of the Company’s management, based on current knowledge and after taking into account its current legal accruals, the eventual outcome of all matters described in this Note would not be likely to have a material impact on the consolidated financial condition of the Company. Nonetheless, given the substantial or indeterminate amounts sought in certain of these matters, and the inherent unpredictability of such matters, an adverse outcome in certain of these matters could, from time to time, have a material effect on the Company’s consolidated results of operations or cash flows in particular quarterly or annual periods.

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Fair Value Measurements

6 Months Ended

Aug. 03, 2013

Fair Value Measurements

Fair Value Measurements

Note 4.   Fair Value Measurements

As defined in ASC 820, Fair Value Measurements and Disclosures, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  ASC 820 establishes a three-level valuation hierarchy for fair value measurements. These valuation techniques are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect less transparent active market data, as well as internal assumptions. These two types of inputs create the following fair value hierarchy:

· Level 1 — Quoted prices for identical instruments in active markets;

· Level 2 — Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose significant inputs are observable; and

· Level 3 — Instruments with significant unobservable inputs.

We apply fair value techniques on a non-recurring basis for the establishment of potential impairment loss related to goodwill pursuant to ASC 350, Intangibles—Goodwill and Other and determining the fair value of long-lived assets pursuant to ASC 360, Property, Plant, and Equipment. During the quarter and six months ended August 3, 2013, there were no material events or changes in circumstances indicating the carrying amounts of our goodwill or long-lived assets may not be recoverable.

The table below provides the carrying and fair values of our senior secured term loan facility (“Restated Term Loan Credit Facility”), our 7 3/4% Senior Notes that mature in 2018 (“2018 Senior Notes”) and our Senior Subordinated Notes, (together, with our 2018 Senior Notes, “our notes” ) as of August 3, 2013. The fair value of our Restated Term Loan Credit Facility was determined based on quoted market prices of similar instruments which are considered Level 2 inputs within the fair value hierarchy. The fair value of our notes was determined based on recent trades which are considered Level 1 inputs within the fair value hierarchy.

	Carrying Value		Fair Value
	(in millions)
Senior secured term loan	$	1,636	$	1,645
Senior notes	1,007		1,079
Senior subordinated notes	255		267

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Income Taxes (Details)	3 Months Ended		6 Months Ended		12 Months Ended
	Aug. 03, 2013	Jul. 28, 2012	Aug. 03, 2013	Jul. 28, 2012	Feb. 01, 2014 Annualized Estimate
Effective tax rate from continuing operations
Effective tax rate (as a percent)	31.00%	38.10%	36.20%	36.50%	37.40%

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Segments and Geographic Information (Details 2) (USD $) In Millions, unless otherwise specified	3 Months Ended		6 Months Ended
	Aug. 03, 2013	Jul. 28, 2012	Aug. 03, 2013	Jul. 28, 2012
Segment and Geographic Information
Net income	$ 20	$ 13	$ 67	$ 66
Interest expense	45	61	92	127
Refinancing costs and losses on early extinguishment of debt			7
Provision for income taxes	9	8	38	38
Depreciation and amortization			50	46
Reporting segment
Segment and Geographic Information
Net income	20	13	67	66
Interest expense	45	61	92	127
Refinancing costs and losses on early extinguishment of debt			7
Provision for income taxes	9	8	38	38
Depreciation and amortization	25	22	50	46
EBITDA (excluding refinancing costs and losses on early extinguishments of debt)	$ 99	$ 104	$ 254	$ 277

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CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $) In Millions, except Share data, unless otherwise specified	Aug. 03, 2013	Feb. 02, 2013	Jul. 28, 2012
CONSOLIDATED BALANCE SHEETS
Debt issuance costs, accumulated amortization (in dollars)	$ 54	$ 54	$ 82
Common Stock, par value (in dollars per share)	$ 0.10	$ 0.10	$ 0.10
Common Stock, shares authorized	100	100	100
Common Stock, shares issued	100	100	100
Common Stock, shares outstanding	100	100	100

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Related Party Transactions

6 Months Ended

Aug. 03, 2013

Related Party Transactions

Related Party Transactions

Note 9.   Related Party Transactions

We pay annual management fees to Bain Capital Partners, LLC (“Bain Capital”) and The Blackstone Group L.P. (“The Blackstone Group” and, together with Bain Capital, the “Sponsors”) and Highfields Capital Management LP in the amount of $12 million and $1 million, respectively. We recognized $3 million and $4 million of expense related to annual management fees during the second quarter of fiscal 2013 and fiscal 2012, respectively and $7 million during the six months ended August 3, 2013 and July 28, 2012, respectively. These expenses are included in related party expenses on the Consolidated Statements of Comprehensive Income.

Bain Capital owns a majority equity position in LogicSource, an external vendor we utilize for print procurement services.  Payments associated with this vendor during the second quarters of fiscal 2013 and fiscal 2012 were $1 million and were $2 million and $3 million during the six months ended August 3, 2013 and July 28, 2012, respectively.  These expenses are included in Selling, general and administrative expense on the Consolidated Statements of Comprehensive Income.

The Blackstone Group owns a majority equity position in Brixmor Properties Group, a vendor we utilize to lease certain properties. Payments associated with this vendor during each of the second quarters of fiscal 2013 and fiscal 2012 were $1 million and were $2 million during the six months ended August 3, 2013 and July 28, 2012.  These expenses are included in Cost of sales and occupancy expense in the Consolidated Statements of Comprehensive Income.

The Blackstone Group owns a majority equity position in RGIS, an external vendor we utilize to count our store inventory. Payments associated with this vendor during the second quarters of fiscal 2013 and fiscal 2012 were $2 million and $1 million, respectively and were $3 million during the six months ended August 3, 2013 and July 28, 2012. These expenses are included in Selling, general and administrative expense on the Consolidated Statements of Comprehensive Income.

The Blackstone Group owns a majority equity position in Vistar, an external vendor we utilize for all of the candy-type items in our stores.  Payments associated with this vendor during the second quarter of fiscal 2013 and fiscal 2012 were $6 million and were $12 million and $11 million during the six months ended August 3, 2013 and July 28, 2012, respectively. These expenses are recognized in cost of sales as the sales are recorded.

Our current directors (other than Jill A. Greenthal and Carl S. Rubin) are affiliates of Bain Capital or The Blackstone Group.  As such, some or all of such directors may have an indirect material interest in payments with respect to debt securities of the Company that have been purchased by affiliates of Bain Capital and The Blackstone Group.  As of August 3, 2013, affiliates of The Blackstone Group held $38 million of our Restated Term Loan Credit Facility.

As a result of the Reorganization discussed in Note 7, at August 3, 2013, the Company has recorded a receivable from Parent of  $4 million for payments made by the Company related to the repurchase of stock issued by Parent as a result of a stock option exercise by an employee of the Company. Amounts paid by the Company on Parent’s behalf related to the dividend payment discussed in Note 7 and the stock option exercise discussed above were $20 million for the six months ended August 3, 2013.

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CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $) In Millions, unless otherwise specified	6 Months Ended
	Aug. 03, 2013	Jul. 28, 2012
Operating activities:
Net income	$ 67	$ 66
Adjustments:
Depreciation and amortization	50	46
Share-based compensation and other	1	3
Debt issuance costs amortization	4	8
Refinancing costs and losses on early extinguishment of debt	7
Changes in assets and liabilities:
Merchandise inventories	(40)	(82)
Prepaid expenses and other	(13)	(9)
Accounts payable	43	(23)
Accrued interest	(2)	(4)
Accrued liabilities and other	(38)	(42)
Income taxes	(71)	(43)
Other long-term liabilities	(2)	1
Net cash provided by (used in) operating activities	6	(79)
Investing activities:
Additions to property and equipment	(50)	(45)
Net cash used in investing activities	(50)	(45)
Financing activities:
Redemption of senior subordinated notes due 2016	(142)
Repurchase of subordinated discount notes due 2016		(127)
Repayments on senior secured term loan facility	(4)
Borrowings on asset-based revolving credit facility	375
Payments on asset-based revolving credit facility	(154)
Repurchase of common stock	(45)	(3)
Proceeds from stock options exercised	25	2
Payment of capital leases	(2)	(1)
Change in cash overdraft	(14)	(5)
Net cash provided by (used in) financing activities	39	(134)
Net decrease in cash and equivalents	(5)	(258)
Cash and equivalents at beginning of period	56	371
Cash and equivalents at end of period	51	113
Supplemental Cash Flow Information:
Cash paid for interest	89	122
Cash paid for income taxes	$ 109	$ 80

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CONSOLIDATED BALANCE SHEETS (USD $) In Millions, unless otherwise specified	Aug. 03, 2013	Feb. 02, 2013	Jul. 28, 2012
Current assets:
Cash and equivalents	$ 51	$ 56	$ 113
Merchandise inventories	905	865	922
Prepaid expenses and other	96	86	89
Deferred income taxes	37	37	42
Income tax receivable	34	3	27
Total current assets	1,123	1,047	1,193
Property and equipment, at cost	1,542	1,502	1,438
Less accumulated depreciation and amortization	(1,195)	(1,164)	(1,112)
Property and equipment, net	347	338	326
Goodwill	94	94	95
Debt issuance costs, net of accumulated amortization of $54, $54, and $82, respectively	40	46	51
Deferred income taxes	13	13	18
Other assets	5	3	3
Total non-current assets	152	156	167
Total assets	1,622	1,541	1,686
Current liabilities:
Accounts payable	289	263	277
Accrued liabilities and other	338	367	351
Current portion of long-term debt	238	150	1
Deferred income taxes	4	4	1
Income taxes payable	1	40	2
Total current liabilities	870	824	632
Long-term debt	2,882	2,891	3,363
Deferred income taxes	2	2	11
Other long-term liabilities	81	83	86
Total long-term liabilities	2,965	2,976	3,460
Total liabilities	3,835	3,800	4,092
Commitments and contingencies
Stockholders' deficit:
Common Stock, $0.10 par value, 100 shares authorized; 100 shares issued and outstanding
Additional paid-in capital	60	61	62
Accumulated deficit	(2,277)	(2,326)	(2,474)
Accumulated other comprehensive income	4	6	6
Total stockholders' deficit	(2,213)	(2,259)	(2,406)
Total liabilities and stockholders' deficit	$ 1,622	$ 1,541	$ 1,686

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Commitments and Contingencies (Details) (USD $) In Millions, unless otherwise specified	6 Months Ended
	Aug. 03, 2013
Commitments and Contingencies
Amount of accrual for estimable and reasonably possible loss	$ 0
Aggregate estimate of possible loss	$ 10
Consumer Class Action Claims | Zip Code Claims
Commitments and Contingencies
Number of cases subject to the consolidation order	2

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Debt (Details) (USD $) In Millions, unless otherwise specified	Aug. 03, 2013	Feb. 02, 2013	Jan. 28, 2013	Jul. 28, 2012
Debt
Total debt	$ 3,120	$ 3,041		$ 3,364
Less current portion	238	150		1
Long-term debt	2,882	2,891		3,363
Senior secured term loan
Debt
Total debt	1,636	1,640		1,996
Senior notes
Debt
Total debt	1,007	1,007		795
Interest rate (as a percent)	7.75%
Senior subordinated notes
Debt
Total debt	255	393		393
Interest rate (as a percent)	11.375%		11.375%
Subordinated discount notes
Debt
Total debt				180
Interest rate (as a percent)				13.00%
Asset-based revolving credit facility
Debt
Total debt	$ 222	$ 1

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Condensed Consolidating Financial Information (Details 2) (USD $) In Millions, unless otherwise specified	3 Months Ended		6 Months Ended
	Aug. 03, 2013	Jul. 28, 2012	Aug. 03, 2013	Jul. 28, 2012
Net sales	$ 904	$ 892	$ 1,897	$ 1,870
Cost of sales and occupancy expense	567	553	1,153	1,119
Gross profit	337	339	744	751
Selling, general, and administrative expense	258	252	529	512
Related party expenses	3	4	7	7
Store pre-opening costs	1	1	3	2
Operating income	75	82	205	230
Interest expense	45	61	92	127
Refinancing costs and losses on early extinguishment of debt			7
Other (income) and expense, net	1		1	(1)
Income before income taxes	29	21	105	104
Provision for income taxes	9	8	38	38
Net income	20	13	67	66
Other comprehensive income, net of tax:
Foreign currency translation adjustment	(2)	(2)	(2)
Actuarial gain on pension plan	1
Comprehensive income	19	11	65	66
Parent Company
Net sales	783	777	1,652	1,638
Cost of sales and occupancy expense	522	515	1,077	1,051
Gross profit	261	262	575	587
Selling, general, and administrative expense	225	219	458	444
Related party expenses	3	4	7	7
Store pre-opening costs	1	1	3	2
Operating income	32	38	107	134
Interest expense	45	61	92	127
Refinancing costs and losses on early extinguishment of debt			7
Intercompany charges (income)	12	15	25	32
Equity in earnings of subsidiaries	54	59	122	129
Income before income taxes	29	21	105	104
Provision for income taxes	9	8	38	38
Net income	20	13	67	66
Other comprehensive income, net of tax:
Foreign currency translation adjustment	(2)		(2)
Actuarial gain on pension plan	1
Comprehensive income	19	11	65	66
Guarantor Subsidiaries
Net sales	534	521	1,081	1,070
Cost of sales and occupancy expense	458	444	912	906
Gross profit	76	77	169	164
Selling, general, and administrative expense	33	33	71	68
Operating income	43	44	98	96
Other (income) and expense, net	1		1	(1)
Intercompany charges (income)	(12)	(15)	(25)	(32)
Income before income taxes	54	59	122	129
Provision for income taxes	17	22	44	47
Net income	37	37	78	82
Other comprehensive income, net of tax:
Comprehensive income	37	37	78	82
Eliminations
Net sales	(413)	(406)	(836)	(838)
Cost of sales and occupancy expense	(413)	(406)	(836)	(838)
Equity in earnings of subsidiaries	(54)	(59)	(122)	(129)
Income before income taxes	(54)	(59)	(122)	(129)
Provision for income taxes	(17)	(22)	(44)	(47)
Net income	(37)	(37)	(78)	(82)
Other comprehensive income, net of tax:
Comprehensive income	$ (37)	$ (37)	$ (78)	$ (82)

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Condensed Consolidating Financial Information (Details 3) (USD $) In Millions, unless otherwise specified	6 Months Ended
	Aug. 03, 2013	Jul. 28, 2012
Operating activities:
Net cash provided by operating activities	$ 6	$ (79)
Investing activities:
Cash paid for property and equipment	(50)	(45)
Net cash used in investing activities	(50)	(45)
Financing activities:
Net repayments of short-term debt	75
Net repayments of long-term debt		(127)
Other financing activities	(36)	(7)
Net cash provided by (used in) financing activities	39	(134)
Net decrease in cash and equivalents	(5)	(258)
Cash and equivalents at beginning of period	56	371
Cash and equivalents at end of period	51	113
Parent Company
Operating activities:
Net cash provided by operating activities	(13)	(98)
Investing activities:
Cash paid for property and equipment	(35)	(38)
Net cash used in investing activities	(35)	(38)
Financing activities:
Net repayments of short-term debt	75
Net repayments of long-term debt		(127)
Other financing activities	(36)	(7)
Net cash provided by (used in) financing activities	39	(134)
Net decrease in cash and equivalents	(9)	(270)
Cash and equivalents at beginning of period	37	363
Cash and equivalents at end of period	28	93
Guarantor Subsidiaries
Operating activities:
Net cash provided by operating activities	66	68
Investing activities:
Cash paid for property and equipment	(15)	(7)
Net cash used in investing activities	(15)	(7)
Financing activities:
Intercompany dividends	(47)	(49)
Net cash provided by (used in) financing activities	(47)	(49)
Net decrease in cash and equivalents	4	12
Cash and equivalents at beginning of period	19	8
Cash and equivalents at end of period	23	20
Eliminations
Operating activities:
Net cash provided by operating activities	(47)	(49)
Financing activities:
Intercompany dividends	47	49
Net cash provided by (used in) financing activities	$ 47	$ 49

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Segments and Geographic Information

6 Months Ended

Aug. 03, 2013

Segments and Geographic Information

Segments and Geographic Information

Note 8.   Segments and Geographic Information

We consider our Michaels — U.S., Michaels — Canada, Aaron Brothers and online scrapbooking business operations to be our operating segments for purposes of determining reportable segments based on the criteria of ASC 280, Segment Reporting. We determined that our Michaels — U.S., Michaels — Canada, and Aaron Brothers operating segments have similar economic characteristics and meet the aggregation criteria set forth in ASC 280. Therefore, we combine those operating segments into one reporting segment.  During the second quarter of 2013, the online scrapbooking business was discontinued; as an operating segment, it is immaterial to the financial statements as a whole.

Our sales and assets by country are as follows:

	Quarter Ended				Six Months Ended
	August 3, 2013		July 28, 2012		August 3, 2013		July 28, 2012
	(in millions)
Net Sales:
United States	$	819	$	812	$	1,717	$	1,703
Canada	85		80		180		167
Consolidated Total	$	904	$	892	$	1,897	$	1,870
	August 3, 2013		February 2, 2013		July 28, 2012
	(in millions)
Total Assets:
United States	$	1,499	$	1,432	$	1,569
Canada	123		109		117
Consolidated Total	$	1,622	$	1,541	$	1,686

Our chief operating decision makers evaluate historical operating performance, plan and forecast future periods’ operating performance based on earnings before interest, income taxes, depreciation, amortization, and refinancing costs and losses on early extinguishment of debt (“EBITDA (excluding refinancing costs and losses on early extinguishment of debt)”). We believe EBITDA (excluding refinancing costs and losses on early extinguishment of debt) represents the financial measure that more closely reflects the operating effectiveness of factors over which management has control. As such, an element of base incentive compensation targets for certain management personnel are based on EBITDA (excluding refinancing costs and losses on early extinguishment of debt). A reconciliation of EBITDA (excluding refinancing costs and losses on early extinguishment of debt) to Net income is presented below.

	Quarter Ended				Six Months Ended
	August 3, 2013		July 28, 2012		August 3, 2013		July 28, 2012
	(in millions)
Net income	$	20	$	13	$	67	$	66
Interest expense	45		61		92		127
Refinancing costs and losses on early extinguishments of debt	—		—		7		—
Provision for income taxes	9		8		38		38
Depreciation and amortization	25		22		50		46
EBITDA (excluding refinancing costs and losses on early extinguishments of debt)	$	99	$	104	$	254	$	277

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The Michaels Companies and its Subsidiaries (Details) (USD $) In Millions, except Share data, unless otherwise specified				1 Months Ended	0 Months Ended
	Aug. 03, 2013	Feb. 02, 2013	Jul. 28, 2012	Jul. 31, 2013 Michaels Companies, Inc.	Jul. 29, 2013 PIK Notes item
Reorganization
Number of shares of common stock for which rights to receive available				1
Number of shares of common stock of which options assumed				1
Number of shares of common stock converted into Parent common stock				118,000,000
Shares issued	100	100	100	100
Common Stock, par value (in dollars per share)	$ 0.10	$ 0.10	$ 0.10	$ 0.10
Principal amount of notes issued					$ 800
PIK interest rate one (as a percent)					7.50%
PIK interest rate two (as a percent)					8.25%
Number of interest payments to be paid entirely in cash					2
Proceeds from debt after discount, fees and expenses					782
Annual interest payments					60
Total interest payments					$ 301

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Summary of Significant Accounting Policies (Policies)

6 Months Ended

Aug. 03, 2013

Summary of Significant Accounting Policies

Basis of Presentation

Basis of Presentation

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

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) 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 GAAP for complete financial statements. Therefore, these financial statements should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended February 2, 2013.

The balance sheet at February 2, 2013 has been derived from the audited financial statements at that date, but does not include all of the information and notes required by GAAP for complete financial statements.

In the opinion of management, all adjustments (consisting of normal recurring accruals and other items) considered necessary for a fair presentation have been included.

Because of the seasonal nature of our business, the results of operations for the quarter ended August 3, 2013 are not indicative of the results to be expected for the entire year.

We report on the basis of a 52- or 53-week fiscal year, which ends on the Saturday closest to January 31. All references herein to “fiscal 2013” relate to the 52 weeks ending February 1, 2014, and all references to”fiscal 2012” relate to the 53 weeks ended February 2, 2013.  In addition, all references herein to “the second quarter of fiscal 2013” relate to the 13 weeks ended August 3, 2013, and all references to “the second quarter of fiscal 2012” relate to the 13 weeks ended July 28, 2012. Finally, all references to “the six months ended August 3, 2013” relate to the 26 weeks ended August 3, 2013, and “the six months ended July 28, 2012” relate to the 26 weeks ended July 28, 2012.

Recent Accounting Pronouncements

Recent Accounting Pronouncements

In July 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss or a Tax Credit Carryforward Exists.” ASU 2013-11 requires unrecognized tax benefits to be presented as a decrease in a net operating loss, similar tax loss or tax credit carryforward  if certain criteria are met.    ASU 2013-11, which is prospective, is effective for reporting periods beginning after December 15, 2013, with earlier adoption permitted.  Retrospective application is also permitted. We are still evaluating the standard to determine when we will adopt the standard but we do not believe the implementation of this standard will result in a material impact to our financial statements.

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The Michaels Companies and its Subsidiaries

6 Months Ended

Aug. 03, 2013

The Michaels Companies and its Subsidiaries

The Michaels Companies and its Subsidiaries

Note 7.   The Michaels Companies and its Subsidiaries

In July 2013, Michaels was reorganized into a holding company structure (“Reorganization”).  The Michaels Companies, Inc. (“Parent”), Michaels FinCo Holdings, LLC (“FinCo Holdings”), Michaels FinCo, Inc. (“ FinCo Inc”) and Michaels Funding, Inc. (“Holdings”) and Michaels Stores Merger Co, Inc. (“MergerCo”) were formed in connection with the Reorganization: (i) MergerCo was merged with and into Michaels with Michaels being the surviving corporation; (ii) each share of Michaels’ common stock was converted into the right to receive one share of Parent common stock, subject to the same vesting conditions, if any, as applied to the share so converted, and each such share of Michaels’ common stock was cancelled and retired and ceased to exist; and (iii)  each option to purchase one or more shares of common stock of Michaels was assumed by Parent and converted into an option to purchase an equivalent number of shares of common stock of Parent with the remaining terms of each such option remaining unchanged except as was necessary to reflect the Reorganization. Approximately 118 million shares of Michaels’ common stock were converted into Parent common stock. The Michaels’ shares were then cancelled and retired and an amount equal to the par value of the original shares was transferred from the common stock account to paid-in capital. Michaels then issued 100 shares of stock with a $0.10 par value to Holdings. In addition, common stock issued and outstanding and additional paid-in capital for February 2, 2013 and July 28, 2012 on the Consolidated Balance Sheets have been adjusted to reflect this transaction as if it happened prior to those dates.

As a result of the Reorganization, FinCo Holdings is wholly owned by the Parent.  FinCo Inc and Holdings are wholly owned by FinCo Holdings.  Michaels is wholly owned by Holdings.

Subsequent to the Reorganization, on July 29, 2013, FinCo Holdings and FinCo Inc issued $800 million aggregate principal amount of 7.50%/8.25% PIK Toggle Notes due 2018 (“PIK Notes”). The PIK Notes were issued in a private transaction.  Interest payments on the PIK Notes are due February 1 and August 1 of each year until maturity.  The first two interest payments and the last interest payment are required to be paid entirely in cash.  All other interest payments must be made in cash, except that all or a portion of the interest on the PIK Notes may be paid by increasing the principal amount of the outstanding PIK Notes or by issuing additional PIK Notes depending on the amount of cash dividends that can be paid by the Company under our credit agreements governing our Senior Secured Credit Facilities, the terms of the indentures governing our outstanding notes and the terms of our other indebtedness outstanding at the time.  The proceeds from the debt issuance were about $782 million, after deducting the initial purchasers’ discount and estimated fees and expenses.  FinCo Holdings distributed the net proceeds to Parent and the proceeds were used to fund a cash dividend to the Parent’s equity and equity-award holders and pay related fees and expenses.

The PIK Notes are senior unsecured obligations of FinCo Holdings and FinCo Inc and are not guaranteed by the Company or any of the Company’s subsidiaries.  In addition, neither the PIK Notes nor the dividend transaction is reflected in the financial statements of the Company.  If interest on the PIK Notes is paid in cash, annual interest payments will total $60 million or a total of approximately $301 million from July 29, 2013 until August, 1, 2018, the maturity date.  Any cash interest payments will be funded by the Company through a cash dividend to Holdings.

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Debt

6 Months Ended

Aug. 03, 2013

Debt

Debt

Note 2.   Debt

Our outstanding debt is detailed in the table below.  We were in compliance with the terms and conditions of all debt agreements for all periods presented.

	August 3, 2013		February 2, 2013		July 28, 2012		Interest Rate
	(in millions)
Senior secured term loan	$	1,636	$	1,640	$	1,996	Variable
Senior notes	1,007		1,007		795		7.750%
Senior subordinated notes	255		393		393		11.375%
Subordinated discount notes	—		—		180		13.000%
Asset-based revolving credit facility	222		1		—		Variable
Total debt	3,120		3,041		3,364
Less current portion	238		150		1
Long-term debt	$	2,882	$	2,891	$	3,363

113/8% Senior Subordinated Notes due 2016

On January 28, 2013, we caused to be delivered to the holders of our outstanding 113/8% Senior Subordinated Notes due November 1, 2016 (the “Senior Subordinated Notes”) an irrevocable notice relating to the redemption of $137 million in aggregate principal amount of the Senior Subordinated Notes. On February 27, 2013, we redeemed the $137 million of Senior Subordinated Notes at a redemption price equal to 103.792%.  In accordance with Accounting Standards Codification (“ASC”) 470 Debt, we recorded a loss on early extinguishment of debt of approximately $7 million related to the partial redemption of our Senior Subordinated Notes. The $7 million loss is comprised of a $5 million redemption premium and $2 million to write off related debt issuance costs.

Restated Revolving Credit Facility

As of August 3, 2013, the borrowing base of our restated senior secured asset-based revolving credit facility (“the Restated Revolving Credit Facility”) was $650 million, of which we had $222 million in borrowings, $61 million of outstanding letters of credit and the unused borrowing capacity was $367 million.

Restated Term Loan Credit Facility

The Company is required to make scheduled quarterly payments, each equal to 0.25% of the original principal amount of the term loans, subject to adjustments relating to the incurrence of additional term loans under the Restated Term Loan Credit Facility, for the first six years and three quarters, with the balance paid on January 28, 2020.  The Company paid $4 million for the quarter ended August 3, 2013 and the current portion of debt includes $16 million that will be paid during the next four quarters.

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Related Party Transactions (Details) (USD $) In Millions, unless otherwise specified	3 Months Ended		6 Months Ended
	Aug. 03, 2013	Jul. 28, 2012	Aug. 03, 2013	Jul. 28, 2012	Feb. 02, 2013
Related Party Transactions
Expenses recognized	$ 3	$ 4	$ 7	$ 7
Long-term debt held	3,120	3,364	3,120	3,364	3,041
Receivable from parent	4		4
Payments on behalf of parent			20
The Sponsors
Related Party Transactions
Annual management fees			12
Highfields Capital Management LP
Related Party Transactions
Annual management fees			1
Bain Capital Partners, LLC | Print procurement services received from an external vendor
Related Party Transactions
Expenses recognized	1	1	2	3
The Blackstone Group | Restated Term Loan Credit Facility
Related Party Transactions
Long-term debt held	38		38
The Blackstone Group | Lease services of certain properties from a vendor
Related Party Transactions
Expenses recognized	1	1	2	2
The Blackstone Group | Store inventory counting services received from an external vendor
Related Party Transactions
Expenses recognized	2	1	3	3
The Blackstone Group | Candy-type items in stores received from an external vendor
Related Party Transactions
Expenses recognized	$ 6	$ 6	$ 12	$ 11

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Fair Value Measurements (Tables)

6 Months Ended

Aug. 03, 2013

Fair Value Measurements

Schedule of carrying and fair values of debt

	Carrying Value		Fair Value
	(in millions)
Senior secured term loan	$	1,636	$	1,645
Senior notes	1,007		1,079
Senior subordinated notes	255		267

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Condensed Consolidating Financial Information

6 Months Ended

Aug. 03, 2013

Condensed Consolidating Financial Information

Condensed Consolidating Financial Information

Note 10.  Condensed Consolidating Financial Information

All obligations of the Company under its notes, the Restated Revolving Credit Facility and the Restated Term Loan Credit Facility are guaranteed by each of its subsidiaries other than Aaron Brothers Card Services, LLC, Artistree of Canada, ULC and Michaels Stores of Puerto Rico, LLC and will be guaranteed by its direct parent, Holdings. As of August 3, 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, directly or indirectly, by the Company and such guarantees of each subsidiary guarantor are (and the guarantee of Holdings will be) 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 Balance Sheet

	August 3, 2013
	Parent  Company			Guarantor  Subsidiaries		Eliminations			Consolidated
	(in millions)
ASSETS
Current assets:
Cash and equivalents	$	28		$	23	$	—		$	51
Merchandise inventories	615			290		—			905
Intercompany receivables	—			481		(481		)	—
Other	139			28		—			167
Total current assets	782			822		(481		)	1,123
Property and equipment, net	274			73		—			347
Goodwill	94			—		—			94
Investment in subsidiaries	472			—		(472		)	—
Other assets	56			2		—			58
Total assets	$	1,678		$	897	$	(953	)	$	1,622
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable	$	5		$	284	$	—		$	289
Accrued liabilities and other	208			130		—			338
Current portion of long-term debt	238			—		—			238
Intercompany payable	481			—		(481		)	—
Other	5			—		—			5
Total current liabilities	937			414		(481		)	870
Long-term debt	2,882			—		—			2,882
Other long-term liabilities	72			11		—			83
Total stockholders’ deficit	(2,213		)	472		(472		)	(2,213		)
Total liabilities and stockholders’ deficit	$	1,678		$	897	$	(953	)	$	1,622

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	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

	July 28, 2012
	Parent  Company			Guarantor  Subsidiaries		Eliminations			Consolidated
	(in millions)
ASSETS
Current assets:
Cash and equivalents	$	93		$	20	$	—		$	113
Merchandise inventories	600			322		—			922
Intercompany receivables	—			556		(556		)	—
Other	135			23		—			158
Total current assets	828			921		(556		)	1,193
Property and equipment, net	265			61		—			326
Goodwill	95			—		—			95
Investment in subsidiaries	586			—		(586		)	—
Other assets	69			3		—			72
Total assets	$	1,843		$	985	$	(1,142	)	$	1,686
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable	$	8		$	269	$	—		$	277
Accrued liabilities and other	232			119		—			351
Current portion of long-term debt	1			—		—			1
Intercompany payable	556			—		(556		)	—
Other	3			—		—			3
Total current liabilities	800			388		(556		)	632
Long-term debt	3,363			—		—			3,363
Other long-term liabilities	86			11		—			97
Total stockholders’ deficit	(2,406		)	586		(586		)	(2,406		)
Total liabilities and stockholders’ deficit	$	1,843		$	985	$	(1,142	)	$	1,686

Supplemental Condensed Consolidating Statement of Comprehensive Income

	Quarter Ended August 3, 2013
	Parent  Company			Guarantor  Subsidiaries			Eliminations			Consolidated
	(in millions)
Net sales	$	783		$	534		$	(413	)	$	904
Cost of sales and occupancy expense	522			458			(413		)	567
Gross profit	261			76			—			337
Selling, general, and administrative expense	225			33			—			258
Related party expenses	3			—			—			3
Store pre-opening costs	1			—			—			1
Operating income	32			43			—			75
Interest expense	45			—			—			45
Refinancing costs and losses on early extinguishment of debt	—			—			—			—
Other (income) and expense, net	—			1			—			1
Intercompany charges (income)	12			(12		)	—			—
Equity in earnings of subsidiaries	54			—			(54		)	—
Income before income taxes	29			54			(54		)	29
Provision for income taxes	9			17			(17		)	9
Net income	20			37			(37		)	20
Other comprehensive income, net of tax:
Foreign currency translation adjustment	(2		)	—			—			(2		)
Actuarial gain on pension plan	1			—			—			1
Comprehensive income	$	19		$	37		$	(37	)	$	19

Supplemental Condensed Consolidating Statement of Comprehensive Income

	Quarter Ended July 28, 2012
	Parent  Company			Guarantor  Subsidiaries			Eliminations			Consolidated
	(in millions)
Net sales	$	777		$	521		$	(406	)	$	892
Cost of sales and occupancy expense	515			444			(406		)	553
Gross profit	262			77			—			339
Selling, general, and administrative expense	219			33			—			252
Related party expenses	4			—			—			4
Store pre-opening costs	1			—			—			1
Operating income	38			44			—			82
Interest expense	61			—			—			61
Other (income) and expense, net	—			—			—			—
Intercompany charges (income)	15			(15		)	—			—
Equity in earnings of subsidiaries	59			—			(59		)	—
Income before income taxes	21			59			(59		)	21
Provision for income taxes	8			22			(22		)	8
Net income	13			37			(37		)	13
Other comprehensive income, net of tax:
Foreign currency translation adjustment	(2		)	—			—			(2		)
Comprehensive income	$	11		$	37		$	(37	)	$	11

Supplemental Condensed Consolidating Statement of Comprehensive Income

	Six Months Ended August 3, 2013
	Parent Company			Guarantor Subsidiaries			Eliminations			Consolidated
	(in millions)
Net sales	$	1,652		$	1,081		$	(836	)	$	1,897
Cost of sales and occupancy expense	1,077			912			(836		)	1,153
Gross profit	575			169			—			744
Selling, general, and administrative expense	458			71			—			529
Related party expenses	7			—			—			7
Store pre-opening costs	3			—			—			3
Operating income	107			98			—			205
Interest expense	92			—			—			92
Refinancing costs and losses on early extinguishment of debt	7			—			—			7
Other (income) and expense, net	—			1			—			1
Intercompany charges (income)	25			(25		)	—			—
Equity in earnings of subsidiaries	122			—			(122		)	—
Income before income taxes	105			122			(122		)	105
Provision for income taxes	38			44			(44		)	38
Net income	67			78			(78		)	67
Other comprehensive income, net of tax:
Foreign currency translation adjustment	(2		)	—			—			$	(2	)
Comprehensive income	$	65		$	78		$	(78	)	$	65

Supplemental Condensed Consolidating Statement of Comprehensive Income

	Six Months Ended July 28, 2012
	Parent Company		Guarantor Subsidiaries			Eliminations			Consolidated
	(in millions)
Net sales	$	1,638	$	1,070		$	(838	)	$	1,870
Cost of sales and occupancy expense	1,051		906			(838		)	1,119
Gross profit	587		164			—			751
Selling, general, and administrative expense	444		68			—			512
Related party expenses	7		—			—			7
Store pre-opening costs	2		—			—			2
Operating income	134		96			—			230
Interest expense	127		—			—			127
Other (income) and expense, net	—		(1		)	—			(1		)
Intercompany charges (income)	32		(32		)	—			—
Equity in earnings of subsidiaries	129		—			(129		)	—
Income before income taxes	104		129			(129		)	104
Provision for income taxes	38		47			(47		)	38
Net income	66		82			(82		)	66
Comprehensive income	$	66	$	82		$	(82	)	$	66

Supplemental Condensed Consolidating Statement of Cash Flows

	Six Months Ended August 3, 2013
	Parent Company			Guarantor Subsidiaries			Eliminations			Consolidated
	(in millions)
Operating activities:
Net cash (used in) provided by operating activities	$	(13	)	$	66		$	(47	)	$	6
Investing activities:
Cash paid for property and equipment	(35		)	(15		)	—			(50		)
Net cash used in investing activities	(35		)	(15		)	—			(50		)
Financing activities:
Net repayments of short-term debt	75			—			—			75
Intercompany dividends	—			(47		)	47			—
Other financing activities	(36		)	—			—			(36		)
Net cash provided by (used in) financing activities	39			(47		)	47			39
Decrease in cash and equivalents	(9		)	4			—			(5		)
Beginning cash and equivalents	37			19			—			56
Ending cash and equivalents	$	28		$	23		$	—		$	51

Supplemental Condensed Consolidating Statement of Cash Flows

	Six Months Ended July 28, 2012
	Parent			Guarantor
	Company			Subsidiaries			Eliminations			Consolidated
	(in millions)
Operating activities:
Net cash used in operating activities	$	(98	)	$	68		$	(49	)	$	(79	)
Investing activities:
Cash paid for property and equipment	(38		)	(7		)	—			(45		)
Net cash used in investing activities	(38		)	(7		)	—			(45		)
Financing activities:
Net repayment of long term debt	(127		)							(127		)
Intercompany dividends	—			(49		)	49			—
Other financing activities	(7		)	—			—			(7		)
Net cash used in financing activities	(134		)	(49		)	49			(134		)
Decrease in cash and equivalents	(270		)	12			—			(258		)
Beginning cash and equivalents	363			8			—			371
Ending cash and equivalents	$	93		$	20		$	—		$	113

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Summary of Significant Accounting Policies (Details)	3 Months Ended		6 Months Ended		12 Months Ended
	Aug. 03, 2013 item	Jul. 28, 2012 item	Aug. 03, 2013 item	Jul. 28, 2012 item	Feb. 01, 2014 item	Feb. 02, 2013 item
Fiscal year
Number of weeks in a fiscal year	13	13	26	26	52	53

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Segments and Geographic Information (Tables)

6 Months Ended

Aug. 03, 2013

Segments and Geographic Information

Schedule of sales and assets by country

	Quarter Ended				Six Months Ended
	August 3, 2013		July 28, 2012		August 3, 2013		July 28, 2012
	(in millions)
Net Sales:
United States	$	819	$	812	$	1,717	$	1,703
Canada	85		80		180		167
Consolidated Total	$	904	$	892	$	1,897	$	1,870
	August 3, 2013		February 2, 2013		July 28, 2012
	(in millions)
Total Assets:
United States	$	1,499	$	1,432	$	1,569
Canada	123		109		117
Consolidated Total	$	1,622	$	1,541	$	1,686

Schedule of reconciliation of EBITDA (excluding refinancing costs and losses on early extinguishment of debt) to Net income

	Quarter Ended				Six Months Ended
	August 3, 2013		July 28, 2012		August 3, 2013		July 28, 2012
	(in millions)
Net income	$	20	$	13	$	67	$	66
Interest expense	45		61		92		127
Refinancing costs and losses on early extinguishments of debt	—		—		7		—
Provision for income taxes	9		8		38		38
Depreciation and amortization	25		22		50		46
EBITDA (excluding refinancing costs and losses on early extinguishments of debt)	$	99	$	104	$	254	$	277

XML

Document and Entity Information	6 Months Ended
	Aug. 03, 2013	Aug. 26, 2013
Document and Entity Information
Entity Registrant Name	MICHAELS STORES INC
Entity Central Index Key	0000740670
Document Type	10-Q
Document Period End Date	Aug. 03, 2013
Amendment Flag	false
Current Fiscal Year End Date	--02-01
Entity Current Reporting Status	Yes
Entity Filer Category	Non-accelerated Filer
Entity Common Stock, Shares Outstanding		100
Document Fiscal Year Focus	2013
Document Fiscal Period Focus	Q2

XML

Condensed Consolidating Financial Information (Tables)

6 Months Ended

Aug. 03, 2013

Condensed Consolidating Financial Information

Schedule of Supplemental Condensed Consolidating Balance Sheet

	August 3, 2013
	Parent  Company			Guarantor  Subsidiaries		Eliminations			Consolidated
	(in millions)
ASSETS
Current assets:
Cash and equivalents	$	28		$	23	$	—		$	51
Merchandise inventories	615			290		—			905
Intercompany receivables	—			481		(481		)	—
Other	139			28		—			167
Total current assets	782			822		(481		)	1,123
Property and equipment, net	274			73		—			347
Goodwill	94			—		—			94
Investment in subsidiaries	472			—		(472		)	—
Other assets	56			2		—			58
Total assets	$	1,678		$	897	$	(953	)	$	1,622
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable	$	5		$	284	$	—		$	289
Accrued liabilities and other	208			130		—			338
Current portion of long-term debt	238			—		—			238
Intercompany payable	481			—		(481		)	—
Other	5			—		—			5
Total current liabilities	937			414		(481		)	870
Long-term debt	2,882			—		—			2,882
Other long-term liabilities	72			11		—			83
Total stockholders’ deficit	(2,213		)	472		(472		)	(2,213		)
Total liabilities and stockholders’ deficit	$	1,678		$	897	$	(953	)	$	1,622

	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	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

	July 28, 2012
	Parent  Company			Guarantor  Subsidiaries		Eliminations			Consolidated
	(in millions)
ASSETS
Current assets:
Cash and equivalents	$	93		$	20	$	—		$	113
Merchandise inventories	600			322		—			922
Intercompany receivables	—			556		(556		)	—
Other	135			23		—			158
Total current assets	828			921		(556		)	1,193
Property and equipment, net	265			61		—			326
Goodwill	95			—		—			95
Investment in subsidiaries	586			—		(586		)	—
Other assets	69			3		—			72
Total assets	$	1,843		$	985	$	(1,142	)	$	1,686
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable	$	8		$	269	$	—		$	277
Accrued liabilities and other	232			119		—			351
Current portion of long-term debt	1			—		—			1
Intercompany payable	556			—		(556		)	—
Other	3			—		—			3
Total current liabilities	800			388		(556		)	632
Long-term debt	3,363			—		—			3,363
Other long-term liabilities	86			11		—			97
Total stockholders’ deficit	(2,406		)	586		(586		)	(2,406		)
Total liabilities and stockholders’ deficit	$	1,843		$	985	$	(1,142	)	$	1,686

Schedule of Supplemental Condensed Consolidating Statement of Comprehensive Income

	Quarter Ended August 3, 2013
	Parent  Company			Guarantor  Subsidiaries			Eliminations			Consolidated
	(in millions)
Net sales	$	783		$	534		$	(413	)	$	904
Cost of sales and occupancy expense	522			458			(413		)	567
Gross profit	261			76			—			337
Selling, general, and administrative expense	225			33			—			258
Related party expenses	3			—			—			3
Store pre-opening costs	1			—			—			1
Operating income	32			43			—			75
Interest expense	45			—			—			45
Refinancing costs and losses on early extinguishment of debt	—			—			—			—
Other (income) and expense, net	—			1			—			1
Intercompany charges (income)	12			(12		)	—			—
Equity in earnings of subsidiaries	54			—			(54		)	—
Income before income taxes	29			54			(54		)	29
Provision for income taxes	9			17			(17		)	9
Net income	20			37			(37		)	20
Other comprehensive income, net of tax:
Foreign currency translation adjustment	(2		)	—			—			(2		)
Actuarial gain on pension plan	1			—			—			1
Comprehensive income	$	19		$	37		$	(37	)	$	19

	Quarter Ended July 28, 2012
	Parent  Company			Guarantor  Subsidiaries			Eliminations			Consolidated
	(in millions)
Net sales	$	777		$	521		$	(406	)	$	892
Cost of sales and occupancy expense	515			444			(406		)	553
Gross profit	262			77			—			339
Selling, general, and administrative expense	219			33			—			252
Related party expenses	4			—			—			4
Store pre-opening costs	1			—			—			1
Operating income	38			44			—			82
Interest expense	61			—			—			61
Other (income) and expense, net	—			—			—			—
Intercompany charges (income)	15			(15		)	—			—
Equity in earnings of subsidiaries	59			—			(59		)	—
Income before income taxes	21			59			(59		)	21
Provision for income taxes	8			22			(22		)	8
Net income	13			37			(37		)	13
Other comprehensive income, net of tax:
Foreign currency translation adjustment	(2		)	—			—			(2		)
Comprehensive income	$	11		$	37		$	(37	)	$	11

	Six Months Ended August 3, 2013
	Parent Company			Guarantor Subsidiaries			Eliminations			Consolidated
	(in millions)
Net sales	$	1,652		$	1,081		$	(836	)	$	1,897
Cost of sales and occupancy expense	1,077			912			(836		)	1,153
Gross profit	575			169			—			744
Selling, general, and administrative expense	458			71			—			529
Related party expenses	7			—			—			7
Store pre-opening costs	3			—			—			3
Operating income	107			98			—			205
Interest expense	92			—			—			92
Refinancing costs and losses on early extinguishment of debt	7			—			—			7
Other (income) and expense, net	—			1			—			1
Intercompany charges (income)	25			(25		)	—			—
Equity in earnings of subsidiaries	122			—			(122		)	—
Income before income taxes	105			122			(122		)	105
Provision for income taxes	38			44			(44		)	38
Net income	67			78			(78		)	67
Other comprehensive income, net of tax:
Foreign currency translation adjustment	(2		)	—			—			$	(2	)
Comprehensive income	$	65		$	78		$	(78	)	$	65

	Six Months Ended July 28, 2012
	Parent Company		Guarantor Subsidiaries			Eliminations			Consolidated
	(in millions)
Net sales	$	1,638	$	1,070		$	(838	)	$	1,870
Cost of sales and occupancy expense	1,051		906			(838		)	1,119
Gross profit	587		164			—			751
Selling, general, and administrative expense	444		68			—			512
Related party expenses	7		—			—			7
Store pre-opening costs	2		—			—			2
Operating income	134		96			—			230
Interest expense	127		—			—			127
Other (income) and expense, net	—		(1		)	—			(1		)
Intercompany charges (income)	32		(32		)	—			—
Equity in earnings of subsidiaries	129		—			(129		)	—
Income before income taxes	104		129			(129		)	104
Provision for income taxes	38		47			(47		)	38
Net income	66		82			(82		)	66
Comprehensive income	$	66	$	82		$	(82	)	$	66

Schedule of Supplemental Condensed Consolidating Statement of Cash Flows

	Six Months Ended August 3, 2013
	Parent Company			Guarantor Subsidiaries			Eliminations			Consolidated
	(in millions)
Operating activities:
Net cash (used in) provided by operating activities	$	(13	)	$	66		$	(47	)	$	6
Investing activities:
Cash paid for property and equipment	(35		)	(15		)	—			(50		)
Net cash used in investing activities	(35		)	(15		)	—			(50		)
Financing activities:
Net repayments of short-term debt	75			—			—			75
Intercompany dividends	—			(47		)	47			—
Other financing activities	(36		)	—			—			(36		)
Net cash provided by (used in) financing activities	39			(47		)	47			39
Decrease in cash and equivalents	(9		)	4			—			(5		)
Beginning cash and equivalents	37			19			—			56
Ending cash and equivalents	$	28		$	23		$	—		$	51

	Six Months Ended July 28, 2012
	Parent			Guarantor
	Company			Subsidiaries			Eliminations			Consolidated
	(in millions)
Operating activities:
Net cash used in operating activities	$	(98	)	$	68		$	(49	)	$	(79	)
Investing activities:
Cash paid for property and equipment	(38		)	(7		)	—			(45		)
Net cash used in investing activities	(38		)	(7		)	—			(45		)
Financing activities:
Net repayment of long term debt	(127		)							(127		)
Intercompany dividends	—			(49		)	49			—
Other financing activities	(7		)	—			—			(7		)
Net cash used in financing activities	(134		)	(49		)	49			(134		)
Decrease in cash and equivalents	(270		)	12			—			(258		)
Beginning cash and equivalents	363			8			—			371
Ending cash and equivalents	$	93		$	20		$	—		$	113