Note 2. Restatement — Share-based Compensation

The Company has determined its previously issued unaudited interim consolidated financial statements for the three month periods ended May 4, 2013 and April 28, 2012, contained an error with respect to ASC 718, Compensation — Stock Compensation. Specifically, former participants in the Company’s Equity Incentive Plan and its successor Plan (The Michaels Companies, Inc. (“Parent”) Equity Incentive Plan, together the “Plan”) exercised stock options upon their termination from the Company, and the Company repurchased the immature shares. The Company consistently repurchased shares in this manner and therefore, under accounting rules, established a pattern of repurchasing immature shares during the third quarter of 2011. The Company determined all stock options should have been treated as liability awards in accordance with the rules of ASC 718-10-25-9. Under liability accounting, the Company re-measures the fair value of stock compensation each period and recognizes changes in fair value as awards vest and until the award is settled. The Company originally recognized expense ratably over the vesting period based on the grant date fair value of the option in accordance with the fixed method of accounting. The Company determined the accounting error was material to fiscal 2011 and fiscal 2012 financial statements and those financial statements required restatement. As a result, the Company is also restating its financial statements for the three months ended May 4, 2013 and April 28, 2012. The impact to share-based compensation cost for the three months ended May 4, 2013 and April 28, 2012, was $5 million ($3, net of tax) and $3 million ($1, net of tax), respectively. As part of the restatement, the Company also recorded other adjustments related to merchandise inventories and the reserve for closed facilities which were previously determined to be immaterial to the respective periods. In total, the adjustments resulted in a decline of Net income by $1 million for the three months ended May 4, 2013, and $2 million for the three months ended April 28, 2012.

The following footnotes have been restated:

· Note 6 — Income Taxes

· Note 8 — Segments and Geographic Information

· Note 10 — Condensed Consolidating Financial Information

The following tables illustrate the correction as associated with certain line items in the unaudited interim consolidated financial statements (amounts in millions):

	Consolidated Balance Sheet
	May 4, 2013
	As Reported			Share-based compensation Adjustment			Other Adjustments			As Restated
Merchandise inventories	$	842		$	2		$	(1	)	$	843
Total current assets	1,027			2			(1		)	1,028
Deferred income taxes	13			15			—			28
Total non-current assets	151			15			—			166
Share-based compensation liability	—			36			—			36
Income taxes payable	31			(4		)	—			27
Total current liabilities	765			32			—			797
Share-based compensation liability	—			28			—			28
Total long-term liabilities	2,968			28			—			2,996
Additional paid-in capital	48			(10		)	—			38
Accumulated deficit	(2,279		)	(33		)	(1		)	(2,313		)
Total stockholders’ deficit	(2,214		)	(43		)	(1		)	(2,258		)

	Consolidated Balance Sheet
	April 28, 2012
	As Reported			Share-based compensation Adjustment			Other Adjustments		As Restated
Merchandise inventories	$	874		$	6		$	—	$	880
Total current assets	1,383			6			—		1,389
Deferred income taxes	18			13			—		31
Total non-current assets	172			13			—		185
Share-based compensation liability	—			28			—		28
Income taxes payable	28			(1		)	—		27
Total current liabilities	824			27			—		851
Share-based compensation liability	—			22			—		22
Total long-term liabilities	3,459			22			—		3,481
Additional paid-in capital	49			(9		)	—		40
Accumulated deficit	(2,487		)	(21		)	—		(2,508		)
Total stockholders’ deficit	(2,418		)	(30		)	—		(2,448		)

	Consolidated Statements of Comprehensive Income
	Quarter Ended May 4, 2013
	As Reported		Share-based compensation Adjustment			Other Adjustments			As Restated
Cost of sales and occupancy expense	$	586	$	1		$	(3	)	$	584
Gross Profit		407		(1	)		3			409
Selling, general and administrative expense	271		1			—			272
Share-based compensation	—		3			—			3
Operating income	130		(5		)	3			128
Income before income taxes	76		(5		)	3			74
Provision for income taxes	29		(2		)	1			28
Net income	47		(3		)	2			46
Comprehensive income	46		(3		)	2			45

	Consolidated Statements of Comprehensive Income
	Quarter Ended April 28, 2012
	As Reported		Share-based compensation Adjustment			Other Adjustments			As Restated
Cost of sales and occupancy expense	$	566	$	—		$	1		$	567
Gross Profit		412		—		(1		)	411
Selling, general and administrative expense	260		(1		)	—			259
Share-based compensation	—		4			—			4
Operating income	148		(3		)	(1		)	144
Income before income taxes	83		(3		)	(1		)	79
Provision for income taxes	30		(2		)	—			28
Net income	53		(1		)	(1		)	51
Comprehensive income	55		(1		)	(1		)	53

	Cash Flow Data
	Quarter Ended May 4, 2013
	As Reported			Share-based compensation Adjustment		Other Adjustments		As Restated
Operating Activities:
Net income	$	47		(3	)	2		$	46
Share-based compensation	(1		)	5		—		4
Merchandise inventories	23			—		(3	)	20
Accrued liabilities and other	(39		)	(2	)	—		(41		)
Income taxes	(15		)	—		1		(14		)

	Cash Flow Data
	Quarter Ended April 28, 2012
	As Reported			Share-based compensation Adjustment		Other Adjustments		As Restated
Operating Activities:
Net income	$	53		(1	)	(1	)	$	51
Share-based compensation	1			3		—		4
Merchandise inventories	(34		)	—		1		(33		)
Income taxes	5			(2	)	––		3