SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 11-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the period February 1, 1996 to December 31, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from to _________ __________ Commission file number 0-11822 A. Full title of the plan and the address of the plan, if different from that of the issuer named below: MICHAELS STORES, INC. EMPLOYEES 401(K) PLAN B. Name of issuer of the securities held pursuant to the plan and the address of its principal executive office: MICHAELS STORES, INC. 8000 Bent Branch Drive, Irving, Texas 75063 P.O. Box 619566, DFW, Texas 75261-9566 Pursuant to the requirements of the Securities Exchange Act of 1934, the trustees have duly caused this annual report to be signed on behalf of the Plan by the undersigned thereunto duly authorized. MICHAELS STORES, INC. EMPLOYEES 401(K) PLAN Date: June 27, 1997 By: /s/ John G. Greene ____________________________ John G. Greene Director of Human Resources and member of Administration Committee MICHAELS STORES, INC. EMPLOYEES 401(K) PLAN In February 1987, Michaels Stores, Inc. (the "Company") established the Michaels Stores, Inc. Employees 401(k) Plan (the "401(k) Plan"). The plan year begins on February 1 and ends on December 31. All subsequent years will begin January 1 and end December 31. Prior to 1996, the plan year was on a fiscal year beginning February 1 and ending on the following January 31. The name of the issuer of the securities held pursuant to the 401(k) Plan and the address of its principal executive office is Michaels Stores, Inc., 8000 Bent Branch Drive, Irving, Texas 75063, P.O. Box 619566, DFW, Texas 75261-9566. Changes in the 401(k) Plan. Effective October 1, 1996, the following changes were made to the provisions of the 401(k) Plan: Employees are eligible to participate in the Plan after completing 500 hours of service in a six-month eligibility period. The employer matching contribution is applied to participant accounts based on participant investment fund elections. A subsidiary of the issuer, Aaron Brothers, Inc., adopted the 401(k) Plan as a participating employer. Participants were granted pass-through voting rights with respect to shares of Michaels common stock held in their accounts in the 401(k) Plan. The 401(k) Plan adopted a daily valuation approach rather than a monthly "balance forward" approach to plan accounting. Changes in Investment Policy. There were no changes in the investment policy of the 401(k) Plan during fiscal 1996. Contributions Under the 401(k) Plan. The Company makes biweekly employer matching contributions to the 401(k) Plan for the account of each participating employee in an amount equal to $.50 for each $1.00 of salary reduction contributed by such employee, up to a maximum Company contribution equal to 3% of the employee's compensation. Participating Employees. As of December 31, 1996, there were 2,982 employees participating in the 401(k) Plan. Administration of the Plan. The 401(k) Plan is administered by an Administration Committee currently consisting of two members, both employees of the Employer, appointed by the Employer's Board of Directors. The members of the Administration Committee serve at the discretion of the Board of Directors without compensation for services. The members of the Administration Committee are: Evan A. Wyly Managing Director John G. Greene Director of Human Resources -1- The address of the members of the Administration Committee listed above is Michaels Stores, Inc., 8000 Bent Branch Drive, Irving, Texas 75063, P.O. Box 619566, DFW, Texas 75261-9566. The Administration Committee directs the operation of the 401(k) Plan and may make administrative and procedural regulations. Certain administrative functions may be delegated to officers or employees of the Company. Administration Committee members, officers and employees do not receive compensation from the 401(k) Plan. Custodian of Investments. The assets of the 401(k) Plan are held in a trust and managed by a trustee ("Trustee"). At present, Wachovia Bank of North Carolina serves as the Trustee. The Company furnishes the 401(k) Plan with employee dishonesty insurance coverage, to comply with ERISA, in the amount of $500,000 covering the Trustee and others who handle funds of the 401(k) Plan. The Company also furnishes coverage under an employee benefit liability endorsement in the amount of $1,000,000. The Trustee receives no compensation from the 401(k) Plan. Reports to Participating Employees. Participants and retired participants having an interest in the 401(k) Plan receive quarterly statements of their accounts each plan year. -2- INDEX TO FINANCIAL STATEMENTS PAGE Report of Independent Auditors F-1 ______________________________ Financial Statements: ____________________ Statements of Net Assets Available for Plan Benefits F-2 to F-3 Statements of Changes in Net Assets Available for Plan Benefits F-4 to F-5 Notes to Financial Statements F-6 to F-11 Supplemental Schedule: Schedule _____________________ ________ Line 27a-Assets Held for Investment Purposes 1 F-12 Line 27d-Reportable Transactions 2 F-13 Consent of Independent Auditors F-14 _______________________________ A schedule of party-in-interest transactions has not been presented because there were no party-in-interest transactions which are prohibited by ERISA Section 406 and for which there is no statutory or administrative exemption. -3- REPORT OF INDEPENDENT AUDITORS Administration Committee Michaels Stores, Inc. Employees 401(k)Plan We have audited the accompanying statements of net assets available for plan benefits of Michaels Stores, Inc. Employees 401(k) Plan (the "Plan") as of December 31, 1996 and January 31, 1996, and the related statements of changes in net assets available for plan benefits for the period from February 1, 1996 to December 31, 1996 and the year ended January 31, 1996. These financial statements are the responsibility of the Plan's Administration Committee. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the net assets available for plan benefits of the Plan at December 31, 1996 and January 31, 1996, and the changes in its net assets available for plan benefits for the period from February 1, 1996 to December 31, 1996 and the year ended January 31, 1996, in conformity with generally accepted accounting principles. Our audits were performed for the purpose of forming an opinion on the basic financial statements taken as a whole. The accompanying supplemental schedules of Assets Held for Investment Purposes as of December 31, 1996 (Schedule 1) and Reportable Transactions for the period from February 1, 1996 to December 31, 1996 (Schedule 2) are presented for purposes of complying with the Department of Labor's Rules and Regulations for Reporting and Disclosure under the Employee Retirement Income Security Act of 1974, and are not a required part of the basic financial statements. The fund information in the statements of net assets available for plan benefits and the statements of changes in net assets available for plan benefits is presented for purposes of additional analysis rather than to present the net assets available for plan benefits and changes in net assets available for plan benefits of each fund. The supplemental schedules and fund information have been subjected to the auditing procedures applied in our audits of the basic financial statements and, in our opinion, are fairly stated in all material respects in relation to the basic financial statements taken as a whole. /s/ Ernst & Young LLP ______________________ ERNST & YOUNG LLP Dallas, Texas June 24, 1997 F-1 MICHAELS STORES, INC. EMPLOYEES 401(K) PLAN STATEMENT OF NET ASSETS AVAILABLE FOR PLAN BENEFITS December 31, 1996 (In thousands) Fund information _________________________________________________ Inter- American Growth mediate General Balanced Fund of Bond Fund Fund Fund America of America Subtotal _______ ________ _______ __________ ________ ASSETS ______ Investment in Michaels Stores, Inc. common stock $6,384 $ 6,384 Investment in mutual funds $2,005 $3,330 $2,306 7,641 Participant loans receivable - - - - - Contributions receivable: Participants 35 19 34 14 102 Employer 11 7 12 5 35 ______ ______ ______ ______ _______ 46 26 46 19 137 Cash and cash equivalents 267 - - - 267 ______ ______ ______ ______ _______ Net assets available for plan benefits $6,697 $2,031 $3,376 $2,325 $14,429 ______ ______ ______ ______ _______ ______ ______ ______ ______ _______ See accompanying notes to financial statements. F-2 (1 of 2) MICHAELS STORES, INC. EMPLOYEES 401(K) PLAN STATEMENT OF NET ASSETS AVAILABLE FOR PLAN BENEFITS December 31, 1996 (In thousands) Fund information ___________________________________________________ Investment New Previous Company of Perspec- Participant Page America tive Loans Subtotal Fund Fund Receivable Total ________ __________ ________ __________ _______ ASSETS ______ Investment in Michaels Stores, Inc. common stock $ 6,384 $ 6,384 Investment in mutual funds 7,641 $3,555 $2,250 13,446 Participant loans receivable - - - $1,301 1,301 Contributions receivable: Participants 102 28 20 - 150 Employer 35 10 7 - 52 _______ ______ ______ ______ _______ 137 38 27 - 202 Cash and cash equivalents 267 - - - 267 _______ ______ ______ ______ _______ Net assets available for plan benefits $14,429 $3,593 $2,277 $1,301 $21,600 _______ ______ ______ ______ _______ _______ ______ ______ ______ _______ See accompanying notes to financial statements. F-2 (2 of 2) MICHAELS STORES, INC. EMPLOYEES 401(K) PLAN STATEMENT OF NET ASSETS AVAILABLE FOR PLAN BENEFITS January 31, 1996 (In thousands) Fund information _________________________________________________ Inter- American Growth mediate General Balanced Fund of Bond Fund Fund Fund America of America Subtotal _______ ________ _______ __________ ________ ASSETS ______ Investment in Michaels Stores, Inc. common stock Non-participant directed $3,598 $ 3,598 Participant directed 840 840 Investment in mutual funds $1,617 $2,772 $2,946 7,335 Participant loans receivable - - - - - Contributions receivable: Participants 149 77 117 59 402 Employer 415 - - - 415 ______ ______ ______ ______ _______ 564 77 117 59 817 Interfund due to/(from) 1,516 (215) (417) (543) 341 Cash and cash equivalents 644 - - - 644 ______ ______ ______ ______ _______ Net assets available for plan benefits $7,162 $1,479 $2,472 $2,462 $13,575 ______ ______ ______ ______ _______ ______ ______ ______ ______ _______ See accompanying notes to financial statements. F-3 (1 of 2) MICHAELS STORES, INC. EMPLOYEES 401(K) PLAN STATEMENT OF NET ASSETS AVAILABLE FOR PLAN BENEFITS January 31, 1996 (In thousands) Fund information ___________________________________________________ Investment New Previous Company of Perspec- Participant Page America tive Loans Subtotal Fund Fund Receivable Total _________ __________ ________ ___________ _______ ASSETS ______ Investment in Michaels Stores, Inc. common stock Non-participant directed $ 3,598 $ 3,598 Participant directed 840 840 Investment in mutual funds 7,335 $2,756 $1,597 11,688 Participant loans receivable - - - $1,004 1,004 Contributions receivable: Participants 402 100 80 - 582 Employer 415 - - - 415 _______ ______ ______ ______ _______ 817 100 80 - 997 Interfund due to/(from) 341 (233) (108) - - Cash and cash equivalents 644 - - - 644 _______ ______ ______ ______ _______ Net assets available for plan benefits $13,575 $2,623 $1,569 $1,004 $18,771 _______ ______ ______ ______ _______ _______ ______ ______ ______ _______ See accompanying notes to financial statements. F-3 (2 of 2) MICHAELS STORES, INC. EMPLOYEES 401(K) PLAN STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR PLAN BENEFITS Period from February 1, 1996 to December 31, 1996 (In thousands) Fund information _______________________________________________________ Inter- mediate American Growth Bond General Balanced Fund of Fund of Fund Fund America America Subtotal _______ ________ _______ ________ ________ Investment income: Interest $ 47 $ 6 $ 9 $ 12 $ 74 Dividends - 69 21 168 258 Capital Gains - 109 165 - 274 Net appreciation (depreciation) in fair value of investments (764) 17 153 (82) (676) ______ ______ ______ ______ _______ (717) 201 348 98 (70) Contributions: Participants 731 468 815 318 2,332 Employer-participant directed 68 95 239 77 479 Employer-non- participant directed 439 - - - 439 Interfund transfers (311) 59 (47) (243) (542) ______ ______ ______ ______ _______ Total additions 210 823 1,355 250 2,638 Distributions to participants (675) (271) (451) (387) (1,784) ______ ______ ______ ______ _______ Net increase (decrease) (465) 552 904 (137) 854 Net assets available for plan benefits: Beginning of year 7,162 1,479 2,472 2,462 13,575 ______ ______ ______ ______ _______ End of year $6,697 $2,031 $3,376 $2,325 $14,429 ______ ______ ______ ______ _______ ______ ______ ______ ______ _______ See accompanying notes to financial statements. F-4 (1 of 2) MICHAELS STORES, INC. EMPLOYEES 401(K) PLAN STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR PLAN BENEFITS Period from February 1, 1996 to December 31, 1996 (In thousands) Fund information _______________________________________________________ Investment Previous Company of New Participant Page America Perspective Loans Subtotal Fund Fund Receivable Total ________ __________ ___________ ___________ ________ Investment income: Interest $ 74 $ 7 $ 4 $ - $ 85 Dividends 258 67 37 - 362 Capital Gains 274 144 79 - 497 Net appreciation (depreciation) in fair value of investments (676) 253 143 - (280) _______ ______ ______ ______ _______ (70) 471 263 - 664 Contributions: Participants 2,332 630 470 - 3,432 Employer-participant directed 479 144 130 - 753 Employer-non- participant directed 439 - - - 439 Interfund transfers (542) 147 16 379 - _______ ______ ______ ______ _______ Total additions 2,638 1,392 879 379 5,288 Distributions to participants (1,784) (422) (171) (82) (2,459) _______ ______ ______ ______ _______ Net increase (decrease) 854 970 708 297 2,829 Net assets available for plan benefits: Beginning of year 13,575 2,623 1,569 1,004 18,771 _______ ______ ______ ______ _______ End of year $14,429 $3,593 $2,277 $1,301 $21,600 _______ ______ ______ ______ _______ _______ ______ ______ ______ _______ See accompanying notes to financial statements. F-4 (2 of 2) MICHAELS STORES, INC. EMPLOYEES 401(K) PLAN STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR PLAN BENEFITS Year Ended January 31, 1996 (In thousands) Fund information _________________________________________________ Inter- American Growth mediate General Balanced Fund of Bond Fund Fund Fund America of America Subtotal _______ ________ _______ __________ ________ Investment income: Interest $ 84 $ 6 $ 11 $ 20 $ 121 Dividends - 50 24 174 248 Capital Gains - 53 190 - 243 Net appreciation (depreciation) in fair value of investments (7,048) 191 341 141 (6,375) _______ ______ ______ ______ _______ (6,964) 300 566 335 (5,763) Contributions: Participants 859 389 548 324 2,120 Employer- non-participant directed 1,442 - - - 1,442 Interfund transfers (43) 165 184 267 573 _______ ______ ______ ______ _______ Total additions (4,706) 854 1,298 926 (1,628) Distributions to participants (1,305) (162) (205) (356) (2,028) _______ ______ ______ ______ _______ Net increase (decrease) (6,011) 692 1,093 570 (3,656) Net assets available for plan benefits: Beginning of year 13,173 787 1,379 1,892 17,231 _______ ______ ______ ______ _______ End of year $ 7,162 $1,479 $2,472 $2,462 $13,575 _______ ______ ______ ______ _______ _______ ______ ______ ______ _______ See accompanying notes to financial statements. F-5 (1 of 2) MICHAELS STORES, INC. EMPLOYEES 401(K) PLAN STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR PLAN BENEFITS Year Ended January 31, 1996 (In thousands) Fund information ____________________________________________________________ Investment Previous Company of New Leewards Participant Page America Perspective Conversion Loan Subtotal Fund Fund Fund Receivable Total ________ __________ ___________ __________ __________ _____ Investment income: Interest $ 121 $ 7 $ 3 $ 37 $ - $ 168 Dividends 248 159 27 - - 434 Capital Gains 243 7 58 - - 308 Net appreciation (depreciation) in fair value of investments (6,375) 431 143 - - (5,801) _______ ______ ______ ______ ______ ______ (5,763) 604 231 37 - (4,891) Contributions: Participants 2,120 523 430 - - 3,073 Employer- non-participant directed 1,442 - - - - 1,442 Interfund transfers 573 276 344 (2,197) 1,004 - _______ ______ ______ ______ ______ ______ Total additions (1,628) 1,403 1,005 (2,160) 1,004 (376) Distributions to participants (2,028) (265) (231) (848) - (3,372) _______ ______ ______ ______ ______ ______ Net increase (decrease) (3,656) 1,138 774 (3,008) - (3,748) Net assets available for plan benefits: Beginning of year 17,231 1,485 795 3,008 - 22,519 _______ ______ ______ ______ ______ _______ End of year $13,575 $2,623 $1,569 $ - $1,004 $18,771 _______ ______ ______ ______ ______ _______ _______ ______ ______ ______ ______ _______ See accompanying notes to financial statements. F-5 (2 of 2) MICHAELS STORES, INC. EMPLOYEES 401(K) PLAN NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996 1. Description of the Plan and Basis of Presentation _________________________________________________ The Michaels Stores, Inc. Employees 401(k) Plan (the "Plan") became effective on February 1, 1987, for eligible employees of Michaels Stores, Inc. (the "Employer" or the "Company") and certain of its subsidiaries. The Plan is a defined contribution plan designed to comply with the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). The following plan amendments were effective October 1, 1996: The Plan changed its accounting year from a fiscal year, beginning February 1 and ending the following January 31, to a calendar year. Employees are eligible to participate in the Plan after completing 500 hours of service in a six-month eligibility period. The Employer Matching Contribution is applied to the participants' accounts based on the participants' investment fund elections. References to 1996 and 1995 throughout these notes pertain to the period from February 1, 1996 to December 31, 1996 and the year ending January 31, 1996, respectively. The following is a brief description of the Plan. Participants should refer to the plan document for complete information regarding the Plan. Participation - Employees become eligible to participate in the Plan once they have reached the age of 21 and have completed 500 hours of service during the previous six months, effective October 1, 1996. Prior to October, employees became eligible to participate in the plan once they had reached the age of 21 and had completed 1000 hours of service during the previous 12 months. Eligible employees who desire to participate in the Plan must elect to participate by phoning the voice response system, or prior to October 1, 1996, by completing the form or forms provided by the Plan's Administration Committee and authorize the Employer to make payroll deductions for contributions to the Plan. Contributions - Participants may elect to have their salary reduced, in increments of whole percents, at a minimum of 1% up to a maximum of 15% of the participant's considered compensation, as defined by the Plan, and have the Employer contribute to the Plan the amount of such reduction ("Salary Reduction Contribution"). A participant's Salary Reduction Contribution may not exceed an amount determined by the Internal Revenue Service each calendar year ($9,500 in 1996 and $9,240 in 1995). Each participant may also elect to make voluntary, after-tax contributions at a minimum of 1% up to a maximum of 10% of the participant's considered compensation ("Employee Contributions"). In addition, the Employer is required to make a biweekly contribution, or prior to October 1, 1996, an annual contribution ("Employer Matching Contribution") to the account of each participant in an amount equal to 50% of the participant's Salary Reduction Contribution up to a maximum of 6% of such participant's considered compensation. The annual Employer Matching Contribution may not exceed 3% of such participant's total considered compensation for the year. F-6 Employer Matching Contributions are net of forfeitures, as defined in the Plan, and are to be deposited as soon as administratively feasible after the end of each payroll period. Effective October 1, 1996, all current and prior Employer Matching Contributions are invested based upon the participants investment elections. Prior to October 1, 1996, all Employer Matching Contributions were invested in the General Fund. Forfeitures of $169,000 and $54,000 were applied against Employer Matching Contributions to the Plan for 1996 and 1995, respectively. Participants may elect investment of their Salary Reduction Contributions and Employee Contributions in one of, or in any combination of the following investment options (except the Leewards Conversion Fund) which have been selected by the Plan's Investment Committee: (a) General Fund - investments in the common stock of the Employer and idle cash utilized to purchase Employer common stock. All Employer Matching Contributions were invested in the General Fund through October 1, 1996. (b) American Balanced Fund - a mutual fund investing in both domestic growth and income producing securities seeking conservation of capital, current income, and long term growth of both capital and income. (c) Growth Fund of America - a mutual fund investing in domestic growth equities seeking growth of capital. (d) Intermediate Bond Fund of America - a mutual fund investing in intermediate term investment grade corporate bonds and government instruments seeking current income and preservation of capital. (e) Investment Company of America Fund - a mutual fund investing in common stocks seeking long term growth of capital and income. (f) New Perspective Fund - a mutual fund investing in both domestic and foreign securities, including both equity and debt instruments, seeking long term growth of capital. (g) Leewards Conversion Fund - investments with an insurance company in a guaranteed investment contract and a money market account. In March 1995 the investments in this fund were liquidated, and investment balances were re-directed by the participants to the investment options available, including the General Fund. F-7 Administration of the Plan - The Plan is administered by an Administration Committee consisting of two people, both employees of the Employer, appointed by the Employer's Board of Directors. The members of the Administration Committee serve at the discretion of the Board of Directors without compensation for services. A separate account is maintained for each participant. The account balances for participants are adjusted periodically as follows: (a) Salary Reduction Contributions and Employee Contributions and any withdrawals are allocated on a biweekly basis with each payroll. (b) Employer Matching Contributions are allocated to participants' accounts biweekly with each payroll. Prior to October 1, 1996, the Employer Contributions were allocated quarterly on January 31, April 30, July 31 and October 31. (c) Income and gains and losses from investments are allocated using a daily valuation approach. Vesting - Participants become partially vested in the Employer Matching Contributions (including investment income and gains and losses thereon) at the rate of: 20% after two years of service; 40% after three years; 60% after four years; and 80% after five years. Employer Matching Contributions vest 100% upon completing six years of service (five years of service for individuals employed before May 1, 1992); attaining the age of 65; becoming disabled; or death. Salary Reduction Contributions and Employee Contributions are 100% vested and nonforfeitable at all times. Withdrawals - Upon death, disability or termination of employment with the Company, participants are entitled to the vested portion of Employer Matching Contributions and 100% of Salary Reduction Contributions and Employee Contributions. Income tax status - The Internal Revenue Service ruled on February 20, 1997 that the Plan qualified under Section 401 (a) of the Internal Revenue Code, (IRC) and , therefore, the related trust is not subject to tax under present income tax law. Once qualified, the Plan is required to operate in conformity with the IRC to maintain its qualification. The Administration Committee believes that the Plan is designed and currently operated in compliance with the applicable requirements of the IRC. Salary Reduction Contributions and Employer Matching Contributions are not included in the participant's gross income for federal income tax purposes in the year such contributions are made. A participant will not be subject to federal income taxes with respect to these contributions until the amounts are withdrawn or distributed. Termination of the Plan - While the Employer has not expressed any intent to discontinue the Plan, the Employer may terminate the Plan at any time. In the event the Plan is terminated, the participants would become fully vested, and the net assets would be distributed to participants in proportion to their account balances. F-8 2. Summary of significant accounting policies __________________________________________ Investments in the common stock of the Employer are valued at the last reported sales price on the last business day of the Plan year as reported on the NASDAQ National Market System. Investments in the mutual funds of American Funds Service Company are valued at the last reported net asset value (NAV) on the last business day of the Plan year as reported on the NASDAQ automated quotation system. Security transactions are recorded on a trade date basis. Contributions and interest income are recorded on an accrual basis. Certain amounts presented in the financial statements for the year ended January 31, 1996 have been reclassified to conform to the 1996 presentation. Use of estimates ________________ The preparation of financial statements in conformity with generally accepted accounting principles requires the use of estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. F-9 3. Investments ___________ Investments at December 31, 1996, are as follows: Number (In thousands) of shares Fair Value _________ ______________ Michaels Stores, Inc. common stock* 532,037 $ 6,384 American Mutual Funds: American Balanced Fund* 137,825 2,005 The Growth Fund of America* 200,996 3,330 Intermediate Bond Fund of America* 171,853 2,306 The Investment Company of America Fund* 146,735 3,555 New Perspective Fund* 123,861 2,250 _______ $19,830 _______ _______ Investments at January 31, 1996, are as follows: Number (In thousands) of shares Fair Value _________ ______________ Michaels Stores, Inc. common stock* 348,039 $ 4,438 American Mutual Funds: American Balanced Fund* 112,523 1,617 The Growth Fund of America* 88,456 2,772 Intermediate Bond Fund of America* 213,823 2,946 The Investment Company of America Fund* 123,744 2,756 New Perspective Fund* 95,083 1,597 _______ $16,126 _______ _______ * Investment represents 5 percent or more of Plan's net assets available for benefits. 4. Related party transactions __________________________ Under the terms of the Plan, all expenses and fees of the Plan are to be paid by the Employer. The Employer paid approximately $429,000 and $160,000, respectively, for administrative and accounting fees on behalf of the Plan for 1996 and 1995, respectively. During 1995, the Plan transferred 107,886 shares of the Employer's common stock to the Employer in settlement of a series of arms-length sales of shares pursuant to which the Employer had previously remitted approximately $3,560,000 to the Plan to fund amounts withdrawn by terminating participants from the General Fund. F-10 5. Differences Between Financial Statements and Form 5500: ______________________________________________________ The following is a reconciliation of net assets available for plan benefits per the financial statements to the Form 5500: (In thousands) 1996 1995 _______ _______ Net assets available for plan benefits per the financial statements $21,600 $18,771 Amounts allocated to withdrawn participants (33) (468) _______ _______ Net assets available for plan benefits per the Form 5500 $21,567 $18,303 _______ _______ _______ _______ The following is a reconciliation of distributions paid to participants per the financial statements to the Form 5500: (In thousands) 1996 ______________ Distributions to participants per the financial statements $2,459 Add: Amounts allocated to withdrawn participants at December 31, 1996 33 Less: Amounts allocated to withdrawn participants at January 31, 1996 (468) ______ Distributions to participants per the Form 5500 $2,024 ______ ______ Amounts allocated to withdrawn participants are recorded on the Form 5500 for termination distributions that have been processed and approved for payment prior to year-end but not yet paid. F-11 Schedule 1 __________ MICHAELS STORES, INC. EMPLOYEES 401(K) PLAN LINE 27a - SCHEDULE OF ASSETS HELD FOR INVESTMENT PURPOSES As Of December 31, 1996 c. Description of Investment Including Number Maturity of Date, Rate of Units/ b. Identity of Issuer, Interest, Shares/ Borrower, Lessor Collateral, Par Face e. Current a. or Similar Party or Maturity Value Value d. Cost Value __ ______________________ _________________ _______ _______ __________ * Michaels Stores, Inc. Common Stock 532,037 $ 5,778 $ 6,384 American Funds Group American Balanced Fund: invests in growth and income securities 137,825 1,781 2,005 American Funds Group Growth Fund of America: invests in growth equities 200,996 2,818 3,330 American Funds Group Intermediate Bond Fund of America: invests in corporate bonds and government instruments 171,853 2,318 2,306 American Funds Group Investment Company of America Fund: invests in common stocks 146,735 2,906 3,555 American Funds Group New Perspective Fund: invests in equity and debt securities 123,861 2,005 2,250 Wachovia Bank Short Term Investment Fund 267,438 267 267 * Participant Loans Receivable 7% to 10% - 1,301 _______ _______ $17,873 $21,398 _______ _______ _______ _______ * Indicates party-in-interest to the Plan F-12 Schedule 2 __________ MICHAELS STORES, INC. EMPLOYEES 401(K) PLAN LINE 27d - REPORTABLE TRANSACTIONS Period from February 1, 1996 to December 31, 1996 (In thousands) Number of ______________________________________________ transactions _________________ Purchase Sales Cost of Net Description of assets Purchases Sales Price price assets sold gain(loss) _____________________ _________ _____ ________ _____ ___________ __________ Category i - Individual securities transaction in excess of 5% of the Plan __________________________________________________________________________ assets at February 1, 1996 __________________________ WB DTF Short Term Investment Fund - $ 1 - $1,798 $1,798 - WB DTF Short Term Investment Fund $ 1 - $1,831 - 1,831 - WB DTF Short Term Investment Fund 1 - 2,948 - 2,948 - Category iii - Series of securities transactions in excess of 5% of the Plan ____________________________________________________________________________ assets at February 1, 1996 __________________________ American Mutual Funds: American Balanced Fund 40 34 $ 799 $ 469 $ 453 $ 16 WB DTF Short Term Investment Fund 61 74 7,852 8,229 8,229 - Growth Fund of America 44 37 1,224 819 795 24 Intermediate Bond Fund of America 34 39 507 1,145 1,146 (1) Investment Company of America Fund 44 38 1,127 611 580 31 New Perspective Fund 44 31 767 267 250 17 Michaels Stores, Inc. Common Stock 14 7 3,148 435 395 40 There were no category ii or iv reportable transactions during fiscal 1996. F-13 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 33-61055) and related Prospectus pertaining to the Michaels Stores, Inc. Employees 401(k) Plan of our report dated June 30, 1997, with respect to the financial statements and supplemental schedules of the Michaels Stores, Inc. Employees 401(k) Plan included in this Annual Report (Form 11-K) for the eleven month period ended December 31, 1996. /s/ Ernst & Young LLP ______________________ ERNST & YOUNG LLP Dallas, Texas June 30, 1997 F-14