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 calendar year ending December 31, 1997 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 Administration Committee has 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 29, 1998 By: /s/ H. Kevin Rutherford ________________________ H. Kevin Rutherford Senior Vice President- Human Resources and member of Administration Committee MICHAELS STORES, INC. EMPLOYEES 401(K) PLAN In February 1987, Michaels Stores, Inc. (the "Employer" or the "Company") established the Michaels Stores, Inc. Employees 401(k) Plan (the "Plan"). Plan year 1997 and all subsequent years begin January 1 and end December 31. Plan year 1996 began on February 1 and ended on December 31. Prior to 1996, the plan year was 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 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 Plan. There were no changes in the provisions of the Plan during the year ending December 31, 1997. Changes in Investment Policy. There were no changes in the investment policy of the Plan during the year ending December 31, 1997. Contributions Under the Plan. The Company makes biweekly employer matching contributions to the 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, 1997, there were 3,208 employees participating in the Plan. Administration of the Plan. The 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 on such Committee. The members of the Administration Committee are: Evan A. Wyly Managing Director H. Kevin Rutherford Senior Vice President of Human Resources 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 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 Plan. - 1 - Custodian of Investments. The assets of the Plan are held in a trust and managed by a trustee ("Trustee"), who may be an employee of the Company. At present, Wachovia Bank of North Carolina, N.A. serves as the Trustee. The Company pays the fees and expenses of the Trustee. Reports to Participating Employees. Each participant and retired participant having an interest in the Plan receives quarterly statements of their accounts each plan year. -2- INDEX TO FINANCIAL STATEMENTS _____________________________ PAGE ____ Report of Ernst & Young LLP, Independent Auditors F-1 _________________________________________________ Audited 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 Schedules: Schedule _____________________ ________ Line 27a-Schedule of Assets Held for Investment Purposes 1 F-12 Line 27b-Schedule of Loans or Fixed Income Obligations 2 F-13 Line 27d-Schedule of Reportable Transactions 3 F-14 Consent of Independent Auditors F-15 _______________________________ -3- REPORT OF ERNST & YOUNG LLP, 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 the Michaels Stores, Inc. Employees 401(k) Plan (the "Plan") as of December 31, 1997 and December 31, 1996, and the related statements of changes in net assets available for plan benefits for the year ended December 31, 1997 and for the period from February 1, 1996 to December 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, 1997 and December 31, 1996, and the changes in its net assets available for plan benefits for the year ended December 31, 1997 and for the period from February 1, 1996 to December 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, 1997 (Schedule 1), Loans or Fixed Income Obligations as of December 31, 1997 (Schedule 2), and Reportable Transactions for the year then ended (Schedule 3), 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 26, 1998 F-1 MICHAELS STORES, INC. EMPLOYEES 401(K) PLAN STATEMENT OF NET ASSETS AVAILABLE FOR PLAN BENEFITS December 31, 1997 (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 $13,427 $13,427 Investment in mutual funds $2,823 $4,802 $2,415 10,040 Participant loans receivable - - - - - Contributions receivable: Participants 46 20 33 11 110 Employer 12 8 12 5 37 _______ ______ ______ ______ _______ 58 28 45 16 147 Cash and cash equivalents 815 - - - 815 _______ ______ ______ ______ _______ Net assets available for plan benefits $14,300 $2,851 $4,847 $2,431 $24,429 _______ ______ ______ ______ _______ _______ ______ ______ ______ _______ 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, 1997 (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 $13,427 $13,427 Investment in mutual funds 10,040 $4,895 $2,773 17,708 Participant loans receivable - - - $1,546 1,546 Contributions receivable: Participants 110 28 20 - 158 Employer 37 10 7 - 54 _______ ______ ______ ______ _______ 147 38 27 - 212 Cash and cash equivalents 815 - - - 815 _______ ______ ______ ______ _______ Net assets available for plan benefits $24,429 $4,933 $2,800 $1,546 $33,708 _______ ______ ______ ______ _______ _______ ______ ______ ______ _______ 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 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-3 (1 of 2) MICHAELS STORES, INC. EMPLOYEES 401(K) PLAN STATEMENT OF NET ASSETS AVAILABLE FOR PLAN BENEFITS December 31, 1996 (In thousands) [CAPTION] 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-3 (2 of 2) MICHAELS STORES, INC. EMPLOYEES 401(K) PLAN STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR PLAN BENEFITS Year Ended December 31, 1997 (In thousands) Fund Information _________________________________________ Inter- American Growth mediate General Balanced Fund of Bond Fund Fund Fund America of America Subtotal ________ ________ _______ __________ ________ Investment income: Interest $ 50 $ 10 $ 18 $ 16 $ 94 Dividends - 88 30 153 271 Capital gain distributions - 213 478 - 691 Net appreciation in fair value of investments 8,552 167 453 10 9,182 _______ ______ ______ ______ _______ 8,602 478 979 179 10,238 Contributions: Participants 804 587 931 307 2,629 Employer-participant directed 74 230 307 117 728 Interfund transfers (101) (64) (70) (77) (312) _______ ______ ______ ______ _______ Total additions 9,379 1,231 2,147 526 13,283 Distributions to participants (1,776) (411) (676) (420) (3,283) _______ ______ ______ ______ _______ Net increase 7,603 820 1,471 106 10,000 Net assets available for plan benefits: Beginning of year 6,697 2,031 3,376 2,325 14,429 _______ ______ ______ ______ _______ End of year $14,300 $2,851 $4,847 $2,431 $24,429 _______ ______ ______ ______ _______ _______ ______ ______ ______ _______ 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 Year Ended December 31, 1997 (In thousands) Fund Information ___________________________________________ Investment Previous Company of New Participant Page America Perspective Loan Subtotal Fund Fund Receivable Total ________ __________ ___________ ___________ _______ Investment income: Interest $ 94 $ 18 $ 9 $ - $ 121 Dividends 271 78 39 - 388 Capital gain distributions 691 413 161 - 1,265 Net appreciation in fair value of investments 9,182 619 164 - 9,965 _______ ______ ______ ______ _______ 10,238 1,128 373 _ 11,739 Contributions: Participants 2,629 771 609 - 4,009 Employer-participant directed 728 262 176 - 1,166 Interfund transfers (312) 21 (190) 481 - _______ ______ ______ ______ _______ Total additions 13,283 2,182 968 481 16,914 Distributions to participants (3,283) (842) (445) (236) (4,806) _______ ______ ______ ______ _______ Net increase 10,000 1,340 523 245 12,108 Net assets available for plan benefits: Beginning of year 14,429 3,593 2,277 1,301 21,600 _______ ______ ______ ______ _______ End of year $24,429 $4,933 $2,800 $1,546 $33,708 _______ ______ ______ ______ _______ _______ ______ ______ ______ _______ 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 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 gain distributions - 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 period 7,162 1,479 2,472 2,462 13,575 ______ ______ ______ ______ _______ End of period $6,697 $2,031 $3,376 $2,325 $14,429 ______ ______ ______ ______ _______ ______ ______ ______ ______ _______ 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 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 gain distributions 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 period 13,575 2,623 1,569 1,004 18,771 _______ ______ ______ ______ _______ End of period $14,429 $3,593 $2,277 $1,301 $21,600 _______ ______ ______ ______ _______ _______ ______ ______ ______ _______ See accompanying notes to financial statements. F-5 (2 of 2) MICHAELS STORES, INC. EMPLOYEES 401(K) PLAN NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997 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 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 to the Company within a six-month eligibility period. The Employer Matching Contribution (as defined below) is applied to the participants' accounts based on the participants' investment fund elections. References to 1997 and 1996 throughout these notes pertain to the year ended December 31, 1997 and the period from February 1, 1996 to December 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 - The plan was amended effective October 1, 1996, so that employees become eligible to participate in the Plan once they have reached the age of 21 and have completed 500 hours of service to the Company during the previous six months. Prior to October 1, 1996, 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. The Administration Committee has developed and implemented a system to notify each employee upon his or her initial eligibility to participate in the Plan. Eligible employees who desire to participate in the Plan must elect to participate by phoning the voice response system maintained by the Plan's recordkeeper to authorize the Employer to make payroll deductions for contributions to the Plan. Contributions - Each participant may elect to have his or her compensation 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 1997 and 1996). 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. However, 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 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 $221,000 and $169,000 were applied against Employer Matching Contributions to the Plan for 1997 and 1996, respectively. Participants may elect investment of their entire Plan account in one of, or in any combination of, the following investment options 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 facilitate the daily processing of investment transactions in all investment options. All Employer Matching Contributions were invested in the General Fund prior to 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. 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 their services. A separate account is maintained in the Plan for each participant. The account balances for participants are adjusted periodically as follows: (a) All contributions are allocated to participants' accounts biweekly with each Company payroll. Prior to October 1, 1996, the Employer Matching Contributions were allocated quarterly. F-7 (b) Daily withdrawal requests are processed weekly. (c) Income and gains and losses from investments are allocated to the participants' accounts daily. (d) Transfers are processed on a daily basis. 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 the participant completing six years of service (five years of service for individuals employed before May 1, 1992); attaining the age of 65; or dying. Salary Reduction Contributions and Employee Contributions are 100% vested and nonforfeitable at all times. Withdrawals - Upon death or termination of employment with the Company, participants are entitled to, and may withdraw from the Plan, the vested portion of Employer Matching Contributions and 100% of Salary Reduction Contributions and Employee Contributions. In-service withdrawal provisions of the Plan allow for early withdrawal of Employee Contributions and rollover contributions at any time and for any reason. Hardship withdrawals of Salary Reduction Contributions may be made under certain limited circumstances while employed by the Company. However, in-service withdrawals may be subject to ordinary income taxes and early distribution penalty taxes. Participants may request distribution of their account any time after their employee termination date, and must begin receiving payments from their account balance by April 1 of the calendar year following the later of the year of employment termination or the year in which they reach age 70-1/2. Active participants of the Plan may obtain loans from their account balance subject to certain requirements without incurring income taxes or penalty taxes. Income tax status - The Internal Revenue Service ruled on February 20, 1997 that the Plan is 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 Plan accounts of all participants would become fully vested. 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 quoted through The Nasdaq Stock Market. 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 quoted through The Nasdaq Stock Market. Security transactions are recorded on a trade date basis. Contributions and interest income are recorded on an accrual basis. Use of estimates ________________ The preparation of financial statements in conformity with generally accepted accounting principles requires the use of estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. F-9 3. Investments ___________ Investments at December 31, 1997, are as follows: Number (In thousands) of Shares Fair Value _________ __________ Michaels Stores, Inc. common stock* 459,038 $13,427 American Mutual Funds: American Balanced Fund* 180,034 2,823 The Growth Fund of America* 255,683 4,802 Intermediate Bond Fund of America* 179,328 2,415 The Investment Company of America Fund* 173,285 4,895 New Perspective Fund* 143,148 2,773 _______ $31,135 _______ _______ 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 _______ _______ * 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 administrative expenses and fees of the Plan are paid by the Employer. The Employer paid approximately $321,000 and $429,000, respectively, for administrative expenses and fees on behalf of the Plan for 1997 and 1996, respectively. 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) 1997 1996 _______ _______ Net assets available for plan benefits per the financial statements $33,708 $21,600 Amounts allocated to withdrawn participants (149) (33) _______ _______ Net assets available for plan benefits per the Form 5500 $33,559 $21,567 _______ _______ _______ _______ The following is a reconciliation of distributions paid to participants per the financial statements to the Form 5500: (In thousands) 1997 ______ Distributions to participants per the financial statements $4,806 Add: Amounts allocated to withdrawn participants at December 31, 1997 149 Less: Amounts allocated to withdrawn participants at December 31, 1996 (33) ______ Distributions to participants per the Form 5500 $4,922 ______ ______ 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. 6. Year 2000 Issue (unaudited) ___________________________ The Company has developed a plan to modify its internal information technology to be ready for the year 2000 Issue and has begun converting critical data processing systems. The project also includes determining whether third party service providers have reasonable plans in place to become year 2000 compliant. The Company currently expects the project to be substantially complete by early 1999. The Company does not expect this project to have a significant effect on the operations of the Plan. F-11 Schedule 1 __________ EIN 75-1943604 PLAN #1 MICHAELS STORES, INC. EMPLOYEES 401(K) PLAN LINE 27a - SCHEDULE OF ASSETS HELD FOR INVESTMENT PURPOSES As Of December 31, 1997 c. Description of Investment Including Maturity Date, Rate of b. Identity of Issuer, Interest, Borrower, Lessor Collateral, Par e. Current a. or Similar Party or Maturity Value d. Cost Value __ ______________________ _________________ ________ __________ * Michaels Stores, Inc. Common Stock $ 5,354 $13,427 American Funds Group American Balanced Fund: invests in growth and income securities 2,702 2,823 American Funds Group Growth Fund of America: invests in growth equities 4,408 4,802 American Funds Group Intermediate Bond Fund of America: invests in corporate bonds and government instruments 2,397 2,415 American Funds Group Investment Company of America Fund: invests in common stocks 4,298 4,895 American Funds Group New Perspective Fund: invests in equity and debt securities 2,623 2,773 Wachovia Bank Short Term Investment Fund 815 815 * Participant Loans Receivable 7% to 10% - 1,546 _______ _______ $22,597 $33,496 _______ _______ _______ _______ * Indicates party-in-interest to the Plan F-12 Schedule 2 __________ EIN 75-1943604 PLAN #1 MICHAELS STORES, INC. EMPLOYEES 401(K) PLAN LINE 27b - SCHEDULE OF LOANS OR FIXED INCOME OBLIGATIONS Year Ended December 31, 1997 AMOUNTS RECEIVED DURING THE YEAR DESCRIPTION OF LOAN AMOUNT OVERDUE _________________________________ ___________________________ ____________________ ORIG. UNPAID BALANCE DATE OF LOAN INTEREST SSN PARTICIPANT LOAN AMT PRINCIPAL INTEREST AS OF 12/31/97 LOAN DURATION RATE PRINCIPAL INTEREST ___________ ______________ ________ _________ ________ ______________ _______ ________ ________ _________ ________ ###-##-#### Zarbock, J. $ 1,300 $ 232 $ 42 $ 1,068 4/14/97 2 9.25% $ 1,068 0 ###-##-#### Carpenter, F. 1,700 152 64 1,548 4/07/97 4 9.25 1,548 0 ###-##-#### Fiore, C. 2,500 33 9 2,467 1/13/97 3 9.25 2,467 0 6,000 1,040 192 4,960 8/31/96 3 9.25 4,960 0 ###-##-#### Smole, D. 2,000 0 0 2,000 3/31/96 5 9.25 2,000 0 ###-##-#### Chrusciel, N. 2,600 0 0 2,600 4/30/96 3 9.25 2,600 0 ###-##-#### Williams, B. 1,700 1,676 0 24 11/06/92 3 7.00 24 0 ###-##-#### Motte, C. 1,778 1,027 98 751 4/30/96 2 9.25 751 0 3,000 73 43 2,927 4/14/97 5 9.50 2,927 0 ###-##-#### Graham, D. 2,165 0 0 2,165 1/04/96 1.5 9.75 2,165 0 ###-##-#### Dorado, M. 7,930 636 0 7,294 1/16/95 5 9.50 7,294 0 ###-##-#### East, V. 1,000 0 0 1,000 12/06/95 1 9.75 1,000 0 1,000 81 44 914 10/14/96 5 9.25 914 0 ###-##-#### Jones, D. 14,500 1,631 880 12,849 9/28/92 5 9.25 12,849 0 ###-##-#### Schenkman, P. 5,000 2,209 8 2,794 6/01/93 5 7.00 2,794 0 ###-##-#### Ledesma, A. 2,300 0 0 2,300 11/10/97 5 9.75 2,300 0 ###-##-#### Wells, C. 6,000 370 208 5,630 6/30/96 5 9.25 5,630 0 ###-##-#### Muniz, R. 7,125 2,024 558 5,101 12/15/94 6 9.50 5,101 0 ###-##-#### Sainz, C. 10,333 0 0 10,333 12/06/95 6 9.75 10,333 0 F-13 Schedule 3 __________ EIN 75-1943604 PLAN #1 MICHAELS STORES, INC. EMPLOYEES 401(K) PLAN LINE 27d - SCHEDULE OF REPORTABLE TRANSACTIONS Year Ended December 31, 1997 (In thousands) _________________________________________________ a. Identity of party involved c. Purchase d. Sales g. Cost of i. Net b. Description of assets price (1) price (2) assets sold gain or (loss) _____________________________ ___________ _________ ___________ ______________ Category (iii) - Series of securities transactions in excess of 5% of the Plan ______________________________________________________________________________ assets at January 1, 1997 _________________________ American Mutual Funds: American Balanced Fund $1,228 $ 577 $ 307 $ 270 WB DTF Short Term Investment Fund 9,675 9,127 9,127 - Growth Fund of America 2,073 1,054 483 571 Intermediate Bond Fund of America 823 723 744 (21) Investment Company of America Fund 1,667 946 275 671 New Perspective Fund 1,051 694 433 261 Michaels Stores, Inc. Common Stock 1,201 2,710 1,625 1,085 There were no category (i), (ii) or (iv) reportable transactions during fiscal 1997. (1) Cost (column g.) and current value of asset on transaction date (column h.) are the same amount as the purchase price. (2) Current value of asset on transaction date (column h.) is the same amount as the selling price. Note: Columns e. and f. are not applicable. F-14 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 26, 1998, 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 year ended December 31, 1997. /s/ Ernst & Young LLP ______________________ ERNST & YOUNG LLP Dallas, Texas June 26, 1998 F-15