UNITED STATES 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 [NO FEE REQUIRED] FOR THE CALENDAR YEAR ENDING DECEMBER 31, 1998 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, 1999 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"). 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. CONTRIBUTIONS UNDER THE PLAN. The Company makes biweekly employer matching contributions to the Plan to 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, 1998, there were 3,015 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 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. 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 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-10 SUPPLEMENTAL SCHEDULES: SCHEDULE Line 27a-Schedule of Assets Held for Investment Purposes 1 F-11 Line 27b-Schedule of Loans or Fixed Income Obligations 2 F-12 Line 27d-Schedule of Reportable Transactions 3 F-13 CONSENT OF INDEPENDENT AUDITORS F-14 -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 the Michaels Stores, Inc. Employees 401(k) Plan as of December 31, 1998 and December 31, 1997, and the related statements of changes in net assets available for plan benefits for the years then ended. 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, 1998 and December 31, 1997, and the changes in its net assets available for plan benefits for the years then ended, 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, 1998 (Schedule 1), Loans or Fixed Income Obligations as of December 31, 1998 (Schedule 2), and Reportable Transactions for the year ended December 31, 1998 (Schedule 3), are presented for purposes of additional analysis and are not a required part of the financial statements but are supplementary information required by the Department of Labor's Rules and Regulations for Reporting and Disclosure under the Employee Retirement Income Security Act of 1974. These supplemental schedules are the responsibility of the Plan's management. 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 25, 1999 F-1 MICHAELS STORES, INC. EMPLOYEES 401(K) PLAN STATEMENT OF NET ASSETS AVAILABLE FOR PLAN BENEFITS December 31, 1998 (In thousands) Fund Information --------------------------------------------------------- American Growth Intermediate General Balanced Fund of Bond Fund Fund Fund America of America Subtotal --------- --------- --------- ------------ --------- ASSETS Investment in Michaels Stores, Inc. common stock $ 8,015 $ 8,015 Investment in mutual funds - $ 3,393 $ 6,948 $ 2,746 13,087 Participant loans receivable - - - - - Contributions receivable: Participants 14 - - - 14 Employer - - - - - --------- --------- --------- ------------ --------- 14 - - - 14 --------- --------- --------- ------------ --------- Cash and equivalents 651 - - - 651 --------- --------- --------- ------------ --------- Net assets available for plan benefits $ 8,680 $ 3,393 $ 6,948 $ 2,746 $ 21,767 ========= ========= ========= ============ ========= See accompanying notes to consolidated financial statements. F-2 (1 of 2) MICHAELS STORES, INC. EMPLOYEES 401(K) PLAN STATEMENT OF NET ASSETS AVAILABLE FOR PLAN BENEFITS December 31, 1998 (In thousands) Fund Information --------------------------------------------------------- Previous Investment New Participant Page Company of Perspective Loans Subtotal America Fund Fund Receivable Total --------- ------------ ----------- ----------- --------- ASSETS Investment in Michaels Stores, Inc. common stock $ 8,015 $ 8,015 Investment in mutual funds 13,087 $ 6,285 $ 3,952 23,324 Participant loans receivable - - - $ 1,563 1,563 Contributions receivable: Participants 14 - - - 14 Employer - - - - - --------- ------------ ----------- ----------- --------- 14 - - - 14 --------- ------------ ----------- ----------- --------- Cash and equivalents 651 - - - 651 --------- ------------ ----------- ----------- --------- Net assets available for plan benefits $ 21,767 $ 6,285 $ 3,952 $ 1,563 $ 33,567 ========= ============ =========== =========== ========= See accompanying notes to consolidated financial statements. F-2 (2 of 2) MICHAELS STORES, INC. EMPLOYEES 401(K) PLAN STATEMENT OF NET ASSETS AVAILABLE FOR PLAN BENEFITS December 31, 1997 (In thousands) Fund Information --------------------------------------------------------- American Growth Intermediate 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 equivalents 815 - - - 815 --------- --------- --------- ------------ --------- Net assets available for plan benefits $ 14,300 $ 2,851 $ 4,847 $ 2,431 $ 24,429 ========= ========= ========= ============ ========= See accompanying notes to consolidated financial statements. F-3 (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 -------------------------------------------------------- Previous Investment New Participant Page Company of Perspective Loans Subtotal America 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 equivalents 815 - - - 815 --------- ------------ ----------- ----------- --------- Net assets available for plan benefits $ 24,429 $ 4,933 $ 2,800 $ 1,546 $ 33,708 ========= ============ =========== =========== ========= See accompanying notes to consolidated 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, 1998 (In thousands) Fund Information ------------------------------------------------------ American Growth Intermediate General Balanced Fund of Bond Fund Fund Fund America of America Subtotal --------- ---------- --------- ------------- ---------- Investment income: Interest $ 76 $ 14 $ 27 $ 15 $ 132 Dividends - 108 26 154 288 Capital gain distributions - 207 617 - 824 Net appreciation (depreciation) in fair value of investments (4,253) 9 954 13 (3,277) --------- ---------- --------- ------------- ---------- (4,177) 338 1,624 182 (2,033) Contributions: Participants 956 643 1,167 532 3,298 Employer 119 196 301 109 725 Interfund transfers (492) (51) 100 (80) (523) --------- ---------- --------- ------------- ---------- Total additions (3,594) 1,126 3,192 743 1,467 --------- ---------- --------- ------------- ---------- Distributions to participants (2,026) (584) (1,091) (428) (4,129) --------- ---------- --------- ------------- ---------- Net increase (decrease) (5,620) 542 2,101 315 (2,662) Net assets available for plan benefits: Beginning of year 14,300 2,851 4,847 2,431 24,429 --------- ---------- --------- ------------- ---------- End of year $ 8,680 $ 3,393 $ 6,948 $ 2,746 $ 21,767 ========= ========== ========= ============= ========== See accompanying notes to consolidated 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, 1998 (In thousands) Fund Information ------------------------------------------------------------ Previous Investment New Participant Page Company of Perspective Loans Subtotal America Fund Fund Receivable Total ---------- -------------- ------------- ------------- -------- Investment income: Interest $ 132 $ 23 $ 15 $ - $ 170 Dividends 288 93 41 - 422 Capital gain distributions 824 534 249 - 1,607 Net appreciation (depreciation) in fair value of investments (3,277) 504 535 - (2,238) ---------- -------------- ------------- ------------- -------- (2,033) 1,154 840 - (39) Contributions: Participants 3,298 1,064 641 - 5,003 Employer 725 260 169 - 1,154 Interfund transfers (523) (144) 133 534 - ---------- -------------- ------------- ------------- -------- Total additions 1,467 2,334 1,783 534 6,118 Distributions to participants (4,129) (982) (631) (517) (6,259) ---------- -------------- ------------- ------------- -------- Net increase (decrease) (2,662) 1,352 1,152 17 (141) Net assets available for plan benefits: Beginning of year 24,429 4,933 2,800 1,546 33,708 ---------- -------------- ------------- ------------- -------- End of year $ 21,767 $ 6,285 $ 3,952 $ 1,563 $ 33,567 ========== ============== ============= ============= ======== See accompanying notes to consolidated 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 December 31, 1997 (In thousands) Fund Information ----------------------------------------------------- American Growth Intermediate 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 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 consolidated 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 December 31, 1997 (In thousands) Fund Information ------------------------------------------------------------ Previous Investment New Participant Page Company of Perspective Loans Subtotal America 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 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 consolidated financial statements. F-5 (2 of 2) MICHAELS STORES, INC. EMPLOYEES 401(K) PLAN NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1998 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 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 to the Company during the previous six 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 ($10,000 in 1998 and $9,500 in 1997). 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 ("Employer Matching Contribution") to the account of each participant in an amount equal to 50% of the participant's Salary Reduction Contribution. However, Employer Matching Contributions may not exceed 3% of each participant's total considered compensation for the year. 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. All Employer Matching Contributions are invested based upon the participants' investment elections. Forfeitures of $318,000 and $221,000 were applied against Employer Matching Contributions to the Plan for 1998 and 1997, 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. (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. F-6 (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. (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. F-7 LOANS - Active participants of the Plan may obtain loans from their account balance subject to certain requirements without incurring income taxes or penalty taxes. Participant loans are repaid, with interest, on an after-tax basis through payroll deductions. Loan repayments (including interest) are deposited to each participant's account and invested according to their investment elections in effect at the time of repayment. Participants may borrow the lesser of 50% of their vested accounted balance or $50,000. 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. 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 based on quoted market prices of the underlying securities comprising the investment funds on the last business day of the Plan year. Participant loans receivable are recorded at cost which approximates fair value. 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 that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. F-8 3. INVESTMENTS. Investments at December 31, 1998, are as follows: Number Fair Value of Shares (In thousands) --------- -------------- Michaels Stores, Inc. common stock* 442,965 $ 8,015 American Mutual Funds: American Balanced Fund* 215,302 3,393 The Growth Fund of America* 310,174 6,948 Intermediate Bond Fund of America* 202,762 2,746 The Investment Company of America Fund* 202,289 6,285 New Perspective Fund* 172,201 3,952 ------- $31,339 ======= Investments at December 31, 1997, are as follows: Number Fair Value of Shares (In thousands) --------- -------------- 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 ======= * 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 $323,000 and $321,000, respectively, for administrative expenses and fees on behalf of the Plan for 1998 and 1997, respectively. F-9 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: 1998 1997 ------- ------- (In thousands) Net assets available for plan benefits per the financial statements $33,567 $33,708 Amounts allocated to withdrawn participants (75) (149) ------- ------- Net assets available for plan benefits per the Form 5500 $33,492 $33,559 ======= ======= The following is a reconciliation of distributions paid to participants per the financial statements to the Form 5500: 1998 ------- (In thousands) Distributions to participants per the financial statements $6,259 Add: Amounts allocated to withdrawn participants at December 31, 1998 75 Less: Amounts allocated to withdrawn participants at December 31, 1997 (149) ------ Distributions to participants per the Form 5500 $6,185 ====== 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. The Company had determined that it was necessary to take certain steps in order to ensure that the Plan's information systems were prepared to handle year 2000 dates. The Company took a two phase approach. The first phase addressed internal systems that had to be modified or replaced to function properly. The Company has completed the modifications to existing software applications. Costs associated with modifying software and equipment were not significant and were paid by the Company. For the second phase of the project, Plan management established formal communications with its third party service providers, including the administrator and trustee that will be providing services to the Plan effective August 1, 1999, to determine that they had developed plans to address their own year 2000 problems as they relate to the Plan's operations. All third party service providers have indicated that they are year 2000 compliant as of the date of this report. F-10 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, 1998 c. Description of Investment Including b. Identity of Issuer, Maturity Date, Rate Borrower, Lessor of Interest, Collateral, e. Current a. or Similar Party Par or Maturity Value d. Cost Value - -- ----------------------- ------------------------ ------- ---------- * Michaels Stores, Inc. Common Stock $ 6,722 $ 8,015 American Funds Group American Balanced Fund: invests in growth and income securities 3,312 3,393 American Funds Group Growth Fund of America: invests in growth equities 5,825 6,948 American Funds Group Intermediate Bond Fund of America: invests in corporate bonds and government instruments 2,728 2,746 American Funds Group Investment Company of America Fund: invests in common stocks 5,423 6,285 American Funds Group New Perspective Fund: invests in equity and debt securities 3,403 3,952 Wachovia Bank Short Term Investment Fund 651 651 * Participant Loans Receivable 7% to 10% - 1,563 ------- ------- $28,064 $33,553 ======= ======= * Indicates party-in-interest to the Plan F-11 SCHEDULE 2 EIN 75-1943604 PLAN #1 MICHAELS STORES, INC. EMPLOYEES 401(K) PLAN SCHEDULE 27b - SCHEDULE OF LOANS OR FIXED INCOME OBLIGATIONS Year Ended December 31, 1998 Amounts Received Amount During the Year Description of Loan Overdue ---------------------------- ------------------------------ ---------------- Unpaid Balance Original As of Date Loan Int. SSN Participant Loan Amt Principal Int. 12/31/98 Of Loan Duration Rate Principal Int. - ----------- ------------ -------- --------- ---- -------- -------- -------- ----- --------- ---- ###-##-#### Baker, S $ 4,689 $ 615 $161 $ 2,197 7/20/95 5yr 9.75% $ 2,197 $ 0 ###-##-#### Kralowski, D 11,000 1,262 654 9,269 8/29/97 5yr 9.50% 9,269 0 ###-##-#### Brennan, D 5,400 131 78 5,234 4/20/98 5yr 9.50% 5,234 0 ###-##-#### Gould, N 20,000 363 218 19,637 7/27/98 5yr 9.50% 19,637 0 ###-##-#### Hollabaugh, R 8,724 1,299 231 2,512 10/31/94 5yr 8.75% 2,512 0 ###-##-#### Smole, D 9,500 1,105 449 6,872 11/25/96 5yr 9.25% 6,872 0 ###-##-#### Hollabaugh, R 6,000 701 344 4,856 6/16/97 5yr 9.50% 4,856 0 F-12 SCHEDULE 3 EIN 75-1943604 Plan #1 MICHAELS STORES, INC. EMPLOYEES 401(K) PLAN LINE 27d - SCHEDULE OF REPORTABLE TRANSACTIONS Year Ended December 31, 1998 (In thousands) a. Identity of party involved and c. Purchase d. Sales g. Cost of i. Net b. Description of assets price (1) price (2) assets sold gain - ---------------------------------- ------------ --------- ----------- ------ Category (iii) - Series of securities transactions in excess of 5% of the Plan assets at January 1, 1998 - ------------------------------------------------------------------------------------------ American Mutual Funds: American Balanced Fund $1,568 $1,007 $ 959 $ 48 Growth Fund of America 3,025 1,834 1,608 226 Intermediate Bond Fund of America 1,841 1,523 1,510 13 Investment Company of America Fund 2,512 1,625 1,386 239 New Perspective Fund 1,635 991 856 135 Michaels Stores, Inc. 3,047 4,198 1,679 2,519 Wachovia Bank DTF Short Term Investment Fund 8,791 9,098 9,098 - There were no category (i), (ii) or (iv) reportable transactions during fiscal 1998. (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-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 25, 1999, 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, 1998. /s/ Ernst & Young LLP -------------------------- ERNST & YOUNG LLP Dallas, Texas June 25, 1999 F-14