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PROXY STATEMENT TABLE OF CONTENTS

SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No.           )

Filed by the Registrant ý

Filed by a Party other than the Registrant o

Check the appropriate box:

o
 
Preliminary Proxy Statement

o
 
Confidential, For Use of the Commission Only (as permitted by Rule 14a-6(e)(2))

ý
 
Definitive Proxy Statement

o
 
Definitive Additional Materials

o
 
Soliciting Material Pursuant to Rule 14a-12

Michaels Stores, Inc.
(Name of Registrant as Specified in Its Charter)

  
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
         
Payment of Filing Fee (Check the appropriate box):

ý
 
No fee required

o
 
Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11
    (1)   Title of each class of securities to which transaction applies:
        
    (2)   Aggregate number of securities to which transaction applies:
        
    (3)   Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):
        
    (4)   Proposed maximum aggregate value of transaction:
        
    (5)   Total fee paid:
        

o
 
Fee paid previously with preliminary materials.

o
 
Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the form or schedule and the date of its filing.

 
 
(1)
 
Amount Previously Paid:
        
    (2)   Form, Schedule or Registration Statement No.:
        
    (3)   Filing Party:
        
    (4)   Date Filed:
        


Michaels Stores, Inc.
8000 Bent Branch Drive
Irving, Texas 75063

May 6, 2003

Dear Stockholder:

        You are cordially invited to attend the Annual Meeting of Stockholders of Michaels Stores, Inc. to be held at the Four Seasons Resort and Club, 4150 North MacArthur Boulevard, Irving, Texas on Thursday, June 19, 2003, at 10:30 a.m., central daylight savings time.

        The attached Notice of Annual Meeting of Stockholders and Proxy Statement describe fully the formal business to be transacted at the Annual Meeting. During the Annual Meeting, stockholders will consider and vote upon the election of six members to the Board of Directors.

        Certain directors and officers will be present at the Annual Meeting and will be available to respond to any questions you may have. I hope you will be able to attend.

        We urge you to review carefully the accompanying material and to return the enclosed proxy card promptly. Please sign, date and return the enclosed proxy card without delay. If you attend the Annual Meeting, you may vote in person even if you have previously mailed a proxy.

    Sincerely,    

 
 
CHARLES J. WYLY, JR.
Chairman of the Board
 
 

Michaels Stores, Inc.
8000 Bent Branch Drive
Irving, Texas 75063


NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

To be Held on June 19, 2003

        NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders (the "Annual Meeting") of Michaels Stores, Inc. will be held at the Four Seasons Resort and Club, 4150 North MacArthur Boulevard, Irving, Texas on Thursday, June 19, 2003, at 10:30 a.m., central daylight savings time, for the following purposes:

        Information concerning the matters to be acted upon at the Annual Meeting is set forth in the accompanying Proxy Statement.

        The close of business on April 28, 2003 has been fixed as the record date for determining the stockholders entitled to notice of, and to vote at, the Annual Meeting or any adjournments thereof. For a period of at least 10 days prior to the Annual Meeting, a complete list of stockholders entitled to vote at the Annual Meeting will be open for examination by any stockholder during ordinary business hours at our offices at 8000 Bent Branch Drive, Irving, Texas 75063.

        We urge stockholders to complete, date, sign and return the enclosed proxy card in the accompanying envelope, which does not require postage if mailed in the United States.


 
 
By Order of the Board of Directors,

 MARK V. BEASLEY
Secretary
 
 

Irving, Texas
May 6, 2003
 
 
 
 


PROXY STATEMENT
TABLE OF CONTENTS

 
   Page

GENERAL QUESTIONS AND ANSWERS
 
1

PROPOSAL FOR ELECTION OF DIRECTORS
 
4

PRINCIPAL STOCKHOLDERS AND MANAGEMENT OWNERSHIP
 
6

CORPORATE GOVERNANCE
 
8
 
Director Independence
 
8
  Meetings of Non-Management Directors   9
  Board Committees   9
  Governance and Nominating Committee   9
  Compensation Committee   10
  Compensation Committee Interlocks and Insider Participation   10
  Audit Committee   10
  Audit Committee Financial Expert   11

AUDIT COMMITTEE REPORT
 
11

INDEPENDENT AUDITORS' FEES
 
12

COMPENSATION OF DIRECTORS
 
13

COMPENSATION COMMITTEE REPORT
 
13

MANAGEMENT COMPENSATION
 
15
 
Summary Compensation Table
 
15
  Option Grants During Fiscal 2002   16
  Option Exercises During Fiscal 2002 and Fiscal Year-End Option Values   17
  Employment, Severance and Change of Control Agreements   17

EQUITY COMPENSATION PLAN INFORMATION
 
18

STOCK PERFORMANCE CHART
 
19

CERTAIN TRANSACTIONS
 
20

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
 
20

OTHER MATTERS
 
20

ANNUAL REPORT
 
20

FORM 10-K
 
20

STOCKHOLDER PROPOSALS
 
20

Michaels Stores, Inc.
8000 Bent Branch Drive
Irving, Texas 75063

PROXY STATEMENT
For
ANNUAL MEETING OF STOCKHOLDERS
To Be Held On June 19, 2003


GENERAL QUESTIONS AND ANSWERS

Q:
When is the Proxy Statement being mailed?

A:
This Proxy Statement is first being mailed on or about May 6, 2003 to our stockholders by our Board of Directors to solicit proxies for our use at the Annual Meeting.

Q:
When is the Annual Meeting and where will it be held?

A:
The Annual Meeting will be held on Thursday, June 19, 2003, at 10:30 a.m., central daylight savings time, at the Four Seasons Resort and Club, 4150 North MacArthur Boulevard, Irving, Texas.

Q:
Who may attend the Annual Meeting?

A:
All of our stockholders may attend the Annual Meeting.

Q:
Who is entitled to vote?

A:
Stockholders as of the close of business on April 28, 2003 are entitled to vote at the Annual Meeting. Each share of our common stock is entitled to one vote.

Q:
On what am I voting?

A:
You will be voting on:

•
The election of six members to our Board of Directors to serve until the next annual meeting of stockholders; and

•
Such other business as may properly come before the Annual Meeting or any adjournments thereof.

Q:
How do I vote?

A:
You may vote by either attending the Annual Meeting or signing and dating each proxy card you receive and returning it in the enclosed prepaid envelope. We encourage you to complete and send in your proxy card.

        All shares represented by valid proxies, unless the stockholder otherwise specifies, will be voted:

Q:
If I abstain from voting or withhold authority to vote for any director nominee, will my shares be counted in the vote?

A:
If you abstain from voting or elect to withhold authority to vote for any director nominee, your shares will not be counted in the vote for that nominee.

Q:
If my shares are held in "street name" by my broker, will my broker vote my shares for me?

A:
Your broker has limited discretion to vote street name shares without your instructions. For example, your broker could vote your shares without your instructions on the proposal for election of directors but is not required to do so. To be sure your shares are voted, you should instruct your broker to vote your shares using the instructions provided by your broker. If you do not instruct your broker on how to vote your shares, your shares may not be counted in the vote on the proposal for election of directors.

Q:
Can I change my vote after I mail my proxy?

A:
Yes. You can change your vote at any time before your proxy is voted at the Annual Meeting. You may revoke your proxy by:

•
delivering, no later than 5:00 p.m., central daylight savings time, on June 18, 2003, written notice of revocation to Computershare Investor Services, L.L.C., 3020 Legacy Drive, Suite 100-307, Plano, Texas 75023; or

•
attending the Annual Meeting and voting in person. Your attendance alone will not revoke your proxy. You must also vote in person at the Annual Meeting.
Q:
What does it mean if I receive more than one proxy card?

A:
If you receive more than one proxy card, it is because your shares are in more than one account. You will need to sign and return all proxy cards to ensure that all of your shares are voted.

Q:
Who will count the vote?

A:
Representatives of Computershare Investor Services, L.L.C., our transfer agent, will tabulate the votes and act as inspectors of election.

Q:
What constitutes a quorum?

A:
As of April 28, 2003, the record date, 66,559,483 shares of our common stock were issued and outstanding. A majority of the issued and outstanding shares, present or represented by proxy, will constitute a quorum for the transaction of business at the Annual Meeting. If you submit a properly executed proxy card, then your shares will be counted as part of the quorum. Votes that are withheld and broker non-votes will be counted towards a quorum but will be excluded from any vote.

Q:
What is the required vote for election of each director?

A:
The required vote for election of each director is a plurality of the votes of the shares of common stock having voting power present or represented by proxy at the Annual Meeting.

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Q:
How much will this proxy solicitation cost?

A:
We have hired Morrow & Co., Inc. to assist us in the distribution of proxy materials and solicitation of votes at a cost of approximately $7,500, plus out-of-pocket expenses. We will reimburse brokerage firms and other custodians, nominees and fiduciaries for their reasonable out-of-pocket expenses for forwarding proxy and solicitation materials to the owners of our common stock. Our officers and regular employees may also solicit proxies, but they will not be specifically compensated for these services.

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PROPOSAL FOR
ELECTION OF DIRECTORS

        Our Board of Directors has six members, a majority of whom are independent directors. Each director serves until the next annual meeting of stockholders and until his or her successor is duly elected and qualified or until the earlier of his or her resignation, death or removal. In order to be elected as a director, a nominee must receive a plurality of the votes of the shares of common stock having voting power present or represented by proxy at the Annual Meeting.

        The Governance and Nominating Committee has recommended, and our Board has approved, the nomination of the six nominees listed below. The nominees have indicated their willingness to serve as members of the Board if elected; however, in case any nominee becomes unavailable for election to the Board for any reason not presently known or contemplated, the proxy holders have discretionary authority to vote proxies for a substitute nominee or nominees. Proxies cannot be voted for more than six nominees. Set forth below is information as to the nominees for election at the Annual Meeting, including their ages, present principal occupations, other business experiences during the last five years, membership on committees of the Board and directorships in other companies.

Name
   Age
   Position
Charles J. Wyly, Jr.   69   Chairman of the Board of Directors
Sam Wyly   68   Vice Chairman of the Board of Directors
Richard E. Hanlon (1)   55   Director
Richard C. Marcus (2)   64   Director
Liz Minyard (3)   49   Director
Cece Smith (4)   58   Director
(1)
Member of the Compensation Committee and the Governance and Nominating Committee.

(2)
Member of the Audit Committee, the Compensation Committee and the Governance and Nominating Committee.

(3)
Member of the Audit Committee and the Compensation Committee.

(4)
Member of the Audit Committee and the Governance and Nominating Committee.

        Mr. Charles J. Wyly, Jr. became a director in 1984. He served as Vice Chairman of the Board from 1985 until 2001 when he became Chairman of the Board. He co-founded Sterling Software, Inc., a worldwide supplier of software products, in 1981 and, until its acquisition in 2000 by another company, had served as a director and since 1984 as Vice Chairman of the Board. Mr. Wyly served as a director of Sterling Commerce, Inc., a worldwide provider of electronic commerce software and services, from December 1995 until its acquisition in 2000 by another company. Mr. Wyly was a director of Scottish Annuity & Life Holdings, Ltd., a variable life insurance and reinsurance company, from October 1998 until November 2000. Mr. Wyly served from 1964 to 1975 as an officer and director, including serving as President from 1969 to 1973, of University Computing Company. Mr. Wyly and his brother, Sam Wyly, founded Earth Resources Company, an oil refining and silver mining company, and Charles J. Wyly, Jr. served as Chairman of the Board of that company from 1968 to 1980. He was also a founding partner of Maverick Capital, Ltd., a manager of equity hedge funds.

        Mr. Sam Wyly has served as Vice Chairman of the Board of Michaels since July 2001 and a director of Michaels since 1984. He served as Chairman of the Board from 1984 until July 2001. Mr. Wyly is an entrepreneur who has created and managed several public and private companies. He is the general partner of Ranger Capital, Ltd., a Dallas-based hedge fund management company. He founded Maverick Capital, Ltd., another hedge fund manager, in 1990. Mr. Wyly is also a director of Green Mountain Energy Company, a clean energy provider. He founded University Computing Company, which became one of the first computer utility networks and one of the first software product companies. He was a founder and, until its acquisition in 2000 by another company, was Chairman and a director of Sterling Software, Inc. He also was Chairman of the Executive Committee and a director of Sterling Commerce, Inc., until its acquisition in 2000 by another company, and was Chairman and a director of Scottish Annuity & Life Holdings, Ltd. from October 1998 until June 2000.

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        Mr. Hanlon has served as a director of Michaels since April 1990. He retired as Senior Vice President—Investor Relations from AOL Time Warner, Inc. in September 2002, having held that position since January 2001 when that media and communications company was formed. From February 1995 until January 2001, he was a senior executive of America Online, Inc., the world's largest provider of Internet online services. From March 1993 until February 1995, Mr. Hanlon was President of Hanlon & Co., which provided consulting services in shareholder and investor relations, and from 1988 until 1993 was Vice President—Corporate Communications and Secretary of LEGENT Corporation, a major enterprise software company.

        Mr. Marcus became a director of Michaels in July 1999. He currently serves as a management consultant to various organizations and, since January 1997, has served as Senior Advisor to Peter J. Solomon Company, an investment banking company. From December 1994 through December 1995, Mr. Marcus served as Chief Executive Officer of Plaid Clothing Group, a manufacturer of men's tailored clothing. He is currently on the boards of directors of Zale Corporation and Fashionmall.com. Prior to these activities, Mr. Marcus was with Neiman Marcus for 27 years and served as Chairman and Chief Executive Officer from 1979 through 1988.

        Ms. Minyard became a director of Michaels in March 2002. Since 1988, Ms. Minyard has served as Co-Chairman of the Board and, since 1998, as Co-Chief Executive Officer of Minyard Food Stores, Inc., a grocery retailer. She is currently an advisory director to TXU Corp.

        Ms. Smith became a director of Michaels in October 2002. She is Managing General Partner of Phillips-Smith-Machens Venture Partners, a venture capital firm that invests in retail and consumer businesses and that she co-founded in 1986. She is currently on the boards of directors of Brinker International, Inc. and Beautyco, Inc. Ms. Smith served as a director from 1992 to 1997 and as Chairman from 1994 to 1996 of the Federal Reserve Bank of Dallas.

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PRINCIPAL STOCKHOLDERS AND MANAGEMENT OWNERSHIP

        The following table sets forth information as of April 28, 2003 regarding the beneficial ownership of common stock by each person known by Michaels to own five percent or more of the outstanding shares of common stock, each director of Michaels, each Named Executive (as defined in "Management Compensation—Summary Compensation Table" herein), and the directors and executive officers of Michaels as a group. The persons named in the table have sole voting and investment power with respect to all shares of common stock owned by them, unless otherwise noted. The percentage of beneficial ownership is calculated based on 66,559,483 shares of common stock outstanding as of April 28, 2003.

Name of Beneficial Owner
   Amount and
Nature of
Beneficial
Ownership (1)
   Percent
of Class
Charles J. Wyly, Jr.   1,552,154 (2)       2.3%
Sam Wyly   1,455,825 (3)       2.1%
Richard E. Hanlon   87,700 (4)     *
Richard C. Marcus   87,500 (5)     *
Liz Minyard   35,000 (6)     *
Cece Smith   17,500 (7)     *
R. Michael Rouleau   511,970 (8)     *
Edward F. Sadler   121,666 (9)     *
Douglas B. Sullivan   51,664 (10)   *
James F. Tucker   54,962 (11)   *
Capital Research and Management Company
    333 South Hope Street
    Los Angeles, California 90071		   7,495,000 (12)   11.3%
FMR Corp.
    82 Devonshire Street
    Boston, Massachusetts 02109		   3,801,945 (13)     5.7%
Putnam, LLC d/b/a Putnam Investments
    One Post Office Square
    Boston, Massachusetts 02109		   5,257,994 (14)     7.9%
All current directors and executive officers as a group (21 persons)   4,157,553 (15)     6.0%
*
Less than one percent.

(1)
Pursuant to Rule 13d-3 under the Securities Exchange Act of 1934, a person has beneficial ownership of any securities as to which such person, directly or indirectly, through any contract, arrangement, undertaking, relationship or otherwise has or shares voting power and/or investment power or as to which such person has the right to acquire such voting and/or investment power within 60 days. Percentage of beneficial ownership by a person as of a particular date is calculated by dividing the number of shares beneficially owned by such person by the sum of the number of shares outstanding as of such date and the number of unissued shares as to which such person has the right to acquire voting and/or investment power within 60 days. The number of shares shown includes outstanding shares of common stock owned as of April 28, 2003 by the person indicated and shares underlying options owned by such person on April 28, 2003 that are exercisable within 60 days of that date. Persons holding shares of common stock pursuant to the Michaels Stores, Inc. Employees 401(k) Plan, as amended and restated, have sole voting power and investment power with respect to such shares.

(2)
Includes 619,166 shares under options of which 400,000 shares under options are held of record by Stargate, Ltd. (a limited partnership, the general partner of which is a trust of which Mr. Wyly is one of the trustees); 160,000 shares held of record by Stargate, Ltd.; 208,604 shares held of record by Shadywood USA, Ltd. (a limited partnership of which Mr. Wyly is the general partner); and 564,284 shares held of record by family trusts of which Mr. Wyly is the trustee.

(3)
Includes 1,085,833 shares under options; 200,000 shares held of record by Tallulah, Ltd. (a limited partnership of which Mr. Wyly is the general partner); 149,572 shares held of record by family trusts of which Mr. Wyly is the trustee; 6,400 shares held of record by a family trust of which Mr. Wyly's spouse is the trustee; and 14,020 shares owned by Mr. Wyly's spouse.

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(4)
Includes 82,500 shares under options and 10,000 shares under options held of record by a family trust of which Mr. Hanlon is a co-trustee.

(5)
Includes 82,500 shares under options.

(6)
Includes 35,000 shares under options.

(7)
Includes 17,500 shares under options.

(8)
Includes 444,999 shares under options; 5,774 shares owned pursuant to our 401(k) Plan; and 20,000 shares which Mr. Rouleau owns jointly with his spouse.

(9)
Includes 121,666 shares under options.

(10)
Includes 49,999 shares under options.

(11)
Includes 33,334 shares under options; 2,034 shares owned pursuant to our 401(k) Plan; and 14,000 shares which Mr. Tucker owns jointly with his spouse.

(12)
Based on an amendment to the Schedule 13G filed with the Securities and Exchange Commission, dated February 10, 2003, Capital Research and Management Company, a registered investment adviser, has the sole power to dispose or direct the disposition of 7,495,000 shares of common stock but has no power to vote or direct the vote of such shares.

(13)
Based on a Schedule 13G filed with the Securities and Exchange Commission, dated February 14, 2003, FMR Corp., a parent holding company, on behalf of itself and its wholly-owned subsidiaries and certain of its affiliates in their various capacities, has the sole power to vote or direct the vote of 259,935 shares of common stock and has the sole power to dispose or direct the disposition of 3,801,945 shares of common stock.

(14)
Based on an amendment to the Schedule 13G filed with the Securities and Exchange Commission, dated February 5, 2003, Putnam, LLC d/b/a Putnam Investments, on behalf of itself and its parent and wholly-owned subsidiaries in their various capacities, shares the power to vote or direct the vote of 410,577 shares of common stock and shares the power to dispose or direct the disposition of 5,257,994 shares of common stock.

(15)
Includes 2,743,327 shares under options, 10,513 shares owned pursuant to our 401(k) Plan held by 11 executive officers not named in the table and 1,014 shares an executive officer not named in the table owns jointly with his spouse.

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CORPORATE GOVERNANCE

        In 2001, Michaels announced several new initiatives designed to further enhance accountability to its stockholders. These initiatives included:

        In 2003, in the wake of the corporate governance reforms initiated by Congress in passing the Sarbanes-Oxley Act of 2002 and by the Securities and Exchange Commission and the New York Stock Exchange in response to the Sarbanes-Oxley Act, Michaels initiated a corporate governance program to comply as soon as practicable with applicable current requirements newly imposed, as well as most of the proposed rules published, by the Securities and Exchange Commission and the New York Stock Exchange with respect to corporate governance. In undertaking this program, Michaels made the decision to conform its corporate governance to these requirements whether or not the legally effective date of the requirements had occurred and whether or not the rules were still in the proposal stage. In this regard, Michaels has, among other things, adopted Corporate Governance Guidelines, a revised Code of Business Conduct and Ethics, a revised Audit Committee Charter, a Compensation Committee Charter and a Governance and Nominating Committee Charter.

        A copy of the charter for each of our Audit Committee, Governance and Nominating Committee and Compensation Committee and a copy of our Corporate Governance Guidelines and Code of Business Conduct and Ethics are available on our Internet website at www.michaels.com under "Corporate Information." Copies are also available to stockholders upon request from our Investor Relations Department. Our revised Audit Committee Charter is also attached to this Proxy Statement as Exhibit A.

        During fiscal 2002, our Board held nine meetings and acted by unanimous written consent five times. In addition to meetings of the full Board, directors attended meetings of Board committees. All incumbent directors attended at least 75% of all Board meetings and 100% of all applicable committee meetings.


Director Independence

        Our Corporate Governance Guidelines require that a majority of the members of our Board of Directors satisfy the independence requirements set forth in the rules of the New York Stock Exchange. Our Board has adopted categorical independence standards for determining the independence of our directors. Those standards reflect the specific independence requirements of the proposed New York Stock Exchange rules and will become effective when the proposed New York Stock Exchange rules become effective. The standards provide that an independent director is a director who:

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The five-year "lookback" provisions in the standards under the proposed rules of the New York Stock Exchange are limited to periods beginning on the effective date of those rules, and the Board categorical independence standards contain that same limitation.

        Our Board has determined that each of our four independent directors, Richard E. Hanlon, Richard C. Marcus, Liz Minyard and Cece Smith, meets the independence requirements of both the current and proposed rules of the New York Stock Exchange and the categorical independence standards set forth above even if the categorical independence standards were already effective and an actual five-year "lookback" were applied under those rules.


Meetings of Non-Management Directors

        Our Corporate Governance Guidelines require our non-management directors to meet at regularly scheduled executive sessions without management directors. Our Corporate Governance Guidelines provide that the position of presiding director for executive sessions of non-management directors shall be rotated for each meeting among the non-management directors on an alphabetical basis. Stockholders may contact the non-management directors on a confidential basis by mail, with the envelope containing the communication marked "confidential" and addressed as follows: Non-Management Directors, c/o Michaels Stores, Inc., 8000 Bent Branch Drive, Irving, Texas 75063.


Board Committees

        As required by our Corporate Governance Guidelines, our Board has three active standing committees, each of which is required by its charter to consist of no fewer than three directors satisfying the applicable current independence criteria of the New York Stock Exchange. The three members of the Governance and Nominating Committee are Richard E. Hanlon (Chairman), Richard C. Marcus and Cece Smith. The three members of the Compensation Committee are Richard E. Hanlon (Chairman), Richard C. Marcus and Liz Minyard. The three members of the Audit Committee are Richard C. Marcus (Chairman), Liz Minyard and Cece Smith.


Governance and Nominating Committee

        Michaels believes that placing the responsibility for nominating directors in the hands of an independent committee, along with charging that committee with the responsibility of taking a leadership role in shaping Michaels' corporate governance matters, enhances the independence and quality of its Board and of its corporate governance practices. Therefore, under the terms of its charter, which was adopted in April 2003, the Governance and Nominating Committee is charged with the responsibility of identifying individuals qualified to become Board members by recommending to the Board candidates to fill vacancies and newly-created positions on the Board and recommending to the Board director nominees for election by the stockholders at the annual stockholder meeting, including recommendations as to whether incumbent members of the Board should be nominated for re-election to the Board. The Governance and Nominating Committee reviews qualifications of, and makes recommendations to

9

the Board concerning, director nominees submitted by stockholders. At any annual meeting, stockholders may nominate a person for election as a director but only upon notice to the Secretary of Michaels given in accordance with the notice provisions in our Certificate of Incorporation. The Governance and Nominating Committee is also charged with the responsibility of developing and recommending corporate governance principles applicable to the Board members and Michaels' employees. The Governance and Nominating Committee Charter requires the committee to develop and recommend guidelines for that purpose consistent with federal and state law and the rules of the Securities and Exchange Commission and the New York Stock Exchange, giving appropriate attention to "best corporate governance practices." In response to that requirement, the Governance and Nominating Committee developed and recommended, and the Board has adopted, the Corporate Governance Guidelines available on our Internet website. The Governance and Nominating Committee also (i) oversees the evaluation of the performance of the Board and Michaels' management against the Corporate Governance Guidelines; and (ii) reviews possible conflicts of interest. During fiscal 2002, the Governance and Nominating Committee met once and acted by unanimous written consent once.


Compensation Committee

        To further enhance the independence and effectiveness of Michaels' corporate policies and practices, under the terms of its charter, which was also adopted in April 2003, the Compensation Committee reviews, approves and administers Michaels' policies, programs, procedures and objectives for compensating its officers and key employees. The Compensation Committee has the sole authority to determine the compensation of Michaels' Chief Executive Officer and reports that determination to the Board. The Compensation Committee reviews, approves and recommends to the Board the compensation levels of all other executive officers. The Compensation Committee also makes recommendations to the Board with respect to the approval and adoption of all cash- and equity-based incentive compensation plans in which any of Michaels' executive officers participate. The Compensation Committee also reviews Board compensation policies, but only the Board may determine compensation for directors. The Compensation Committee acts as the committee of the Board that administers the 1997 Employees Stock Purchase Plan, the 1997 Stock Option Plan, the 2001 Employee Stock Option Plan and the 2001 General Stock Option Plan. With respect to the 1997 Stock Option Plan, the 2001 Employee Stock Option Plan and the 2001 General Stock Option Plan, the Compensation Committee has the power to grant options and determine the number of shares to be covered by each option under each of those plans. Additionally, with respect to the 1997 Stock Option Plan, the Compensation Committee determines when options will be exercisable under that plan. During fiscal 2002, the Compensation Committee met twice and acted by unanimous written consent twelve times.


Compensation Committee Interlocks and Insider Participation

        During fiscal 2002, Richard E. Hanlon, Richard C. Marcus, Liz Minyard and former director Elizabeth VanStory served as members of the Compensation Committee, and none of them were or have been employees of Michaels.


Audit Committee

        The revised Audit Committee Charter adopted in April 2003 requires that all members of the Audit Committee satisfy the independence criteria of the New York Stock Exchange and Section 301 of the Sarbanes-Oxley Act of 2002. It also requires that the Audit Committee members meet the financial literacy requirements of the New York Stock Exchange rules and that at least one Audit Committee member satisfy the accounting or related financial management expertise standards of the New York Stock Exchange rules and that either that member or another member satisfy the criteria for an "audit committee financial expert," as that term is defined in Securities and Exchange Commission rules. All three members of the Audit Committee meet both the existing and proposed independence requirements and the existing financial literacy requirements of the New York Stock Exchange and the independence requirements of the Securities Exchange Act of 1934. Cece Smith, a member of the Audit Committee, satisfies the accounting or related financial management expertise standards of the New York Stock Exchange and meets the definition of an audit committee financial expert in the Securities and Exchange Commission rules. Under its charter, the Audit Committee is generally responsible for overseeing Michaels' financial reporting process and assists the Board in fulfilling the Board's oversight responsibilities with respect to (i) the integrity of Michaels' financial statements; (ii) Michaels' compliance with legal and regulatory requirements; (iii) the independent auditors' qualifications and independence; and (iv) the performance of the independent auditors

10

and of Michaels' internal audit function. In fulfilling its obligations, the Audit Committee directly appoints, retains, terminates and determines the compensation of the independent auditors. The Audit Committee is also responsible for the resolution of disagreements between management and the independent auditors along with the pre-approval and approval of all audit and non-audit engagement fees, terms and services with the independent auditors in a manner consistent with the Sarbanes-Oxley Act of 2002. Michaels' independent auditors are required to report directly to the Audit Committee concerning, among other things, the auditors' internal quality control procedures, the independence of the auditors and the plans for, and the scope and conduct of, annual audits. The Audit Committee is in the process of developing procedures for (i) receiving and dealing with complaints regarding accounting, internal accounting controls or auditing matters and (ii) the confidential submission by employees of concerns regarding questionable accounting or auditing matters. These procedures will be disclosed on Michaels' website as soon as they are adopted. During fiscal 2002, the Audit Committee met ten times.


Audit Committee Financial Expert

        The Board has determined that at least one of our Audit Committee members, Cece Smith, satisfies the criteria adopted by the Securities and Exchange Commission to serve as the "audit committee financial expert" of Michaels.


AUDIT COMMITTEE REPORT

        The Audit Committee operates under a written charter adopted by the Board of Directors, which was reviewed and revised in April 2003 and is attached to this Proxy Statement as Exhibit A. The Audit Committee Charter requires our Audit Committee to undertake a variety of activities designed to assist our Board in fulfilling its oversight role regarding our auditors' independence, our financial reporting process, our systems of internal controls and our compliance with applicable laws, rules and regulations. These activities are briefly summarized in this Proxy Statement under the caption "Corporate Governance—Audit Committee." The Charter also makes it clear that the independent auditors are ultimately accountable to the Board and the Audit Committee, not management.

        The internal accountants of Michaels prepare its consolidated financial statements and Michaels' independent auditors are responsible for auditing those financial statements. The Audit Committee monitors and reviews the financial reporting processes implemented by management but does not conduct any auditing or accounting reviews. The members of the Audit Committee are not employees of Michaels and do not represent themselves as experts in the field of accounting or auditing. Instead, the Audit Committee relies, without independent verification, on management's representation that the financial statements have been prepared in conformity with generally accepted accounting principles and on the representations of our independent auditors included in their report on our financial statements. The Audit Committee's oversight does not provide them with an independent basis for determining whether management has maintained appropriate accounting and financial reporting principles or policies or appropriate internal controls and procedures designed to assure compliance with accounting standards and applicable laws and regulations. Furthermore, the Audit Committee's discussions with management and its auditors do not insure that the financial statements are presented in accordance with generally accepted accounting principles, that the audit of the financial statements has been carried out in accordance with generally accepted auditing standards or that the independent accountants are in fact "independent."

        We have engaged Ernst & Young LLP as independent auditors to audit and report to our stockholders on our financial statements for fiscal 2003. During fiscal 2002, there were no disagreements with Ernst & Young LLP on any matter of accounting principle or practice, financial statement disclosure or auditing scope or procedure, which, if not resolved to the satisfaction of Ernst & Young LLP, would have caused them to make a reference to the subject matter of the disagreement in connection with its reports.

        The Audit Committee has reviewed and discussed with our management and Ernst & Young LLP, our independent auditors, the audited financial statements of Michaels contained in our Annual Report on Form 10-K for the fiscal year ended February 1, 2003. The Audit Committee has also discussed with our independent auditors the matters required to be discussed pursuant to SAS No. 61 and SAS No. 90 (Codification of Statements on Auditing Standards, Communication with Audit Committees).

11

        The Audit Committee has also received and reviewed the written disclosures and the letter from Ernst & Young LLP required by Independence Standards Board Standard No. 1 ("Independence Discussions with Audit Committees") and has discussed with Ernst & Young LLP their independence.

        Based on the review and discussions referred to above, the Audit Committee recommended to the Board of Directors that the audited financial statements be included in our Annual Report on Form 10-K for the fiscal year ended February 1, 2003, as filed with the Securities and Exchange Commission.

        The Audit Committee considered whether, and concluded that, the provision by Ernst & Young LLP of the services referred to under "Tax Fees" and "All Other Fees" is compatible with maintaining the independence of Ernst & Young LLP.

        This report is submitted by the members of the Audit Committee of the Board of Directors:


INDEPENDENT AUDITORS' FEES

        The following table presents fees for professional audit services rendered by Ernst & Young LLP for the audit of Michaels' annual financial statements for 2001 and 2002, and fees billed for other services rendered by Ernst & Young LLP.

 
   2001
   2002
Audit fees (1)   $448,000   $516,000
Audit-related fees (2)   $175,000   $123,000
Tax fees (3)   $164,000   $102,000
All other fees   None   None
(1)
Audit fees consist principally of fees for the audit of our annual financial statements and review of our financial statements included in our quarterly reports on Form 10-Q for those years.

(2)
Audit-related fees consist principally of fees for pension and statutory audits and registration statements filed with the Securities and Exchange Commission.

(3)
Tax fees consist principally of fees for tax compliance and preparation, tax advice and tax planning. In the table above, under "Tax Fees," $28,102 and $46,418 constituted tax compliance and preparation fees in 2001 and 2002, respectively.

        The Audit Committee Charter requires that the Audit Committee pre-approve all audit and non-audit engagement fees, terms and services in a manner consistent with the Sarbanes-Oxley Act of 2002. The Audit Committee may delegate the authority to grant any pre-approvals to one or more members of the Audit Committee, provided that such member(s) reports any pre-approvals to the Audit Committee at its next scheduled meeting. The Audit Committee has delegated pre-approval authority to Richard C. Marcus, the Chairman of the Audit Committee.

        Representatives of Ernst & Young LLP are expected to be present at the Annual Meeting and will have the opportunity to make a statement if they desire to do so and will be available to respond to appropriate questions.

12


COMPENSATION OF DIRECTORS

        During fiscal 2002, Michaels paid Charles J. Wyly, Jr. $37,500 per month for serving as Chairman of the Board and Sam Wyly $18,750 per month for serving as Vice Chairman of the Board.

        During fiscal 2002, Mr. Hanlon, Mr. Marcus, Ms. Minyard and Ms. Smith each received an annual fee of $24,000 as members of the Board and a fee of $1,000 for attendance at each regular or special Board meeting. Mr. Marcus, Ms. Minyard and Ms. Smith each received a fee of $1,000 for attendance at each meeting of the Audit Committee. Effective as of May 1, 2003, the Board has approved changes to the compensation payable to directors. Currently, Mr. Hanlon, Mr. Marcus, Ms. Minyard and Ms. Smith each receive an annual fee of $48,000 as members of the Board and a fee of $1,500 for attendance at each regular or special Board meeting and for attendance at each meeting of a committee of which they are a member. We also reimburse directors for expenses incurred in attending meetings.

        Upon first election to the Board and immediately following each annual meeting of stockholders thereafter, each Director receives an automatic grant of options exercisable for 17,500 shares of common stock under the 2001 General Stock Option Plan.


COMPENSATION COMMITTEE REPORT

What is our compensation philosophy?

        The objectives of our executive compensation program are to:

        We believe in a total compensation approach, with a greater emphasis on variable components of pay including bonus and stock option appreciation. High performing executives should be well compensated through cash compensation in sufficient amounts to retain such executives and in stock option awards which align such executives with the interests of the stockholders and stimulate focus on long-term stockholder value enhancement.

How is compensation determined?

        The Compensation Committee has the sole authority to determine our Chief Executive Officer's compensation level and reports that determination to the Board. The Compensation Committee reviews, approves and recommends to the Board the compensation level of all other executive officers. In determining or approving compensation levels, the Compensation Committee considers external competitiveness of total compensation, an individual's experience and prior performance as well as our operating performance and the attainment of planned financial and strategic initiatives. The experience, performance and attainment of initiatives are evaluated by the Compensation Committee with no particular weight given to any particular factor.

        In approving the annual plans for executive bonuses, the Compensation Committee provides financial incentives to those members of management who can make an important contribution to our success by tying the bonuses to the attainment of certain financial objectives which may be different from individual to individual. Each participating executive is entitled to a bonus equal to a certain percentage of that executive's salary based upon the attainment of such objectives.

13

        In compensating executive officers and other officers and employees through stock option awards, the Compensation Committee (or the Board as a whole) makes, pursuant to certain option grant guidelines, discretionary grants, based upon the level of responsibility and performance of the individual grantee. The Compensation Committee reviews and approves the guidelines used for such discretionary grants.

How are our incentive compensation programs used to focus management on increasing stockholder value?

        We maintain stock option plans for our directors, officers and employees. We believe that the grant of options aligns executive and stockholder long-term interests by creating a strong and direct link between executive compensation and stockholder return. The grant of options also allows executives to develop and maintain a long-term ownership position in our common stock.

How have we responded to the IRS limits on deductibility of compensation?

        Options granted under our 1997 Stock Option Plan and 2001 General Stock Option Plan are intended to meet the performance based compensation exception to the annual $1,000,000 limitation on the tax deduction we may claim for compensation of certain executives. However, our executive bonus program does not meet the exception to the IRS deduction limitation.

How is the CEO compensated?

        The Compensation Committee solely determines the compensation level of our Chief Executive Officer, Mr. Rouleau. Mr. Rouleau received a base salary of $695,192 during fiscal 2002. Mr. Rouleau's incentive compensation for fiscal 2002, in the form of a bonus, was based upon the attainment of specified financial or performance goals and objectives. With respect to fiscal 2002, Mr. Rouleau received $405,000 in a cash bonus. Mr. Rouleau also received stock options for 100,000 shares of common stock and certain perquisites, including the transfer of a company-owned automobile, valued at $47,440, to Mr. Rouleau in fiscal 2002.

How are the other executive officers compensated?

        Our other executive officers usually receive base salaries, annual cash bonuses, long-term incentive compensation in the form of stock options and various benefits. The Compensation Committee reviews, approves and recommends to the Board the compensation level for our executive officers. The Compensation Committee, in administering the 1997 Stock Option Plan and the 2001 General Stock Option Plan, may also evaluate the executive officers' performance in determining whether to grant any stock options to the executives.

        This report is submitted by the members of the Compensation Committee, which also performs the additional duties of administering the Amended and Restated 1997 Employees Stock Purchase Plan, the 1997 Stock Option Plan, the Amended and Restated 2001 Employee Stock Option Plan and the 2001 General Stock Option Plan:

14


MANAGEMENT COMPENSATION

Summary Compensation Table

        The following table sets forth certain information regarding compensation paid or accrued by Michaels to our Chief Executive Officer and each of our four other most highly compensated executive officers, employed by Michaels at the end of the fiscal year, based on salary and bonus earned during fiscal 2002 (the "Named Executives").

 
    
    
    
    
   Long-Term
Compensation
Awards
    
 
    
   Annual Compensation
    
 
    
   Securities
Underlying
Options/
SARs (#)(1)
    
Name and Principal Position
   Fiscal
Year
   Salary ($)
   Bonus ($)
   Other Annual
Compensation ($)
   All Other
Compensation ($)
R. Michael Rouleau
    President and
    Chief Executive Officer		   2002
2001
2000		   695,192
670,193
632,308		   405,000
390,000
267,500		   85,062(2)
  6,711(2)
18,144(2)		   100,000
200,000
200,000		   60,411(3)
59,632(3)
67,735(3)

Douglas B. Sullivan
    Executive Vice President—
    Development
 
2002
2001
2000
 
299,988
299,988
300,290
 
239,621
149,994
120,000
 
—
—
—
 
  25,000
  50,000
  50,000
 
30,464(4)
32,391(4)
32,959(4)

Charles J. Wyly, Jr.
    Chairman of the
    Board of Directors
 
2002
2001
2000
 
450,000
337,500
225,000
 
—
—
—
 
—
—
—
 
117,500
235,000
100,000
 
—
—
—

Edward F. Sadler
    Executive Vice President—
    Store Operations
 
2002
2001
2000
 
293,269
283,885
275,000
 
128,700
123,750
110,000
 
—
  7,798(6)
28,000(6)
 
  25,000
  50,000
  37,500
 
19,811(5)
17,434(5)
89,065(5)

James F. Tucker
    Executive Vice President—
    Chief Information Officer
 
2002
2001
2000
 
266,462
258,077
248,462
 
130,000
125,000
  96,000
 
—
—
—
 
  25,000
  50,000
  50,000
 
14,698(7)
12,128(7)
12,135(7)
(1)
Options to acquire shares of common stock. The number of options included for fiscal 2000 and 2001 have been adjusted to retroactively reflect a two-for-one stock split effected in the form of a stock dividend to stockholders of record as of the close of business on November 12, 2001.

(2)
The amount shown includes (i) the personal use of a company-owned automobile of $22,126 in fiscal 2002 and the transfer of that automobile, valued at $47,440, to Mr. Rouleau in fiscal 2002, and (ii) income taxes paid by Michaels in the amount of $6,608, $6,711 and $18,144 in fiscal 2002, 2001 and 2000, respectively.

(3)
The amounts shown include (i) life insurance premiums paid by Michaels in the amount of $39,555, $39,526 and $39,516 in fiscal 2002, 2001 and 2000, respectively, (ii) annual matching contributions paid by Michaels for Mr. Rouleau's account pursuant to our Deferred Compensation Plan in the amount of $18,855, $15,075 and $23,039 in fiscal 2002, 2001 and 2000, respectively, and (iii) annual matching contributions paid by Michaels for Mr. Rouleau's account pursuant to our 401(k) Plan in the amount of $2,001, $5,031 and $5,180 in fiscal 2002, 2001 and 2000, respectively.

(4)
The amounts shown include (i) life insurance premiums paid by Michaels in the amount of $21,465, $19,792 and $19,460 in fiscal 2002, 2001 and 2000, respectively, (ii) annual matching contributions paid by Michaels for Mr. Sullivan's account pursuant to our Deferred Compensation Plan in the amount of $8,384, $8,953 and $9,113 in fiscal 2002, 2001 and 2000, respectively, and (iii) annual matching contributions paid by Michaels for Mr. Sullivan's account pursuant to our 401(k) Plan in the amount of $615, $3,646 and $4,386 in fiscal 2002, 2001 and 2000, respectively.

(5)
The amounts shown include (i) life insurance premiums paid by Michaels in the amount of $7,300, $7,268 and $7,244 in fiscal 2002, 2001 and 2000, respectively, (ii) annual matching contributions paid by Michaels for Mr. Sadler's account pursuant to our Deferred Compensation Plan in the amount of $10,804, $5,015 and $7,754 in fiscal 2002, 2001 and 2000, respectively, (iii) annual matching contributions paid by Michaels for Mr. Sadler's account pursuant to our 401(k) Plan in the amount of $1,707, $5,151 and $1,714 in fiscal 2002, 2001 and 2000, respectively, and (iv) relocation expenses paid for by Michaels in the amount of $72,353 in fiscal 2000.

(6)
Income taxes paid by Michaels on taxable relocation expenses.

(7)
The amounts shown include (i) life insurance premiums paid by Michaels in the amount of $2,954, $2,946 and $2,943 in fiscal 2002, 2001 and 2000, respectively, (ii) annual matching contributions paid by Michaels for Mr. Tucker's account

15

pursuant to our Deferred Compensation Plan in the amount of $9,835, $4,294 and $4,008 in fiscal 2002, 2001 and 2000, respectively, and (iii) annual matching contributions paid by Michaels for Mr. Tucker's account pursuant to our 401(k) Plan in the amount of $1,909, $4,888 and $5,184 in fiscal 2002, 2001 and 2000, respectively.


Option Grants During Fiscal 2002

        The following table provides information related to options granted to the Named Executives during fiscal 2002.

Individual Grants
   Potential Realizable
Value at Assumed
Annual Rates of
Stock Price Appreciation
for Option Term(1)
Name
   Number of
Securities
Underlying
Options/SARs
Granted (#)(2)
   % of Total
Options/SARs
Granted to
Employees in
Fiscal Year
   Exercise
or Base
Price  ($/Sh)(3)
   Expiration Date
   5% ($)
   10% ($)
R. Michael Rouleau   100,000(4)   5.58   34.10   08/06/2007   942,120   2,081,839
Douglas B. Sullivan     25,000(4)   1.40   34.10   08/06/2007   235,530      520,460
Charles J. Wyly, Jr.   100,000(4)
  17,500 (5)		   5.58
0.98		   34.10
42.25		   08/06/2007
06/19/2007		   942,120
204,276		   2,081,839
   451,396
Edward F. Sadler     25,000(4)   1.40   34.10   08/06/2007   235,530      520,460
James F. Tucker     25,000(4)   1.40   34.10   08/06/2007   235,530      520,460
(1)
The potential realizable value portion of the foregoing table illustrates value that might be realized upon exercise of the options immediately prior to the expiration of their term, assuming the specified compounded rates of appreciation on our common stock over the term of the options. These numbers do not take into account provisions of certain options providing for termination of the options following termination of employment, nontransferability or vesting over periods. The use of the assumed 5% and 10% returns is established by the Securities and Exchange Commission and is not intended by Michaels to forecast possible future appreciation of the price of our common stock.

(2)
Options to acquire shares of our common stock.

(3)
The option exercise price may be paid in shares of common stock owned by the Named Executives, in cash, or in any other form of valid consideration or a combination of any of the foregoing, in some cases as determined by the Board of Directors or the Compensation Committee in their discretion. The exercise price of each option was equal to the fair market value of the common stock on the date of grant.

(4)
Stock options will become exercisable with respect to 1/3 of the shares covered thereby on each of August 7, 2003, August 7, 2004 and August 7, 2005.

(5)
Stock options are fully exercisable.

16


Option Exercises During Fiscal 2002 and Fiscal Year-End Option Values

        The following table provides information related to options exercised by the Named Executives during fiscal 2002 and the number and value of options held at fiscal year-end. Michaels does not have any outstanding stock appreciation rights.

 
    
    
   Number of Securities
Underlying Unexercised
Options/SARs at Fiscal
Year End (#)(1)
   Value of Unexercised
In-the- Money
Options/SARs at Fiscal
Year End ($)(2)
 
   Shares Acquired
on Exercise (#)
   Value
Realized ($)(3)
Name
   Exercisable
   Unexercisable
   Exercisable
   Unexercisable
R. Michael Rouleau   125,000   3,927,191   474,999        300,001     7,792,654   2,560,346
Douglas B. Sullivan     50,000   1,326,221     49,999          75,001        641,904      640,096
Charles J. Wyly, Jr.   —   —   619,166(4)   233,334   12,841,001   1,702,009
Edward F. Sadler     20,000      585,008   121,666          70,834     1,892,112      586,446
James F. Tucker     33,333      822,155     33,334          75,001        532,559      640,096
(1)
The number of shares has been adjusted to retroactively reflect a two-for-one stock split effected in the form of a stock dividend to stockholders of record as of the close of business on November 12, 2001.

(2)
The closing price for our common stock as reported on the New York Stock Exchange on January 31, 2003, the last trading day of fiscal 2002, was $33.75. Value is calculated on the basis of the difference between the option exercise price and $33.75 multiplied by the number of shares of common stock underlying the option.

(3)
Value realized is calculated based on the difference between the aggregate exercise price of the options exercised and the aggregate market value of the shares of common stock acquired on the date of exercise.

(4)
Includes 400,000 options held of record by Stargate, Ltd. (a limited partnership of which Mr. Wyly is the general partner).


Employment, Severance and Change of Control Agreements

        In March 2001, Michaels entered into a new employment agreement with R. Michael Rouleau, the President and Chief Executive Officer of Michaels, and that employment agreement was amended as of July 16, 2002. The employment agreement is for a term expiring on January 31, 2006 with provisions for annual automatic one-year extensions unless Michaels gives notice of non-extension 120 days prior to any expiration date. Under the employment agreement, Mr. Rouleau is entitled to receive an annual base salary of $675,000, or such higher amount as the Board of Directors or Compensation Committee shall determine, and standard executive officer benefits. Additionally, he is allowed to participate in a bonus plan in any year in which a bonus plan is established. For fiscal 2002, Mr. Rouleau received a bonus of $405,000 pursuant to a bonus plan based upon the attainment by Michaels of specified financial or performance goals. Upon a change of control of Michaels or if Michaels terminates Mr. Rouleau's employment (other than for cause) prior to the expiration of the employment agreement, Mr. Rouleau is entitled to continue to receive his base salary and other benefits until January 31, 2006 and a prorated bonus for the fiscal year in which the termination occurs if Mr. Rouleau would have earned a bonus in that year. If Mr. Rouleau's employment is terminated for any reason, at any time, (i) all unvested options then held by him will immediately become fully exercisable and, if Mr. Rouleau was terminated for any reason other than for cause, the expiration date for those options will automatically be extended to the date that is one day prior to the fifth anniversary of his termination date, (ii) Mr. Rouleau will be entitled to the value of any unvested interest he may have in our 401(k) Plan, and (iii) Mr. Rouleau will automatically become the owner of his Company-paid whole life insurance policy.

        Michaels has an agreement with Douglas B. Sullivan, an executive officer of Michaels, which provides for his employment by Michaels if a change of control of Michaels occurs during the term of the agreement for a salary not less than his annual salary immediately preceding the change of control and allows him to participate in bonuses with other key management personnel of Michaels. This agreement expires on April 5, 2005 subject to an automatic extension to April 5, 2006 if a change of control of Michaels occurs prior to April 5, 2005. This agreement requires Michaels to pay to Mr. Sullivan, if his employment is terminated within one year of a change of control, a sum equal to his salary and bonus, and the value of benefits and perquisites provided, during the twelve-month period immediately preceding termination, plus credit for an additional twelve months service for pension benefits purposes and certain healthcare benefits for such twelve-month period.

17


EQUITY COMPENSATION PLAN INFORMATION

        The following table provides information as of February 1, 2003 with respect to shares of Michaels common stock that may be issued under our existing equity compensation plans, including the Amended and Restated 1997 Employees Stock Purchase Plan, the 1997 Stock Option Plan, the Amended and Restated 2001 Employee Stock Option Plan and the 2001 General Stock Option Plan.

Plan Category
   Number of shares
of common stock to
be issued upon exercise
of outstanding options,
warrants and rights
   Weighted-average
exercise price of
outstanding options,
warrants and rights
   Number of shares of
common stock remaining
available for future
issuance under equity
compensation plans
(excluding shares of
common stock
reflected in column (a))
 
   (a)

   (b)

   (c)
Equity compensation plans
    approved by stockholders		    
 
Stock option plans (1)(2)
 
5,351,283
 
$18.3236
 
3,936,944
 
1997 Employees Stock
    Purchase Plan
 
Not applicable
 
Not applicable
 
1,661,332

Equity compensation plans not
    approved by stockholders (2)(3)
 
2,160,712
 
$27.6168
 
3,562,424
(1)
Includes the 1997 Stock Option Plan and the 2001 General Stock Option Plan.

(2)
The number of shares of common stock to be issued upon exercise of options and the number of shares remaining available for future issuance are approximate, because such numbers are affected by out-of-period adjustments for options which terminate without exercise in connection with termination of employment. Shares of common stock included in such options are required to be deducted from column (a) and added to column (c), since shares covered by terminated options return to the authorized capacity under the option plans. Out-of-period adjustments are not material.

(3)
The Amended and Restated 2001 Employee Stock Option Plan.

        The 2001 Employee Stock Option Plan was adopted by our Board of Directors on July 23, 2001. In the second quarter of fiscal 2002, our Board amended and restated the 2001 Employee Stock Option Plan to increase the total number of shares authorized for issuance by an additional 4,000,000 shares to an aggregate of 6,000,000 shares of common stock. Under the 2001 Employee Stock Option Plan, stock options are granted to eligible employees of Michaels and its subsidiaries but may not be granted to executive officers and directors. Stock options are granted with an exercise price equal to the fair market value of our common stock on the date of grant and generally become exercisable with respect to 1/3 of the shares covered thereby on each of the three anniversary dates following the date of grant. The 2001 Employee Stock Option Plan is included as Exhibit 99.1 in our Current Report on Form 8-K filed with the Securities and Exchange Commission on July 29, 2002.

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STOCK PERFORMANCE CHART

        The following chart compares the yearly changes in the total stockholder return on our common stock against two other measures of performance. The comparison is on a cumulative basis for our last five fiscal years. The two other performance measures are the Dow Jones US Total Market Index (previously known as the Dow Jones Equity Market Index) and the Dow Jones Retail—Other Specialty Index. In each case, we assumed an initial investment of $100 on January 30, 1998. Dates on the following chart represent the last trading day of the indicated fiscal year. We paid no cash dividends during such five-year period.

STOCK PERFORMANCE
Comparison of Five Fiscal Year Total Return

         GRAPHIC

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CERTAIN TRANSACTIONS

        In fiscal 2002, we paid $240,856 in salary to Donald R. Miller, Jr., Vice President—Market Development of Michaels. Mr. Miller also earned (i) a bonus of $117,500, (ii) $18,390 for the personal use of a company-owned automobile and the transfer of that automobile, valued at $55,892, to Mr. Miller, and (iii) $2,605 for other employee benefits. In fiscal 2002, Michaels granted options to Mr. Miller exercisable for 25,000 shares of common stock at an exercise price of $34.10 per share, the fair market value of a share of common stock on the date of grant. Mr. Miller is the son-in-law of Charles J. Wyly, Jr.


SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

        Section 16(a) of the Securities Exchange Act of 1934 requires our officers and directors and persons who own more than 10% of a registered class of our equity securities to file initial reports of ownership and reports of changes in ownership with the Securities and Exchange Commission. Such persons are required by regulation of the Securities and Exchange Commission to furnish us with copies of all Section 16(a) forms they file. Based solely on our review of the copies of such forms or written representations from certain reporting persons received by us with respect to fiscal 2002, we believe that our officers and directors and persons who own more than 10% of a registered class of our equity securities have complied with all applicable filing requirements.


OTHER MATTERS

        We do not know of any other matters to be presented or acted upon at the Annual Meeting. If any other matter is presented at the Annual Meeting on which a vote may properly be taken, the shares represented by proxies will be voted in accordance with the judgment of the proxy holders.


ANNUAL REPORT

        The Annual Report to Stockholders of Michaels, including financial statements for the fiscal year ended February 1, 2003, accompanies this Proxy Statement. The Annual Report is not to be deemed part of this Proxy Statement.


FORM 10-K

        Copies of our Annual Report on Form 10-K (excluding exhibits) filed with the Securities and Exchange Commission are available, without charge, upon written request to Michaels Stores, Inc., 8000 Bent Branch Drive, Irving, Texas 75063, Attention: Investor Relations Department. Exhibits to the Form 10-K will be furnished upon payment of a fee of $0.50 per page to cover our expenses in furnishing the exhibits.


STOCKHOLDER PROPOSALS

        To be considered for inclusion in our proxy statement for our 2004 annual meeting of stockholders, proposals of stockholders must be in writing and received by us no later than January 7, 2004. To be presented at the 2003 annual meeting of stockholders without inclusion in our proxy statement for such meeting, proposals of stockholders must be in writing and received by us no later than March 5, 2004. Such proposals should be mailed to Michaels Stores, Inc., P.O. Box 619566, DFW, Texas 75261-9566 and directed to the Secretary of Michaels.


 
 
By Order of the Board of Directors,

 MARK V. BEASLEY
Secretary
 
 

Irving, Texas
May 6, 2003
 
 
 
 

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EXHIBIT A

MICHAELS STORES, INC.

AUDIT COMMITTEE CHARTER

Purposes

        The purposes of the Audit Committee of the Board of Directors of Michaels Stores, Inc. are to assist the Board in fulfilling the Board's oversight responsibilities with respect to:


        The Committee shall also have the responsibility to prepare the Committee's report, made pursuant to the Securities Exchange Act of 1934 (the "Exchange Act"), to be included in the Company's annual proxy statement.

Composition of the Committee

        Number.    The Committee shall consist of no fewer than three members of the Board.

        Qualifications.    Each Committee member shall have all of the following qualifications:

        Appointment and Removal.    The Board appoints Committee members and appoints a Committee Chairman from among those members. Each Committee member shall serve at the pleasure of the Board for such term as the Board may decide or until such Committee member is no longer a Board member.


Duties and Responsibilities of the Committee

        The Committee is responsible for overseeing the Company's financial reporting process on behalf of the Board. Management is responsible for the preparation, presentation and integrity of the Company's financial statements and for the appropriateness of the accounting and reporting policies that are used by the Company. The independent auditors are responsible for auditing the Company's financial statements and for reviewing the Company's interim financial statements. The independent auditors are ultimately accountable to the Board and the Committee, as representatives of the Company's stockholders. As used in this Charter, the term "independent auditor" means any independent auditor, including one constituting a "registered public accounting firm" (as defined in Section 2(a)(12) of the Sarbanes-Oxley Act of 2002), engaged for the purpose of preparing or issuing an audit report or performing other audit review or attest services for the Company.

        In performing its responsibilities:

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Meetings of the Committee

        The Committee shall meet in person or telephonically at least quarterly, or more frequently as it may determine necessary, to comply with its responsibilities as set forth herein. The Committee Chairman shall, in consultation with the other members of the Committee, the Company's independent auditors and the appropriate officers of the Company, be responsible for calling meetings of the Committee, establishing agenda therefor and supervising the conduct thereof. Any Committee member may submit items to be included on the agenda. Committee members may also raise subjects that are not on the agenda at any meeting. The Committee Chairman or a majority of the Committee members may call a meeting of the Committee at any time. A majority of the number of Committee members shall constitute a quorum for conducting business at a meeting of the Committee. The act of a majority of Committee members present at a Committee meeting at which a quorum is in attendance shall be the act of the Committee, unless a greater number is required by law, the Company's certificate of incorporation or bylaws, or this Charter.

        The Committee may request any officer or employee of the Company or the Company's outside legal counsel or independent auditors to attend a meeting of the Committee or to meet with any member, consultant or retained expert of the Committee. The Committee shall meet with the Company's management, the staff responsible for the internal audit function and the independent auditors periodically in separate private sessions to discuss any matter that the Committee believes should be discussed privately.

Resources and Authority of the Committee

        The Committee shall have the resources and authority appropriate, in the Committee's discretion, to discharge its responsibilities and carry out its duties as required by law, including access to all books, records, facilities and personnel of the Company and the authority to engage outside auditors for special audits, reviews and other procedures and to engage independent counsel and other advisors, experts or consultants. In addition, by adoption of this Charter, the Board authorizes funding for the Committee appropriate, in the Committee's discretion, for the discharge of the Committee's functions and responsibilities. The Committee may also, to the extent it deems necessary or appropriate, meet with the Company's investment bankers or financial analysts who follow the Company.

Audit Committee Report

        The Committee, with the assistance of management, the independent auditors and outside legal counsel, shall prepare the audit committee report to be included in the Company's proxy statement relating to the Company's annual meeting of stockholders.

Annual Review of Charter

        Annually, the Committee shall conduct a review and reassessment of the adequacy of this Charter as required by the rules of the New York Stock Exchange and for the giving of the affirmation required by such rules, and recommend any changes to the Board. The Committee shall conduct this charter review and reassessment in such manner as the Committee, in its business judgment, deems appropriate.

Annual Performance Evaluation

        The Committee will conduct and review with the Board annually an evaluation of the Committee's performance with respect to the requirements of this Charter. The Committee shall conduct this evaluation in such manner as the Committee, in its business judgment, deems appropriate.

        This Charter will be included on the Company's website and will be made available in print to any stockholder of the Company who submits a request to the Secretary for a copy of this Charter. The Company's annual report to stockholders will state that this Charter is available on the Company's website and will be available in print to any stockholder of the Company who submits to the Secretary a request for a copy of this Charter.

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Proxy—Michaels Stores, Inc.

PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FOR THE 2003 ANNUAL MEETING OF STOCKHOLDERS
JUNE 19, 2003

The undersigned hereby appoints Jeffrey N. Boyer and Mark V. Beasley, each with power to act without the other and with full power of substitution, as proxies to vote, as designated below, all stock of Michaels Stores, Inc. owned by the undersigned at the 2003 Annual Meeting of Stockholders to be held at the Four Seasons Resort and Club, 4150 North MacArthur Boulevard, Irving, Texas on Thursday, June 19, 2003, at 10:30 a.m. central daylight savings time, or any adjournment thereof, upon such business as may properly come before the meeting or any adjournment thereof.

UNLESS OTHERWISE MARKED, THIS PROXY WILL BE VOTED FOR THE ELECTION OF EACH OF THE NOMINEES NAMED AND IN THE DISCRETION OF THE PROXY HOLDERS ON ANY OTHER MATTER THAT MAY PROPERLY COME BEFORE THE MEETING OR ANY ADJOURNMENT THEREOF.

YOUR VOTE IS IMPORTANT!

PLEASE VOTE, SIGN, DATE AND RETURN THIS PROXY CARD PROMPTLY USING THE ENCLOSED ENVELOPE.

(Continued and to be signed and dated on reverse side)

Michaels Stores, Inc.

          o Mark this box with an X if you have made changes to your name or address details above.

Annual Meeting Proxy Card

A. Election of Directors

1.
The Board of Directors Recommends a Vote FOR the Listed Nominees.

    For   Withhold       For   Withhold
01—Charles J. Wyly, Jr.   o   o   04—Richard C. Marcus   o   o

02—Sam Wyly
 
o
 
o
 
05—Liz Minyard
 
o
 
o

03—Richard E. Hanlon
 
o
 
o
 
06—Cece Smith
 
o
 
o

2.   In their discretion on any other matter that may properly come before the meeting or any adjournment thereof.    




B. Authorized Signatures—Sign Here—This section must be completed for your instructions to be executed.

Please sign exactly as your name appears hereon and mail promptly this proxy card in the enclosed envelope. Joint owners should each sign. When signing as attorney, administrator, executor, guardian or trustee, please give your full title as such. If executed by a corporation, the proxy should be signed by a duly authorized officer. If executed by a partnership, please sign in the partnership name by an authorized person.

Signature 1—Please keep signature within the box
   Signature 2—Please keep signature within the box
   Date (mm/dd/yyyy)