Our future looks bright...

We have spent considerable time the last three years repositioning our Company. This repositioning is divided into two distinct parts - financial and operational. We accomplished the financial turnaround quickly and have sustained it.

The operational turnaround required to run great stores takes much more time. It takes modern systems, distribution facilities that work, inventory management tools, supportive vendors, experienced retail management, impactful advertising, great buyers, great store managers and on and on. Significant store operating improvements couldn't be made until the tools necessary to make a visible difference were in place, and three years ago, we just didn't have much to work with. In fact, it could be said that for the last three years, we have been putting in place the tools we need for the operational turnaround. With those tools in hand, we are now prepared to start in 1999.

I like to describe the last three years this way. 1996 was the year where we dedicated our total efforts to our financial turnaround. We very successfully accomplished this challenge in a very short time and returned the Company to profitability by year-end.

In 1997, we spent considerable time determining what investments were needed at Michaels to support the long-term profitable growth of the Company. We also developed our Company strategy, which we call "Directions for Michaels" and out of that strategy came the "Four Cornerstones" to our future success. These Cornerstones are 1) An Exciting Store, 2) Effective Distribution Centers, 3) Modern Systems, and 4) Disciplined Inventory Management and Control. With these Cornerstones identified, we then established Company initiatives to support this repositioning. We ended 1997 with another successful financial performance and a clear direction.

In 1998, we pressed hard on our Company initiatives and as a result made significant progress with our ability to support the implementation of our "Four Cornerstones" strategy. For the year, we generated another successful financial performance as our momentum continued.

While we are very pleased with our recent financial performance, the development of a Company strategy and our progress on our initiatives in 1997-98 have positioned us to now grow comparable store sales and make real progress in the operation of our stores. Improvements in merchandise content, store in-stocks, and customer service and satisfaction are expected to manifest themselves in sustained sales and profit growth for Michaels.

A significant acquisition consisting of 16 competitor's stores primarily in the Baltimore/Washington, D.C. market earlier this year positioned us to dominate a very large and important market. It would have taken us years to position ourselves this strongly in a major market by only opening new stores.

We greatly appreciate the commitment and dedication of our vendor partners and our more than 20,000 associates. The last three years have not been easy, but the steps that we have taken were necessary ones in order to provide a firm foundation for our Company's profitable future growth.

We continue to be very pleased, not only with this past year's financial results, but with the building blocks which have been put in place for the future. As we look forward, important initiatives will include the building of Michaels' brand name and the development of e-commerce on the World Wide Web.

We are committed to building our traditional and non-traditional businesses prudently. This year we will begin embracing Economic Value Added (EVA) as a concept to allocate capital and compensate our management. Our $20 million repurchase of Michaels' stock was an EVA-inspired action.

We believe strongly that the best years are still ahead for Michaels and we look forward with anticipation to 1999 and beyond.