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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-K
  þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from to
 Commission file number 000-23157
 A.C. MOORE ARTS & CRAFTS, INC.
 (Exact name of registrant as specified in its charter)
 Pennsylvania
    
    22-3527763(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification No.)130 A.C. Moore Drive, Berlin, New Jersey
    
    08009(Address of principal executive offices)
    
    (Zip Code)
 (856) 768-4930
 Common stock, no par value  (Title of class)
 None
 o þ
 o þ
 þ o
 þ
  o þ o
 o þ
 (1)




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DOCUMENTS INCORPORATED BY REFERENCE
  
 (1)
    
    The aggregate market value of the voting stock set forth above equals the number
of shares of the registrants common stock outstanding, reduced by the number of shares of common
stock held by executive officers, directors and shareholders owning in excess of 10% of the
registrants common stock, multiplied by the last reported sale price for the registrants common
stock on the last business day of the registrants most recently completed second fiscal quarter.
The information provided shall in no way be construed as an admission that any person whose
holdings are excluded from this figure is an affiliate of the registrant or that any person whose
holdings are included in this figure is not an affiliate of the registrant and any such admission
is hereby disclaimed. The information provided herein is included solely for record keeping
purposes of the Securities and Exchange Commission.




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TABLE OF CONTENTS  PART IITEM 1. BUSINESS.ITEM 1A. RISK FACTORS.ITEM 1B. UNRESOLVED STAFF COMMENTSITEM 2. PROPERTIESITEM 3. LEGAL PROCEEDINGSITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSPART IIITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIESITEM 6. SELECTED FINANCIAL DATAITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING ANDITEM 9A. CONTROLS AND PROCEDURESITEM 9B. OTHER INFORMATIONPART IIIITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTITEM 11. EXECUTIVE COMPENSATIONITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERSITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONSITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICESPART IVITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULESSIGNATURESEXHIBIT INDEXAmendment to Articles of IncorporationEmployment Agreement Amy RhoadesFirst Amendment to Employment Agreement Dated July 24, 2006Promissory Note and Loan Modification Agreement Dated March 12, 2007Subsidiaries of the CompanyConsent of PricewaterhouseCoopers LLPCertification of Rick A. LepleyCertification of Marc KatzCertification of Rick A. Lepley Pursuant to 18 U.S.C.Section 1350Certification of Marc Katz Pursuant to 18 U.S.C. Section 1350    Table of Contents  Cautionary Statement Relating to Forward-Looking Statements
 As used herein, unless the context otherwise requires, all references to A.C. Moore, the
Company, we, our, us and similar terms in this report refer to A.C. Moore Arts & Crafts,
Inc. together with its subsidiaries.
 Certain oral statements made by our management from time to time and certain statements
contained herein or in other reports filed by us with the Securities and Exchange Commission or
incorporated by reference herein or therein are forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange
Act of 1934, as amended (Exchange Act), with respect to our results of operations and our
business. All such statements, other than statements of historical facts, including those
regarding market trends, our financial position and results of operations, business strategy,
projected costs, and plans and objectives of management for future operations, are forward-looking
statements. In general, such statements are identified by the use of forward-looking words or
phrases including, but not limited to, intended, will, should, may, believes, expects,
expected, anticipates and anticipated or the negative thereof or variations thereon or
similar terminology. These forward-looking statements are based on our current expectations.
Although we believe that the expectations reflected in forward- looking statements are reasonable,
there can be no assurance that such expectations will prove to be correct. These forward-looking
statements represent our current judgment. We disclaim any intent or obligation to update our
forward-looking statements. Because forward-looking statements involve risks and uncertainties,
our actual results could differ materially. Important factors that could cause actual results to
differ materially from our expectations (Cautionary Statements) include those that are discussed
in this Annual Report on Form 10-K , particularly in Item 1. Business, Item 1A. Risk Factors and
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations.
All subsequent written and oral forward-looking statements attributable to us or persons acting on
our behalf are expressly qualified in their entirety by the Cautionary Statements.
 
 PART I
 
 ITEM 1. BUSINESS.
 Our Company




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Our Market
  Craftrends
 Our Merchandise
  
    
    Art Supplies and Scrapbooking: paints, brushes, canvas, drawing tools,
rubber stamps and stationery, scrapbooking supplies and stencils.
    
    Traditional Crafts: stitchery, yarn, cake and candy making supplies, glass
crafts, wood crafts, kids crafts, felt, glitter, dollmaking, dollhouses and furniture,
and instructional books.
    
    Floral, Floral Accessories and Silk Plants: silk flowers, silk plants,
accessories like vases and other products to assist in the arrangement of flowers and
pre-made and custom made floral arrangements.
    
    Fashion Crafts: t-shirts and sweatshirts, decorative items like patches and
rhinestones, and jewelry making supplies like beads.
    
    Frames: custom framing, ready-made frames, frame hardware and accessories,
framed art and prints.
    
    Home Décor: ribbon and lace, wedding-related items, potpourri, candles,
candle making supplies, wicker baskets, decorative storage containers and childrens
furniture.
 2




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
    
    Seasonal Items: craft making materials, decorations and floral products for
all major holidays and seasons, including Christmas, Fall/Halloween, Spring/Easter,
Valentines Day and St. Patricks Day.
 Recent Developments in Business and Operating Strategy
   Selling, general and administrative expense reduction
  
    
    Store payroll costs.We introduced a new store general manager compensation
plan based on pay-for-performance beginning in January 2007. Bonuses earned in one
year are no longer rolled into base salary for the coming year. We also tested
different store staffing models, including an appropriate mix of full- and
part-time team members, in the second half of 2006 that we believe will assist us
in improving our results of operations through payroll savings.
    
    Advertising spending.We are in the process of experimenting with the reach,
frequency and timing of our advertisements. During the fourth quarter of 2006, we
moved approximately 75% of our print advertising from a mid-week, varying between
Wednesday, Thursday and Friday, to Sunday. While we are still analyzing the
results from this change, we believe that a uniform approach within the chain to
advertising strategy will result in overall efficiencies.
    
    Real estate site location strategy.We believe that our selling, general and
administrative expenses may be significantly reduced if we increase store openings
in existing markets in order to leverage advertising costs. In the future, we
intend to increase store density in existing markets. In addition, previously we entered new markets opening only a single store. When we enter new
markets in the future, as appropriate, we intend to open more than one store at the same time that
we enter that market.
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Inventory reduction
  Improved information technology
  Globally sourced and private label products
  Centrally directed operations
  Business and Operating Strategy
  We
strive to offer the broadest and deepest assortment of arts, crafts and floral merchandise.
  4




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We strive to maintain a superior in-stock merchandise position.
  We strive to operate exciting, easy-to-shop stores.
  We strive to drive sales and optimize profit through merchandising creativity.
  We strive to provide superior price/value for our customers.
  Growth Strategy
   5




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Merchandising
   Year Ended December 31,2006
    
    2005
    
    2004Art & scrapbooking
    
    
    25.2
    %
    
    
    24.6
    %
    
    
    24.8
    %Traditional crafts
    
    
    25.8
    
    
    
    28.4
    
    
    
    29.4Floral and accessories
    
    
    12.1
    
    
    
    12.0
    
    
    
    12.2Fashion crafts
    
    
    9.8
    
    
    
    9.6
    
    
    
    7.6Frames
    
    
    9.3
    
    
    
    8.6
    
    
    
    9.2Home décor
    
    
    13.6
    
    
    
    12.9
    
    
    
    13.3Seasonal items
    
    
    4.2
    
    
    
    3.9
    
    
    
    3.5Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
  6




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Stores
  Store layout and operations
  Store management and training
  7




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Purchasing
    
    
    the largest 25 domestic vendors accounted for approximately 48% of our
purchases,
    
    the largest vendor, SBARS, Inc., a distributor of arts and crafts
merchandise, accounted for approximately 22% of our purchases, and
    
    approximately 13% of our merchandise, primarily floral and seasonal items,
was directly imported from foreign manufacturers or their agents, almost exclusively
from the Peoples Republic of China.
  8




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Distribution
     Marketing
 Craftrends
  www.acmoore.com
 9




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Information Technology
     Competition
  
    
    Multi-store arts and crafts retailers. This category includes several
multi-store arts and crafts chains operating more than 35 stores and comprises:
Michaels Stores, Inc., a chain which operates approximately 925 Michaels stores
throughout the United States and Canada; Jo-Ann Stores, Inc., which operates
approximately 630 traditional Jo-Ann Fabrics and Crafts stores and 175 Jo-Ann
superstores nationwide; Hobby Lobby Stores, Inc., a chain which operates approximately
390 stores primarily in the midwest United States; Garden Ridge, Inc., which operates
approximately 35 stores primarily in the southeast and midwest United States; and Rag
Shops, Inc., which operates approximately 60 stores located primarily in New Jersey and
Florida.
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
    
    Mass merchandisers. This category includes Wal-Mart Stores, Inc., and
other mass merchandisers. These retailers typically dedicate a relatively small
portion of their selling space to a limited assortment of arts and crafts supplies and
floral merchandise.
 
    
    Small, local specialty retailers. This category includes thousands of
local independent arts and crafts retailers. Typically, these are single store
operations managed by the owner. The stores generally offer a limited selection and
have limited resources for advertising, purchasing and distribution. Many of these
stores have established a loyal customer base within a given community and compete on
customer service.
  Team Members
  Trademarks
  Website and Availability of Information
 www.acmoore.com www.acmoore.com www.acmoore.com
  
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ITEM 1A. RISK FACTORS.
 An increase in our sales, profitability and cash flow will depend on our ability to increase the
number of stores we operate and increase the productivity and profitability of our existing stores.
   
    
    our ability to identify suitable markets in which to expand,
    
    the availability of suitable sites for additional stores,
    
    the ability to negotiate acceptable lease terms for sites we identify,
    
    the availability of acceptable financing to support our growth,
    
    our ability to hire, train and retain a sufficient number of qualified
general managers and other store personnel, which ability may be impacted by changes to
store personnel compensation and staffing, and
    
    the effectiveness of our advertising strategies.
 If we fail to maintain an effective system of internal controls, we may not be able to accurately
report our financial results or prevent fraud.
  12




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Our success will depend on how well we manage our growth.
  
    
    The costs of opening and operating new stores may offset the increased
sales generated by the additional stores;
    
    The opening of additional stores in an existing market could reduce net
sales from existing stores in that market;
    
    The opening of stores in new geographic markets may present competitive and
merchandising challenges that are different than those we face in our existing
geographic markets;
    
    The closing or relocation of under-performing stores may result in us
retaining liability for outstanding lease obligations;
    
    Our growth may outpace our ability to expand, upgrade and improve our
administrative, operational and management systems, controls and resources;
    
    Our suppliers may be unable to meet our increased demand for merchandise as
a result of the additional stores and increased productivity of our existing stores;
and
    
    We may be unable to expand our existing distribution capabilities, or
employ third-party distribution services on a cost-effective basis, to provide
sufficient merchandise for sale by our new stores.
 A weak fourth quarter would have a material adverse effect on our operating results for the year.
  13




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Our quarterly results fluctuate due to a variety of factors and are not a meaningful indicator of
future performance.
  
    
    the mix of merchandise sold,
    
    the timing and level of markdowns,
    
    promotional events and changes in advertising,
    
    adverse weather conditions,
    
    store openings and closings,
    
    remodels or relocations of our stores,
    
    length and timing of the holiday seasons,
    
    competitive factors, and
    
    general economic and political conditions.
  Our success depends on key personnel whom we may not be able to retain or hire.
  We face an extremely competitive retail business market.
  14




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We may not be able to successfully anticipate changes in merchandise trends and consumer demands
and our failure to do so may lead to loss of sales and the closing of
under-performing stores.
   Unexpected consumer response to changes in our advertising strategy could materially and adversely
affect our sales, profitability and cash flow.
  Because of our small store base adverse events could have a greater impact on us than if we had a
larger store base.
  15




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A disruption in the operations of our distribution center could have a material adverse effect on
our financial condition and results of operations.
  We depend on a number of key vendors to supply our merchandise, and the loss of any one of our key
vendors may result in a loss of sales and significantly harm our operating results.
  We face risks associated with sourcing and obtaining merchandise from foreign sources.
  16




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
    
    changes in import duties, tariffs and quotas,
    
    loss of most favored nation trading status by the United States in
relation to a particular foreign country, including the Peoples Republic of China,
    
    work stoppages,
    
    delays in shipments,
    
    revaluation of the Chinese currency and fluctuations in
exchange rates,
    
    freight cost increases,
    
    economic uncertainties, including inflation,
    
    foreign government political unrest, and
    
    trade restrictions, including the United States retaliating against
protectionist foreign trade practices.
  We face risks relating to inventory.
  17




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Our information technology may prove inadequate.
  An increase in the cost of fuel oil and oil-based products could impact our earnings and margins.
  Terrorist attacks and threats or actual war may impact all aspects of our operations, revenues,
costs and stock price in unpredictable ways.
  18




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EXECUTIVE OFFICERS OF THE REGISTRANT
  Name
    
    Age
    
    PositionRick A. Lepley
    
    
    56
    
    
    Chief Executive Officer and DirectorLawrence H. Fine
    
    
    53
    
    
    President, Chief Operating Officer and DirectorMarc Katz
    
    
    42
    
    
    Executive Vice President and Chief Financial OfficerAmy Rhoades
    
    
    35
    
    
    Vice President and General Counsel
     
 ITEM 1B. UNRESOLVED STAFF COMMENTS.
 19




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ITEM 2. PROPERTIES.
     20




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Store Locations by City and State :
 Alabama (1)
    
    Massachusetts (12)
    
    New York (21)
    
    Pennsylvania (19)Montgomery
    
    
    
    Bellingham
    
    
    
    Amherst
    
    
    
    AllentownBrockton
    
    
    
    Binghamton
    
    
    
    AltoonaConnecticut (4)
    
    
    
    Danvers
    
    
    
    Carle Place
    
    
    
    BensalemManchester
    
    
    
    Dedham
    
    
    
    DeWitt
    
    
    
    BroomallNew London
    
    
    
    Framingham
    
    
    
    Glendale
    
    
    
    ErieOrange
    
    
    
    Hanover
    
    
    
    Greece
    
    
    
    ExtonPlainville
    
    
    
    Holyoke
    
    
    
    Hamburg
    
    
    
    HanoverHyannis
    
    
    
    Hauppauge
    
    
    
    HarrisburgDelaware (2)
    
    
    
    North Dartmouth
    
    
    
    Henrietta
    
    
    
    LancasterDover
    
    
    
    Somerville
    
    
    
    Holbrook
    
    
    
    LanghorneWilmington
    
    
    
    Woburn
    
    
    
    Ithaca
    
    
    
    MechanicsburgWorcester
    
    
    
    Latham
    
    
    
    MontgomeryvilleFlorida (6)
    
    
    
    
    
    
    
    Middletown
    
    
    
    MuncyDaytona Beach
    
    New Hampshire (4)
    
    
    
    Nanuet
    
    
    
    PhiladelphiaFt. Walton Beach
    
    
    
    Manchester
    
    
    
    Plainedge
    
    
    
    ReadingJacksonville
    
    
    
    Nashua
    
    
    
    Poughkeepsie
    
    
    
    RoyersfordOrlando
    
    
    
    Portsmouth
    
    
    
    Saratoga Springs
    
    
    
    ScrantonPompano Beach
    
    
    
    Salem
    
    
    
    Staten Island
    
    
    
    StroudsburgViera
    
    
    
    
    
    
    
    Syracuse
    
    
    
    Wilkes BarreNew Jersey (15)
    
    
    
    UticaGeorgia (2)
    
    
    
    Brick Town
    
    
    
    Yorktown Heights
    
    Rhode Island (1)Columbus
    
    
    
    Clifton
    
    
    
    
    
    
    
    WarwickSavannah
    
    
    
    Deptford
    
    North Carolina (11)East Brunswick
    
    
    
    Asheville
    
    South Carolina (4)Maine (2)
    
    
    
    English Creek
    
    
    
    Cary
    
    
    
    ColumbiaBangor
    
    
    
    Hamilton
    
    
    
    Concord
    
    
    
    GreenvillePortland
    
    
    
    Linden
    
    
    
    Durham
    
    
    
    Myrtle BeachManalapan
    
    
    
    Fayetteville
    
    
    
    N. CharlestonMaryland (7)
    
    
    
    Moorestown
    
    
    
    GreensboroBowie
    
    
    
    Paramus
    
    
    
    Hickory
    
    Tennessee (2)Frederick
    
    
    
    Parsippany
    
    
    
    Matthews
    
    
    
    ChattanoogaGlen Burnie
    
    
    
    Rockaway
    
    
    
    Raleigh
    
    
    
    KnoxvilleHagerstown
    
    
    
    Secaucus
    
    
    
    WilmingtonRockville
    
    
    
    Shrewsbury
    
    
    
    Winston-Salem
    
    Virginia (7)Waldorf
    
    
    
    Watchung
    
    
    
    
    
    
    
    FairfaxWhite Marsh
    
    
    
    
    
    
    
    
    
    
    
    Falls ChurchFredericksburgManassasRoanokeSterlingVirginia BeachWest Virginia (2)ClarksburgHuntington
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ITEM 3. LEGAL PROCEEDINGS.
   
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
  22




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PART II
 
 ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES.
  High
    
    LowYear Ended December 31, 2006First Quarter
    
    $
    18.64
    
    
    $
    12.55Second Quarter
    
    
    19.47
    
    
    
    14.96Third Quarter
    
    
    19.42
    
    
    
    14.98Fourth Quarter
    
    
    23.54
    
    
    
    18.42Year Ended December 31, 2005First Quarter
    
    $
    30.09
    
    
    $
    24.91Second Quarter
    
    
    31.89
    
    
    
    24.81Third Quarter
    
    
    33.25
    
    
    
    18.52Fourth Quarter
    
    
    19.84
    
    
    
    12.40
    23




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ITEM 6. SELECTED FINANCIAL DATA.
  Year Ended December 31,2006
    
    2005
    
    2004
    
    2003
    
    2002(in thousands except per share data)Statement of Income Data:Net sales
    
    $
    589,506
    
    
    $
    539,436
    
    
    $
    497,626
    
    
    $
    433,928
    
    
    $
    393,392Gross margin (1)
    
    
    230,781
    
    
    
    212,855
    
    
    
    197,754
    
    
    
    161,894
    
    
    
    148,791Selling, general and administrative expenses (1)
    
    
    219,298
    
    
    
    192,878
    
    
    
    166,485
    
    
    
    131,890
    
    
    
    122,984Store pre-opening expenses
    
    
    3,241
    
    
    
    3,459
    
    
    
    4,036
    
    
    
    2,842
    
    
    
    2,884Income from operations
    
    
    4,866
    
    
    
    16,518
    
    
    
    27,233
    
    
    
    27,162
    
    
    
    22,923Net income
    
    
    2,434
    
    
    
    10,042
    
    
    
    16,848
    
    
    
    17,034
    
    
    
    14,208Net income per share, diluted (2)
    
    $
    0.12
    
    
    $
    0.50
    
    
    $
    0.84
    
    
    $
    0.86
    
    
    $
    0.75Weighted average shares outstanding, diluted (2)
    
    
    20,019
    
    
    
    20,149
    
    
    
    20,012
    
    
    
    19,729
    
    
    
    18,828(in thousands)Balance Sheet Data (as of):Working capital
    
    $
    158,779
    
    
    $
    158,432
    
    
    $
    150,414
    
    
    $
    112,751
    
    
    $
    123,811Total assets
    
    
    329,837
    
    
    
    312,757
    
    
    
    304,112
    
    
    
    235,163
    
    
    
    198,559Total debt
    
    
    24,214
    
    
    
    26,786
    
    
    
    29,357
    
    
    
    504
    
    
    
    1,846Shareholders equity
    
    
    207,778
    
    
    
    198,509
    
    
    
    186,215
    
    
    
    165,259
    
    
    
    142,856(dollars in thousands except sales per square foot)Other Data:Cash flows from operating activities
    
    $
    31,496
    
    
    $
    14,620
    
    
    $
    18,495
    
    
    $
    23,227
    
    
    $
    9,656Number of stores open at end of period
    
    
    122
    
    
    
    109
    
    
    
    96
    
    
    
    81
    
    
    
    71Net sales per total square foot (3)
    
    $
    234
    
    
    $
    241
    
    
    $
    256
    
    
    $
    260
    
    
    $
    272Average net sales per store (3)
    
    $
    5,401
    
    
    $
    5,417
    
    
    $
    5,802
    
    
    $
    5,839
    
    
    $
    6,064Comparable store sales increase (decrease ) (4)
    
    
    0
    %
    
    
    (3
    %)
    
    
    4
    %
    
    
    2
    %
    
    
    5
    %
 
 (1)
    
    As of January 1, 2004, for all vendor contracts entered into or modified after December 31,
2002, the Company adopted the Emerging Issues Task Force (EITF) 02-16, Accounting by a
Customer (including a Reseller) for Cash Consideration Received from a Vendor. EITF 02-16
addresses the accounting for cash consideration received by a customer from a vendor (e.g.,
slotting fees, cooperative advertising payments, buydowns) and rebates or refunds from a
vendor that is payable only if the customer completes a specified cumulative level of
purchases or remains a customer for a specified time period. The change in accounting means
that vendor monies which support the Companys advertising programs are now being recorded as
a reduction in the cost of inventory, and are recognized as a reduction of cost of goods sold
when the inventory is sold. Previously, they were accounted for as an offset to advertising
costs. This accounting change results in a timing difference as to when these monies are
recognized in the Companys income statement. In 2004, net income was reduced by $3.4 million
or $0.17 per share, gross margin increased by $11.9 million, selling, general and
administrative costs increased by $17.4 million and inventory decreased by $5.5 million.(2)
    
    All share and per share data reflect the two-for-one stock split paid July 31, 2002.(3)
    
    Includes only stores open during the entire period.(4)
    
    Stores are added to the comparable store base at the beginning of their fourteenth full month
of operation. 24




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ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
 Overview
        Share Based Payment
 25




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Recent Developments and Business Update
  Selling, general and administrative expense reduction
  
    
    Store payroll costs.We introduced a new general manager compensation plan
based on pay-for-performance beginning in January 2007. Bonuses earned in one year
are no longer rolled into base salary for the coming year. We also tested
different store staffing models, including an appropriate mix of full- and
part-time team members, in the second half of 2006 that we believe will assist us
in improving our results of operations through payroll savings.
    
    Advertising spending.We are in the process of experimenting with the reach,
frequency and timing of our advertisements. During the fourth quarter of 2006, we
moved approximately 75% of our print advertising from mid-week, varying between
Wednesday, Thursday and Friday, to Sunday. While we are still analyzing the
results from this change, we believe that a uniform approach within the chain to
advertising strategy will result in overall efficiencies.
    
    Real estate site location strategy.We believe that our selling, general and
administrative expenses may be significantly reduced if we increase store openings
in existing markets in order to leverage advertising costs. In the future, we
intend to increase store density in existing markets. In addition, previously we entered new markets opening only a single store. When we enter new
markets in the future, as appropriate, we intend to open more than one store at the same time that
we enter that market.
 Inventory reduction
  Improved information technology
  26




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##### Table of Contents



Globally sourced and private label products
  Centrally directed operations
  Results of Operations
  Year Ended December 31,2006
    
    2005
    
    2004Net sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales
    
    
    60.9
    
    
    
    60.5
    
    
    
    60.3Gross margin
    
    
    39.1
    
    
    
    39.5
    
    
    
    39.7Selling, general and administrative expenses
    
    
    37.2
    
    
    
    35.8
    
    
    
    33.4Costs related to change in management
    
    
    0.6
    
    
    
    
    
    
    
    Store pre-opening expenses
    
    
    0.5
    
    
    
    0.6
    
    
    
    0.8Income from operations
    
    
    0.8
    
    
    
    3.1
    
    
    
    5.5Interest expense (income), net
    
    
    0.0
    
    
    
    0.1
    
    
    
    (0.0
    )Income before income taxes
    
    
    0.8
    
    
    
    3.0
    
    
    
    5.5Provision for income taxes
    
    
    0.4
    
    
    
    1.1
    
    
    
    2.1Net income
    
    
    0.4
    %
    
    
    1.9
    %
    
    
    3.4
    %
 2006 Compared to 2005
 Net Sales
  27




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##### Table of Contents



Gross Margin
  Selling, General and Administrative Expenses
   Costs Related to Changes in Management.
  28




---



##### Table of Contents



Net Interest Expense (Income).
 Store Pre-Opening Expenses
 Income Taxes
 2005 Compared to 2004
 Net Sales
  Gross Margin
  29




---



##### Table of Contents



Selling, General and Administrative Expenses
  Net Interest Expense (Income).
 Store Pre-Opening Expenses
 Income Taxes
 30




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##### Table of Contents



Quarterly Results and Seasonality
  First
    
    Second
    
    Third
    
    FourthQuarter
    
    Quarter
    
    Quarter
    
    Quarter2006Net sales
    
    $
    132,918
    
    
    $
    129,815
    
    
    $
    128,936
    
    
    $
    197,839Gross margin
    
    
    53,153
    
    
    
    52,792
    
    
    
    52,981
    
    
    
    71,853Income (loss) from operations
    
    
    469
    
    
    
    (2,875
    )
    
    
    (4,193
    )
    
    
    11,464Net income (loss)
    
    
    250
    
    
    
    (1,769
    )
    
    
    (2,645
    )
    
    
    6,595Net income (loss) per share, diluted
    
    $
    0.01
    
    
    $
    (0.09
    )
    
    $
    (0.13
    )
    
    $
    0.33Diluted average shares outstanding
    
    
    20,070
    
    
    
    19,857
    
    
    
    19,916
    
    
    
    20,192Number of stores open at end of period
    
    
    113
    
    
    
    114
    
    
    
    117
    
    
    
    122Comparable store sales increase (decrease)
    
    
    (2.0
    %)
    
    
    3.0
    %
    
    
    2.0
    %
    
    
    (3.0
    %)2005Net sales
    
    $
    122,879
    
    
    $
    113,489
    
    
    $
    115,094
    
    
    $
    187,974Gross margin
    
    
    48,128
    
    
    
    45,689
    
    
    
    46,692
    
    
    
    72,346Income (loss) from operations
    
    
    2,123
    
    
    
    (21
    )
    
    
    (2,928
    )
    
    
    17,344Net income (loss)
    
    
    1,252
    
    
    
    (50
    )
    
    
    (1,900
    )
    
    
    10,740Net income (loss) per share, diluted
    
    $
    0.06
    
    
    $
    (0.00
    )
    
    $
    (.10
    )
    
    $
    0.53Diluted average shares outstanding
    
    
    20,209
    
    
    
    19,743
    
    
    
    19,808
    
    
    
    20,105Number of stores open at end of period
    
    
    96
    
    
    
    98
    
    
    
    105
    
    
    
    109Comparable store sales increase (decrease)
    
    
    (2.0
    %)
    
    
    1.0
    %
    
    
    (4.0
    %)
    
    
    (4.0
    %)
   Liquidity and Capital Resources
  31




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32




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##### Table of Contents



Payments Due By Period ($000)Less than
    
    
    
    
    
    
    
    
    
    After 5Contractual Obligations
    
    Total
    
    1 Year
    
    1-3 Years
    
    4-5 Years
    
    YearsLong-term debt (1)
    
    $
    31,998
    
    
    $
    3,898
    
    
    $
    10,808
    
    
    $
    5,171
    
    
    $
    12,121Store operating leases (2)
    
    
    270,322
    
    
    
    37,414
    
    
    
    105,547
    
    
    
    56,909
    
    
    
    70,452Vehicle and equipment leases
    
    
    1,534
    
    
    
    435
    
    
    
    950
    
    
    
    149
    
    
    
    Purchase obligations (3)
    
    
    15
    
    
    
    15
    
    
    
    
    
    
    
    
    
    
    
    Deferred tax liability (4)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total contractual cash obligations
    
    $
    303,869
    
    
    $
    41,762
    
    
    $
    117,305
    
    
    $
    62,229
    
    
    $
    82,573
 
 (1)
    
    Includes interest calculated using the effective rates of 5.77% and 5.72% as of December 31,
2006. In November 2006, the Company entered into two interest rate swap agreements with
Wachovia Bank. The swaps effectively convert the Companys variable interest rate mortgage
obligations to a fixed rate. See Note 1 of the Notes to Consolidated Financial Statements for
additional information on these swaps.(2)
    
    Most store leases have an average initial term of ten years, with three five year renewal
options, and provide for predetermined escalation in future minimum annual rent. Rent
payments are amortized over the initial lease term commencing on the date we take possession.
The pro rata portion of scheduled rent escalations has been included in other long-term
liabilities in the balance sheet.(3)
    
    Purchase obligations include agreements for goods and services that are enforceable and
legally binding on the Company and that specify all significant terms. As of December 31,
2006, such obligations include telephone services for information technology.(4)
    
    The amount of deferred income taxes has been excluded from the above table as the timing of
any cash payment is uncertain. See Note 6 of the Notes to Consolidated Financial Statements
for additional information regarding our deferred tax position. Critical Accounting Estimates
  33




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##### Table of Contents



Merchandise Inventories.
  Impairment of Long-Lived Assets.
 Income Taxes. .
 Other Estimates.
 .
 34




---



##### Table of Contents



Change in Accounting Principles
  New Accounting Pronouncements
   
 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
    35




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##### Table of Contents



ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 A.C. MOORE ARTS & CRAFTS, INC.
 PageReport of Independent Registered Public Accounting Firm
    
    
    37Consolidated Balance Sheets at December 31, 2006 and 2005
    
    
    39Consolidated Statements of Income for each of the three years
in the period ended December 31, 2006
    
    
    40Consolidated Statements of Changes in Shareholders Equity for each of the
three years in the period ended December 31, 2006
    
    
    41Consolidated Statements of Cash Flows for each of the three years
in the period ended December 31, 2006
    
    
    42Notes to Consolidated Financial Statements
    
    
    43
 36




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##### Table of Contents



Report of Independent Registered Public Accounting Firm
   Consolidated financial statements and financial statement schedule
   Internal control over financial reporting
 Internal Control  Integrated Framework Internal Control  Integrated Framework
 37




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38




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##### Table of Contents



A.C. MOORE ARTS & CRAFTS, INC.
CONSOLIDATED BALANCE SHEETS
 (dollars in thousands)
 December 31,2006
    
    
    2005ASSETSCurrent assets:Cash and cash equivalents
    
    $
    76,120
    
    
    $
    57,748Marketable securities
    
    
    
    
    
    
    5,224Inventories
    
    
    146,751
    
    
    
    152,646Prepaid expenses and other current assets
    
    
    7,653
    
    
    
    6,900Deferred tax asset
    
    
    2,636
    
    
    
    734233,160
    
    
    
    223,252Non current assets:Property and equipment, net
    
    
    95,268
    
    
    
    88,098Other assets
    
    
    1,409
    
    
    
    1,407$
    329,837
    
    
    $
    312,757LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Current portion of long-term debt
    
    $
    2,571
    
    
    $
    2,571Trade accounts payable
    
    
    48,703
    
    
    
    46,445Accrued payroll and payroll taxes
    
    
    3,011
    
    
    
    3,928Accrued expenses
    
    
    17,336
    
    
    
    10,044Accrued lease liability
    
    
    825
    
    
    
    153Income taxes payable
    
    
    1,935
    
    
    
    1,67974,381
    
    
    
    64,820Non current liabilities:Long-term debt
    
    
    21,643
    
    
    
    24,215Deferred tax liability
    
    
    6,605
    
    
    
    8,039Accrued lease liability
    
    
    19,430
    
    
    
    17,17447,678
    
    
    
    49,428122,059
    
    
    
    114,248Commitments and contingenciesShareholders equity:Preferred stock, no par value, 10,000,000 shares authorized;
none issued
    
    
    
    
    
    
    Common stock, no par value, 40,000,000 shares authorized;
issued and outstanding 20,167,098 shares at December 31,
2006 and 19,816,774 shares at December 31, 2005
    
    
    118,218
    
    
    
    111,383Retained earnings
    
    
    89,560
    
    
    
    87,126207,778
    
    
    
    198,509$
    329,837
    
    
    $
    312,757
  39




---



##### Table of Contents



A.C. MOORE ARTS & CRAFTS, INC.
CONSOLIDATED STATEMENTS OF INCOME
 (dollars in thousands except per share data)
 December 31,2006
    
    
    2005
    
    
    2004Net sales
    
    $
    589,506
    
    
    $
    539,436
    
    
    $
    497,626Cost of sales (including buying and distribution costs)
    
    
    358,725
    
    
    
    326,581
    
    
    
    299,872Gross margin
    
    
    230,781
    
    
    
    212,855
    
    
    
    197,754Selling, general and administrative expenses
    
    
    219,298
    
    
    
    192,878
    
    
    
    166,485Costs related to change in management
    
    
    3,376
    
    
    
    
    
    
    
    Store pre-opening expenses
    
    
    3,241
    
    
    
    3,459
    
    
    
    4,036Income from operations
    
    
    4,866
    
    
    
    16,518
    
    
    
    27,233Interest expense
    
    
    1,547
    
    
    
    1,234
    
    
    
    380Interest (income)
    
    
    (1,224
    )
    
    
    (784
    )
    
    
    (543
    )Income before income taxes
    
    
    4,543
    
    
    
    16,068
    
    
    
    27,396Provision for income taxes
    
    
    2,109
    
    
    
    6,026
    
    
    
    10,548Net income
    
    
    2,434
    
    
    $
    10,042
    
    
    $
    16,848Basic net income per share
    
    $
    0.12
    
    
    $
    0.51
    
    
    $
    0.86Diluted net income per share
    
    $
    0.12
    
    
    $
    0.50
    
    
    $
    0.84
  40




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##### Table of Contents



A.C. MOORE ARTS & CRAFTS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
 (in thousands except share data)
 RetainedShares
    
    
    Common Stock
    
    
    Earnings
    
    
    TotalBalance, December 31, 2003
    
    
    19,357,541
    
    
    $
    105,023
    
    
    $
    60,236
    
    
    $
    165,259Net income
    
    
    
    
    
    
    
    
    
    
    16,848
    
    
    
    16,848Exercise of stock options
    
    
    297,559
    
    
    
    1,805
    
    
    
    
    
    
    
    1,805Tax benefit from exercise of stock options
    
    
    
    
    
    
    2,303
    
    
    
    
    
    
    
    2,303Balance, December 31, 2004
    
    
    19,655,100
    
    
    $
    109,131
    
    
    $
    77,084
    
    
    $
    186,215Net income
    
    
    
    
    
    
    
    
    
    
    10,042
    
    
    
    10,042Exercise of stock options
    
    
    161,674
    
    
    
    1,023
    
    
    
    
    
    
    
    1,023Tax benefit from exercise of stock options
    
    
    
    
    
    
    1,229
    
    
    
    
    
    
    
    1,229Balance, December 31, 2005
    
    
    19,816,774
    
    
    $
    111,383
    
    
    $
    87,126
    
    
    $
    198,509Net income
    
    
    
    
    
    
    
    
    
    
    2,434
    
    
    
    2,434Exercise of stock options
    
    
    350,324
    
    
    
    2,152
    
    
    
    
    
    
    
    2,152Tax benefit from exercise of stock options
    
    
    
    
    
    
    1,606
    
    
    
    
    
    
    
    1,606Stock-based
compensation expense
    
    
    
    
    
    
    3,077
    
    
    
    
    
    
    
    3,077Balance, December 31, 2006
    
    
    20,167,098
    
    
    $
    118,218
    
    
    $
    89,560
    
    
    $
    207,778
  41




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##### Table of Contents



A.C. MOORE ARTS & CRAFTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
 (in thousands)
 Year Ended December 31,2006
    
    
    2005
    
    
    2004Cash flows from operating activities:Net income
    
    $
    2,434
    
    
    $
    10,042
    
    
    $
    16,848Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    12,281
    
    
    
    10,769
    
    
    
    8,967Stock based compensation expense
    
    
    3,077
    
    
    
    
    
    
    
    Loss on disposal of assets
    
    
    83
    
    
    
    438
    
    
    
    Provision for (benefit of) deferred income taxes, net
    
    
    (3,336
    )
    
    
    (484
    )
    
    
    1,934Changes in assets and liabilities:Inventories
    
    
    5,895
    
    
    
    (9,814
    )
    
    
    (21,339
    )Prepaid expenses and other current assets
    
    
    (753
    )
    
    
    755
    
    
    
    (4,693
    )Accounts payable, accrued payroll and payroll
taxes and accrued expenses
    
    
    8,633
    
    
    
    (2,118
    )
    
    
    14,461Accrued lease liability
    
    
    2,928
    
    
    
    3,532
    
    
    
    3,272Income taxes payable
    
    
    256
    
    
    
    1,160
    
    
    
    (897
    )Other
    
    
    (2
    )
    
    
    340
    
    
    
    (58
    )Net cash provided by operating activities
    
    
    31,496
    
    
    
    14,620
    
    
    
    18,495Cash flows from investing activities:Capital expenditures
    
    
    (19,534
    )
    
    
    (16,086
    )
    
    
    (40,999
    )Proceeds from maturation of marketable securities
    
    
    5,224
    
    
    
    22,570
    
    
    
    686Investment in marketable securities
    
    
    
    
    
    
    (10,236
    )
    
    
    (4,112
    )Cash flows (used in) investing activities
    
    
    (14,310
    )
    
    
    (3,752
    )
    
    
    (44,425
    )Cash flows from financing activities:Exercise of stock options
    
    
    2,152
    
    
    
    1,023
    
    
    
    1,805Tax benefit of stock options
    
    
    1,606
    
    
    
    
    
    
    
    Increase in long-term debt
    
    
    
    
    
    
    
    
    
    
    30,000Repayment of long-term debt
    
    
    (2,572
    )
    
    
    (2,571
    )
    
    
    (643
    )Repayment of equipment leases
    
    
    
    
    
    
    
    
    
    
    (504
    )Net cash provided by (used in) by financing activities
    
    
    1,186
    
    
    
    (1,548
    )
    
    
    30,658Net increase in cash and cash equivalents
    
    
    18,372
    
    
    
    9,320
    
    
    
    4,728Cash and cash equivalents at beginning of period
    
    
    57,748
    
    
    
    48,428
    
    
    
    43,700Cash and cash equivalents at end of period
    
    $
    76,120
    
    
    $
    57,748
    
    
    $
    48,428Supplemental cash flow information:Cash paid during the year for:Interest
    
    $
    1,538
    
    
    $
    1,197
    
    
    $
    496Income taxes
    
    $
    3,639
    
    
    $
    5,345
    
    
    $
    9,553Non-cash items:Tax benefit of stock options
    
    $
    
    
    
    $
    1,229
    
    
    $
    2,303
  42




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##### Table of Contents



A.C. MOORE ARTS & CRAFTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 1. Summary of Significant Accounting Policies
 Organization and basis of presentation. .
 Use of estimates.
 Cash and cash equivalents.
 Concentration of credit risk.
 Inventories.
 Marketable Securities.
 Property and equipment.
  43




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##### Table of Contents



Impairment of Long-Lived Assets
 Other Assets
 Revenue recognition
 Lease Accounting
 Store pre-opening expenses.
 Advertising costs.
 Fair value of financial instruments.
  44




---



##### Table of Contents



Stock-based compensation
   2006
    
    2005
    
    2004Average fair value of options granted
    
    $
    8.99
    
    
    $
    9.79
    
    
    $
    11.15Risk free interest rate
    
    
    4.6
    %
    
    
    4.4
    %
    
    
    3.8
    %Dividend yield
    
    
    
    
    
    
    
    
    
    
    Average expected life
    
    6.0
    yrs

    
    5.0
    yrs

    

    4.9
    yrsExpected stock price volatility
    
    
    44.4
    %
    
    
    38.9
    %
    
    
    54.9
    %
    45




---



##### Table of Contents



Accounting for Stock-Based Compensation
 2005
    
    2004(In thousands, except per share data)Net income
    
     As reported
    
    $
    10,042
    
    
    $
    16,848 Compensation cost, net of tax
    
    
    1,827
    
    
    
    1,749 Pro forma
    
    
    8,215
    
    
    
    15,099Basic earnings per share
    
     As reported
    
    $
    0.51
    
    
    $
    0.86 Pro forma
    
    
    0.42
    
    
    
    0.78Diluted earnings per share
    
     As reported
    
    $
    0.50
    
    
    $
    0.84 Pro forma
    
    
    0.41
    
    
    
    0.75
 Income taxes
 2. New Accounting Pronouncements
   3. Store Closure Costs
 Store Closure Costs
 46




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##### Table of Contents



(dollars in thousands)Type of Cost
    
    Total
    
    
    Current Cash
    
    
    Future Cash
    
    
    Non-CashLease obligations
    
    $
    1,033
    
    
    
    
    
    
    $
    1,033
    
    
    
    Severance
    
    
    10
    
    
    $
    10
    
    
    
    
    
    
    
    Inventory
liquidation
    
    
    87
    
    
    
    
    
    
    
    
    
    
    $
    87$
    1,130
    
    
    $
    10
    
    
    $
    1,033
    
    
    $
    87
   4. Costs Related to Changes in Management
 Costs related to changes in management
  5. Earnings Per Share
  47




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##### Table of Contents



Year endedDecember 31,2006
    
    
    2005
    
    
    2004(In thousands, except per share data)Net income
    
    $
    2,434
    
    
    $
    10,042
    
    
    $
    16,848Weighted average shares:Basic
    
    
    19,929
    
    
    
    19,758
    
    
    
    19,482Incremental shares
from assumed exercise
of stock options
    
    
    90
    
    
    
    391
    
    
    
    530Diluted
    
    
    20,019
    
    
    
    20,149
    
    
    
    20,012Basic net income per share
    
    $
    0.12
    
    
    $
    0.51
    
    
    $
    0.86Diluted net income per share
    
    $
    0.12
    
    
    $
    0.50
    
    
    $
    0.84Stock options excluded from
calculation because
exercise price was greater
than average market price
    
    
    937
    
    
    
    308
    
    
    
    306
 6. Property and Equipment
  Year EndedDecember 31,2006
    
    
    2005(in thousands)Land
    
    $
    2,466
    
    
    $
    2,466Buildings and improvements
    
    
    38,370
    
    
    
    38,370Furniture, fixtures and equipment
    
    
    107,148
    
    
    
    88,932Leasehold improvements
    
    
    6,205
    
    
    
    6,205Equipment for future stores
    
    
    1,260
    
    
    
    525155,449
    
    
    
    136,498Less: Accumulated depreciation and amortization
    
    
    (60,181
    )
    
    
    (48,400
    )$
    95,268
    
    
    $
    88,098
 7. Financing Agreement
  48




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##### Table of Contents



8. Income Taxes
  Year Ended December 31,2006
    
    
    2005
    
    
    2004(in thousands)United States federal taxes at statutory rate
    
    $
    1,590
    
    
    $
    5,624
    
    
    $
    9,595State and local taxes, net
    
    
    286
    
    
    
    673
    
    
    
    1,236Change in estimates for uncertain tax positions
    
    
    198
    
    
    
    0
    
    
    
    0Incentive stock option compensation
    
    
    468
    
    
    
    0
    
    
    
    0Tax free interest
    
    
    (292
    )
    
    
    (227
    )
    
    
    (164
    )Other
    
    
    (141
    )
    
    
    (44
    )
    
    
    (119
    )Income tax provision
    
    $
    2,109
    
    
    $
    6,026
    
    
    $
    10,548
 49




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##### Table of Contents



Year Ended December 31,2006
    
    
    2005
    
    
    2004(in thousands)Current tax expense:Federal
    
    $
    4,834
    
    
    $
    5,487
    
    
    $
    6,407State
    
    
    611
    
    
    
    1,023
    
    
    
    2,207Total current
    
    
    5,445
    
    
    
    6,510
    
    
    
    8,614Deferred tax expense:Federal
    
    
    (3,166
    )
    
    
    (497
    )
    
    
    2,239State
    
    
    (170
    )
    
    
    13
    
    
    
    (305
    )Total deferred
    
    
    (3,336
    )
    
    
    (484
    )
    
    
    1,934Total income tax provision
    
    $
    2,109
    
    
    $
    6,026
    
    
    $
    10,548
  December 31,2006
    
    
    2005(in thousands)Current deferred taxesInventory valuation
    
    $
    90
    
    
    $
    677Inventory claim receivable
    
    
    0
    
    
    
    (345
    )Accrued Expenses
    
    
    2,823
    
    
    
    0Other
    
    
    (277
    )
    
    
    402Total current deferred taxes
    
    $
    2,636
    
    
    $
    734Non-current deferred taxesProperty and equipment
    
    
    (14,798
    )
    
    
    (12,747
    )Stock Option Compensation
    
    
    701
    
    
    
    0Accrued rent expense
    
    
    6,773
    
    
    
    4,708Other
    
    
    719
    
    
    
    0Total non-current deferred taxes
    
    
    (6,605
    )
    
    
    (8,039
    )Net deferred tax
    
    $
    (3,969
    )
    
    $
    (7,305
    )
 50




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##### Table of Contents



9. Shareholders Equity
     2006
    
    
    2005
    
    
    2004Weighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    
    Exercise
    
    
    
    
    
    
    ExerciseOptions
    
    
    Price
    
    
    Options
    
    
    Price
    
    
    Options
    
    
    PriceOutstanding at beginning of year
    
    
    1,485,067
    
    
    $
    16.97
    
    
    
    1,431,132
    
    
    $
    14.76
    
    
    
    1,544,452
    
    
    $
    12.23Granted
    
    
    342,000
    
    
    
    18.07
    
    
    
    237,375
    
    
    
    23.74
    
    
    
    215,875
    
    
    
    21.95Forfeited
    
    
    109,065
    
    
    
    23.67
    
    
    
    21,766
    
    
    
    24.42
    
    
    
    31,636
    
    
    
    22.40Exercised
    
    
    350,324
    
    
    
    6.17
    
    
    
    161,674
    
    
    
    6.37
    
    
    
    297,559
    
    
    
    6.07Outstanding at end of year
    
    
    1,367,678
    
    
    $
    19.50
    
    
    
    1,485,067
    
    
    $
    16.97
    
    
    
    1,431,132
    
    
    $
    14.76Exercisable at end of year
    
    
    862,366
    
    
    $
    19.41
    
    
    
    1,019,544
    
    
    $
    13.83
    
    
    
    930,105
    
    
    $
    10.14
  51




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##### Table of Contents



Stock Options Outstanding
    
    
    Stock Options ExercisableWeighted Average
    
    
    Weighted
    
    
    
    
    
    
    WeightedRange of
    
    
    
    
    
    Remaining Life
    
    
    Average
    
    
    
    
    
    
    AverageExercise Prices
    
    Shares
    
    
    (Years)
    
    
    Exercise Price
    
    
    Shares
    
    
    Exercise Price2.88-4.50
    
    
    107,774
    
    
    
    2.5
    
    
    $
    3.72
    
    
    
    107,774
    
    
    $
    3.727.69-8.32
    
    
    76,286
    
    
    
    3.6
    
    
    
    8.13
    
    
    
    76,286
    
    
    
    8.1416.38-18.32
    
    
    297,000
    
    
    
    9.6
    
    
    
    17.57
    
    
    
    0
    
    
    
    0.0019.11-21.95
    
    
    422,393
    
    
    
    6.8
    
    
    
    20.45
    
    
    
    335,247
    
    
    
    20.1422.25-27.15
    
    
    464,225
    
    
    
    7.5
    
    
    
    25.40
    
    
    
    343,059
    
    
    
    26.021,367,678
    
    
    
    7.1
    
    
    $
    19.50
    
    
    
    862,366
    
    
    $
    19.41
 10. Retirement Plan
  11. Commitments and Contingencies
 Commitments
  52




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##### Table of Contents



Year Ended December 31,2006
    
    
    2005
    
    
    2004(in thousands)Minimum rentals
    
    $
    33,024
    
    
    $
    29,017
    
    
    $
    27,017Contingent payments
    
    
    76
    
    
    
    62
    
    
    
    84$
    33,100
    
    
    $
    29,079
    
    
    $
    27,101
   2007
    
    $
    37,8492008
    
    
    36,8132009
    
    
    35,4322010
    
    
    34,2522011
    
    
    30,607Thereafter
    
    
    96,903Total minimum future rentals
    
    $
    271,856
 Contingencies
    53




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##### Table of Contents



12. Related Party Transactions
   54




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##### Table of Contents



ITEM 9.
    
    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
  
 ITEM 9A. CONTROLS AND PROCEDURES.
 Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
  Managements Report on Internal Control Over Financial Reporting
   Changes in Internal Control over Financial Reporting
  55




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##### Table of Contents



ITEM 9B. OTHER INFORMATION
 Amendment to Loan Documents and Line of Credit
    56




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##### Table of Contents



PART III
 
 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
  Code of Ethics
 www.acmoore.com/corporate.asp
 
 ITEM 11. EXECUTIVE COMPENSATION.
  
 ITEM 12.
    
    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS.
  57




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##### Table of Contents



Equity Compensation Plan Information
  (c)Number of securities(a)
    
    
    
    
    
    remaining available forNumber of securities
    
    (b)
    
    future issuance underto be issued upon
    
    Weighted-average
    
    equity compensationexercise of
    
    exercise price of
    
    plans (excludingoutstanding options,
    
    outstanding options,
    
    securities reflected inPlan Category
    
    warrants and rights
    
    warrants and rights
    
    column (a))Equity compensation
plans approved by
security holders
(1)
    
    
    1,367,678
    
    
    $
    19.50
    
    
    
    403,425Equity compensation
plans not approved
by security holders
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    1,367,678
    
    
    $
    19.50
    
    
    
    403,425
 
 (1)
    
    These plans are our 1997 Employee, Director and Consultant Stock Option
Plan and our 2002 Stock Option Plan. 
 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
  
 ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
  58




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##### Table of Contents



PART IV
 
 ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
 (a)
    
    The following documents are filed as part of this Annual Report on Form 10-K:
 (1)
    
    Financial Statements:Report of Independent Registered Public Accounting FirmConsolidated Balance Sheets at December 31, 2006 and 2005Consolidated Statements of Income for each of the three years
in the period ended December 31, 2006Consolidated Statements of Changes in Shareholders Equity for each of the
three years in the period ended December 31, 2006Consolidated Statements of Cash Flows for each of the three
years in the period ended December 31, 2006Notes to Consolidated Financial Statements(2)
    
    Financial Statement Schedules:Schedule II  Valuation and Qualifying Accounts and Reserves.All other schedules have been omitted because they are not applicable,
not required or the information is included elsewhere herein.(3)
    
    Exhibits:The exhibits filed as part of this report are listed under exhibits at
subsection (b) of this Item 15.
 (b)
    
    Exhibits:
 Exhibit Number
    
    Description3.1(1)
    
    Articles of Incorporation3.2
    
    Amendment to Articles of Incorporation3.3(2)
    
    Amended and Restated Bylaws+10.1(1)
    
    1997 Employee, Director and Consultant Stock Option Plan
 59




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##### Table of Contents



Exhibit Number
    
    Description+10.2(3)
    
    2002 Stock Option Plan+10.3(1)
    
    Form of Stock Option Award Agreement under the 1997
Employee, Director and Consultant Stock Option Plan+10.4(8)
    
    Form of Option Agreement under the 2002 Stock Option Plan10.5(1)
    
    Tax Indemnification Agreement, dated July 22, 1997, among
the Company, John E. Parker and William Kaplan10.6(4)
    
    Lease, dated August 14, 1995, between Freeport 130 L.L.C.
and A.C. Moore, Inc.10.7(5)
    
    Second Amendment to Lease, dated as of March 25, 1998,
between Freeport 130 L.L.C. and A.C. Moore, Inc.10.8(6)
    
    Loan Agreement dated as of October 28, 2003, by and
between Wachovia Bank, National Association and A.C. Moore
Arts & Crafts, Inc., A.C. Moore Incorporated, Moorestown
Finance, Inc., Blackwood Assets, Inc. and A.C. Moore Urban
Renewal, LLC. A.C. Moore will furnish to the Securities
and Exchange Commission a copy of any omitted exhibits or
schedules upon request.10.9(6)
    
    Construction Loan Agreement dated as of October 28, 2003,
by and between Wachovia Bank, National Association and
A.C. Moore Arts & Crafts, Inc., A.C. Moore Incorporated,
Moorestown Finance, Inc., Blackwood Assets, Inc. and A.C.
Moore Urban Renewal, LLC. A.C. Moore will furnish to the
Securities and Exchange Commission a copy of any omitted
exhibits or schedules upon request.10.10(6)
    
    Mortgage, Assignment of Rents and Security Agreement and
Financing Statement dated as of October 28, 2003, by and
between A.C. Moore Urban Renewal, LLC and Wachovia Bank,
National Association. A.C. Moore will furnish to the
Securities and Exchange Commission a copy of any omitted
exhibits upon request.10.11(7)
    
    Modification Number One to Promissory Note dated as of
November 3, 2004, by and between Wachovia Bank, National
Association and A.C. Moore Arts & Crafts, Inc., A.C. Moore
Incorporated, Moorestown Finance, Inc., Blackwood Assets,
Inc. and A.C. Moore Urban Renewal, LLC10.12(9)
    
    Promissory Note and Loan Modification Agreement dated as
of February 22, 2006, by and between Wachovia Bank,
National Association and A.C. Moore Arts & Crafts, Inc.,
A.C. Moore Incorporated, Moorestown Finance, Inc.,
Blackwood Assets, Inc. and A.C. Moore Urban Renewal, LLC
 60




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##### Table of Contents



Exhibit Number
    
    Description+10.13 (10)
    
    Employment Agreement, effective as of June 1, 2006,
between the Company and Rick A. Lepley.+10.14 (10)
    
    Form of Option Agreement between the Company and Rick A.
Lepley.+10.15 (10)
    
    Agreement and Complete and Full General Release, effective
as of June 1, 2006, between the Company and Jack Parker.+10.16 (10)
    
    Agreement and Complete and Full General Release, effective
as of June 1, 2006, between the Company and Leslie H.
Gordon.+10.17 (11)
    
    Agreement and Complete and Full General Release, effective
as of June 8, 2006, between the Company and Patricia A.
Parker.+10.18 (12)
    
    Agreement and Complete and Full General Release, dated
July 31, 2006, between the Company and Janet Parker.+10.19 (13)
    
    Employment Agreement, signed on September 6, 2006 and
effective as of September 13, 2006, between the Company
and Marc Katz.+10.20 (13)
    
    Form of Option Agreement between the Company and Marc Katz.+10.21 (13)
    
    Amendment No. One, dated September 6, 2006, to Agreement
and Complete and Full General Release, dated June 1, 2006,
between the Company and Leslie H. Gordon.+10.22 (14)
    
    First Amendment, dated as of November 15, 2006, to the
Employment Agreement, dated as of June 1, 2006, between
the Company and Rick A. Lepley.10.23 (15)
    
    Amended and Restated Swap Transaction Confirmation, signed
on December 8, 2006 and effective as of November 27, 2006.10.24 (15)
    
    Amended and Restated Swap Transaction Confirmation, signed
on December 8, 2006 and effective as of November 27, 2006.+10.25
    
    Employment Agreement, effective as of July 24, 2006,
between the Company and Amy Rhoades.+10.26
    
    First Amendment, dated as of November 15, 2006, to the
Employment Agreement, dated as of July 24, 2006, between
the Company and Amy Rhoades.
 61




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##### Table of Contents



Exhibit Number
    
    Description10.27
    
    Promissory Note and Loan Modification Agreement dated as
of March 12, 2007 by and between Wachovia Bank, National
Association and A.C. Moore Arts & Crafts, Inc., A.C. Moore
Incorporated, Moorestown Finance, Inc., Blackwood Assets,
Inc. and A.C. Moore Urban Renewal, LLC21.1
    
    Subsidiaries of the Company23.1
    
    Consent of PricewaterhouseCoopers LLP31.1
    
    Certification of Chief Executive Officer pursuant to Rule
13a14(a) promulgated under the Securities Exchange Act of
1934, as amended (the Exchange Act)31.2
    
    Certification of Chief Financial Officer pursuant to Rule
13a14(a) promulgated under the Exchange Act32.1
    
    Certification of the Companys Chief Executive Officer and
Chief Financial Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 200232.2
    
    Certification of the Companys Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
 
 +
    
    Management contract or compensatory plan or arrangement.(1)
    
    Incorporated by reference to the Companys Registration Statement on Form S-1 (File
No. 333-32859), filed on August 5, 1997.(2)
    
    Incorporated by reference to the Companys Form 8-K filed on August 27, 2004.(3)
    
    Incorporated by reference to the Companys Definitive Proxy Statement filed on April
22, 2002.(4)
    
    Incorporated by reference to Amendment No. 1 to the Companys Registration Statement
on Form S-1 (File No. 333-32859), filed on September 16, 1997.(5)
    
    Incorporated by reference to the Companys Form 10-K for the year ended December 31,
1998.(6)
    
    Incorporated by reference to the Companys Form 10-Q for the quarter ended September
30, 2003.(7)
    
    Incorporated by reference to the Companys Form 10-K for the year ended December 31,
2004.(8)
    
    Incorporated by reference to the Companys Form 8-K filed on August 9, 2006. 62




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##### Table of Contents



(9)
    
    Incorporated by reference to the Companys Form 10-K for the year ended December 31,
2005.(10)
    
    Incorporated by reference to the Companys Form 8-K filed on June 7, 2006.(11)
    
    Incorporated by reference to the Companys Form 8-K filed on June 14, 2006.(12)
    
    Incorporated by reference to the Companys Form 8-K filed on July 31, 2006.(13)
    
    Incorporated by reference to the Companys Form 8-K filed on September 6, 2006.(14)
    
    Incorporated by reference to the Companys Form 8-K filed on November 16, 2006.(15)
    
    Incorporated by reference to the Companys Form 8-K filed on December 14, 2006. 63




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##### Table of Contents



SCHEDULE II
A.C. MOORE ARTS & CRAFTS, INC.
Valuation and Qualifying Accounts
 (in thousands)
 Column A
    
    Column B
    
    
    Column C
    
    
    Column D
    
    
    Column EDeductions Write-offs,
    
    
    Balance atBalance at
    
    
    Additions 
    
    
    Payments and
    
    
    End ofDescription
    
    Beginning of Period
    
    
    Charged to Expense
    
    
    Other Adjustments
    
    
    PeriodLower of Cost or
Market Reserve2006
    
    $
    1,525
    
    
    $
    462
    
    
    $
    672
    
    
    $
    1,3152005
    
    
    1,467
    
    
    
    501
    
    
    
    443
    
    
    
    1,5252004
    
    
    1,284
    
    
    
    628
    
    
    
    445
    
    
    
    1,467
 64




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##### Table of Contents



SIGNATURES
  A.C. MOORE ARTS & CRAFTS, INC.Date: March 12, 2007
    By:
    /s/ Rick A. LepleyRick A. LepleyChief Executive Officer  Signature
    
    Capacity
    
    Date/s/ Rick A. Lepley

Rick A. Lepley
    
    Chief Executive Officer and Director
(Principal Executive Officer)
    
    March 12, 2007/s/ Marc Katz

Marc Katz
    
    Executive Vice President and Chief
Financial Officer
(Principal Financial and
Accounting Officer)
    
    March 12, 2007/s/ Michael J. Joyce

Michael J. Joyce
    
    Chairman of the Board of Directors
    
    March 12, 2007/s/ Joseph F. Coradino

Joseph F. Coradino
    
    Director
    
    March 12, 2007/s/ Lawrence H. Fine

Lawrence H. Fine
    
    Director
    
    March 12, 2007/s/ Neil A. McLachlan

Neil A. McLachlan
    
    Director
    
    March 12, 2007/s/ Thomas S. Rittenhouse

Thomas S. Rittenhouse
    
    Director
    
    March 12, 2007/s/ Lori J. Schafer

Lori J. Schafer
    
    Director
    
    March 12, 2007




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##### Table of Contents



EXHIBIT INDEX
 Exhibit Number
    
    Description3.1(1)
    
    Articles of Incorporation3.2
    
    Amendment to Articles of Incorporation3.3(2)
    
    Amended and Restated Bylaws+10.1(1)
    
    1997 Employee, Director and Consultant Stock Option Plan+10.2(3)
    
    2002 Stock Option Plan+10.3(1)
    
    Form of Stock Option Award Agreement under the 1997 Employee,
Director and Consultant Stock Option Plan+10.4(8)
    
    Form of Option Agreement under the 2002 Stock Option Plan10.5(1)
    
    Tax Indemnification Agreement, dated July 22, 1997, among the
Company, John E. Parker and William Kaplan10.6(4)
    
    Lease, dated August 14, 1995, between Freeport 130 L.L.C. and
A.C. Moore, Inc.10.7(5)
    
    Second Amendment to Lease, dated as of March 25, 1998, between
Freeport 130 L.L.C. and A.C. Moore, Inc.10.8(6)
    
    Loan Agreement dated as of October 28, 2003, by and between
Wachovia Bank, National Association and A.C. Moore Arts &
Crafts, Inc., A.C. Moore Incorporated, Moorestown Finance,
Inc., Blackwood Assets, Inc. and A.C. Moore Urban Renewal, LLC.
A.C. Moore will furnish to the Securities and Exchange
Commission a copy of any omitted exhibits or schedules upon
request.10.9(6)
    
    Construction Loan Agreement dated as of October 28, 2003, by
and between Wachovia Bank, National Association and A.C. Moore
Arts & Crafts, Inc., A.C. Moore Incorporated, Moorestown
Finance, Inc., Blackwood Assets, Inc. and A.C. Moore Urban
Renewal, LLC. A.C. Moore will furnish to the Securities and
Exchange Commission a copy of any omitted exhibits or schedules
upon request.10.10(6)
    
    Mortgage, Assignment of Rents and Security Agreement and
Financing Statement dated as of October 28, 2003, by and
between A.C. Moore Urban Renewal, LLC and Wachovia Bank,
National Association. A.C. Moore will furnish to the Securities
and Exchange Commission a copy of any omitted exhibits upon
request.




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##### Table of Contents



Exhibit Number
    
    Description10.11(7)
    
    Modification Number One to Promissory Note dated as of November
3, 2004, by and between Wachovia Bank, National Association and
A.C. Moore Arts & Crafts, Inc., A.C. Moore Incorporated,
Moorestown Finance, Inc., Blackwood Assets, Inc. and A.C. Moore
Urban Renewal, LLC10.12(9)
    
    Promissory Note and Loan Modification Agreement dated as of
February 22, 2006, by and between Wachovia Bank, National
Association and A.C. Moore Arts & Crafts, Inc., A.C. Moore
Incorporated, Moorestown Finance, Inc., Blackwood Assets, Inc.
and A.C. Moore Urban Renewal, LLC+10.13(10)
    
    Employment Agreement, effective as of June 1, 2006, between the
Company and Rick A. Lepley.+10.14(10)
    
    Form of Option Agreement between the Company and Rick A. Lepley.+10.15(10)
    
    Agreement and Complete and Full General Release, effective as
of June 1, 2006, between the Company and Jack Parker.+10.16(10)
    
    Agreement and Complete and Full General Release, effective as
of June 1, 2006, between the Company and Leslie H. Gordon.+10.17 (11)
    
    Agreement and Complete and Full General Release, effective as
of June 8, 2006, between the Company and Patricia A. Parker.+10.18(12)
    
    Agreement and Complete and Full General Release, dated July 31,
2006, between the Company and Janet Parker.+10.19(13)
    
    Employment Agreement, signed on September 6, 2006 and effective
as of September 13, 2006, between the Company and Marc Katz.+10.20(13)
    
    Form of Option Agreement between the Company and Marc Katz.+10.21(13)
    
    Amendment No. One, dated September 6, 2006, to Agreement and
Complete and Full General Release, dated June 1, 2006, between
the Company and Leslie H. Gordon.+10.22(14)
    
    First Amendment, dated as of November 15, 2006, to the
Employment Agreement, dated as of June 1, 2006, between the
Company and Rick A. Lepley.10.23(15)
    
    Amended and Restated Swap Transaction Confirmation, signed on
December 8, 2006 and effective as of November 27, 2006.10.24(15)
    
    Amended and Restated Swap Transaction Confirmation, signed on
December 8, 2006 and effective as of November 27, 2006.+10.25
    
    Employment Agreement, effective as
of July 24, 2006, between the Company and Amy Rhoades.+10.26
    
    First Amendment, dated as of November 15, 2006, to the
Employment Agreement, dated as of July 24, 2006, between the
Company and Amy Rhoades.




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##### Table of Contents



Exhibit Number
    
    Description10.27
    
    Promissory Note and Loan Modification Agreement dated as of
March 12, 2007 by and between Wachovia Bank, National
Association and A.C. Moore Arts & Crafts, Inc., A.C. Moore
Incorporated, Moorestown Finance, Inc., Blackwood Assets, Inc.
and A.C. Moore Urban Renewal, LLC21.1
    
    Subsidiaries of the Company23.1
    
    Consent of PricewaterhouseCoopers LLP31.1
    
    Certification of Chief Executive Officer pursuant to Rule
13a14(a) promulgated under the Securities Exchange Act of
1934, as amended (the Exchange Act)31.2
    
    Certification of Chief Financial Officer pursuant to Rule
13a14(a) promulgated under the Exchange Act32.1
    
    Certification of the Companys Chief Executive Officer pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 200232.2
    
    Certification of the Companys Chief Financial Officer pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
 
 +
    
    Management contract or compensatory plan or arrangement.(1)
    
    Incorporated by reference to the Companys Registration Statement on Form S-1 (File
No. 333-32859), filed on August 5, 1997.(2)
    
    Incorporated by reference to the Companys Form 8-K filed on August 27, 2004.(3)
    
    Incorporated by reference to the Companys Definitive Proxy Statement filed on April
22, 2002.(4)
    
    Incorporated by reference to Amendment No. 1 to the Companys Registration Statement
on Form S-1 (File No. 333-32859), filed on September 16, 1997.(5)
    
    Incorporated by reference to the Companys Form 10-K for the year ended December 31,
1998.(6)
    
    Incorporated by reference to the Companys Form 10-Q for the quarter ended September
30, 2003.(7)
    
    Incorporated by reference to the Companys Form 10-K for the year ended December 31,
2004.(8)
    
    Incorporated by reference to the Companys Form 8-K filed on August 9, 2006.




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(9)
    
    Incorporated by reference to the Companys Form 10-K for the year ended December 31,
2005.(10)
    
    Incorporated by reference to the Companys Form 8-K filed on June 7, 2006.(11)
    
    Incorporated by reference to the Companys Form 8-K filed on June 14, 2006.(12)
    
    Incorporated by reference to the Companys Form 8-K filed on July 31, 2006.(13)
    
    Incorporated by reference to the Companys Form 8-K filed on September 6, 2006.(14)
    
    Incorporated by reference to the Companys Form 8-K filed on November 16, 2006.(15)
    
    Incorporated by reference to the Companys Form 8-K filed on December 14, 2006.