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                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

                                    FORM 10-K

           [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934
                   For the fiscal year ended December 31, 1999
                                       OR
           [ ] 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)
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                                  Pennsylvania                                                          23-3527763
         (State or other jurisdiction of incorporation or organization)                    (I.R.S. Employer Identification No.)

                      500 University Court, Blackwood, NJ                                                  08012
                    (Address of principal executive offices)                                            (Zip code)
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       Registrant's telephone number, including area code: (856) 228-6700

        Securities registered pursuant to section 12(b) of the Act: None

           Securities registered pursuant to section 12(g) of the Act:
                           Common Stock, no par value
                                (Title of Class)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]

As of March 16, 2000, the aggregate market value of the voting stock held by
non-affiliates of the registrant was approximately $23,069,000 based on the
closing price of the Registrant's common stock on such date, $6.94, as reported
on the Nasdaq Stock Market.(1)

The number of shares of Common Stock outstanding as of March 16, 2000 was
7,405,000.

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive proxy statement for the 2000 Annual Meeting of
Shareholders are incorporated into Part III of this Form 10-K.

----------------
         (1) The aggregate dollar amount of the voting stock set forth equals
the number of shares of Common Stock outstanding, reduced by the number of
shares of Common Stock held by executive officers, and directors and
shareholders owning in excess of 10% of the registrant's Common Stock. 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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                                     PART I

ITEM 1. BUSINESS.

General

         A.C. Moore Arts & Crafts, Inc. ("the Company") is a leading operator of
arts and crafts superstores that offer a vast assortment of traditional and
contemporary arts, crafts and floral merchandise for a wide range of customers.
The Company's business strategy is to provide the broadest and deepest selection
of high quality merchandise at the lowest prices in an inviting, attractive
superstore environment with superior customer service. The Company's objective
is to become the leading arts and crafts retailer in each of its markets. The
Company opened its first store in 1985 and since then has focused on developing
and refining its retail concept. The Company became a holding company in July
1997 by incorporating in Pennsylvania and exchanging 4,300,000 shares of Common
Stock for all the capital stock of its operating subsidiary which was organized
in Delaware in 1984. As of December 31, 1999, the Company was operating 40
superstores in the mid-Atlantic and Northeast regions. The Company has signed
leases at four locations in the Southeast region where it expects to begin
operations in 2000.

         The Company's prototype superstore ranges in size from 20,000 to 25,000
square feet, with approximately 80% devoted to selling space. A typical store
offers approximately 65,000 SKUs across 26 merchandise categories during the
course of a year, with more than 45,000 SKUs offered at any one time.
Merchandise is presented in a distinctive manner designed to maximize shopping
convenience and to reinforce themes and colors often associated with holidays,
seasonal events or specific merchandise categories. Completed arts and crafts
projects are prominently displayed in each department throughout the store to
stimulate new project ideas for customers and to enhance the shopping
environment.

Business Strategy

         The key elements of the Company's business strategy are as follows:

         Vast Merchandise Selection. The Company's merchandising strategy is to
offer the broadest and deepest selection of arts and crafts merchandise so that
customers can obtain everything necessary to create and finish any arts and
crafts project. The Company's key merchandise categories include silk and dried
flowers, floral arrangements and accessories, ribbon, wedding crafts, potpourri,
stitchery, yarn, jewelry crafts, kids crafts, art supplies, picture frames,
stamps, doll-making, seasonal items and a variety of unfinished wood crafts. The
Company believes its merchandise appeals to a wide range of recreational and
professional crafters of all ages across diverse economic backgrounds. The
Company actively seeks new merchandise by monitoring industry trends, working
with domestic and international vendors, attending trade shows and craft fairs
and regularly interacting with customers. The Company has designed its
merchandise distribution systems to ensure rapid replenishment and the highest
levels of in-stock positions. Each superstore receives merchandise daily from
vendors or the Company's distribution center, which during peak periods will
deliver a minimum of three and up to five times per week to the superstores.

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         Customer Friendly Superstores. The Company believes that its high level
of customer service and its attractive, easy-to-shop superstores are important
competitive advantages. To ensure prompt and personalized service, the Company
staffs its stores with a high ratio of store personnel to customers, including a
store manager, three associate managers and a staff of up to 60 full-time and
part-time sales associates. Store personnel, many of whom are arts and crafts
enthusiasts, assist customers with merchandise selection and project ideas. All
superstores are furnished with a customer service area, a counter for the free
arrangement of floral merchandise, eight to ten registers to ensure quick
customer checkout and a room in which classes are held up to seven days a week
for adults and children on a wide variety of craft skills. The Company's
superstores are typically located in power strip centers with convenient parking
and are easily accessible from main arteries.

         Price Leadership. The Company seeks to maintain the lowest prices on
all merchandise. Buyers and store managers actively monitor competitors' prices
to ensure that the Company maintains the lowest prices. The Company's policy to
beat any competitor's advertised price by 10% is clearly displayed in all
superstores. In addition, on a weekly basis, the Company advertises select items
at 20% to 40% off their everyday low prices. The Company believes that its
strategy of price leadership enhances customer loyalty and provides superior
value.

         Entrepreneurial Culture. Since inception, the Company has strived to
foster an ownership culture and merchandising creativity at all levels of the
organization. This culture allows the Company to have numerous merchandising
initiatives, which, if proven successful, can be implemented very quickly
throughout the Company. For example, each store manager is empowered to purchase
merchandise to meet the unique needs of the local customer base. Store managers
and associate managers earn incentive bonuses based upon annual increases in
store profitability, and in 1999, average compensation for store managers was
$98,000. The Company believes its focus on empowering and rewarding its
employees helps in recruiting, hiring and retaining talented personnel.

Growth Strategy

         The Company has developed an expansion plan to become the leading arts
and crafts retailer in each of its markets and plans to open at least 24
superstores in 2000 and 2001. The Company has no current plans to expand through
acquisitions, but may consider possible acquisitions in the future. The Company
is targeting its expansion in both existing and new markets within an
approximate 500-mile radius of the Company's southern New Jersey distribution
center. This area contains more than 25% of the United States' population.

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Merchandising

         The Company's typical superstore offers approximately 65,000 SKUs
across 26 merchandise categories during the course of a year, with more than
45,000 SKUs offered at any one time. The merchandise offered by the Company, by
major product category, is as follows:

         Floral and Accessories

                  Silk Flowers - includes a wide, seasonally changing assortment
of high quality silk flowers, hand wrapped flowers, polystems, potted plants and
green and flowering bushes.

                  Dried Flowers - includes baby's breath, eucalyptus and many
styles and colors of a seasonally changing assortment of bouquets of dried
flowers.

                  Floral Accessories - includes clay, brass, glass and ceramic
containers, assorted mosses, styrofoam shapes, wreaths and other components to
create floral displays.

                  Floral Arrangements - the Company's floral designers work with
customers to make any arrangement, free of charge, from silk or dried flowers
purchased from the Company. The superstores also carry a large assortment of
pre-made arrangements.

                  Ribbon - includes ribbon by the spool, lace, a large selection
of specialty ribbon sold by the yard and pre-made bows.

                  Wedding - includes wedding supplies, bridal headpieces, bridal
flowers, bouquet holders, ribbon roses and items used for christenings and baby
showers.

                  Potpourri - includes dried potpourri, potpourri oils, packaged
scents and a wide assortment of candles, ranging from tealights to five pound
three wick candles.

                  Candle Making - includes blocks of paraffin wax, wicks and
other materials necessary to make candles, as well as candle kits and brass and
glass candle holders.

                  Wicker - includes a wide assortment of wicker baskets in
various shapes and sizes.

         In 1999, 1998 and 1997, floral and accessories accounted for
approximately 28%, 27% and 27% of sales, respectively.

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         Traditional Crafts

                  Stitchery - includes a broad range of stitchery kits which
appeal to beginner and experienced stitchers, cross stitch supplies, stitchery
accessories, floss and sewing notions.

                  Yarn - includes acrylic, crochet cotton, cotton blends, rayon
and other blends, as well as a full assortment of hooks, needles and other
accessories.

                  Wood - includes a variety of unfinished wood products, such as
shelves, bird houses, clocks and other decorative pieces which can be finished
in various ways such as painting, staining or stenciling.

                  Cake and Candy Making - includes cake boards, bakeware, candy
molds, chocolate melts, cookie cutters, icing coloring and flavors and spices.

                  Miniatures - includes dollhouses and dollhouse furnishings,
such as room settings, wallpaper, flooring and lighting, as well as miniature
porcelains and ceramics.

                  Doll Making - includes bodies, heads and hair used to make
dolls and clothing for dolls, as well as teddy bears and other stuffed animals.

                  Kids Crafts - includes sand art, sidewalk chalk, bead art
supplies, children's stitchery kits, coloring and other books and children's
crafts similar to crafts done by adults.

                  Felt, Glitter - includes felt, glitter, pom-poms, chenille
stems and loupy, all of which are used in the creation of craft projects.

                  Books - includes a wide range of books to assist crafters in
all categories, such as how-to books for the beginner and books for the
experienced crafter.

         In 1999, 1998 and 1997, traditional crafts accounted for approximately
29%, 30% and 28% of sales, respectively.

         Art Supplies and Frames

                  Art Supplies - includes bottled and tube paints (oil, acrylic
and water based), pastels, brushes, tablets, canvas pieces, drawing pencils,
markers and art palettes.

                  Stamps and Stationery - includes decorative stamps, stamp
pads, fashion stickers, embossing tools, photo and memory albums, memory album
accessories, scissors, hole punchers and note and fashion papers.

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                  Stencils - includes decorative stencils, crayons and paints
for use on walls, wood, metal, clothing and other products.

                  Frames - includes frames of all types and sizes, including
empty frames and frames with glass, matting, posters and framing hardware.

         In 1999, 1998 and 1997, art supplies and frames accounted for
approximately 30%, 28% and 28% of sales, respectively.

         Fashion Crafts

                  Clothing - includes adult's and children's T-shirts and
sweatshirts to be decorated with fabric art, as well as related accessories.

                  Transfers - includes pictures which are ironed or sewn onto
clothing, most of which can be further embellished with glitter and fabric
paints.

                  Jewelry Making - includes jewelry making components such as
beads, sequins, rhinestones and findings, as well as the tools required to
complete the project.

         In 1999, 1998 and 1997, fashion crafts accounted for approximately 7%,
7% and 8% of sales, respectively.

         Seasonal Items

         Seasonal items include a wide range of merchandise used as decorations
for all major holidays and seasons, including the two most popular holiday
seasons, Christmas and Easter. Other holidays, such as Valentine's Day, St.
Patrick's Day and Halloween also result in significant sales of seasonal
merchandise.

         In 1999, 1998 and 1997, seasonal items accounted for approximately 7%,
8% and 9% of sales, respectively.

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Purchasing

         The Company's purchasing programs are designed to support its business
strategy of providing customers with the broadest and deepest selection of high
quality arts and crafts merchandise at the lowest prices and maintaining high
in-stock positions. In order to manage its inventory of approximately 65,000
SKUs, the Company has organized its product offerings into 26 merchandise
categories. The Company's 21 person corporate buying staff develops corporate
buying programs to establish the merchandise direction for the Company and
creates "planograms" to provide store managers with detailed descriptions and
illustrations of store layout and merchandise presentation. The Company's
product offering at a superstore is often enhanced by merchandise purchased by
that store's manager to meet the unique needs of the superstore's customer base.
The Company monitors these purchases through vendor master file controls.
In-store department managers are responsible for daily reordering of merchandise
and are monitored by store managers. Ordering occurs frequently, and the Company
seeks vendors who can deliver on a timely basis. Approximately 96% of
merchandise orders are placed through the Company's Electronic Data Interchange
("EDI") system, which allows for the automated reordering of merchandise from
most domestic vendors. Approximately 57% of orders are shipped directly from the
vendor to the Company's superstores. The remaining 43%, over 35% of which are
floral and seasonal items, are shipped from the Company's distribution center.
An early morning stocking crew unpacks deliveries and stocks merchandise before
the superstore opens.

         The Company purchases its inventory from more than 500 vendors
world-wide. The largest 25 suppliers accounted for approximately 45% of the
dollar volume of the Company's purchases in 1999, and the largest supplier,
SBAR'S, Inc. ("SBAR'S") accounted for approximately 21% of the dollar volume of
the Company's purchases in 1999. Approximately 11% of the Company's merchandise,
primarily floral and seasonal items, is imported directly from foreign
manufacturers or their agents, principally in the Far East. All of the Company's
overseas purchases are denominated in dollars.

         SBAR'S is a large distributor of arts and crafts merchandise, primarily
to independent arts and crafts retailers. SBAR'S maintains an inventory of many
of the items the Company purchases directly from other vendors, thereby allowing
the Company to obtain merchandise from SBAR'S which cannot be delivered by
vendors on a timely basis. SBAR'S maintains a product development and design
department which assists the Company in identifying craft trends, and the
Company often obtains from SBAR'S product samples and displays which are
utilized in the Company's superstores to generate customer interest. The Company
has developed a disciplined purchasing and ordering relationship with SBAR'S,
which includes daily reordering and two to five deliveries by SBAR'S per store
each week, depending on the size of the store and time of the year. SBAR'S has
equipped the Company's superstores with handheld scanners to aid in product
re-ordering. Merchandise purchased from SBAR'S typically has a high SKU count
but small dollar volume, requires greater volume purchases from a manufacturer
to obtain competitive pricing or involves a small number of SKUs from individual
vendors with whom it would be impractical for the Company to establish a direct
buying relationship. The Company does not have a purchase agreement or an
exclusive arrangement with SBAR'S, and ordering of merchandise typically occurs
through the issuance of individual purchase orders.

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         The Company's buying operation led by an Executive Vice President is
divided into two divisions. One division, headed by an Executive Vice President
assisted by two buyers, handles merchandising for all floral and seasonal items.
The other division, headed by a Senior Vice President assisted by seven buyers,
is responsible for merchandising all other items, which comprised approximately
82% of net sales in 1999. Buyers and store management regularly attend trade
shows and craft fairs to monitor industry trends and to obtain new craft ideas.

Superstore Format and Operations

         The Company's superstores are typically located in power strip centers
with convenient parking and are easily accessible from main traffic arteries.
The Company's prototype superstore ranges in size from 20,000 to 25,000 square
feet, with approximately 80% devoted to selling space and the remainder
consisting of delivery, storage, classroom and office areas. Superstores are
typically open from 9:30 am to 9:00 pm, Monday through Saturday and from 10:00
am to 6:00 pm on Sunday.

         Superstores are designed with a layout intended to lead customers
through the entire store in order to expose them to all 26 merchandise
categories. Merchandise is grouped to aid the customer in finding project
related items. Extensive use is made of the display shelving at both ends of
each aisle to present the best selling items. Generally, the center of the
superstore contains the floral area, which includes a counter for floral
arrangement and a ribbon center. Superstores also contain a customer service
area, eight to ten registers for quick customer checkout and a room for classes.

         Classes are regularly held on a wide variety of craft skills. Classes
are taught by sales associates as well as outside professionals. Typical classes
provide instruction on oil painting, cake decorating, advanced stamping, and on
making bows, children's beaded necklaces and memory albums. Classes are free of
charge unless there is an extensive use of materials.

         A major component of the Company's promotional strategy is its use of
in-store displays and samples. Because many customers browse for new craft
ideas, eye-catching displays of completed craft projects are effective at
motivating impulse purchases. These displays enhance the image of store
departments. Knowledgeable store personnel are available to describe displays in
detail to customers and to offer assistance on related arts and crafts projects.
The Company has three field design coordinators who are responsible for ensuring
high quality floral displays in all superstores.

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         The Company's Chief Operating Officer is responsible for store
operations and is assisted by the Senior Vice President, Store Operations and
five Vice Presidents. Each Vice President is responsible for seven to eight
superstores. Each superstore employs up to approximately 60 full and part-time
sales associates and is managed by a store manager, assisted by three associate
store managers, each of whom is responsible for approximately one-third of a
superstore's selling space. New superstores are opened by the Company's new
store development team which consists of the Vice President, New Store
Development, a set-up-crew, and staff from the human resources and planogram
departments. The Company seeks to develop the management capabilities of its
managers through both Company training programs and on-the-job training. In
addition, store managers and associate store managers attend several
Company-sponsored conferences each year to refine and develop their skills in
merchandising, merchandise trends, store operations, finance, interviewing,
performance appraisals and general management. Training sessions are also held
for floral designers and classroom coordinators at various times during the
year.

Distribution

         The Company's objective of maintaining high in-stock positions in all
merchandise categories in all superstore locations is supported by its
distribution system. Approximately 43% of the selling value of all merchandise
is delivered to stores from the Company's distribution center, 21% is delivered
by SBAR'S and the balance is drop-shipped by other vendors. Deliveries are made
from the Company's distribution center two or three times per week, depending on
superstore size, during eight months of the year and three to five times during
the peak selling season of September through December. The Company maintains its
own leased fleet of tractors and trailers. The Company has contracted with an
outside carrier to deliver to superstores for which deliveries will require an
overnight stay.

         The distribution center's mission is to support the Company's
superstores. The distribution center is used strategically to distribute
merchandise which is imported, cannot be delivered by a vendor on a timely basis
or in the small quantities demanded by the store ordering process or is bulky
and, therefore, difficult to store in the superstores. Also, the Company will
order merchandise in large quantities for delivery to the distribution center
when the vendor offers substantial volume discounts or other economic
incentives.

         The Company's 250,000 square foot distribution center and adjoining
10,000 square foot office complex in Blackwood, New Jersey is leased for a term
which expires in October 2004 with an option to renew for six years.
Approximately one-sixth of the distribution center is used for order picking,
with the balance used for receiving and bulk stock storage. The distribution
center was expanded to its current size in 1998.

         Management of the distribution process is accomplished through the use
of a distribution center management system. The system includes the use of
handheld computers to record all merchandise movement throughout the
distribution center and to instantly update inventory records through the use of
radio frequency communication. The Company believes that this system, which
operates in a paperless environment, enables the Company to enhance the tracking
of inventory in the distribution center, increases the efficiency of
distribution center personnel and helps ensure the distribution center's ability
to maintain high in-stock positions in each of the Company's superstores as the
Company expands its superstore base.

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Advertising and Promotion

         The Company creates its own advertising using photo art scanned into a
Macintosh system supported by Pagemaker(R) software. The Company advertises 52
weeks per year, typically in midweek editions of local and/or regional
newspapers. Approximately eight times per year the Company runs multi-page
newspaper inserts in local and regional newspapers. In addition, prior to store
openings, the Company uses radio advertisements to develop customer awareness
and runs special pre-opening ads, normal advertising copy and/or grand opening
inserts in newspapers. In 1999, the Company's net advertising expenditures were
approximately 3% of net sales.

         The Company uses in-store displays and samples of completed arts and
crafts projects as a major component of its promotional strategy. Because many
customers browse for new craft ideas, eye-catching displays of completed craft
projects are effective at motivating impulse purchases. The Company also
promotes customer interest in crafting by offering classes on a wide variety of
craft skills.

         The Company believes that teachers, who often purchase arts and crafts
merchandise for in-school projects, are an important customer segment. To
generate goodwill, the Company offers teachers who join its Teachers Program a
10% discount on all regularly and sale priced merchandise. Over 436,000 discount
cards have been issued to teachers.

         The Company's "Crafty Kids Birthday Club" and "Teen Club" are intended
to develop future crafters as customers. Members of these clubs receive a
birthday card containing a $5.00 gift certificate each year through their
fifteenth birthday. These clubs have over 375,000 members.

Management Information Systems

         The Company operates a high speed multi-platform local area network
(LAN) and a wide area network (WAN) which support the 10 servers and 200
workstations within its distribution center and corporate offices, and the 42
remote servers and 252 remote workstations located in the stores. In 1999 the
Company successfully installed a voice over frame telecommunications system over
their Virtual Private Network (VPN) that links their stores to their main office
and distribution center. A VPN uses virtual connectivity to give all users the
look and feel of a private network with the flexibility and economics of a
public network. All voice and data transmissions are passed over this VPN.

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         The LAN and WAN support the Company's corporate systems which include
their accounting, merchandising and Radio Frequency (RF) warehouse management
system. The Company's management information and control system has been
designed to support the Company's key business objective of maintaining high
in-stock merchandise positions in all of the Company's superstores. This
internally developed system is based upon EDI with most of the Company's vendors
as well as with its distribution center. Stores electronically transmit their
orders over the VPN to the corporate office where data is electronically sorted,
processed and transmitted to the appropriate vendor. Orders are also fed
automatically into the accounts payable system. This system captures daily
purchases by SKU. The information is then used to develop planograms and is
integrated into reports for the buyers and store managers.

         In the fall of 1999 the Company undertook testing a new Point of Sale
system (POS) in three of its superstores. This new POS system which includes
merchandise UPC scanning at the registers along with the expansion of the
Company's Radio Frequency System, will allow its stores to save or re-deploy
manpower that had previously been used to mark each piece of merchandise. This
system will also improve the speed of the check-out process at the registers,
cut down the number of pricing errors, and provide greater control over register
operations. With the POS data capturing capabilities, faster and more detailed
sales and margin information will be made available. Based on the results of
this test, the Company is currently installing this system in all new stores and
retrofitting exiting stores. It is expected that all stores will be operating on
this system by the beginning of the fourth quarter 2000.

Competition

         The arts and crafts retailing business is highly competitive. The
Company currently competes against a diverse group of retailers, including
several national and regional chains of arts and crafts retailers (such as
publicly-held Michaels Stores and Rag Shops and privately-held Frank's Nursery
and Crafts), local merchants that specialize in one or more aspects of arts and
crafts and various mass merchandisers that typically dedicate a portion of their
selling space to a limited selection of arts and crafts items. These mass
merchandisers and some of the national chains have substantially greater
financial resources and operate more stores than the Company.

         The Company believes that the principal competitive factors in its
business are pricing, breadth of merchandise selection, in-stock merchandise
position and customer service. The Company believes that it is well positioned
to compete on each of these factors.

Employees

         As of December 31, 1999, the Company had 1,113 full-time and 2,006
part-time employees, 2,885 of whom worked at superstores, 117 at the
distribution center and 117 at the corporate offices. None of the Company's
employees is covered by a collective bargaining agreement, and the Company
considers its relationship with its employees to be good.

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Trademarks

         The Company uses the "A.C. Moore" name as a tradename and as a service
mark in connection with the sale of its merchandise. The Company's "A.C. Moore"
logo has been federally registered as a service mark.

Cautionary Statement Relating to Forward Looking Statements

         Certain oral statements made by management of the Company from time to
time and certain statements contained herein or in other periodic reports filed
by the Company 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 and Section 21E of the Securities
Exchange Act of 1934, as amended ("Exchange Act") with respect to results of
operations and the business of the Company. All such statements, other than
statements of historical facts, including those regarding market trends, the
Company's financial position, 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,"
"expects," "expected," "anticipates," and "anticipated" or the negative thereof
or variations thereon or similar terminology. These forward-looking statements
are based on the Company's current expectations. Although the Company believes
that the expectations reflected in such forward looking statements are
reasonable, there can be no assurance that such expectations will prove to be
correct. These forward-looking statements represent the Company's current
judgment. The Company disclaims any intent or obligation to update its
forward-looking statements. Because forward-looking statements involve risks and
uncertainties, the Company's actual results could differ materially. Important
factors that could cause actual results to differ materially from the Company's
expectations ("Cautionary Statements") include those that are discussed below.
All subsequent written and oral forward-looking statements attributable to the
Company or persons acting on behalf of the Company are expressly qualified in
their entirety by the Cautionary Statements.

         Risks Associated With Expansion. The Company's strategy to increase its
net sales and earnings will depend in large part on its ability to open new
superstores and to operate them on a profitable basis. The Company opened three
superstores in 1999 and anticipates opening 12 superstores in 2000 and at least
12 superstores in 2001, in both existing and new geographic markets. The opening
of additional superstores in an existing market could result in lower net sales
from the Company's existing superstores in that market. Opening superstores in
new geographic markets may present competitive and merchandising challenges that
are different from those currently faced by the Company in its existing
geographic markets. The Company may incur higher costs related to advertising
and distribution in connection with entering new markets. If the Company opens
superstores that do not perform to the Company's expectations or if superstore
openings are delayed, the Company's results of operations and financial
condition could be materially adversely affected. The success of the Company's
planned expansion will be dependent upon many factors, including the
identification of suitable markets, the availability and leasing of suitable
sites on acceptable terms, the availability of acceptable financing, the hiring,


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training and retention of qualified management and other store personnel and
general economic conditions. The Company's expansion will place significant
demands on the Company's management, resources, operations and existing
information systems, and the Company must ensure the continuing adequacy of its
financial controls, operating procedures and information systems. Also, the
Company's continued growth will depend on its ability to increase sales in its
existing superstores. The Company has experienced a decline in its comparable
store sales growth rate in recent years. There can be no assurance that the
Company will be successful in any of these areas, and, as a result, there can be
no assurance that the Company will achieve its planned expansion or that new
superstores will be effectively integrated into the Company's existing
operations or will be profitable.

         Dependence on Key Personnel. The success of the Company and its growth
strategy is dependent upon the active involvement of senior management
personnel, particularly John E. ("Jack") Parker, its President and Chief
Executive Officer. The loss of the services of Mr. Parker or other members of
senior management could have a materially adverse effect on the Company. The
Company has not entered into employment agreements with any members of its
senior management team nor does it maintain any key man life insurance on them.
The Company's success in the future will also be dependent upon its ability to
attract and retain other qualified personnel, including store managers.

         Small Store Base. As of December 31, 1999 the Company operated a chain
of only 40 superstores. The results achieved to date by the Company's relatively
small store base may not be indicative of the results of the larger number of
superstores which the Company intends to operate in existing or new markets.
Because the Company's current and planned superstores are located in the
mid-Atlantic, Northeast and Southeast regions, the effect on the Company of
adverse events in these regions (such as weather or unfavorable regional
economic conditions) may be greater than if the Company's superstores were more
geographically dispersed. Furthermore, due to the Company's relatively small
store base, one or more unsuccessful new superstores, or a decline in sales at
an existing superstore, will have a more significant effect on the Company's
results of operations than would be the case if the Company had a larger store
base.

         Quarterly Fluctuations. The Company's business is affected by the
seasonality pattern common to most retailers. Due to the importance of the fall
selling season, which includes Halloween, Thanksgiving and Christmas, the fourth
calendar quarter has historically contributed, and is expected to continue to
contribute, a substantial majority of the Company's operating income for the
entire year. As a result, any factors negatively affecting the Company during
the fourth quarter of any year, including adverse weather and unfavorable
economic conditions, would have a materially adverse effect on the Company's
results of operations for the entire year. The Company's quarterly results of
operations also may fluctuate based upon such factors as the timing of certain
holiday seasons, the number and timing of new superstore openings, the amount of
superstore pre-opening expenses, the amount of net sales contributed by new and
existing superstores, the mix of products sold, the timing and level of
markdowns, competitive factors, weather and general economic conditions.

                                       13
<PAGE>

         Competition. The arts and crafts retailing business is highly
competitive. The Company currently competes against a diverse group of
retailers, including several national and regional chains of arts and crafts
retailers, a substantial number of local merchants that specialize in one or
more aspects of arts and crafts and various mass merchandisers that typically
dedicate a portion of their selling space to a limited selection of arts and
crafts items. These mass merchandisers and some of the national chains have
substantially greater financial resources and operate more stores than the
Company.

         Risks Associated With Merchandising. The Company's success depends, in
large part, on its ability to anticipate and respond, in a timely manner, to
changing merchandise trends and consumer demands. Accordingly, any delay or
failure by the Company in identifying and responding to changing merchandise
trends could adversely affect consumer acceptance of the merchandise in the
Company's superstores. In addition, the Company makes decisions regarding
merchandise well in advance of each of the seasons in which such merchandise
will be sold. Significant deviations from projected demand for products would
have a materially adverse effect on the Company's results of operations and
financial condition, either from lost sales due to insufficient inventory or
lower margins due to the need to mark down excess inventory.

         Dependence on SBAR'S. SBAR'S is the Company's largest supplier of
merchandise to the Company who accounted for approximately 21% of the dollar
volume of the Company's purchases in 1999. The Company's future success is
dependent upon its ability to maintain a continuing good relationship with
SBAR'S and its other principal suppliers. The Company does not have any purchase
agreements or exclusive arrangements with SBAR'S or any other vendors, and
ordering of merchandise typically occurs through the issuance of individual
purchase orders. The failure to maintain such relationships could have a
materially adverse effect on the Company's results of operations, financial
condition and planned store expansion.

         Risks Associated with Sourcing and Obtaining Merchandise from Foreign
Sources. The Company in recent years has placed increased emphasis on obtaining
floral and seasonal items from overseas vendors, with approximately 11% of all
merchandise being purchased from overseas vendors in 1999. A change in the
competitiveness of a particular country's exports, whether due to a change in
trade regulations, currency fluctuations or other reasons is likely to increase
the cost of items purchased by the Company overseas or make such items
unavailable with a possible resulting materially adverse effect on the Company's
results of operations and financial condition.

         Inventory Risk. The Company depends upon in-store department managers
to reorder merchandise. The failure of the Company's staff to accurately respond
to inventory requirements could adversely affect consumer acceptance of the
merchandise in the Company's stores and thereby negatively impact sales which
could have a materially adverse effect on the Company's results of operations
and financial condition. In addition, as do most other retailers, the Company
conducts a physical inventory in the stores once a year, and quarterly results
are based on an estimated gross margin and accrual for estimated inventory
shrinkage.

                                       14
<PAGE>

         Future Capital Needs. The Company currently intends to finance the
opening of new superstores with cash flow from operations and borrowings. The
Company plans to open 12 superstores in 2000 and at least 12 superstores in
2001. The Company expects that the average cash investment, including
pre-opening expenses, required to open a superstore will be approximately
$1,250,000. There can be no assurance that the actual cost of opening a
superstore will not be significantly greater than that expected by the Company.
The Company may be required to seek additional debt and/or equity financing in
order to fund its continued expansion. There can be no assurance that such
additional financing will be available on terms acceptable to the Company, if at
all. In addition, the Company's ability to incur additional indebtedness or
issue equity or debt securities could be limited by covenants in present and
future loan agreements and debt instruments.




                                       15
<PAGE>

EXECUTIVE OFFICERS OF THE REGISTRANT

          The executive officers of the Company are currently as follows:
<TABLE>
<CAPTION>
                  Name                      Age                           Position
                  ----                      ---                           ---------
<S>                                        <C>      <C>
John E. (Jack) Parker.................       58     President, Chief Executive Officer and Director

Rex A. Rambo..........................       58     Executive Vice President, Chief Operating Officer

Patricia A. Parker....................       57     Executive Vice President, Merchandising and Director

Leslie H. Gordon......................       56     Executive Vice President, Treasurer and Chief Financial
                                                         Officer

Dean C. Emmans........................       49     Executive Vice President, Merchandising and Marketing

Janet Parker-Vandenberg...............       37     Senior Vice President, Merchandising
</TABLE>
         Mr. Parker is a co-founder of the Company and has been President, Chief
Executive Officer and a director of the Company since its inception. From 1959
to 1984, Mr. Parker worked for the F.W. Woolworth Company ("Woolworth") in
various management positions, most recently as President and Chief Executive
Officer of the U.S. General Merchandise Group where he had responsibility for
more than 1,000 stores, including the entire domestic chain of Woolworth retail
stores. Mr. Parker is the husband of Patricia A. Parker and the father of Janet
Parker-Vandenberg.

         Mr. Rambo has been Executive Vice President and Chief Operating Officer
of the Company since December 1997. From December 1996 to December 1997, Mr.
Rambo served as Executive Vice President, Strategic Development, Merchandising
and Marketing of the Company. In 1995 and 1996, Mr. Rambo was Executive Vice
President, Merchandising and Marketing of Michaels Stores, Inc., an arts and
crafts retailer. From 1992 to 1995, Mr. Rambo served in various management
capacities with Montgomery Ward & Co. and its affiliates, first, from 1992 to
1994 as a Vice President of Montgomery Ward and most recently as President and
Chief Operating Officer of Montgomery Ward's subsidiary Lechmere, Inc., a
retailer of electronics and other home products. In July 1997, Lechmere, Inc.
filed a petition in bankruptcy under Chapter 11. From 1963 to 1992, Mr. Rambo
worked for Sears, Roebuck and Co. in various management capacities, including
National Marketing Manager.

         Ms. Parker has been Executive Vice President, Merchandising of the
Company since September 1990. From 1985 to 1990, she served as a Vice President
of the Company. Ms. Parker is responsible for purchasing all floral and seasonal
merchandise and the Company's import purchasing program. Ms. Parker is the wife
of Jack Parker.

                                       16
<PAGE>

         Mr. Gordon has been Executive Vice President, Treasurer and Chief
Financial Officer of the Company since February 1999. From March 1996 to January
1999, Mr. Gordon served as Senior Vice President, Treasurer and Chief Financial
Officer of the Company. From 1992 to 1995, Mr. Gordon was Senior Vice President,
Finance of C & J Clark America, Inc., a shoe manufacturer, wholesaler and
retailer. From 1986 to 1992, Mr. Gordon served as Senior Vice President, Finance
of SILO, Inc., an electronics retailer.

         Mr. Emmans has been Executive Vice President, Merchandising and
Marketing since September 1999. He was elected an executive officer on March 7,
2000. From 1998 to 1999 Mr. Emmans was Senior Vice President of Business
Development for Hilco/Great American Group, a company which provided strategic
financial services for retailers, distributors, manufacturers and lenders. From
1995 to 1998, Mr. Emmans served as President of Crafts & Stuff, a regional arts
and crafts chain. From 1988 to 1994, Mr. Emmans was President and Chief
Executive Officer of Northwest Fabrics & Crafts, Inc., a division of ConAgra
which operated 110 retail stores selling crafts, textiles and home-sewing
products.

         Ms. Parker-Vandenberg has been Senior Vice President, Merchandising of
the Company since 1994. From 1990 to 1994, Ms. Parker-Vandenberg served as Vice
President of Administration of the Company, and from 1985 to 1990, she was the
Company's Accounting Manager. Ms. Parker-Vandenberg is the daughter of Jack and
Patricia A. Parker.

ITEM 2.  PROPERTIES.

         As of March 15, 2000, the Company operated nine superstores in
Pennsylvania, eight superstores in New York, seven superstores each in New
Jersey and Massachusetts, three superstores in Maryland, two superstores each in
Delaware and Connecticut, and one superstore in each of New Hampshire and Rhode
Island, all of which are leased. In addition, the Company has eight superstores
(four in North Carolina and one each in New Jersey, Pennsylvania and Maryland)
under lease, all of which the Company plans to open in 2000. Most superstore
leases have an average initial term of ten years, with three five-year renewal
options, and provide for predetermined escalations in future minimum annual rent
or additional rent contingent upon store sales levels. The pro rata portion of
scheduled rent escalations has been included in other long-term liabilities in
the Company's balance sheet.

         The Company selects superstore sites on the basis of various factors,
including physical location, demographics, anchor and other tenants, location
within the center, parking and available lease terms. The Company looks for
co-tenants that generate a high rate of shopping traffic, such as specialty
value-oriented women's retailers, leading chain supermarkets, discount chains,
home improvement centers, book superstores and domestics superstores. The
Company believes its superstores are attractive to developers because they
attract high rates of customer traffic and generate above average net sales per
square foot. The Company's superstore site selection process is headed by the
Chief Operating Officer.

                                       17
<PAGE>

         The Company's 250,000 square foot distribution center and adjoining
10,000 square foot office complex in Blackwood, New Jersey is leased for a term
which expires in October, 2004 with an option to renew for six years.
Approximately one-sixth of the distribution center is used for order picking,
with the balance used for receiving and bulk stock storage.

ITEM 3.  LEGAL PROCEEDINGS.

         From time to time, the Company is involved in litigation arising in the
ordinary course of its business. None of the pending litigation, in the opinion
of management, is likely to have a materially adverse effect on the Company's
results of operations or financial condition. The Company maintains general
liability insurance in amounts deemed adequate by management.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

         No matters were submitted to a vote of security holders during the
fourth quarter of fiscal 1999, through the solicitation of proxies or otherwise.

                                     PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

          The Company's Common Stock is traded on the NASDAQ National Market
under the symbol ACMR. The following table shows the quarterly range of high and
low sales prices of the Common Stock for each quarterly period within the two
most recent years:
<TABLE>
<CAPTION>
             Quarter Ended                               High                                    Low
             -------------                               ----                                    ---
<S>                                                    <C>                                     <C>
                 1999
               March 31                                $   6 1/2                              $   4 1/8
                June 30                                    6 7/8                                  4 1/2
             September 30                                  6 3/8                                  4 1/8
              December 31                                  6 1/8                                  4

                 1998
               March 31                                $  19 1/4                              $  10 1/2
                June 30                                   19 7/8                                 15 1/2
             September 30                                 16 3/4                                  4 7/8
              December 31                                 10 1/2                                  5
</TABLE>


                                       18
<PAGE>

          As of March 16, 2000, there were approximately 93 stockholders of
record.

         From its inception in 1985 until immediately prior to completion of its
initial public offering, the Company was subject to taxation under Subchapter S
of the Internal Revenue Code of 1986 (the "Code"). As a result, the net income
of the Company, for federal and certain state income tax purposes, was taxable
directly to the Company's shareholders during that time rather than to the
Company. To provide funds for tax obligations payable by its shareholders on
account of the Company's taxable income in 1996 and as distributions of
earnings, the Company made aggregate distributions to its shareholders of $7.0
million during 1997. The funds distributed to shareholders, reduced by the
amounts used to pay tax obligations on account of the Company's taxable income,
were loaned to the Company contemporaneously with their distribution to provide
working capital to the Company. In connection with its conversion from S
Corporation to C Corporation status, the Company distributed $256,000 to the
Company's shareholders. This distribution represented the shareholders'
proportionate interest in the Company's earnings which had not been distributed
to the shareholders prior to the Company's conversion to a C Corporation.

         The Company does not intend to pay any cash dividends as it intends to
retain its earnings to finance the expansion of its business. Future dividends,
if any, will depend upon the Company's results of operations, financial
condition, cash requirements and other factors deemed relevant by the Board of
Directors. Furthermore, the Company's credit agreement prohibits the payment of
cash dividends by the Company without the bank's consent.



                                       19
<PAGE>

ITEM 6.  SELECTED FINANCIAL DATA.

         The selected Financial data for the five years ended December 31, 1999
should be read in conjunction with the Company's consolidated financial
statements and notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" appearing elsewhere herein.
<TABLE>
<CAPTION>
                                                                                Year Ended December 31,
                                                           (dollars in thousands, except per share and per square foot data)
                                                         ----------------------------------------------------------------------
                                                               1999           1998          1997          1996          1995
                                                               ----           ----          ----          ----          ----
<S>                                                          <C>            <C>           <C>           <C>           <C>
STATEMENT OF INCOME DATA:
Net sales............................................         $222,998       $187,005      $138,056      $109,319     $100,106

Income from operations...............................            8,975          5,830         7,781         6,943        7,248

Net income...........................................            5,664          3,935         3,992         6,306        6,409

Net income per share, diluted........................             0.76           0.52          0.79          1.46         1.48

Pro forma net income(1)..............................               --             --         4,431         3,817        3,840

Pro forma diluted net income per share(1)............               --             --          0.87          0.88         0.89

Weighted average shares outstanding .................        7,405,000      7,517,000     5,078,000     4,326,000    4,326,000

BALANCE SHEET DATA:
Working capital......................................          $46,625        $42,721       $40,974       $20,597      $20,224

Total assets.........................................           90,617         82,357        66,067        37,799       34,571

Long-term debt, excluding current portion............            1,199          1,568             -        17,748       16,105

Shareholders' equity.................................           56,972         51,171        47,086         7,492        7,756

OTHER DATA:
Cash flows from operating activities.................           $9,808        $(4,445)       $1,452        $6,653       $4,190

EBITDA(2)............................................          $11,874         $8,032        $9,242        $8,088       $8,223

Stores open, end of year.............................               40             37            25            17           16

Comparable store sales increase......................               6%             3%            4%            5%           8%

Average sales per store..............................           $5,915         $6,329        $6,728        $6,586       $6,245

Sales per total square foot..........................            $ 271          $ 302         $ 326         $ 320        $ 303

Footnotes on following page.
</TABLE>

                                       20
<PAGE>
---------------
(1)  Prior to the Company's initial public offering completed on October 9,
     1997, the Company elected to be taxed under the S Corporation provisions of
     the Internal Revenue Code. Under these provisions, the shareholders of the
     Company included their pro rata share of income or loss in their individual
     returns. The pro forma information has been computed as if the Company was
     subject to federal and all applicable state corporate income taxes for each
     year presented, assuming the tax rate that would have applied had the
     Company been taxed as a C Corporation

(2)  EBITDA is calculated as income before income taxes plus interest,
     depreciation and amortization. EBITDA should not be considered as an
     alternative to net income, as an indicator of operating performance or as
     an alternative to cash flow as a measure of liquidity to service debt
     obligations and is not in accordance with or superior to generally accepted
     accounting principles, but provides additional information on the company's
     ability to incur and service debt.


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS.

         The following discussion of the Company's historical results of
operations and its liquidity and capital resources should be read in conjunction
with the selected financial data and the consolidated financial statements of
the Company and related notes thereto appearing elsewhere in this report.

Overview

         The Company is a rapidly growing operator of arts and crafts
superstores that offers a vast assortment of traditional and contemporary arts
and crafts merchandise for a wide range of customers.

         In 1995, the Company implemented a plan to build its infrastructure to
position the Company for rapid future growth. By the end of 1996, the Company
had recruited experienced senior retail executives in the areas of operations,
merchandising and finance, made key additions in other areas such as buying,
information systems, human resources and real estate, leased a new 130,000
square foot distribution center and office complex (expanded to 250,000 square
feet in 1998), developed its automated ordering system to electronically link
the Company with most vendors, and developed a real estate program to
accommodate the Company's expansion plan. In 1996, the Company opened one new
superstore. In 1997 and 1998, the Company continued the implementation of its
expansion strategy by opening a total of 20 new superstores and achieved a sales
growth in the existing store base of 3% in 1998 and 4% in 1997. Newer
superstores, on average, do not generate the volume levels of older stores. As a
result, average sales per store in 1998 of $6.3 million was lower than the
average sales per store of $6.7 million in 1997, and sales per square foot of
$302 in 1998 was lower than sales per square foot of $326 in 1997.

                                       21
<PAGE>

         In 1998, the Company did not meet its sales and profit objectives and
as a result made the decision to slow down its store expansion so that it could
concentrate on improving the operations and profits of its existing stores. In
1999, the Company opened three new superstores, improved its departmental
plan-o-grams and also improved its internal communications between various
components of its organization. In 1999, the sales growth in existing stores was
6%. Average sales per store and sales per square foot continued to decline in
1999 to $5.9 million and $271, respectively, from the previous year due to the
factors cited above.

         With the changes made by the Company in 1999, the Company has
re-established its aggressive opening schedule and plans to open at least 24 new
superstores in 2000 and 2001, all within 500 miles of its southern New Jersey
distribution center. This area contains more than 25% of the United States'
population.

         The Company successfully completed an initial public offering on
October 9, 1997 by issuing 3,105,000 shares of common stock including shares
issued upon the exercise of an underwriters' option and received $42.6 million
in net proceeds. The Company retired all outstanding bank debt and shareholder
loans totaling $28.0 million with the proceeds.


Results of Operations

         The following table sets forth, for the periods indicated, selected
statement of operations data expressed as a percentage of net sales:
<TABLE>
<CAPTION>
                                                                           Year Ended December 31,
                                                          ----------------------------------------------------------
                                                                1999                 1998                1997
                                                          -----------------     ---------------     ----------------
<S>                                                       <C>                   <C>                 <C>
Net sales............................................           100.0%              100.0%              100.0%
Cost of sales........................................            64.2                63.5                62.9
                                                                -----               -----               -----
Gross margin.........................................            35.8                36.5                37.1
Selling, general and administrative expenses.........            31.5                32.2                30.4
Store pre-opening expenses...........................              .3                 1.2                 1.1
                                                                -----               -----               -----
Income from operations...............................             4.0                 3.1                 5.6
Interest (income) expense, net.......................            (0.0)               (0.2)                0.3
                                                                -----               -----               -----
Income before income taxes...........................             4.0                 3.3                 5.3
Provision for income taxes...........................             1.5                 1.2                 2.4
                                                                -----               -----               -----
Net income...........................................             2.5%                2.1%                2.9%
                                                                =====               =====               =====
Pro forma income tax provision.......................            ---                 ---                  2.1
                                                                -----               -----               -----
Pro forma net income.................................            ---                 ---                  3.2%
                                                                =====               =====               =====
</TABLE>

                                       22
<PAGE>


1999 Compared to 1998

         Net Sales. Net sales increased $36.0 million, or 19.2%, to $223.0
million from $187.0 million in 1998. This increase resulted from (i) net sales
of $4.1 million from three new superstores opened during the period, (ii) net
sales of $21.1 million from superstores opened in 1998 not included in the
comparable store base, and (iii) a comparable store sales increase of $10.8
million, or 6%. Stores are added to the comparable store base at the beginning
of the fourteenth full month of operation.

         Gross Margin. Cost of sales includes the cost of merchandise, plus
certain distribution and purchasing costs. Cost of sales increased $24.4
million, or 20.5%, to $143.1 million in 1999 from $118.7 million in 1998. The
gross margin increased $11.6 million, or 17.1%, to $79.9 million in 1999 from
$68.3 million in 1998. The gross margin decreased to 35.8% of net sales in 1999
from 36.5% in 1998 mainly due to competitive discounting in the marketplace.

         Selling, General and Administrative Expenses. Selling, general and
administrative expenses include (a) direct store level expenses, including rent
and related operating costs, payroll, advertising, depreciation and other direct
costs, and (b) corporate level costs not directly associated with or allocable
to cost of sales including executive salaries, accounting and finance, corporate
information systems, office facilities and other corporate expenses. Selling,
general and administrative expenses increased $10.1 million, or 16.8%, in 1999
to $70.3 million from $60.2 million in 1998. Of the increase, $9.8 million was
attributable to the three superstores open during 1999 which were not open
during 1998 and the superstores opened in 1998 not in the comparable store base.
The remainder of the increase is attributable to $200,000 in operating expenses
in the comparable superstores and $100,000 in corporate costs. As a percentage
of sales, selling, general and administrative costs decreased to 31.5% of net
sales in 1999 from 32.2% of net sales in 1998. This decrease is primarily due to
leveraging of corporate general and administrative expenses.

         Store pre-Opening Expenses. The Company expenses store pre-opening
costs as incurred. Pre-opening expenses for the three new superstores opened in
1999 amounted to $609,000. In 1998, the Company opened 12 superstores and had
pre-opening expenses of $2.2 million.

         Interest Expense. Interest expense was $172,000 for 1999, an increase
of $106,000 from 1998. This increase was the result of greater short-term bank
borrowings as compared with 1998.

         Interest Income. Interest income was $211,000 in 1999, a decrease of
$260,000 from 1998. The decrease was due to lower cash investments as monies
received from the sale of common shares in 1997 have been used to fund the
Company's growth.

         Income Taxes. For 1999, the effective tax rate was 37.2%, .3% greater
than the effective rate in 1998.

                                       23
<PAGE>

1998 Compared to 1997

         Net Sales. Net sales increased $48.9 million, or 35.5%, to $187.0
million from $138.1 million in 1997. This increase resulted from (i) net sales
of $28.8 million from 12 new superstores opened during the period, (ii) net
sales of $15.7 million from superstores opened in 1997 not included in the
comparable store base, and (iii) a comparable store sales increase of $4.4
million, or 3%.

         Gross Margin. Cost of sales increased $31.9 million, or 36.7%, to
$118.7 million in 1998 from $86.8 million in 1997. The gross margin increased
$17.1 million, or 33.3%, to $68.3 million in 1998 from $51.2 million in 1997.
The gross margin decreased to 36.5% of net sales in 1998 from 37.1% in 1997
mainly due to competitive discounting in the marketplace.

         Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $18.2 million, or 43.5%, in 1998 to $60.2
million from $42.0 million in 1997. Of the increase, $15.6 million was
attributable to the 12 superstores open during 1998 which were not open during
1997 and the superstores opened in 1997 not in the comparable store base. The
remainder of the increase is attributable to $1.2 million in operating expenses
in the comparable superstores and $1.4 million in corporate costs, principally
from the addition of corporate staff and infrastructure to support the growth of
the Company. As a percentage of sales, selling, general and administrative costs
increased to 32.2% of net sales in 1998 from 30.4% of net sales in 1997. This
increase is primarily due to the new stores, which, on average, have higher
operating costs as a percent of sales than older stores.

         Store pre-Opening Expenses. Pre-opening expenses for the 12 new
superstores opened in 1998 amounted to $2.2 million. In 1997, the Company opened
eight superstores and had pre-opening expenses of $1.5 million.

         Interest Expense. Interest expense was $66,000 for 1998, a decrease of
$565,000 from 1997. This decrease was the result of minimal short-term bank
borrowings as compared with 1997. The Company was able to utilize the funds
obtained from the sale of common shares in October of 1997 to finance its
operating needs and capital expenditures.

         Interest Income. Interest income was $471,000 in 1998, an increase of
$269,000 from 1997. The increase was due to the investment of cash received from
the sale of common shares.

         Income Taxes. For 1998, the effective tax rate was 36.9%, 2.8% lower
than the pro forma effective tax rate of 39.7% in 1997. The reduction is due to
the organizational structures established effective with the sale of common
shares in October 1997 and in effect for the entire 1998 period.

                                       24
<PAGE>

Seasonality and Quarterly Results

         Due to the importance of the fall selling season, which includes
Halloween, Thanksgiving and Christmas, the fourth calendar quarter has
historically contributed, and is expected to continue to contribute, a
substantial majority of the Company's profitability for the entire year. As a
result, any factors negatively affecting the Company during the fourth quarter
of any year, including adverse weather and unfavorable economic conditions,
would have a materially adverse effect on the Company's results of operations
for the entire year.

         The Company's quarterly results of operations also may fluctuate based
upon such factors as the timing of certain holiday seasons, the number and
timing of new superstore openings, the amount of superstore pre-opening
expenses, the amount of net sales contributed by new and existing superstores,
the mix of products sold, the timing and level of markdowns, competitive
factors, weather and general economic conditions.

         Set forth below is certain summary information with respect to the
Company's operations for the most recent eight fiscal quarters:
<TABLE>
<CAPTION>
                                                           First          Second           Third            Fourth
                                                          Quarter         Quarter         Quarter          Quarter
                                                        ------------    ------------    ------------     -------------
                                                                   (in thousands except per share amounts)
<S>                                                     <C>              <C>             <C>               <C>
Year ended December 31, 1999
      Net sales....................................       $48,136        $45,460         $50,245            $79,157
      Income (loss) from operations................           700           (268)            (82)             8,625
      Income (loss) before income taxes............           771           (258)           (130)             8,631
      Net income (loss)............................           470           (157)            (79)             5,430
      Net income (loss) per share, diluted.........          0.06          (0.02)          (0.01)               .73
      Weighted average shares outstanding..........         7,405          7,405           7,405              7,405

Year ended December 31, 1998
      Net sales....................................       $38,219        $36,691         $41,783            $70,312
      Income (loss) from operations................           469           (370)           (394)             6,125
      Income (loss) before income taxes............           666           (267)           (339)             6,175
      Net income (loss)............................           406           (163)           (207)             3,899
      Net income (loss) per share, diluted.........          0.05          (0.02)          (0.03)               .53
      Weighted average shares outstanding..........         7,566          7,602           7,405              7,405
</TABLE>


                                       25
<PAGE>

Liquidity and Capital Resources

         The Company's cash needs are primarily for working capital to support
its inventory requirements and capital expenditures, pre-opening expenses and
beginning inventory for new superstores.

         At December 31, 1999 and 1998, the Company's working capital was $46.6
million and $42.7 million, respectively. During 1999 cash of $9.8 million was
generated by operations and in 1998 cash of $4.4 million was used in operations.
In 1999 and 1998, $4.9 million and $17.4 million of cash, respectively, was used
to increase inventory levels to support both new and existing stores. In these
periods, part of the inventory increase was financed through increases in
accounts payable of $2.6 million and $6.7 million, respectively.

         Net cash used in investing activities during 1999 and 1998 was $1.7
million and $4.6 million, respectively. This use of cash was attributed to
capital expenditures of $5.5 million in 1999 and $4.7 million in 1998. In 1999
capital expenditures included $2.5 million for new store openings and for major
renovations in existing stores and $2.0 million relating to point of sale and
other systems development. In 1998 capital expenditures related principally to
new store openings and the expansion of the distribution center. In 1998, the
Company received the proceeds of $3.9 million of marketable securities. In 2000,
the Company expects to spend approximately $9.0 million on capital expenditures,
which includes approximately $5.4 million for new store openings, $2.6 million
for remodeling and systems in existing stores, and the remainder for warehouse
equipment and systems development.

         On March 11, 1998, the Company entered into a four year financing
agreement with a bank which provides a $25 million revolving credit facility,
$20 million of which is currently available with the remainder available in July
2000 providing the Company is in compliance with the agreement's covenants. In
1998, the Company utilized a portion of the credit facility to finance the
acquisition of various equipment purchases through a series of five year capital
leases.

         In October 1997, the Company completed an initial public offering of
3,105,000 shares of its common stock, including shares issued upon exercise of
an underwriters' overallotment option in November 1997. Net proceeds to the
Company, after deducting underwriting commissions and discounts and expenses,
was $42.6 million. Approximately $28.0 million of the proceeds were used to
retire long-term debt, borrowings under the line of credit and the loans from
shareholders.

         The Company believes the cash generated from operations and available
borrowings under the financing agreement will be sufficient to finance its
working capital and capital expenditure requirements for at least the next 12
months.

                                       26
<PAGE>

Inflation

         Management does not believe that inflation has had a material effect on
its financial condition or results of operations during the past three years.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.

         Not applicable.



                                       27
<PAGE>


ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                         A.C. MOORE ARTS & CRAFTS, INC.

                                                                           Page
                                                                           ----
Report of Independent Accountants.........................................  29

Consolidated Balance Sheets at December 31, 1999 and 1998.................  30

Consolidated Statements of Income for each of the three years
         in the period ended December 31, 1999............................  31

Statements of Changes in Shareholders' Equity for each of the
         three years in the period ended December 31, 1999................  32

Consolidated Statements of Cash Flows for each of the three
         years in the period ended December 31, 1999......................  33

Notes to Consolidated Financial Statements................................  34



                                       28
<PAGE>



                        Report of Independent Accountants


To the Board of Directors and Shareholders of
A.C. Moore Arts & Crafts, Inc.

In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of A.C.
Moore Arts & Crafts, Inc. and its subsidiaries at December 31, 1999 and 1998,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1999 in conformity with accounting
principles generally accepted in the United States. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.



PricewaterhouseCoopers LLP

Philadelphia, Pennsylvania
February 24, 2000


                                       29
<PAGE>
                         A.C. MOORE ARTS & CRAFTS, INC.
                           CONSOLIDATED BALANCE SHEETS
                             (dollars in thousands)
<TABLE>
<CAPTION>
                                                                                               December 31,
                                                                                     --------------------------------
                                                                                         1999                1998
                                                                                     -------------        -----------
<S>                                                                                  <C>                  <C>
                                      ASSETS
Current assets:
     Cash and cash equivalents..................................................         $  14,553          $   9,475
     Marketable securities......................................................                 -              3,894
     Accounts receivable........................................................               491                869
     Inventories................................................................            59,327             54,379
     Prepaid expenses and other current assets..................................               903              1,080
                                                                                         ---------          ---------
                                                                                            75,274             69,697
Property and equipment, net.....................................................            14,711             12,059
Other assets....................................................................               632                601
                                                                                         ---------          ---------
                                                                                         $  90,617          $  82,357
                                                                                         =========          =========
                       LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
     Current portion of capitalized leases......................................         $     369          $     350
     Accounts payable to trade and others.......................................            20,224             20,176
     Accrued payroll and payroll taxes..........................................             3,019              2,888
     Accrued expenses...........................................................             3,005              3,321
     Income taxes payable.......................................................             2,032                241
                                                                                         ---------          ---------
                                                                                            28,649             26,976
                                                                                         ---------          ---------
Long-term liabilities:
     Capital leases.............................................................             1,199              1,568
     Deferred income taxes......................................................             1,720                981
     Other long-term liabilities................................................             2,077              1,661
                                                                                         ---------          ---------
                                                                                             4,996              4,210
                                                                                         ---------          ---------
                                                                                            33,645             31,186
                                                                                         ---------          ---------
Commitments and contingencies

Shareholders' equity:
     Preferred stock, no par value, 5,000,000 shares
     authorized, none issued....................................................                 -                  -
     Common stock, no par value, 20,000,000 shares
     authorized, 7,405,000 shares issued and
     outstanding at December 31, 1999 and 1998..................................            43,116             42,979
     Retained earnings..........................................................            13,856              8,192
                                                                                         ---------          ---------
                                                                                            56,972             51,171
                                                                                         ---------          ---------
                                                                                         $  90,617          $  82,357
                                                                                         =========          =========
</TABLE>
              The accompanying notes are an integral part of these
                       consolidated financial statements.


                                       30
<PAGE>
                         A.C. MOORE ARTS & CRAFTS, INC.
                        CONSOLIDATED STATEMENTS OF INCOME
                  (dollars in thousands except per share data)
<TABLE>
<CAPTION>
                                                                                Year Ended December 31,
                                                                 ------------------------------------------------------
                                                                   1999                   1998                   1997
                                                                 --------               --------               --------
<S>                                                             <C>                    <C>                    <C>
Net sales............................................            $222,998               $187,005               $138,056
Cost of sales (including buying and
   distribution costs)...............................             143,078                118,727                 86,827
                                                                 --------               --------               --------
Gross margin.........................................              79,920                 68,278                 51,229
Selling, general and administrative expenses.........              70,336                 60,214                 41,971
Store pre-opening expenses...........................                 609                  2,234                  1,477
                                                                 --------               --------               --------
Income from operations...............................               8,975                  5,830                  7,781
   Interest expense..................................                 172                     66                    631
   Interest income...................................                (211)                  (471)                  (202)
                                                                 --------               --------               --------
Income before income taxes...........................               9,014                  6,235                  7,352
   Provision for income taxes........................               3,350                  2,300                  3,360
                                                                 --------               --------               --------
Net income...........................................            $  5,664               $  3,935               $  3,992
                                                                 ========               ========               ========

Basic net income per share...........................               $0.76                  $0.53                  $0.80
                                                                 ========               ========               ========

Weighted average shares outstanding..................           7,405,000              7,405,000              4,982,000

Diluted net income per share.........................               $0.76                  $0.52                  $0.79
                                                                 ========               ========               ========
Weighted average shares outstanding
   plus impact of stock options......................           7,405,000              7,517,000              5,078,000
Pro forma income and per share data (unaudited) (Note 6):
Income before income taxes, as reported..............                  --                     --                 $7,352
   Pro forma income tax provision....................                  --                     --                  2,921
                                                                 --------               --------               --------
Pro forma net income.................................                  --                     --                 $4,431
                                                                 ========               ========               ========
Pro forma basic net income per share.................                  --                     --                  $0.89
                                                                 ========               ========               ========
Pro forma diluted net income per share...............                  --                     --                  $0.87
                                                                 ========               ========               ========
</TABLE>

              The accompanying notes are an integral part of these
                       consolidated financial statements.


                                       31
<PAGE>


                          A.C. MOORE ARTS & CRAFTS INC.
                  STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
                             (dollars in thousands)
<TABLE>
<CAPTION>
                                                                   Common              Retained
                                                Shares              Stock              Earnings             Total
                                            --------------     ----------------    -----------------    -------------
<S>                                        <C>                <C>                  <C>                 <C>
Balance, December 31, 1996..............      4,300,000          $    200             $ 7,292             $  7,492
Net income..............................             --                --               3,992                3,992
Distributions to shareholders...........             --                --              (7,027)              (7,027)
Proceeds from sale of common stock            3,105,000            42,590                  --               42,590
Compensation expense related to
         stock options..................             --                39                  --                   39
                                              ---------          --------             -------             --------
Balance, December 31, 1997..............      7,405,000            42,829               4,257               47,086
Net income .............................             --                --               3,935                3,935
Compensation expense related to
         stock options..................             --               150                  --                  150
                                              ---------          --------             -------             --------
Balance, December 31, 1998..............      7,405,000          $ 42,979             $ 8,192             $ 51,171
Net income .............................             --                --               5,664                5,664
Compensation expense related to
         stock options..................             --               137                  --                  137
                                              ---------          --------             -------             --------
Balance, December 31, 1999..............      7,405,000          $ 43,116             $13,856             $ 56,972
                                              =========          ========             =======             ========
</TABLE>
              The accompanying notes are an integral part of these
                       consolidated financial statements.


                                       32
<PAGE>
                         A.C. MOORE ARTS & CRAFTS, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (dollars in thousands)
<TABLE>
<CAPTION>
                                                                                    Year Ended December 31,
                                                                         ------------------------------------------
                                                                            1999              1998           1997
                                                                           ------            ------         ------
<S>                                                                      <C>               <C>            <C>
Cash flows from operating activities:
Net income                                                               $  5,664           $ 3,935        $  3,992
Adjustments to reconcile net income to net cash provided by
         (used in) operating activities:
         Depreciation and amortization............................          2,899             2,202           1,461
         Compensation expense related to stock options............            137               150              39
         Provision for deferred income taxes......................            739               151             830
         Changes in assets and liabilities:
               Accounts receivable................................            378              (738)             31
               Inventories........................................         (4,948)          (17,357)        (11,767)
               Prepaid expenses and other current assets                      177              (177)           (542)
               Accounts payable, accrued payroll and payroll                2,582             6,745           7,166
                   taxes and accrued expenses.....................
               Income taxes payable...............................          1,791               241              --
               Other long-term liabilities........................            416               431             283
               Other..............................................            (27)              (28)            (41)
                                                                         --------           -------        --------
Net cash provided by (used in) operating activities...............          9,808            (4,445)          1,452
                                                                         --------           -------        --------
Cash flows from investing activities:
         Capital expenditures.....................................         (5,526)           (4,682)         (4,002)
         Proceeds from maturity of marketable securities..........          3,865             4,004              --
         Investment in marketable securities......................             --            (3,950)         (4,004)
                                                                         --------           -------        --------
Net cash (used in) investing activities...........................         (1,661)           (4,628)         (8,006)
                                                                         --------           -------        --------
Cash flows from financing activities:
         Proceeds from issuance of common stock...................             --                --          42,590
         Proceeds from bank overdraft.............................             --             2,719              --
         Repayment of bank overdraft..............................         (2,719)               --              --
         Proceeds from short-term debt............................          9,500             3,606              --
         Repayment of short-term debt.............................         (9,500)           (3,606)             --
         Proceeds from shareholders' loans........................             --                 --          3,705
         Repayment of shareholders' loans.........................             --                 --        (14,800)
         Repayment of capital leases..............................           (350)               (6)         (8,510)
         Distributions to shareholders............................             --                --          (7,027)
                                                                         --------           -------        --------
Net cash provided by (used in) financing activities...............         (3,069)            2,713          15,958
                                                                         --------           -------        --------
Net increase (decrease) in cash and cash equivalents..............          5,078            (6,360)          9,404
Cash and cash equivalents at beginning of year....................          9,475            15,835           6,431
                                                                         --------           -------        --------
Cash and cash equivalents at end of year..........................       $ 14,553           $ 9,475        $ 15,835
                                                                         ========           =======        ========
Supplemental cash flow information:
Cash paid during the year for:
         Interest.................................................       $    171           $    68        $    679
                                                                         ========           =======        ========
         Income taxes.............................................       $    701           $ 2,180        $  2,707
                                                                         ========           =======        ========
</TABLE>

              The accompanying notes are an integral part of these
                       consolidated financial statements.

                                       33
<PAGE>

                         A.C. MOORE ARTS & CRAFTS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1. Summary of Significant Accounting Policies

Organization and basis of presentation. A.C. Moore Arts & Crafts, Inc. became a
holding company in July 1997 by incorporating in Pennsylvania and exchanging its
common stock for all of the capital stock of A.C. Moore Inc. held by its
shareholders. The consolidated financial statements include the accounts of A.C.
Moore Arts & Crafts, Inc. and its wholly owned subsidiaries (collectively the
"Company"). All intercompany accounts and transactions have been eliminated. As
of December 31, 1999, the Company operated a 40-store chain of retail arts and
crafts stores in the mid-Atlantic and northeast regions of the United States.

Cash and cash equivalents. Cash and cash equivalents are stated at cost, which
approximates market value. Cash equivalents include only securities having an
original maturity of three months or less.

Marketable securities. The Company's investments, consisting of corporate debt
securities, are classified as available-for-sale and are recorded at cost which
approximates fair market value. Fair market value is based upon quoted market
prices on the last day of the year. These securities matured in June 1999.

Concentration of credit risk. Financial instruments, which potentially subject
the Company to concentrations of credit risk, are cash, cash equivalents and
marketable securities. The Company limits its credit risk by placing its
investments in highly rated, highly liquid funds.

Inventories. Inventories, which consist of general consumer merchandise held for
sale, are stated at the lower of cost or market. The cost of store inventories
is determined by the retail inventory method. Warehouse inventories are
determined on a first-in, first-out basis. The Company includes as inventoriable
costs certain indirect costs, principally purchasing, warehousing and
distribution.

Property and equipment. Property and equipment are stated at cost. Depreciation
is provided on a straight-line basis over the estimated useful lives of the
assets. Furniture, fixtures and equipment are depreciated over periods of five
to ten years and leasehold improvements are depreciated over the shorter of
their estimated useful lives or the term of the related lease. Maintenance and
repairs are charged to operations as incurred and major improvements are
capitalized. Amortization of assets recorded under capital leases is included in
depreciation expense.

Store pre-opening expenses. Direct incremental costs incurred to prepare a store
for opening are charged to expense as incurred.

                                       34
<PAGE>

Advertising costs. The costs incurred for advertising are expensed the first
time the advertising takes place and are offset by reimbursements received under
cooperative advertising programs with certain vendors. Net advertising expense
during 1999, 1998 and 1997 was $6,305,000, $5,748,000 and $4,083,000,
respectively.

Fair value of investments. The carrying amounts of cash, cash equivalents and
marketable securities, accounts receivable, other current assets, accounts
payable, accrued expenses and other liabilities approximate fair value because
of the short maturity of these instruments. The carrying amount of capital lease
obligations approximate fair value, as the interest rates on the obligations
approximate rates currently available to the Company for obligations with
similar terms and remaining maturities.

Use of estimates. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements, and the amount of revenues and expenses
during the reporting period. Differences from those estimates, if any, are
recorded in the period they become known.

Stock option plan. The Company accounts for its employee stock options using the
intrinsic value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25). Compensation cost for stock
options is measured as the excess of the quoted market price of the Company's
stock at the date of grant over the amount an employee must pay to acquire the
stock.

2. Earnings Per Share

The following is a reconciliation of the denominators of the basic and diluted
earnings per share computations:
<TABLE>
<CAPTION>

                                                        Year Ended December 31,
                                         -----------------------------------------------------
                                            1999                 1998                1997
                                         ------------        -------------       -------------
                                                            (in thousands)
<S>                                     <C>                  <C>                 <C>
Basic...............................           7,405                7,405               4,982
Effect of dilutive options..........             --                   112                  96
                                         -----------         ------------        ------------
Diluted.............................           7,405                7,517               5,078
                                         ===========         ============        ============
</TABLE>
3. Accounts Payable to Trade and Others

         At December 31, 1998 accounts payable to trade and others includes
$2,719,000 of book overdrafts which represents outstanding checks at certain
banks in excess of funds on deposit at those banks. These accounts are
maintained as zero balance accounts and are covered as required from funds
available at other banks.

                                       35
<PAGE>

4. Property and Equipment

Property and equipment consists of:
<TABLE>
<CAPTION>
                                                                          December 31,
                                                                 ------------------------------
                                                                    1999               1998
                                                                 -----------        -----------
                                                                        (in thousands)
<S>                                                              <C>                <C>
Furniture, fixtures and equipment........................         $20,865            $16,531
Leasehold improvements...................................             599                931
Equipment for future stores..............................             897                 39
Capital leases...........................................           1,924              1,924
                                                                  -------            -------
                                                                   24,285             19,425
Less:  Accumulated depreciation and amortization.........           9,574              7,366
                                                                  -------            -------
                                                                  $14,711            $12,059
                                                                  =======            =======
</TABLE>
5. Financing Agreement

The Company has a financing agreement through April 1, 2002 with a bank which
provides a $25,000,000 revolving credit facility, $20,000,000 of which is
available immediately, the additional $5,000,000 is available on July 1, 2000
providing the Company is in compliance with the leverage and debt service ratios
contained in the agreement. The agreement is collateralized by all of the
Company's assets and bears elective interest rates which vary based upon the
bank's prime rate or LIBOR. Available amounts under this facility are reduced by
amounts outstanding under capital lease obligations with the bank. There were no
amounts outstanding at December 31, 1999 or 1998 under the revolving line of
credit.

6. Income Taxes and Pro Forma Income Taxes

Prior to the Company's initial public offering completed on October 9, 1997, the
Company elected to be taxed under the S Corporation provisions of the Internal
Revenue Code. Under these provisions, the shareholders of the Company included
their pro rata share of income or loss in their individual federal and state tax
returns. A portion of the distributions to shareholders was related to their
individual income tax liabilities resulting from S Corporation taxable earnings.
The Company's earnings subsequent to conversion to C Corporation status reflect
all applicable income taxes.

The Company utilizes the liability method of accounting for income taxes. Under
this method, deferred tax liabilities and assets are recognized for the expected
future tax consequences of temporary differences between the carrying amounts
and the tax bases of assets and liabilities. Effective with the termination of
its S Corporation status the Company recognized deferred income taxes of
$659,000 for cumulative temporary differences between income for financial and
tax reporting purposes. As of December 31, 1999 and 1998, the deferred tax
liability of $1,720,000 and $981,000, respectively comprised principally
temporary differences related to depreciation.

                                       36
<PAGE>

For the year ended December 31, 1997, pro forma taxes have been computed as if
the Company was subject to all applicable federal and state income taxes,
assuming the tax rate that would have applied had the Company been taxed as a C
Corporation.

A reconciliation of income tax expense at the federal income tax rate to the
income tax provision is as follows:
<TABLE>
<CAPTION>
                                                                           Year Ended December 31,
                                                                 ---------------------------------------------
                                                                   1999              1998             1997
                                                                 ----------        ----------       ----------
                                                                                (in thousands)
<S>                                                              <C>               <C>             <C>
    U.S. federal taxes at statutory rate.................         $3,065            $2,120          $2,500
    State and local taxes, net...........................            193                32             355
    Effect of S Corporation taxable earnings.............         --                --                (212)
    Recognition of cumulative deferred income tax........         --                --                 659
    Non-deductible stock option expense..................             47                51              13
    Other................................................             45                97              45
                                                                  ------            ------          ------
    Income tax provision.................................         $3,350            $2,300          $3,360
                                                                  =======           ======          ======
</TABLE>
The income tax provision consists of the following:
<TABLE>
<CAPTION>
                                                                             Year Ended December 31,
                                                                   --------------------------------------------
                                                                      1999              1998           1997
                                                                   -----------       -----------     ----------
<S>                                                                <C>               <C>             <C>
              Current tax expense:
                   Federal  .....................................    $2,566            $2,139         $2,035
                   State    .....................................        45                10            495
                                                                     ------            ------         ------
                       Total current.............................     2,611             2,149          2,530
                                                                     ------            ------         ------

              Deferred tax expense:
                   Federal - current year........................       526               112            128

                   Federal - prior years.........................    --                                  659
                                                                                       --
                   State    .....................................       213                39             43
                                                                     ------            ------         ------
                       Total deferred............................       739               151            830
                                                                     ------            ------         ------
                       Total income tax provision................    $3,350            $2,300         $3,360
                                                                     ======            ======         ======
</TABLE>
7. Shareholders' Equity

In October 1997 the Company completed an initial public offering of 2,700,000
shares of its common stock. Net proceeds to the Company, after deducting
underwriting discounts and commissions and expenses, were $36,990,000.
Approximately $28,000,000 of the proceeds were used to retire long-term debt,
borrowings under a line of credit and loans from shareholders. In November 1997,
an additional 405,000 shares of common stock were sold pursuant to the
underwriters' over-allotment option, providing additional net proceeds to the
Company of approximately $5,600,000

                                       37
<PAGE>

The Company has authorized 5,000,000 shares of undesignated preferred stock. The
Company may issue preferred stock in one or more series by vote of its Board of
Directors having the dividend rights, dividend rates, conversion rights, voting
rights, terms of redemption, redemption prices and liquidation preferences
approved by the Board of Directors.

At December 31, 1999, under the Company's Employee, Director and Consultant
Stock Option Plan (the "1997 Plan"), the Company may grant up to 1,000,000
shares of common stock. Stock options expire ten years from the date of grant
and vest ratably over a three year period. Shares available for future grants
amounted to 334,700 at December 31, 1999 and 493,000 at December 31, 1998.

For 1999, 1998 and 1997, the Company's stock option activity is summarized
below:
<TABLE>
<CAPTION>
                                          1999                          1998                          1997
                                --------------------------    -------------------------     -------------------------
                                               Weighted                     Weighted                      Weighted
                                               Average                      Average                       Average
                                               Exercise                     Exercise                      Exercise
                                 Options       Price           Options      Price            Options      Price
                                ----------     -----------    ----------    -----------     ----------    -----------
<S>                             <C>            <C>            <C>           <C>             <C>           <C>
Outstanding at beginning
     of year                      507,000        $ 10.80       386,500        $  9.00            -0-
Granted                           203,900           5.62       152,150          15.21        444,500        $ 9.00
Forfeited                          45,600           9.59        31,650           9.94         58,000          9.00
                                  -------        -------       -------        -------        -------        ------
Outstanding at end of year        665,300        $  9.31       507,000        $ 10.80        386,500        $ 9.00
                                  =======        =======       =======        =======        =======        ======
Exercisable at end of year        279,385        $ 10.00       119,833        $  9.00            -0-
                                  =======        =======       =======        =======        =======
</TABLE>
Exercise prices for options outstanding as of December 31, 1999 ranged from
$4.75 to $15.375. The weighted average remaining contractual life of the options
is 8.3 years.

Had compensation cost for the Company's stock-based compensation plan been
determined based on the fair value at the grant date for awards under those
plans, consistent with the requirements of SFAS No. 123, "Accounting for
Stock-Based Compensation," net income and earnings per share would have been
reduced to the following pro-forma amounts:
<TABLE>
<CAPTION>
                                                           1999               1998                1997
                                                     ---------------    ---------------     ----------------
<S>                                                  <C>                <C>                  <C>
Net income                 -- As reported               $ 5,664,000        $ 3,935,000          $ 3,992,000
                           -- Pro forma                   4,962,000          3,341,000            3,864,000

Basic earnings per share   -- As reported               $       .76        $       .53          $       .80
                           -- Pro forma                         .67                .45                  .78

Diluted earnings per share -- As reported               $       .76        $       .52          $       .79
                           -- Pro forma                         .67                .45                  .76
</TABLE>

                                       38
<PAGE>

The pro forma results may not be representative of the effects on reported
operations for future years. The fair value of the options was calculated using
a Black-Scholes options pricing model with the following weighted-average
assumptions: risk-free interest rate of 5.7% for 1999, 5.1% for 1998 and 6.4%
for 1997; no dividend yield; and a weighted average expected life of the options
of seven years. In accordance with the provisions of SFAS No. 123, for 1997 no
expected volatility was utilized in determining fair value, as the options were
granted prior to the Company becoming a public entity. For both 1999 and 1998
the expected stock price volatility was 54.6%.

Effective September 15, 1997, options to purchase 444,500 shares of common stock
were granted under the 1997 Plan at an exercise price per share of $9.00 with an
exercise term of ten years. The estimated fair value of the shares on the
measurement date was $10.20. The related compensation expense is being amortized
ratably over the three year vesting period. At December 31, 1999 and 1998,
unearned compensation included in stockholders' equity was $102,000 and
$329,000, respectively.

On February 28, 1995, in recognition of financial consulting services, the
Company granted a Board member an option to purchase 64,500 shares of common
stock, representing a 1.5% ownership interest in the Company. The option, which
expires February 28, 2005, has an exercise price of $4.66. The Company utilized
the Black-Scholes option-pricing model to estimate the fair value of the option.
The fair value of the option did not materially impact the results of operations
over the periods benefited.

8. Retirement Plan

In January 1999 the Company established a 401(k) savings plan (the "401(k)
Plan") for eligible team members. Participation in the 401(k) Plan is voluntary
and available to any team member who is 21 years of age and has completed 1000
hours of service in a twelve-month eligibility period. Participants may elect to
contribute up to 20% of their compensation. In accordance with the provisions of
the 401(k) Plan, the Company makes a matching contribution to the account of
each participant in an amount equal to 25% of the first 6% of eligible
compensation contributed by each participant with a maximum match of $1,500. The
Company's matching contribution expense for 1999 was $168,000.

9. Commitments and Contingencies

Commitments

The Company leases its retail stores, administrative offices and warehouse
facilities under noncancelable operating leases. The lease for the
administrative offices and distribution center has an initial lease term of six
years with a six-year renewal option. Most store leases have an average initial
term of ten years, with three five year renewal options, and provide for
predetermined escalations in future minimum annual rent or additional rent
contingent upon store sales levels. The pro rata portion of scheduled rent
escalations has been included in other long-term liabilities in the accompanying
balance sheet. For the years 1999 and 1998 the amount of accrued rent expense
recognized over the amount paid were $416,000 and $431,000, respectively and has
been included in other long-term liabilities in the accompanying consolidated
balance sheet.

                                       39
<PAGE>

         Rent expense under operating leases consists of:
<TABLE>
<CAPTION>
                                                                       Year Ended December 31,
                                                                       -----------------------
                                                                1999              1998             1997
                                                                -----             ----             ----
                                                                             (in thousands)
<S>                                                           <C>                <C>             <C>
Minimum rentals.........................................      $10,846            $8,218          $6,444
Contingent payments....................................           146               188             232
                                                              -------            ------          ------
                                                              $11,992            $8,406          $6,676
                                                              =======            ======          ======
</TABLE>
In 1999, the Company entered into eight leases for stores to open in 2000.

Future minimum lease payments (including those for unopened stores) as of
December 31, 1999 for non-cancelable operating leases with terms in excess of
one year are as follows (in thousands):

                  2000.......................................     $12,609
                  2001.......................................      13,655
                  2002.......................................      12,670
                  2003.......................................      11,874
                  2004.......................................      10,913
                  Thereafter.................................      64,287
                                                                 --------
                     Total minimum future rentals............    $126,008
                                                                 ========

Financing activities not affecting cash during 1998 included capital lease
obligations incurred in connection with equipment purchases of $1,924,000. These
leases require payments of principal and interest of $443,000 per year through
2003. Interest rates under these leases approximate 6.4%.

Contingencies
The Company is not a party to any material legal proceedings other than routine
litigation incidental to its business. In the opinion of management, the amount
of ultimate liability with respect to these actions will not materially affect
the financial position, operating results or cash flows of the Company.

                                       40
<PAGE>

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

         The Company had no changes in or disagreements with accountants on
accounting and financial disclosure of the type referred to in Item 304 of
Regulation S-K.

                                    PART III


ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

         The information concerning the directors of the Company is set forth in
the Proxy Statement to be delivered to shareholders in connection with the
Company's 2000 Annual Meeting of Shareholders (the "Proxy Statement") under the
heading "Election of Directors," which information is incorporated herein by
reference. The name, age and position of each executive officer of the Company
is set forth under the heading "Executive Officers of the Registrant" in Item 1
of this report, which information is incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION.

         The information concerning executive compensation is set forth in the
Proxy Statement under the heading "Executive Compensation," which information is
incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

         The information concerning security ownership of certain beneficial
owners and management is set forth in the Proxy Statement under the heading
"Principal Stockholders and Management Ownership," which information is
incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

         The information concerning certain relationships and related
transactions is set forth in the Proxy Statement under the heading "Certain
Transactions," which information is incorporated herein by reference.

                                       41
<PAGE>

                                     PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.

         (a) The following documents are filed as part of this Annual Report on
             Form 10-K:

                  (1)      Financial Statements:

                           Report of Independent Accountants

                           Consolidated Balance Sheets at December 31, 1999 and
                                    1998

                           Consolidated Statements of Income for each of the
                                    three years in the period ended December
                                    31, 1999

                           Statements of Changes in Shareholders' Equity for
                                    each of the three years in the period ended
                                    December 31, 1999

                           Consolidated Statements of Cash Flows for each of the
                                    three years in the period ended December 31,
                                    1999

                           Notes to Consolidated Financial Statements

                  (2)      Financial Statement Schedules:

                  No financial statement schedules are required to be filed as
part of this report.

                  (3)   Exhibits:

                           The exhibits filed as part of this report are listed
under exhibits at subsection (c) of this Item 14.

             (b)  Current Reports on Form 8-K:

                           No report on Form 8-K was filed on behalf of the
                    Registrant during the last quarter of the period covered by
                    this report.

                                       42
<PAGE>

     (c)  Exhibits:

Exhibit Number Description
-------------- -----------
     *3.1      Articles of Incorporation

     *3.2      Bylaws

   *+10.1      1997 Employee, Director and Consultant Stock Option Plan

   *+10.2      Form of Stock Option Award Agreement

   **10.3      Loan Agreement, dated March 11, 1998, between the Company and
               KeyBank National Association

   *+10.4      Correspondence reflecting option granted to Richard Lesser

    *10.5      Tax Indemnification Agreement, dated July 22, 1997, among the
               Company, John E. Parker and William Kaplan

    *10.6      Lease, dated August 14, 1995, between Freeport 130 LLC and A.C.
               Moore, Inc.

  ***10.7      Second Amendment to Lease, dated as of March 25, 1998, between
               Freeport IBO LLC and A.C. Moore, Inc.

  ***21.1      Subsidiaries of the Company

     23.1      Consent of PricewaterhouseCoopers LLP

     27.1      Financial Data Schedule

-------------------
+        Management contract or compensatory plan or arrangement.
*        Incorporated by reference to the Company's Registration Statement on
         Form S-1 (#333-32859).
**       Incorporated by reference to the Company's Form 10-K for the year ended
         December 31, 1997.
***      Incorporated by reference to the Company's Form 10-K for the year ended
         December 31, 1998.


                                       43
<PAGE>



                                   SIGNATURES

              Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.

                                            A.C. MOORE ARTS & CRAFTS, INC.

Date: March 17 , 2000                       By: /s/ John E. Parker
                                                -----------------------
                                                John E. Parker, President and
                                                Chief Executive Officer


              Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
           SIGNATURE                                      CAPACITY                              DATE
---------------------------------          ---------------------------------------          --------------
<S>                                        <C>                                             <C>
    /s/ John E. Parker                     President, Chief Executive Officer, and          March 17, 2000
   ------------------------------          Director (Principal Executive Officer)
   John E. Parker


    /s/ Leslie H. Gordon                   Executive Vice President and Chief               March 17, 2000
   ------------------------------          Financial Officer (Principal Financial and
   Leslie H. Gordon                        Accounting Officer)



    /s/ William Kaplan                     Chairman of the Board                            March 17, 2000
   ------------------------------
   William Kaplan


    /s/ Patricia A. Parker                 Director                                         March 17, 2000
   ------------------------------
   Patricia A. Parker


    /s/ Richard Lesser                     Director                                         March 17, 2000
   ------------------------------
   Richard Lesser


    /s/ Richard J. Bauer                   Director                                         March 17, 2000
   ------------------------------
   Richard J. Bauer


    /s/ Richard J. Drake                   Director                                         March 17, 2000
   ------------------------------
   Richard J. Drake
</TABLE>

                                       44
<PAGE>


                                  EXHIBIT INDEX


Exhibit No.   Description
-----------   -----------
   *3.1       Articles of Incorporation

   *3.2       Bylaws

 *+10.1       1997 Employee, Director and Consultant Stock Option Plan

 *+10.2       Form of Stock Option Award Agreement

 **10.3       Loan Agreement, dated March 11, 1998, between the Company and
              KeyBank National Association

 *+10.4       Correspondence reflecting option granted to Richard Lesser

  *10.5       Tax Indemnification Agreement, dated July 22, 1997, among the
              Company, John E. Parker and William Kaplan

  *10.6       Lease, dated August 14, 1995, between Freeport 130 LLC and A.C.
              Moore, Inc.

***10.7       Second Amendment to Lease, dated as of March 25, 1998, between
              Freeport
              IBO LLC and A.C. Moore, Inc.

***21.1       Subsidiaries of the Company

   23.1       Consent of PricewaterhouseCoopers LLP

   27.1       Financial Data Schedule

-------------------
+        Management contract or compensatory plan or arrangement
*        Incorporated by reference to the Company's Registration Statement on
         Form S-1 (#333-32859)
**       Incorporated by reference to the Company's Form 10-K for the year ended
         December 31, 1997.
***      Incorporated by reference to the Company's Form 10-K for the year ended
         December 31, 1998.

                                       45