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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-K
  þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended January 3, 2009
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission file number 000-23157
 A.C. MOORE ARTS & CRAFTS, INC.
 (Exact name of registrant as specified in its charter)
 Pennsylvania
    
    22-3527763(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification No.)130 A.C. Moore Drive, Berlin, New Jersey
    
    08009(Address of principal executive offices)
    
    (Zip Code)
 (856) 768-4930
 Common stock, no par value  (Title of class)
 (Name of each exchange on which registered)
 None
 o Yes þ No
 o Yes þ No
 þ o
 þ
  o Large accelerated filer
    
    þ Accelerated filer
    
    o Non-accelerated filer
    
    o Smaller reporting company(Do not check if a smaller reporting company)
 o þ
 (1)




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##### Table of Contents



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




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TABLE OF CONTENTS  PART IITEM 1. BUSINESSITEM 1A. RISK FACTORSITEM 1B. UNRESOLVED STAFF COMMENTSITEM 2. PROPERTIESITEM 3. LEGAL PROCEEDINGSITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSPART IIITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIESITEM 6. SELECTED FINANCIAL DATAITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSUREITEM 9A. CONTROLS AND PROCEDURESITEM 9B. OTHER INFORMATIONPART IIIITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCEITEM 11. EXECUTIVE COMPENSATIONITEM 12. ECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERSITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDANCEITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICESPART IVITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULESSIGNATURESExhibit IndexExhibit 10.25Exhibit 21.1Exhibit 23.1Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2    Table of Contents  Cautionary Statement Relating to Forward-Looking Statements
 As used herein, unless the context otherwise requires, all references to A.C. Moore, the
Company, we, our, us and similar terms in this report refer to A.C. Moore Arts & Crafts,
Inc. together with its subsidiaries.
 Certain oral statements made by our management from time to time and certain statements
contained herein or in other reports filed by us with the Securities and Exchange Commission
(SEC) or incorporated by reference herein or therein are forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities
Exchange Act of 1934, as amended (Exchange Act), with respect to our results of operations and
our business. All such statements, other than statements of historical facts, including those
regarding market trends, our financial position and results of operations, business strategy,
projected costs, and plans and objectives of management for future operations, are forward-looking
statements. In general, such statements are identified by the use of forward-looking words or
phrases including, but not limited to, intended, will, should, may, believes, expects,
expected, anticipates and anticipated or the negative thereof or variations thereon or
similar terminology. These forward-looking statements are based on our current expectations.
Although we believe that the expectations reflected in forward-looking statements are reasonable,
there can be no assurance that such expectations will prove to be correct. These forward-looking
statements represent our current judgment. We disclaim any intent or obligation to update our
forward-looking statements. Because forward-looking statements involve risks and uncertainties,
our actual results could differ materially. Important factors that could cause actual results to
differ materially from our expectations (Cautionary Statements) include those that are discussed
in this Annual Report on Form 10-K , particularly in Item 1. Business, Item 1A. Risk Factors and
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations.
All subsequent written and oral forward-looking statements attributable to us or persons acting on
our behalf are expressly qualified in their entirety by the Cautionary Statements.
 
 
 PART I
 
 
 ITEM 1. BUSINESS.
 General
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Industry Overview and Competition
    
    
    Multi-store arts and crafts retailers. This category includes several multi-store
arts and crafts chains operating more than 35 stores and comprises: Michaels Stores,
Inc., a chain which operates approximately 1,000 Michaels stores throughout the United
States and Canada; Jo-Ann Stores, Inc., which operates approximately 555 traditional
Jo-Ann Fabrics and Crafts stores and 210 Jo-Ann superstores nationwide in addition to
sales on its e-commerce site; and Hobby Lobby Stores, Inc., a chain which operates
approximately 355 stores primarily in the Midwest United States.
    
    Mass merchandisers. This category includes Wal-Mart Stores, Inc., Target
Corporation and other mass merchandisers. These retailers typically dedicate a
relatively small portion of their selling space to a limited assortment of arts and
crafts supplies and floral merchandise, as well as seasonal merchandise and home décor.
    
    Small, local specialty retailers. This category includes thousands of local
independent arts and crafts retailers. Typically, these are single store operations
managed by the owner. The stores generally offer a limited selection and have limited
resources for advertising, purchasing and distribution. Many of these stores have
established a loyal customer base within a given community and compete based on
customer service.
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Business and Operating Strategy
  Improve Store Profitability .
 
    
    Real estate portfolio strategy.In June 2008, and during the year-end closing
process, management completed a portfolio review of all current stores and future
prospects to identify underperforming locations and assess closure of those stores that
are no longer strategically or economically viable. As a result of our analysis, we
closed four stores in July, one store in August, one store in November and three stores
in December. When entering new markets which we deem to be multi-store markets, we will
attempt to do so with sufficient store density to leverage expenses such as advertising
and supply chain replenishment. If strategically viable, we will also consider adding
new stores and relocating existing stores in our existing markets.
    
    Advertising spending. In fiscal 2008, we utilized the services of a newspaper
placement agency to negotiate our insertion rates and distribution costs. We
implemented those recommendations by the end of the first quarter of fiscal 2008. We
will continue this initiative in fiscal 2009 by analyzing our distribution methods to
further enhance productivity of our advertising vehicles. In fiscal 2008, we began
supplementing our newspaper advertising program with a combination of in-store and
targeted marketing programs.
    
    Centrally directed operations and our new store prototype.We believe that
increasing the level of standardization in operations and centrally directed management
practices will improve our operating efficiencies. This initiative includes
standardizing the presentation in our stores, reengineering our store processes and
implementing and refining our new store prototype which we refer to as our Nevada
model. As of January 3, 2009, we operated 18 Nevada class stores. We believe the Nevada
model will help us achieve efficiencies through increased ease of operation and reduced
labor costs. While we believe the Nevada model is a desirable design, we are currently
refining the design based on the results of this initial phase of implementation and
expect to continue to do so in the future.
    
    Store Structure.In fiscal 2008, we fully optimized our store payroll model. To
improve our execution at store level, we implemented a new field structure as well, which
added District Managers who report to Regional Directors. This new structure allows our
management team to have a reduced scope of store count, which increases their number of
visits to each store, yielding improved levels of customer service, more efficient
merchandising and better executed operational programs.
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Increase Sales.
 
    
    Customer service.We continue our consumer research initiatives designed to better
understand our customers expectations and purchasing motivation, with the goal of
developing stronger
relationships with our customers. We have successfully implemented our formal customer
service program which involves in-depth training of our store associates and store
management teams.
    
    Enhanced merchandise assortment.We continually seek to identify new and enhanced
product lines and merchandise assortments that differentiate us from our competitors.
We regularly review product adjacencies in order to improve our average sales ticket per
customer and enhance the overall shopping experience.
    
    Improved in-stock position.Maintaining a full in-stock position is critical to
driving sales, as providing all of the components for a particular craft project is
essential to meeting customer demand. Our perpetual inventory system, implemented in
January 2008, as well as other technological improvements, have allowed us to achieve
better in-stock positions as well as information about quantities available at the store
level. We also regularly evaluate our supply chain operations to improve the process
and timing within which product is ordered and delivered to our stores.
    
    Promotional strategies.Especially in light of the current macroeconomic and retail
environment, we continue to refine our advertising vehicles and pricing strategies. We
believe identifying and featuring key promotional items, combined with a blend of
in-store promotions, and targeted marketing efforts to complement our regular newspaper
insert program will drive customer traffic.
    
    A.C. Moore Rewards program.During the third quarter of fiscal 2008, we launched our
A.C. Moore Rewards program in a select group of pilot stores. For the first time, we
now have access to business intelligence related to who our customers are, what they
purchase, and how often they visit our stores. Although still in the pilot stage,
initial customer response to the program has been positive. We will continue to monitor
our pilot results as we believe this initiative will support our strategic efforts at
differentiating ourselves from our competition while providing our customers with more
reasons to shop in our stores.
 Increase Gross Margin .
 
    
    Category management.During fiscal 2008, we completed the implementation of both
category management structure and process. The category management process leverages
merchandise assortment planning tools, the use of a merchandising planning calendar, and
an open-to-buy process focused on sales and inventory productivity. We are committed to
reducing our exposure in seasonal goods by controlling buys and utilizing new planning
processes which will in turn reduce our markdown liability.
    
    Domestic and globally sourced private label products.In fiscal 2008, we continued to
refine our sourcing and private label strategies, adopting a more balanced approach. We
continue to explore new opportunities involving private label products. We believe the
sale of private label products, both domestic and globally sourced, will result in gross
margin improvement.
    
    Supply chain optimization.In fiscal 2008, we increased our focus on improving
in-stock levels, reducing inventory levels, increasing merchandise turns and improving
distribution efficiencies. Based on the success of these initiatives, in December
2008, we discontinued our lease on our second
distribution center in Blackwood, New Jersey. The lease was previously scheduled to
expire on January 31, 2009. We believe that our current distribution center will continue
to support our needs in the near-term. We continue to make significant strides in our
efforts to further improve service levels, efficiency, accuracy and safety in the supply
chain organization. The performance management program, which was implemented in early
fiscal 2008 in our distribution center, continues to help us improve labor efficiencies.
Our compliance team has helped us improve picking and shipping accuracy while reducing
workers compensation claims. Effective January 1, 2009, we outsourced our store delivery
operation to allow us to intensify our focus on our core business while improving service
levels and reducing delivery costs.
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Improve Information Technology.
  Merchandising
 www.acmoore.com
  Fiscal2008
    
    
    2007Art and scrapbooking
    
    
    29.4
    %
    
    
    28.9
    %Traditional crafts
    
    
    27.7
    
    
    
    26.0Floral and floral accessories
    
    
    9.9
    
    
    
    10.9Fashion crafts
    
    
    9.6
    
    
    
    9.4Home décor and frames
    
    
    17.8
    
    
    
    18.0Seasonal items
    
    
    5.6
    
    
    
    6.8Total
    
    
    100.0
    %
    
    
    100.0
    %
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Purchasing
  
    
    The largest 25 vendors accounted for approximately 56 percent of our purchases;
    
    The largest domestic vendor, SBARS, Inc., a distributor of arts and crafts
merchandise, accounted for approximately 18 percent of our purchases; and
    
    Approximately 13 percent of our purchases, primarily floral and seasonal items, were
directly imported from foreign manufacturers or their agents, almost exclusively from
China. All of our overseas purchases are denominated in U.S. dollars.
   Marketing
    6




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Store Design and Operations
    Store Expansion
 .
   Distribution
     7




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Information Technology
   www.acmoore.com
 Associates
  Trademarks
  Website and Availability of Information
 www.acmoore.com www.acmoore.com www.acmoore.com
  8




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ITEM 1A. RISK FACTORS.
 Economic conditions could have a material adverse effect on our business, revenue and
profitability.
   Future losses may adversely affect our financial condition and cash flows.
  If we are unable to comply with the terms of our credit facility, it could materially harm our
business and financial condition and restrict our operating flexibility.
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Our stock could be delisted if we fail to satisfy the NASDAQ rules relating to minimum share price.
  Our business could be negatively impacted by changes in the labor market and our cost of doing
business could increase as a result of changes in federal, state or local regulations.
  Existing or future government regulation could harm our business or may cause us to incur
additional costs associated with compliance.
  An increase in our sales, profitability and cash flow will depend on our ability to increase the
number of stores we operate and increase the productivity and profitability of our existing stores.
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
    
    our ability to identify suitable markets in which to expand,
    
    the availability of suitable sites for additional stores,
    
    our ability to negotiate acceptable lease terms for sites we identify,
    
    the availability of acceptable financing to support our growth, and
    
    our ability to hire, train and retain a sufficient number of qualified general
managers and other store personnel.
 Our success will depend on how well we manage growth.
  
    
    The costs of opening and operating new stores, especially in new markets, may offset
the increased sales generated by the additional stores.
    
    The opening of additional stores in an existing market could reduce net sales from
existing stores in that market.
    
    The opening of stores in new markets may present competitive and merchandising
challenges that are different than those we face in existing markets.
    
    The closing or relocation of under-performing stores may result in us retaining
liability for outstanding lease obligations.
    
    Our growth may outpace our ability to expand, upgrade and improve administrative,
operational and management systems, controls and resources.
    
    Our suppliers may be unable to meet increased demand for merchandise as a result of
the additional stores and increased productivity of our existing stores.
    
    We may be unable to expand existing distribution capabilities, or employ third-party
distribution services on a cost-effective basis, to provide sufficient merchandise for
sale by our new stores.
 Our real estate strategy may not result in improved profitability.
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A weak fourth quarter would have a material adverse effect on our operating results for the year.
  Our quarterly results fluctuate due to a variety of factors and are not necessarily a meaningful
indicator of future performance.
  
    
    the mix of merchandise sold,
    
    the timing and level of markdowns,
    
    promotional events and changes in advertising,
    
    adverse weather conditions (particularly on weekends),
    
    store openings, closings, remodels or relocations,
    
    length and timing of the holiday seasons,
    
    merchandise in-stock positions,
    
    competitive factors, and
    
    general economic and political conditions.
  Our success depends on key personnel whom we may not be able to retain or hire.
  Competition could negatively impact our operations.
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We may not be able to successfully anticipate changes in merchandise trends and consumer demands
and our failure to do so may lead to lost sales
  The failure to accurately respond to inventory requirements may have a material adverse impact on
our results from operations.
  Unfavorable consumer response to our promotional strategy could materially and adversely affect our
sales, profitability and cash flow.
  Adverse events could have a greater impact on us than if we had a larger store base in different
geographical regions.
  A disruption in our operations could have a material adverse effect on our financial condition and
results of operations.
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Significant changes in our relationships with key suppliers may adversely impact our business.
  Our reliance on imported merchandise may negatively impact our business in the event of disruptions
or increased costs associated with obtaining such merchandise.
  
    
    Disruptions in the flow of imported goods because of factors such as:
 
    
    Raw material shortages, factory consolidations, work stoppages,
strikes and political unrest;
    
    The inability of vendors to secure adequate credit facilities;
    
    Problems with trans-ocean shipping, including storage of shipping containers; and
    
    Global or international economic uncertainties, crises or disputes.
 
    
    Increases in the cost of purchasing or shipping imported merchandise that may result from:
 
    
    Increases in shipping rates imposed by trans-ocean carriers;
    
    Changes in currency exchange rates and local economic conditions, including inflation;
    
    Failure of the United States to maintain normal trade relations with China; and
    
    Import duties, quotas and other trade sanctions.
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Our information technology may prove inadequate.
  An increase in the cost of fuel oil and oil-based products could impact our earnings and margin.
  Terrorist attacks and threats or actual war may impact all aspects of our operations, revenues,
costs and stock price in unpredictable ways.
  EXECUTIVE OFFICERS OF THE REGISTRANT
  Name
    
    Age
    
    
    PositionRick A. Lepley
    
    
    58
    
    
    President, Chief Executive Officer and DirectorJoseph A. Jeffries
    
    
    43
    
    
    Executive Vice President and Chief Operating OfficerMichael G. Zawoysky
    
    
    51
    
    
    Executive Vice President and Chief Financial OfficerAmy Rhoades
    
    
    37
    
    
    Vice President and General Counsel
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ITEM 1B. UNRESOLVED STAFF COMMENTS.
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ITEM 2. PROPERTIES
  Number ofState
    
    Locations1.
    
    Connecticut
    
    
    42.
    
    Delaware
    
    
    23.
    
    Florida
    
    
    64.
    
    Georgia
    
    
    15.
    
    Maine
    
    
    36.
    
    Maryland
    
    
    87.
    
    Massachusetts
    
    
    128.
    
    New Hampshire
    
    
    49.
    
    New Jersey
    
    
    2010.
    
    New York
    
    
    2111.
    
    North Carolina
    
    
    1112.
    
    Pennsylvania
    
    
    2313.
    
    Rhode Island
    
    
    114.
    
    South Carolina
    
    
    415.
    
    Tennessee
    
    
    116.
    
    Virginia
    
    
    917.
    
    West Virginia
    
    
    2132
   
 
 ITEM 3. LEGAL PROCEEDINGS.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
  
 
 PART II
 
 
 ITEM 5.
    
    MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES.
  High
    
    
    LowFiscal 2008First Quarter
    
    $
    13.77
    
    
    $
    5.47Second Quarter
    
    
    8.78
    
    
    
    5.73Third Quarter
    
    
    8.72
    
    
    
    5.61Fourth Quarter
    
    
    6.78
    
    
    
    0.71Fiscal 2007First Quarter
    
    $
    22.49
    
    
    $
    18.90Second Quarter
    
    
    23.41
    
    
    
    19.42Third Quarter
    
    
    21.55
    
    
    
    15.40Fourth Quarter
    
    
    17.20
    
    
    
    11.37
    
 
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ITEM 6. SELECTED FINANCIAL DATA.
  Fiscal2008
    
    
    2007
    
    
    2006
    
    
    2005
    
    
    2004(In thousands except per share data)Statement of Operations Data:Net sales
    
    $
    534,665
    
    
    $
    559,693
    
    
    $
    589,506
    
    
    $
    539,436
    
    
    $
    497,626Gross margin
    
    
    217,281
    
    
    
    228,731
    
    
    
    226,828
    
    
    
    210,871
    
    
    
    194,243Selling, general and administrative
expenses (3)
    
    
    232,307
    
    
    
    219,597
    
    
    
    217,923
    
    
    
    192,878
    
    
    
    166,485Store pre-opening and closing expenses
    
    
    8,742
    
    
    
    3,229
    
    
    
    4,616
    
    
    
    3,459
    
    
    
    4,036Income (loss) from operations
    
    
    (23,768
    )
    
    
    5,470
    
    
    
    913
    
    
    
    14,534
    
    
    
    23,722Net income (loss)
    
    
    (26,571
    )
    
    
    3,783
    
    
    
    (406
    )
    
    
    8,901
    
    
    
    14,746Net income (loss) per share, diluted
    
    $
    (1.31
    )
    
    $
    0.19
    
    
    $
    (0.02
    )
    
    $
    0.44
    
    
    $
    0.74Weighted average shares outstanding,
diluted
    
    
    20,301
    
    
    
    20,349
    
    
    
    19,929
    
    
    
    20,149
    
    
    
    20,012(In thousands)Balance Sheet Data (as of):Working capital
    
    $
    102,074
    
    
    $
    145,037
    
    
    $
    143,206
    
    
    $
    145,699
    
    
    $
    143,007Total assets
    
    
    293,746
    
    
    
    321,890
    
    
    
    314,264
    
    
    
    300,024
    
    
    
    296,705Long-term debt
    
    
    
    
    
    
    19,071
    
    
    
    21,643
    
    
    
    24,215
    
    
    
    29,357Shareholders equity
    
    
    174,300
    
    
    
    199,600
    
    
    
    192,505
    
    
    
    185,776
    
    
    
    174,623(In thousands except sales per square foot)Other Data:Cash flows from operating activities
    
    $
    17,719
    
    
    $
    8,610
    
    
    $
    31,496
    
    
    $
    14,620
    
    
    $
    18,495Number of stores open at end of period
    
    
    132
    
    
    
    132
    
    
    
    122
    
    
    
    109
    
    
    
    96Net sales per total square foot (1)
    
    $
    177
    
    
    $
    198
    
    
    $
    234
    
    
    $
    241
    
    
    $
    256Average net sales per store (1)
    
    $
    4,047
    
    
    $
    4,674
    
    
    $
    5,401
    
    
    $
    5,417
    
    
    $
    5,802Comparable store sales increase (decrease ) (2)
    
    
    (9
    )%
    
    
    (10
    )%
    
    
    0
    %
    
    
    (3
    )%
    
    
    4
  
 (1)
    
    Includes only stores open during the entire period.(2)
    
    Stores are added to the comparable store base at the beginning of their fourteenth full
month of operation.(3)
    
    Effective January 1, 2006, the Company adopted the provisions of FAS 123(R), Share-based
Payments, which requires the recognition of compensation expense related to the fair value of
its equity awards. In fiscal years 2008, 2007 and 2006, compensation was reported as a
component of selling, general and administrative expenses in the amount of $2.0 million, $2.6
million and $3.1 million, respectively. 
 
 ITEM 7.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
 Overview
 General
 www.acmoore.com
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Fiscal2008
    
    
    2007Closed store expenses
    
    $
    7,447
    
    
    $
    621Asset impairment
    
    
    6,016
    
    
    
    Record interest rate swap at fair market value
    
    
    2,389
    
    
    
    Other
    
    
    700
    
    
    
    2,100Total, before income taxes
    
    
    16,552
    
    
    
    2,721Income taxes
    
    
    3,485
    
    
    
    (925
    )Total, after income taxes
    
    $
    20,037
    
    
    $
    1,796Per diluted share
    
    $
    0.99
    
    
    $
    0.09
 
    
    In fiscal 2008, the Company closed nine stores at a cost of $7.4 million. In
fiscal 2007, we closed two stores at a cost of $0.6 million.
 
    
    In fiscal 2008, we tested the recoverability of our stores fixed assets. As a
result, we recorded an asset impairment of $6.0 million.
 
    
    During fiscal 2008, we recorded a $2.4 million charge to adjust an interest rate
swap to fair market value because it no longer qualified for cash flow hedge
accounting.
 
    
    In fiscal 2008, we recorded a net charge of $0.7 million related to an additional
reserve for state income taxes and professional fees related to our prior year
inventory restatement which were partially offset by the favorable impact of the
additional three days of sales in fiscal 2008 resulting from the change in our
fiscal year-end.
 
    
    In fiscal 2007, we recorded a total charge of $2.1 million relating professional
fees in connection with our inventory restatement, a legal settlement, management
change costs and additional interest expense.
 
    
    Because of a cumulative three year loss and other available evidence, during
fiscal 2008, the Company determined that it could no longer record an income tax
benefit on its losses. Applying a 34 percent effective tax rate to our 2008 pretax
loss after adjusting for the $16.6 million in adjustments identified above would
have resulted in a $3.5 million tax benefit.
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Business and Operating Strategy
  Increase Sales.
 
    
    Customer service.We continue our consumer research initiatives designed to better
understand our customers expectations and purchasing motivation, with the goal of
developing stronger relationships with our customers. We have successfully implemented
our formal customer service program which involves in-depth training of our store
associates and store management teams.
 
    
    Enhanced merchandise assortment.We continually seek to identify new and enhanced
product lines and merchandise assortments that differentiate us from our competitors.
We regularly review product adjacencies in order to improve our average sales ticket per
customer and enhance the overall shopping experience.
 
    
    Improved in-stock position.Maintaining a full in-stock position is critical to
driving sales, as providing the components for a particular craft project is essential
to meeting customer demand. Our perpetual inventory system, implemented in January
2008, as well as other technological improvements, have allowed us to achieve better
in-stock positions as well as information about quantities available at the store level.
We also regularly evaluate our supply chain operations to improve the process and
timing within which product is ordered and delivered to our stores.
 
    
    Promotional strategies.Particularly in light of the current macroeconomic and
retail environment, we continue to refine our advertising vehicles and pricing
strategies. We believe identifying and featuring key promotional items, combined with a
blend of in-store promotions, and targeted marketing efforts to complement our regular
newspaper insert program will drive customer traffic.
  21




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
    
    A.C. Moore Rewards program.During the third quarter of fiscal 2008, we launched our
A.C. Moore Rewards program in a select group of pilot stores.  For the first time, we
will have access to business intelligence related to who our customers are, what they
purchase, and how often they visit our stores. Although still in the pilot phase,
initial customer response to the program has been positive. We will continue to monitor
our pilot results as we believe this initiative will support our strategic efforts at
differentiating ourselves from our competition while providing our customers with more
reasons to shop in our stores.
 Improve Store Profitability .
 
    
    Real estate portfolio strategy.In June 2008, and during the year-end closing
process, management completed a portfolio review of all current stores and future
prospects to identify underperforming locations and assess closure of those stores that
are no longer strategically or economically viable. As a result of this analysis, we
closed four stores in July, one store in August, one store in November and three stores
in December. When entering new markets which we deem to be multi-store markets, we will
attempt to do so with sufficient store density to leverage expenses such as advertising
and supply chain replenishment. If strategically viable, we will also consider adding
new stores and relocating existing stores in our existing markets.
 
    
    Advertising spend. In fiscal 2008, we utilized the services of a newspaper placement
agency to negotiate our ad insertion rates and distribution costs. We implemented those
recommendations by the end of the first quarter of fiscal 2008. We will continue this
initiative in fiscal 2009 by analyzing our distribution methods to further enhance
productivity of the advertising vehicles. In fiscal 2008, we began supplementing our
newspaper advertising program with a combination of in store and targeted marketing
programs.
 
    
    Centrally directed operations and our new store prototype.We believe that
increasing the level of standardization in operations and centrally directed management
practices will improve our operating efficiencies. This initiative includes
standardizing the presentation in our stores, reengineering our store processes and
implementing and refining our new store prototype which we refer to as our Nevada
model. As of January 3, 2009, we operated 18 Nevada class stores. We believe the Nevada
model will help us achieve efficiencies through increased ease of operation and reduced
labor costs. While we believe the Nevada model is a desirable design, we are currently
refining the design based on the results of this initial phase of implementation and
expect to continue to do so in the future.
 
    
    Store structure.In fiscal 2008, we fully optimized our store payroll model. To
increase our execution at the store level we implemented a new field structure as well,
which added District Managers who report to Regional Directors. This new structure
allows our management team to have a reduced scope of store count, which increases their
number of visits to each store, yielding improved levels of customer service, more
efficient merchandising and better executed operational programs.
  22




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Increase Gross Margin .
 
    
    Category management.During fiscal 2008, we completed the implementation of both
category management structure and process. The category management process leverages
merchandise assortment planning tools, the use of a merchandising planning calendar, and
an open-to-buy process focused on sales and inventory productivity. We are committed to
reducing our exposure in seasonal goods by controlling buys and utilizing new planning
processes which will in turn reduce our markdown liability.
 
    
    Domestic and globally sourced private label products.In fiscal 2008, we continued
to refine our sourcing and private label strategies, adopting a more balanced approach.
We continue to explore new opportunities involving private label product. We believe
the sale of private label products, both domestic and globally sourced, will result in
gross margin improvement.
 
    
    Supply chain optimization.In fiscal 2008, we increased our focus on improving in
stock levels, reducing inventory levels, increasing merchandise turns, and improving
distribution efficiencies. Based on the success of these initiatives, in December
2008, we discontinued our lease on our second distribution center in Blackwood, New
Jersey. The lease was previously scheduled to expire on January 31, 2009. We believe
that our current distribution center will continue to support our needs in the
near-term. We continue to make significant strides in our efforts to further improve
service levels, efficiency, accuracy, and safety in the supply chain organization. The
performance management program, which was implemented in early fiscal 2008 in our
distribution center, continues to help us improve labor efficiencies. Our compliance
team has helped us improve picking and shipping accuracy while reducing workers
compensation claims. Effective January 1, 2009, we outsourced our store delivery
operation to allow us to intensify our focus on our core business while improving
service levels and reducing delivery costs.
 Improve Information Technology.
  23




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Results of Operations
  Fiscal2008
    
    
    2007
    
    
    2006Net sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales
    
    
    59.4
    
    
    
    59.1
    
    
    
    61.5Gross margin
    
    
    40.6
    
    
    
    40.9
    
    
    
    38.5Selling, general and administrative expenses
    
    
    43.4
    
    
    
    39.2
    
    
    
    37.0Costs related to change in management
    
    
    0.0
    
    
    
    0.1
    
    
    
    0.6Store pre-opening and closing expenses
    
    
    1.6
    
    
    
    0.6
    
    
    
    0.7Income (loss) from operations
    
    
    (4.4
    )
    
    
    1.0
    
    
    
    0.2Interest expense (income), net
    
    
    0.6
    
    
    
    (0.0
    )
    
    
    0.1Income (loss) before income taxes
    
    
    (5.0
    )
    
    
    1.0
    
    
    
    0.1Provision for (benefit from) income taxes
    
    
    (0.0
    )
    
    
    0.3
    
    
    
    0.3Net income (loss)
    
    
    (5.0
    )%
    
    
    0.7
    %
    
    
    (0.2
    )%
 Fiscal 2008 Compared to Fiscal 2007
 Net Sales
  Gross Margin
 Selling, General and Administrative Expenses
  24




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##### Table of Contents



Costs Related to Change in Management.
 Store Pre-Opening and Closing Expenses
   Interest Income and Expense.
 Income Taxes
 Fiscal 2007 Compared to Fiscal 2006
 Net Sales
  25




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Gross Margin
 Selling, General and Administrative Expenses
  Costs Related to Change in Management.
 Store Pre-opening and Closing Expenses
 Interest Income and Expense.
 Income Taxes
  26




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Quarterly Results and Seasonality
  First Quarter
    
    
    Second Quarter
    
    
    Third Quarter
    
    
    Fourth QuarterFiscal 2008Net sales
    
    $
    126,544
    
    
    $
    126,430
    
    
    $
    116,661
    
    
    $
    165,030Gross margin
    
    
    54,111
    
    
    
    52,363
    
    
    
    50,433
    
    
    
    60,374Income (loss) from operations
    
    
    (2,127
    )
    
    
    (6,622
    )
    
    
    (4,285
    )
    
    
    (10,734
    )Net income (loss)
    
    
    (1,767
    )
    
    
    (4,265
    )
    
    
    (7,539
    )
    
    
    (13,000
    )Net income (loss) per share, diluted
    
    $
    (0.09
    )
    
    $
    (0.21
    )
    
    $
    (0.37
    )
    
    $
    (0.64
    )Diluted average shares outstanding
    
    
    20,299
    
    
    
    20,299
    
    
    
    20,300
    
    
    
    20,304Number of stores open at end of period
    
    
    136
    
    
    
    139
    
    
    
    135
    
    
    
    132Comparable store sales increase (decrease)
    
    
    (12
    )%
    
    
    (5
    )%
    
    
    (9
    )%
    
    
    (9
    )%Fiscal 2007Net sales
    
    $
    135,380
    
    
    $
    124,439
    
    
    $
    122,608
    
    
    $
    177,266Gross margin
    
    
    55,311
    
    
    
    52,079
    
    
    
    52,679
    
    
    
    68,662Income (loss) from operations
    
    
    314
    
    
    
    (1,103
    )
    
    
    (1,115
    )
    
    
    7,374Net income (loss)
    
    
    345
    
    
    
    (559
    )
    
    
    (654
    )
    
    
    4,651Net income (loss) per share, diluted
    
    $
    0.02
    
    
    $
    (0.03
    )
    
    $
    (0.03
    )
    
    $
    0.23Diluted average shares outstanding
    
    
    20,279
    
    
    
    20,229
    
    
    
    20,275
    
    
    
    20,346Number of stores open at end of period
    
    
    123
    
    
    
    124
    
    
    
    127
    
    
    
    132Comparable store sales increase (decrease)
    
    
    (5
    )%
    
    
    (10
    )%
    
    
    (10
    )%
    
    
    (15
    )%Fiscal 2006Net sales
    
    $
    132,918
    
    
    $
    129,815
    
    
    $
    128,936
    
    
    $
    197,837Gross margin
    
    
    52,467
    
    
    
    52,122
    
    
    
    52,315
    
    
    
    69,922Income (loss) from operations
    
    
    (217
    )
    
    
    (3,545
    )
    
    
    (4,859
    )
    
    
    9,535Net income (loss)
    
    
    (161
    )
    
    
    (2,153
    )
    
    
    (3,019
    )
    
    
    4,927Net income (loss) per share, diluted
    
    $
    (0.01
    )
    
    $
    (0.11
    )
    
    $
    (0.15
    )
    
    $
    0.24Diluted average shares outstanding
    
    
    19,838
    
    
    
    19,857
    
    
    
    19,916
    
    
    
    20,192Number of stores open at end of period
    
    
    113
    
    
    
    114
    
    
    
    117
    
    
    
    122Comparable store sales increase (decrease)
    
    
    (2
    )%
    
    
    3
    %
    
    
    2
    %
    
    
    (3
    )%
   Liquidity and Capital Resources
   27




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28




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Payments Due By Period ($ 000)Contractual Obligations
    
    Total
    
    
    < 1 Year
    
    
    1  3 Years
    
    
    4  5 Years
    
    
    > 5 YearsShort-term debt (1)
    
    $
    29,071
    
    
    $
    29,071
    
    
    $
    
    
    
    $
    
    
    
    $
    Store operating leases (2)
    
    
    260,711
    
    
    
    42,737
    
    
    
    117,258
    
    
    
    51,841
    
    
    
    48,875Equipment leases
    
    
    249
    
    
    
    197
    
    
    
    52
    
    
    
    
    
    
    
    Purchase obligations (3)
    
    
    5,002
    
    
    
    1,696
    
    
    
    3,052
    
    
    
    254
    
    
    
    Deferred tax liability (4)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Liability for uncertain tax positions (5)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total contractual cash obligations
    
    $
    295,032
    
    
    $
    73,701
    
    
    $
    120,361
    
    
    $
    52,095
    
    
    $
    48,875
 (1)
    
    On January 15, 2009, the Company paid off its line of credit and mortgage obligations with
Wachovia Bank. The mortgage obligations had previously been classified as long-term debt.
Because the Company had, prior to the end of fiscal 2008, an agreement in principle for a new
financing agreement to replace the Wachovia agreement and because the existing mortgages were
not refinanced with similar long-term debt, the Company reclassified these mortgages as
short-term as of January 3, 2009.(2)
    
    Most store leases have an average initial term of ten years, with three five-year renewal
options, and provide for predetermined escalation in future minimum annual rent. Rent
payments are amortized over the initial lease term commencing on the date we take possession.
The pro rata portion of scheduled rent escalations has been included in other long-term
liabilities in the balance sheet. Amounts listed in this table only include minimum rent
payments. Most leases contain provisions that require payment for other items such as real
estate taxes, common area maintenance and insurance. Historically, these additional items
have been equal to approximately 30 percent of the minimum lease payments.(3)
    
    Purchase obligations include agreements for goods and services that are enforceable and
legally binding to the Company and that specify all significant terms. Such obligations were
primarily for the purchase of information technology hardware and software.  29




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##### Table of Contents



(4)
    
    The amount of deferred income taxes has been excluded from the above table as the timing of
any cash payment is uncertain. See Note 10 of the Notes to Consolidated Financial Statements
for additional information regarding our deferred tax position.(5)
    
    The Companys liability for uncertain tax positions was excluded from the table above, as the
timing of any cash payment is uncertain. Critical Accounting Estimates
  Merchandise Inventories.
    30




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##### Table of Contents



Impairment of Long-lived Assets.
 Reserve for Closed Stores.
  Income Taxes.
  Other Estimates.
  31




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Change in Accounting Principles
 Merchandise Inventories
 Accounting for Uncertainty in Income Taxes
 The Fair Value Option for Financial Assets and
Financial Liabilities,
 Fair Value Measurements,
   32




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##### Table of Contents



Fair Value Measurements at January 3, 2009 UsingSignificant Other
    
    
    SignificantTotal Carrying
    
    
    Quoted Prices in
    
    
    Observable
    
    
    UnobservableValue at
    
    
    Active Markets
    
    
    Inputs
    
    
    Inputs(In thousands)
    
    January 3, 2009
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Cash equivalents
    
    $
    79,400
    
    
    $
    79,400
    
    
    $
    
    
    
    $
    Interest rate swaps (1)
    
    
    (2,400
    )
    
    
    
    
    
    
    (2,400
    )
    
    
    
 (1)
    
    Included in Accrued expenses on our Consolidated Balance Sheets.  New Accounting Pronouncements
 Disclosures about Derivative Instruments and Hedging
Activities, an amendment to FASB Statement 133,
 
 
 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
    33




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##### Table of Contents



ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 A.C. MOORE ARTS & CRAFTS, INC.
 PageReport of Independent Registered Public Accounting Firm
    
    
    35Consolidated Balance Sheets at January 3, 2009 and December 31, 2007
    
    
    36Consolidated Statements of Operations for each of the Three Fiscal Years
in the Period Ended January 3, 2009
    
    
    37Consolidated Statements of Changes in Shareholders Equity for each of the
Three Fiscal Years in the Period Ended January 3, 2009
    
    
    38Consolidated Statements of Cash Flows for each of the Three Fiscal Years
in the Period ended January 3, 2009
    
    
    39Notes to Consolidated Financial Statements
    
    
    40
   34




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##### Table of Contents



Report of Independent Registered Public Accounting Firm
  Internal Control  Integrated Framework
     
  35




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##### Table of Contents



A.C. MOORE ARTS & CRAFTS, INC.
 
 CONSOLIDATED BALANCE SHEETS
 (In thousands)
 January 3,
    
    
    December 31,2009
    
    
    2007ASSETSCurrent assets:Cash and cash equivalents
    
    $
    74,437
    
    
    $
    65,195Inventories
    
    
    109,365
    
    
    
    128,391Prepaid expenses and other current assets
    
    
    8,346
    
    
    
    11,940Prepaid and receivable income taxes
    
    
    1,905
    
    
    
    7,411Deferred tax assets
    
    
    4,600
    
    
    
    7,533198,653
    
    
    
    220,470Non-current assets:Property and equipment, net
    
    
    92,403
    
    
    
    99,328Other assets
    
    
    2,690
    
    
    
    2,092$
    293,746
    
    
    $
    321,890LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Short-term debt
    
    $
    29,071
    
    
    $
    2,571Trade accounts payable
    
    
    39,274
    
    
    
    48,780Accrued payroll and payroll taxes
    
    
    2,414
    
    
    
    2,980Accrued expenses
    
    
    23,879
    
    
    
    17,753Accrued lease liability
    
    
    1,941
    
    
    
    1,440Other current liabilities
    
    
    
    
    
    
    1,90996,579
    
    
    
    75,433Non-current liabilities:Long-term debt
    
    
    
    
    
    
    19,071Deferred tax liability and other
    
    
    4,560
    
    
    
    8,719Accrued lease liability
    
    
    18,307
    
    
    
    19,06722,867
    
    
    
    46,857119,446
    
    
    
    122,290Commitments and contingencies (See Note 13)Shareholders equity:Preferred stock, no par value, 10,000,000 shares
authorized; none issued
    
    
    
    
    
    
    Common stock, no par value, 40,000,000 shares authorized;
shares issued and outstanding 20,467,151and 20,375,646
at January 3, 2009 and December 31, 2007, respectively
    
    
    124,909
    
    
    
    122,921Accumulated other comprehensive (loss)
    
    
    
    
    
    
    (483
    )Retained earnings
    
    
    49,391
    
    
    
    77,162174,300
    
    
    
    199,600$
    293,746
    
    
    $
    321,890
   36




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##### Table of Contents



A.C. MOORE ARTS & CRAFTS, INC.
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (In thousands except per share data)
 Fiscal2008
    
    
    2007
    
    
    2006Net sales
    
    $
    534,665
    
    
    $
    559,693
    
    
    $
    589,506Cost of sales (including buying and distribution costs)
    
    
    317,384
    
    
    
    330,962
    
    
    
    362,678Gross margin
    
    
    217,281
    
    
    
    228,731
    
    
    
    226,828Selling, general and administrative expenses
    
    
    232,307
    
    
    
    219,597
    
    
    
    217,923Costs related to change in management
    
    
    
    
    
    
    435
    
    
    
    3,376Store pre-opening and closing expenses
    
    
    8,742
    
    
    
    3,229
    
    
    
    4,616Income (loss) from operations
    
    
    (23,768
    )
    
    
    5,470
    
    
    
    913Interest expense
    
    
    4,245
    
    
    
    1,791
    
    
    
    1,547Interest (income)
    
    
    (1,210
    )
    
    
    (1,997
    )
    
    
    (1,224
    )Income (loss) before income taxes
    
    
    (26,803
    )
    
    
    5,676
    
    
    
    590Provision for (benefit from) income taxes
    
    
    (232
    )
    
    
    1,893
    
    
    
    996Net income (loss)
    
    $
    (26,571
    )
    
    $
    3,783
    
    
    $
    (406
    )Basic net income (loss) per share
    
    $
    (1.31
    )
    
    $
    0.19
    
    
    $
    (0.02
    )Diluted net income (loss) per share
    
    $
    (1.31
    )
    
    $
    0.19
    
    
    $
    (0.02
    )
    37




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##### Table of Contents



A.C. MOORE ARTS & CRAFTS, INC.
 
 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
 (In thousands except share data)
 AccumulatedOtherCommon
    
    
    Retained
    
    
    ComprehensiveShares
    
    
    Stock
    
    
    Earnings
    
    
    Loss
    
    
    TotalBalance, December 31, 2005
    
    
    19,816,774
    
    
    $
    111,383
    
    
    $
    74,393
    
    
    $
    
    
    
    $
    185,776Net (loss)
    
    
    
    
    
    
    
    
    
    
    (406
    )
    
    
    
    
    
    
    (406
    )Exercise of stock options
    
    
    350,324
    
    
    
    2,152
    
    
    
    
    
    
    
    
    
    
    
    2,152Tax benefit from exercise of
stock options
    
    
    
    
    
    
    1,606
    
    
    
    
    
    
    
    
    
    
    
    1,606Stock-based compensation expense
    
    
    
    
    
    
    3,077
    
    
    
    
    
    
    
    
    
    
    
    3,077Balance, December 31, 2006
    
    
    20,167,098
    
    
    $
    118,218
    
    
    $
    73,987
    
    
    $
    
    
    
    $
    192,205Net income
    
    
    
    
    
    
    
    
    
    
    3,783
    
    
    
    
    
    
    
    3,783Unrealized (loss), net of taxes
of $322
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (483
    )
    
    
    (483
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    3,300Exercise of stock options
    
    
    131,503
    
    
    
    1,626
    
    
    
    
    
    
    
    
    
    
    
    1,626Tax benefit from exercise of
stock options
    
    
    
    
    
    
    433
    
    
    
    
    
    
    
    
    
    
    
    433Stock-based compensation expense
    
    
    
    
    
    
    2,644
    
    
    
    
    
    
    
    
    
    
    
    2,644Restricted shares, net
    
    
    77,045
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Change in accounting principle
(Note 10)
    
    
    
    
    
    
    
    
    
    
    (608
    )
    
    
    
    
    
    
    (608
    )Balance, December 31, 2007
    
    
    20,375,646
    
    
    $
    122,921
    
    
    $
    77,162
    
    
    $
    (483
    )
    
    $
    199,600Net (loss)
    
    
    
    
    
    
    
    
    
    
    (26,571
    )
    
    
    
    
    
    
    (26,571
    )Unrealized (loss), net of taxes
of $633
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (951
    )
    
    
    (951
    )Reclassification adjustment,
net of taxes of $955
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,434
    
    
    
    1,434Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (26,088
    )Exercise of stock options
    
    
    2,200
    
    
    
    8
    
    
    
    
    
    
    
    
    
    
    
    8Tax benefit from exercise of
stock options
    
    
    
    
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    3Stock-based compensation expense
    
    
    
    
    
    
    1,977
    
    
    
    
    
    
    
    
    
    
    
    1,977Restricted shares, net
    
    
    89,305
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Change in accounting principle
(Note 3)
    
    
    
    
    
    
    
    
    
    
    (1,200
    )
    
    
    
    
    
    
    (1,200
    )Balance, January 3, 2009
    
    
    20,467,151
    
    
    $
    124,909
    
    
    $
    49,391
    
    
    $
    
    
    
    $
    174,300
   38




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##### Table of Contents



A.C.
MOORE ARTS & CRAFTS, INC.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
 Fiscal2008
    
    
    2007
    
    
    2006Cash flows from operating activities:Net income (loss)
    
    $
    (26,571
    )
    
    $
    3,783
    
    
    
    (406
    )Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    15,714
    
    
    
    14,079
    
    
    
    12,281Stock-based compensation expense
    
    
    1,977
    
    
    
    2,644
    
    
    
    3,077Impairment of fixed assets
    
    
    6,016
    
    
    
    
    
    
    
    Loss on disposal of assets
    
    
    1,112
    
    
    
    883
    
    
    
    83Provision for (benefit of) deferred income taxes, net
    
    
    2,388
    
    
    
    5,033
    
    
    
    (4,449
    )Changes in assets and liabilities:Inventories
    
    
    17,012
    
    
    
    (5,941
    )
    
    
    9,848Prepaid expenses and other current assets
    
    
    3,594
    
    
    
    (4,770
    )
    
    
    (753
    )Income taxes receivable
    
    
    3,193
    
    
    
    (6,928
    )
    
    
    Accounts payable
    
    
    (9,506
    )
    
    
    77
    
    
    
    2,258Accrued payroll, payroll taxes and accrued expenses
    
    
    5,560
    
    
    
    386
    
    
    
    6,375Accrued lease liability
    
    
    (259
    )
    
    
    252
    
    
    
    2,928Income taxes payable
    
    
    (1,909
    )
    
    
    (205
    )
    
    
    256Other
    
    
    (602
    )
    
    
    (683
    )
    
    
    (2
    )Net cash provided by operating activities
    
    
    17,719
    
    
    
    8,610
    
    
    
    31,496Cash flows from investing activities:Capital expenditures
    
    
    (15,917
    )
    
    
    (19,022
    )
    
    
    (19,534
    )Proceeds from maturation of marketable securities
    
    
    
    
    
    
    
    
    
    
    5,224Investment in marketable securities
    
    
    
    
    
    
    
    
    
    
    Cash flows (used in) investing activities
    
    
    (15,917
    )
    
    
    (19,022
    )
    
    
    (14,310
    )Cash flows from financing activities:Exercise of stock options
    
    
    8
    
    
    
    1,626
    
    
    
    2,152Tax benefit of stock options
    
    
    3
    
    
    
    433
    
    
    
    1,606Borrowing under line of credit
    
    
    10,000
    
    
    
    
    
    
    
    Repayment of long-term debt
    
    
    (2,571
    )
    
    
    (2,572
    )
    
    
    (2,572
    )Net cash provided by (used in) financing activities
    
    
    7,440
    
    
    
    (513
    )
    
    
    1,186Net (decrease) increase in cash and cash equivalents
    
    
    9,242
    
    
    
    (10,925
    )
    
    
    18,372Cash and cash equivalents at beginning of period
    
    
    65,195
    
    
    
    76,120
    
    
    
    57,748Cash and cash equivalents at end of period
    
    $
    74,437
    
    
    $
    65,195
    
    
    $
    76,120Supplemental cash flow information:Cash paid during the year for:Interest
    
    $
    2,190
    
    
    $
    1,343
    
    
    $
    1,538Income taxes, net of refunds
    
    $
    649
    
    
    $
    1,898
    
    
    $
    3,639
   39




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##### Table of Contents



A.C. MOORE ARTS & CRAFTS, INC.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 1. Summary of Significant Accounting Policies
 Organization and Basis of Presentation. .
 Use of Estimates.
 Fiscal Year.
 Cash and Cash Equivalents.
 Concentration of Credit Risk.
 Merchandise Inventories.
   40




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##### Table of Contents



Property and Equipment.
  Impairment of Long-lived Assets.
 Other Assets
 Revenue Recognition
  41




---



##### Table of Contents



Fiscal(In thousands)
    
    2008
    
    
    2007Art and scrapbooking
    
    $
    156,898
    
    
    $
    161,628Traditional crafts
    
    
    148,248
    
    
    
    145,517Floral and floral accessories
    
    
    53,057
    
    
    
    61,263Fashion crafts
    
    
    51,217
    
    
    
    52,638Home décor and frames
    
    
    95,183
    
    
    
    100,692Seasonal items
    
    
    30,061
    
    
    
    37,955Total
    
    $
    534,665
    
    
    $
    559,693
   Lease Accounting
 Reserve for Closed Stores.
 Store Pre-opening and Closing Costs.
 Accounting for Costs
Associated with Exit or Disposal Activities Employers Accounting for
Postemployment Benefits.
    42




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##### Table of Contents



Fiscal(In thousands)
    
    2008
    
    
    2007
    
    
    2006Store pre-opening costs
    
    $
    1,295
    
    
    $
    2,608
    
    
    $
    3,241Store closing costs
    
    
    7,447
    
    
    
    621
    
    
    
    1,375$
    8,742
    
    
    $
    3,229
    
    
    $
    4,616
 Advertising Costs.
 Insurance Liabilities.
 Fair Value of Financial Instruments. Fair Value
Measurements,
   43




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##### Table of Contents



Fair Value Measurements at January 3, 2009 UsingSignificant Other
    
    
    SignificantTotal Carrying
    
    
    Quoted Prices in
    
    
    Observable
    
    
    UnobservableValue at
    
    
    Active Markets
    
    
    Inputs
    
    
    Inputs(In thousands)
    
    January 3, 2009
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Cash equivalents
    
    $
    79,400
    
    
    $
    79,400
    
    
    $
    
    
    
    $
    Interest rate swaps (1)
    
    
    (2,400
    )
    
    
    
    
    
    
    (2,400
    )
    
    
    
 (1)
    
    Included in Accrued expenses on our Consolidated Balance Sheets.  The Fair Value Option for Financial Assets and
Financial Liabilities,
 Stock-based Compensation Share-Based Payment
  Fiscal2008
    
    
    2007
    
    
    2006Average fair value of awards
    
    $
    2.20
    
    
    $
    7.72
    
    
    $
    8.99Risk free interest rate
    
    
    2.7
    %
    
    
    4.6
    %
    
    
    4.6
    %Dividend yield
    
    
    
    
    
    
    
    
    
    
    Average expected life
    
    4.5
    yrs
    
    4.5
    yrs
    
    6.0
    yrsExpected stock price volatility
    
    
    46.3
    %
    
    
    38.0
    %
    
    
    44.4
    %
    44




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##### Table of Contents



Income Taxes
  2. New Accounting Pronouncements
 Disclosures about Derivative Instruments and Hedging
Activities, an amendment to FASB Statement 133,
 3. Merchandise Inventories
  Accounting Changes and Error Corrections
  45




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##### Table of Contents



4. Impairment of Long-lived Assets
 Accounting for the Impairment or Disposal of Long-lived Assets
  5. Store Closing Costs
 Accounting for Costs Associated with Exit
or Disposal Activities Employers Accounting for Postemployment Benefits.
  Fiscal(In thousands)
    
    2008
    
    
    2007
    
    
    2006Non-cancellable lease obligations
    
    $
    5,702
    
    
    $
    
    
    
    $
    1,308Asset related charges
    
    
    580
    
    
    
    460
    
    
    
    Severence, liquidation and other
    
    
    1,165
    
    
    
    161
    
    
    
    67$
    7,447
    
    
    $
    621
    
    
    $
    1,375
     46




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##### Table of Contents



6. Costs Related to Change in Management
  7. Earnings Per Share
  Fiscal Year(In thousands, except per share data)
    
    2008
    
    
    2007
    
    
    2006Net income (loss)
    
    $
    (26,571
    )
    
    $
    3,783
    
    
    $
    (406
    )Weighted average shares:Basic
    
    
    20,301
    
    
    
    20,246
    
    
    
    19,929Incremental shares from assumed exercise of stock options and stock
appreciation rights
    
    
    
    
    
    
    56
    
    
    
    Incremental restricted shares
    
    
    
    
    
    
    47
    
    
    
    Diluted
    
    
    20,301
    
    
    
    20,349
    
    
    
    19,929Basic net income (loss) per share
    
    $
    (1.31
    )
    
    $
    0.19
    
    
    $
    (0.02
    )Diluted net income (loss) per share
    
    $
    (1.31
    )
    
    $
    0.19
    
    
    $
    (0.02
    )Stock options and stock appreciation rights excluded from the
calculation
because the exercise price was greater than the average market price
    
    
    1,439
    
    
    
    807
    
    
    
    937Potentially dilutive shares excluded from the calculation as the
result would
be anti-dilutive
    
    
    228
    
    
    
    
    
    
    
    90
  47




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##### Table of Contents



8. Property and Equipment
  Fiscal Year Ended(In thousands)
    
    2008
    
    
    2007
    
    
    2006Land
    
    $
    2,466
    
    
    $
    2,466
    
    
    $
    2,466Buildings and improvements
    
    
    38,370
    
    
    
    38,370
    
    
    
    38,370Furniture, fixtures, software and equipment
    
    
    135,862
    
    
    
    123,589
    
    
    
    107,148Leasehold improvements
    
    
    8,183
    
    
    
    5,849
    
    
    
    6,205Equipment for future stores
    
    
    552
    
    
    
    2,179
    
    
    
    1,260185,433
    
    
    
    172,453
    
    
    
    155,449Less: Accumulated depreciation and amortization
    
    
    (93,030
    )
    
    
    (73,125
    )
    
    
    (60,181
    )$
    92,403
    
    
    $
    99,328
    
    
    $
    95,268
 9. Financing Agreement
   Accounting for Derivative Instruments and Hedging Activities,
   48




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##### Table of Contents



10. Income Taxes
 Accounting for Uncertainty in Income Taxes
  Fiscal(In thousands)
    
    2008
    
    
    2007Gross unrecognized tax benefits, beginning of period
    
    $
    2,826
    
    
    $
    1,059Increases in tax positions for prior years
    
    
    563
    
    
    
    46Decreases in tax positions for prior years
    
    
    (493
    )
    
    
    Increases in tax positions for current year
    
    
    388
    
    
    
    1,721Settlements
    
    
    (3,033
    )
    
    
    Lapse in statute of limitations
    
    
    
    
    
    
    Gross unrecognized tax benefits, end of period
    
    $
    251
    
    
    $
    2,826
   49




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##### Table of Contents



Fiscal(In thousands)
    
    2008
    
    
    2007
    
    
    2006United States federal taxes at statutory rate
    
    $
    (9,381
    )
    
    $
    1,986
    
    
    $
    206State and local taxes, net
    
    
    (1,679
    )
    
    
    176
    
    
    
    119Change in estimates for uncertain tax positions
    
    
    309
    
    
    
    229
    
    
    
    98Change in tax rates
    
    
    
    
    
    
    
    
    
    
    329Valuation allowance
    
    
    10,474
    
    
    
    174
    
    
    
    170Incentive stock option compensation
    
    
    32
    
    
    
    150
    
    
    
    468Tax free interest
    
    
    (304
    )
    
    
    (614
    )
    
    
    (292
    )Other
    
    
    317
    
    
    
    (208
    )
    
    
    (102
    )Income tax provision (benefit)
    
    $
    (232
    )
    
    $
    1,893
    
    
    $
    996
  Fiscal(In thousands)
    
    2008
    
    
    2007
    
    
    2006Current tax expense (benefit):Federal
    
    $
    (3,249
    )
    
    $
    (3,231
    )
    
    $
    4,834State
    
    
    629
    
    
    
    91
    
    
    
    611Total current
    
    
    (2,620
    )
    
    
    (3,140
    )
    
    
    5,445Deferred tax expense (benefit):Federal
    
    
    1,828
    
    
    
    4,922
    
    
    
    (4,550
    )State
    
    
    560
    
    
    
    111
    
    
    
    101Total deferred
    
    
    2,388
    
    
    
    5,033
    
    
    
    (4,449
    )Total income tax provision (benefit)
    
    $
    (232
    )
    
    $
    1,893
    
    
    $
    996
  50




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##### Table of Contents



Fiscal Year Ended(In thousands)
    
    2008
    
    
    2007
    
    
    2006Current deferred taxesInventory valuation
    
    $
    2,402
    
    
    $
    2,838
    
    
    $
    9,895Accrued expenses
    
    
    5,876
    
    
    
    3,277
    
    
    
    2,823Deferred revenue
    
    
    265
    
    
    
    1,731
    
    
    
    Valuation allowance
    
    
    (3,943
    )
    
    
    (544
    )
    
    
    (591
    )Other
    
    
    
    
    
    
    231
    
    
    
    (763
    )Total current deferred taxes
    
    $
    4,600
    
    
    $
    7,533
    
    
    $
    11,364Non-current deferred taxesProperty and equipment
    
    
    (14,501
    )
    
    
    (14,895
    )
    
    
    (14,798
    )Stock option compensation
    
    
    2,368
    
    
    
    1,604
    
    
    
    701Accrued rent expense
    
    
    5,946
    
    
    
    6,931
    
    
    
    6,773Federal net operating losses and credits
    
    
    6,328
    
    
    
    
    
    
    
    State net operating loss carryforwards
    
    
    3,412
    
    
    
    1,895
    
    
    
    424Valuation allowance
    
    
    (8,577
    )
    
    
    (2,463
    )
    
    
    (771
    )Other
    
    
    529
    
    
    
    304
    
    
    
    1,066Total non-current deferred taxes
    
    
    (4,495
    )
    
    
    (6,624
    )
    
    
    (6,605
    )Net deferred tax
    
    $
    105
    
    
    $
    909
    
    
    $
    4,759Deferred tax assets
    
    $
    27,126
    
    
    $
    18,811
    
    
    $
    21,682Deferred tax liabilities
    
    
    (27,021
    )
    
    
    (17,902
    )
    
    
    (16,923
    )Net deferred tax
    
    $
    105
    
    
    $
    909
    
    
    $
    4,759
   11. Stock-based Compensation
    51




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##### Table of Contents



Fiscal(In thousands except per share data and # of months)
    
    2008
    
    
    2007Stock-based compensation expense
    
    $
    1,977
    
    
    $
    2,644Effect on net income
    
    
    1,977
    
    
    
    1,759Effect on earnings per share
    
    
    0.10
    
    
    
    0.09Market value in excess of grant price for options exercised
    
    
    6
    
    
    
    1,071Intrinsic value of options outstanding
    
    
    27
    
    
    
    963Unrecognized compensation cost
    
    $
    3,264
    
    
    $
    4,295Months over which compensation costs will be recognized
    
    
    57
    
    
    
    48Shares available for future grant
    
    
    734
    
    
    
    1,094
  tock Options and Stock Appreciation Rights
  Fiscal 2008
    
    
    Fiscal 2007Stock Options and
    
    
    Weighted Average
    
    
    Stock Options and
    
    
    Weighted AverageStock Appreciation Rights
    
    
    Exercise Price
    
    
    Stock Appreciation Rights
    
    
    Exercise PriceOutstanding at beginning of period
    
    
    1,249,606
    
    
    $
    19.82
    
    
    
    1,367,678
    
    
    $
    19.50Activity:Granted
    
    
    487,996
    
    
    
    5.32
    
    
    
    336,300
    
    
    
    20.52Forfeited
    
    
    234,948
    
    
    
    16.19
    
    
    
    322,869
    
    
    
    22.50Exercised
    
    
    2,200
    
    
    
    3.84
    
    
    
    131,503
    
    
    
    12.63Outstanding at end of period
    
    
    1,500,454
    
    
    $
    15.34
    
    
    
    1,249,606
    
    
    $
    19.82
  Stock Options and
    
    
    Stock Options andStock Appreciation Rights Outstanding
    
    
    Stock Appreciation Rights ExercisableWeighted
    
    
    
    
    
    
    
    
    
    
    WeightedAverage
    
    
    Weighted
    
    
    
    
    
    
    Average
    
    
    WeightedRemaining Life
    
    
    Average
    
    
    
    
    
    
    Remaining Life
    
    
    AverageRange of Exercise Prices
    
    Shares
    
    
    (Years)
    
    
    Exercise Price
    
    
    Shares
    
    
    (Years)
    
    
    Exercise Price2.88  4.50
    
    
    196,804
    
    
    
    5.1
    
    
    $
    1.90
    
    
    
    61,804
    
    
    
    1.1
    
    
    $
    3.464.51  8.50
    
    
    337,241
    
    
    
    5.8
    
    
    
    7.08
    
    
    
    45,986
    
    
    
    2.5
    
    
    
    8.328.51  18.50
    
    
    272,700
    
    
    
    7.3
    
    
    
    17.20
    
    
    
    195,966
    
    
    
    7.3
    
    
    
    17.2518.51  22.00
    
    
    397,642
    
    
    
    5.0
    
    
    
    20.53
    
    
    
    284,376
    
    
    
    5.0
    
    
    
    20.5322.01  27.15
    
    
    296,067
    
    
    
    5.6
    
    
    
    25.01
    
    
    
    285,800
    
    
    
    5.6
    
    
    
    25.111,500,454
    
    
    
    5.7
    
    
    $
    15.34
    
    
    
    873,933
    
    
    
    5.3
    
    
    $
    19.44
  52




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##### Table of Contents



Restricted Stock
   Fiscal 2008
    
    
    Fiscal 2007Number of
    


    Weighted Average
    
    
    Number of
    
    
    Weighted AverageShares
    
    
    Grant Date Fair Value
    
    
    Shares
    
    
    Grant Date Fair ValueOutstanding at beginning of period
    
    
    77,045
    
    
    $
    20.89
    
    
    
    0
    
    
    $
    Activity:Granted
    
    
    120,953
    
    
    
    7.19
    
    
    
    77,045
    
    
    
    20.89Vested
    
    
    3,815
    
    
    
    21.84
    
    
    
    0
    
    
    
    Cancelled
    
    
    31,648
    
    
    
    14.41
    
    
    
    0
    
    
    
    Outstanding at end of period
    
    
    162,535
    
    
    $
    11.86
    
    
    
    77,045
    
    
    $
    20.89
 12. Retirement Plan
  13. Commitments and Contingencies
 Commitments
   Fiscal(In thousands)
    
    2008
    
    
    2007
    
    
    2006Minimum rentals
    
    $
    40,508
    
    
    $
    36,036
    
    
    $
    33,024Contingent payments
    
    
    46
    
    
    
    83
    
    
    
    76$
    40,554
    
    
    $
    36,119
    
    
    $
    33,100
  53




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##### Table of Contents



2009
    
    $
    42,7372010
    
    
    42,5612011
    
    
    39,2982012
    
    
    35,3982013
    
    
    28,878Thereafter
    
    
    71,839Total minimum future rentals
    
    $
    260,711
 Contingencies
  14. Related Party Transactions
       54




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##### Table of Contents



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




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##### Table of Contents



ITEM 9B. OTHER INFORMATION
  
 
 PART III
 
 
 ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
  Code of Ethical Business Conduct
 Code of Ethical Business Conduct www.acmoore.com
 
 
 ITEM 11. EXECUTIVE COMPENSATION.
  
 
 ITEM 12.
    
    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS.
   56




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##### Table of Contents



Equity Compensation Plan Information
  (c)(a)
    
    
    
    
    
    
    Number of securitiesNumber of securities
    
    
    (b)
    
    
    remaining available forto be issued upon
    
    
    Weighted-average
    
    
    future issuance underexercise of outstanding
    
    
    exercise price of
    
    
    equity compensationoptions, warrants and
    
    
    outstanding options,
    
    
    plans (excluding securitiesPlan Category
    
    rights
    
    
    warrants and rights
    
    
    reflected in column (a))Equity compensation
plans approved by
security holders
(1)
    
    
    1,500,454
    
    
    $
    15.34
    
    
    
    734,262Equity compensation
plans not approved
by security holders
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    1,500,454
    
    
    $
    15.34
    
    
    
    734,262
 
 (1)
    
    These plans are our 1997 Employee, Director and Consultant Stock Option Plan, 2002
Stock Option Plan and 2007 Stock Incentive Plan. 
 
 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDANCE.
  
 
 ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
  
 
 PART IV
 
 
 ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
 (a)
    
    The following documents are filed as part of this Annual Report on Form 10-K:
 (1)
    
    Financial Statements:Report of Independent Registered Public Accounting FirmConsolidated Balance Sheets at January 3, 2009 and December 31, 2007Consolidated Statements of Operations for each of the three fiscal years
in the period ended January 3, 2009Consolidated Statements of Changes in Shareholders Equity for each of the
three fiscal years in the period ended January 3, 2009Consolidated Statements of Cash Flows for each of the three fiscal
years in the period ended January 3, 2009Notes to Consolidated Financial Statements
  57




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##### Table of Contents



(2)
    
    Financial Statement Schedules:Schedule II  Valuation and Qualifying AccountsAll other schedules have been omitted because they are not applicable,
not required or the information is included elsewhere herein.(3)
    
    Exhibits:The exhibits filed as part of this report are listed under exhibits at
subsection (b) of this Item 15.
 (b)
    
    Exhibits:
 Exhibit Number
    
    Description3.1(1)
    
    Articles of Incorporation.3.1.1(2)
    
    Amendment to Articles of Incorporation.3.1.2(3)
    
    Amendment to Articles of Incorporation.3.2(4)
    
    Amended and Restated Bylaws.+10.1(1)
    
    1997 Employee, Director and Consultant Stock Option Plan.+10.2(1)
    
    Form of Incentive Stock Option Agreement under the 1997 Employee,
Director and Consultant Stock Option Plan.+10.3(5)
    
    2002 Stock Option Plan.+10.4(6)
    
    Form of Incentive Stock Option/Non-Qualified Option Agreement under the
2002 Stock Option Plan.+10.5(7)
    
    2007 Annual Incentive Plan.+10.6(8)
    
    2007 Stock Incentive Plan.+10.7(8)
    
    Form of Stock Unit Agreement under the 2007 Stock Incentive Plan.
  58




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##### Table of Contents



Exhibit Number
    
    Description+10.8    (8)
    
    Form of Nonqualified Stock Option Agreement under the 2007 Stock
Incentive Plan.+10.9    (8)
    
    Form of Incentive Stock Option Agreement under the 2007 Stock Incentive
Plan.+10.10    (8)
    
    Form of Stock Appreciation Rights Agreement under the 2007 Stock
Incentive Plan.+10.11    (8)
    
    Form of Restricted Stock Agreement under the 2007 Stock Incentive Plan.10.12    (9)
    
    Amended and Restated Loan Agreement, dated as of May 31, 2008, between
the Company and Wachovia Bank, National Association (Wachovia).10.13    (9)
    
    Amendment to Loan Documents, dated as of May 31, 2008, between the
Company and Wachovia.10.14    (9)
    
    Amended and Restated Promissory Note, dated as of May 31, 2008, between
the Company and Wachovia.10.15    (10)
    
    Promissory Note and Loan Modification, dated as of September 18, 2008,
between the Company and Wachovia Bank, National Association.10.16    (11)
    
    Amended and Restated Swap Transaction Confirmation, signed on December
8, 2006 and effective as of November 27, 2006.10.17    (11)
    
    Amended and Restated Swap Transaction Confirmation, signed on December
8, 2006 and effective as of November 27, 2006.10.18    (12)
    
    Credit Agreement, dated as of January 15, 2009, among A.C. Moore
Incorporated, as the Lead Borrower, the Borrowers now or hereafter
party thereto, the Guarantors now or hereafter party thereto, each
lender from time to time party thereto, and Wells Fargo Retail Finance,
LLC, as Administrative Agent, Collateral Agent and Swing Line Lender.10.19    (12)
    
    Security Agreement, dated as of January 15, 2009, by and among A.C.
Moore Incorporated, A.C. Moore Arts & Crafts, Inc., Moorestown Finance,
Inc., Blackwood Assets, Inc., and Wells Fargo Retail Finance, LLC, as
collateral agent.10.20    (12)
    
    Guaranty, dated as of January 15, 2009, by A.C. Moore Arts & Crafts,
Inc., Moorestown Finance, Inc., and Blackwood Assets, Inc. in favor of
Wells Fargo Retail Finance, LLC, as administrative agent and collateral
agent, and the Credit Parties.+10.21    (13)
    
    Employment Agreement, effective as of June 1, 2006, between the Company
and Rick A. Lepley.
  59




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##### Table of Contents



Exhibit Number
    
    Description+10.22(13)
    
    Form of Option Agreement between the Company and Rick A. Lepley.+10.23(14)
    
    First Amendment, dated as of November 15, 2006, to the Employment
Agreement, dated as of June 1, 2006, between the Company and Rick A.
Lepley.+10.24(3)
    
    Second Amendment, dated as of November 19, 2007, to the Employment
Agreement, dated as of June 1, 2006, between the Company and Rick A.
Lepley, as amended by the First Amendment, dated as of November 15,
2006.+10.25
    
    
    Third Amendment, dated as of December 3, 2008, to the Employment
Agreement, dated as of June 1, 2006, between the Company and Rick A.
Lepley, as amended by the First Amendment, dated as of November 15,
2006, and by the Second Amendment, dated as of November 19, 2007.+10.26(15)
    
    Letter Agreement, dated November 28, 2007, between the Company and
Joseph A. Jeffries.+10.27(9)
    
    First Amendment, dated August 6, 2008, to Employment Letter dated
November 28, 2007, between the Company and Joseph A. Jeffries.+10.28(10)
    
    Amendment and Restatement, dated as of September 24, 2008, of
Employment Letter, dated as of March 21, 2007, between the Company and
Michael G. Zawoysky.+10.29(2)
    
    Employment Agreement, effective as of July 24, 2006, between the
Company and Amy Rhoades.+10.30(2)
    
    First Amendment, dated as of November 15, 2006, to the Employment
Agreement, dated as of July 24, 2006, between the Company and Amy
Rhoades.+10.31(3)
    
    Second Amendment, dated as of November 19, 2007, to the Employment
Agreement, dated as of July 24, 2006, by and between the Company and
Amy Rhoades, as amended by the First Amendment, dated as of November
15, 2006.+10.32(16)
    
    Form of Special Retention Award Agreement.+10.33(17)
    
    Letter Agreement, dated July 3, 2007, between the Company and Craig R.
Davis.+10.34(18)
    
    Separation Agreement, dated July 17, 2007, between the Company and
Lawrence H. Fine.
  60




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##### Table of Contents



Exhibit Number
    
    Description18.1(19)
    
    Preferability letter provided by PricewaterhouseCoopers LLC, our
independent registered public accounting firm to change our method of
accounting for valuing store inventories to weighted average cost.21.1
    
    
    Subsidiaries of the Company.23.1
    
    
    Consent of PricewaterhouseCoopers LLP.31.1
    
    
    Certification of Chief Executive Officer pursuant to Rule 13a-14(a)
promulgated under the Securities Exchange Act of 1934, as amended (the
Exchange Act).31.2
    
    
    Certification of Chief Financial Officer pursuant to Rule 13a-14(a)
promulgated under the Exchange Act.32.1
    
    
    Certification of the Companys Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.32.2
    
    
    Certification of the Companys Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
 
 +
    
    Management contract or compensatory plan or arrangement.(1)
    
    Incorporated by reference to the Companys Registration Statement on Form S-1 (File
No. 333-32859) filed on August 5, 1997.(2)
    
    Incorporated by reference to the Companys Form 10-K for the year ended December 31, 2006.(3)
    
    Incorporated by reference to the Companys Form 8-K filed on November 21, 2007.(4)
    
    Incorporated by reference to the Companys Form 8-K filed on August 27, 2004.(5)
    
    Incorporated by reference to the Companys Definitive Proxy Statement filed on April 22, 2002.(6)
    
    Incorporated by reference to the Companys Form 8-K filed on August 9, 2006.(7)
    
    Incorporated by reference to the Companys Definitive Proxy Statement filed on April 30, 2007.(8)
    
    Incorporated by reference to the Companys Registration Statement on Form S-8 (File
No. 333-143612) filed on June 8, 2007.(9)
    
    Incorporated by reference to the Companys Form 10-Q for the quarter ended June 30, 2008.(10)
    
    Incorporated by reference to the Companys Form 10-Q for the quarter ended September 30, 2008.(11)
    
    Incorporated by reference to the Companys Form 8-K filed on December 14, 2006.(12)
    
    Incorporated by reference to the Companys Form 8-K filed on January 22, 2009.  61




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##### Table of Contents



(13)
    
    Incorporated by reference to the Companys Form 8-K filed on June 7, 2006.(14)
    
    Incorporated by reference to the Companys Form 8-K filed on November 16, 2006.(15)
    
    Incorporated by reference to the Companys Form 8-K filed on November 28, 2007.(16)
    
    Incorporated by reference to the Companys Form 8-K filed on April 4, 2008.(17)
    
    Incorporated by reference to the Companys Form 10-Q for the quarter ended June 30,
2007.(18)
    
    Incorporated by reference to the Companys Form 8-K filed on July 20, 2007.(19)
    
    Incorporated by reference to the Companys Form 10-Q for the quarter ended March
31, 2008.  62




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##### Table of Contents



SCHEDULE II
A.C. MOORE ARTS & CRAFTS, INC.
Valuation and Qualifying Accounts
 (In thousands)
 Column A
    
    Column B
    
    
    Column C
    
    
    Column D
    
    
    Column EDeductions -Write-offs,Balance at
    
    
    Additions -
    
    
    Additions -
    
    
    Payments andDescription
    
    Beginning of
    
    
    Charge d to
    
    
    Charged to
    
    
    Other
    
    
    Balance at EndLower of Cost or Market Reserve
    
    Period
    
    
    Expense
    
    
    Other Accounts
    
    
    Adjustments
    
    
    of Period2008
    
    $
    1,791
    
    
    $
    541
    
    
    $
    2,724
    
    
    $
    692
    
    
    $
    4,3642007
    
    
    1,315
    
    
    
    1,489
    
    
    
    
    
    
    
    1,013
    
    
    
    1,7912006
    
    
    1,525
    
    
    
    462
    
    
    
    
    
    
    
    672
    
    
    
    1,315
 Deductions -Write-offs,Balance at
    
    
    Additions -
    
    
    Additions -
    
    
    Payments andDescription
    
    Beginning of
    
    
    Charged to
    
    
    Charged to
    
    
    Other
    
    
    Balance at EndIncome Tax Valuation Allowance
    
    Period
    
    
    Expense
    
    
    Other Accounts
    
    
    Adjustments
    
    
    of Period2008
    
    $
    3,007
    
    
    $
    10,474
    
    
    $
    
    
    
    $
    961
    
    
    $
    12,5202007
    
    
    1,362
    
    
    
    1,645
    
    
    
    
    
    
    
    
    
    
    
    3,0072006
    
    
    875
    
    
    
    487
    
    
    
    
    
    
    
    
    
    
    
    1,362
  63




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##### Table of Contents



SIGNATURES
  A.C. MOORE ARTS & CRAFTS, INC.Date: March 13, 2009
    By:
    /s/ Rick A. LepleyRick A. LepleyPresident and Chief Executive Officer  Signature
    
    Capacity
    
    Date/s/ Rick A. Lepley

Rick A. Lepley
    
    President, Chief Executive
Officer and Director (Principal
Executive Officer)
    
    March 13, 2009/s/ Michael G. Zawoysky

Michael G. Zawoysky
    
    Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
    
    March 13, 2009/s/ Michael J. Joyce

Michael J. Joyce
    
    Chairman of the Board of Directors
    
    March 13, 2009/s/ Joseph F. Coradino

Joseph F. Coradino
    
    Director
    
    March 13, 2009/s/ Neil A. McLachlan

Neil A. McLachlan
    
    Director
    
    March 13, 2009/s/ Thomas S. Rittenhouse

Thomas S. Rittenhouse
    
    Director
    
    March 13, 2009/s/ Lori J. Schafer

Lori J. Schafer
    
    Director
    
    March 13, 2009
  64




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##### Table of Contents



Exhibit Index
 Exhibit Number
    
    Description3.1(1)
    
    Articles of Incorporation.3.1.1(2)
    
    Amendment to Articles of Incorporation.3.1.2(3)
    
    Amendment to Articles of Incorporation.3.2(4)
    
    Amended and Restated Bylaws.+10.1(1)
    
    1997 Employee, Director and Consultant Stock Option Plan.+10.2(1)
    
    Form of Incentive Stock Option Agreement under the 1997 Employee,
Director and Consultant Stock Option Plan.+10.3(5)
    
    2002 Stock Option Plan.+10.4(6)
    
    Form of Incentive Stock Option/Non-Qualified Option Agreement under the
2002 Stock Option Plan.+10.5(7)
    
    2007 Annual Incentive Plan.+10.6(8)
    
    2007 Stock Incentive Plan.+10.7(8)
    
    Form of Stock Unit Agreement under the 2007 Stock Incentive Plan.+10.8(8)
    
    Form of Nonqualified Stock Option Agreement under the 2007 Stock
Incentive Plan.+10.9(8)
    
    Form of Incentive Stock Option Agreement under the 2007 Stock Incentive
Plan.+10.10(8)
    
    Form of Stock Appreciation Rights Agreement under the 2007 Stock
Incentive Plan.+10.11(8)
    
    Form of Restricted Stock Agreement under the 2007 Stock Incentive Plan.10.12(9)
    
    Amended and Restated Loan Agreement, dated as of May 31, 2008, between
the Company and Wachovia Bank, National Association (Wachovia).10.13(9)
    
    Amendment to Loan Documents, dated as of May 31, 2008, between the
Company and Wachovia.
  65




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##### Table of Contents



Exhibit Number
    
    Description10.14
    (9)
    
    Amended and Restated Promissory Note, dated as of May 31, 2008, between
the Company and Wachovia.10.15
    (10)
    
    Promissory Note and Loan Modification, dated as of September 18, 2008,
between the Company and Wachovia Bank, National Association.10.16
    (11)
    
    Amended and Restated Swap Transaction Confirmation, signed on December
8, 2006 and effective as of November 27, 2006.10.17
    (11)
    
    Amended and Restated Swap Transaction Confirmation, signed on December
8, 2006 and effective as of November 27, 2006.10.18
    (12)
    
    Credit Agreement, dated as of January 15, 2009, among A.C. Moore
Incorporated, as the Lead Borrower, the Borrowers now or hereafter
party thereto, the Guarantors now or hereafter party thereto, each
lender from time to time party thereto, and Wells Fargo Retail Finance,
LLC, as Administrative Agent, Collateral Agent and Swing Line Lender.10.19
    (12)
    
    Security Agreement, dated as of January 15, 2009, by and among A.C.
Moore Incorporated, A.C. Moore Arts & Crafts, Inc., Moorestown Finance,
Inc., Blackwood Assets, Inc., and Wells Fargo Retail Finance, LLC, as
collateral agent.10.20
    (12)
    
    Guaranty, dated as of January 15, 2009, by A.C. Moore Arts & Crafts,
Inc., Moorestown Finance, Inc., and Blackwood Assets, Inc. in favor of
Wells Fargo Retail Finance, LLC, as administrative agent and collateral
agent, and the Credit Parties.+10.21
    (13)
    
    Employment Agreement, effective as of June 1, 2006, between the Company
and Rick A. Lepley.+10.22
    (13)
    
    Form of Option Agreement between the Company and Rick A. Lepley.+10.23
    (14)
    
    First Amendment, dated as of November 15, 2006, to the Employment
Agreement, dated as of June 1, 2006, between the Company and Rick A.
Lepley.+10.24
    (3)
    
    Second Amendment, dated as of November 19, 2007, to the Employment
Agreement, dated as of June 1, 2006, between the Company and Rick A.
Lepley, as amended by the First Amendment, dated as of November 15,
2006.+10.25
    
    
    Third Amendment, dated as of December 3, 2008, to the Employment
Agreement, dated as of June 1, 2006, between the Company and Rick A.
Lepley, as amended by the First Amendment, dated as of November 15,
2006, and by the Second Amendment, dated as of November 19, 2007.+10.26
    (15)
    
    Letter Agreement, dated November 28, 2007, between the Company and
Joseph A. Jeffries.
  66




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##### Table of Contents



Exhibit Number
    
    Description+10.27(9)
    
    First Amendment, dated August 6, 2008, to Employment Letter dated
November 28, 2007, between the Company and Joseph A. Jeffries.+10.28(10)
    
    Amendment and Restatement, dated as of September 24, 2008, of
Employment Letter, dated as of March 21, 2007, between the Company and
Michael G. Zawoysky.+10.29(2)
    
    Employment Agreement, effective as of July 24, 2006, between the
Company and Amy Rhoades.+10.30(2)
    
    First Amendment, dated as of November 15, 2006, to the Employment
Agreement, dated as of July 24, 2006, between the Company and Amy
Rhoades.+10.31(3)
    
    Second Amendment, dated as of November 19, 2007, to the Employment
Agreement, dated as of July 24, 2006, by and between the Company and
Amy Rhoades, as amended by the First Amendment, dated as of November
15, 2006.+10.32(16)
    
    Form of Special Retention Award Agreement.+10.33(17)
    
    Letter Agreement, dated July 3, 2007, between the Company and Craig R.
Davis.+10.34(18)
    
    Separation Agreement, dated July 17, 2007, between the Company and
Lawrence H. Fine.18.1(19)
    
    Preferability letter provided by PricewaterhouseCoopers LLC, our
independent registered public accounting firm to change our method of
accounting for valuing store inventories to weighted average cost.21.1
    
    
    Subsidiaries of the Company.23.1
    
    
    Consent of PricewaterhouseCoopers LLP.31.1
    
    
    Certification of Chief Executive Officer pursuant to Rule 13a-14(a)
promulgated under the Securities Exchange Act of 1934, as amended (the
Exchange Act).31.2
    
    
    Certification of Chief Financial Officer pursuant to Rule 13a-14(a)
promulgated under the Exchange Act.32.1
    
    
    Certification of the Companys Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.32.2
    
    
    Certification of the Companys Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
 
 +
    
    Management contract or compensatory plan or arrangement.(1)
    
    Incorporated by reference to the Companys Registration Statement on Form S-1 (File
No. 333-32859) filed on August 5, 1997.(2)
    
    Incorporated by reference to the Companys Form 10-K for the year ended December 31,
2006.(3)
    
    Incorporated by reference to the Companys Form 8-K filed on November 21, 2007.(4)
    
    Incorporated by reference to the Companys Form 8-K filed on August 27, 2004.(5)
    
    Incorporated by reference to the Companys Definitive Proxy Statement filed on April
22, 2002.(6)
    
    Incorporated by reference to the Companys Form 8-K filed on August 9, 2006.(7)
    
    Incorporated by reference to the Companys Definitive Proxy Statement filed on April
30, 2007.(8)
    
    Incorporated by reference to the Companys Registration Statement on Form S-8 (File
No. 333-143612) filed on June 8, 2007.(9)
    
    Incorporated by reference to the Companys Form 10-Q for the quarter ended June 30,
2008.(10)
    
    Incorporated by reference to the Companys Form 10-Q for the quarter ended
September 30, 2008.(11)
    
    Incorporated by reference to the Companys Form 8-K filed on December 14, 2006.(12)
    
    Incorporated by reference to the Companys Form 8-K filed on January 22, 2009.(13)
    
    Incorporated by reference to the Companys Form 8-K filed on June 7, 2006.(14)
    
    Incorporated by reference to the Companys Form 8-K filed on November 16, 2006.(15)
    
    Incorporated by reference to the Companys Form 8-K filed on November 28, 2007.(16)
    
    Incorporated by reference to the Companys Form 8-K filed on April 4, 2008.(17)
    
    Incorporated by reference to the Companys Form 10-Q for the quarter ended June 30,
2007.(18)
    
    Incorporated by reference to the Companys Form 8-K filed on July 20, 2007.(19)
    
    Incorporated by reference to the Companys Form 10-Q for the quarter ended March
31, 2008.




67