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 2, 2010
 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)
 The NASDAQ Stock Market LLC
 (Name of each exchange on which registered)
 None
 o Yes þ No
 o Yes þ No
 þ o
 þ
 o o
  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)
  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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##### 



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 this Cautionary Statement.
 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 530 small-format stores and 228 large-format stores nationwide in
addition to sales on its e-commerce site; and Hobby Lobby Stores, Inc., a chain which
operates approximately 434 stores primarily in the Midwestern and Southeastern 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.
  2




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Business and Operating Strategy
  Increase sales.
 
    
    Customer insight and 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 unique
product lines and merchandise assortments that differentiate us from our competitors.
We regularly review our supplier base and product assortment to ensure that we are
offering newness to our customers and enhancing the overall shopping experience.
 
    
    Improved in-stock position.Maintaining a high 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
has allowed us to achieve better in-stock positions by providing information about
quantities available at the store level. During the first half of 2009, we began
aggressively converting our staple stock-keeping units (SKUs) to our new automated
replenishment system. By mid-September, slightly ahead of schedule, all 2009
implementation objectives had been achieved. Early indicators suggest marked
improvements in our in-stock positions for the products converted to automated
replenishment. In 2010, we may choose to put additional categories onto automated
replenishment. During the second quarter of 2009, we began implementation of an
advanced forecasting service. This forecasting service establishes appropriate
inventory levels at the SKU and store level. We expect to have this forecasting tool
fully implemented in the first quarter of 2010.
 
    
    Integrated marketing/advertising program.We have enhanced our marketing and
advertising mix which provides us with the ability to reach both current and prospective
customers more efficiently. This also enables us to be more productive with promotional
items, along with more options to introduce new items and programs.
 
    
    Promotional strategies.We are testing new advertising and marketing vehicles and
continue to employ category management discipline focused around the best assortment and
optimization of our price points. We have enhanced our processes which has enabled us
to identify and feature the right items in our print advertising. We have also
increased our direct marketing initiatives and other retention programs which we believe
will contribute to incremental sales, increased customer traffic and margin enhancement.
In fiscal 2009, we primarily used newspaper advertising to drive sales and
traffic. We continue to utilize the services of a strategic media partner to assist us in
our overall pre-print circulation strategy. In addition, we will be testing other
vehicles in 2010 to further enhance the productivity of the advertising spend, along with
our focus on driving profitable sales and traffic.
  3




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
    
    A.C. Moore Rewards program.During the third quarter of fiscal 2008, we tested our
A.C. Moore Rewards program in a select group of pilot stores. In July 2009, we launched
this program throughout the chain. 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. 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.Management continually reviews opportunities for
stores in new markets and for relocations of existing stores where strategically prudent
and economically viable. However, with continued softness in the macroeconomic
environment, we will proceed very cautiously with new store openings. Existing stores
are reviewed on a periodic basis to identify underperforming locations for potential
remodeling, relocation or closure. During 2009, we successfully completed several lease
renegotiations lowering the cost of occupancy across a group of stores. This initiative
will continue into 2010 and beyond.
 
    
    Advertising spending. In fiscal 2009, we utilized the services of a newspaper
placement agency to assist in the negotiation of our insertion rates. We continue to
optimize our circulation based on zip code surveys and newspaper circulation updates.
During fiscal 2009, we began supplementing our newspaper advertising program with a
combination of in-store and targeted marketing programs.
 
    
    Analytics/tools. During the fourth quarter of fiscal 2009, store
operations developed several online tools for the field organization to utilize. These
dashboards help field management to analyze sales by store and category, margin impact,
inventory levels and completion of corporate directed tasks, along with many other
metrics, in which the Company can optimize its results on a go forward basis and allow
field input for any exceptions in these categories.
 Increase gross margin .
 
    
    Category management.The category management process leverages merchandise assortment
planning tools, the use of a merchandise planning calendar and an open-to-buy process
focused on sales and inventory productivity.
 
    
    Price optimization.We believe we have significant opportunities to increase our
gross margin by optimizing our regular shelf prices and employing new market basket
tools to improve promotional sales. We will continue to offer competitive pricing but
believe we can strategically improve our margins while continuing to grow sales and
market share.
 
    
    Supply chain optimization.In addition to our ongoing supply chain initiatives,
including improving our in-stock positions, optimizing inventory levels, increasing
merchandise turns and improving distribution efficiencies, in fiscal 2009 we continued
to focus on two key projects: automated replenishment and advance shipment notification
(ASN) supported cross-docking. We began
implementation of automated replenishment in the fall of 2008 with a group of pilot stores
and have successfully achieved all of our 2009 implementation objectives. Initial
results, especially in-stock metrics, are promising. In 2010, we may choose to put
additional categories onto automated replenishment. Our second key project is ASN
supported cross docking. This program will allow our vendors to ship orders, which were
previously shipped to stores, directly to our warehouse. Once at our warehouse these
orders will be received, combined with orders picked from our warehouse stock and shipped
to the stores on the same trailers. We believe this project will minimize vendor
direct-to-store shipments, reduce freight costs, and enable us to leverage our current
distribution center to handle the vast majority of all merchandise sold in our stores,
allowing store associates to spend more time serving our customers. This project required
modifications to our existing warehouse management system and reconfiguring our
distribution center to facilitate a more streamlined, flow through design. The
distribution center modifications are complete. We anticipate the system capabilities to
be in place in the first quarter of fiscal 2010 and we will begin converting
direct-to-store vendors to cross-dock at that time. Full completion is expected during
the third quarter of 2010.
  4




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Merchandising
   Fiscal2009
    
    
    2008
    
    
    2007Art and scrapbooking
    
    
    27.7
    %
    
    
    29.4
    %
    
    
    28.9
    %Traditional crafts
    
    
    32.2
    
    
    
    27.7
    
    
    
    26.0Floral and floral accessories
    
    
    8.9
    
    
    
    9.9
    
    
    
    10.9Fashion crafts
    
    
    9.3
    
    
    
    9.6
    
    
    
    9.4Home décor and frames
    
    
    17.3
    
    
    
    17.8
    
    
    
    18.0Seasonal items
    
    
    4.6
    
    
    
    5.6
    
    
    
    6.8Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
   Purchasing
  
    
    The largest 25 vendors accounted for approximately 59 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 nine 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.
  5




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Marketing
   Store Design and Operations
   Store Expansion
 .
  6




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Distribution
    Information Technology
     7




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Associates
  Trademarks
  Website and Availability of Information
   David SternExecutive Vice President and Chief Financial OfficerA.C. Moore Arts & Crafts, Inc.130 A.C. Moore DriveBerlin, New Jersey 08009
  ITEM 1A.
    
    RISK FACTORS.
 The current recession could have a material adverse effect on our business, revenue and
profitability.
   8




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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.
  An increase in our sales, profitability and cash flow will depend on our ability to increase the productivity and profitability of our existing stores.
   9




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##### 



Our real estate strategy may not result in improved profitability.
  Changes in estimates, assumptions and judgments made by management related to our evaluation of
store closure reserves and impairments could significantly affect our financial results.
   10




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Higher costs or any failure to achieve targeted results associated with the implementation of new
programs or initiatives could affect our results of operations adversely.
  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.
  We are a retailer that is dependent on attracting and retaining a large number of quality
associates in entry level or part-time positions. Since our ability to meet our labor needs is
subject to factors we cannot control, the performance of our business could be negatively impacted
by changes in these factors and our cost of doing business could increase as a result of changes in
federal, state or local regulations.
   11




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Our success depends on Rick A. Lepley, our Chief Executive Officer, Joseph A. Jeffries, our Chief
Operating Officer, David Abelman, our Chief Marketing and Merchandising Officer and David Stern,
our Chief Financial Officer and the loss of any of them could have a negative impact on our ability
to execute on our business and operating strategy.
  Competition could negatively impact our operations.
  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.
   12




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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.
  Significant changes in our relationships with key suppliers may adversely impact our business.
   13




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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.
  Our information technology may prove inadequate.
  An increase in the cost of fuel oil and oil-based products could impact our earnings and margin.
   14




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##### 



The recently enacted Consumer Product Safety Improvement Act and other existing or future
government regulation could harm our business or may cause us to incur additional costs associated
with compliance.
  The price and volume of our common stock over the last eighteen months has been volatile and may
continue to be so. This volatility may mean that, at times, the holders of our common stock may be
unable to resell their shares at or above the price at which they acquired them.
   
    
    worldwide economic conditions;
    
    changes in our business, operations or prospects;
    
    continued operating losses:
    
    loss or bankruptcy of any of our distribution partners or suppliers;
    
    departure of key personnel;
    
    variations in our quarterly operating results;
    
    announcements by our competitors of significant contracts, new products or product
enhancements, acquisitions, distribution partnerships, joint ventures or capital
commitments;
    
    actions by NASDAQ if we failed to satisfy NASDAQ listing rules;
    
    sales of common stock or other securities by us in the future; and
    
    fluctuations in stock market prices and volumes.
   15




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EXECUTIVE OFFICERS OF THE REGISTRANT
  Name
    
    Age
    
    PositionRick A. Lepley
    
    59
    
    President, Chief Executive Officer and DirectorJoseph A. Jeffries
    
    44
    
    Executive Vice President and Chief Operating OfficerDavid Abelman
    
    50
    
    Executive Vice President and Chief Merchandising and Marketing OfficerDavid Stern
    
    43
    
    Executive Vice President and Chief Financial OfficerAmy Rhoades
    
    38
    
    Senior Vice President and General Counsel
      ITEM 1B.
    
    UNRESOLVED STAFF COMMENTS.
   16




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ITEM 2.
    
    PROPERTIES.
  Fiscal YearState
    
    
    2009
    
    
    2008
    
    
    20071.
    
    Alabama
    
    
    0
    
    
    
    0
    
    
    
    12.
    
    Connecticut
    
    
    4
    
    
    
    4
    
    
    
    43.
    
    Delaware
    
    
    2
    
    
    
    2
    
    
    
    24.
    
    Florida
    
    
    6
    
    
    
    6
    
    
    
    95.
    
    Georgia
    
    
    1
    
    
    
    1
    
    
    
    26.
    
    Maine
    
    
    3
    
    
    
    3
    
    
    
    27.
    
    Maryland
    
    
    8
    
    
    
    8
    
    
    
    78.
    
    Massachusetts
    
    
    12
    
    
    
    12
    
    
    
    129.
    
    New Hampshire
    
    
    4
    
    
    
    4
    
    
    
    410.
    
    New Jersey
    
    
    20
    
    
    
    20
    
    
    
    1911.
    
    New York
    
    
    21
    
    
    
    21
    
    
    
    2212.
    
    North Carolina
    
    
    12
    
    
    
    11
    
    
    
    1113.
    
    Pennsylvania
    
    
    25
    
    
    
    23
    
    
    
    2114.
    
    Rhode Island
    
    
    1
    
    
    
    1
    
    
    
    115.
    
    South Carolina
    
    
    4
    
    
    
    4
    
    
    
    416.
    
    Tennessee
    
    
    1
    
    
    
    1
    
    
    
    117.
    
    Virginia
    
    
    9
    
    
    
    9
    
    
    
    818.
    
    West Virginia
    
    
    2
    
    
    
    2
    
    
    
    2Total Stores Open at End of
Year
    
    
    135
    
    
    
    132
    
    
    
    132
   Fiscal Year2009
    
    
    2008
    
    
    2007Stores Open at Beginning of Year
    
    
    132
    
    
    
    132
    
    
    
    122Stores Opened During the Year
    
    
    3
    
    
    
    9
    
    
    
    12Stores Closed During the Year
    
    
    0
    
    
    
    (9
    )
    
    
    (2
    )Stores Open at End of Year
    
    
    135
    
    
    
    132
    
    
    
    132Stores Relocated
    
    
    2
    
    
    
    1
    
    
    
    0Stores Remodeled to Nevada Prototype
    
    
    1
    
    
    
    0
    
    
    
    0Nevada Prototype Stores Open at End
of Year
    
    
    24
    
    
    
    18
    
    
    
    10
  17




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ITEM 3.
    
    LEGAL PROCEEDINGS.
  ITEM 4.
    
    (REMOVED AND RESERVED)
 PART II
 ITEM 5.
    
    MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES.
  High
    
    
    LowFiscal 2009First Quarter
    
    $
    2.68
    
    
    $
    1.00Second Quarter
    
    
    4.38
    
    
    
    1.87Third Quarter
    
    
    4.21
    
    
    
    2.85Fourth Quarter
    
    
    5.63
    
    
    
    2.29Fiscal 2008First Quarter
    
    $
    13.77
    
    
    $
    5.47Second Quarter
    
    
    8.78
    
    
    
    5.73Third Quarter
    
    
    8.72
    
    
    
    5.61Fourth Quarter
    
    
    6.78
    
    
    
    0.71
     18




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ITEM 6.
    
    SELECTED FINANCIAL DATA.
  Fiscal2009
    
    
    2008
    
    
    2007
    
    
    2006
    
    
    2005(In thousands except per share data)Statement of Operations Data:Net sales
    
    $
    468,889
    
    
    $
    534,665
    
    
    $
    559,693
    
    
    $
    589,506
    
    
    $
    539,436Gross margin
    
    
    187,275
    
    
    
    217,281
    
    
    
    228,731
    
    
    
    226,828
    
    
    
    210,871Selling, general and administrative expenses (3)
    
    
    213,268
    
    
    
    232,307
    
    
    
    219,597
    
    
    
    217,923
    
    
    
    192,878Store pre-opening and closing expenses
    
    
    4,477
    
    
    
    8,742
    
    
    
    3,229
    
    
    
    4,616
    
    
    
    3,459Income (loss) from operations
    
    
    (30,470
    )
    
    
    (23,768
    )
    
    
    5,470
    
    
    
    913
    
    
    
    14,534Net income (loss)
    
    
    (25,903
    )
    
    
    (26,571
    )
    
    
    3,783
    
    
    
    (406
    )
    
    
    8,901Net income (loss) per share, diluted
    
    $
    (1.15
    )
    
    $
    (1.31
    )
    
    $
    0.19
    
    
    $
    (0.02
    )
    
    $
    0.44Weighted average shares outstanding, diluted
    
    
    22,470
    
    
    
    20,301
    
    
    
    20,349
    
    
    
    19,929
    
    
    
    20,149(In thousands)Balance Sheet Data (as of):Working capital
    
    $
    96,627
    
    
    $
    102,074
    
    
    $
    145,037
    
    
    $
    143,206
    
    
    $
    145,699Total assets
    
    
    265,469
    
    
    
    293,746
    
    
    
    321,890
    
    
    
    314,264
    
    
    
    300,024Total debt
    
    
    19,000
    
    
    
    29,071
    
    
    
    21,642
    
    
    
    24,214
    
    
    
    26,786Shareholders equity
    
    
    160,074
    
    
    
    174,300
    
    
    
    199,600
    
    
    
    192,505
    
    
    
    185,776(In thousands except sales per square foot and
store count)Other Data:Cash flows from operating activities
    
    $
    (17,932
    )
    
    $
    17,719
    
    
    $
    8,610
    
    
    $
    31,496
    
    
    $
    14,620Number of stores open at end of period
    
    
    135
    
    
    
    132
    
    
    
    132
    
    
    
    122
    
    
    
    109Net sales per total square foot (1)
    
    $
    155
    
    
    $
    177
    
    
    $
    198
    
    
    $
    234
    
    
    $
    241Average net sales per store (1)
    
    $
    3,519
    
    
    $
    4,047
    
    
    $
    4,674
    
    
    $
    5,401
    
    
    $
    5,417Comparable store sales increase (decrease) (2)
    
    
    (11
    )%
    
    
    (9
    )%
    
    
    (10
    )%
    
    
    0
    %
    
    
    (3
    )Certain prior year amounts have been reclassified to conform to current year classification.
 
 (1)
    
    Includes only stores open during the entire period.(2)
    
    Stores are added to the comparable store base at the beginning of the fourteenth full month
of operation. Comparable stores that are relocated or remodeled remain in the comparable store
base. Stores that close are removed from the comparable store base as of the beginning of the
month of closure.(3)
    
    Effective January 1, 2006, the Company adopted the provisions of an accounting standard
which requires the recognition of compensation expense related to the fair value of its equity
awards. In fiscal years 2009, 2008, 2007 and 2006, compensation was reported as a component of
selling, general and administrative expenses in the amount of $1.8 million, $2.0 million, $2.6
million and $3.1 million, respectively.  19




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ITEM 7.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
 Overview
 General
   Fiscal2009
    
    
    2008Closed store expenses
    
    $
    3,982
    
    
    $
    7,447Asset impairment
    
    
    4,252
    
    
    
    6,016Record interest rate swap at fair market value
    
    
    409
    
    
    
    2,389Other
    
    
    
    
    
    
    700Total, before income taxes
    
    
    8,643
    
    
    
    16,552Income taxes
    
    
    1,795
    
    
    
    3,485Total, after income taxes
    
    $
    10,437
    
    
    $
    20,037Per diluted share
    
    $
    0.46
    
    
    $
    0.99
 
    
    In fiscal 2008, the Company closed nine stores at a cost of $7.4 million.
In fiscal 2009, we recorded store closing costs of $4.0 million, the majority of
which relate to increases in the estimates for future net rental obligations, after
consideration of estimated sublease income, on stores that were closed in prior
years. We did not close any stores in fiscal 2009.
 
    
    In fiscal 2009 and 2008, we tested the recoverability of our stores fixed assets.
As a result, we recorded asset impairments of $4.3 million and $6.0 million,
respectively.
 
    
    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 2009, we recorded an additional charge of $0.4 million when
the swap was terminated.
 
    
    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.
 
    
    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 and established a 100% valuation allowance against its net
deferred tax asset. In fiscal 2009, due to a tax law change the Company was able to
realize $15.8 million of its net operating losses and as a result recorded an income
tax benefit in 2009 of $6.0 million. Applying a 34 percent effective tax rate to
our 2009 and 2008 pretax loss after adjusting for the items identified above would
have resulted in a tax benefit of $1.8 and $3.5 million, respectively.
  20




---



##### 



21




---



##### 



Business and Operating Strategy
  Increase sales.
 
    
    Customer insight and 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 unique
product lines and merchandise assortments that differentiate us from our competitors.
We regularly review our supplier base and product assortment to ensure that we are
offering newness to our customers and enhancing the overall shopping experience.
 
    
    Improved in-stock position.Maintaining a high 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
has allowed us to achieve better in-stock positions by providing information about
quantities available at the store level. During the first half of 2009, we began
aggressively converting our staple stock-keeping units (SKUs) to our new automated
replenishment system. By mid-September, slightly ahead of schedule, all 2009
implementation objectives had been achieved. Early indicators suggest marked
improvements in our in-stock positions for the products converted to automated
replenishment. In 2010 we may choose to put additional categories onto automated
replenishment. During the second quarter of 2009 we began implementation of an advanced
forecasting service. This forecasting service establishes appropriate inventory levels
at the SKU and store level. We expect to have this forecasting tool fully implemented
in the first quarter of 2010.
 
    
    Integrated marketing/advertising program.We have enhanced our marketing and
advertising mix which provides us with the ability to reach both current and prospective
customers more efficiently. This also enables us to be more productive with promotional
items, along with more options to introduce new items and programs.
 
    
    Promotional strategies.We are testing new advertising and marketing vehicles and
continue to employ category management discipline focused around the best assortment and
optimization of our price points. We have enhanced our processes which has enabled us
to identify and feature the right items in our print advertising. We have also
increased our direct marketing initiatives and other retention programs which we believe
will contribute to incremental sales, increased customer traffic and margin enhancement.
In fiscal 2009, we primarily used newspaper advertising to drive sales and traffic. We
continue to utilize the services of a strategic media partner to assist us in our
overall pre-print circulation strategy. In addition, we will be testing other vehicles
in 2010 to further enhance the productivity of the advertising spend, along with our
focus on driving profitable sales and traffic.
 
    
    A.C. Moore Rewards program.During the third quarter of fiscal 2008, we tested our
A.C. Moore Rewards program in a select group of pilot stores. In
July 2009, we launched
this program throughout the chain. 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. 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.
  22




---



##### 



Improve store profitability .
 
    
    Real estate portfolio strategy.Management continually reviews opportunities for
stores in new markets and for relocations of existing stores where strategically prudent
and economically viable. However, with continued softness in the macroeconomic
environment, we will proceed very cautiously with new store openings. Existing stores
are reviewed on a periodic basis to identify underperforming locations for potential
remodeling, relocation or closure. During 2009, we successfully completed several lease
renegotiations lowering the cost of occupancy across a group of stores. This level of
effort will continue into 2010 and beyond.
 
    
    Advertising spending. In fiscal 2009, we utilized the services of a newspaper
placement agency to assist in the negotiation of our insertion rates. We continue to
optimize our circulation based on zip code surveys and newspaper circulation updates.
During fiscal 2009 we began supplementing our newspaper advertising program with a
combination of in-store and targeted marketing programs.
 
    
    Analytics/tools. During the fourth quarter of fiscal 2009, store
operations developed several online tools for the field organization to utilize. These
dashboards help field management to analyze sales by store and category, margin impact,
inventory levels and completion of corporate directed tasks, along with many other
metrics, in which the Company can optimize its results on a go forward basis and allow
field input for any exceptions in these categories.
 Increase gross margin .
 
    
    Category management.The category management process leverages merchandise assortment
planning tools, the use of a merchandise planning calendar and an open-to-buy process
focused on sales and inventory productivity.
 
    
    Price optimization.We believe we have significant opportunities to increase our
gross margin by optimizing our regular shelf prices and employing new market basket
tools to improve promotional sales. We will continue to offer competitive pricing but
believe we can strategically improve our margins while continuing to grow sales and
market share.
 
    
    Supply chain optimization.In addition to our ongoing supply chain initiatives,
including improving our in-stock positions, optimizing inventory levels, increasing
merchandise turns and improving distribution efficiencies, in fiscal 2009 we continued
to focus on two key projects: automated replenishment and advance shipment notification
(ASN) supported cross-docking. We began implementation of automated replenishment in
the fall of 2008 with a group of pilot stores and have successfully achieved all of our
2009 implementation objectives. Initial results, especially in-stock metrics, are
promising. In 2010, we may choose to put additional categories onto automated
replenishment. Our second key project is ASN supported cross docking. This program
will allow our vendors to ship orders, which were previously shipped to stores, directly
to our warehouse. Once at our warehouse these orders will be received, combined with
orders picked from our warehouse stock and shipped to the stores on the same trailers.
We believe this project will minimize vendor direct-to-store shipments, reduce freight
costs, and enable us to leverage our current distribution center to handle the vast
majority of all merchandise sold in our stores, allowing store associates to spend more
time serving our customers. This project requires modifications to our existing
warehouse management system and reconfiguring our distribution center to facilitate a
more streamlined, flow through design. The distribution center modifications are
complete. We anticipate the system capabilities to be in place in the first quarter of
fiscal 2010 and we will begin converting direct-to-store vendors to cross-dock at that
time. Full completion is expected during the third quarter of 2010.
  23




---



##### 



Results of Operations
  Fiscal2009
    
    
    2008
    
    
    2007Net sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales
    
    
    60.1
    
    
    
    59.4
    
    
    
    59.1Gross margin
    
    
    39.9
    
    
    
    40.6
    
    
    
    40.9Selling, general and administrative
expenses
    
    
    45.5
    
    
    
    43.4
    
    
    
    39.2Costs related to change in management
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.1Store pre-opening and closing expenses
    
    
    1.0
    
    
    
    1.6
    
    
    
    0.6Income (loss) from operations
    
    
    (6.5
    )
    
    
    (4.4
    )
    
    
    1.0Interest expense (income), net
    
    
    0.2
    
    
    
    0.6
    
    
    
    (0.0
    )Income (loss) before income taxes
    
    
    (6.7
    )
    
    
    (5.0
    )
    
    
    1.0Provision for (benefit from) income taxes
    
    
    (1.2
    )
    
    
    (0.0
    )
    
    
    0.3Net income (loss)
    
    
    (5.5
    )%
    
    
    (5.0
    )%
    
    
    0.7
    %
 Fiscal 2009 Compared to Fiscal 2008
 Net Sales .
 Gross Margin .
  24




---



##### 



Selling, General and Administrative Expenses .
  Store Pre-Opening and Closing Expenses
   Interest Income and Expense.
 Income Taxes .
 Fiscal 2008 Compared to Fiscal 2007
 Net Sales .
  25




---



##### 



Gross Margin .
 Selling, General and Administrative Expenses .
  Costs Related to Change in Management .
 Store Pre-Opening and Closing Expenses .
    26




---



##### 



Interest Income and Expense.
 Income Taxes .
  27




---



##### 



Quarterly Results and Seasonality
  First Quarter
    
    
    Second Quarter
    
    
    Third Quarter
    
    
    Fourth QuarterFiscal 2009Net sales
    
    $
    108,647
    
    
    $
    104,442
    
    
    $
    106,083
    
    
    $
    149,717Gross margin
    
    
    46,547
    
    
    
    43,464
    
    
    
    40,733
    
    
    
    56,531Income (loss) from operations
    
    
    (3,684
    )
    
    
    (8,031
    )
    
    
    (12,694
    )
    
    
    (6,061
    )Net income (loss)
    
    
    (4,308
    )
    
    
    (8,149
    )
    
    
    (12,909
    )
    
    
    (537
    )Net income (loss) per share, diluted
    
    $
    (0.21
    )
    
    $
    (0.38
    )
    
    $
    (0.53
    )
    
    $
    (0.02
    )Diluted average shares outstanding
    
    
    20,305
    
    
    
    21,323
    
    
    
    24,325
    
    
    
    24,325Number of stores open at end of period
    
    
    132
    
    
    
    133
    
    
    
    133
    
    
    
    135Comparable store sales increase
(decrease)
    
    
    (13
    )%
    
    
    (14
    )%
    
    
    (8
    )%
    
    
    (9
    )%Fiscal 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
    )%
    28




---



##### 



Liquidity and Capital Resources
       29




---



##### 



30




---



##### 



Payments Due By Period ($000)Contractual Obligations
    
    Total
    
    
    < 1 Year
    
    
    1 - 3 Years
    
    
    4 - 5 Years
    
    
    > 5 YearsShort-term debt (1)
    
    $
    19,000
    
    
    $
    19,000
    
    
    $
    
    
    
    $
    
    
    
    $
    Store operating leases (2)
    
    
    235,860
    
    
    
    42,763
    
    
    
    109,187
    
    
    
    44,464
    
    
    
    39,445Equipment leases
    
    
    1,147
    
    
    
    412
    
    
    
    734
    
    
    
    
    
    
    
    Purchase obligations (3)
    
    
    5,625
    
    
    
    2,296
    
    
    
    3,329
    
    
    
    
    
    
    
    Deferred tax liability (4)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Liability for uncertain tax positions (5)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total contractual cash obligations
    
    $
    261,631
    
    
    $
    64,471
    
    
    $
    113,251
    
    
    $
    44,464
    
    
    $
    39,445
 (1)
    
    Short-term debt represents advances under the Companys line of credit. These advances
are renewed over periods of between 30 and 90 days.(2)
    
    Most store leases have an average initial term of ten years, with three five-year renewal
options, and provide for predetermined escalations in future minimum annual rent. 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 35 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.(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 9 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
   31




---



##### 



Merchandise Inventories.
   Impairment of Long-lived Assets.
 Reserve for Closed Stores.
  32




---



##### 



Income Taxes.
 .
 Other Estimates.
 .
 Change in Accounting Principles
 Merchandise Inventories
   33




---



##### 



New Accounting Pronouncements
     ITEM 7A.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
    34




---



##### 



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
    
    
    36Consolidated Balance Sheets at January 2, 2010 and January 3, 2009
    
    
    37Consolidated Statements of Operations for each of the Three Fiscal Years
in the Period Ended January 2, 2010
    
    
    38Consolidated Statements of Changes in Shareholders Equity for each of the
Three Fiscal Years in the Period Ended January 2, 2010
    
    
    39Consolidated Statements of Cash Flows for each of the Three Fiscal Years
in the Period ended January 2, 2010
    
    
    40Notes to Consolidated Financial Statements
    
    
    41
  35




---



##### 



Report of Independent Registered Public Accounting Firm
  Internal Control  Integrated Framework
     
  36




---



##### 



A.C. MOORE ARTS & CRAFTS, INC.
 
 CONSOLIDATED BALANCE SHEETS
 (In thousands except shares)
 January 2,
    
    
    January 3,2010
    
    
    2009ASSETSCurrent assets:Cash and cash equivalents
    
    $
    45,952
    
    
    $
    74,437Inventories
    
    
    122,058
    
    
    
    109,365Prepaid expenses and other current assets
    
    
    9,239
    
    
    
    8,346Prepaid and receivable income taxes
    
    
    472
    
    
    
    1,905Deferred tax assets
    
    
    3,577
    
    
    
    4,600181,298
    
    
    
    198,653Non-current assets:Property and equipment, net
    
    
    81,938
    
    
    
    92,403Other assets
    
    
    2,233
    
    
    
    2,690$
    265,469
    
    
    $
    293,746LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Short-term debt
    
    $
    19,000
    
    
    $
    29,071Trade accounts payable
    
    
    37,047
    
    
    
    39,274Accrued payroll and payroll taxes
    
    
    1,973
    
    
    
    2,414Accrued expenses
    
    
    24,580
    
    
    
    23,879Accrued lease liability
    
    
    2,071
    
    
    
    1,94184,671
    
    
    
    96,579Non-current liabilities:Deferred tax liability and other
    
    
    3,344
    
    
    
    4,560Accrued lease liability
    
    
    17,380
    
    
    
    18,30720,724
    
    
    
    22,867105,395
    
    
    
    119,446Commitments and contingencies (See Note 12)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 24,851,594 and 20,467,151
at January 2, 2010 and January 3, 2009, respectively
    
    
    136,586
    
    
    
    124,909Retained earnings
    
    
    23,488
    
    
    
    49,391160,074
    
    
    
    174,300$
    265,469
    
    
    $
    293,746
   37




---



##### 



A.C. MOORE ARTS & CRAFTS, INC.
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (In thousands except per share data)
 Fiscal2009
    
    
    2008
    
    
    2007Net sales
    
    $
    468,889
    
    
    $
    534,665
    
    
    $
    559,693Cost of sales (including buying and distribution costs)
    
    
    281,614
    
    
    
    317,384
    
    
    
    330,962Gross margin
    
    
    187,275
    
    
    
    217,281
    
    
    
    228,731Selling, general and administrative expenses
    
    
    213,268
    
    
    
    232,307
    
    
    
    219,597Costs related to change in management
    
    
    
    
    
    
    
    
    
    
    435Store pre-opening and closing expenses
    
    
    4,477
    
    
    
    8,742
    
    
    
    3,229Income (loss) from operations
    
    
    (30,470
    )
    
    
    (23,768
    )
    
    
    5,470Interest expense
    
    
    1,417
    
    
    
    4,245
    
    
    
    1,791Interest (income)
    
    
    (319
    )
    
    
    (1,210
    )
    
    
    (1,997
    )Income (loss) before income taxes
    
    
    (31,568
    )
    
    
    (26,803
    )
    
    
    5,676Provision for (benefit from) income taxes
    
    
    (5,665
    )
    
    
    (232
    )
    
    
    1,893Net income (loss)
    
    $
    (25,903
    )
    
    $
    (26,571
    )
    
    $
    3,783Basic net income (loss) per share
    
    $
    (1.15
    )
    
    $
    (1.31
    )
    
    $
    0.19Diluted net income (loss) per share
    
    $
    (1.15
    )
    
    $
    (1.31
    )
    
    $
    0.19Basic weighted average shares outstanding
    
    
    22,470
    
    
    
    20,301
    
    
    
    20,246Diluted weighted average shares outstanding
    
    
    22,470
    
    
    
    20,301
    
    
    
    20,349
   38




---



##### 



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, 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 (loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    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 9)
    
    
    
    
    
    
    
    
    
    
    (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 (loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (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
    
    
    $
    
    
    
    $
    174,300Net (loss)
    
    
    
    
    
    
    
    
    
    
    (25,903
    )
    
    
    
    
    
    
    (25,903
    )Total comprehensive income (loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (25,903
    )Stock-based compensation expense
    
    
    
    
    
    
    1,824
    
    
    
    
    
    
    
    
    
    
    
    1,824Issuance of common stock
    
    
    4,000,000
    
    
    
    9,853
    
    
    
    
    
    
    
    
    
    
    
    9,853Restricted shares, net
    
    
    384,443
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance, January 2, 2010
    
    
    24,851,594
    
    
    $
    136,586
    
    
    $
    23,488
    
    
    $
    
    
    
    $
    160,075
   39




---



##### 



A.C. MOORE ARTS & CRAFTS, INC.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In thousands)
 Fiscal2009
    
    
    2008
    
    
    2007Cash flows from operating activities:Net income (loss)
    
    $
    (25,903
    )
    
    $
    (26,571
    )
    
    $
    3,783Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    16,220
    
    
    
    15,714
    
    
    
    14,079Stock-based compensation expense
    
    
    1,824
    
    
    
    1,977
    
    
    
    2,644Impairment of fixed assets
    
    
    4,252
    
    
    
    6,016
    
    
    
    Loss on disposal of assets
    
    
    328
    
    
    
    1,112
    
    
    
    883Provision for (benefit of) deferred income taxes, net
    
    
    (192
    )
    
    
    2,388
    
    
    
    5,033Changes in assets and liabilities:Inventories
    
    
    (12,693
    )
    
    
    17,012
    
    
    
    (5,941
    )Prepaid expenses and other current assets
    
    
    (893
    )
    
    
    3,594
    
    
    
    (4,770
    )Income taxes receivable
    
    
    1,433
    
    
    
    3,193
    
    
    
    (6,928
    )Accounts payable
    
    
    (2,227
    )
    
    
    (9,506
    )
    
    
    77Accrued payroll, payroll taxes and accrued expenses
    
    
    260
    
    
    
    5,560
    
    
    
    386Accrued lease liability
    
    
    (798
    )
    
    
    (259
    )
    
    
    252Income taxes payable
    
    
    
    
    
    
    (1,909
    )
    
    
    (205
    )Other
    
    
    458
    
    
    
    (602
    )
    
    
    (683
    )Net cash provided by operating activities
    
    
    (17,932
    )
    
    
    17,719
    
    
    
    8,610Cash flows from investing activities:Capital expenditures
    
    
    (10,335
    )
    
    
    (15,917
    )
    
    
    (19,022
    )Cash flows (used in) investing activities
    
    
    (10,335
    )
    
    
    (15,917
    )
    
    
    (19,022
    )Cash flows from financing activities:Exercise of stock options
    
    
    
    
    
    
    8
    
    
    
    1,626Tax benefit of stock options
    
    
    
    
    
    
    3
    
    
    
    433Issuance of common stock
    
    
    9,853
    
    
    
    
    
    
    
    Borrowing under line of credit
    
    
    19,000
    
    
    
    10,000
    
    
    
    Repayment of debt
    
    
    (29,071
    )
    
    
    (2,571
    )
    
    
    (2,572
    )Net cash provided by (used in) financing activities
    
    
    (218
    )
    
    
    7,440
    
    
    
    (513
    )Net (decrease) increase in cash and cash equivalents
    
    
    (28,485
    )
    
    
    9,242
    
    
    
    (10,925
    )Cash and cash equivalents at beginning of period
    
    
    74,437
    
    
    
    65,195
    
    
    
    76,120Cash and cash equivalents at end of period
    
    $
    45,952
    
    
    $
    74,437
    
    
    $
    65,195Supplemental cash flow information:Cash paid (received) during the year for:Interest
    
    $
    3,819
    
    
    $
    2,190
    
    
    $
    1,343Income taxes, net of refunds
    
    $
    (7,349
    )
    
    $
    649
    
    
    $
    1,898
   40




---



##### 



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 .
   41




---



##### 



Property and Equipment.
  Impairment of Long-lived Assets .
 Other Assets .
 Revenue Recognition .
  42




---



##### 



Fiscal(In thousands)
    
    2009
    
    
    2008
    
    
    2007Art and scrapbooking
    
    $
    130,003
    
    
    $
    156,898
    
    
    $
    161,628Traditional crafts
    
    
    150,810
    
    
    
    148,248
    
    
    
    145,517Floral and floral accessories
    
    
    41,539
    
    
    
    53,057
    
    
    
    61,263Fashion crafts
    
    
    43,828
    
    
    
    51,217
    
    
    
    52,638Home décor and frames
    
    
    81,145
    
    
    
    95,183
    
    
    
    100,692Seasonal items
    
    
    21,564
    
    
    
    30,061
    
    
    
    37,955Total
    
    $
    468,889
    
    
    $
    534,665
    
    
    $
    559,693
   Lease Accounting .
 Reserve for Closed Stores.
 Store Pre-opening and Closing Costs .
     43




---



##### 



Fiscal(In thousands)
    
    2009
    
    
    2008
    
    
    2007Store pre-opening costs
    
    $
    495
    
    
    $
    1,295
    
    
    $
    2,608Store closing costs
    
    
    3,982
    
    
    
    7,447
    
    
    
    621$
    4,477
    
    
    $
    8,742
    
    
    $
    3,229
 Advertising Costs.
 Insurance Liabilities.
 Fair Value of Financial Instruments.
  44




---



##### 



Fair Value Measurements UsingQuoted Prices
    
    
    Significant
    
    
    SignificantTotal
    
    
    in Active
    
    
    Observable
    
    
    Unobservable
    
    
    TotalCarrying
    
    
    Markets
    
    
    Inputs
    
    
    Inputs
    
    
    Gains(In thousands)
    
    Value
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    
    (Losses)RecurringJanuary 2, 2010Cash equivalents
    
    $
    44,300
    
    
    $
    44,300
    
    
    $
    
    
    
    $
    January 3, 2009Cash equivalents
    
    $
    79,400
    
    
    $
    79,400
    
    
    $
    
    
    
    $
    Interest rate swaps (1)
    
    
    (2,400
    )
    
    
    
    
    
    
    (2,400
    )
    
    
    
    
    
    $
    (2,400
    )
 (1)
    
    Included in Accrued expenses on our Consolidated Balance Sheets. NonrecurringJanuary 2, 2010Long-lived assets held
and used (2)
    
    $
    1,256
    
    
    $
    
    
    
    $
    
    
    
    $
    1,256
    
    
    $
    (4,300
    )
 (2)
    
    Represents retail store fixed assets written down to their fair value, resulting
in a impairment charge of $4.3 million which was
included in earnings for the period.   Stock-based Compensation .
  45




---



##### 



Fiscal2009
    
    
    2008
    
    
    2007Average fair value of awards
    
    $
    1.02
    
    
    $
    2.20
    
    
    $
    7.72Risk free interest rate
    
    
    1.8
    %
    
    
    2.7
    %
    
    
    4.6
    %Dividend yield
    
    
    
    
    
    
    
    
    
    
    Average expected life
    
    
    4.5 yrs
    
    
    4.5 yrs
    
    
    4.5 yrsExpected stock price volatility
    
    
    60.6
    %
    
    
    46.3
    %
    
    
    38.0
    %
   Income Taxes .
  .
  46




---



##### 



Liquidity and Capital Resources.
 2. New Accounting Pronouncements
     3. Merchandise Inventories
    47




---



##### 



4. Impairment of Long-lived Assets
    5. Store Closing Costs
   48




---



##### 



Non-cancellable
    
    
    Asset
    
    
    Severence,lease
    
    
    related
    
    
    liquidation(In thousands)
    
    obligations
    
    
    charges
    
    
    and other
    
    
    TotalBalance, December 31, 2007
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Charges
    
    
    5,702
    
    
    
    580
    
    
    
    1,165
    
    
    
    7,447Non-cash adjustments
    
    
    
    
    
    
    (580
    )
    
    
    
    
    
    
    (580
    )Cash payments
    
    
    
    
    
    
    
    
    
    
    (1,165
    )
    
    
    (1,165
    )Balance, January 3, 2009
    
    $
    5,702
    
    
    $
    
    
    
    $
    
    
    
    $
    5,702Charges
    
    
    3,475
    
    
    
    304
    
    
    
    203
    
    
    
    3,982Non-cash adjustments
    
    
    
    
    
    
    (304
    )
    
    
    
    
    
    
    (304
    )Cash payments
    
    
    (1,796
    )
    
    
    
    
    
    
    (203
    )
    
    
    (1,999
    )Balance, January 2, 2010
    
    $
    7,381
    
    
    $
    
    
    
    $
    
    
    
    $
    7,381
    49




---



##### 



6. Earnings Per Share
  Fiscal Year(In thousands, except per share data)
    
    2009
    
    
    2008
    
    
    2007Net income (loss)
    
    $
    (25,903
    )
    
    $
    (26,571
    )
    
    $
    3,783Weighted average shares:Basic
    
    
    22,470
    
    
    
    20,301
    
    
    
    20,246Incremental shares from assumed exercise of stock options and stock
appreciation rights
    
    
    
    
    
    
    
    
    
    
    56Incremental restricted shares
    
    
    
    
    
    
    
    
    
    
    47Diluted
    
    
    22,470
    
    
    
    20,301
    
    
    
    20,349Basic net income (loss) per share
    
    $
    (1.15
    )
    
    $
    (1.31
    )
    
    $
    0.19Diluted net income (loss) per share
    
    $
    (1.15
    )
    
    $
    (1.31
    )
    
    $
    0.19Stock options and stock appreciation rights excluded from the calculation
because the exercise price was greater than the average market price
    
    
    1,287
    
    
    
    1,439
    
    
    
    807Potentially dilutive shares excluded from the calculation as the result would
be anti-dilutive
    
    
    894
    
    
    
    228
    
    
    
    
 7. Property and Equipment
  Fiscal Year Ended(In thousands)
    
    2009
    
    
    2008
    
    
    2007Land
    
    $
    2,466
    
    
    $
    2,466
    
    
    $
    2,466Buildings and improvements
    
    
    38,370
    
    
    
    38,370
    
    
    
    38,370Furniture, fixtures, software and equipment
    
    
    131,036
    
    
    
    129,949
    
    
    
    123,589Leasehold improvements
    
    
    9,555
    
    
    
    8,183
    
    
    
    5,849Equipment for future stores
    
    
    705
    
    
    
    552
    
    
    
    2,179182,132
    
    
    
    179,520
    
    
    
    172,453Less: Accumulated depreciation and amortization
    
    
    (100,194
    )
    
    
    (87,117
    )
    
    
    (73,125
    )$
    81,938
    
    
    $
    92,403
    
    
    $
    99,328Depreciation expense
    
    $
    16,220
    
    
    $
    15,714
    
    
    $
    14,079
  50




---



##### 



8. Financing Agreements
        51




---



##### 



9. Income Taxes
   Fiscal(In thousands)
    
    2009
    
    
    2008
    
    
    2007Gross unrecognized tax benefits, beginning of period
    
    $
    251
    
    
    $
    2,826
    
    
    $
    1,059Increases in tax positions for prior years
    
    
    360
    
    
    
    563
    
    
    
    46Decreases in tax positions for prior years
    
    
    
    
    
    
    (493
    )
    
    
    Increases in tax positions for current year
    
    
    34
    
    
    
    388
    
    
    
    1,721Settlements
    
    
    (21
    )
    
    
    (3,033
    )
    
    
    Lapse in statute of limitations
    
    
    (14
    )
    
    
    
    
    
    
    Gross unrecognized tax benefits, end of period
    
    $
    610
    
    
    $
    251
    
    
    $
    2,826
      52




---



##### 



Fiscal(In thousands)
    
    2009
    
    
    2008
    
    
    2007United States federal taxes at statutory rate
    
    $
    (11,049
    )
    
    $
    (9,381
    )
    
    $
    1,986State and local taxes, net
    
    
    (1,842
    )
    
    
    (1,679
    )
    
    
    176Change in estimates for uncertain tax positions
    
    
    466
    
    
    
    309
    
    
    
    229Change in tax rates
    
    
    
    
    
    
    
    
    
    
    Valuation allowance
    
    
    6,812
    
    
    
    10,474
    
    
    
    174Incentive stock option compensation
    
    
    
    
    
    
    32
    
    
    
    150Tax free interest
    
    
    (73
    )
    
    
    (304
    )
    
    
    (614
    )Other
    
    
    20
    
    
    
    317
    
    
    
    (208
    )Income tax provision (benefit)
    
    $
    (5,665
    )
    
    $
    (232
    )
    
    $
    1,893
  53




---



##### 



Fiscal(In thousands)
    
    2009
    
    
    2008
    
    
    2007Current tax expense (benefit):Federal
    
    $
    (5,550
    )
    
    $
    (3,249
    )
    
    $
    (3,231
    )State
    
    
    57
    
    
    
    629
    
    
    
    91Total current
    
    
    (5,494
    )
    
    
    (2,620
    )
    
    
    (3,140
    )Deferred tax expense (benefit):Federal
    
    
    (172
    )
    
    
    1,828
    
    
    
    4,922State
    
    
    
    
    
    
    560
    
    
    
    111Total deferred
    
    
    (172
    )
    
    
    2,388
    
    
    
    5,033Total income tax provision (benefit)
    
    $
    (5,665
    )
    
    $
    (232
    )
    
    $
    1,893
  Fiscal Year Ended(In thousands)
    
    2009
    
    
    2008
    
    
    2007Current deferred taxesInventory valuation
    
    $
    2,824
    
    
    $
    2,402
    
    
    $
    2,838Accrued expenses
    
    
    6,804
    
    
    
    5,876
    
    
    
    3,277Deferred revenue
    
    
    209
    
    
    
    265
    
    
    
    1,731Valuation allowance
    
    
    (6,260
    )
    
    
    (3,943
    )
    
    
    (544
    )Other
    
    
    
    
    
    
    
    
    
    
    231Total current deferred taxes
    
    $
    3,577
    
    
    $
    4,600
    
    
    $
    7,533Non-current deferred taxesProperty and equipment
    
    
    (10,676
    )
    
    
    (14,501
    )
    
    
    (14,895
    )Stock option compensation
    
    
    3,040
    
    
    
    2,368
    
    
    
    1,604Accrued rent expense
    
    
    5,628
    
    
    
    5,946
    
    
    
    6,931Federal net operating losses and credits
    
    
    7,580
    
    
    
    6,328
    
    
    
    State net operating loss carryforwards
    
    
    4,658
    
    
    
    3,412
    
    
    
    1,895Valuation allowance
    
    
    (13,304
    )
    
    
    (8,577
    )
    
    
    (2,463
    )Other
    
    
    (227
    )
    
    
    529
    
    
    
    304Total non-current deferred taxes
    
    
    (3,301
    )
    
    
    (4,495
    )
    
    
    (6,624
    )Net deferred tax assets
    
    $
    276
    
    
    $
    105
    
    
    $
    909Deferred tax assets
    
    $
    30,743
    
    
    $
    27,126
    
    
    $
    18,811Deferred tax liabilities
    
    
    (30,467
    )
    
    
    (27,021
    )
    
    
    (17,902
    )Net deferred tax assets
    
    $
    276
    
    
    $
    105
    
    
    $
    909
   54




---



##### 



10. Stock-based Compensation
    Fiscal(In thousands except per share data and # of months)
    
    2009
    
    
    2008
    
    
    2007Stock-based compensation expense
    
    $
    1,823
    
    
    $
    1,977
    
    
    $
    2,644Effect on net income
    
    
    1,823
    
    
    
    1,977
    
    
    
    1,759Effect on earnings per share
    
    
    0.08
    
    
    
    0.10
    
    
    
    0.09Market value in excess of grant price for options exercised
    
    
    
    
    
    
    6
    
    
    
    1,071Intrinsic value of options outstanding
    
    
    551
    
    
    
    27
    
    
    
    963Unrecognized compensation cost
    
    $
    2,399
    
    
    $
    3,264
    
    
    $
    4,295Months over which compensation costs will be recognized
    
    
    45
    
    
    
    57
    
    
    
    48Shares available for future grant
    
    
    4,148
    
    
    
    734
    
    
    
    1,094
   55




---



##### 



tock Options and Stock Appreciation Rights
  Fiscal 2009
    
    
    Fiscal 2008Stock Options and
    
    
    Weighted Average
    
    
    Stock Options and
    
    
    Weighted AverageStock Appreciation Rights
    
    
    Exercise Price
    
    
    Stock Appreciation Rights
    
    
    Exercise PriceOutstanding at beginning of period
    
    
    1,500,454
    
    
    $
    15.34
    
    
    
    1,249,606
    
    
    $
    19.82Activity:Granted
    
    
    357,054
    
    
    
    1.94
    
    
    
    487,996
    
    
    
    5.32Expired
    
    
    26,968
    
    
    
    2.88
    
    
    
    
    
    
    
    16.19Forfeited
    
    
    198,923
    
    
    
    10.14
    
    
    
    234,948
    
    
    
    16.19Exercised
    
    
    
    
    
    
    
    
    
    
    2,200
    
    
    
    3.84Outstanding at end of period
    
    
    1,631,616
    
    
    $
    6.52
    
    
    
    1,500,454
    
    
    $
    15.34
   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 Price1.00  5.00
    
    
    465,654
    
    
    
    5.8
    
    
    $
    1.90
    
    
    
    87,434
    
    
    
    4.0
    
    
    $
    2.175.01  10.00
    
    
    266,777
    
    
    
    4.7
    
    
    
    7.18
    
    
    
    119,152
    
    
    
    3.9
    
    
    
    7.4510.01  15.00
    
    
    
    
    
    
    0.0
    
    
    
    
    
    
    
    0
    
    
    
    0.0
    
    
    
    15.01  20.00
    
    
    360,618
    
    
    
    5.4
    
    
    
    17.72
    
    
    
    352,995
    
    
    
    5.4
    
    
    
    17.7720.01  26.67
    
    
    538,567
    
    
    
    4.5
    
    
    
    23.07
    
    
    
    482,701
    
    
    
    4.6
    
    
    
    23.351,631,616
    
    
    
    5.1
    
    
    $
    6.52
    
    
    
    1,042,281
    
    
    
    4.7
    
    
    $
    17.87
 Restricted Stock
   Fiscal 2009
    
    
    Fiscal 2008Number of
    
    
    Weighted Average
    
    
    Number of
    
    
    Weighted AverageShares
    
    
    Grant Date Fair Value
    
    
    Shares
    
    
    Grant Date Fair ValueOutstanding at beginning of period
    
    
    162,535
    
    
    $
    11.86
    
    
    
    77,045
    
    
    $
    20.89Activity:Granted
    
    
    473,852
    
    
    
    2.15
    
    
    
    120,953
    
    
    
    7.19Vested
    
    
    20,244
    
    
    
    10.38
    
    
    
    3,815
    
    
    
    21.84Cancelled
    
    
    89,409
    
    
    
    5.84
    
    
    
    31,648
    
    
    
    14.41Outstanding at end of period
    
    
    526,734
    
    
    $
    5.40
    
    
    
    162,535
    
    
    $
    11.86
 11. Retirement Plan
   56




---



##### 



12. Commitments and Contingencies
 Commitments
   Fiscal(In thousands)
    
    2009
    
    
    2008
    
    
    2007Minimum rentals
    
    $
    38,097
    
    
    $
    40,508
    
    
    $
    36,036Contingent payments
    
    
    68
    
    
    
    46
    
    
    
    83$
    38,165
    
    
    $
    40,554
    
    
    $
    36,119
  Fiscal Year
    
    Rent Obligation2010
    
    $
    42,7632011
    
    
    40,6092012
    
    
    37,4532013
    
    
    31,1262014
    
    
    25,378Thereafter
    
    
    58,531Total minimum future rentals
    
    $
    235,860
 Contingencies
  13. Related Party Transactions
    57




---



##### 



ITEM 9.
    
    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
  ITEM 9A.
    
    CONTROLS AND PROCEDURES.
 Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
  Managements Report on Internal Control Over Financial Reporting
   Changes in Internal Control over Financial Reporting
   58




---



##### 



ITEM 9B.
    
    OTHER INFORMATION
  PART III
 ITEM 10.
    
    DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
  Code of Ethical Business Conduct
 Code of Ethical Business Conduct
 ITEM 11.
    
    EXECUTIVE COMPENSATION.
  ITEM 12.
    
    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS.
   59




---



##### 



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)
    
    
    1,631,616
    
    
    $
    6.52
    
    
    
    4,147,908Equity compensation plans not approved by security holders
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    1,631,616
    
    
    $
    6.52
    
    
    
    4,147,908
 
 (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.
  (1)
    
    Financial Statements:Report of Independent Registered Public Accounting FirmConsolidated Balance Sheets at January 2, 2010 and January 3, 2009Consolidated Statements of Operations for each of the three fiscal years
in the period ended January 2, 2010Consolidated Statements of Changes in Shareholders Equity for each of the
three fiscal years in the period ended January 2, 2010Consolidated Statements of Cash Flows for each of the three fiscal
years in the period ended January 2, 2010Notes to Consolidated Financial Statements
  60




---



##### 



(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.
  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.4.1
    (20)


    
    Registration Rights Agreement, dated May 27, 2009.+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.+10.6.1

    (21)

    
    Amendment to 2007 Stock Incentive Plan.
  61




---



##### 



Exhibit Number
    
    Description+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.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
    (22)
    
    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.
  62




---



##### 



Exhibit Number
    
    Description+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
    (23)
    
    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.+10.27.1
    (22)
    
    Amended and Restated Employment Letter, dated as of August 10, 2009,
between the Company and Joseph A. Jeffries.+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.
  63




---



##### 



Exhibit Number
    
    Description+10.35
    (22)
    
    Employment Letter, dated as of May 7, 2009, between the Company and
David Abelman.+10.35.1
    
    
    Amendment One, dated as of March 16, 2010, to Employment
Letter, dated as of May 7, 2009, between the Company and David Abelman.+10.36
    (22)
    
    Employment Letter, dated as of May 13, 2009, between the Company and
David Stern.+10.36.1
    
    
    Special Award Agreement,
dated as of November 24, 2009, between the Company and David Stern.+10.37
    (20)
    
    Securities Purchase Agreement, dated May 27, 2009.18.1
    (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.  64




---



##### 



(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.(20)
    
    Incorporated by reference to the Companys Form 8-K filed May 27, 2009.(21)
    
    Incorporated by reference to the Companys Definitive Proxy Statement filed on July 24, 2009.(22)
    
    Incorporated by reference to the Companys Form 10-Q for the fiscal quarter ended July 4, 2009.(23)
    
    Incorporated by reference to the Companys Form 10-K for the fiscal year ended January 3, 2009.  65




---



##### 



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
    
    
    Charged to
    
    
    Charged to
    
    
    Other
    
    
    Balance at EndLower of Cost or Market Reserve
    
    Period
    
    
    Expense
    
    
    Other Accounts
    
    
    Adjustments
    
    
    of Period2009
    
    $
    4,364
    
    
    $
    1,989
    
    
    $
    
    
    
    $
    402
    
    
    $
    5,9512008
    
    
    1,791
    
    
    
    541
    
    
    
    2,724
    (a)
    
    
    692
    
    
    
    4,3642007
    
    
    1,315
    
    
    
    1,489
    
    
    
    
    
    
    
    1,013
    
    
    
    1,791
 (a)
    
    Represents a lower of cost or market reserve previously included in the cost of
inventory under the retail
inventory method. 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 Period2009
    
    $
    12,520
    
    
    $
    
    
    
    $
    13,080
    (b)
    
    $
    6,036
    
    
    $
    19,5642008
    
    
    3,007
    
    
    
    10,474
    
    
    
    
    
    
    
    961
    
    
    
    12,5202007
    
    
    1,362
    
    
    
    1,645
    
    
    
    
    
    
    
    
    
    
    
    3,007
 (b)
    
    Represents additions to net deferred tax assets against which the Company records a
valuation allowance. Deductions -Write-offs,Balance at
    
    
    Additions -
    
    
    Additions -
    
    
    Payments andDescription
    
    Beginning of
    
    
    Charged to
    
    
    Charged to
    
    
    Other
    
    
    Balance at EndSales Returns Allowance
    
    Period
    
    
    Expense
    
    
    Other Accounts
    
    
    Adjustments
    
    
    of Period2009
    
    $
    206
    
    
    $
    25
    
    
    $
    
    
    
    $
    
    
    
    $
    2312008
    
    
    227
    
    
    
    
    
    
    
    
    
    
    
    21
    
    
    
    2062007
    
    
    235
    
    
    
    
    
    
    
    
    
    
    
    8
    
    
    
    227
  66




---



##### 



SIGNATURES
  A.C. MOORE ARTS & CRAFTS, INC.Date: March 18, 2010
    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 18, 2010/s/ David Stern

David Stern
    
    Executive Vice President and
Chief Financial Officer
(Principal Financial and
Accounting officer)
    
    March 18, 2010/s/ Michael J. Joyce

Michael J. Joyce
    
    Chairman of the Board of Directors
    
    March 18, 2010/s/ Joseph F. Coradino

Joseph F. Coradino
    
    Director
    
    March 18, 2010/s/ Neil A. McLachlan

Neil A. McLachlan
    
    Director
    
    March 18, 2010/s/ Thomas S. Rittenhouse

Thomas S. Rittenhouse
    
    Director
    
    March 18, 2010/s/ Lori J. Schafer

Lori J. Schafer
    
    Director
    
    March 18, 2010
  67




---



##### 



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.4.1
    (20)
    
    Registration Rights Agreement, dated May 27, 2009.+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.+10.6.1
    (21)
    
    Amendment to 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).
  68




---



##### 



Exhibit Number
    
    Description10.13
    (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
    (22)
    
    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
    (23)
    
    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.
  69




---



##### 



Exhibit Number
    
    Description+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.+10.27.1
    (22)
    
    Amended and Restated Employment Letter, dated as of August 10, 2009,
between the Company and Joseph A. Jeffries.+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.+10.35
    (22)
    
    Employment Letter, dated as of May 7, 2009, between the Company and
David Abelman.+10.35.1
    
    
    Amendment One, dated as of March 16, 2010, to Employment
Letter, dated as of May 7, 2009, between the Company and David Abelman.+10.36
    (22)
    
    Employment Letter, dated as of May 13, 2009, between the Company and
David Stern.+10.36.1
    
    
    Special Award Agreement,
dated as of November 24, 2009, between the Company and David Stern.+10.37
    (20)
    
    Securities Purchase Agreement, dated May 27, 2009.+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.
  70




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##### 



Exhibit Number
    
    Description31.1
    
    
    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.  71




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##### 



(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.(20)
    
    Incorporated by reference to the Companys Form 8-K filed May 27, 2009.(21)
    
    Incorporated by reference to the Companys Definitive Proxy Statement filed on July
24, 2009.(22)
    
    Incorporated by reference to the Companys Form 10-Q for the fiscal quarter ended
July 4, 2009.(23)
    
    Incorporated by reference to the Companys Form 10-K for the fiscal year ended
January 3,
2009.  72