-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Bjv7GjP15eVegTZ2agyxZKnV4HLMm2uifARuUnax1nO4mPPeRvNErmaEvwGS5tfe Ouu1mjFM2D15CnB5UiteLA== 0000893220-07-000695.txt : 20070312 0000893220-07-000695.hdr.sgml : 20070312 20070312165315 ACCESSION NUMBER: 0000893220-07-000695 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 20061231 FILED AS OF DATE: 20070312 DATE AS OF CHANGE: 20070312 FILER: COMPANY DATA: COMPANY CONFORMED NAME: A.C. Moore Arts & Crafts, Inc. CENTRAL INDEX KEY: 0001042809 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-HOBBY, TOY & GAME SHOPS [5945] IRS NUMBER: 223527763 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-23157 FILM NUMBER: 07688258 BUSINESS ADDRESS: STREET 1: 130 A.C. MOORE DRIVE CITY: BERLIN STATE: NJ ZIP: 08009 BUSINESS PHONE: (856) 768-4930 MAIL ADDRESS: STREET 1: 130 A.C. MOORE DRIVE CITY: BERLIN STATE: NJ ZIP: 08009 FORMER COMPANY: FORMER CONFORMED NAME: A C MOORE ARTS & CRAFTS INC DATE OF NAME CHANGE: 19970722 10-K 1 w31791e10vk.htm FORM 10-K e10vk
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
þ   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2006
OR
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                                          to                                         
Commission file number  000-23157
A.C. MOORE ARTS & CRAFTS, INC.
(Exact name of registrant as specified in its charter)
     
Pennsylvania   22-3527763
     
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)
     
130 A.C. Moore Drive, Berlin, New Jersey   08009
     
(Address of principal executive offices)   (Zip Code)
Registrant’s telephone number, including area code: (856) 768-4930
Securities registered pursuant to Section 12(b) of the Act:
Common stock, no par value
(Title of class)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. o Yes     þ No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. o Yes     þ No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ Yes     No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this Chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
o Large accelerated filer       þ Accelerated filer       o Non-accelerated filer
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). o Yes       þ No
As of June 30, 2006, the aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $329,000,000 based on $16.31, the closing price per share of the registrant’s common stock on such date, as reported on the Nasdaq Stock Market.(1)
The number of shares of the registrant’s common stock outstanding as of March 9, 2007 was 20,188,898.
 
 

 


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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement for the 2007 Annual Meeting of Shareholders are incorporated into Part III of this Form 10-K; provided, however, that the Compensation Committee Report, the Audit Committee Report and any other information in the proxy statement that is not required to be included in this Annual Report on Form 10-K shall not be deemed to be incorporated herein by reference.
 
(1)   The aggregate market value of the voting stock set forth above equals the number of shares of the registrant’s common stock outstanding, reduced by the number of shares of common stock held by executive officers, directors and shareholders owning in excess of 10% of the registrant’s common stock, multiplied by the last reported sale price for the registrant’s common stock on the last business day of the registrant’s most recently completed second fiscal quarter. The information provided shall in no way be construed as an admission that any person whose holdings are excluded from this figure is an affiliate of the registrant or that any person whose holdings are included in this figure is not an affiliate of the registrant and any such admission is hereby disclaimed. The information provided herein is included solely for record keeping purposes of the Securities and Exchange Commission.

 


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PART I
ITEM 1. BUSINESS.
ITEM 1A. RISK FACTORS.
ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 2. PROPERTIES
ITEM 3. LEGAL PROCEEDINGS
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
ITEM 6. SELECTED FINANCIAL DATA
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9B. OTHER INFORMATION
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
SIGNATURES
EXHIBIT INDEX
Amendment to Articles of Incorporation
Employment Agreement Amy Rhoades
First Amendment to Employment Agreement Dated July 24, 2006
Promissory Note and Loan Modification Agreement Dated March 12, 2007
Subsidiaries of the Company
Consent of PricewaterhouseCoopers LLP
Certification of Rick A. Lepley
Certification of Marc Katz
Certification of Rick A. Lepley Pursuant to 18 U.S.C.Section 1350
Certification of Marc Katz Pursuant to 18 U.S.C. Section 1350


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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 or incorporated by reference herein or therein are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended (“Exchange Act”), with respect to our results of operations and our business. All such statements, other than statements of historical facts, including those regarding market trends, our financial position and results of operations, business strategy, projected costs, and plans and objectives of management for future operations, are forward-looking statements. In general, such statements are identified by the use of forward-looking words or phrases including, but not limited to, “intended,” “will,” “should,” “may,” “believes,” “expects,” “expected,” “anticipates” and “anticipated” or the negative thereof or variations thereon or similar terminology. These forward-looking statements are based on our current expectations. Although we believe that the expectations reflected in forward- looking statements are reasonable, there can be no assurance that such expectations will prove to be correct. These forward-looking statements represent our current judgment. We disclaim any intent or obligation to update our forward-looking statements. Because forward-looking statements involve risks and uncertainties, our actual results could differ materially. Important factors that could cause actual results to differ materially from our expectations (“Cautionary Statements”) include those that are discussed in this Annual Report on Form 10-K, particularly in “Item 1. Business,” “Item 1A. Risk Factors” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the Cautionary Statements.
PART I
ITEM 1. BUSINESS.
Our Company
     We are a specialty retailer offering a vast selection of arts, crafts, and floral merchandise to a broad demographic of consumers. Our stores are located in the eastern United States from Maine to Florida. We have grown from 17 stores in January 1997 to 122 stores as of December 31, 2006. Our stores typically range from 20,000 to 25,000 square feet. In 2006, for stores open for the full calendar year, our average sales per square foot was $234, and our average sales per store was $5.4 million.
     Our assortment of merchandise consists of more than 60,000 stock keeping units, or SKUs, with approximately 45,000 SKUs offered at each store at any one time. We believe we offer an arts and crafts shopping experience that is differentiated by our broad merchandise assortment, high in-stock positions, exciting stores, knowledgeable sales associates and competitive prices. We also offered custom framing in 53 stores as of December 31, 2006 and anticipate that the number of stores with custom framing will increase to approximately 100 stores by the end of 2007. In-store events and programs for children and adults provide hands-on arts and crafts experience and encourage the creativity of our customers.
     Due to the importance of our peak selling season, which includes Fall/Halloween, Thanksgiving and Christmas, the fourth quarter has historically contributed, and is expected to continue to contribute, a significant portion of our profitability for the entire year. As a result, any factors negatively affecting us

 


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during the fourth quarter of any year, including adverse weather and unfavorable economic conditions, would have a material adverse effect on our results of operations for the entire year.
     We became a holding company in July 1997 by incorporating in Pennsylvania and exchanging 4,300,000 shares of our common stock for all of the capital stock of our operating subsidiary which was organized in 1984.
Our Market
     In its 2006 Attitude & Usage Study, the Craft and Hobby Association (“CHA”) found that industry size was approximately $30.2 billion as a result of a 2.6% annual growth rate since 2002. Our market is highly fragmented and is served by multi-store arts and crafts retailers, mass merchandisers, small, local specialty retailers, mail order vendors, hardware stores and a variety of other retailers. According to this study, only 14% of crafters stated that they have a specific purchase in mind when shopping, with the majority of purchases made on impulse.
     The size and growth of our market is sustained by the popularity of arts and crafts. The CHA study referred to above reported that 57% of U.S. households, or approximately 62 million, participated in crafts in the past year, with the average annual spending per crafting household averaging $476. A December 2005 Craftrends magazine consumer participation survey identified that 94% of all crafters are female, 70% are under the age of 55, 48% are between the ages of 35 and 54, 74% have incomes over $40,000 per year and 44% have incomes over $60,000 per year. The crafter is educated, with 92% having graduated from high school and almost 60% having attended college.
Our Merchandise
     Our merchandising strategy is to offer the broadest and deepest assortment of arts, crafts and floral merchandise and to provide our customers with all of the components necessary for their crafting projects on a regular basis. Below is a representative list of our merchandise:
    Art Supplies and Scrapbooking: paints, brushes, canvas, drawing tools, rubber stamps and stationery, scrapbooking supplies and stencils.
 
    Traditional Crafts: stitchery, yarn, cake and candy making supplies, glass crafts, wood crafts, kids crafts, felt, glitter, dollmaking, dollhouses and furniture, and instructional books.
 
    Floral, Floral Accessories and Silk Plants: silk flowers, silk plants, accessories like vases and other products to assist in the arrangement of flowers and pre-made and custom made floral arrangements.
 
    Fashion Crafts: t-shirts and sweatshirts, decorative items like patches and rhinestones, and jewelry making supplies like beads.
 
    Frames: custom framing, ready-made frames, frame hardware and accessories, framed art and prints.
 
    Home Décor: ribbon and lace, wedding-related items, potpourri, candles, candle making supplies, wicker baskets, decorative storage containers and children’s furniture.

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    Seasonal Items: craft making materials, decorations and floral products for all major holidays and seasons, including Christmas, Fall/Halloween, Spring/Easter, Valentine’s Day and St. Patrick’s Day.
Recent Developments in Business and Operating Strategy
     The year 2006 was a year of transition for our Company, as the composition of our senior management team changed substantially. Our new Chief Executive Officer joined us on June 1, 2006 and our new Chief Financial Officer joined us on September 13, 2006. See “Item 1A. Risk Factors” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” for more information on recent changes in management.
     Our financial and sales performance for 2006 was disappointing. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” for further discussion of our results in 2006. We expect that 2007 will also be a year of transition as our new management team is focused on reviewing and adjusting various aspects of our business and operations to position ourselves for improved performance. The business and operating initiatives discussed below supplement the business and operating strategies discussed under “— Business and Operating Strategy.”
Selling, general and administrative expense reduction
     We are aggressively reviewing all facets of our business for opportunities to reduce expenses. The following are our major expense reduction initiatives:
    Store payroll costs. We introduced a new store general manager compensation plan based on pay-for-performance beginning in January 2007. Bonuses earned in one year are no longer rolled into base salary for the coming year. We also tested different store staffing models, including an appropriate mix of full- and part-time team members, in the second half of 2006 that we believe will assist us in improving our results of operations through payroll savings.
 
    Advertising spending. We are in the process of experimenting with the reach, frequency and timing of our advertisements. During the fourth quarter of 2006, we moved approximately 75% of our print advertising from a mid-week, varying between Wednesday, Thursday and Friday, to Sunday. While we are still analyzing the results from this change, we believe that a uniform approach within the chain to advertising strategy will result in overall efficiencies.
 
    Real estate site location strategy. We believe that our selling, general and administrative expenses may be significantly reduced if we increase store openings in existing markets in order to leverage advertising costs. In the future, we intend to increase store density in existing markets. In addition, previously we entered new markets opening only a single store. When we enter new markets in the future, as appropriate, we intend to open more than one store at the same time that we enter that market.

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Inventory reduction
     During the fourth quarter of 2006, we reviewed the level and composition of our store inventories and took steps to reduce excess inventory. We will attempt to improve control in the future over inventory through aggressive clearance procedures and more centrally directed purchasing.
Improved information technology
     We are committed to enhancing our information technology to increase operating efficiencies, improve merchandise selection and better serve our customers. During the fourth quarter of 2006, we completed the upgrade of our point of sales, or POS, system and began to construct a sales audit system which will help us better manage the information available from our POS system. We are currently investigating the development of both a perpetual inventory and an automated replenishment system, which we anticipate will be implemented in 2007 and 2008, respectively.
Globally sourced and private label products
     We are currently investigating increased global sourcing of products. We anticipate that products imported directly through an arrangement with a global sourcing supplier will be sold in our stores beginning in the second half of 2007. We expect that the number of products globally sourced will substantially increase in the future as a result of this new arrangement. We also intend to introduce in our stores private-label products bearing the A.C. Moore name and logo beginning in the second half of 2007. We believe that increased global sourcing and sale of private label products will result in substantial margin improvement.
Centrally directed operations
     We are committed to increasing the level of standardization in our operations and centrally directed management practices. This initiative includes, without limitation, standardizing the presentation in our stores, managing store classroom programs from our corporate office and advertising strategy. We believe that increased centrally directed management will improve our operating efficiencies.
Business and Operating Strategy
     Our goal is to provide our customers with the tools and ideas for their creative endeavors in a solution-oriented environment that exceeds their expectations and encourages repeat business. We believe that our assortment, convenience, service and pricing differentiate us from our competitors. In addition to the business and operating priorities discussed above under “— Recent Developments in Business and Operating Strategy,” we pursue the business and operating strategies described below in order to achieve our goal.
     We strive to offer the broadest and deepest assortment of arts, crafts and floral merchandise.
     We believe key elements in our customers’ decision as to where to shop are variety and selection of merchandise. We strive to offer the broadest and deepest selection of arts, crafts and floral merchandise in our industry. Each of our stores stocks more than 60,000 SKUs across our major merchandise categories during the course of a year, with approximately 45,000 SKUs offered at each store at any one time.

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     We strive to maintain a superior in-stock merchandise position.
     Craft projects usually require multiple components. Providing all of the components for a particular craft project in a single store on a regular basis is critical to meeting the demands of our customers. Therefore, we designed our merchandise distribution systems and distribution operations to ensure rapid replenishment of inventory and high levels of in-stock positions in our stores and distribution operations.
     We strive to operate exciting, easy-to-shop stores.
     We believe that our customers expect exceptional service in an exciting and easy-to-shop store. We regularly provide in-store presentations of various crafting techniques, completed projects and consumer crafting events. We offer a multitude of in-store classes for children and adults in most of our stores on a wide variety of craft skills such as scrapbooking and knitting. Our stores are designed to be well organized and well lit. Store personnel, whom we provide with educational materials about various crafting products and techniques, assist customers with merchandise selection and project ideas.
     We strive to drive sales and optimize profit through merchandising creativity.
     We strive to foster merchandising creativity in our stores while providing centralized direction and support from our corporate office. General managers and store personnel are empowered and encouraged to identify merchandising opportunities and to tailor displays to local preferences for craft projects. If proven successful, merchandising ideas generated by a general manager can be implemented quickly throughout our chain. We believe this helps us to increase sales and profitability. Our focus on empowering our employees helps in recruiting, hiring and retaining talented personnel.
     We strive to provide superior price/value for our customers.
     We believe that our customers consider the relationship between the price and quality of merchandise to be important factors in their buying decisions. Therefore, we strive to be the price/value leader in all of our merchandise categories. Our merchants and general managers actively monitor competitors’ prices to ensure we maintain low prices while preserving merchandise quality. We believe that our price/value strategy enhances customer loyalty.
Growth Strategy
     The industry in which we operate is large and fragmented. We believe that this presents an opportunity to continue to grow our business for the foreseeable future. Our objective is to improve our market share in existing geographic markets and to expand into new geographic markets while enhancing our profitability through greater leverage of our corporate infrastructure. We believe by systematically increasing our store base we can obtain economies of scale in advertising, distribution, purchasing and management costs and, as a result, improve our operating margins.
     During the next two years we intend to increase our store base of 122 locations at December 31, 2006 by approximately 10% to 15% per year. Our current strategy is to open new stores within the range of our corporate headquarters and distribution center located in suburban Philadelphia. Ultimately, we believe that we can operate a minimum of 175 stores within the range of our distribution center without significantly diluting sales in our existing stores. In the future, we anticipate opening stores in other regions.

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     Our site selection strategy is overseen by our Vice President of Real Estate who is responsible for identifying favorable store locations in both existing and new markets. Our site selection criteria include an assessment of demographic characteristics of the trade area, including growth trends, customer traffic patterns, demographic analysis, performance of other retailers, co-tenants within potential projects, potential cannibalization, competition and projected profitability. We also employ the services of two real estate brokerage firms to facilitate real estate research, selection and leasing.
     We have developed a standardized procedure for opening new stores which we continue to refine. Our new store opening team develops the floor plan and merchandise plan based on our store prototype and hires and trains team members in preparation for the opening of each new store. For each new store we open in the next two years, we expect to spend approximately $1.4 million, which includes $400,000 for fixtures and equipment, $300,000 in pre-opening costs (including lease costs from date of possession) and $700,000 for in-store inventory, net of accounts payable.
     In 2006, for stores open at least one full calendar year, our average sales per square foot was $234 and our average sales per store was approximately $5.4 million. In each of 2006 and 2005, sales in comparable stores declined by 3%. Previously, our comparable store sales grew by 4% in 2004, 2% in 2003, 5% in 2002 and 8% in 2001. Stores are added to the comparable store base at the beginning of their fourteenth full month of operation. Our primary method of growing sales in our existing stores over the long-term is to successfully execute our business and operating strategies, including reducing expenses as a percentage of sales, described above under “— Recent Developments in Business and Operating Strategy” and “— Business and Operating Strategy.” There can be no assurance that our comparable store sales will increase in the future.
Merchandising
     Our merchandising strategy is to offer the broadest and deepest assortment of arts, crafts and floral merchandise and to provide our customers with all of the components necessary for their crafting projects on a regular basis. We believe our merchandise appeals to a wide range of recreational and professional crafters of all ages and economic backgrounds, with our primary customers being women ages 25 to 55. Our buyers actively seek new merchandising opportunities by monitoring industry trends, working with domestic and international vendors, and regularly attending trade and consumer shows.
     The following table describes net sales for each of our merchandise categories as a percentage of our total net sales for the years ended December 31, 2004 through 2006:
                         
    Year Ended December 31,
    2006   2005   2004
Art & scrapbooking
    25.2 %     24.6 %     24.8 %
Traditional crafts
    25.8       28.4       29.4  
Floral and accessories
    12.1       12.0       12.2  
Fashion crafts
    9.8       9.6       7.6  
Frames
    9.3       8.6       9.2  
Home décor
    13.6       12.9       13.3  
Seasonal items
    4.2       3.9       3.5  
 
                       
Total
    100.0 %     100.0 %     100.0 %
     Our buyers develop a planogram for each of our basic and seasonal merchandise categories which is implemented at the store level. A planogram is a diagram that shows how and where each specific

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retail product should be placed on shelves or displays. The planograms are developed by a team consisting of our buyers and members of our planogram department, with input from key vendors. The planograms are developed using information about the products, such as size, shape, colors, theme, sales volume and inventory levels. By analyzing past and current sales patterns, we can then adjust our planograms to present merchandise in a manner that helps maximize sales.
     Our POS system allows us to make better merchandising decisions by identifying sales volume and seasonality patterns of particular items of merchandise. With this information we can make better decisions regarding when to stock, reorder, mark-down and discontinue merchandise.
     Our purchasing staff and general managers actively monitor competitors’ prices to ensure we maintain low prices while preserving merchandise quality and value. Our policy of beating any competitor’s advertised price by 10% is displayed in our stores. On a weekly basis, we advertise select items generally at 20% to 50% off their everyday low prices. We also accept competitors’ coupons. We believe that our strategy of price/value enhances customer loyalty.
     Our stores regularly feature seasonal merchandise that complements our core merchandising strategy. Seasonal merchandise is offered for all major holidays and seasons, including Christmas, Fall/Halloween, Spring/Easter, Valentine’s Day and St. Patrick’s Day. By far the greatest portion of our seasonal merchandise is sold during the Christmas season. This includes merchandise in our seasonal department as well as seasonal products sold in other merchandise categories. Our Christmas holiday merchandise is given floor and shelf space in our stores beginning in late summer. The Christmas holiday season is longer for our stores than for many traditional retailers because of the project-oriented nature of Christmas crafts and gift-making ideas.
Stores
     Our stores typically range from 20,000 to 25,000 square feet. Most of our stores are located in strip centers that are easily accessible from main traffic arteries and have convenient parking. Our store size varies based on market demographics and real estate availability. Store leases generally have an initial term of ten years, with three five year renewal options, and provide for predetermined escalations in minimum annual rent. Rent payments are amortized over the initial lease term commencing on the date we take possession. Our stores are generally open from 9:30 a.m. to 9:00 p.m., Monday through Saturday, and from 10:00 a.m. to 6:00 p.m. on Sunday.
     Store layout and operations
     Our stores provide a “one-stop-shopping” destination for arts, crafts and floral merchandise. We design our stores to be attractive and easy-to-shop with a layout intended to lead customers through the entire store in order to expose them to all of our merchandise categories. We use end-of-aisle displays to feature best-selling items and promotional merchandise. Generally, the center of the store contains the floral area, which includes a ribbon center and counter for free floral arrangement services. Our stores contain a customer service area and typically eight or more checkout registers. Our prototype store is apportioned approximately 80% to selling space with the remainder devoted to delivery, storage, classroom and office areas.
     Store management and training
     Each store is managed by a general manager who is assisted by two or three assistant general managers, three to five department managers and an appropriate mix of full-time and part-time team

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members to service our customers. The number of store personnel is substantially higher during our peak selling season. Our general managers and assistant general managers are responsible for store results, primarily merchandising, customer service, training, hiring store level team members, inventory management and expense control. The department managers are responsible for merchandise ordering, inventory management and customer service. Typically, general managers are promoted from within our organization. We selectively hire experienced store managers from other retailers. We also develop assistant general managers from retail trainees and other internal candidates.
     Our training program for store management includes Company-sponsored forums to refine and develop skills in merchandising, merchandise trends, store operations, financial controls, human resources and general management. We provide our team members with educational materials on various crafting products and techniques to create a sales staff with a strong focus on customer service and a willingness to assist customers in assembling and coordinating their craft projects.
     Each general manager reports to a district manager. Our stores are organized into ten districts. Our district managers also participate in Company-sponsored forums that focus on human resources, profit improvement, general management, marketing and other initiatives.
Purchasing
     Our purchasing programs are designed to support our business strategy of providing customers with the broadest and deepest assortment of high quality arts, crafts and floral merchandise at value prices while maintaining high in-stock positions. Our buying staff oversees all of our purchasing. Buyers regularly attend trade and consumer shows to monitor industry trends and to obtain new craft ideas.
     In-store department managers are responsible for daily reordering of merchandise for their departments. In 2006, approximately 99% of our merchandise orders were placed through our electronic data interchange, or EDI, system. Approximately 63% of our orders were shipped directly from vendors to our stores; the remaining 37%, approximately one-third of which are floral and seasonal items, were shipped from our distribution center. Merchandise assortments at our stores can be enhanced by products ordered by general managers to meet the unique needs of their customers. All purchases are monitored through centralized system controls.
     In 2006, we purchased our inventory from more than 500 vendors worldwide. One of the key criteria for the selection of vendors is their responsiveness to our delivery requirements and timing needs. In 2006:
    the largest 25 domestic vendors accounted for approximately 48% of our purchases,
 
    the largest vendor, SBAR’S, Inc., a distributor of arts and crafts merchandise, accounted for approximately 22% of our purchases, and
 
    approximately 13% of our merchandise, primarily floral and seasonal items, was directly imported from foreign manufacturers or their agents, almost exclusively from the People’s Republic of China.
All of our overseas purchases are denominated in U.S. dollars.

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Distribution
     Our distribution strategy is focused on supporting our stores and maintaining high in-stock positions in all of our merchandise categories. Our stores receive merchandise deliveries one to three times per week, depending on store volume and time of year.
     In the third quarter of 2004 we moved into our new distribution center and office facility. This facility contains 710,000 square feet for distribution and warehousing plus 60,000 square feet of office space. We believe this facility is positioned to handle our future expansion and will enable us to service at least 175 stores. The new facility includes an automated picking and sortation system. The total cost of this facility was $46.3 million.
     Our distribution center and warehouse operations are supported by our real-time warehouse management system which uses hand-held computers and radio frequency communication technology to track merchandise. We believe our warehouse management system, which was upgraded in 2004, helps to make our distribution center and warehouse operations efficient and is instrumental in helping us meet our commitment to provide superior inventory replenishment to each of our stores.
     We lease a fleet of tractors and trailers to deliver merchandise to 61 of our 122 stores directly from our distribution center. Additionally, we have contracted with a dedicated third-party carrier to deliver merchandise to the 61 stores where an overnight stay is required because of travel time. In 2006, approximately 37% of our merchandise was delivered from our distribution center to our stores. In the second half of 2006, we implemented new processes within our supply chain, including routing, or cross-docking, which increased amounts of merchandise and additional SKUs through our distribution center.
Marketing
     Our marketing and advertising is designed to attract current customers and appeal to prospective customers. A study published in Craftrends magazine in December 2005 surveyed over 1,000 craft customers across the country. Of the participants, 61% were between the ages of 26 and 54, 94% were female and 44% had an annual income greater than $60,000. We believe that our target customer is consistent with this demographic profile.
     In 2006, we advertised 50 weeks of the year, typically in midweek editions of local and/or regional newspapers. In September 2006, we changed approximately 75% of our print advertising from mid-week, varying between Wednesday, Thursday and Friday, to Sunday. We are currently analyzing the results from this switch in advertising strategy. In addition, prior to store openings, we generally use radio advertisements to develop customer awareness and we place special pre-opening advertisements, normal advertising copy and/or grand opening inserts in newspapers. We create all of our advertising in-house. We are currently experimenting with the overall visual presentation of our ads in an effort to increase impact.
     Our website, www.acmoore.com, is designed to drive additional store traffic by providing information, inspiration and ideas to our visitors. It also serves as another marketing channel to build brand name awareness. Our website offers a collection of over 300 different how-to videos that customers can view to learn the latest crafting tips, techniques and project ideas. Our website also features weekly advertisements, a store locator and an in-store class schedule, as well as suggested craft projects for children and adults with accompanying instructions and shopping lists for merchandise to be purchased at our stores. We also employ e-marketing that allows us to email all customers in our

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database our weekly advertisements, news flashes regarding upcoming events and special offers. Gift cards may be purchased online. At this time, we do not sell our merchandise on our website.
Information Technology
     As discussed above under “— Recent Developments in Business and Operating Strategy,” we are committed to enhanced information technology as an operating priority. During the fourth quarter of 2006, we analyzed our current information technology situation to determine how we can become a more technologically driven company and better utilize computer generated metrics to drive performance.
     A technology project life cycle was introduced to the organization in the fourth quarter of 2006. This is a formal, structured approach to application development initiatives. This will ensure that proper coding and testing disciplines are woven into our project practices as we build quality systems that will serve as the back bone for future growth.
     We completed the conversion of our POS systems in the fourth quarter of 2006. In addition to faster transaction speeds and an improved customer returns database, this conversion provided additional functionality such as debit cards and zip code collection. More importantly, it now provides us the framework for future initiatives that bring additional value and a better experience to the customer.
     During the fourth quarter of 2006, we began to build a sales audit system that will be used for data cleansing from the POS to assure we have a single source of data in which to feed all reporting. We recently held initial discovery meetings with our business teams and various vendors to determine the best approach for delivering perpetual inventory. Introduction of a perpetual inventory program will be a significant milestone as it is a prerequisite to launching an automated replenishment system. Automated replenishment utilizes sales history and vendor lead times to automatically place orders to vendors on a by SKU, by store basis. This eliminates manual involvement for ordering basic, repeatable product. This system will help us better control our inventories, make better buying decisions and reduce our store labor costs. We remain confident that we will have automated replenishment in place during the 2008 calendar year.
Competition
     The market in which we compete is highly fragmented, containing multi-store arts and crafts retailers, mass merchandisers, small local specialty retailers, mail order vendors, hardware stores and a variety of other retailers. We believe we are one of five retailers in the United States dedicated to serving the arts and crafts market that have annual sales in excess of $100.0 million. We compete with many retailers and classify our principal competition within the following three categories:
    Multi-store arts and crafts retailers. This category includes several multi-store arts and crafts chains operating more than 35 stores and comprises: Michaels Stores, Inc., a chain which operates approximately 925 Michaels stores throughout the United States and Canada; Jo-Ann Stores, Inc., which operates approximately 630 traditional Jo-Ann Fabrics and Crafts stores and 175 Jo-Ann superstores nationwide; Hobby Lobby Stores, Inc., a chain which operates approximately 390 stores primarily in the midwest United States; Garden Ridge, Inc., which operates approximately 35 stores primarily in the southeast and midwest United States; and Rag Shops, Inc., which operates approximately 60 stores located primarily in New Jersey and Florida.

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    Mass merchandisers. This category includes Wal-Mart Stores, Inc., and other mass merchandisers. These retailers typically dedicate a relatively small portion of their selling space to a limited assortment of arts and crafts supplies and floral merchandise.
    Small, local specialty retailers. This category includes thousands of local independent arts and crafts retailers. Typically, these are single store operations managed by the owner. The stores generally offer a limited selection and have limited resources for advertising, purchasing and distribution. Many of these stores have established a loyal customer base within a given community and compete on customer service.
     We believe that the principal competitive factors of our business are assortment, convenience, service and pricing. We believe that we are well positioned to compete on each of these factors.
Team Members
     As of December 31, 2006, we had 2,109 full-time and 2,832 part-time team members, 4,622 of whom worked at our stores, 164 at our distribution center and 155 at our corporate offices. None of our team members are covered by a collective bargaining agreement, and we believe our relationship with our team members is good.
Trademarks
     “A.C. Moore,” “Fashion Forward,” “Splendor of Spring,” “Holiday Hues,” “Harvest Hues,” “Easy as 1*2*3,” “Shades of the Season” and “Creations for All Generations” are trademarks that have been registered with the U. S. Patent and Trademark Office. “Stow N Go,” “Make It Yours, Make It for Less,” “Frames N’ Moore,” “Frames @ Moore,” “Frames and Moore” and “Frames & Moore” are common law trademarks for which applications are now pending with the U.S. Patent and Trademark Office. We use the “A.C. Moore” name and logo as a trade name and as a service mark in connection with the sale of our merchandise. The “Fashion Forward” name and logo is used on the exclusive packaging of some of our picture frames. “Splendor of Spring,” “Holiday Hues,” “Harvest Hues,” “Shades of the Season” are all used on packaging for products. All other trademarks are used in advertising campaigns and point of purchase displays.
Website and Availability of Information
     Our internet address is www.acmoore.com. We make available free of charge on or through www.acmoore.com our annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Additionally, charters for the Audit, Compensation and Nominating and Corporate Governance Committees of our Board of Directors and our Corporate Code of Ethics can be found on our Internet website at www.acmoore.com under the heading “Investor Relations,” “Corporate Profile.”
     We will provide, at no cost, paper or electronic copies of our reports and other filings made with the SEC. Requests should be directed to:
Marc Katz
Chief Financial Officer
A.C. Moore Art & Crafts, Inc.

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130 A.C. Moore Drive
Berlin, New Jersey 08009
     The information on the website listed above is not, and should not be considered, part of this annual report on Form 10-K, and is not incorporated by reference in this document. This website is only intended to be an inactive textual reference.
ITEM 1A. RISK FACTORS.
An increase in our sales, profitability and cash flow will depend on our ability to increase the number of stores we operate and increase the productivity and profitability of our existing stores.
     Key components of our operating strategy are to increase the number of stores we operate and increase the productivity and profitability of our existing stores. If we are unable to implement this strategy, our ability to increase our sales, profitability and cash flow could be significantly impaired. To the extent we are unable to open new stores as planned, our sales growth would come only from increases in comparable store sales. There can be no assurance that we will be able to increase our comparable store sales, improve our margins or reduce costs as a percentage of sales. Growth in profitability in that case would depend significantly on our ability to increase margins or reduce our costs as a percentage of sales. Further, as we implement new initiatives to reduce the cost of operating our stores, our sales and profitability may be negatively impacted. In particular, we are currently evaluating our store model as it relates to levels of staffing and compensation. There can be no assurance as to whether and to what extent a new store format will be successful.
     There are many factors, some of which are beyond our control, which could impact our ability to implement our strategy to increase productivity and profitability of our current and future store locations. These factors include:
    our ability to identify suitable markets in which to expand,
 
    the availability of suitable sites for additional stores,
 
    the ability to negotiate acceptable lease terms for sites we identify,
 
    the availability of acceptable financing to support our growth,
 
    our ability to hire, train and retain a sufficient number of qualified general managers and other store personnel, which ability may be impacted by changes to store personnel compensation and staffing, and
 
    the effectiveness of our advertising strategies.
If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent fraud.
     Effective internal controls are necessary for us to provide reliable financial reports and effectively prevent or detect fraud. Any inability to provide reliable financial reports or prevent or detect fraud could harm our business. We continue to evaluate our internal control procedures to satisfy the requirements of the Sarbanes-Oxley Act of 2002, which requires management and our independent registered public accounting firm to evaluate and assess the effectiveness of our internal controls. If we fail to maintain the adequacy of our internal controls, as such standards are modified, supplemented or amended from time to time, we could be subject to regulatory scrutiny, civil or criminal penalties or shareholder litigation. In addition, failure to maintain adequate internal controls could result in financial statements that do not accurately reflect our financial condition or results.

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Our success will depend on how well we manage our growth.
     Even if we are able to implement, to a significant degree, our operating strategies of expanding our store base and increasing the productivity and profitability of our existing stores, we may experience problems relating to our growth, which may prevent any significant increase in profitability or negatively impact our cash flow. For example:
    The costs of opening and operating new stores may offset the increased sales generated by the additional stores;
 
    The opening of additional stores in an existing market could reduce net sales from existing stores in that market;
 
    The opening of stores in new geographic markets may present competitive and merchandising challenges that are different than those we face in our existing geographic markets;
 
    The closing or relocation of under-performing stores may result in us retaining liability for outstanding lease obligations;
 
    Our growth may outpace our ability to expand, upgrade and improve our administrative, operational and management systems, controls and resources;
 
    Our suppliers may be unable to meet our increased demand for merchandise as a result of the additional stores and increased productivity of our existing stores; and
 
    We may be unable to expand our existing distribution capabilities, or employ third-party distribution services on a cost-effective basis, to provide sufficient merchandise for sale by our new stores.
A weak fourth quarter would have a material adverse effect on our operating results for the year.
     Our business is affected by the seasonality pattern common to most retailers. Due to the importance of our peak selling season, which includes Fall/Halloween, Thanksgiving and Christmas, the fourth quarter has historically contributed, and is expected to continue to contribute, a significant portion of our net income for the entire year. In anticipation of increased sales activity during the fourth quarter, we incur significant additional expense both prior to and during the fourth quarter. These expenses may include acquisition of additional inventory, advertising, in-store promotions, seasonal staffing needs and

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other similar items. As a result, any factors negatively affecting us during the fourth quarter of any year, including adverse weather and unfavorable economic conditions, would have a material adverse effect on our results of operations for the entire year.
Our quarterly results fluctuate due to a variety of factors and are not a meaningful indicator of future performance.
     Our quarterly results have fluctuated in the past and may fluctuate significantly in the future depending upon a variety of factors, including, among other things:
    the mix of merchandise sold,
 
    the timing and level of markdowns,
 
    promotional events and changes in advertising,
 
    adverse weather conditions,
 
    store openings and closings,
 
    remodels or relocations of our stores,
 
    length and timing of the holiday seasons,
 
    competitive factors, and
 
    general economic and political conditions.
We believe that period-to-period comparisons of past operating results cannot be relied upon as indicators of future performance. If our operating results in any future period fall below the expectations of securities analysts and investors, the market price of our securities would likely decline.
Our success depends on key personnel whom we may not be able to retain or hire.
     We are dependent on the services, abilities and experience of our senior management team. The year 2006 involved substantial change in our senior management team. On June 1, 2006, we appointed Rick A. Lepley as our new Chief Executive Officer. On September 13, 2006, we appointed Marc Katz as our new Chief Financial Officer. The loss of the services of senior executives and any general instability in the composition of our senior management team could have a negative impact on our ability to execute on our business and operating strategy. Our business may be impacted by the familiarity of newly appointed executives with our business, and their abilities to develop relationships with each other, our team members and vendors and to implement or change our business and operating strategy. In addition, our success in the future is dependent upon our ability to attract and retain other qualified personnel, including general managers. Any inability to do so may have a material adverse impact on our business and operating results.
We face an extremely competitive retail business market.
     The arts and crafts retailing business is highly competitive. We currently compete against a diverse group of retailers, including multi-store arts and crafts retailers, mass merchandisers, small local

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specialty retailers, mail order vendors, hardware stores and a variety of other retailers. Almost all of our stores face aggressive competition in their market area from one or more of our major competitors. In addition, alternative methods of selling crafts, such as over the Internet or direct marketing, could result in additional future competitors and increased price competition because our customers could more readily comparison shop. Some of our competitors, particularly the mass merchandisers and national arts and crafts chains, have substantially greater financial resources and operate more stores than we do. We also compete with these and other retailers for customers, suitable retail locations, suppliers and qualified employees and management personnel. Moreover, increased competition may result in potential or actual litigation between us and our competitors relating to such activities as competitive sales and hiring practices, exclusive relationships with key suppliers and manufacturers and other matters. As a result, increased competition may adversely affect our future financial performance, and we cannot assure you that we will be able to compete effectively in the future.
We may not be able to successfully anticipate changes in merchandise trends and consumer demands and our failure to do so may lead to loss of sales and the closing of under-performing stores.
     Our success depends, in large part, on our ability to anticipate and respond in a timely manner to changing merchandise trends and consumer demand. Accordingly, any delay or failure by us in identifying and correctly responding to changing merchandise trends and consumer demand could adversely affect consumer acceptance of the merchandise in our stores. In addition, we make decisions regarding merchandise well in advance of each of the seasons in which such merchandise will be sold. Significant deviations from projected demand for merchandise would have a material adverse effect on our results of operations and financial condition, either from lost sales due to insufficient inventory or lower margins due to the need to mark down excess inventory.
     A material decline in sales and other adverse conditions resulting from our failure to accurately anticipate changes in merchandise trends and consumer demands may require us to close under-performing stores. Closing stores would subject us to additional costs including, but not limited to, taking reserves on impaired assets, loss of customer goodwill and costs associated with outstanding lease obligations.
Unexpected consumer response to changes in our advertising strategy could materially and adversely affect our sales, profitability and cash flow.
     Advertising promotions have a significant impact on consumers’ shopping decisions. We are in the process of experimenting with the reach, frequency and timing of our print advertisements, as well as the overall visual presentation. During the fourth quarter of 2006, we moved approximately 75% of our print advertising from mid-week, varying between Wednesday, Thursday and Friday, to Sunday. We are still analyzing the results from these changes and are unable to predict what effect these changes will have on our business. In addition, we may from time to time change our other promotional activities. If we misjudge consumer response to these changes, our financial condition and operating results could be materially and adversely impacted.
Because of our small store base adverse events could have a greater impact on us than if we had a larger store base.
     As of December 31, 2006, we operated a chain of 122 stores. Because our current and planned stores are located in the eastern United States, the effect on us of adverse events in this region (such as weather or unfavorable regional economic conditions) may be greater than if our stores were more

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geographically dispersed. Because overhead costs are spread over a smaller store base, increases in our general and administrative expenses could affect our profitability more negatively than if we had a larger store base. Due to our relatively small store base, one or more unsuccessful new stores, or a decline in sales at an existing store, will have a more significant effect on our results of operations than would be the case if we had a larger store base.
A disruption in the operations of our distribution center could have a material adverse effect on our financial condition and results of operations.
     Our distribution center in suburban Philadelphia currently handles approximately 37% of the merchandise sold in our stores. As part of our efforts to improve operating efficiencies, we are implementing new processes within our supply chain, including routing, or cross-docking, increased amounts of merchandise and additional SKUs through our distribution center. Significant changes to our supply chain could have a material adverse impact on our operating results. Our distribution center, and thus our distribution operations, is vulnerable to damage or interruption from fire, flood, power loss, break-ins and similar events. We have no formal disaster recovery plan for our distribution center. The occurrence of unanticipated problems at our distribution center, all of which may not be covered by insurance, could cause interruptions or delays in our business which would have a material adverse effect on our financial condition and results of operations.
We depend on a number of key vendors to supply our merchandise, and the loss of any one of our key vendors may result in a loss of sales and significantly harm our operating results.
     Our performance depends on our ability to purchase our merchandise in sufficient quantities at competitive prices. Our future success is dependent upon our ability to maintain a good relationship with our suppliers. SBAR’S, one of our suppliers, accounted for approximately 22% of the aggregate dollar volume of our purchases in 2006. We do not have any long-term purchase agreements or other contractual assurances of continued supply, pricing or access to new products, and any vendor or distributor could discontinue selling to us at any time. We may not be able to acquire desired merchandise in sufficient quantities or on terms acceptable to us in the future, or be able to develop relationships with new vendors to replace discontinued vendors. Our inability to acquire suitable merchandise in the future or the loss of one or more key vendors and our failure to replace any one or more of them may have a material adverse effect on our business, results of operations and financial condition. Our smaller vendors generally have limited resources, production capacities and operating histories, and some of our vendors have limited the distribution of their merchandise in the past. These vendors may be susceptible to cash flow problems, downturns in economic conditions, production difficulties, quality control issues and difficulty delivering agreed-upon quantities on schedule. We also cannot assure you that we would be able, if necessary, to return product to these vendors and obtain refunds of our purchase price or obtain reimbursement or indemnification from any of our vendors if their products prove defective.
We face risks associated with sourcing and obtaining merchandise from foreign sources.
     We have in recent years placed increased emphasis on obtaining floral, seasonal and other items from overseas vendors, with approximately 13% of all of our merchandise being purchased directly by us from overseas vendors in 2006. In addition, many of our domestic suppliers purchase a portion of their merchandise from foreign sources. Our future success will depend in large measure upon our ability to

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maintain our existing foreign supplier relationships and to develop new ones. While we rely on our long-term relationships with our foreign vendors, we have no long-term contracts with them. Virtually all of the merchandise which we purchase from foreign sources is manufactured in the People’s Republic of China. Many of our imported products are subject to duties, tariffs and quotas that may limit the quantity of some types of goods which we may import into the United States. Our dependence on foreign imports also makes us vulnerable to risks associated with products manufactured abroad, including, among other things:
    changes in import duties, tariffs and quotas,
 
    loss of “most favored nation” trading status by the United States in relation to a particular foreign country, including the People’s Republic of China,
 
    work stoppages,
 
    delays in shipments,
 
    revaluation of the Chinese currency and fluctuations in exchange rates,
 
    freight cost increases,
 
    economic uncertainties, including inflation,
 
    foreign government political unrest, and
 
    trade restrictions, including the United States retaliating against protectionist foreign trade practices.
     If any of these or other factors were to render the conduct of business in particular countries undesirable or impractical, our financial condition and results of operations could be materially and adversely affected because we would have difficulty sourcing the merchandise we need to remain competitive. An interruption or delay in supply from our foreign sources, or the imposition of additional duties, taxes or other charges on these imports could have a material adverse effect on our business, financial condition and results of operations unless and until alternative supply arrangements are secured. Products from alternative sources may be of lesser quality and/or more expensive than those we currently purchase, resulting in a loss of sales and/or profit to us.
We face risks relating to inventory.
     We depend upon our in-store department managers to reorder the majority of our merchandise. The failure of these department managers to accurately respond to inventory requirements could adversely affect consumer acceptance of the merchandise in our stores and negatively impact sales which could have a material adverse effect on our results of operations and financial condition. If we misjudge the market, we may significantly overstock unpopular products and be forced to take significant inventory markdowns, which would have a negative impact on our operating results and cash flow. Conversely, shortages of key items could have a material adverse impact on our operating results. In addition, we

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conduct a physical inventory in our stores once a year, and quarterly results are based on an estimated gross margin and accrual for estimated inventory shrinkage.
Our information technology may prove inadequate.
     We depend on our information technology systems for many aspects of our business. Some of our key software has been developed by our own programmers and this software may not be easily integrated with other software and systems. Our business will be materially and adversely affected if our systems are disrupted or if we are unable to improve, upgrade, integrate or expand upon our systems, particularly in light of our intention to significantly increase the number of stores that we operate.
An increase in the cost of fuel oil and oil-based products could impact our earnings and margins.
     Prices for oil have fluctuated dramatically in the past and rose substantially in 2006. These fluctuations impact our distribution costs and the distribution costs of our vendors. If the price of fuel oil continues to increase, our distribution costs will increase, which could impact our earnings. In addition, many of the products we sell, such as paints, are oil-based. If the price of oil continues to increase, the price of the oil-based products we purchase and sell may increase, which could impact our margins.
Terrorist attacks and threats or actual war may impact all aspects of our operations, revenues, costs and stock price in unpredictable ways.
     Terrorist attacks in the United States, as well as future events occurring in response or in connection to them, including, without limitation, future terrorist attacks against U.S. targets, rumors or threats of war, actual conflicts involving the United States or its allies or military or trade disruptions impacting our domestic or foreign suppliers of merchandise, may impact our operations, including, among other things, causing delays or losses in the delivery of merchandise to us and decreased sales of the products we carry. More generally, any of these events could cause consumer confidence and spending to decrease or result in increased volatility in the United States and worldwide financial markets and economy. They also could result in a deepening of any economic recession in the United States or abroad. These events could also temporarily increase demand for our products as consumers respond by traveling less and engaging in home-based leisure activities which could contribute to a temporary increase in our sales which may not be sustainable. Any of these occurrences could have a significant impact on our operating results, revenues and costs and may result in the volatility of the market price for our common stock.

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EXECUTIVE OFFICERS OF THE REGISTRANT
     Our executive officers are as follows:
             
Name   Age   Position
Rick A. Lepley
    56     Chief Executive Officer and Director
Lawrence H. Fine
    53     President, Chief Operating Officer and Director
Marc Katz
    42     Executive Vice President and Chief Financial Officer
Amy Rhoades
    35     Vice President and General Counsel
     Mr. Lepley has served as Chief Executive Officer and a director of the Company since June 2006. Previously, Mr. Lepley was Executive Vice President of North American Retail for Office Depot, Inc., global supplier of office products and services, a position he held from March 2004 to April 2006. Mr. Lepley was President, Office Depot Japan from May 2001 to March 2004 and was responsible for all of that company’s operations in Japan. From 1994 to 2000, Mr. Lepley served as founder and President of Retail Investment Concepts, Inc., an independent retailer and Office Depot licensee for Eastern Europe. From 1982 to 1993, Mr. Lepley was employed by Mitsubishi Motor Sales of America, Inc., the exclusive U.S. distributor of Mitsubishi Motors-brand cars and vehicles, where he held various positions, including Senior Vice President of Sales and Marketing, and was responsible for more than 500 Mitsubishi Motors dealerships in the United States. He was one of 11 executives who founded Mitsubishi Motor Sales of America, Inc. in 1982.
     Mr. Fine has served as the President of the Company since June 2001, a director since August 2002 and Chief Operating Officer since February 2003. Previously, Mr. Fine was Executive Vice President – General Merchandise Manager for arts and crafts retailer Michaels Stores, Inc., a position he held since November 1996. From 1995 until joining Michaels in November 1996, he was Senior Vice President of Merchandising for Party City Corp., a specialty retailer of party merchandise. Prior to joining Party City, Mr. Fine held a variety of merchandising positions with the Jamesway Corporation, a retail mass-merchandiser, for nearly 16 years.
     Mr. Katz has served as Executive Vice President and Chief Financial Officer of the Company since September 2006. Previously, Mr. Katz was Senior Vice President and Chief Information Officer of Foot Locker, Inc., a specialty athletic retailer, a position he held from May 2003 to September 2006. Mr. Katz served as Vice President and Chief Information Officer of Foot Locker from July 2002 to May 2003. From 1997 to 2002, Mr. Katz served in the following capacities at the financial services center of Foot Locker: Vice President and Controller from July 2001 to July 2002; Controller from December 1999 to July 2001; Retail Controller from October 1997 to December 1999; and Director Inventory Control from June 1997 to October 1997. Prior to his employment with Foot Locker, Mr. Katz served for eight years at The May Department Stores Company, an operator of department store chains, in various financial positions.
     Ms. Rhoades has served as Vice President and General Counsel of the Company since July 2006. From April 2003 to July 2006, Ms. Rhoades was an attorney at Blank Rome LLP, a law firm based in Philadelphia, Pennsylvania. Ms. Rhoades joined Blank Rome as a summer associate in 2001.
ITEM 1B. UNRESOLVED STAFF COMMENTS.

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     None.
ITEM 2. PROPERTIES.
     As of December 31, 2006, we operated 122 stores in 18 states, the majority of which are located within an approximate 500 mile radius of our suburban Philadelphia distribution center. All of our stores are leased. The number of our stores located in each state and the city in which each store is located is shown in the table below.
     Store leases generally have an initial term of 10 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 payments has been included in other long-term liabilities in our balance sheet.
     We select store locations on the basis of various factors, including market dynamics, demographics, co-tenants, location within the center, parking and lease terms. We look for co-tenants that generate a high rate of shopping traffic, such as specialty women’s retailers, leading supermarkets, discount chains, home improvement centers, book stores and domestics stores. We believe our stores are attractive to landlords because they attract a high volume of customer traffic.
     In the third quarter of 2004 we moved into our new distribution center and office facility. This facility contains 710,000 square feet for distribution and warehousing plus 60,000 square feet of office space. We believe this facility is positioned to handle our future expansion and will enable us to service at least 175 stores. The new facility includes an automated picking and sortation system. The total cost of this facility was $46.3 million.

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Store Locations by City and State:
                             
Alabama (1)   Massachusetts (12)   New York (21)   Pennsylvania (19)
 
  Montgomery       Bellingham       Amherst       Allentown
 
          Brockton       Binghamton       Altoona
Connecticut (4)       Danvers       Carle Place       Bensalem
 
  Manchester       Dedham       DeWitt       Broomall
 
  New London       Framingham       Glendale       Erie
 
  Orange       Hanover       Greece       Exton
 
  Plainville       Holyoke       Hamburg       Hanover
 
          Hyannis       Hauppauge       Harrisburg
Delaware (2)       North Dartmouth       Henrietta       Lancaster
 
  Dover       Somerville       Holbrook       Langhorne
 
  Wilmington       Woburn       Ithaca       Mechanicsburg
 
          Worcester       Latham       Montgomeryville
Florida (6)               Middletown       Muncy
    Daytona Beach   New Hampshire (4)       Nanuet       Philadelphia
 
  Ft. Walton Beach       Manchester       Plainedge       Reading
 
  Jacksonville       Nashua       Poughkeepsie       Royersford
 
  Orlando       Portsmouth       Saratoga Springs       Scranton
 
  Pompano Beach       Salem       Staten Island       Stroudsburg
 
  Viera               Syracuse       Wilkes Barre
        New Jersey (15)       Utica        
Georgia (2)       Brick Town       Yorktown Heights   Rhode Island (1)
 
  Columbus       Clifton               Warwick
    Savannah       Deptford   North Carolina (11)        
            East Brunswick       Asheville   South Carolina (4)
Maine (2)       English Creek       Cary       Columbia
 
  Bangor       Hamilton       Concord       Greenville
 
  Portland       Linden       Durham       Myrtle Beach
 
          Manalapan       Fayetteville       N. Charleston
Maryland (7)       Moorestown       Greensboro        
    Bowie       Paramus       Hickory   Tennessee (2)
 
  Frederick       Parsippany       Matthews       Chattanooga
 
  Glen Burnie       Rockaway       Raleigh       Knoxville
 
  Hagerstown       Secaucus       Wilmington        
    Rockville       Shrewsbury       Winston-Salem   Virginia (7)
 
  Waldorf       Watchung               Fairfax
 
  White Marsh                       Falls Church
 
                          Fredericksburg
 
                          Manassas
 
                          Roanoke
 
                          Sterling
 
                          Virginia Beach
 
                           
                        West Virginia (2)
 
                          Clarksburg
 
                          Huntington

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ITEM 3. LEGAL PROCEEDINGS.
     On April 4, 2003, Kathleen Stahl, a former store merchandiser for the Company, filed a civil action against us in the Superior Court of New Jersey, Burlington County–Law Division for alleged retaliatory harassment and constructive discharge under the New Jersey Conscientious Employee Protection Act. The plaintiff sought lost wages, compensatory and punitive damages, and costs. The complaint was dismissed without prejudice on December 5, 2003 and reinstated on April 15, 2005. On October 23, 2006, a jury trial on the case began. On October 30, 2006, the jury returned a verdict in favor of the plaintiff for $19,600 in lost wages, $1.8 million for emotional distress and $1.5 million in punitive damages. We are disappointed with the jury’s verdict and believe it is not supported by the evidence. We are vigorously pursuing an appeal.
     We are involved in other legal proceedings from time to time in the ordinary course of business. Management believes that none of these other legal proceedings will have a materially adverse effect on our financial condition or results of operations. However, there can be no assurance that future costs of such litigation would not be material to our financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
     No matters were submitted to a vote of security holders during the fourth quarter of 2006, through the solicitation of proxies or otherwise.

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PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
     Our common stock is quoted on the Nasdaq Stock Market and trades under the symbol “ACMR.” The following table sets forth the high and low sales prices per share of our common stock as reported on the Nasdaq Stock Market for the periods indicated.
                 
    High   Low
Year Ended December 31, 2006
               
First Quarter
  $ 18.64     $ 12.55  
Second Quarter
    19.47       14.96  
Third Quarter
    19.42       14.98  
Fourth Quarter
    23.54       18.42  
 
               
Year Ended December 31, 2005
               
First Quarter
  $ 30.09     $ 24.91  
Second Quarter
    31.89       24.81  
Third Quarter
    33.25       18.52  
Fourth Quarter
    19.84       12.40  
     The number of record holders of our common stock as of March 9, 2007 was 95.
     Since becoming a public company we have never declared or paid any cash dividends on our common stock. We currently intend to retain our future earnings, if any, to finance the expansion of our business and do not expect to pay any cash dividends in the foreseeable future.
     See Part III, Item 12 for a description of our equity compensation plans.

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

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Overview
     We are a specialty retailer offering a vast selection of arts, crafts and floral merchandise to a broad demographic of consumers. We have grown from 17 stores in January 1997 to 122 stores in December 2006. Our stores are located in the eastern United States from Maine to Florida.
     We established our first store in Moorestown, New Jersey in 1984 and grew to five stores by the end of 1993. We added a total of 12 additional stores in 1994 and 1995. In 1995, we began implementing an aggressive expansion plan and developing our infrastructure to position us for that growth.
     We continued to develop our operating systems including a point of sale system, a radio frequency re-order system, a real time merchandise information and control system, a warehouse management system and an automated ordering system using EDI (electronic data interchange) to link us electronically with most of our vendors. We also implemented updated general ledger and payroll systems.
     In 1997, we received financing for our growth through an initial public offering of our common stock with net proceeds, after the payment of outstanding debt, of approximately $16.0 million. We received an additional $52.1 million from the secondary offering of shares in March 2002.
     Our expansion plans continued as we opened 43 new stores in the period 2000 to 2003, 15 new stores in 2004, 13 new stores in 2005 and 14 new stores in 2006. We closed one store in 2006. We believe we can operate at least 175 stores within the range of our new distribution center without significantly diluting sales in our existing stores. We constructed our new distribution center, which opened in the third quarter of 2004 and is 710,000 square feet plus 60,000 square feet of office space.
     Starting in 2004, vendor monies which support our advertising programs are recorded as a reduction in the cost of inventory, and are recognized as a reduction to cost of goods sold when the inventory is sold. Previously, they were accounted for as an offset to advertising costs. This accounting change results in a timing difference as to when these monies are recognized in our income statement. For 2006, this resulted in a reduction in net income of $0.3 million, or $0.02 per share. For the year, gross margin increased by $20.3 million, selling, general, and administrative costs increased by $21.0 million and inventory decreased by $0.7 million. In 2005, net income was reduced by $1.3 million, or $0.06 per share, gross margin increased by $16.7 million, selling, general and administrative costs increased by $18.7 million and inventory decreased by $2.0 million. In 2004, net income was reduced by $3.4 million, or $0.17 per share, gross margin increased by $11.9 million, selling, general and administrative costs increased by $17.4 million and inventory decreased by $5.5 million.
     Our sales for the year ended December 31, 2006 were $589.5 million, an increase of 9% over 2005 sales of $539.4 million. Same store sales were flat. Net income for the year 2006 decreased to $2.4 million or $0.12 per diluted share. In 2005, our net income was $10.0 million or $0.50 per diluted share.
     Effective January 1, 2006 we adopted FAS 123(R), Share Based Payment, using the modified prospective application method. The impact of the adoption of FAS 123(R) on 2006 net income, including options granted in 2006, was $2.3 million or $0.11 per diluted share.

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Recent Developments and Business Update
     The year 2006 was a year of transition for our Company, as the composition of our senior management team changed substantially. Our financial and sales performance for 2006 was disappointing. We expect that 2007 will also be a year of transition as our new management team is focused on reviewing and adjusting various aspects of our business and operations to position ourselves for improved performance. New management’s primary business and operating initiatives are discussed below.
Selling, general and administrative expense reduction
     We are aggressively reviewing all facets of our business for opportunities to reduce expenses. The following are our major expense reduction initiatives:
    Store payroll costs. We introduced a new general manager compensation plan based on pay-for-performance beginning in January 2007. Bonuses earned in one year are no longer rolled into base salary for the coming year. We also tested different store staffing models, including an appropriate mix of full- and part-time team members, in the second half of 2006 that we believe will assist us in improving our results of operations through payroll savings.
 
    Advertising spending. We are in the process of experimenting with the reach, frequency and timing of our advertisements. During the fourth quarter of 2006, we moved approximately 75% of our print advertising from mid-week, varying between Wednesday, Thursday and Friday, to Sunday. While we are still analyzing the results from this change, we believe that a uniform approach within the chain to advertising strategy will result in overall efficiencies.
 
    Real estate site location strategy. We believe that our selling, general and administrative expenses may be significantly reduced if we increase store openings in existing markets in order to leverage advertising costs. In the future, we intend to increase store density in existing markets. In addition, previously we entered new markets opening only a single store. When we enter new markets in the future, as appropriate, we intend to open more than one store at the same time that we enter that market.
Inventory reduction
     During the fourth quarter of 2006, we reviewed the level and composition of our store inventories and took steps to reduce excess inventory. We will attempt to improve control in the future over inventory through aggressive clearance procedures and more centrally directed purchasing.
Improved information technology
     We are committed to enhancing our information technology to increase operating efficiencies, improve merchandise selection and better serve our customers. During the fourth quarter of 2006, we completed the upgrade of our POS system and began to construct a sales audit system which will help us better manage the information available from our POS system. We are currently investigating the development of both a perpetual inventory and an automated replenishment system, which we anticipate will be implemented in 2007 and 2008, respectively.

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Globally sourced and private label products
     We are currently investigating increased global sourcing of products. We anticipate that products imported directly through an arrangement with a global sourcing supplier will be sold in our stores beginning in the second half of 2007. We expect that the number of products globally sourced will substantially increase in the future. We also intend to introduce in our stores private-label products bearing our Company name and logo beginning in the second half of 2007. We believe that increased global sourcing and sale of private label products will result in substantial margin improvement.
Centrally directed operations
     We are committed to increasing the level of standardization in operations and centrally directed management practices. This initiative includes, without limitation, standardizing the presentation in our stores, managing store classroom programs from our corporate office and advertising strategy. We believe that increased centrally directed management will improve our operating efficiencies.
Results of Operations
     The following table sets forth, for the periods indicated, selected statement of operations data expressed as a percentage of net sales:
                         
    Year Ended December 31,
    2006   2005   2004
Net sales
    100.0 %     100.0 %     100.0 %
Cost of sales
    60.9       60.5       60.3  
 
                       
Gross margin
    39.1       39.5       39.7  
Selling, general and administrative expenses
    37.2       35.8       33.4  
Costs related to change in management
    0.6              
Store pre-opening expenses
    0.5       0.6       0.8  
 
                       
Income from operations
    0.8       3.1       5.5  
Interest expense (income), net
    0.0       0.1       (0.0 )
 
                       
Income before income taxes
    0.8       3.0       5.5  
Provision for income taxes
    0.4       1.1       2.1  
 
                       
Net income
    0.4 %     1.9 %     3.4 %
 
                       
2006 Compared to 2005
     Net Sales. Net sales increased $50.1 million, or 9%, to $589.5 million in 2006 from $539.4 million in 2005. This increase resulted from (i) net sales of $24.5 million from 14 new stores opened in 2006, (ii) net sales of $27.1 million from stores opened in 2005 not included in the comparable store base, and (iii) a comparable store sales decrease of $1.5 million, or 0.3%. For the year, customer transactions in comparable stores decreased 0.6% compared with 2005 and the average sale increased 0.3%. Stores are added to the comparable store base at the beginning of the fourteenth full month of operation.
     Merchandise categories that exhibited strength during 2006 included seasonal, wedding, basic crafts and candy making. Our entry into the custom framing business in the beginning of the third quarter gained momentum throughout the fall season and we ended up with 53 custom frame shops by end of year. Custom framing volume picked up throughout the fourth quarter with the average ticket

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dramatically increasing. Yarn continued to have a negative effect on overall sales. In addition, various tests conducted with regard to advertising reach, frequency and timing (mid-week versus Sunday) negatively impacted comparable store sales.
     Gross Margin. Gross margin is net sales minus the cost of merchandise which includes purchasing and receiving costs, inbound freight, duties related to import purchases, internal transfer costs and warehousing costs. Gross margin as a percent of net sales decreased 0.4% in 2006, to 39.1 % from 39.5% in 2005. The mix of merchandise sold was the primary reason for the decrease in gross margin.
     During the fourth quarter we reviewed the level and composition of our inventories in some detail and determined that some stores had inventory in excess of what was required to support current sales levels. We addressed this situation by reducing store purchases and then moving excess inventory in the stock rooms to the sales floor. This strategy resulted in a 14% reduction in average store inventory.
     Selling, General and Administrative Expenses. Selling, general and administrative expenses include (i) direct store level expenses, including rent and related operating costs, payroll, advertising, depreciation and other direct costs, and (ii) corporate level costs not directly associated with or allocable to cost of sales including executive salaries, accounting and finance, corporate information systems, office facilities, stock based compensation and other expenses.
     Selling, general and administrative expenses, as a percent of net sales, increased 1.4% in 2006, to 37.2% from 35.8 % in 2005. In 2006, we began expensing stock-based compensation as required by SFAS No. 123(R). This expense accounted for 0.5% of the increase in selling, general and administrative expenses. Additional increases were the closure of our Birmingham location and a lease termination representing a 0.2% increase, consulting studies performed during the year representing a 0.1% increase, and the remainder was due to the de-leveraging of expenses versus sales that occurred in the first and fourth quarters of 2006.
     In 2006, the Company recognized $3.1 million of share-based compensation expense. Of this amount, $2.8 million was included as a component of selling, general and administrative expense and $326,000 was included in costs related to changes in management.
     Costs Related to Changes in Management. We incurred a cost of $3.4 million in 2006 related to changes in management. This cost includes severance for departing officers and employees as well as recruiting costs for new officers. As of December 31, 2006, there was $518,000 of unpaid severance costs included in accrued expenses. On June 1, 2006, we had a total of 26 officers at the vice president level and above. As of December 31, 2006, we had 11 officers at this level and above.
     Changes in management since June 1, 2006 include but are not limited to the following: (i) appointment of a new Chief Executive Officer on June 1, 2006 to replace the previous Chief Executive Officer who retired on June 1, 2006; (ii) appointment of a new Chief Financial Officer on September 13, 2006 to replace the former Chief Financial Officer who retired on July 31, 2006, (iii) replacement of 11 field vice president positions with seven district manager positions; (iv) retirement of the Executive Vice President, Merchandising on June 30, 2006; (v) departure of the Executive Vice President, Merchandising and Marketing on July 31, 2006; (vi) departure of our Executive Vice President, Store Operations on November 22, 2006; (vii) departure of two senior vice presidents and five vice presidents, of which two were replaced; and (viii) hiring of three new vice presidents to fill newly created positions. It is anticipated that the Company will continue to incur additional expenses of this nature as it implements

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various other changes through at least June 30, 2007. Subsequent to year-end, our Vice President of Distribution and our Senior Vice President of Finance left the Company.
     Net Interest Expense (Income). In 2006, we had net interest expense of $323,000 compared with net interest expense of $450,000 in 2005. The decrease is principally due to additional interest income received during the year based on our higher cash position.
     Store Pre-Opening Expenses. We expense store pre-opening costs as they are incurred, which would include straight-line expense of rent holidays prior to store opening. Pre-opening expenses for the 14 new stores opened in 2006 amounted to $3.2 million. In 2005, we opened 13 new stores and relocated one store and incurred pre-opening expenses of $3.5 million.
     Income Taxes. Our effective income tax rate was 46.4% for 2006 and 37.5% for 2005. The increase is primarily attributable to the adoption of SFAS No.123(R) and the resulting permanent difference for non-deductible compensation expense from incentive stock options, or ISOs, when applied against a lower level of pre-tax profits. Tax benefits from the exercise of ISOs will be recognized in future periods if disqualifying dispositions occur.
2005 Compared to 2004
     Net Sales. Net sales increased $41.8 million, or 8.4%, to $539.4 million in 2005 from $497.6 million in 2004. This increase resulted from (i) net sales of $19.4 million from 13 new stores opened in 2005, (ii) net sales of $35.0 million from stores opened in 2004 not included in the comparable store base, and (iii) a comparable store sales decrease of $12.6 million, or 2.6%. For the year, customer transactions in comparable stores decreased by 3.2% compared with 2004 and the average sale increased by 0.6%. Stores are added to the comparable store base at the beginning of the fourteenth full month of operation.
     Sales in 2005 were impacted by adverse weather conditions in the first three quarters of the year, and by the significant decline in the yarn category in the second half of the year. We had achieved major sales increases in yarn during 2004 and the spring of 2005, at which time there was a large supply of yarn in the marketplace coupled with a decline in customer demand. This resulted in our yarn sales declining by approximately 30% in the second half of the year. Merchandise categories that exhibited strength during the year included jewelry making, wearables and basic crafts. Additionally, our floral and seasonal businesses strengthened considerably in the fourth quarter.
     Gross Margin. Gross margin is net sales minus the cost of merchandise which includes purchasing and receiving costs, inbound freight, duties related to import purchases, internal transfer costs and warehousing costs. Gross margin as a percent of net sales decreased 0.2% in 2005, to 39.5 % from 39.7% in 2004.
     The mix of merchandise sold decreased margins by 0.9%, principally as the result of heavy discounting that occurred throughout the arts and crafts sector during the fourth quarter. The application of EITF 02-16 relating to our accounting for vendor monies which support our advertising programs on our gross margin resulted in an increase of 0.7% in margin rate for the year ended December 31, 2005 compared with the year ended December 31, 2004. Improved productivity in our warehouse increased margins by 0.3% in 2005 as a result of a reduction in distribution costs. Insurance claim proceeds added 0.3% to the margins in 2004.

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     Selling, General and Administrative Expenses. Selling, general and administrative expenses include (i) direct store level expenses, including rent and related operating costs, payroll, advertising, depreciation and other direct costs, and (ii) corporate level costs not directly associated with or allocable to cost of sales including executive salaries, accounting and finance, corporate information systems, office facilities and other expenses.
     Selling, general and administrative expenses, as a percent of net sales, increased 2.4% in 2005, to 35.8% from 33.4% in 2004. As a percent to net sales on a per store basis, selling, general and administrative expenses increased by 2.4% in 2005 as compared with 2004. Selling, general and administrative costs increased by 1.3% in the comparable store base as a result of the decline in comparable store sales. There was a 1.1% increase attributable to new stores opened in 2004 and 2005 which have higher selling, general and administrative expenses as a percentage of sales than existing stores.
     Net Interest Expense (Income). In 2005 we had net interest expense of $450,000 compared with net interest income of $163,000 in 2004. The increase is principally due to interest expense from mortgages related to our new distribution center and corporate offices which were outstanding for a full year in 2005 compared with five months in 2004.
     Store Pre-Opening Expenses. We expense store pre-opening costs as they are incurred, which would include straight-line expense of rent holidays prior to store opening. Pre-opening expenses for the 13 new stores opened in 2005 and the one store which was relocated during the year, amounted to $3.5 million. In 2004, we opened fifteen new stores and relocated two stores and incurred pre-opening expenses of $4.0 million.
     Income Taxes. Our effective income tax rate was 37.5% for 2005 and 38.5% for 2004. The reduction in rates is consistent with the lower level of profits and the graduated income tax rates.

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Quarterly Results and Seasonality
     The following table sets forth our unaudited quarterly operating results for our eight most recent quarterly periods, and the number of stores open at the end of each period (dollars in thousands, except share and store data).
                                 
    First   Second   Third   Fourth
    Quarter   Quarter   Quarter   Quarter
2006
                               
Net sales
  $ 132,918     $ 129,815     $ 128,936     $ 197,839  
Gross margin
    53,153       52,792       52,981       71,853  
Income (loss) from operations
    469       (2,875 )     (4,193 )     11,464  
Net income (loss)
    250       (1,769 )     (2,645 )     6,595  
Net income (loss) per share, diluted
  $ 0.01     $ (0.09 )   $ (0.13 )   $ 0.33  
Diluted average shares outstanding
    20,070       19,857       19,916       20,192  
 
                               
Number of stores open at end of period
    113       114       117       122  
Comparable store sales increase (decrease)
    (2.0 %)     3.0 %     2.0 %     (3.0 %)
 
                               
2005
                               
Net sales
  $ 122,879     $ 113,489     $ 115,094     $ 187,974  
Gross margin
    48,128       45,689       46,692       72,346  
Income (loss) from operations
    2,123       (21 )     (2,928 )     17,344  
Net income (loss)
    1,252       (50 )     (1,900 )     10,740  
Net income (loss) per share, diluted
  $ 0.06     $ (0.00 )   $ (.10 )   $ 0.53  
Diluted average shares outstanding
    20,209       19,743       19,808       20,105  
 
                               
Number of stores open at end of period
    96       98       105       109  
Comparable store sales increase (decrease)
    (2.0 %)     1.0 %     (4.0 %)     (4.0 %)
     Due to the importance of our peak selling season, which includes Fall/Halloween, Thanksgiving and Christmas, the fourth quarter has historically contributed, and is expected to continue to contribute, a significant portion of our profitability for the entire year. As a result, any factors negatively affecting us during the fourth quarter of any year, including adverse weather and unfavorable economic conditions, would have a material adverse effect on our results of operations for the entire year.
     Our quarterly results of operations also may fluctuate based upon such factors as the length of holiday seasons, the date on which holidays fall, the number and timing of new store openings, the amount of store pre-opening expenses, the amount of net sales contributed by new and existing stores, the mix of products sold, the amount of sales returns, the timing and level of markdowns and other competitive factors.
Liquidity and Capital Resources
     Our cash is used primarily for working capital to support our inventory requirements and fixtures and equipment, pre-opening expenses and beginning inventory for new stores. In recent years, we have financed our operations and new store openings primarily with cash from operations, the net proceeds we received from our initial public offering in 1997 and from a secondary offering in 2002. In 2004 we borrowed $30.0 million under two mortgage agreements we have with Wachovia Bank N.A. (“Wachovia”) to finance our new distribution center and corporate offices.

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     At December 31, 2006 and 2005, our working capital was $158.8 million and $158.4 million, respectively. During 2006, 2005 and 2004, cash of $31.5 million, $14.6 million and $18.5 million was generated by operations, respectively. In 2006, the Company executed an inventory reduction plan which amounted to $5.9 million, and increases in accounts payable accounted for $8.6 million. In 2005 and 2004, $9.8 million and $21.3 million of cash, respectively, was used to increase inventory levels to support both new and existing stores.
     Net cash used in investing activities during 2006, 2005 and 2004 was $14.3 million, $3.8 million and $44.4 million, respectively. In 2006, this use of cash was for $19.5 million of capital expenditures, which includes $10.1 million for new store openings, and the remainder for remodeling existing stores, upgrading systems in existing stores, warehouse equipment and corporate systems development; paid for in part through the sale of $5.2 million in marketable securities. In 2005, this use of cash was for capital expenditures of $16.1 million, paid for in part through the sale of $12.3 million in marketable securities. We spent $11.0 million for new stores and the remainder for remodeling existing stores and upgrading systems. In 2004 we spent $27.0 million for the construction of our new distribution center, $11.1 million for new stores and $6.3 million for remodeling existing stores and upgrading systems. In 2007, we expect to spend approximately $19.0 million on capital expenditures, which includes $10.0 million for new store openings, and the remainder for remodeling existing stores, upgrading systems in existing stores, warehouse equipment and corporate systems development.
     We maintain two mortgage agreements with Wachovia related to our distribution center and corporate offices, of which $24.2 and $26.8 million was outstanding at December 31, 2006 and 2005, respectively. The mortgages are secured by land, building, and equipment. Of the original $30.0 million in mortgages, $22.5 million ($19.1 million at December 31, 2006) is repayable over 15 years and $7.5 million ($5.1 million at December 31, 2006) is repayable over seven years. Fixed monthly payments totaling $214,000 started in October 2004. As of November 2006, we effectively converted these mortgages from a variable interest rate to fixed interest rates of 5.77% on the 15-year mortgage and 5.72% on the seven-year mortgage through the use of an interest rate swap.
     In March 2007, we amended these two mortgages to modify certain covenants. See “Item 9B. Other Information” for more information on this amendment. The mortgages, as amended, contain covenants that, among other things, restrict our ability to incur additional indebtedness or guarantee obligations in excess of $18.0 million, engage in mergers or consolidations, dispose of assets, make acquisitions requiring a cash outlay in excess of $20.0 million, make loans or advances in excess of $1.0 million, permit liens relating to capitalized lease obligations or purchase money financing in excess of $2.0 million, or change the nature of our business. We are restricted in capital expenditures unless certain financial covenants are maintained including those relating to tangible net worth and funded debt. The mortgages also define various events of default, including cross default provisions, defaults for any material judgments or a change in control. At December 31, 2006, we were in compliance with these covenants.
     At December 31, 2006, we had a $35.0 million line of credit agreement with Wachovia, which would have expired on May 31, 2007. In March 2007, we extended our line of credit agreement with Wachovia from May 31, 2007 to May 31, 2008. Borrowing under this line bears interest at LIBOR plus 65 basis points and is subject to the same covenants as the mortgages described above. As of December 31, 2006, there were no borrowings outstanding under this agreement.

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     We believe the cash generated from operations during the year and available borrowings under our line of credit agreement with Wachovia will be sufficient to finance our working capital and capital expenditure requirements for at least the next 12 months.
     We lease our retail stores and some vehicles and equipment under non-cancelable operating leases. At December 31, 2006 our total obligations under these operating leases were $271.9 million. The following table reflects as of December 31, 2006 the payments due (including those for unopened stores) for the periods indicated.
                                         
    Payments Due By Period ($000)
            Less than                   After 5
Contractual Obligations   Total   1 Year   1-3 Years   4-5 Years   Years
Long-term debt (1)
  $ 31,998     $ 3,898     $ 10,808     $ 5,171     $ 12,121  
Store operating leases (2)
    270,322       37,414       105,547       56,909       70,452  
Vehicle and equipment leases
    1,534       435       950       149        
Purchase obligations (3)
    15       15                    
Deferred tax liability (4)
                             
Total contractual cash obligations
  $ 303,869     $ 41,762     $ 117,305     $ 62,229     $ 82,573  
 
(1)   Includes interest calculated using the effective rates of 5.77% and 5.72% as of December 31, 2006. In November 2006, the Company entered into two interest rate swap agreements with Wachovia Bank. The swaps effectively convert the Company’s variable interest rate mortgage obligations to a fixed rate. See Note 1 of the Notes to Consolidated Financial Statements for additional information on these swaps.
 
(2)   Most store leases have an average initial term of ten years, with three five year renewal options, and provide for predetermined escalation in future minimum annual rent. Rent payments are amortized over the initial lease term commencing on the date we take possession. The pro rata portion of scheduled rent escalations has been included in other long-term liabilities in the balance sheet.
 
(3)   Purchase obligations include agreements for goods and services that are enforceable and legally binding on the Company and that specify all significant terms. As of December 31, 2006, such obligations include telephone services for information technology.
 
(4)   The amount of deferred income taxes has been excluded from the above table as the timing of any cash payment is uncertain. See Note 6 of the Notes to Consolidated Financial Statements for additional information regarding our deferred tax position.
Critical Accounting Estimates
     Our accounting policies are more fully described in Note 1 of the Notes to Consolidated Financial Statements included herein. As disclosed in Note 1 of the Notes to Consolidated Financial Statements, the preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions about future events that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. Since future events and their effects cannot be determined with absolute certainty, actual results may differ from those estimates. Management makes adjustments to its assumptions and judgments when facts and circumstances dictate. The amounts currently estimated by us are subject to change if future events cause us to change our assumptions. We evaluate our estimates and judgments on an ongoing basis and predicate those estimates and judgments on historical experience and on various other factors that are believed to be reasonable

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under the circumstances. Management believes the following critical accounting estimates encompass the more significant judgments and estimates used in preparation of the Consolidated Financial Statements.
     Merchandise Inventories. We value our inventories at the lower of cost or market. The retail inventory method is used to determine cost at our store locations. For our warehouse inventories cost is determined on a first-in, first-out basis. We perform complete physical inventories in our stores and warehouse at the end of each year. The physical count of merchandise is made by a combination of store personnel and a third-party inventory counting service firm. We include as inventoriable costs certain indirect costs, such as purchasing and receiving costs, inbound freight, duties related to import purchases, internal transfer costs and warehousing costs.
     Inventory valuation methods also require certain management estimates and judgments. These include estimates of net realizable value on product designated for clearance or on slow moving merchandise. Quarterly, our inventory valuation includes estimates for shrinkage, capitalized buying, warehousing and distribution costs related to inventory, and markdowns of merchandise inventories. The accuracy of our estimates can be affected by many factors, some of which are outside of our control, including changes in economic conditions and consumer buying trends. Historically, we have not experienced significant differences in our estimates of recovery compared with actual results. We believe our process results in an appropriate value of our inventory on hand at year-end.
     Impairment of Long-Lived Assets. In accordance with generally accepted accounting principles, we review long-lived assets for impairment by comparing the carrying value of assets with their estimated future undiscounted cash flows. To the extent these future estimates change, the conclusion regarding impairment may differ from our current estimates, and the loss, if any, would be recognized at that time. The impairment loss is calculated as the difference between asset carrying values and the present value of estimated net cash flows or comparable market values, giving consideration to recent operating performance and pricing trends.
     Income Taxes. We do business in various jurisdictions that impose income taxes. Management determines the aggregate amount of income tax expense to accrue and the amount currently payable based upon the tax statutes of each jurisdiction. This process involves adjusting income determined using generally accepted accounting principles for items that are treated differently by the applicable taxing authorities. Deferred taxes are reflected on our balance sheet for temporary differences that will reverse in subsequent years. If different judgments had been made, our tax expense, assets and liabilities could have been different.
     Other Estimates. Management uses estimates in the determination of the required accruals for general liability, workers’ compensation and health insurance. These estimates are based upon examination of historical trends, industry claims experience and, in certain cases, calculations performed by third-party experts. Projected claims information may change in the future and may require management to revise these accruals.
     We are periodically involved in various legal actions arising in the normal course of business. Management is required to assess the probability of any adverse judgments as well as the potential range of any losses. Management determines the required accruals after a careful review of the facts of each legal action. Our accruals may change in the future due to new developments in these matters.

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Change in Accounting Principles
     Effective January 1, 2006 we adopted FAS123(R) using the modified prospective application method. As of December 31, 2005, the compensation cost related to non-vested stock options not yet recognized totaled $3.4 million. This amount will be recognized over the next 20 months. The impact of the adoption of FAS 123(R) on 2006 net income was $2.3 million or $0.11 per diluted share.
New Accounting Pronouncements
     In July 2006, the Financial Accounting Standards Board (“FASB”) issued Financial Accounting Standards Board Interpretation (“FIN”) No. 48, “Accounting for Uncertainty in Income Taxes.” FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in an enterprise’s tax return. This interpretation also provides guidance on the derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition of tax positions. The recognition threshold and measurement attribute is part of a two step tax position evaluation process prescribed in FIN 48. FIN 48 is effective after the beginning of an entity’s first fiscal year that begins after December 15, 2006. We will adopt FIN 48 as of January 1, 2007. We are currently assessing the impact to our consolidated financial statements.
     In September 2006, FASB issued SFAS No. 157, “Fair Value Measurements,” which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. SFAS No. 157 is effective for financial statements issued in 2008. The company is currently assessing the impact of SFAS No. 157 to its consolidated financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
     We invest cash balances in excess of operating requirements primarily in money market mutual funds and to a lesser extent in interest-bearing securities with maturities of less than two years. The fair value of our cash and equivalents at December 31, 2006 approximated carrying value. A hypothetical decrease in interest rates of 10% compared to the rates in effect at year end would reduce our interest income $311,000 annually.
     We had no borrowings outstanding under our line of credit at December 31, 2006. The interest rates on our mortgages fluctuate with market rates and therefore the value of these financial instruments will not be impacted by a change in interest rates. In November 2006, we entered into an interest rate swap that had the effect of converting our variable mortgages to a fixed rate. As a result, a 10% increase or decrease in interest rates would have no impact on our interest expense as the increase/decrease in interest paid on our mortgages would be offset by a corresponding increase/decrease in the interest received from our swap.
     A 10% decrease in interest rates would cause the fair market value of the swap to decrease by $652,000.

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

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Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of A.C. Moore Arts & Crafts, Inc.:
We have completed integrated audits of A.C. Moore Arts & Crafts, Inc.’s consolidated financial statements and of its internal control over financial reporting as of December 31, 2006, in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.
Consolidated financial statements and financial statement schedule
In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of A.C. Moore Arts & Crafts, Inc. and its subsidiaries at December 31, 2006 and 2005, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2006 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 1, the Company adopted a new financial accounting standard for share-based compensation during 2006.
Internal control over financial reporting
Also, in our opinion, management’s assessment, included in Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A, that the Company maintained effective internal control over financial reporting as of December 31, 2006 based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control — Integrated Framework issued by the COSO. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating

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management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
March 12, 2007

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A.C. MOORE ARTS & CRAFTS, INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
                 
    December 31,  
    2006     2005  
ASSETS
               
Current assets:
               
Cash and cash equivalents
  $ 76,120     $ 57,748  
Marketable securities
          5,224  
Inventories
    146,751       152,646  
Prepaid expenses and other current assets
    7,653       6,900  
Deferred tax asset
    2,636       734  
 
           
 
    233,160       223,252  
 
           
 
               
Non current assets:
               
Property and equipment, net
    95,268       88,098  
Other assets
    1,409       1,407  
 
           
 
  $ 329,837     $ 312,757  
 
           
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
Current liabilities:
               
Current portion of long-term debt
  $ 2,571     $ 2,571  
Trade accounts payable
    48,703       46,445  
Accrued payroll and payroll taxes
    3,011       3,928  
Accrued expenses
    17,336       10,044  
Accrued lease liability
    825       153  
Income taxes payable
    1,935       1,679  
 
           
 
    74,381       64,820  
 
           
 
               
Non current liabilities:
               
Long-term debt
    21,643       24,215  
Deferred tax liability
    6,605       8,039  
Accrued lease liability
    19,430       17,174  
 
           
 
    47,678       49,428  
 
           
 
    122,059       114,248  
 
           
 
               
Commitments and contingencies
               
 
               
Shareholders’ equity:
               
Preferred stock, no par value, 10,000,000 shares authorized; none issued
           
 
               
Common stock, no par value, 40,000,000 shares authorized; issued and outstanding 20,167,098 shares at December 31, 2006 and 19,816,774 shares at December 31, 2005
    118,218       111,383  
 
               
Retained earnings
    89,560       87,126  
 
           
 
    207,778       198,509  
 
           
 
  $ 329,837     $ 312,757  
 
           
The accompanying notes are an integral part of these consolidated financial statements.

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

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

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

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A.C. MOORE ARTS & CRAFTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Organization and basis of presentation. A.C. Moore Arts & Crafts, Inc. became a holding company in July 1997 by incorporating in Pennsylvania and exchanging its common stock for all of the capital stock of A.C. Moore Inc. held by its shareholders. The consolidated financial statements include the accounts of A.C. Moore Arts & Crafts, Inc. and its wholly owned subsidiaries (collectively the “Company”). All intercompany accounts and transactions have been eliminated. As of December 31, 2006, the Company operated a 122-store chain of retail arts and crafts stores in the eastern region of the United States.
Use of estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, and the amount of revenues and expenses during the reporting period. Differences from those estimates, if any, are recorded in the period they become known.
Cash and cash equivalents. Cash and cash equivalents are stated at cost, which approximates market value. Cash equivalents include only securities having an original maturity of three months or less.
Concentration of credit risk. Financial instruments, which potentially subject the Company to concentrations of credit risk, are cash and cash equivalents. The Company limits its credit risk by placing its investments in highly rated, highly liquid funds.
Inventories. Inventories, which consist of general consumer merchandise held for sale, are stated at the lower of cost or market. The cost of store inventories is determined by the retail inventory method. The cost of warehouse inventories is determined on a first-in, first-out basis. The Company includes as inventoriable costs certain indirect costs, such as purchasing and receiving costs, inbound freight, duties related to import purchases, internal transfer costs and warehousing costs.
Marketable Securities. Marketable securities represent investments in municipal bonds with maturities of three months or longer from time of purchase. They are classified as held-to-maturity and recorded at amortized cost.
Property and equipment. Property and equipment are stated at cost. Depreciation is provided on a straight-line basis over the estimated useful lives of the assets. Buildings are depreciated over 40 years and building improvements are depreciated principally over 20 years. Furniture, fixtures and equipment are depreciated over periods of five to ten years and leasehold improvements are depreciated over the shorter of their estimated useful lives or the original term of the related lease. Maintenance and repairs are charged to operations as incurred and major improvements are capitalized. Amortization of assets recorded under capital leases is included in depreciation expense.
The Company capitalizes certain costs incurred in connection with developing or obtaining internal use software. These capitalized software costs are included in Property and equipment, net in the consolidated balance sheets, and are being amortized over the estimated useful life of the software, not to exceed five years.

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Impairment of Long-Lived Assets. The Company reviews long-lived assets for impairment by comparing the carrying value of assets with their estimated future undiscounted cash flows. If it is determined that an impairment loss has occurred, the loss would be recognized during that period. The impairment loss is calculated as the difference between the carrying values of the asset and the present value of estimated net cash flows or comparable market values, giving consideration to recent operating performance and pricing trends. The Company had no impairment losses related to long-lived assets during 2006, 2005 or 2004.
Other Assets. Includes amounts to obtain store leases. These amounts are being amortized over the life of the original lease.
Revenue recognition. The Company recognizes revenue at the time of sale of merchandise to its customers, with the exception of the sale of custom frames, which are recognized at the time of delivery. The value of point of sale coupons, which have a very limited life, and other discounts that result in a reduction of the price paid by the customer are recorded as a reduction of sales. Sales returns, which are reserved for based on historical experience, are provided for in the period that the related sales are recorded. Proceeds from the sale of gift cards are recorded as gift card liabilities and recognized as revenue when redeemed by the holder.
Lease Accounting. The Company commences accounting for store leases on the date they take possession of the leased space. Landlord allowances and incentives are recorded as deferred rent liabilities and are amortized as a reduction of rent expense over the initial term of the lease, commencing with the date of possession.
Store pre-opening expenses. Direct incremental costs incurred to prepare a store for opening, including straight-line rent expense, are charged to expense as incurred.
Advertising costs. The costs incurred for advertising are expensed the first time the advertising takes place and are offset by reimbursements received under cooperative advertising programs with certain vendors. Co-op advertising funds are only recognized in gross margin when we have performed our contractual obligations under a co-op advertising agreement. Advertising expense before the consideration of cooperative advertising allowances was $34.2 million, $29.8 million and $23.9 million for 2006, 2005 and 2004 respectively, and is included in selling, general, and administrative expense.
Fair value of financial instruments. The carrying amounts of cash, cash equivalents and marketable securities, accounts receivable, other current assets, accounts payable, accrued expenses and other liabilities approximate fair value because of the short maturity of these instruments. The Company invests cash balances in excess of operating requirements primarily in money market mutual funds and to a lesser extent in interest-bearing securities with maturities of less than two years. The fair value of the Company’s cash and equivalents at December 31, 2006 and December 31, 2005 approximated carrying value. The Company had no borrowings outstanding under the line of credit at December 31, 2006 or December 31, 2005. The interest rates on the Company’s mortgages fluctuate with market rates and therefore the value of these financial instruments will not be impacted by a change in interest rates.
As of November 2006, the Company entered into two interest rate swap agreements with Wachovia Bank. These transactions were entered into as interest rate hedges as they effectively convert the Company’s variable rate mortgage obligations to a fixed rate. The first swap was for a notional amount of $5.2 million, amortizing on a straight line basis through September 2011. On this amount the Company will pay a fixed rate of 5.72% and receive a variable rate of LIBOR plus .65%. The second swap was for a

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notional amount of $19.2 million, amortizing on a straight line basis through September 2019. On this amount, the Company will pay a fixed rate of 5.77% and receive LIBOR plus .65%. As of December 31, 2006, these swaps have a fair market value of $42,000.
Stock-based compensation. On January 1, 2006 the Company adopted SFAS 123(R), “Share-Based Payment,” requiring the recognition of compensation expense in the Consolidated Statement of Operations related to the fair value of its employee share-based options.
The Company will recognize the cost of all employee stock options on a straight-line attribution basis over their respective vesting periods, net of estimated forfeitures. The Company selected the modified prospective method of application; accordingly, prior periods have not been restated. Prior to adopting SFAS No. 123(R), the Company applied APB Opinion No. 25, and related interpretations in accounting for its stock-based compensation plans. Subsequent to the company’s initial public offering in 1997, employee stock options were granted at the grant date market price. Accordingly, before January 1, 2006, no compensation cost was recognized for stock option grants. Under the modified prospective method, compensation expense will be recorded for the unvested portion of previously issued awards that remain outstanding at January 1, 2006 using the same estimate of the grant date fair value and the same attribution method used to determine the pro forma disclosure under SFAS No. 123.
The company determines fair value of such awards using the Black-Scholes options pricing model with the following weighted-average assumptions:
                         
    2006   2005   2004
Average fair value of options granted
  $ 8.99     $ 9.79     $ 11.15  
Risk free interest rate
    4.6 %     4.4 %     3.8 %
Dividend yield
                 
Average expected life
  6.0 yrs   5.0 yrs   4.9 yrs  
Expected stock price volatility
    44.4 %     38.9 %     54.9 %
Expected volatilities were based on a blend of historical and implied volatilities of the Company’s common stock for 2006 and 2005, and on historical volatilities for 2004 and 2003; the expected life represents the weighted average period of time that options granted are expected to be outstanding giving consideration to vesting schedules and the Company’s historical exercise patterns; and the risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods corresponding with the expected life of the option.
In 2006, the Company recognized $3.1 million of share-based compensation expense. Of this amount, $2.8 million was included as a component of selling, general and administrative expense and $326,000 was included in costs related to changes in management.
Had compensation cost for the Company’s stock-based compensation plan been determined based on the fair value at the grant date for awards under those plans, consistent with the requirements of SFAS No.

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123, “Accounting for Stock-Based Compensation,” net income and earnings per share would have been reduced to the following pro forma amounts:
                     
        2005   2004
        (In thousands, except per share data)
Net income
  — As reported   $ 10,042     $ 16,848  
 
  — Compensation cost, net of tax     1,827       1,749  
 
  — Pro forma     8,215       15,099  
 
                   
Basic earnings per share
  — As reported   $ 0.51     $ 0.86  
 
  — Pro forma     0.42       0.78  
 
                   
Diluted earnings per share
  — As reported   $ 0.50     $ 0.84  
 
  — Pro forma     0.41       0.75  
Income taxes. The Company uses the asset and liability method of accounting for income taxes. The Company does business in various jurisdictions that impose income taxes. Management determines the aggregate amount of income tax expense to accrue and the amount currently payable based upon the tax statutes of each jurisdiction. This process includes adjusting income determined using generally accepted accounting principles for items that are treated differently by the applicable taxing authorities. Deferred taxes are reflected on the Company’s balance sheet for temporary differences that will reverse in subsequent years. When the Company believes the recovery of all or a portion of a deferred tax asset is not likely, the Company establishes a valuation allowance.
2. New Accounting Pronouncements
In July 2006, the Financial Accounting Standards Board (“FASB”) issued Financial Accounting Standards Board Interpretation (“FIN”) No. 48, “Accounting for Uncertainty in Income Taxes.” FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in an enterprise’s tax return. This interpretation also provides guidance on the derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition of tax positions. The recognition threshold and measurement attribute is part of a two step tax position evaluation process prescribed in FIN 48. FIN 48 is effective after the beginning of an entity’s first fiscal year that begins after December 15, 2006. We will adopt FIN 48 as of January 1, 2007. We are currently assessing the impact to our consolidated financial statements.
In September 2006, FASB issued SFAS No. 157, “Fair Value Measurements,” which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. SFAS No. 157 is effective for financial statements issued in 2008. The company is currently assessing the impact of SFAS No. 157 to its consolidated financial statements.
3. Store Closure Costs
Store Closure Costs. The Company regularly reviews store performance. If the Company were to determine that a store does not meet certain performance criteria over a sustained period of time, the Company may determine to close that location. In December 2006, the Company’s management decided

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to close its Birmingham, Alabama store effective with the close of business on December 31, 2006. The total expected cost of this closure is approximately $1.130 million. The table below summarizes the costs and identifies the cash and non-cash components of current and future expenditures.
                                 
(dollars in thousands)  
Type of Cost   Total     Current Cash     Future Cash     Non-Cash  
Lease obligations
  $ 1,033           $ 1,033        
Severance
    10     $ 10              
Inventory liquidation
    87                 $ 87  
 
                       
 
  $ 1,130     $ 10     $ 1,033     $ 87  
In the table above, “Current Cash” means that the charge required payment during the fourth quarter of 2006. “Future Cash” relates to the payment of lease obligations over the remaining scheduled lease term, and is net of anticipated sublease income. The lease obligations may settle earlier if the Company negotiates an appropriate termination arrangement.
In December 2006, the Company paid a one-time fee of $275,000 in connection with the termination of a real estate lease. The lease, which was signed in 2006, related to premises in which the Company had not yet opened an A. C. Moore store for business. The Company terminated the lease due to a shift in store opening strategy toward increased backfill of real estate markets in which the Company currently operates.
4. Costs Related to Changes in Management
Costs related to changes in management. The Company incurred a cost of $3.4 million in 2006 related to changes in management. This cost includes severance for departing officers and employees as well as recruiting costs for new officers. As of December 31, 2006, there was $518,000 of unpaid severance costs included in accrued expenses. On June 1, 2006, the Company had a total of 26 officers at the vice president level and above. As of December 31, 2006, the Company had 11 officers at this level and above.
Changes in management since June 1, 2006 include but are not limited to the following: (i) appointment of a new Chief Executive Officer on June 1, 2006 to replace the previous Chief Executive Officer who retired on June 1, 2006; (ii) appointment of a new Chief Financial Officer on September 13, 2006 to replace the former Chief Financial Officer who retired on July 31, 2006, (iii) replacement of 11 field vice president positions with seven district manager positions; (iv) retirement of the Executive Vice President, Merchandising on June 30, 2006; (v) departure of the Executive Vice President, Merchandising and Marketing on July 31, 2006; (vi) departure of two senior vice presidents and five vice presidents, of which two were replaced; and (vii) hiring of three new vice presidents to fill newly created positions. It is anticipated that the Company will continue to incur additional expenses of this nature as it implements various other changes through at least June 30, 2007. Subsequent to year-end, the Company’s Vice President of Distribution and its Senior Vice President of Finance left the Company.
5. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share:

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    Year ended  
    December 31,  
    2006     2005     2004  
    (In thousands, except per share data)  
Net income
  $ 2,434     $ 10,042     $ 16,848  
 
                 
 
                       
Weighted average shares:
                       
Basic
    19,929       19,758       19,482  
Incremental shares from assumed exercise of stock options
    90       391       530  
 
                 
 
                       
Diluted
    20,019       20,149       20,012  
 
                 
 
                       
Basic net income per share
  $ 0.12     $ 0.51     $ 0.86  
 
                 
 
                       
Diluted net income per share
  $ 0.12     $ 0.50     $ 0.84  
 
                 
 
                       
Stock options excluded from calculation because exercise price was greater than average market price
    937       308       306  
 
                 
6. Property and Equipment
Property and equipment consists of:
                 
    Year Ended  
    December 31,  
    2006     2005  
    (in thousands)  
Land
  $ 2,466     $ 2,466  
Buildings and improvements
    38,370       38,370  
Furniture, fixtures and equipment
    107,148       88,932  
Leasehold improvements
    6,205       6,205  
Equipment for future stores
    1,260       525  
 
           
 
    155,449       136,498  
Less: Accumulated depreciation and amortization
    (60,181 )     (48,400 )
 
           
 
  $ 95,268     $ 88,098  
 
           
7. Financing Agreement
The Company maintains two mortgage agreements with Wachovia Bank on its corporate office and distribution center which are secured by land, buildings and equipment. Of the original $30.0 million in mortgages, $22.5 million ($19.1 million as of December 31, 2006) is repayable over 15 years and $7.5 million ($5.1 million as of December 31, 2006) is repayable over seven years. Fixed monthly payments

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totaling $214,000 started in October 2004. In November 2006, the Company effectively converted these mortgages from a variable rate to fixed interest rates of 5.77% on the 15-year mortgage and 5.72% on the seven-year mortgage through the use of an interest rate swap.
In March 2007, the Company amended these two mortgages to modify certain covenants. The mortgages, as amended, contain covenants that, among other things, restrict the Company’s ability to incur additional indebtedness or guarantee obligations in excess of $18.0 million, engage in mergers or consolidations, dispose of assets, make acquisitions requiring a cash outlay in excess of $20.0 million, make loans or advances in excess of $1.0 million, permit liens relating to capitalized lease obligations or purchase money financing in excess of $2.0 million, or change the nature of the Company’s business. The Company is restricted in capital expenditures unless certain financial covenants are maintained including those relating to tangible net worth and funded debt. The mortgages also define various events of default, including cross default provisions, defaults for any material judgments or a change in control. At December 31, 2006, the Company was in compliance with these covenants.
At December 31, 2006 the Company had a $35.0 million line of credit agreement with Wachovia, which would have expired on May 31, 2007. In March 2007, the Company extended the line of credit to May 31, 2008. Borrowing under this line bears interest at LIBOR plus 65 basis points and is subject to the same covenants as the mortgages described above. At December 31, 2006 and 2005, there were no borrowings outstanding under this agreement.
8. Income Taxes
A reconciliation of income tax expense at the federal income tax rate to the income tax provision is as follows:
                         
    Year Ended December 31,  
    2006     2005     2004  
    (in thousands)  
United States federal taxes at statutory rate
  $ 1,590     $ 5,624     $ 9,595  
State and local taxes, net
    286       673       1,236  
Change in estimates for uncertain tax positions
    198       0       0  
Incentive stock option compensation
    468       0       0  
Tax free interest
    (292 )     (227 )     (164 )
Other
    (141 )     (44 )     (119 )
 
                 
Income tax provision
  $ 2,109     $ 6,026     $ 10,548  
 
                 

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     The income tax provision consists of the following:
                         
    Year Ended December 31,  
    2006     2005     2004  
    (in thousands)  
Current tax expense:
                       
Federal
  $ 4,834     $ 5,487     $ 6,407  
State
    611       1,023       2,207  
 
                 
Total current
    5,445       6,510       8,614  
 
                 
Deferred tax expense:
                       
Federal
    (3,166 )     (497 )     2,239  
State
    (170 )     13       (305 )
 
                 
Total deferred
    (3,336 )     (484 )     1,934  
 
                 
Total income tax provision
  $ 2,109     $ 6,026     $ 10,548  
 
                 
The Company utilizes the asset and liability method of accounting for income taxes. Under this method, deferred tax liabilities and assets are recognized for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. The tax effect of temporary differences and carry forwards that compromise significant portions of deferred tax assets and liabilities is as follows:
                 
    December 31,  
    2006     2005  
    (in thousands)  
Current deferred taxes
               
Inventory valuation
  $ 90     $ 677  
Inventory claim receivable
    0       (345 )
Accrued Expenses
    2,823       0  
Other
    (277 )     402  
 
           
Total current deferred taxes
  $ 2,636     $ 734  
 
           
 
               
Non-current deferred taxes
               
Property and equipment
    (14,798 )     (12,747 )
Stock Option Compensation
    701       0  
Accrued rent expense
    6,773       4,708  
Other
    719       0  
 
           
Total non-current deferred taxes
    (6,605 )     (8,039 )
 
           
Net deferred tax
  $ (3,969 )   $ (7,305 )
 
           

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At December 31, 2006 the Company had approximately $7.5 million of state net operating loss carry forwards (NOL’s) of which $0 will expire in 2007 with the balance expiring through 2026. We have recognized a long-term deferred tax asset of $140,000 relating to these NOL’s, which represents the $653,000 value of their future tax deductions reduced by a $513,000 valuation allowance to the amount that is more likely than not to be realized.
In connection with the adoption of FAS 123R, the Company has elected to calculate its pool of excess tax benefits under the short cut method. At December 31, 2006 this pool was $6.8 million and can be used to offset future tax expense if deferred tax assets relating to stock options are not realized.
9. Shareholders’ Equity
The Company has authorized 10,000,000 shares of undesignated preferred stock. The Company may issue preferred stock in one or more series by vote of its Board of Directors having the dividend rights, dividend rates, conversion rights, voting rights, terms of redemption, redemption prices and liquidation preferences approved by the Board of Directors.
Under the Company’s Employee, Director and Consultant Stock Option Plan (the “1997 Plan”), the Company may grant up to 2,000,000 shares of common stock. Stock options expire ten years from the date of grant and vest ratably over a three year period. Shares available for future grants under the 1997 Plan amounted to 18,444 at December 31, 2006 and 9,877 at December 31, 2005.
In March 2002, the Company’s Board of Directors adopted the Company’s 2002 Stock Option Plan (the “2002 Plan”). This Plan was approved by majority shareholder vote at the Company’s Annual Meeting of Shareholders on May 16, 2002. Under the 2002 Plan, the Company may grant up to 1,500,000 shares of common stock. Stock options expire ten years from the date of grant and vest ratably over a period of from one to three years. Shares available for future grants under the 2002 Plan amounted to 384,981 at December 31, 2006 and 627,283 at December 31, 2005.
For 2006, 2005, and 2004, the Company’s stock option activity is summarized below:
                                                 
    2006     2005     2004  
            Weighted             Weighted             Weighted  
            Average             Average             Average  
            Exercise             Exercise             Exercise  
    Options     Price     Options     Price     Options     Price  
Outstanding at beginning of year
    1,485,067     $ 16.97       1,431,132     $ 14.76       1,544,452     $ 12.23  
Granted
    342,000       18.07       237,375       23.74       215,875       21.95  
Forfeited
    109,065       23.67       21,766       24.42       31,636       22.40  
Exercised
    350,324       6.17       161,674       6.37       297,559       6.07  
 
                                   
 
                                               
Outstanding at end of year
    1,367,678     $ 19.50       1,485,067     $ 16.97       1,431,132     $ 14.76  
 
                                   
 
                                               
Exercisable at end of year
    862,366     $ 19.41       1,019,544     $ 13.83       930,105     $ 10.14  
 
                                   
The aggregate intrinsic value of vested stock options outstanding at December 31, 2006 was $3.5 million. Intrinsic value for stock options is calculated based on the exercise price of the underlying awards and the

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quoted price of the Company’s common stock as of the reporting date where there is positive value. The total market value at date of exercise in excess of grant price of options exercised during 2006 was $4.0 million.
As of December 31, 2006, there was $3.7 million of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the Company’s stock option plans. That cost is expected to be recognized over the next 35 months.
Using a Black-Scholes options pricing model, the average grant date fair value of options granted was $8.99, $9.79, and $11.15 for options granted in 2006, 2005 and 2004, respectively.
The following table summarizes information about stock options outstanding at December 31, 2006.
                                         
    Stock Options Outstanding     Stock Options Exercisable  
            Weighted Average     Weighted             Weighted  
Range of           Remaining Life     Average             Average  
Exercise Prices   Shares     (Years)     Exercise Price     Shares     Exercise Price  
2.88-4.50
    107,774       2.5     $ 3.72       107,774     $ 3.72  
7.69-8.32
    76,286       3.6       8.13       76,286       8.14  
16.38-18.32
    297,000       9.6       17.57       0       0.00  
19.11-21.95
    422,393       6.8       20.45       335,247       20.14  
22.25-27.15
    464,225       7.5       25.40       343,059       26.02  
 
                             
 
    1,367,678       7.1     $ 19.50       862,366     $ 19.41  
 
                             
10. Retirement Plan
In January 1999 the Company established a 401(k) savings plan (the “401(k) Plan”) for eligible team members. Participation in the 401(k) Plan is voluntary and available to any team member who is 21 years of age and has completed a three month eligibility period. Participants may elect to contribute up to 100% of their compensation. In accordance with the provisions of the 401(k) Plan, the Company makes a matching contribution to the account of each participant in an amount equal to 25% of the first 6% of eligible compensation contributed by each participant with a maximum match of $1,500. The Company’s matching contribution expense for 2006, 2005 and 2004 was $398,000, $339,000, and $298,000, respectively.
11. Commitments and Contingencies
Commitments
The Company leases its retail stores and some vehicles under non-cancelable operating leases. Most store leases have an average initial term of ten years, with three five year renewal options, and provide for predetermined escalations in future minimum annual rent or additional rent contingent upon store sales levels. Rent escalations are amortized over the initial term commencing on the date the Company takes possession. The pro rata portion of rent holidays and scheduled rent escalations has been included in accrued lease liabilities in the accompanying balance sheet. For the years 2006, 2005 and 2004 the amounts of rent expense recognized over the amounts paid were $461,000, $1,027,000, and $1,674,000 respectively.

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Rent expense under operating leases consists of:
                         
    Year Ended December 31,  
    2006     2005     2004  
    (in thousands)  
Minimum rentals
  $ 33,024     $ 29,017     $ 27,017  
Contingent payments
    76       62       84  
 
                 
 
  $ 33,100     $ 29,079     $ 27,101  
 
                 
As of December 31, 2006, the Company entered into five leases for stores to open in 2007 and 2008.
Future minimum lease payments (including those for unopened stores) as of December 31, 2006 for non-cancelable operating leases with terms in excess of one year are as follows (in thousands):
         
2007
  $ 37,849  
2008
    36,813  
2009
    35,432  
2010
    34,252  
2011
    30,607  
Thereafter
    96,903  
 
     
Total minimum future rentals
  $ 271,856  
 
     
Contingencies
On April 4, 2003, Kathleen Stahl, a former store merchandiser for the Company, filed a civil action against the Company in the Superior Court of New Jersey, Burlington County–Law Division for alleged retaliatory harassment and constructive discharge under the New Jersey Conscientious Employee Protection Act. The plaintiff sought lost wages, compensatory and punitive damages, and costs. The complaint was dismissed without prejudice on December 5, 2003 and reinstated on April 15, 2005. On October 23, 2006, a jury trial on the case began. On October 30, 2006, the jury returned a verdict in favor of the plaintiff for $19,600 in lost wages, $1.8 million for emotional distress and $1.5 million in punitive damages. The Company is disappointed with the jury’s verdict and believes it is not supported by the evidence. The Company is vigorously pursuing an appeal.
The Company believes that the requirements of Statement of Financial Accounting Standards No. 5, “Accounting for Contingencies,” for accruing a charge for this matter have not been met. At this time, the Company believes that a loss from this lawsuit is probable but cannot reasonably estimate the amount of the loss. The Company believes that the range of loss in this matter is from $0 to the amount of the verdict, plus interest. However, the Company cannot at this time determine a best estimate within this range. The Company has therefore not recorded a charge.
Management may determine in the future that a charge for all or a portion of the award is required. Any such charge could materially and adversely affect the Company’s results of operations for the quarter or the year in which such a charge may be accrued.

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The Company is not a party to any other material legal proceedings other than routine litigation incidental to its business. In the opinion of management, the amount of ultimate liability with respect to these actions will not materially affect the financial position, operating results or cash flows of the Company.
12. Related Party Transactions
Richard J. Drake, a director of the Company who retired in February 2007, is a member of a law firm which the Company retains. The Company has paid fees to Mr. Drake’s firm in the amount of $56,972, $112,000 and $83,000 during the years ended December 31, 2006, 2005 and 2004, respectively.
Michael J. Joyce, a director of the Company since 2004 and chair of the Company’s Audit Committee, was a director of Heritage Property Investment Trust, Inc. (“Heritage”) until October 5, 2006, when Heritage merged with and into affiliates of Centro Properties Group. The Company leased one of its store locations in 2006, 2005 and 2004 from Heritage. The Company paid rent to Heritage in the amount of $249,742, $206,000 and $193,000 during the years ended December 31, 2006, 2005 and 2004, respectively.

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ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
     None.
ITEM 9A. CONTROLS AND PROCEDURES.
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
     We carried out an evaluation, with the participation of our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures as of December 31, 2006. Based on this evaluation, our principal executive officer and principal financial officer concluded that, as of December 31, 2006, our disclosure controls and procedures, as defined in Rule 13a-15(e), were effective at the reasonable assurance level, to ensure that (i) information required to be disclosed by the issuer in the reports that it files or submits under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and (ii) information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Management’s Report on Internal Control Over Financial Reporting
     Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we carried out an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2006 based on the Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2006.
     PricewaterhouseCoopers LLP, the independent registered public accounting firm that audited our financial statements included in this Annual Report on Form 10-K, has audited our management’s assessment of the effectiveness of our internal control over financial reporting as of December 31, 2006 as stated in their report which is included herein.
Changes in Internal Control over Financial Reporting
     Our management carried out an evaluation, with the participation of our principal executive officer and principal financial officer, of changes in our internal control over financial reporting, as defined in Exchange Act Rule 13a-15(f). Based on this evaluation, our management determined that no change in our internal control over financial reporting occurred during the fourth quarter of 2006 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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ITEM 9B. OTHER INFORMATION
Amendment to Loan Documents and Line of Credit
     On March 12, 2007, the Company entered into a promissory note and loan modification agreement (the “loan modification”) with Wachovia Bank, N.A., the lender on the Company’s two mortgages dated October 28, 2003 on its corporate offices and distribution center. The loan modification amends these two mortgages. The two mortgages originally totaled an aggregate of $30.0 million, $22.5 million payable over 15 years and $7.5 million payable over seven years. As of December 31, 2006, $19.1 million was outstanding on the 15-year mortgage and $5.1 million was outstanding on the seven-year mortgage.
     The original two mortgages contained covenants that restricted the Company’s ability to (i) incur additional indebtedness or guarantee obligations in excess of $8.0 million, and (ii) make acquisitions requiring a cash outlay in excess of $10.0 million. The loan modification increased the threshold amounts in the foregoing two covenants to $18.0 million and $20.0 million, respectively. The loan modification also added a provision that permits the Company to incur liens relating to capitalized lease obligations or purchase money financing not in excess of $2.0 million. In addition, the loan modification eliminated the current ratio of assets to liabilities and decreased the threshold debt service coverage ratio from 1.35 to 1.00 to 1.25 to 1.00. These two ratios affect the amount of interest paid by the Company on the mortgages.
     On March 12, 2007, pursuant to the loan modification, the Company also amended its $35.0 million line of credit with Wachovia to extend the maturity date from May 31, 2007 to May 31, 2008. As of December 31, 2007, there were no amounts outstanding under this line of credit. The promissory note and loan modification amending the two mortgages and extending the line of credit is attached to this annual report on Form 10-K as Exhibit 10.27. This summary is not intended to be complete and is qualified in its entirety by reference to this exhibit which is incorporated by reference into this Item 9B.

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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
     Incorporated by reference from our Proxy Statement relating to our 2007 Annual Meeting of Shareholders to be filed in accordance with General Instruction G(3) to Form 10-K, except information concerning our executive officers which is set forth in Part I of this Annual Report on Form 10-K and which is incorporated herein by reference.
     Code of Ethics
     We have adopted a Code of Business Ethics and Conflict of Interest Policy that applies to all of our directors and employees including, without limitation, our principal executive officer, our principal financial officer, our principal accounting officer and all of our employees performing similar functions. Our Code of Business Ethics and Conflict of Interest Policy is available on our website, located at www.acmoore.com/corporate.asp. We intend to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding an amendment to a provision of our Code of Business Ethics and Conflict of Interest Policy by posting such information on our website at the location specified above.
ITEM 11. EXECUTIVE COMPENSATION.
     Incorporated by reference from our Proxy Statement relating to our 2007 Annual Meeting of Shareholders to be filed in accordance with General Instruction G(3) to Form 10-K.
ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
     Incorporated by reference from our Proxy Statement relating to our 2007 Annual Meeting of Shareholders to be filed in accordance with General Instruction G(3) to Form 10-K.

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Equity Compensation Plan Information
     The following table details information regarding our existing equity compensation plans as of December 31, 2006:
                         
                    (c)
                    Number of securities
    (a)           remaining available for
    Number of securities   (b)   future issuance under
    to be issued upon   Weighted-average   equity compensation
    exercise of   exercise price of   plans (excluding
    outstanding options,   outstanding options,   securities reflected in
Plan Category   warrants and rights   warrants and rights   column (a))
Equity compensation plans approved by security holders (1)
    1,367,678     $ 19.50       403,425  
Equity compensation plans not approved by security holders
                 
Total
    1,367,678     $ 19.50       403,425  
 
(1)   These plans are our 1997 Employee, Director and Consultant Stock Option Plan and our 2002 Stock Option Plan.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
     Incorporated by reference from our Proxy Statement relating to our 2007 Annual Meeting of Shareholders to be filed in accordance with General Instruction G(3) to Form 10-K.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
     Incorporated by reference from our Proxy Statement relating to our 2007 Annual Meeting of Shareholders to be filed in accordance with General Instruction G(3) to Form 10-K.

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PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
  (a)   The following documents are filed as part of this Annual Report on Form 10-K:
  (1)   Financial Statements:
 
      Report of Independent Registered Public Accounting Firm
 
      Consolidated Balance Sheets at December 31, 2006 and 2005
 
      Consolidated Statements of Income for each of the three years
in the period ended December 31, 2006
 
      Consolidated Statements of Changes in Shareholders’ Equity for each of the
three years in the period ended December 31, 2006
 
      Consolidated Statements of Cash Flows for each of the three
years in the period ended December 31, 2006
 
      Notes to Consolidated Financial Statements
 
  (2)   Financial Statement Schedules:
 
      Schedule II – Valuation and Qualifying Accounts and Reserves.
 
      All other schedules have been omitted because they are not applicable,
not required or the information is included elsewhere herein.
 
  (3)   Exhibits:
 
      The exhibits filed as part of this report are listed under exhibits at subsection (b) of this Item 15.
  (b)   Exhibits:
     
Exhibit Number   Description
3.1(1)
  Articles of Incorporation
 
   
3.2
  Amendment to Articles of Incorporation
 
   
3.3(2)
  Amended and Restated Bylaws
 
   
+10.1(1)
  1997 Employee, Director and Consultant Stock Option Plan

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Exhibit Number   Description
+10.2(3)
  2002 Stock Option Plan
 
   
+10.3(1)
  Form of Stock Option Award Agreement under the 1997 Employee, Director and Consultant Stock Option Plan
 
   
+10.4(8)
  Form of Option Agreement under the 2002 Stock Option Plan
 
   
10.5(1)
  Tax Indemnification Agreement, dated July 22, 1997, among the Company, John E. Parker and William Kaplan
 
   
10.6(4)
  Lease, dated August 14, 1995, between Freeport 130 L.L.C. and A.C. Moore, Inc.
 
   
10.7(5)
  Second Amendment to Lease, dated as of March 25, 1998, between Freeport 130 L.L.C. and A.C. Moore, Inc.
 
   
10.8(6)
  Loan Agreement dated as of October 28, 2003, by and between Wachovia Bank, National Association and A.C. Moore Arts & Crafts, Inc., A.C. Moore Incorporated, Moorestown Finance, Inc., Blackwood Assets, Inc. and A.C. Moore Urban Renewal, LLC. A.C. Moore will furnish to the Securities and Exchange Commission a copy of any omitted exhibits or schedules upon request.
 
   
10.9(6)
  Construction Loan Agreement dated as of October 28, 2003, by and between Wachovia Bank, National Association and A.C. Moore Arts & Crafts, Inc., A.C. Moore Incorporated, Moorestown Finance, Inc., Blackwood Assets, Inc. and A.C. Moore Urban Renewal, LLC. A.C. Moore will furnish to the Securities and Exchange Commission a copy of any omitted exhibits or schedules upon request.
 
   
10.10(6)
  Mortgage, Assignment of Rents and Security Agreement and Financing Statement dated as of October 28, 2003, by and between A.C. Moore Urban Renewal, LLC and Wachovia Bank, National Association. A.C. Moore will furnish to the Securities and Exchange Commission a copy of any omitted exhibits upon request.
 
   
10.11(7)
  Modification Number One to Promissory Note dated as of November 3, 2004, by and between Wachovia Bank, National Association and A.C. Moore Arts & Crafts, Inc., A.C. Moore Incorporated, Moorestown Finance, Inc., Blackwood Assets, Inc. and A.C. Moore Urban Renewal, LLC
 
   
10.12(9)
  Promissory Note and Loan Modification Agreement dated as of February 22, 2006, by and between Wachovia Bank, National Association and A.C. Moore Arts & Crafts, Inc., A.C. Moore Incorporated, Moorestown Finance, Inc., Blackwood Assets, Inc. and A.C. Moore Urban Renewal, LLC

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Exhibit Number   Description
+10.13 (10)
  Employment Agreement, effective as of June 1, 2006, between the Company and Rick A. Lepley.
 
   
+10.14 (10)
  Form of Option Agreement between the Company and Rick A. Lepley.
 
   
+10.15 (10)
  Agreement and Complete and Full General Release, effective as of June 1, 2006, between the Company and Jack Parker.
 
   
+10.16 (10)
  Agreement and Complete and Full General Release, effective as of June 1, 2006, between the Company and Leslie H. Gordon.
 
   
+10.17 (11)
  Agreement and Complete and Full General Release, effective as of June 8, 2006, between the Company and Patricia A. Parker.
 
   
+10.18 (12)
  Agreement and Complete and Full General Release, dated July 31, 2006, between the Company and Janet Parker.
 
   
+10.19 (13)
  Employment Agreement, signed on September 6, 2006 and effective as of September 13, 2006, between the Company and Marc Katz.
 
   
+10.20 (13)
  Form of Option Agreement between the Company and Marc Katz.
 
   
+10.21 (13)
  Amendment No. One, dated September 6, 2006, to Agreement and Complete and Full General Release, dated June 1, 2006, between the Company and Leslie H. Gordon.
 
   
+10.22 (14)
  First Amendment, dated as of November 15, 2006, to the Employment Agreement, dated as of June 1, 2006, between the Company and Rick A. Lepley.
 
   
10.23 (15)
  Amended and Restated Swap Transaction Confirmation, signed on December 8, 2006 and effective as of November 27, 2006.
 
   
10.24 (15)
  Amended and Restated Swap Transaction Confirmation, signed on December 8, 2006 and effective as of November 27, 2006.
 
   
+10.25
  Employment Agreement, effective as of July 24, 2006, between the Company and Amy Rhoades.
 
   
+10.26
  First Amendment, dated as of November 15, 2006, to the Employment Agreement, dated as of July 24, 2006, between the Company and Amy Rhoades.

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Exhibit Number   Description
10.27
  Promissory Note and Loan Modification Agreement dated as of March 12, 2007 by and between Wachovia Bank, National Association and A.C. Moore Arts & Crafts, Inc., A.C. Moore Incorporated, Moorestown Finance, Inc., Blackwood Assets, Inc. and A.C. Moore Urban Renewal, LLC
 
   
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 and Chief Financial 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 8-K filed on August 27, 2004.
 
(3)   Incorporated by reference to the Company’s Definitive Proxy Statement filed on April 22, 2002.
 
(4)   Incorporated by reference to Amendment No. 1 to the Company’s Registration Statement on Form S-1 (File No. 333-32859), filed on September 16, 1997.
 
(5)   Incorporated by reference to the Company’s Form 10-K for the year ended December 31, 1998.
 
(6)   Incorporated by reference to the Company’s Form 10-Q for the quarter ended September 30, 2003.
 
(7)   Incorporated by reference to the Company’s Form 10-K for the year ended December 31, 2004.
 
(8)   Incorporated by reference to the Company’s Form 8-K filed on August 9, 2006.

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

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SCHEDULE II
A.C. MOORE ARTS & CRAFTS, INC.
Valuation and Qualifying Accounts
(in thousands)
                                 
Column A   Column B     Column C     Column D     Column E  
                    Deductions —        
                    Write-offs,     Balance at  
    Balance at     Additions —     Payments and     End of  
Description   Beginning of Period     Charged to Expense     Other Adjustments     Period  
Lower of Cost or Market Reserve
                               
2006
  $ 1,525     $ 462     $ 672     $ 1,315  
2005
    1,467       501       443       1,525  
2004
    1,284       628       445       1,467  

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SIGNATURES
     Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
         
  A.C. MOORE ARTS & CRAFTS, INC.
 
 
Date: March 12, 2007  By:   /s/ Rick A. Lepley    
          Rick A. Lepley   
          Chief Executive Officer   
 
     Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
         
Signature   Capacity   Date
 
/s/ Rick A. Lepley
 
Rick A. Lepley
  Chief Executive Officer and Director
(Principal Executive Officer) 
  March 12, 2007
 
       
/s/ Marc Katz
 
Marc Katz
  Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)    March 12, 2007
 
       
/s/ Michael J. Joyce
 
Michael J. Joyce
  Chairman of the Board of Directors    March 12, 2007
 
       
/s/ Joseph F. Coradino
 
Joseph F. Coradino
  Director    March 12, 2007
 
       
/s/ Lawrence H. Fine
 
Lawrence H. Fine
  Director    March 12, 2007
 
       
/s/ Neil A. McLachlan
 
Neil A. McLachlan
  Director    March 12, 2007
 
       
/s/ Thomas S. Rittenhouse
 
Thomas S. Rittenhouse
  Director    March 12, 2007
 
       
/s/ Lori J. Schafer
 
Lori J. Schafer
  Director    March 12, 2007

 


Table of Contents

EXHIBIT INDEX
     
Exhibit Number   Description
3.1(1)
  Articles of Incorporation
 
   
3.2
  Amendment to Articles of Incorporation
 
   
3.3(2)
  Amended and Restated Bylaws
 
   
+10.1(1)
  1997 Employee, Director and Consultant Stock Option Plan
 
   
+10.2(3)
  2002 Stock Option Plan
 
   
+10.3(1)
  Form of Stock Option Award Agreement under the 1997 Employee, Director and Consultant Stock Option Plan
 
   
+10.4(8)
  Form of Option Agreement under the 2002 Stock Option Plan
 
   
10.5(1)
  Tax Indemnification Agreement, dated July 22, 1997, among the Company, John E. Parker and William Kaplan
 
   
10.6(4)
  Lease, dated August 14, 1995, between Freeport 130 L.L.C. and A.C. Moore, Inc.
 
   
10.7(5)
  Second Amendment to Lease, dated as of March 25, 1998, between Freeport 130 L.L.C. and A.C. Moore, Inc.
 
   
10.8(6)
  Loan Agreement dated as of October 28, 2003, by and between Wachovia Bank, National Association and A.C. Moore Arts & Crafts, Inc., A.C. Moore Incorporated, Moorestown Finance, Inc., Blackwood Assets, Inc. and A.C. Moore Urban Renewal, LLC. A.C. Moore will furnish to the Securities and Exchange Commission a copy of any omitted exhibits or schedules upon request.
 
   
10.9(6)
  Construction Loan Agreement dated as of October 28, 2003, by and between Wachovia Bank, National Association and A.C. Moore Arts & Crafts, Inc., A.C. Moore Incorporated, Moorestown Finance, Inc., Blackwood Assets, Inc. and A.C. Moore Urban Renewal, LLC. A.C. Moore will furnish to the Securities and Exchange Commission a copy of any omitted exhibits or schedules upon request.
 
   
10.10(6)
  Mortgage, Assignment of Rents and Security Agreement and Financing Statement dated as of October 28, 2003, by and between A.C. Moore Urban Renewal, LLC and Wachovia Bank, National Association. A.C. Moore will furnish to the Securities and Exchange Commission a copy of any omitted exhibits upon request.

 


Table of Contents

     
Exhibit Number   Description
10.11(7)
  Modification Number One to Promissory Note dated as of November 3, 2004, by and between Wachovia Bank, National Association and A.C. Moore Arts & Crafts, Inc., A.C. Moore Incorporated, Moorestown Finance, Inc., Blackwood Assets, Inc. and A.C. Moore Urban Renewal, LLC
 
   
10.12(9)
  Promissory Note and Loan Modification Agreement dated as of February 22, 2006, by and between Wachovia Bank, National Association and A.C. Moore Arts & Crafts, Inc., A.C. Moore Incorporated, Moorestown Finance, Inc., Blackwood Assets, Inc. and A.C. Moore Urban Renewal, LLC
 
   
+10.13(10)
  Employment Agreement, effective as of June 1, 2006, between the Company and Rick A. Lepley.
 
   
+10.14(10)
  Form of Option Agreement between the Company and Rick A. Lepley.
 
   
+10.15(10)
  Agreement and Complete and Full General Release, effective as of June 1, 2006, between the Company and Jack Parker.
 
   
+10.16(10)
  Agreement and Complete and Full General Release, effective as of June 1, 2006, between the Company and Leslie H. Gordon.
 
   
+10.17 (11)
  Agreement and Complete and Full General Release, effective as of June 8, 2006, between the Company and Patricia A. Parker.
 
   
+10.18(12)
  Agreement and Complete and Full General Release, dated July 31, 2006, between the Company and Janet Parker.
 
   
+10.19(13)
  Employment Agreement, signed on September 6, 2006 and effective as of September 13, 2006, between the Company and Marc Katz.
 
   
+10.20(13)
  Form of Option Agreement between the Company and Marc Katz.
 
   
+10.21(13)
  Amendment No. One, dated September 6, 2006, to Agreement and Complete and Full General Release, dated June 1, 2006, between the Company and Leslie H. Gordon.
 
   
+10.22(14)
  First Amendment, dated as of November 15, 2006, to the Employment Agreement, dated as of June 1, 2006, between the Company and Rick A. Lepley.
 
   
10.23(15)
  Amended and Restated Swap Transaction Confirmation, signed on December 8, 2006 and effective as of November 27, 2006.
 
   
10.24(15)
  Amended and Restated Swap Transaction Confirmation, signed on December 8, 2006 and effective as of November 27, 2006.
 
   
+10.25
  Employment Agreement, effective as of July 24, 2006, between the Company and Amy Rhoades.
 
   
+10.26
  First Amendment, dated as of November 15, 2006, to the Employment Agreement, dated as of July 24, 2006, between the Company and Amy Rhoades.

 


Table of Contents

     
Exhibit Number   Description
10.27
  Promissory Note and Loan Modification Agreement dated as of March 12, 2007 by and between Wachovia Bank, National Association and A.C. Moore Arts & Crafts, Inc., A.C. Moore Incorporated, Moorestown Finance, Inc., Blackwood Assets, Inc. and A.C. Moore Urban Renewal, LLC
 
   
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 8-K filed on August 27, 2004.
 
(3)   Incorporated by reference to the Company’s Definitive Proxy Statement filed on April 22, 2002.
 
(4)   Incorporated by reference to Amendment No. 1 to the Company’s Registration Statement on Form S-1 (File No. 333-32859), filed on September 16, 1997.
 
(5)   Incorporated by reference to the Company’s Form 10-K for the year ended December 31, 1998.
 
(6)   Incorporated by reference to the Company’s Form 10-Q for the quarter ended September 30, 2003.
 
(7)   Incorporated by reference to the Company’s Form 10-K for the year ended December 31, 2004.
 
(8)   Incorporated by reference to the Company’s Form 8-K filed on August 9, 2006.

 


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

 

EX-3.2 2 w31791exv3w2.htm AMENDMENT TO ARTICLES OF INCORPORATION exv3w2
 

Exhibit 3.2
     As filed with the Secretary of the Commonwealth of Pennsylvania, on July 1, 2002, the first sentence of Article 5 of the Articles of Incorporation was amended to read in its entirety as follows:
     “The aggregate number of shares which the Corporation shall have the authority to issue shall be 50,000,000 shares, of which 10,000,000 shares shall be Preferred Stock, no par value, and 40,000,000 shares shall be common stock, no par value.”

EX-10.25 3 w31791exv10w25.htm EMPLOYMENT AGREEMENT AMY RHOADES exv10w25
 

Exhibit 10.25
EMPLOYMENT AGREEMENT
     THIS AGREEMENT is dated July 24, 2006 (the “Agreement”) between A.C. Moore Arts & Crafts, Inc., a Pennsylvania corporation (the “Company”), and Amy Rhoades (“Executive”). This Agreement replaces and supersedes any and all prior discussions, offers, communications or agreements of any sort whatsoever, existing between the Company and Executive, of whatsoever nature.
     NOW THEREFORE,
     In consideration of the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:
     1. Employment.
          (a) The Company shall employ Executive, and Executive hereby accepts employment with the Company, upon the terms and conditions set forth in this Agreement for the period beginning on July 24, 2006 and ending as provided in paragraph 4 hereof (the “Employment Term”).
          (b) The Board of Directors of the Company (the “Board”) has determined that it is in the best interests of the Company and its shareholders to assure that the Company will have the continued dedication of the Executive, notwithstanding the possibility, threat or occurrence of a Change of Control (as defined in Appendix I to this Agreement) of the Company. The Board believes it is imperative to diminish the inevitable distraction of the Executive by virtue of the personal uncertainties and risks created by a pending or threatened Change of Control and to encourage the Executive’s full attention and dedication to the Company currently and in the event of any threatened or pending Change of Control, and to provide the Executive with compensation and benefits arrangements upon a Change of Control which ensure that the compensation and benefits expectations of the Executive will be satisfied and which are competitive with those of other corporations. Therefore, in order to accomplish these objectives if a Change of Control occurs, paragraphs 1 through 4 of this Agreement (except paragraphs 3(c), 3(d), 3(e) and 3(f) which shall continue) shall be superseded by Appendix I.
     2. Position and Duties.
          (a) During the Employment Term, Executive shall serve as Vice President and General Counsel of the Company. Executive shall report directly to the Chief Executive Officer of the Company and shall have such duties and responsibilities as is customary for general counsel for companies of like size and type.
          (b) Executive shall devote Executive’s best efforts and Executive’s full business time and attention (except for permitted vacation periods and reasonable periods of illness or other incapacity) to the business and affairs of the Company and its Subsidiaries (as defined below); provided that Executive shall, with the prior written approval of the Board, be

 


 

allowed to serve as (i) a director or officer of any non-profit organization including trade, civic, educational or charitable organizations, or (ii) a director of any corporation which is not competing with the Company or any of its Subsidiaries so long as such duties do not materially interfere with the performance of Executive’s duties or responsibilities under this Agreement. Executive shall perform Executive’s duties and responsibilities under this Agreement to the best of Executive’s abilities in a diligent, trustworthy, businesslike and efficient manner.
          (c) Executive shall be based at or in the vicinity of the Company’s headquarters in Berlin, New Jersey, but may be required to travel as necessary to perform Executive’s duties and responsibilities under this Agreement.
          (d) For purposes of this Agreement, “Subsidiaries” shall mean any entity of which the securities having a majority of the voting power in electing directors or managers are, at the time of determination, owned by the Company, directly or through one or more Subsidiaries.
     3. Base Salary, Bonus, Options, Equity Compensation and Benefits.
          Subject to the provisions of paragraph 4, which shall control, Executive shall be entitled to the following compensation and benefits during the Employment Term:
          (a) Initially, Executive’s base salary shall be $175,200 per year (the “Base Salary”), which salary shall be payable in regular installments in accordance with the Company’s general payroll practices. Executive’s Base Salary shall be reviewed at least annually by the Compensation Committee of the Board and shall be subject to increase, as it shall determine based on among other things, market practice and performance.
          (b) During each calendar year of the Company in which Executive continues to be employed by the Company pursuant to this Agreement, Executive shall be entitled to participate in the Company’s annual bonus plan as administered by the Compensation Committee of the Board of Directors. Executive shall be entitled to participate in any bonus plan available to similarly situated officers of the Company.
          (c) Executive shall be entitled to paid vacation in accordance with the Company’s general payroll practices for officers of the Company.
          (d) The Company shall reimburse Executive for all reasonable expenses incurred by Executive in the course of performing Executive’s duties under this Agreement which are consistent with the Company’s policies in effect from time to time with respect to travel, entertainment and other business expenses, subject to the Company’s requirements with respect to reporting and documentation of such expenses.
          (e) Executive will be entitled to all benefits as are, from time to time, maintained for officers of the Company, including without limitation: medical and other insurance plans, and retirement benefits.
          (f) Pursuant and subject to the terms and conditions of the Company’s 2002 Stock Option Plan or any successor plan:

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               (1) On July 24, 2006, upon the approval of the Board of Directors, Executive shall be granted a non-qualified option to purchase 12,500 shares of common stock of the Company (the “Initial Option”).
               (2) For each calendar year after December 31, 2006 that Executive continues to be employed by the Company pursuant to this Agreement, on the day of each such calendar year that the Board otherwise grants options to management of the Company, Executive shall be granted a non-qualified option to purchase shares of common stock of the Company (each an “Annual Option”). The number of shares of the Company’s common stock subject to each Annual Option shall be a number not lower than the highest number established for any vice president of the Company.
The grant of the Initial Option and each Annual Option shall be evidenced by a Stock Option Agreement pursuant to the 2002 Stock Option Plan.
               (3) In the event that the Company adopts a new equity compensation plan or program, Executive shall be entitled to receive grants of stock options, restricted stock or other equity related awards pursuant to such new plan or program, subject to the terms and conditions thereof, at amounts no lower than the highest amount established for any vice president of the Company.
     4. Term.
          (a) The Employment Term shall begin on July 24, 2006 and end on the twelfth (12th) month anniversary of such date; provided that (i) the Employment Term shall be extended for successive periods of one (1) year each (each of which is referred to as an “extension term” of the Employment Term) in the event that written notice of termination hereof is not given by one party hereof to the other at least sixty (60) days prior to the end of the Employment Term or the then applicable extension term, as the case may be; provided further that, and notwithstanding anything to the contrary in this Agreement, (ii) the Employment Term or the then applicable extension term shall terminate prior to such date (A) upon Executive’s death or permanent disability or incapacity (as determined by the Board in its good faith judgment), (B) upon the mutual agreement of the Company and Executive, (C) by the Company’s termination of this Agreement for Cause (as defined below) or without Cause or (D) by Executive’s termination of this Agreement for Good Reason (as defined below) or without Good Reason.
          (b) If the Employment Term or any extension term is terminated by the Company without Cause or is terminated by the Executive for Good Reason, Executive (and Executive’s family with respect to clause (iii) of this paragraph 4(b)) shall be entitled to receive (i) Executive’s Base Salary through the twelfth month anniversary of such termination and Executive’s Pro Rata Bonus (as defined in paragraph (h) below), if and only if Executive has not breached the provisions of paragraphs 5, 6 and 7 hereof, and (ii) vested and earned (in accordance with the Company’s applicable plan or program) but unpaid amounts under incentive plans, health and welfare plans, and other employer programs (other than deferred compensation plans the payments under which shall be determined in the plan of reference) of the Company in which Executive is then participating (other than the Pro Rata Bonus). The amounts payable

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pursuant to paragraph 4(b)(i) and (ii) shall be payable in equal installments on the first day of each month during the said twelve month period. No payment of any sum nor the receipt of any benefit shall be due to Executive under this paragraph 4(b) unless and until Executive shall have executed and delivered to the Company a release of any and all claims against the Company and its Subsidiaries (and their respective present and former officers, directors, employees and agents – collectively the “Released Parties”) and a covenant not to sue the Released Parties, all in form and substance as provided by counsel to the Company (the “Release”) and any waiting period or revocation period provided by law for the effectiveness of such Release shall have expired without Executive’s having revoked such Release. In the event Executive shall decline or fail for any reason to execute and deliver such Release, the Executive shall be entitled to receive only those amounts provided pursuant to paragraph 4(c) provided for an Executive whose employment is terminated by the Company for Cause or by Executive without Good Reason.
          (c) If the Employment Term or any extension term is terminated by the Company for Cause or by the Executive without Good Reason, Executive shall be entitled to receive (i) Executive’s Base Salary through the date of such termination and (ii) vested and earned (in accordance with the Company’s applicable plan or program) but unpaid amounts under health plans of the Company which Executive participates; provided, however, that Executive shall not be entitled to payment of a Pro Rata Bonus.
          (d) If the Employment Term or any extension term is terminated upon Executive’s death or permanent disability or incapacity (as determined by the Board in its good faith judgment), Executive, or Executive’s estate if applicable, shall be entitled to receive the sum of (i) Executive’s Base Salary through the date of such termination and Executive’s Pro Rata Bonus and (ii) vested and earned (in accordance with the Company’s applicable plan or program) but unpaid amounts under incentive plans, health and welfare plans, and other employer programs (other than deferred compensation as determined in such plans) of the Company in which Executive participates. The amounts payable pursuant to this paragraph 4(d) shall be payable, in any manner consistent with the Company’s normal payment policies.
          (e) Except as otherwise provided herein, fringe benefits and bonuses (if any) which accrue or become payable after the termination of the Employment Term or any extension term shall cease upon such termination.
          (f) For purposes of this Agreement, “Cause” shall mean:
               (i) the failure of the Executive to perform substantially the Executive’s duties with the Company or one of its affiliates (other than any such failure resulting from incapacity due to physical or mental illness), after a written demand for substantial performance is delivered to the Executive by the Chief Executive Officer which specifically identifies the manner in which the Chief Executive Officer believes that the Executive has not substantially performed the Executive’s duties; provided however, that Executive shall have one opportunity to cure the failure so identified for sixty (60) days from the written demand, or
               (ii) the engaging by the Executive in illegal conduct or gross misconduct in violation of the Company’s Code of Business Ethics and Conflict of Interest Policy.

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Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board or upon the instructions of the Chief Executive Officer or based upon the advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by the Executive in good faith and in the best interests of the Company. The cessation of employment of the Executive shall not be deemed to be for Cause unless and until there shall have been delivered to the Executive a written notice from the Chief Executive Officer, a copy of which notice has been previously delivered to the Board of Directors, finding that, in the good faith opinion of the Chief Executive Officer, the Executive is guilty of the conduct described in subparagraph (i) or (ii) above, and specifying the particulars thereof in detail.
          (g) For purposes of this Agreement, “Good Reason” shall mean:
               (i) the assignment to the Executive of any duties inconsistent with the Executive’s position, authority, duties or responsibilities as contemplated by paragraph 2 of this Agreement, or any other action by the Company which results in a material diminution in such position, authority, duties or responsibilities, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive;
               (ii) any failure by the Company to comply with any of the provisions of paragraph 3 of this Agreement, other than an isolated, insubstantial and inadvertent failure not occurring in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive;
               (iii) the Company’s requiring the Executive to be based at any location other than as provided in paragraph 2(c) hereof; or
               (iv) any purported termination by the Company of the Executive’s employment otherwise than as expressly permitted by this Agreement.
          (h) For purposes of this Agreement, “Pro Rata Bonus” shall mean the pro rata portion (calculated as if the “target” amount under such plan has been reached) under any current annual bonus plan from January 1 of the year of termination through the date of termination.
     5. Confidential Information.
          Executive acknowledges that the information, observations and data obtained by Executive while employed by the Company concerning the business or affairs of the Company or any Subsidiary (“Confidential Information”) are the property of the Company or such Subsidiary. Therefore, Executive agrees that Executive shall not disclose to any unauthorized person or use for Executive’s own purposes any Confidential Information without the prior written consent of the Board, unless and to the extent that the aforementioned matters become generally known to and available for use by the public other than as a result of Executive’s acts or omissions not within the ordinary course of business of the Company. Executive shall deliver to the Company at the termination of the Employment Term or any extension term, or at any other time the Company may request, all memoranda, notes, plans, records, reports, computer tapes, printouts and software and other documents and data (and copies thereof) in any form or medium relating to the Confidential Information, Work Product (as defined below) or the

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business of the Company or any Subsidiary that Executive may then possess or have under Executive’s control.
     6. Inventions and Patents.
          Executive acknowledges that all inventions, innovations, improvements, developments, methods, designs, analyses, drawings, reports and all similar or related information (whether or not patentable) that relate to the Company’s or any of its Subsidiaries’ actual or anticipated business, research and development or existing or future products or services and that are conceived, developed or made by Executive while employed by the Company (“Work Product”) belong to the Company or such Subsidiary. Executive shall promptly disclose such Work Product to the Company’s Chief Executive Officer or Chairman of the Board and perform all actions reasonably requested by the Chief Executive Officer or Board, as applicable (whether during or after the Employment Term or any extension term) to establish and confirm such ownership (including, without limitation, assignments, consents, powers of attorney and other instruments).
     7. Non-Compete, Non-Solicitation.
          (a) In further consideration of the compensation to be paid to Executive hereunder, Executive acknowledges that in the course of Executive’s employment with the Company Executive shall become familiar with the Company’s trade secrets and with other Confidential Information concerning the Company and its Subsidiaries and that Executive’s services shall be of special, unique and extraordinary value to the Company and its Subsidiaries. Therefore, Executive agrees that, during the Employment Term or any extension term and for a period of twelve (12) months thereafter (as applicable, the “Noncompete Period”), Executive shall not directly or indirectly own any interest in, manage, control, participate in, consult with, render services for, or in any manner engage in any business competing with the businesses of the Company or its Subsidiaries, as such businesses exist or are in process on the date of the termination of Executive’s employment, within any geographical area in which the Company or its Subsidiaries engage or actively plan to engage in such businesses. Nothing herein shall prohibit Executive from being a passive owner of not more than 2% of the outstanding stock of any class of a corporation which is publicly traded, so long as Executive has no direct or indirect active participation in the business of such corporation.
          (b) During the Noncompete Period, Executive shall not directly or indirectly through another person or entity (i) induce or attempt to induce any employee of the Company or any Subsidiary to leave the employ of the Company or such Subsidiary, or in any way interfere with the relationship between the Company or any Subsidiary and any employee thereof, (ii) hire an employee of the Company or any Subsidiary, or (iii) induce or attempt to induce any customer, supplier, licensee, licensor, franchisee or other business relation of the Company or any Subsidiary to cease doing business with the Company or such Subsidiary, or in any way interfere with the relationship between any such customer, supplier, licensee, licensor, franchisee, or business relation and the Company or any Subsidiary (including, without limitation, making any negative statements or communications about the Company or its Subsidiaries).

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          (c) The provisions of this paragraph 7 will be enforced to the fullest extent permitted by the law in the state in which Executive resides or is employed at the time of the enforcement of the provision. If, at the time of enforcement of this paragraph 7, a court shall hold that the duration, scope or area restrictions stated herein are unreasonable under circumstances then existing, the parties agree that the maximum duration, scope or area reasonable under such circumstances shall be substituted for the stated duration, scope or area and that the court shall be allowed to revise the restrictions contained herein to cover the maximum period, scope and area permitted by law. Executive agrees that the restrictions contained in this paragraph 7 are reasonable.
          (d) In the event of the breach or a threatened breach by Executive of any of the provisions of this paragraph 7, the Company, in addition and supplementary to other rights and remedies existing in its favor, may apply to any court of law or equity of competent jurisdiction for specific performance and/or injunctive or other relief in order to enforce or prevent any violations of the provisions hereof (without posting a bond or other security). In addition, in the event of an alleged breach or violation by Executive of this paragraph 7, the Noncompete Period shall be tolled until such breach or violation has been duly cured.
     8. Executive’s Representations.
          Executive hereby represents and warrants to the Company that (i) the execution, delivery and performance of this Agreement by Executive do not and shall not conflict with, breach, violate or cause a default under any contract, agreement, instrument, order, judgment or decree to which Executive is a party or by which Executive is bound, (ii) Executive is not a party to or bound by any employment agreement, noncompete agreement or confidentiality agreement with any other person or entity and (iii) upon the execution and delivery of this Agreement by the Company, this Agreement shall be the valid and binding obligation of Executive, enforceable in accordance with its terms. Executive hereby acknowledges and represents that Executive has had an opportunity to consult with independent legal counsel regarding Executive’s rights and obligations under this Agreement and that Executive fully understands the terms and conditions contained herein.
     9. Survival.
          Paragraphs 5, 6 and 7 and paragraphs 9 through 16 shall survive and continue in full force in accordance with their terms notwithstanding any termination of the Employment Term or any extension term.
     10. Notices.
          Any notice provided for in this Agreement shall be in writing and shall be either personally delivered, or mailed by certified first class mail, return receipt requested, to the recipient at the address below indicated:
          Notices to Executive:

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     Amy Rhoades, at her most recent address as reflected in the employment records of the Company.
Notices to the Company:
130 A.C. Moore Drive
Berlin, NJ 08009
Attention: Chief Executive Officer
or such other address or to the attention of such other person as the recipient party shall have specified by prior written notice to the sending party. Any notice under this Agreement shall be deemed to have been given when so delivered or mailed.
     11. Severability.
          Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability shall not affect any other provision or any other jurisdiction, but this Agreement shall be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provision had never been contained herein.
     12. Complete Agreement.
          This Agreement and Appendix I hereto and those documents expressly referred to herein and therein, embody the complete agreement and understanding among the parties and supersede and preempt any prior understandings, agreements or representations by or among the parties, written or oral, which may have related to the subject matter hereof in any way.
     13. No Strict Construction.
          The language used in this Agreement shall be deemed to be the language chosen by the parties hereto to express their mutual intent, and no rule of strict construction shall be applied against any party.
     14. Counterparts.
          This Agreement may be executed in separate counterparts, each of which is deemed to be an original and all of which taken together constitute one and the same agreement.
     15. Successors and Assigns.
          This Agreement is intended to bind and inure to the benefit of and be enforceable by Executive, the Company and their respective heirs, successors and assigns, except that Executive may not assign Executive’s rights or delegate Executive’s obligations hereunder without the prior written consent of the Company.

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     16. Choice of Law.
          All issues and questions concerning the construction, validity, enforcement and interpretation of this Agreement and Appendix I hereto shall be governed by, and construed in accordance with, the laws of the State of New Jersey, without giving effect to any choice of law or conflict of law rules or provisions (whether of the State of New Jersey or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the State of New Jersey.
     17. Amendment and Waiver.
          The provisions of this Agreement may be amended or waived only with the prior written consent of the Company and Executive, and no course of conduct or failure or delay in enforcing the provisions of this Agreement shall affect the validity, binding effect or enforceability of this Agreement.
     18. Arbitration Provisions.
          Except as to the right of the Company to resort to any court of competent jurisdiction to obtain injunctive relief or specific enforcement of the Executive’s obligations of confidentiality, non-solicitation and non-competition under this Employment Agreement (or otherwise), any dispute or controversy between the Company and Executive arising out of or relating to Executive’s employment or termination of employment, this Agreement or the breach of this Agreement, including but not limited to disputes involving discrimination arising under common law, and/or federal, state and local laws, shall be settled by arbitration administered by the American Arbitration Association (“AAA”) in accordance with its National Rules for the Resolution of Employment Disputes then in effect, and judgment on the award rendered by the arbitrator may be entered in any court having jurisdiction thereof. Any arbitration shall be held before a single arbitrator who shall be selected by the mutual agreement of the Company and Executive, unless the parties are unable to agree to an arbitrator, in which case the arbitrator will be selected under the procedures of the AAA. The arbitrator shall have the authority to award any remedy or relief that a court of competent jurisdiction could order or grant, including, without limitation, the issuance of an injunction. Executive agrees to abide by and accept the final decision of the arbitrator as to the ultimate resolution of any and all covered disputes and understands that arbitration replaces any right to trial by a judge or jury. However, either party may, without inconsistency with this arbitration provision, apply to any court otherwise having jurisdiction over such dispute or controversy and seek interim provisional, injunctive or other equitable relief until the arbitration award is rendered or the controversy is otherwise resolved. Except as necessary in court proceedings to enforce this arbitration provision or an award rendered hereunder, or to obtain interim relief, or as may otherwise be required by law, neither a party nor an arbitrator may disclose the existence, content or results of any arbitration hereunder without the prior written consent of the Company and Executive. The Company and Executive acknowledge that this Agreement evidences a transaction involving interstate commerce. Notwithstanding any choice of law provision included in this Agreement, the United States Federal Arbitration Act shall govern the interpretation and enforcement of this arbitration provision. The arbitration proceeding shall be conducted in Camden County, New Jersey unless

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the parties mutually agree to another location. The Company shall pay the costs of any arbitrator appointed hereunder.
     19. Withholding.
          The Company may withhold any amounts payable under this Agreement for such Federal, state, local or foreign taxes as shall be required to be withheld pursuant to any applicable law or regulation.
     20. Section 409A.
          In the event that an amount becomes payable to the Executive after her termination of employment, the Company shall determine whether such payment is subject to the requirements of Section 409A (a) (2)(A)(i) and Section 409A (a)(2)(B)(i) of the Internal Revenue Code of 1986, as amended (hereinafter referred to as the “Specified Employee Rule”). The Company shall make such determination and provide written notice thereof to the Executive prior to the earlier of the date that any such amounts would be paid to the Executive without regard to Code Section 409A or within 30 days after her termination of employment. Upon the request of the Executive, the Company agrees to promptly provide to her such information that the Executive may reasonably request with regard to its determination. In the event that the Company determines that an amount payable to the Executive after her termination of employment is subject to the Specified Employee Rule, then no distribution of such amount shall be made to the Executive on account of her separation from service before the date which is six (6) months after the date of her separation from service (or if earlier, the date of death of the Executive). The aggregate amount that would have been payable to the Executive but for the restrictions imposed by Section 409A shall be paid to the Executive as soon as permitted by Section 409A.
* * *
     IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above.
             
 
           
    A.C. MOORE ARTS & CRAFTS, INC.    
 
           
 
  By:   /s/ Rick A. Lepley    
 
           
 
      Name: Rick A. Lepley    
 
      Its: Chief Executive Officer    
 
           
    EXECUTIVE    
 
           
    /s/ Amy Rhoades    
         
    Name: Amy Rhoades    

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APPENDIX I
CHANGE OF CONTROL PROVISIONS
To Employment Agreement Of Amy Rhoades
     If a Change of Control (as defined in this Appendix I ) of the Company occurs, paragraphs 1 through 4 of the Agreement (except paragraphs 3(c), 3(d), 3(e) and 3(f) which shall continue) shall be superseded by this Appendix I.
     NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:
     1. Effective Date.
          For the purpose of this Appendix I, the “Effective Date” shall mean the date on which a Change of Control (as defined in Section 2 of this Appendix I) occurs. Anything in the Agreement to the contrary notwithstanding, if a Change of Control occurs and if the Executive’s employment with the Company is terminated prior to the date on which the Change of Control occurs, and if it is reasonably demonstrated by the Executive that such termination of employment (i) was at the request of a third party who has taken steps reasonably calculated to effect a Change of Control or (ii) otherwise arose in connection with or anticipation of a Change of Control, then for all purposes of the Agreement and this Appendix I, the “Effective Date” shall mean the date immediately prior to the date of such termination of employment.
     2. Change of Control. For the purpose of this Agreement, a “Change of Control” shall mean:
          (a) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) (a “Person”) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of more than 50% of either (i) the then-outstanding shares of common stock of the Company (the “Outstanding Company Common Stock”) or (ii) the combined voting power of the then-outstanding voting securities of the Company entitled to vote generally in the election of directors (the “Outstanding Company Voting Securities”); provided, however, that for purposes of this subsection (a), the following acquisitions shall not constitute a Change of Control: (i) any acquisition directly from the Company, (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company, or (iv) any acquisition by any corporation pursuant to a transaction which complies with clauses (i), (ii) and (iii) of subsection (c) of this Section 2; or
          (b) Individuals who, as of the date hereof, constitute the Board (the “Incumbent Board”) cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company’s shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened

 


 

election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or
          (c) Consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company (a “Business Combination”), in each case, unless, following such Business Combination, (i) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of, respectively, the then-outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company’s assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (ii) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, more than 50% of, respectively, the then-outstanding shares of common stock of the corporation resulting from such Business Combination, or the combined voting power of the then-outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination and (iii) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or
          (d) Approval by the shareholders of the Company of a complete liquidation or dissolution of the Company.
     3. Employment Term. The Company hereby agrees to continue the Executive in its employ, and the Executive hereby agrees to remain in the employ of the Company subject to the terms and conditions of this Agreement, for the period commencing on the Effective Date and ending on the twelfth month anniversary of such date (the “Employment Term”). Such period may be extended in writing by the mutual agreement of the Company and Executive at any time prior to such anniversary.
     4. Terms of Employment.
          (a) Position and Duties.
               (i) During the Employment Term, (A) the Executive’s position, authority, duties and responsibilities shall be at least commensurate in all material respects with the most significant of those held, exercised and assigned to her at any time during the 120-day period immediately preceding the Effective Date and (B) the Executive’s services shall be performed at the location where the Executive was employed immediately preceding the Effective Date or any office or location less than 35 miles from such location.

 


 

               (ii) During the Employment Term, and excluding any periods of vacation and sick leave to which the Executive is entitled, the Executive agrees to devote Executive’s best efforts and Executive’s full business time and attention to the business and affairs of the Company and its Subsidiaries. During the Employment Term it shall not be a violation of this Agreement for the Executive to (A) serve on corporate, civic or charitable boards or committees, (B) deliver lectures, fulfill speaking engagements or teach at educational institutions, and (C) manage personal investments, so long as such activities do not significantly interfere with the performance of the Executive’s responsibilities as an employee of the Company in accordance with this Agreement. It is expressly understood and agreed that to the extent that any such activities have been conducted by the Executive prior to the Effective Date, the continued conduct of such activities (or the conduct of activities similar in nature and scope thereto) subsequent to the Effective Date shall not thereafter be deemed to interfere with the performance of the Executive’s responsibilities to the Company.
          (b) Compensation.
               (i) Base Salary. During the Employment Term, the Executive shall receive an annual base salary (“Annual Base Salary”), which shall be paid at a monthly rate, at least equal to twelve times the highest monthly base salary paid or payable, including any base salary which has been earned but deferred, to the Executive by the Company and its affiliated companies in respect of the twelve-month period immediately preceding the month in which the Effective Date occurs. During the Employment Term, the Annual Base Salary shall be reviewed no more than 12 months after the last salary increase awarded to the Executive prior to the Effective Date and thereafter at least annually. Any increase in Annual Base Salary shall not serve to limit or reduce any other obligation to the Executive under this Agreement. Annual Base Salary shall not be reduced after any such increase and the term Annual Base Salary as utilized in this Agreement shall refer to Annual Base Salary as so increased. As used in this Appendix I, the term “affiliated companies” shall include any company controlled by, controlling or under common control with the Company.
               (ii) Annual Bonus. In addition to Annual Base Salary, the Executive shall be awarded, for each calendar year ending during the Employment Term, an annual bonus (the “Annual Bonus”) in cash at least equal to the Executive’s bonus under the Company’s annual bonus plans or any comparable bonus under any predecessor or successor plan or plans, for the last full calendar year prior to the Effective Date (annualized in the event that the Executive was not employed by the Company for the whole of such calendar year). Each such Annual Bonus shall be paid no later than March 15th of the calendar year next following the calendar year for which the Annual Bonus is awarded.
     5. Termination of Employment.
          (a) Death or Disability. The Executive’s employment shall terminate automatically upon the Executive’s death during the Employment Term. If the Company determines in good faith that the Disability of the Executive has occurred during the Employment Term (pursuant to the definition of Disability set forth below), it may give to the Executive written notice in accordance with the Agreement of its intention to terminate the Executive’s employment. In such event, the Executive’s employment with the Company shall

 


 

terminate effective on the 30th day after receipt of such notice by the Executive (the “Disability Effective Date”), provided that, within the 30 days after such receipt, the Executive shall not have returned to full-time performance of the Executive’s duties. For purposes of this Agreement, “Disability” shall mean the absence of the Executive from the Executive’s duties with the Company on a full-time basis for 90 consecutive days as a result of incapacity due to mental or physical illness which is determined to be total and permanent by a physician selected by the Company or its insurers and acceptable to the Executive or the Executive’s legal representative.
          (b) Cause. The Company may terminate the Executive’s employment during the Employment Term for Cause. For purposes of this Agreement, “Cause” shall mean:
               (i) the failure of the Executive to perform substantially the Executive’s duties with the Company or one of its affiliates (other than any such failure resulting from incapacity due to physical or mental illness), after a written demand for substantial performance is delivered to the Executive by the Chief Executive Officer which specifically identifies the manner in which the Chief Executive Officer believes that the Executive has not substantially performed the Executive’s duties; provided however, that Executive shall have one opportunity to cure the failure so identified for sixty days from the written demand, or
               (ii) the engaging by the Executive in illegal conduct or gross misconduct in violation of the Company’s Code of Ethics and Conflict of Interest Policy.
Any act, or failure to act, based upon authority given pursuant to a resolution duty adopted by the Board or upon the instructions of the Chief Executive Officer or based upon the advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by the Executive in good faith and in the best interests of the Company. The cessation of employment of the Executive shall not be deemed to be for Cause unless and until there shall have been delivered to the Executive a written notice from the Chief Executive Officer, a copy of which notice has been previously delivered to the Board of Directors, finding that, in the good faith opinion of the Chief Executive Officer, the Executive is guilty of the conduct described in subsection 5(b)(i) or (ii) above, and specifying the particulars thereof in detail.
          (c) Good Reason. The Executive’s employment may be terminated by the Executive for Good Reason. For purposes of this Agreement, “Good Reason” shall mean:
               (i) the assignment to the Executive of any duties inconsistent in any respect with the Executive’s position, authority, duties or responsibilities as contemplated by Section 4(a) of this Appendix I, or any other action by the Company which results in a material diminution in such position, authority, duties or responsibilities, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive;
               (ii) any failure by the Company to comply with any of the provisions of Section 4(b) of this Appendix I, other than an isolated, insubstantial and inadvertent failure not occurring in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive;

 


 

               (iii) the Company’s requiring the Executive to be based at any office or location other than as provided in Section 4(a)(i)(B) of this Appendix I;
               (iv) any purported termination by the Company of the Executive’s employment otherwise than as expressly permitted by this Appendix I; or
               (v) any failure by the Company to require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform the Agreement (including without limitation this Appendix I) in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place.
          (d) Date of Termination. “Date of Termination” means (i) if the Executive’s employment is terminated by the Company for Cause, or by the Executive for Good Reason, the date of receipt of the notice of termination, (ii) if the Executive’s employment is terminated by the Company other than for Cause or Disability, the date on which the Company notifies the Executive of such termination and (iii) if the Executive’s employment is terminated by reason of death or Disability, the date of death of the Executive or the Disability Effective Date, as the case may be.
     6. Obligations of the Company upon Termination.
          (a) Good Reason; Other Than for Cause, Death or Disability. If, during the Employment Term, the Company shall terminate the Executive’s employment other than for Cause, death or Disability or the Executive shall terminate Executive’s employment for Good Reason:
               (i) the Company shall pay to the Executive in a single lump sum payment in cash within 30 days after the Date of Termination the aggregate of the following amounts:
                    (A) the sum of (1) the Executive’s Annual Base Salary through the Date of Termination to the extent not theretofore paid, plus (2) the product of (I) the target Annual Bonus paid or payable, for the most recently completed calendar year during the Employment Term and (II) a fraction, the numerator of which is the number of days in the current calendar year through the Date of Termination, and the denominator of which is 365, plus (3) any compensation previously deferred by the Executive and not theretofore previously paid shall be paid in accordance with the terms of the plan pursuant to which deferral was made, plus (4) an amount equal to the Executive’s Annual Base Salary through the twelfth month anniversary of the Date of Termination.
               (ii) The Company shall provide all benefits as are, from time to time, maintained for officers of the Company, including without limitation, medical and other insurance plans to the Executive through the twelfth month anniversary of the Date of Termination of Executive’s employment pursuant to or, if not pursuant to, which are substantially equal to the Company’s insurance programs in effect and to the extent Executive participated immediately prior to the date of such termination, provided that if the Consolidated Omnibus Reconciliation Act of 1985 (“COBRA”) applies to the provision of health insurance benefits for

 


 

any part of the period of benefit continuation provided for by this paragraph, Executive will make all necessary elections and such benefits will run concurrently with and satisfy the continuation coverage requirements of this paragraph for the period to which COBRA applies.
               (iii) all options to purchase common stock in the Company previously granted to Executive and all options to purchase common stock in the Company to which Executive would be entitled to be granted on the last day of the calendar year if Date of Termination had not occurred in such year, shall immediately be deemed granted, vested and become exercisable on the Date of Termination.
No payment of any sum nor the receipt of any benefit shall be due to Executive under this Section 6(a) unless and until Executive shall have executed and delivered to the Company a release of any and all claims against the Company and its Subsidiaries (and their respective present and former officers, directors, employees and agents – collectively the “Released Parties”) and a covenant not to sue the Released Parties, all in form and substance as provided by counsel to the Company (the “Release”) and any waiting period or revocation period provided by law for the effectiveness of such Release shall have expired without Executive’s having revoked such Release. In the event Executive shall decline or fail for any reason to execute and deliver such Release, the Executive shall be entitled to receive only those amounts provided pursuant to Section 6(d) provided for an Executive whose employment is terminated by the Company for Cause or by Executive without Good Reason.
          (b) Death. If the Executive’s employment is terminated by reason of the Executive’s death during the Employment Term, this Agreement shall terminate without further obligations to the Executive’s legal representatives under this Agreement, except that Executive, or Executive’s estate if applicable, shall be entitled to receive the sum of (i) Executive’s Annual Base Salary through the Date of Termination and (ii) Executive’s Pro Rata Bonus (as defined below) and the timely payment or provision of any other amounts or benefits required to be paid or provided or which the Executive is eligible to receive under any plan, program, policy or practice or contract or agreement of the Company and its affiliated companies. The amounts set forth in Section 6(b)(i) and (ii) shall be paid to the Executive’s estate, as applicable, in a lump sum in cash within 30 days of the Date of Termination. For purposes of this Appendix I, “Pro Rata Bonus” shall mean the pro rata portion (calculated as if the “target” amount under such plan has been reached) under any current annual bonus plan from the beginning of the year of termination through the date of termination.
          (c) Disability. If the Executive’s employment is terminated by reason of the Executive’s Disability during the Employment Term, this Agreement shall terminate without further obligations to the Executive, except that Executive shall be entitled to receive the sum of (i) Executive’s Annual Base Salary through the Disability Effective Date and (ii) Executive’s Pro Rata Bonus (as defined in Section 6(b)) and the timely payment or provision of disability and other benefits required to be paid or provided or which the Executive is eligible to receive under any plan, program, practices and policies relating to disability of the Company and its affiliated companies.
          (d) Cause; Other than for Good Reason. If the Executive’s employment shall be terminated for Cause or Executive voluntarily terminates employment without Good Reason

 


 

during the Employment Term, this Agreement shall terminate without further obligations to the Executive other than for the Executive’s Annual Base Salary through the Date of Termination and timely payment or provision of other benefits , in each case to the extent theretofore unpaid.
     7. Nonexclusivity of Rights. Nothing in this Agreement shall prevent or limit the Executive’s continuing or future participation in any plan, program, policy or practice provided by the Company or any of its affiliated companies and amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan, policy, practice or program of or any contract or agreement with the Company or any of its affiliated companies at or subsequent to the date of termination of employment shall be payable in accordance with such plan, policy, practice or program or contract or agreement except as explicitly modified by this Agreement.

 

EX-10.26 4 w31791exv10w26.htm FIRST AMENDMENT TO EMPLOYMENT AGREEMENT DATED JULY 24, 2006 exv10w26
 

Exhibit 10.26
FIRST AMENDMENT TO
EMPLOYMENT AGREEMENT
     FIRST AMENDMENT, dated as of November 15, 2006 (this “Amendment”) to EMPLOYMENT AGREEMENT, dated as of July 24, 2006 (as heretofore amended, the “Employment Agreement”) between A. C. Moore Arts & Crafts, Inc., a Pennsylvania corporation (“Company”), and Amy Rhoades (“Executive”). Capitalized terms used herein and not defined herein shall have the respective meanings set forth for such terms in the Employment Agreement.
RECITALS:
     WHEREAS, Company and Executive have mutually agreed that certain provisions of the Employment Agreement be amended, as set forth herein.
     NOW, THEREFORE, intending to be legally bound hereby, it is agreed as follows:
     Section 1. Amendment to Paragraph 4(b). Immediately after the tenth word of the first sentence, which is the word “terminated”, Paragraph 4(b) is amended to include the following parenthetical:
“(including, without limitation, pursuant to the 60-day notice under Paragraph 4(a))”
     Section 2. Section 6(a)(iii) of Appendix I. Section 6(a)(iii) of Appendix I is hereby amended to include the following as an additional last sentence:
“(iii) all options to purchase common stock in the Company to which Executive would be entitled to be granted pursuant to the terms of this Agreement shall immediately be deemed granted, vested and become exercisable on the Date of Termination. Executive shall have 18 months after the Date of Termination to exercise such options, subject to the provisions of the plans under which they were granted.”
     Section 3. Amendment to Appendix I. Appendix I is amended to include the following Section 8:
Options. All options to purchase common stock in the Company held by Executive on the date of a Change of Control shall immediately be deemed vested and become exercisable on the date of the Change in Control and Executive shall have until the end of the applicable original term of each such option to exercise such options; provided, however, that in the event that

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Executive’s employment with the Company is terminated for any reason (other than Cause) after the Change in Control, Executive shall have until the earlier of (1) the end of the applicable original term of each such option and (2) 18 months after the Date of Termination to exercise such options post-termination. In the event that Executive’s employment with the Company is terminated for Cause, all options held by Executive shall terminate immediately.”
     Section 4. Effectiveness. This Amendment shall be become effective as of the date hereof.
     Section 5. Status of Employment Agreement. This Amendment is limited solely for the purposes and to the extent expressly set forth herein, and, except as expressly set forth herein all of the terms, provisions and conditions of the Employment Agreement shall continue in full force and effect and are not effected by this Amendment.
     IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to Employment Agreement to be duly executed and delivered as of the date first written above.
         
    /s/ Amy Rhoades
     
    AMY RHOADES
 
       
    A. C. MOORE ARTS & CRAFTS, INC.
 
       
 
  By:   /s/ Rick A. Lepley
 
       
 
      Rick A. Lepley
 
      Chief Executive Officer

2

EX-10.27 5 w31791exv10w27.htm PROMISSORY NOTE AND LOAN MODIFICATION AGREEMENT DATED MARCH 12, 2007 exv10w27
 

Exhibit 10.27
PROMISSORY NOTE AND LOAN MODIFICATION AGREEMENT
A.C. Moore Arts & Crafts, Inc.
130 A.C. Moore Drive
Berlin, NJ 08009
A.C. Moore Incorporated
130 A.C. Moore Drive
Berlin, NJ 08009
Moorestown Finance, Inc.
103 Foulk Road, Suite 200
Wilmington DE 19803
Blackwood Assets, Inc.
103 Foulk Road, Suite 200
Wilmington DE 19803
A.C. Moore Urban Renewal, LLC
130 A.C. Moore Drive
Berlin, NJ 08009
(Individually and collectively, “Borrower”)
Wachovia Bank, National Association
190 River Road
Summit, New Jersey 07901
(hereinafter referred to as the “Bank”)
THIS AGREEMENT is entered into on March 12, 2007 by and between Bank and Borrower.
RECITALS
Bank is the holder of the following notes: (i) a Promissory Note (the “$35MM Note”) executed and delivered by Borrower, dated October 28, 2003, as subsequently amended by a Promissory Note and Loan Modification Agreement, dated February 22, 2006, and Promissory Note and Loan Modification Agreement, dated May 1, 2006, (ii) a Promissory Note (the “$22.5MM Note”) executed and delivered by Borrower, dated October 28, 2003, as subsequently amended by Promissory Note and Loan Modification Agreement, dated May 1, 2006, (iii) a Promissory Note (the “$7.5MM Note”; executed and delivered by Borrower, dated October 28, 2003, as subsequently amended by a Promissory Note and Loan Modification Agreement, dated May 1, 2006, and certain other loan documents, including without limitation, a Loan Agreement, dated October 28, 2003 (the “Loan Agreement”), and a Security Agreement, dated October 28, 2003 (the “Security Agreement”); and
Borrower and Bank have agreed to modify the terms of the Loan Documents; and
In consideration of Bank’s continued extension of credit and the agreements contained herein, the parties agree as follows:

 


 

AGREEMENT
$35MM NOTE MODIFICATIONS. The following modifications shall apply only to the $35MM Note:
     1. Maturity Date. The term of the $35,000,000.00 line of credit shall be extended to May 31, 2008 (the “Maturity Date”) with all outstanding principal and interest due on or before the Maturity Date.
     2. Repayment Terms. The $35MM Note shall be due and payable in consecutive monthly payments of accrued interest only, commencing on April 1, 2007, and continuing on the same day of each month thereafter until fully paid. In any event, all principal and accrued interest shall be due and payable on the Maturity Date.
$35MM NOTE, $22.5MM NOTE AND $7.5MM NOTE MODIFICATIONS. The following modifications shall apply to the Loan Documents related to the $35MM Note, $22.5MM Note and the $7.5MM Note:
     1. Interest Rate. The “Margin” means the applicable margin based upon the following Debt Service Coverage Ratio (“DSCR”), as defined in the Loan Agreement as amended herein below, as follows:
DEBT SERVICE COVERAGE RATIO — TRAILING 12 MONTHS
                 
GREATER   LESS THAN    
THAN   OR EQUAL TO   MARGIN
1.75
            0.50 %
1.35
    1.75       0.65 %
1.25
    1.35       0.90 %
     2. Negative Covenants.
          a. Change in Fiscal Year. Change its fiscal year without the written consent of Bank, not to be unreasonably withheld.
          b. Encumbrances. Create, assume, or permit to exist any mortgage, security deed, deed of trust, pledge, lien, charge or other encumbrance on any of its assets, whether now owned or hereafter acquired, other than: (i) security interests required by the Loan Documents; (ii) liens for taxes contested in good faith; (iii) liens accruing by law for employee benefits; (iv) Permitted Liens or (v) liens relating to capitalized lease obligations or purchase money financing not to exceed $2,000,000 in the aggregate.
          c. Default on Other Contracts or Obligations. Default on any contract with or obligation when due to a third party or default in the performance of any obligation to a third party incurred for borrowed money, the default of which could result in an uninsured liability in excess of $500,000.
     3. Financial Covenants.
          a. Debt Service Coverage Ratio. Borrower shall maintain a Debt Service Coverage Ratio of not less than 1.25 to 1.00, to be calculated quarterly, on a rolling four quarters basis. “Debt Service Coverage Ratio” means the ratio of (i) the sum of net profit plus depreciation plus amortization plus interest expense plus operating lease (rent) expenses minus all cash dividends, withdrawals and/or other equity disbursements divided by (ii) the sum of the current portion of long term debt and capital lease obligations plus interest expenses plus operating lease (rent) expenses.

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          b. Material Acquisitions. Borrower shall not acquire substantially all of the business or assets or more than 50% of the outstanding stock or voting power of any other entity or entities requiring a cash expenditure of more than $20,000,000 in the aggregate and providing that such acquisition shall not cause any condition or event which constitutes a Default (as defined in the Loan Documents executed by the Borrower) or any event which, upon the giving of notice or lapse of time or both, may become a Default.
          c. Limitation on Debt. Borrower shall not, directly or indirectly, create, incur, assume or become liable for any additional indebtedness, whether contingent or direct, if, giving effect to such additional debt on a pro forma basis causes the aggregate amount of Borrower’s debt, excluding obligations to Bank, to exceed $18,000,000.00. Notwithstanding this limitation on debt, Borrower shall be allowed to incur debt subordinated to Bank on terms and conditions satisfactory to Bank, providing that the repayment of such debt shall not cause any condition or event which constitutes a Default (as defined in the Loan Documents executed by the Borrower) or any event which, upon the giving of notice or lapse of time or both, may become a default. Debt in this paragraph shall mean indebtedness for borrowed money including capital leases and purchase money financing.
     4. Default.
          a. Cross Default. At Bank’s option, (i) any default in payment or performance of any obligation under any other loans, contracts or agreements of Borrower, any Subsidiary of Borrower, any general partner of or the holder(s) of the majority ownership interests of Borrower (except holder(s) of the common stock of the Borrower) with Bank or its affiliates (“Affiliate” shall have the meaning as defined in 11 U.S.C. § 101, except that the term “Borrower” shall be substituted for the term “Debtor” therein; “Subsidiary” shall mean any business in which Borrower holds, directly or indirectly, a controlling interest), or (ii) any default in payment or performance of any obligation under any other loans aggregating more than $2,500,000 of Borrower, or any Subsidiary of Borrower.
          b. Cessation; Bankruptcy. The death of, appointment of a guardian for, dissolution of, termination of existence of, appointment of a receiver for, assignment for the benefit of creditors of, or commencement of any bankruptcy or insolvency proceeding by or against Borrower or its Subsidiaries, or any party to the Loan Documents.
          c. Material Capital Structure or Business Alteration. Without prior written consent of Bank, (i) a material alteration in the kind or type of Borrower’s business or that of Borrower’s Subsidiaries, if any; (ii) the sale of substantially all of the business or assets of Borrower, any of Borrower’s Subsidiaries or any guarantor, or a material portion (10% or more) of such business or assets if such a sale is outside the ordinary course of business of Borrower, or any of Borrower’s Subsidiaries or any guarantor, or more than 50% of the outstanding stock or voting power of or in any such entity in a single transaction or a series of transactions; (iii) the acquisition of substantially all of the business or assets of any entity, which acquisition has a total cost, singly or in the aggregate, in excess of $20,000,000; or (iv) should any Borrower or any of Borrower’s Subsidiaries or any guarantor enter into any merger or consolidation if Borrower, such subsidiary or guarantor is not the surviving entity; or (v) should Borrower be delisted from the NASDAQ, unless Borrower is being listed on another recognized United States stock exchange.
          d. Material Adverse Change. This provision shall be omitted in its entirety.
ACKNOWLEDGMENTS AND REPRESENTATIONS. Borrower acknowledges and represents that the Notes and other Loan Documents, as amended hereby, are in full force and effect without any defense, counterclaim, right or claim of set-off; that, after giving effect to this Agreement, no default or event that with the passage of time or giving of notice would constitute a default under the Loan Documents has occurred, all representations and warranties contained in the Loan Documents are true and correct as of

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this date, all necessary action to authorize the execution and delivery of this Agreement has been taken; and this Agreement is a modification of an existing obligation and is not a novation.
COLLATERAL. Borrower acknowledges and confirms that there have been no changes in the ownership of any Collateral pledged to secure the Obligations since the Collateral was originally pledged; Borrower acknowledges and confirms that the Bank has existing, valid first priority security interests and liens in the Collateral; and that such security interests and liens shall secure Borrower’s Obligations, including this Agreement, and all future modifications, extensions, renewals and/or replacements of the Loan Documents.
MISCELLANEOUS. This Agreement shall be construed in accordance with and governed by the laws of the applicable state as originally provided in the Loan Documents, without reference to that state’s conflicts of law principles. This Agreement and the other Loan Documents constitute the sole agreement of the parties with respect to the subject matter thereof and supersede all oral negotiations and prior writings with respect to the subject matter thereof. No amendment of this Agreement, and no waiver of any one or more of the provisions hereof shall be effective unless set forth in writing and signed by the parties hereto. The illegality, unenforceability or inconsistency of any provision of this Agreement shall not in any way affect or impair the legality, enforceability or consistency of the remaining provisions of this Agreement or the other Loan Documents. This Agreement and the other Loan Documents are intended to be consistent. However, in the event of any inconsistencies among this Agreement and any of the Loan Documents, the terms of this Agreement, and then the Notes, shall control. This Agreement may be executed in any number of counterparts and by the different parties on separate counterparts. Each such counterpart shall be deemed an original, but all such counterparts shall together constitute one and the same agreement. Terms used in this Agreement which are capitalized and not otherwise defined herein shall have the meanings ascribed to such terms in the Notes.
FEES. Borrower shall pay for all reasonable attorney’s fees and all costs and expenses incurred by Bank in connection with the preparation of this Agreement and closing the modification herein described.
LIMITATION ON LIABILITY; WAIVER OF PUNITIVE DAMAGES. EACH OF THE PARTIES HERETO, INCLUDING BANK BY ACCEPTANCE HEREOF, AGREES THAT IN ANY JUDICIAL, MEDIATION OR ARBITRATION PROCEEDING OR ANY CLAIM OR CONTROVERSY BETWEEN OR AMONG THEM THAT MAY ARISE OUT OF OR BE IN ANY WAY CONNECTED WITH THIS AGREEMENT, THE LOAN DOCUMENTS OR ANY OTHER AGREEMENT OR DOCUMENT BETWEEN OR AMONG THEM OR THE OBLIGATIONS EVIDENCED HEREBY OR RELATED HERETO, IN NO EVENT SHALL ANY PARTY HAVE A REMEDY OF, OR BE LIABLE TO THE OTHER FOR, (1) INDIRECT, SPECIAL OR CONSEQUENTIAL DAMAGES OR (2) PUNITIVE OR EXEMPLARY DAMAGES. EACH OF THE PARTIES HEREBY EXPRESSLY WAIVES ANY RIGHT OR CLAIM TO PUNITIVE OR EXEMPLARY DAMAGES THEY MAY HAVE OR WHICH MAY ARISE IN THE FUTURE IN CONNECTION WITH ANY SUCH PROCEEDING, CLAIM OR CONTROVERSY, WHETHER THE SAME IS RESOLVED BY ARBITRATION, MEDIATION, JUDICIALLY OR OTHERWISE.
FINAL AGREEMENT. This Agreement and the other Loan Documents represent the final agreement between the parties and may not be contradicted by evidence of prior, contemporaneous or subsequent oral agreements of the parties. There are no unwritten oral agreements between the parties.
DEFINITIONS. The term “Loan Documents”, as used in this Agreement and the other Loan Documents, refers to all documents, agreements, and instruments executed in connection with any of the Obligations (as defined herein), and may include, without limitation, modification agreements, a commitment letter that survives closing, a loan agreement, any note, guaranty agreements, security agreements, security instruments, financing statements, mortgage instruments, letters of credit and any renewals or modifications, whenever any of the foregoing are executed, but does not include swap agreements (as defined in 11 U.S.C. § 101). The term “Obligations”, as used in this Agreement and the other Loan Documents, refers to any and all indebtedness and other obligations of every kind and description of the

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Borrower to the Bank or to any Bank affiliate, whether or not under the Loan Documents, and whether such debts or obligations are primary or secondary, direct or indirect, absolute or contingent, sole, joint or several, secured or unsecured, due or to become due, contractual, including, without limitation, swap agreements (as defined in 11 U.S.C. § 101), arising by tort, arising by operation of law, by overdraft or otherwise, or now or hereafter existing, including, without limitation, principal, interest, fees, late fees, expenses, attorneys’ fees and costs that have been or may hereafter be contracted or incurred. Any defined term provided for herein and not otherwise defined shall have the meaning given to it in the Loan Documents.
WAIVER OF JURY TRIAL. TO THE EXTENT PERMITTED BY APPLICABLE LAW, EACH OF BORROWER BY EXECUTION HEREOF AND BANK BY ACCEPTANCE HEREOF, KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES ANY RIGHT EACH MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED ON, OR ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT, THE LOAN DOCUMENTS OR ANY AGREEMENT CONTEMPLATED TO BE EXECUTED IN CONNECTION WITH THIS AGREEMENT, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF ANY PARTY WITH RESPECT HERETO. THIS PROVISION IS A MATERIAL INDUCEMENT TO BANK TO ACCEPT THIS AGREEMENT. EACH OF THE PARTIES AGREES THAT THE TERMS HEREOF SHALL SUPERSEDE AND REPLACE ANY PRIOR AGREEMENT RELATED TO ARBITRATION OF DISPUTES BETWEEN THE PARTIES CONTAINED IN ANY LOAN DOCUMENT OR ANY OTHER DOCUMENT OR AGREEMENT HERETOFORE EXECUTED IN CONNECTION WITH, RELATED TO OR BEING REPLACED, SUPPLEMENTED, EXTENDED OR MODIFIED BY, THIS AGREEMENT.
IN WITNESS WHEREOF, the undersigned have signed and sealed this Agreement the day and year first above written.
         
A.C. Moore Arts & Crafts, Inc.
Taxpayer Identification Number: 22-3527763
   
 
       
By:
  /s/ Marc Katz
 
  (SEAL) 
Name: Marc Katz
Title: Executive Vice President and Chief Financial Officer
   
 
       
A.C. Moore Incorporated
Taxpayer Identification Number: 22-2546111
   
 
       
By:
  /s/ Marc Katz
 
  (SEAL) 
Name: Marc Katz
Title: Executive Vice President and Chief Financial Officer
   
 
       
Moorestown Finance, Inc.
Taxpayer Identification Number: 52-2066272
   
 
       
By:
  /s/ Marc Katz
 
  (SEAL) 
Name: Marc Katz
Title: Executive Vice President and Chief Financial Officer
   

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Blackwood Assets, Inc.
Taxpayer Identification Number: 52-2066271
   
 
       
By:
  /s/ Marc Katz   (SEAL)
 
       
Name: Marc Katz
Title: Executive Vice President and Chief Financial Officer
   
 
       
A.C. Moore Urban Renewal, LLC
Taxpayer Identification Number: 56-2388590
   
 
       
By:
  /s/ Marc Katz   (SEAL)
 
       
Name: Marc Katz
Title: Executive Vice President and Chief Financial Officer
   
 
       
Wachovia Bank, National Association    
 
       
By:
  /s/ Dante Bucci   (SEAL)
 
       
Name: Dante Bucci
Title: Senior Vice President
   

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EX-21.1 6 w31791exv21w1.htm SUBSIDIARIES OF THE COMPANY exv21w1
 

Exhibit 21.1
SUBSIDIARIES OF THE COMPANY
         
        Jurisdiction of
        Incorporation or
Subsidiary   Parent   Organization
A. C. Moore Incorporated
  A. C. Moore Arts & Crafts, Inc.   Virginia
 
Moorestown Finance, Inc.
  A. C. Moore Arts & Crafts, Inc.   Delaware
 
Blackwood Assets, Inc.
  Moorestown Finance, Inc.   Delaware
 
A. C. Moore Urban Renewal, LLC
  A. C. Moore Arts & Crafts, Inc.   New Jersey

 

EX-23.1 7 w31791exv23w1.htm CONSENT OF PRICEWATERHOUSECOOPERS LLP exv23w1
 

Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-59243, 333-38156, 333-91140) of A. C. Moore Arts & Crafts, Inc. of our report dated March 12, 2007 relating to the financial statements, financial statement schedule, management’s assessment of the effectiveness of internal control over financial reporting and the effectiveness of internal control over financial reporting, which appears in this Form 10-K.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Philadelphia, PA
March 12, 2007

 

EX-31.1 8 w31791exv31w1.htm CERTIFICATION OF RICK A. LEPLEY exv31w1
 

Exhibit 31.1
I, Rick A. Lepley, certify that:
     1. I have reviewed this Form 10-K of A.C. Moore Arts & Crafts, Inc.;
     2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
     3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
     4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
          (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
          (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
          (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
          (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and;
     5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
          (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
          (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: March 12, 2007
         
     
  By:   /s/ Rick A. Lepley    
    Rick A. Lepley   
    Chief Executive Officer
(principal executive officer) 
 
 

 

EX-31.2 9 w31791exv31w2.htm CERTIFICATION OF MARC KATZ exv31w2
 

Exhibit 31.2
I, Marc Katz, certify that:
     1. I have reviewed this Form 10-K of A.C. Moore Arts & Crafts, Inc.;
     2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
     3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
     4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
          (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
          (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
          (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
          (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and;
     5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
          (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
          (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
         
     
Date: March 12, 2007  By:   /s/ Marc Katz    
    Marc Katz   
    Executive Vice President and Chief Financial
Officer (principal financial officer) 
 
 

 

EX-32.1 10 w31791exv32w1.htm CERTIFICATION OF RICK A. LEPLEY PURSUANT TO 18 U.S.C.SECTION 1350 exv32w1
 

Exhibit 32.1
A.C. MOORE ARTS & CRAFTS, INC.
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
     Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Section 1350 of Chapter 63 of Title 18 of the United States Code), the undersigned officer of A.C. Moore Arts & Crafts, Inc. (the “Company”), does hereby certify with respect to this Form 10-K of the Company for the fiscal year ended December 31, 2006 (the “Report”) that:
          (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
          (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
         
     
Date: March 12, 2007  /s/ Rick A. Lepley    
  Rick A. Lepley   
  Chief Executive Officer   
 
     The foregoing certification is being furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Section 1350 of Chapter 63 of Title 18 of the United States Code) and is not being filed as part of the Report or as a separate disclosure document.

 

EX-32.2 11 w31791exv32w2.htm CERTIFICATION OF MARC KATZ PURSUANT TO 18 U.S.C. SECTION 1350 exv32w2
 

Exhibit 32.2
A.C. MOORE ARTS & CRAFTS, INC.
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
     Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Section 1350 of Chapter 63 of Title 18 of the United States Code), the undersigned officer of A.C. Moore Arts & Crafts, Inc. (the “Company”), does hereby certify with respect to this Form 10-K of the Company for the fiscal year ended December 31, 2006 (the “Report”) that:
          (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
          (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
         
     
Date: March 12, 2007  /s/ Marc Katz    
  Marc Katz    
  Executive Vice President and Chief Financial Officer  
 
     The foregoing certification is being furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Section 1350 of Chapter 63 of Title 18 of the United States Code) and is not being filed as part of the Report or as a separate disclosure document.

 

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