Filed by Bowne Pure Compliance

-----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, NpG/J6Lv6n0u0Y4uMu+acGCZ3laK/znk0KzxKuasJhb9+ZB7PQ9NwZp2VRgi+XyG vlxfruvtuh8V9rJs7tPuAQ== 0001362310-08-006948.txt : 20081110 0001362310-08-006948.hdr.sgml : 20081110 20081110095612 ACCESSION NUMBER: 0001362310-08-006948 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20080930 FILED AS OF DATE: 20081110 DATE AS OF CHANGE: 20081110 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-23157 FILM NUMBER: 081173727 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-Q 1 c76934e10vq.htm FORM 10-Q Filed by Bowne Pure Compliance

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For The Quarterly Period Ended September 30, 2008


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, NJ 08009

(Address of principal executive offices) (Zip Code)

(856) 768-4930

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if

changed since last report)

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


o Large accelerated filer	þ Accelerated filer	o Non-accelerated filer	o Smaller reporting company
		(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:


		Outstanding at November 6, 2008

Common Stock, no par value		20,300,801

A.C. MOORE ARTS & CRAFTS, INC.

TABLE OF CONTENTS


	Page

PART I: FINANCIAL INFORMATION

Item 1. Financial Statements (unaudited)

Consolidated Balance Sheets as of September 30, 2008, December 31, 2007 and September 30, 2007		1

Consolidated Statements of Operations for the Three and Nine Month Periods Ended September 30, 2008 and 2007		2

Consolidated Statements of Cash Flows for the Nine Month Periods Ended September 30, 2008 and 2007		3

Notes to Consolidated Financial Statements		4

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		12

Item 3. Quantitative and Qualitative Disclosures About Market Risk		22

Item 4. Controls and Procedures		22

PART II: OTHER INFORMATION

Item 1. Legal Proceedings		23

Item 1A. Risk Factors		23

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		23

Item 3. Defaults Upon Senior Securities		23

Item 4. Submission of Matters to a Vote of Security Holders		23

Item 5. Other Information		24

Item 6. Exhibits		24

SIGNATURES		25

Exhibit 10.1
Exhibit 10.2
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

A.C. MOORE ARTS & CRAFTS, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands except share data)

(unaudited)


	September 30,			December 31,			September 30,
	2008			2007			2007

ASSETS
Current assets:
Cash and cash equivalents	$	46,756		$	65,195		$	43,133
Inventories		142,004			128,391			142,042
Prepaid expenses and other current assets		4,428			11,940			6,622
Prepaid and receivable income taxes		1,958			7,411			6,973
Deferred tax assets		2,521			7,533			5,655

		197,667			220,470			204,425


Non-current assets:
Property and equipment, net		98,510			99,328			97,894
Other assets		2,544			2,092			2,213

	$	298,721		$	321,890		$	304,532


LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt	$	2,571		$	2,571		$	2,571
Short-term borrowing		10,000			—			—
Trade accounts payable		42,346			48,780			41,392
Accrued payroll and payroll taxes		2,104			2,980			3,013
Accrued expenses		14,246			17,753			16,151
Accrued lease liability		1,357			1,440			1,413
Other current liabilities		—			1,909			87

		72,624			75,433			64,627


Non-current liabilities:
Long-term debt		17,143			19,071			19,714
Deferred tax liability and other		3,742			8,719			6,196
Accrued lease liability		19,087			19,067			19,254

		39,972			46,857			45,164

		112,596			122,290			109,791


Shareholders’ equity:
Preferred stock, no par value, 10,000,000 shares authorized; none issued		—			—			—

Common stock, no par value, 40,000,000 shares authorized; shares issued and outstanding 20,299,801; 20,298,601; and 20,298,601 September 30, 2008, December 31, 2007 and September 30, 2007, respectively		124,291			122,921			122,355

Accumulated other comprehensive income (loss)		(562	)		(483	)		(126	)

Retained earnings		62,396			77,162			72,512

		186,125			199,600			194,741

	$	298,721		$	321,890		$	304,532

See accompanying notes to financial statements.

A.C. MOORE ARTS & CRAFTS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands except per share data)

(unaudited)


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2008			2007			2008			2007

Net sales	$	116,661		$	122,608		$	369,635		$	382,427
Cost of sales (including buying and distribution costs)		66,228			69,929			212,728			222,358

Gross margin		50,433			52,679			156,907			160,069
Selling, general and administrative expenses		53,390			52,832			166,657			160,085
Costs related to change in management		—			—			—			435
Store pre-opening and closing expenses		1,328			962			3,284			1,453

Income (loss) from operations		(4,285	)		(1,115	)		(13,034	)		(1,904	)
Interest expense		382			351			1,397			1,062
Interest (income)		(224	)		(430	)		(868	)		(1,591	)

Income (loss) before income taxes		(4,443	)		(1,036	)		(13,563	)		(1,375	)
Provision for (benefit of) income taxes		3,096			(382	)		8			(507	)

Net income (loss)	$	(7,539	)	$	(654	)	$	(13,571	)	$	(868	)


Basic net income (loss) per share	$	(0.37	)	$	(0.03	)	$	(0.67	)	$	(0.04	)

Diluted net income (loss) per share	$	(0.37	)	$	(0.03	)	$	(0.67	)	$	(0.04	)

See accompanying notes to financial statements.

A.C. MOORE ARTS & CRAFTS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(unaudited)


	Nine Months Ended
	September 30,
	2008			2007
Cash flows from operating activities:
Net income (loss)	$	(13,570	)	$	(868	)
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		11,808			10,413
Stock-based compensation expense		1,365			2,083
Loss on impairment of fixed assets		1,850			—
Provision for (benefit of) deferred income taxes, net		774			4,565
Changes in assets and liabilities:
Inventories		(15,627	)		(19,592	)
Prepaid expenses and other current assets		12,965			(5,942	)
Accounts payable		(6,434	)		(7,311	)
Accrued payroll and payroll taxes and accrued expenses		(4,383	)		(1,183	)
Accrued lease liability		(63	)		412
Other current liabilities		(1,909	)		(1,847	)
Other assets		(452	)		(803	)


Net cash (used in) operating activities		(13,676	)		(20,073	)


Cash flows from investing activities:
Capital expenditures		(12,840	)		(13,039	)

Cash flows (used in) investing activities		(12,840	)		(13,039	)


Cash flows from financing activities:
Exercise of stock options		5			1,626
Tax benefit of stock options		—			428
Short-term borrowings		10,000			—
Repayment of long-term debt		(1,928	)		(1,929	)


Net cash provided by (used in) financing activities		8,077			125


Net (decrease) in cash and cash equivalents		(18,439	)		(32,987	)

Cash and cash equivalents at beginning of period		65,195			76,120


Cash and cash equivalents at end of period	$	46,756		$	43,133

See accompanying notes to financial statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

(1) Basis of Presentation

The consolidated financial statements included herein include the accounts of A.C. Moore Arts & Crafts, Inc. and its wholly owned subsidiaries. The Company is a specialty retailer of arts, crafts and floral merchandise for a wide range of customers. As of November 10, 2008, the Company operated a chain of 136 stores. The stores are located in the Eastern United States from Maine to Florida. The Company also serves customers nationally via its e-commerce site, www.acmoore.com.

The preparation of these consolidated financial statements in conformity with accounting principles generally accepted in the United States of America 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 reported amounts of expenses during the reported period and related disclosures. Significant estimates made as of and for the three and nine month periods ended September 30, 2008 and 2007 include provisions for shrinkage, capitalized buying, warehousing and distribution costs related to inventory, markdowns of merchandise inventories, asset impairments and deferred tax valuation allowances. Actual results could differ materially from those estimates.

These financial statements have been prepared by management without audit and should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2007. Due to the seasonality of the Company’s business, the results for the interim periods are not necessarily indicative of the results for the year. The Company has included its balance sheet as of September 30, 2007 to assist in viewing the Company on a full-year basis. The accompanying consolidated financial statements reflect, in the opinion of management, all adjustments necessary for a fair statement of the interim financial statements. In the opinion of management, all such adjustments are of a normal and recurring nature. Certain amounts in the fiscal 2007 financial statements have been restated to conform to current year classifications.

(2) Restatement of Consolidated Financial Statements

As more fully described in our Annual Report on Form 10-K for the year ended December 31, 2007, in October 2007 the Company determined that there were errors in the method used to value store inventories. The correction of these errors resulted in a restatement of the Company’s financial statements for the periods including and prior to the six months ended June 30, 2007. Financial statement line items affected by this restatement include gross margin and provision for income taxes in the Consolidated Statements of Operations and inventory and current deferred taxes in the Consolidated Balance Sheets. There was no impact to operating cash flows from this restatement.

The effect of these restatements on previously reported consolidated balance sheets, statements of operations and statements of cash flows are included in Note 1 of our notes to consolidated financial statements included in our Annual Report on Form 10-K for the year-ended December 31, 2007.

(3) Change in Accounting Method

•

Results in greater precision in the determination of cost of sales and inventory valuation because each item is supported by records which are valued using stock-keeping unit (“SKU”) level purchase order data. Availability of this data significantly reduces management estimates used under the retail inventory method where costs are averaged based on pools of merchandise at the department level.

•

Increases the accuracy of matching sales with related expenses, as cost of sales represent the average cost of individual items sold rather than the average of an entire pool. This matching eliminates fluctuations that could result from seasonal changes in initial markups or composition of the mix of product within a pool.

•

Provides additional insight into the components of shrink as information will be available at the SKU/store level.

•

Aligns financial reporting with the operational view of the Company, providing consistency in inventory valuation and margin analysis. This in turn improves accountability within the merchandising and stores’ organizations which will enable management to more precisely manage inventory levels.

•

Allows for consistent valuation methods across all inventories, as our warehouse inventory is already valued using weighted average cost.

According to the guidance of SFAS 154, “Accounting Changes and Error Corrections,” when it is impracticable to determine the periods to which the effects of a change in accounting principle apply, the effect of the change will be applied to the balances of assets and liabilities as of the beginning of the earliest period that retrospective application is practicable and that a corresponding adjustment be made to retained earnings. Prior to December 31, 2007, the Company did not take its store physical inventories at the SKU level and as such was not able to value its inventory using weighted average cost for prior periods. Accordingly, as of January 1, 2008, the Company reduced the value of its beginning inventory by $2.0 million and recorded a corresponding adjustment, net of tax of $804,000, as a reduction to retained earnings.

(4) New Accounting Pronouncements

In March 2008, the FASB issued SFAS 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment to FASB Statement 133,” which requires companies to provide greater transparency through disclosures about how and why the company uses derivative instruments, how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations, the level of derivative activity entered into by the company and how derivative instruments and related hedged items affect the company’s financial position, results of operations, and cash flows. SFAS 161 is effective for fiscal years and interim periods beginning after November 15, 2008, and will be adopted by the Company in the first quarter of 2009. The Company is currently evaluating the potential impact of the adoption of SFAS 161 on its consolidated financial statements.

In February 2007, the FASB issued SFAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities,” which provides companies with an option to report selected financial assets and liabilities at fair value. This statement was effective for the Company starting January 1, 2008. The adoption of the provisions of SFAS 159 is optional. The Company adopted SFAS 159 effective January 1, 2008, and did not elect the fair value option for any of its existing financial assets and liabilities.

In September 2006, the FASB issued SFAS 157, “Fair Value Measurements,” which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. It does not expand the use of fair value measurement. The Company adopted SFAS 157 for financial assets and liabilities on January 1, 2008. The adoption of SFAS 157 did not require material modification of the Company’s fair value measurements and will be substantially limited to expanded disclosures in the notes to our Consolidated Financial Statements relating to those notes that currently have components measured at fair value. In February 2008, the FASB deferred adoption of SFAS 157 for non-financial assets and liabilities, except for those that are recognized at fair value on a recurring basis (at least annually), until the fiscal year beginning after December 15, 2008.

SFAS 157 establishes a valuation hierarchy for disclosure of the inputs to valuation used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument. Level 3 inputs are unobservable inputs based on our own assumptions used to measure assets and liabilities at fair value. A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.

The following table provides the assets and liabilities carried at fair value measured on a recurring basis as of September 30, 2008:


				Fair Value Measurements at September 30, 2008 Using
						Significant Other			Significant
	Total Carrying			Quoted Prices in		Observable			Unobservable
	Value at			Active Markets		Inputs			Inputs
(In thousands)	September 30, 2008			(Level 1)		(Level 2)			(Level 3)

Cash Equivalents	$	42,725		$	42,725	$	—		$	—

Interest Rate Swaps (1)		(922	)		—		(922	)		—


(1)		Included in Deferred taxes and other liabilities in our Consolidated Balance Sheets.

Cash Equivalents are measured at fair value using quoted market prices and are classified within Level 1 of the valuation hierarchy. Interest rate swaps are measured at fair value using quoted market prices for the swap interest rate indexes over the term of the swap discounted to present value versus the fixed rate of the contract. They are classified within Level 2 of the valuation hierarchy.

(5) 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.

During the third quarter of 2008, the Company began testing a customer loyalty program in a limited number of stores. This program allows members to earn points for purchases of merchandise at the participating locations. When members have earned a specified number of points they are entitled to receive a certificate that may be redeemed on future purchases. The value of points earned is included in accrued expenses and recorded as a reduction of revenue at the time the points are earned.

(6) Inventories

The Company values its inventories at the lower of cost or market. For warehouse inventories, cost is determined using a weighted average cost method. Effective January 1, 2008, the Company changed its method of accounting for store inventories from the retail inventory method to weighted average cost. As a result of this change, the Company recorded a $2.0 million reduction in the value of its beginning inventory.

In 2007, the Company took a stock-keeping unit (“SKU”) level physical inventory in all of its store locations at year end. These physical inventories were valued using a weighted average cost to determine the value of beginning inventory for 2008. Cost is determined at the time of receipt based on actual vendor invoices and includes the cost of purchasing, warehousing and transportation. Vendor allowances, which primarily represent volume discounts and cooperative advertising funds, are recorded as a reduction in the cost of merchandise inventories. For merchandise where the Company is the direct importer, ocean freight, duty and internal transfer costs are included as inventory costs.

On a quarterly basis, management uses a specific cost method to determine the value of its store inventories. Through its point of sale system, the Company is able to assign a SKU specific cost to every item sold. Using this information, along with estimates for inventory shrinkage and transportation costs, management estimates cost of sales and inventory during the first three quarters of each year.

The estimates for inventory shrinkage used to value inventory on a quarterly basis are adjusted to actual shrinkage amounts at year-end when a full physical inventory in each of our stores and warehouse facility are taken.

As of December 31, 2007, inventory in the Company’s stores was valued under the retail inventory method. Under this method, store inventories are valued at their current retail selling price multiplied by a cost complement to arrive at an inventory value at cost. The cost complement is a ratio of merchandise available-for-sale at cost to merchandise available-for-sale at its original selling price.

The Company’s inventory valuation methodology also requires other management estimates and judgment, such as the net realizable value of merchandise designated for clearance or on overstock or slow-moving merchandise. The accuracy of these estimates can be impacted by many factors, some of which are outside of management’s control, including changes in economic conditions and consumer buying trends. The Company believes the process it uses results in an appropriate inventory value.

(7) Shareholders’ Equity

During the nine months ended September 30, 2008, shareholders’ equity changed as follows:


								Accumulated
								Other
			Common		Retained			Comprehensive
(In thousands, except share data)	Shares		Stock		Earnings			(Loss)			Total
Balance, December 31, 2007		20,298,601	$	122,921	$	77,162		$	(483	)	$	199,600
Net income (loss)		—		—		(13,571	)		—			(13,571	)
Unrealized loss, net of taxes of $38 (Note 8)		—		—		—			(79	)		(79	)

Total comprehensive income (loss)											$	(13,650	)
Exercise of stock options		1,200		5		—			—			5
Tax benefit from exercise of stock options		—		—		—			—			—
Stock-based compensation expense		—		1,365		—			—			1,365
Change in accounting principle (Note 3)		—		—		(1,195	)		—			(1,195	)

Balance, September 30, 2008		20,299,801	$	124,291	$	62,396		$	(562	)	$	186,125

(8) Financing Agreement

The Company maintains two mortgage agreements with Wachovia Bank N.A. (“Wachovia”) on its corporate office and main distribution center which are collateralized by land, buildings and equipment. These mortgages had initial terms of 15 and seven years and have remaining terms of 12 and four years, respectively. As of September 30, 2008, there was $19.7 million outstanding under these mortgages of which $16.5 million is repayable over 12 years and $3.2 million is repayable over four years. Fixed monthly payments are $214,000. In November 2006, the Company entered into an interest rate swap agreement on these two mortgages. The Company pays a fixed interest rate of 5.77% on the 15-year mortgage and 5.72% on the seven-year mortgage and receives a variable rate equal to LIBOR plus .65%.

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.

In January 2008, the Company amended these two mortgages and its line of credit and entered into a promissory note and loan modification agreement. Pursuant to the loan modification, Wachovia agreed to waive non-compliance with certain provisions of the loan documents relating to the Company’s failure to deliver financial statements and the Company’s Form 10-Q for the quarter ended September 30, 2007. The loan modification also amended the loan documents to (i) increase the interest rate for the two mortgages and borrowing under the line of credit from a LIBOR-based rate plus 65 basis points to a LIBOR-based rate plus 90 basis points, and (ii) require the Company to maintain a deposit account with the bank with a minimum balance of $500,000. These two provisions terminated on April 17, 2008.

Effective May 31, 2008, the Company and its subsidiaries entered into an Amended and Restated Loan Agreement, an Amended and Restated Promissory Note and an Amendment to Loan Documents (collectively, the “Amended Loan Agreements”) with Wachovia. Pursuant to these agreements, the term of the line of credit was extended to May 30, 2009 and the aggregate amount of the line of credit was reduced from $35.0 million to $30.0 million. In addition, the limit for issuance of letters of credit under the line of credit was increased from $7.5 million to $12.5 million.

Effective September 18, 2008, the Company amended these agreements to modify the definition of net income as used to calculate certain loan covenants. Pursuant to this amendment, net income was modified to exclude (i) the provisions of FAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets,” in an amount not to exceed $2.0 million, and (ii) the provisions of FAS 146, "Accounting for Costs Associated with Exit or Disposal Activities” in an amount not to exceed $7.0 million.

The Amended Loan Agreements contain several financial covenants which are calculated on a rolling four quarters basis. The Company determined that it was in violation of the debt service coverage ratio financial covenant under the Amended Loan Agreements for the four quarters ended September 30, 2008. This violation was primarily the result of the increase in the net loss from recording a valuation allowance against deferred tax assets as more fully described in Note 11, Income Taxes. On November 6, 2008 pursuant to a Promissory Note and Loan Modification Agreement (“Modification Agreement”), Wachovia granted a waiver of the covenant violation as of September 30, 2008 in exchange for which the Company agreed to pay a $50,000 waiver/amendment fee. In addition, the Modification Agreement provides effective as of November 1, 2008 the interest rate on borrowings increases to LIBOR plus 2.75% and effective for the quarter ended December 31, 2008 that the Company will be subject to an unused fee of 0.5% for all amounts not borrowed under the line of credit. As of September 30, 2008 there were $6.9 million in letters of credit and $10 million of borrowings outstanding under the line of credit. Based on current projections the Company has concluded that it is not probable that the Company will fail to satisfy future covenants.

(9) Impairment of Long-Lived Assets

Under SFAS No. 144, “Accounting for the Impairment or Disposal of Long-lived Assets”, long-lived assets should be tested for recoverability whenever events or changes in circumstances indicate that the carrying amounts of the asset may not be recoverable. The carrying amount of a long-lived asset is not recoverable if it exceeds the undiscounted cash flows expected from the use and eventual disposition of the asset. The impairment loss is calculated as the amount by which the carrying amount of the asset exceeds its fair market value. The Company uses a present value technique to estimate the fair market value of its long-lived assets.

During the second quarter of 2008, as a result of the completion of the real estate portfolio review discussed further in Note 10, Store Pre-Opening and Closing Costs, the Company recorded an impairment charge of $1.8 million against the fixed assets of certain stores which will remain in operation based on a review of the historical cash flow and projected future performance of these stores. This charge is included in Selling, general and administrative expenses on the Consolidated Statements of Operations.

(10) Store Pre-Opening and Closing Costs

Store pre-opening costs include training for new employees, costs to stock initial inventory and store occupancy costs incurred prior to the opening date.

Store closing costs are accounted for in accordance with SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”. Store closing costs include employee severance, inventory liquidation costs, lease termination payments and the net present value of future lease obligations less estimated sub-lease income.

In June 2008, the Company announced the results of a real estate portfolio review which began during the first quarter of the year. The intent of this review was to evaluate existing store performance and the prospects for new stores in order to identify underperforming locations and develop a strategy for locations that were no longer strategically or economically viable. As a result of this analysis, the Company announced that it expected to close between seven and 10 existing stores and reduce its planned store openings for 2008 from a previously announced 14 locations to between eight and 12. The cost associated with these store closings and reduction in new store openings was expected to be between $5.0 and $7.0 million, all of which were expected to be incurred in 2008. The Company has determined that these store closings have not met the criteria for discontinued operations, as set forth in SFAS 144, due to the fact that the Company anticipates the customers and related cash flows from those stores will migrate to other Company stores.

Through the end of the third quarter, the Company has closed five stores and expects to close an additional four stores in the fourth quarter. Year to date, store closing costs total $1.7 million which includes $471,000 in fixed asset write-offs, $220,000 in inventory liquidation costs, $178,000 in payroll related costs and a $381,000 reduction in estimated sub-lease income for a store that closed in 2006. The Company continues to expect that the costs associated with these store closings will be in the range of $5.0 to $7.0 million.

Prior to 2008, the Company included store closing costs as a component of Selling, general and administrative expenses on the Consolidated Statements of Operations. For the three and nine month periods ended September 30, 2007, the Company reclassified $64,000 from Selling, general and administrative expenses to Store pre-opening and closing expenses to make the reporting consistent.

(11) Income Taxes

The Company accounts for income taxes in accordance with SFAS 109, “Accounting for Income Taxes.” Deferred income taxes reflect the impact of temporary differences between the amounts of assets and liabilities recognized for financial reporting purposes and the amount recognized for income tax purposes measured by applying currently enacted tax rates. SFAS 109 requires that deferred tax assets be reduced by valuation allowances if, based on consideration of all available evidence, it is more likely than not that some portion of a net deferred tax asset will not be realized. The Company evaluates its deferred income taxes quarterly to determine if a valuation allowance is required. During fiscal 2008, the Company generated a cumulative three-year loss. Based on this, and other available evidence, management concluded that a valuation allowance should be recorded against its net deferred tax asset. During the third quarter of 2008, the Company recorded a valuation allowance of $4.7 million. Considering our net deferred tax asset valuation allowance and discrete tax items, we do not expect to incur significant income tax expense or benefit in the current fiscal year.

On January 1, 2007, the Company adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). Effective with the adoption of FIN 48, the Company records interest as a component of interest expense and penalties as a component of income tax expense. As of December 31, 2007, the Company had $3.3 million of unrecognized tax benefits. In February 2008, the Company finalized an audit with the Internal Revenue Service that covered the 2004, 2005 and 2006 tax years. As a result of this settlement, reserves for uncertain tax positions totaling $2.0 million were reversed, of which $298,000 was recorded as a reduction in income tax expense in the first quarter of 2008.

The Company increased its reserve for uncertain tax positions by $670,000 in the first quarter of this year based on a change in a state tax position regarding calculation of income apportionment. Of this amount, $336,000 was recorded as interest expense and $334,000 was recorded as income tax expense.

In March 2008, the Company received permission from the Internal Revenue Service to change its method of accounting for inventory effective on its 2007 income tax return, which was filed in May. As a result of this change, the Company received a tax deduction of approximately $20.0 million and in June 2008, received a refund of approximately $7.0 million of previously paid federal income taxes.

The Company is subject to U.S. Federal income tax as well as income tax of multiple state jurisdictions. The Company has substantially concluded all material tax matters in jurisdictions where it files returns for years through 2003.

(12) Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per share:


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(In thousands, except per share data)	2008			2007			2008			2007

Net income (loss)	$	(7,539	)	$	(654	)	$	(13,571	)	$	(868	)


Weighted average shares:
Basic		20,299,501			20,275,000			20,298,961			20,230,000
Incremental shares from assumed exercise of stock options and stock appreciation rights		—			—			—			—


Diluted		20,299,501			20,275,000			20,298,961			20,230,000


Basic net income (loss) per share	$	(0.37	)	$	(0.03	)	$	(0.67	)	$	(0.04	)


Diluted net income (loss) per share	$	(0.37	)	$	(0.03	)	$	(0.67	)	$	(0.04	)


Stock options and stock appreciation rights excluded from calculation because exercise price was greater than average market price		1,070			367			1,017			367


Potentially dilutive shares excluded from the calculation as the result would be anti-dilutive		448			865			501			865

(13) Commitments and Contingencies

The Company is involved in legal proceedings from time to time in the ordinary course of business. Management believes that none of these legal proceedings will have a materially adverse effect on the Company’s financial condition or results of operations. However, there can be no assurance that future costs of such litigation would not be material to the Company’s financial condition or results of operations.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Cautionary Statement Relating to Forward-looking Statements

The following discussion contains statements that are forward-looking within the meaning of applicable federal securities laws and are based on our current expectations and assumptions as of this date. We undertake no obligation to update or revise any forward-looking statement whether as the result of new developments or otherwise. These statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from those anticipated. Factors that could cause actual results to differ from those anticipated include, but are not limited to, our ability to implement our business and operating initiatives to improve profitability, how well we manage our growth, customer demand and trends in the arts and crafts industry, inventory risks, the effect of economic conditions and gasoline prices, the impact of unfavorable weather conditions, the impact of competitors’ locations or pricing, difficulties with respect to new system technologies, difficulties in implementing measures to reduce costs and expenses and improve margins, supply constraints or difficulties, the effectiveness of and changes to advertising strategies, difficulties in determining the outcome and impact of litigation, the accuracy of and changes in assumptions for estimated costs for the settlement of lease liabilities and related costs and non-cash fixed asset impairment, timing in execution of our real estate strategy, the outcome of negotiations with landlords and other third parties in executing the real estate strategy, the impact of the threat of terrorist attacks and war, our ability to maintain an effective system of internal control over financial reporting, risks related to our recent restatement and other risks detailed in the Company’s Securities and Exchange Commission (“SEC”) filings. For additional information concerning factors that could cause actual results to differ materially from the information contained herein, reference is made to the information under Part II, “Item 1A. Risk Factors” as set forth below and in our Annual Report on Form 10-K for the year ended December 31, 2007 as filed with the SEC.

Overview

General

We are a specialty retailer of arts, crafts and floral merchandise for a wide range of customers. Our first store opened in Moorestown, New Jersey in 1985. As of September 30, 2008, we operated 135 stores in the Eastern United States from Maine to Florida. As of November 10, 2008, we operated 136 stores. Our stores typically range from 20,000 to 25,000 square feet. We also serve customers nationally through our e-commerce site, www.acmoore.com.

Due to the importance of our peak selling season, which includes the Fall and Winter holiday seasons, 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, closure of stores, 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.

In June 2008, the Company announced the results of a real estate portfolio review which began during the first quarter of the year. The intent of this review was to evaluate existing store performance and the prospects for new stores in order to identify underperforming locations and develop a strategy for locations that were no longer strategically or economically viable. As a result of this analysis, the Company announced that it will close between seven and 10 existing stores and reduce its planned store openings for 2008 from a previously announced 14 locations to between eight and 12. The Company closed four stores in July, one store in August, and intends to close four additional stores later this year. The Company continues to expect the cost of these store closings and reduction in new store openings will be approximately $5.0 to $7.0 million.

As part of this real estate portfolio review, the Company also tested the recoverability of its store fixed assets under SFAS 144, “Accounting for the Impairment or Disposal of Long-lived Assets”. As a result, during the second quarter, the Company recorded a $1.8 million impairment charge against the fixed assets of certain stores still in operation.

Long-lived asset groups are tested for recoverability when changes in circumstances indicate the carrying value may not be recoverable. Events that trigger a test for recoverability include material adverse changes in projected revenues and expenses, significant underperformance relative to historical or projected future operating results, and significant negative industry or economic trends. Management currently believes that none of these circumstances have occurred since it completed its real estate review during the second quarter of this year, however, a continuing slowdown in the United States economy could lead to reduced consumer demand for our products and have an adverse effect on store profitability which may increase the likelihood of the need for additional asset impairments in the future.

For the three months ended September 30, 2008, comparable store sales decreased 9.4%, while gross margin improved by 0.2%. Adjusting for the impact of the liquidation of four stores that we are in the process of closing during the fourth quarter, comparable stores would have decreased by 9.8% and gross margins would have increased by 0.2%. The decline in comparable store sales was due to the expected result of our real estate portfolio strategy of building store density in an existing sales market and the softness in the macroeconomic and retail environment.

While we may experience cannibalization of sales in our existing stores and an increased selling, general and administrative expense rate as we execute our real estate portfolio strategy, we expect improvements in the execution of our operating initiatives which may lessen the impact on comparable store sales for the remaining portion of 2008.

Business and Operating Strategy

The year ended December 31, 2007, as well as the nine months ended September 30, 2008, both involved substantial transition as our management team focused on reviewing and adjusting various aspects of our business and operations to position us for improved performance. Management’s primary business and operating initiatives are discussed below.

Improve Store Profitability. We continue to strive to improve store profitability by reducing expenses through a focus on the following areas: store payroll, real estate portfolio strategy, advertising spend, supply chain optimization, centrally directed operations and our new store prototype.

•

Store payroll. We have completed the second phase of a process reengineering project centered on store staffing, scheduling and standard operating procedures. We have implemented new processes that we believe are making us more efficient and provide us with the ability to redeploy labor to service and selling activities. These new processes are focused in our receiving, stocking, ordering, and recovery programs in all of our stores.

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Real estate portfolio strategy. In June 2008, we completed a portfolio review of all current stores and future prospects to identify underperforming locations and assess closure of those stores that are no longer strategically or economically viable. As a result of this analysis, we closed four stores in July one store in August and expect to close four additional stores in the fourth quarter. When entering new markets which we deem to be multi-store markets, we will attempt to do so with sufficient store density to leverage expenses such as advertising and supply chain replenishment. If strategically viable, we will also consider adding new stores and relocating existing stores in our current markets.

•

Advertising spend. Our advertising is primarily distributed via newspaper. We regularly analyze our distribution methods to enhance productivity of our advertising spend. In 2008, we began supplementing our newspaper advertising program with a combination of in store and targeted marketing programs.

•

Centrally directed operations and our store prototype. We believe that increasing the level of standardization in operations and centrally directed management practices will improve our operating efficiencies. This initiative includes standardizing the presentation in our stores, reengineering our store processes and implementing and refining our new store prototype which we refer to as our “Nevada” model. As of September 30, 2008, we operated 17 Nevada class stores. We believe the Nevada model will help us achieve efficiencies through increased ease of operation and reduced labor costs. While we believe the Nevada model is a desirable design, we are currently refining the design based on the results of this initial phase of implementation and expect to continue to do so in the future.

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Supply chain optimization. Early in the third quarter, we began utilizing diversified logistical resources to deliver product to our stores in a more cost effective manner. In addition to the savings programs implemented this year, we have identified additional opportunities to reduce transportation expense beginning in 2009. We believe that these savings, in conjunction with our efforts to improve distribution center operations, will enable us to continue to reduce our supply chain operating costs in 2009.

Increase Sales. We continue to strive toward increasing sales through better execution in customer service, an enhanced merchandise assortment, improved in-stock position and creative promotional strategies.

•

Customer service. We continue our consumer research initiatives designed to better understand our customers’ expectations and purchasing motivation, with the goal of developing stronger relationships with our customers. We have successfully implemented our formal customer service program involving in-depth training of our associates and store management teams.

•

Enhanced merchandise assortment. We continually seek to identify new and enhanced product lines and merchandise assortments that differentiate us from our competitors. We regularly review product adjacencies in order to improve our average customer ticket and the overall shopping experience.

•

Improved in-stock position. Maintaining a full in-stock position is critical to driving sales, as providing the components for a particular craft project is important to meeting customer demand. Our perpetual inventory implemented in January 2008 and other technology improvements has allowed us to achieve better in-stock position through information about quantities available at the store level. We also regularly evaluate our supply chain operations to improve the process and timing within which product is ordered and delivered to our stores.

•

Promotional strategies. In the current macroeconomic and retail environment, we continue to refine our marketing vehicles and pricing strategies. We believe identifying and featuring key promotional items, combined with a blend of in store promotions, and targeted marketing efforts to complement our regular newspaper insert program will drive customer traffic.

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A.C. Moore Rewards Program. During the third quarter, we launched our A.C. Moore Rewards program in a select group of pilot stores. Although still in the pilot stage, initial customer response to the program has been positive. We will continue to monitor our pilot results as we believe this initiative will support our strategic efforts at differentiating ourselves from our competition while providing our customers with more reasons to shop in our stores. Once we are satisfied with our pilot results, we will begin implementation of the program to the remainder of the chain.

Increase Gross Margins. We are focused on increasing gross margins through implementation of category management of our merchandise, increasing both domestic and globally sourced private label products, and improving supply chain efficiencies. However, continued softness in the macroeconomic and retail environment could cause us to be more promotional than we currently expect, which would have a negative impact on margins.

•

Category management. We have completed the second full quarter of utilizing our new category management process. The category management process leverages merchandise assortment planning tools, the use of a merchandising planning calendar, and an open-to-buy process focused on sales and inventory productivity.

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Domestic and globally sourced private label products. Beginning in the second half of 2007, we introduced in our stores private label products bearing the A.C. Moore name and logo. We continue to explore new opportunities involving private label /globally sourced product. We believe the sale of private label products, both domestic and globally sourced, will result in gross margin improvement.

•

Supply chain efficiencies. We continue to make significant strides in our effort to further improve efficiency, accuracy, and safety in the supply chain organization. The performance management program, which was implemented earlier this year in our distribution center, continues to help us improve labor efficiencies. Our newly formed compliance team has helped us improve picking and shipping accuracy while reducing workers compensation claims. Our recently implemented, and continuously improving, inventory control initiatives have helped us reduce inventory in our warehouses which we believe will help ensure that our existing distribution space will continue to support our business in the near-term.

Improve Information Technology. We are committed to enhancing our information technology to increase operating efficiencies, improve merchandise selection and better serve our customers. Throughout 2007, we made infrastructure improvements, implemented a fully featured e-commerce site with over 50,000 SKUs, and captured physical inventories at the SKU-level. The SKU-level inventory enabled us to implement a perpetual inventory beginning in January 2008 which will be the precursor for additional merchandising systems, including automated replenishment. A project team consisting of outside consultants and A.C. Moore associates is working on the implementation of a packaged comprehensive retail merchandising system which will begin with merchandising management and reporting and a pilot of replenishment in the fourth quarter of 2008, followed by full replenishment and allocation in the second half of 2009. We do not anticipate that we will realize benefits from the automated replenishment system until 2010, due to a period of adjustment in operations following implementation.

Results of Operations

The following table sets forth, for the periods indicated, selected statement of operations data expressed as a percentage of net sales and the number of stores open at the end of each such period:


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2008			2007			2008			2007

Net sales		100.0	%		100.0	%		100.0	%		100.0	%
Cost of sales		56.8			57.0			57.6			58.1

Gross margin		43.2			43.0			42.4			41.9
Selling, general and administrative expenses		45.8			43.1			45.1			41.9
Costs related to change in management		0.0			0.0			0.0			0.1
Store pre-opening and closing expenses		1.1			0.8			0.9			0.4

Income (loss) from operations		(3.7	)		(0.9	)		(3.5	)		(0.5	)
Interest expense (income), net		0.1			(0.1	)		0.1			(0.1	)

Income (loss) before income taxes		(3.8	)		(0.8	)		(3.7	)		(0.4	)
Provision for (benefit of) income taxes		2.7			(0.3	)		0.0			(0.1	)

Net income (loss)		(6.5	)%		(0.5	)%		(3.7	)%		(0.2	)%


Number of stores open at end of period		135			127

Three Months Ended September 30, 2008 Compared to Three Months Ended September 30, 2007

Net Sales. Net sales decreased $5.9 million, or 4.9%, to $116.7 million in the three months ended September 30, 2008 from $122.6 million in the comparable 2007 period. This decrease is comprised of (i) comparable store sales decrease of $11.1 million or 9.4%, (ii) net sales of $2.8 million for stores closed since the comparable period last year, and (iii) an increase in net sales of $8.0 million from stores not included in the comparable store base and e-commerce sales. As previously stated, the decline in comparable store sales was due to the expected result of our real estate strategy of building store density in an existing sales market and the softness in the macroeconomic and retail environment.

Merchandise categories that performed below the Company average on a comparable store basis included scrapbooking, floral, seasonal, wood, and jewelry. Categories that performed better than average included custom framing, cake and candy making, ready made frames, kid’s crafts, stitchery and yarn.

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 was 43.2% for the three months ended September 30, 2008, and 43.0% for the three months ended September 30, 2007. This 0.2% improvement in gross margin is attributable to ongoing price elasticity studies, more favorable vendor pricing and a higher initial mark-up on imported merchandise and was partially offset by freight cost increases and the liquidation of four stores that will be closing in the fourth quarter.

Selling, General and Administrative Expenses. Selling, general and administrative expenses include (a) direct store level expenses, including rent and related operating costs, payroll, advertising, depreciation and other direct costs, and (b) corporate level costs not directly associated with or allocable to cost of sales, including executive salaries, accounting and finance, corporate information systems, office facilities, stock-based compensation and other corporate expenses.

Selling, general and administrative expenses, as a percent of sales, increased 2.7% during the three months ended September 30, 2008 to 45.8% from 43.1% in the three months ended September 30, 2007. Favorable reductions in advertising expenditures totaling 1.0% of sales were more than offset by the deleveraging of store payroll and occupancy costs against a decline in store sales.

Store Pre-Opening and Closing Expenses. We expense store pre-opening expenses as they are incurred which includes lease costs prior to a store opening. Store closing costs include severance, inventory liquidation costs, loss on disposal of fixed assets, lease termination payments and the net present value of future rent obligations less estimated sub-lease income.

Pre-opening expenses for the one store opened in the third quarter of 2008 and the store that will open in October of 2008 totaled $314,000. In the third quarter of 2007, we incurred store pre-opening expenses related to the three stores which opened in that quarter and lease costs of $962,000 related to stores opened later in 2007.

Store closing costs for the third quarter were $1.0 million which included $471,000 in fixed asset write-offs, $220,000 in inventory liquidation costs and $178,000 in payroll related costs. These costs include the five stores we closed in the third quarter as well as inventory liquidation costs for conducting going-out-of business sales during the third quarter for four additional stores that will close in the fourth quarter of 2008.

Interest Income and Expense. In the third quarter of 2008, we had net interest expense of $158,000 compared with net interest income of $79,000 for the same period in 2007. This decrease is attributable to a lower average cash position and lower interest rates throughout the quarter.

Income Taxes. In the third quarter of fiscal 2008, we recorded income tax expense of $3.1 million. This includes a tax benefit of $1.6 million on the third quarter pretax loss of $4.4 million offset by a $4.7 million valuation allowance recorded against the Company’s net deferred tax asset. Considering our net deferred tax asset valuation allowance and discrete items, we do not expect to incur significant income tax expense or benefit in the current fiscal year.

Nine Months Ended September 30, 2008 Compared to Nine Months Ended September 30, 2007

Net Sales. Net sales decreased $12.8 million, or 3.3%, to $369.6 million in the nine months ended September 30, 2008 from $382.4 million in the comparable 2007 period. This decrease is comprised of (i) a comparable store sales decrease of $32.6 million, or 8.7%, (ii) net sales of $5.5 million from stores closed since the comparable period last year and (iii) an increase in net sales of $25.3 million from stores not included in the comparable store base and e-commerce sales. The decline in our nine month comparable store sales was the result of our focus on store profitability, our real estate portfolio strategy and the softness in the macroeconomic and retail environment.

Merchandise categories that performed below the Company average on a comparable store basis included candles, floral accessories, scrapbooking and seasonal. Categories which performed better than average included custom framing, cake and candy making, clothing and ready made frames.

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 was 42.4% for the nine months ended September 30, 2008, and 41.9% for the nine months ended September 30, 2007. This 0.5% improvement in gross margin is attributable to retail price adjustments as a result of ongoing price elasticity studies, more favorable vendor pricing and a higher initial mark-up on imported merchandise. Partially offsetting the improvement in gross margin were increases in freight costs and the liquidation of nine stores which are either closed or will close before the end of 2008.

Selling, general and administrative expenses, as a percent of sales, increased 3.2% in the nine months ended September 30, 2008 to 45.1% from 41.9% in the nine months ended September 30, 2007. Costs related to the inventory restatement represented 0.2%, and the impairment of assets represented 0.5%. The majority of the balance of the increase was the result of deleveraging of store payroll and occupancy costs against a decline in store sales.

Costs Related to Change in Management. For the nine months ended September 30, 2008 and 2007, the Company incurred costs of $0 and $435,000, respectively, related to severance costs for departing officers and employees as well as recruiting costs for new officers. There were no costs charged to this classification since the second quarter 2007.

Store Pre-Opening and Closing Expenses. The Company expenses store pre-opening expenses as they are incurred which includes lease costs prior to a store opening. Store closing costs include severance, inventory liquidation costs, loss on disposal of fixed assets, lease termination payments and the net present value of future rent obligations less estimated sub-lease income.

Pre-opening expenses for the eight stores opened during the first nine months of 2008 and stores that will open later in the year totaled $1.5 million. In the first nine months of 2007, we incurred store pre-opening expenses related to the five stores which opened during the first nine months of 2007 and lease costs related to stores opened later in 2007 of $1.5 million.

Store closing costs for the first nine months were $1.7 million which includes $471,000 in fixed asset write-offs, $220,000 in inventory liquidation costs and $178,000 in payroll related costs for the five stores that closed during the third quarter and four stores that will close in the fourth quarter and a $381,000 reduction in estimated sub-lease income for a store that closed in 2006.

Interest Income and Expense. In the first nine months of 2008, the Company had net interest expense of $529,000 compared with net interest income of $529,000 for the same period in 2007. This decrease is attributable to the interest component of the increase in our reserve for uncertain tax positions, a lower cash position and lower interest rates throughout the year.

Income Taxes. In the first nine months of fiscal 2008, we recorded an income tax expense of $8,000. This includes a tax benefit of $5.2 million on our nine month pretax loss of $13.6 million offset by a $4.7 million valuation allowance recorded against the Company’s net deferred tax asset and discrete items of $500,000, primarily related to the settlement of state income tax audits. Considering our net deferred tax asset valuation allowance and discrete items, we do not expect to incur significant income tax expense or benefit in the current fiscal year.

Change in Accounting Method. Effective January 1, 2008, we changed our method of accounting for store inventories from the retail inventory method to the weighted average cost method. See Note 3 “Change in Accounting Method” in the Notes to Consolidated Financial Statements. As a result, we reduced the value of our beginning inventory by $2.0 million and recorded a corresponding adjustment, net of tax, as a reduction to retained earnings.

Liquidity and Capital Resources

The Company’s 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. 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.

At September 30, 2008 and December 31, 2007, our working capital was $125.0 million and $145.0 million, respectively. Cash used in operations was $13.7 million for the nine months ended September 30, 2008. This is principally the result of a $22.1 million increase in the net investment in (inventory less accounts payable) in seasonal and new store inventory partially offset by a $7.0 million refund of federal income taxes which is included as a component of the $6.4 million reduction of prepaid expenses and other current assets. For the nine months ended September 30, 2007, cash used in operations was $20.1 million which was primarily the result of a $26.9 million increase in the net investment in inventory.

Net cash used in investing activities during the nine months ended September 30, 2008 was $12.8 million, all of which related to capital expenditures. In 2008, we expect to invest approximately $17.0 million in capital projects, which includes $7.2 million for new store openings and the remainder for relocating existing stores, upgrading systems in existing stores, upgrading warehouse equipment and corporate systems development. For the nine months ended September 30, 2007, we invested $13.0 million all of which related to capital expenditures.

During the third quarter of 2008, the Company made a decision to borrow $10.0 million under its line of credit. Although the Company had a strong cash position at the time, management felt that it was prudent to increase its cash on hand given the current economic environment and tightness of the credit markets.

In February 2008, we finalized an audit with the Internal Revenue Service that covered the 2004, 2005 and 2006 tax years and resulted in a payment of tax and interest totaling $2.1 million.

In March 2008, the Company received permission from the Internal Revenue Service to change its method of accounting for inventory, effective on it’s 2007 income tax return which was filed in May. As a result of this change, the Company received a tax deduction of approximately $20.0 million and in June received a refund of approximately $7.0 million of previously paid federal income taxes. The Company has approximately $2.0 million of available federal net operating loss carrybacks and expects to receive a refund of those taxes when it files its 2008 federal income tax return sometime during the first half of 2009.

The Company plans to manage its liquidity during the next 12 months through a combination of initiatives that include an intense focus on controlling costs, a significant reduction in projected capital expenditures, use of our recently implemented perpetual inventory and replenishment systems to reduce average store inventories, exploring alternative methods of financing and maintain strong vendor relationships to ensure continued availability of trade financing.

Subject to successful execution, we believe that the aforementioned initiatives, coupled with the Company’s current cash position will be sufficient to finance our working capital, debt service and capital expenditure requirements for at least the next 12 months.

Critical Accounting Estimates

Except as described below, our accounting policies are fully described in Note 2 of our notes to consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2007. 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 our 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 different assumptions as to the outcome of future events were made. 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 management believes to be reasonable under the circumstances. Management believes the following critical accounting estimates encompass the more significant judgments and estimates used in preparation of our consolidated financial statements:

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merchandise inventories;

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impairment of long-lived assets;

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reserve for store closures;

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stock-based compensation under SFAS No. 123(R);

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income taxes and accounting for uncertain tax positions under FIN 48;

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legal contingencies;

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future debt covenants compliance; and

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other estimates.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We invest cash balances in excess of operating requirements primarily in money market mutual funds. The fair value of our cash and equivalents at September 30, 2008 approximated carrying value. A hypothetical decrease in interest rates of 10% compared to the rates in effect at September 30, 2008 would reduce our interest income by $208,000 annually.

We had $10.0 million of borrowings outstanding under our line of credit at September 30, 2008. The interest rate on our line of credit and mortgages fluctuate with market rates and therefore the value of these financial instruments will not be impacted by a change in interest rates. A hypothetical decrease in interest rates of 10% compared to the rates in effect at September 30, 2008 would reduce the interest expense on the borrowings under our line of credit by $40,000 annually.

In November 2006, the Company entered into an interest rate swap agreement on these two mortgages. The Company pays a fixed interest rate of 5.77% on the 15-year mortgage and 5.72% on the seven-year mortgage and receives a variable rate equal to LIBOR plus .65%. 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 decrease/increase 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 approximately $313,000.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are controls and procedures that are designed to ensure that the information we are required to disclose in the reports that we file or submit under 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 that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

We carried out an evaluation, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of September 30, 2008. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of September 30, 2008 as a result of a material weakness in the accuracy and valuation of the accounting for and disclosure of inventory and the related cost of goods sold accounts. Specifically, controls over the formulas used to calculate the cost complement used to value the Company’s store inventories under the retail inventory method and the estimates used to determine the timing of recognition of internal transfer costs on imported merchandise were not effective.

Plan for Remediation of Material Weakness

Effective January 1, 2008, the Company changed its method of accounting for store inventories from the retail inventory method to the weighted average cost method. Management believes that changing to the weighted average cost method will remediate the identified control deficiency related to the formulas used to calculate the retail inventory method cost complement as these formulas will no longer be used.

In January 2008, the Company implemented a store perpetual inventory system. This system will enable management to more accurately estimate the amount of internal transfer costs as it allows us to determine the value of imported merchandise relating to on-hand quantities in our stores and at our distribution centers. Management believes that implementation of a store perpetual inventory system and implementation of appropriate internal controls will remediate the identified control deficiency.

Changes in Internal Control Over Financial Reporting

As described above, there were changes in our internal control over financial reporting, as described in Exchange Act Rule 13a-15(f), during the third quarter of 2008 that have materially affected, or are reasonably likely to affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

ITEM 1A. RISK FACTORS

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2007, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K for the year ended December 31, 2007 are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

Changes in our real estate strategy may not result in improved profitability.

In June 2008, we announced results of our real estate portfolio review. As a result of this review, and in light of the macro-environment for retailing, we determined to exit certain markets where we cannot achieve operating efficiencies and reduce new store openings planned for 2008. The estimated costs and charges associated with these actions may vary materially based on various factors, including but not limited to, timing in execution, the outcome of negotiations with landlords and other third parties and changes in management’s assumptions and projections. As a result of these events and circumstances, delays and unexpected costs may occur, which could result in our not realizing any or all of the anticipated benefits of this strategy. There is no assurance that changes in our real estate strategy will lead to improved operating results.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Not Applicable.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not Applicable.

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

Not Applicable.

ITEM 5. OTHER INFORMATION

Effective May 31, 2008, the Company and its subsidiaries entered into an Amended and Restated Loan Agreement, an Amended and Restated Promissory Note and an Amendment to Loan Documents (collectively, the “Amended Loan Agreements”) with Wachovia Bank , N.A.. Pursuant to these agreements, the term of the line of credit ends on May 30, 2009, the aggregate amount of the line of credit is $30.0 million and the limit for issuance of letters of credit under the line of credit is $12.5 million.

The Amended Loan Agreements contain several financial covenants which are calculated on a rolling four quarters basis. The Company determined that it was in violation of the debt service coverage ratio financial covenant under the Amended Loan Agreements for the four quarters ended September 30, 2008. This violation was primarily the result of the increase in the net loss from recording a valuation allowance against deferred tax assets as more fully described in Note 11, Income Taxes. On November 6, 2008 pursuant to a Promissory Note and Loan Modification Agreement (“Modification Agreement”), Wachovia granted a waiver of the covenant violation as of September 30, 2008 calculation in exchange for which the Company agreed to pay a $50,000 waiver/amendment fee. In addition, the Modification Agreement provides effective as of November 1, 2008 the interest rate on borrowings increases to LIBOR plus 2.75% and effective for the quarter ended December 31, 2008 that the Company will be subject to an unused fee of 0.5% for all amounts not borrowed under the line of credit. As of September 30, 2008 there were $6.9 million in letters of credit and $10 million of borrowings outstanding under the line of credit. Based on current projections the Company has concluded that it is not probable that the Company will fail to satisfy future covenants.

ITEM 6. EXHIBITS


	10.1			Promissory Note and Loan Modification, dated as of September 18, 2008, between the Company and Wachovia Bank, National Association.

	10.2			Amendment and Restatement, dated as of September 24, 2008, of Employment Letter, dated as of March 21, 2007, between the Company and Michael G. Zawoysky.

	31.1			Certification pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended (“Exchange Act”).

	31.2			Certification pursuant to Rule 13a-14(a) promulgated under the Exchange Act.

	32.1			Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

	32.2			Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

Pursuant to the requirements 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: November 10, 2008	By:	/s/ Rick A. Lepley
		Rick A. Lepley
		President and Chief Executive Officer (duly authorized officer and principal executive officer)

Date: November 10, 2008	By:	/s/ Michael G. Zawoysky
		Michael G. Zawoysky
		Executive Vice President and Chief Financial Officer (duly authorized officer and principal financial officer)

Exhibit Index


Exhibit No.		Description

	10.1	Promissory Note and Loan Modification, dated as of September 18, 2008, between the Company and Wachovia Bank, National Association.

	10.2	Amendment and Restatement, dated as of September 24, 2008, of Employment Letter, dated as of March 21, 2007, between the Company and Michael G. Zawoysky.

	31.1	Certification pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended (“Exchange Act”).

	31.2	Certification pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended (“Exchange Act”).

	32.1	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

	32.2	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

EX-10.1 2 c76934exv10w1.htm EXHIBIT 10.1 Filed by Bowne Pure Compliance

Exhibit 10.1

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
(Hereinafter referred to as “Borrower”)

Wachovia Bank, National Association
Summit, New Jersey 07901
(Hereinafter referred to as “Bank”)

THIS AGREEMENT is entered into as of September 18, 2008 by and between Bank and Borrower.

RECITALS

Bank is the holder of the following notes: (i) an Amended & Restated Promissory Note executed and delivered by Borrower, dated as of May 31, 2008, in the original principal amount of $30,000,000.00 (the “$30MM Note”); (ii) a Promissory Note executed and delivered by Borrower, dated October 28, 2003, in the original principal amount of $22,500,000.00, as subsequently amended by Promissory Note and Loan Modification Agreement, dated March 12, 2007, Promissory Note and Loan Modification Agreement, dated January 24, 2008, and an Amendment to Loan Documents dated as of May 31, 2008 (the “$22.5MM Note”); and (iii) a Promissory Note executed and delivered by Borrower, dated October 28, 2003, in the original principal amount of $7,500,000.00, as subsequently amended by Promissory Note and Loan Modification Agreement, dated March 12, 2007, Promissory Note and Loan Modification Agreement, dated January 24, 2008, and an Amendment to Loan Documents dated as of May 31, 2008 (the “$7.5MM Note”, and collectively with the $30MM Note and the $22.5MM Note, the “Notes”), and certain other loan documents, including without limitation, an Amended and Restated Loan Agreement, dated May 31, 2008 (the “Loan Agreement”), a Security Agreement, dated October 28, 2003 (the “Security Agreement”), and a Mortgage, Assignment of Rents and Security Agreement and Financing Statement dated as of October 28, 2003 (the “Mortgage”); 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

ACKNOWLEDGMENT OF BALANCE. Borrower acknowledges that the most recent Commercial Loan Invoice sent to Borrower with respect to the Obligations under each of the Notes is correct.

MODIFICATIONS.

1. Interest Rate. The Notes are hereby modified by deleting the definition of “Margin”, and substituting the following in its place and stead:

The “Margin” means the applicable margin based upon the following Debt Service Coverage Ratio as defined in the Loan Agreement, as follows:


DEBT SERVICE COVERAGE RATIO — TRAILING 12 MONTHS
GREATER	LESS THAN
THAN	OR EQUAL TO	MARGIN
1.75		0.65%
1.50	1.75	0.85%
1.35	1.50	1.10%
1.25	1.35	1.35%

2. Financial Covenants. Notwithstanding anything in the section entitled FINANCIAL COVENANTS of the Loan Agreement to the contrary, for purposes of calculating the Debt Service Coverage Ratio, Leverage Ratio, Current Ratio and Limitation on Debt covenants:

(a) Borrower and Bank agree that for fiscal quarters ending September 30, 2008, January 3, 2009, April 4, 2009, and July 4, 2009, the Bank shall calculate the Borrower’s income notwithstanding the provisions of FAS 144 “Accounting for the Impairment or Disposal of Long-Lived Assets.” in an amount not to exceed Two Million and 00/100 Dollars ($2,000,000.00).

(b) Borrower and Bank agree that for fiscal quarters ending September 30, 2008, January 3, 2009, April 4, 2009, July 4, 2009 and October 3, 2009, the Bank shall calculate the Borrower’s income notwithstanding the provisions of FAS 146 “Accounting for Costs Associated With Exit or Disposal Activities.” in an amount not to exceed Seven Million and 00/100 Dollars ($7,000,000.00).

3. ISDA Master Agreement. Pursuant to subpart (ii) of the definition of Financial Agreement as set forth in the ISDA Master Agreement dated as of October 18, 2006 (including the Schedule and all confirmations relating to any transaction thereunder), among Bank and Borrower, as amended by an ISDA Amendment dated as of January 29, 2008, and an Amendment to Loan Documents dated as of May 31, 2008, Bank hereby consents to amend the definition of Financial Agreement to include and refer to this Agreement.

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 this date (except to the extent that such representations or warranties relate to an earlier date or have been updated by Borrower with Bank in the ordinary course), 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.

Page 2

COLLATERAL. Borrower acknowledges and confirms that there have been no changes in the ownership of any collateral pledged to secure the Obligations (the “Collateral”) 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 any modification of any Note or Loan Agreement, if any, 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 (including by facsimile or PDF) 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. 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 agreements of the parties. There are no unwritten agreements between the parties.

WAIVER OF JURY TRIAL. TO THE EXTENT PERMITTED BY APPLICABLE LAW, EACH 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.

[Signature Page to Follow Immediately Hereafter]

Page 3

IN WITNESS WHEREOF, the undersigned have duly signed and sealed this Agreement the day and year first above written.


	A.C. MOORE ARTS & CRAFTS, INC., a Pennsylvania corporation Taxpayer Identification Number: 22-3527763
	By:	/s/ Rodney B. Schriver
		Rodney B. Schriver
		Vice President/Controller

	A.C. MOORE INCORPORATED, a Virginia corporation Taxpayer Identification Number: 22-2546111
	By:	/s/ Rodney B. Schriver
		Rodney B. Schriver
		Vice President/Controller

	MOORESTOWN FINANCE, INC. a Delaware corporation Taxpayer Identification Number: 52-2066272
	By:	/s/ Rodney B. Schriver
		Rodney B. Schriver
		Vice President/Controller

	BLACKWOOD ASSETS, INC., a Delaware corporation Taxpayer Identification Number: 52-2066271
	By:	/s/ Rodney B. Schriver
		Rodney B. Schriver
		Vice President/Controller

Page 4


	A.C. MOORE URBAN RENEWAL, LLC, a New Jersey limited liability company Taxpayer Identification Number: 56-2388590
	By:	/s/ Rodney B. Schriver
		Rodney B. Schriver
		Authorized Signatory

	WACHOVIA BANK, NATIONAL ASSOCIATION
	By:
		Dante Bucci,
		Senior Vice President

Page 5

EX-10.2 3 c76934exv10w2.htm EXHIBIT 10.2 Filed by Bowne Pure Compliance

Exhibit 10.2

AMENDMENT AND RESTATEMENT OF

EMPLOYMENT LETTER

AMENDMENT AND RESTATEMENT, dated as of September 24, 2008 (this “Amended and Restated Employment Letter”) of EMPLOYMENT LETTER, dated as of March 21, 2007 (the “Employment Letter”) between A.C. Moore Arts & Crafts, Inc., a Pennsylvania corporation (“Company”), and Michael G. Zawoysky (“Executive”).

R E C I T A L S:

WHEREAS, Company and Executive have mutually agreed that the Employment Letter be amended and restated in its entirety, as set forth herein.

NOW, THEREFORE, intending to be legally bound hereby, it is agreed as follows:

1. Change of Control. 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) 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 3 through 11 of this Amended and Restated Employment Letter (except paragraph 8 which shall continue) shall be superseded by Appendix I.

2. Effectiveness. This Amended and Restated Employment Letter shall be become effective as of the date hereof.

3. Title. Your title will be Executive Vice President and Chief Financial Officer. You will report directly to the Chief Executive Officer.

4. Base Salary. Your annual base salary will be $250,000, payable in regular installments in accordance with the Company’s general payroll practices. Your base salary will be subject to review annually. Your first performance and salary review is currently anticipated to be in May 2009 and thereafter your performance and base salary will be reviewed annually on a schedule consistent with the Company’s practice for officers (such schedule currently contemplated to be May of each year).

5. Annual Bonus Plan. During each calendar year beginning in 2008 in which you continue to be employed by the Company, you will be entitled to participate in the Company’s annual incentive bonus plan (the “Bonus Plan”) as administered and determined by the Compensation Committee of the Board of Directors.

6. Long-Term Incentive Compensation. You will be eligible to participate in the Company’s long-term incentive plan as administered and determined by the Compensation Committee of the Board of Directors. Pursuant to the Company’s 2007 Stock Incentive Plan (the “2007 Plan”), you will be granted 25,000 stock appreciation rights (“SARs”) and 7,500 shares of performance accelerated restricted stock (“PARS”) on the effective date of this Amended and Restated Employment Letter. Pursuant to the 2007 Plan, the grant of the PARS and SARs will be evidenced by, respectively, a Restricted Stock Agreement and a Stock Appreciation Rights Agreement entered into between you and the Company.

7. Benefits. You will be entitled to receive benefits generally provided to officers of the Company consistent with the Company’s practices, including without limitation, the following:

•

Medical, dental and prescription benefits.

•

Life insurance equal to 1.5 times your annual base salary, with a maximum amount of $450,000.

•

Optional voluntary life insurance.

•

Long-term disability benefits.

•

Participation in the Company’s 401(k) plan.

•

New Jersey short-term disability benefits.

•

Vacation.

•

Cell phone/blackberry.

•

Reimbursement for business expenses/use of a corporate credit card.

8. Covenants.

(a) In consideration of the compensation to be paid to you as set forth in this Amended and Restated Employment Letter, the sufficiency of which you hereby acknowledge, you agree that for a period of twelve (12) months after termination of your employment (the “Non-Compete Period”) you will 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 (such businesses being the retail sale of arts and crafts and related products), as such businesses exist or are in process on the date of the termination of your employment, within a fifty (50) mile radius of any geographic location in which the Company or its subsidiaries engage in such businesses or actively plan to engage in such businesses. Nothing herein shall prohibit you from being a passive owner of not more than 2% of the outstanding stock of any class of a corporation which is publicly traded and which competes with the businesses of Company and its subsidiaries, so long as you have no direct or indirect active participation in the business of such corporation.

(b) During the Non-Compete Period, you 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).

(c) The provisions of this paragraph 8 will be enforced to the fullest extent permitted by the law in the state in which you reside or are employed at the time of the enforcement of the provision. If, at the time of enforcement of this paragraph 8, 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. You agree that the restrictions contained in this paragraph 8 are reasonable. In the event of the breach or a threatened breach by you of any of the provisions of this paragraph 8, 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 you of this paragraph 8, the Non-Compete Period shall be tolled until such breach or violation has been duly cured.

9. Severance and Benefits Prior to a Change of Control. If your employment is terminated at any time by the Company without cause prior to a Change of Control, you will receive (i) severance payments in the amount of six (6) months’ compensation at your then current rate, less any required withholdings or authorized deductions, in equal monthly installments, plus (ii) health insurance benefits pursuant to the Company’s programs as in effect from time to time, to the extent you participated immediately prior to the date of such termination (“Insurance Benefits”). Should you remain continuously unemployed for six (6) months from the date of your termination, you will receive an additional month of severance at your then current rate and Insurance Benefits for each month after the six (6) months that you remain unemployed, up to a maximum of six (6) additional months of severance at your then current rate and Insurance Benefits. The total amount of severance to be paid to you pursuant to this paragraph 9 shall not equal more than twelve (12) months’ compensation at your then current rate. Likewise, Insurance Benefits will be provided to you for no more than twelve (12) months following your termination date. You agree to (a) actively seek employment in good faith and (b) notify the Company immediately upon obtaining employment. Cause includes but is not limited to your failure to perform substantially your duties with the Company as determined by the Company or illegal conduct or gross misconduct in violation of the Company’s Code of Ethical Business Conduct. No payment of any sum pursuant to this paragraph 9 will be made unless and until you 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), 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 the Release shall have expired without you having revoked the Release.

10. At Will. You may terminate your employment with the Company at any time and for any reason whatsoever. Likewise, the Company may terminate your employment at any time and for any reason whatsoever, with or without cause or advance notice. This at-will employment relationship cannot be changed except in writing signed by an officer of the Company so authorized.

11. No Confidences. During your employment, you shall not improperly use, communicate, disclose, provide commentary regarding or make available any proprietary information or trade secrets of any former employer or any other person or entity to whom or to which you have any duty of confidentiality. Further, you warrant that you shall not bring onto the Company’s premises or transfer to the Company’s electronic media any documents or information that is not generally known to the public, belonging to any former employer or other person or entity to whom or to which you owe a duty of confidentiality unless you have written consent from the former employer or other person or entity. You acknowledge that you are taking employment with the Company and are agreeing to all of the terms of this letter voluntarily and without any coercion or restraint.

12. Other Agreements. Consistent with the Company’s practices, you will enter into or have entered into agreements relating to confidentiality and arbitration with the Company as a condition of your employment. With the exception of the confidentiality and arbitration agreements, the letter agreement relating to your retention award, as well as any agreements relating to equity grants to you, this Amended and Restated Employment Letter replaces and supersedes any prior agreements or offers previously provided to you by the Company.

13. Counterparts. This Amended and Restated Employment Letter 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 letter.

IN WITNESS WHEREOF, the parties hereto have caused this Amended and Restated Employment Letter to be duly executed and delivered as of the date first written above.


	/s/ Michael G. Zawoysky
Date: September 24, 2008	EXECUTIVE

	A. C. MOORE ARTS & CRAFTS, INC.
Date: September 24, 2008	By:	/s/ Rick A. Lepley
		President and Chief Executive Officer

APPENDIX I

CHANGE OF CONTROL PROVISIONS

To Amended and Restated Employment Letter of Michael G. Zawoysky (“Executive”)

If a Change of Control (as defined in this Appendix I) of the Company occurs, paragraphs 3 through 11 of the Amended and Restated Employment Letter (except paragraph 8 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 Amended and Restated Employment Letter 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 Amended and Restated Employment Letter 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 Appendix I and the Amended and Restated Employment Letter, 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 the Amended and Restated Employment Letter and this Appendix I, 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 him 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 Appendix I or the Amended and Restated Employment Letter 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 Appendix I and the Amended and Restated Employment Letter. 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. Any increase in Annual Base Salary shall not serve to limit or reduce any other obligation to the Executive under the Amended and Restated Employment Letter and this Appendix I. Annual Base Salary shall not be reduced after any such increase and the term Annual Base Salary as utilized in the Amended and Restated Employment Letter and this Appendix I 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; Long-term incentive plan; Benefits. 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. Executive will continue to be eligible to participate in the Company’s long-term incentive plan as administered and determined by the Compensation Committee of the Board of Directors and to be entitled to receive benefits generally provided to officers of the Company consistent with the Company’s practices.

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 this Appendix I and the Amended and Restated Employment Letter 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 Appendix I and the Amended and Restated Employment Letter, “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 Appendix I and the Amended and Restated Employment Letter, “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 either case, in violation of the Company’s Code of Ethical Business Conduct.

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 Appendix I and the Amended and Restated Employment Letter, “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 this Appendix I and the Amended and Restated Employment Letter 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 (“Pro Rata Bonus”), 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 and (4) the 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 the 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.

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 Appendix I and the Amended and Restated Employment Letter shall terminate without further obligations to the Executive’s legal representatives under this Appendix I and the Amended and Restated Employment Letter, 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, (ii) Executive’s Pro Rata Bonus (as defined in Section 6(a)(i)(A)(2)) and (iii) 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.

(c) Disability. If the Executive’s employment is terminated by reason of the Executive’s Disability during the Employment Term, this Appendix I and the Amended and Restated Employment Letter 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(a)(i)(A)(2)) and (iii) the timely payment or provision of other benefits required to be paid or provided to Executive or which Executive is eligible to receive under any plan, program, practices or policies relating to disability of the Company and its affiliated Companies. The amounts set forth in Section 6(c)(i) and (ii) shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination.

(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 Appendix I and the Amended and Restated Employment Letter 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 any other applicable benefits, in each case to the extent theretofore unpaid.

7. Options, SARs and Restricted Stock. All options to purchase and stock appreciation rights in common stock in the Company and the grants of common stock in the Company with vesting restrictions held by Executive on the date of a Change of Control shall immediately be deemed vested and the options and stock appreciation rights shall immediately 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 and stock appreciation right to exercise such option and stock appreciation right; provided, however, that if 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 stock appreciation right and (2) 18 months after the Date of Termination to exercise each such option and stock appreciation right post-termination. In the event that Executive’s employment with the Company is terminated for Cause, all options, stock appreciation rights and unvested restricted stock held by Executive shall terminate immediately.

8. Nonexclusivity of Rights. Nothing in this Appendix I or the Amended and Restated Employment Letter 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 Appendix I and the Amended and Restated Employment Letter.

9. Section 409A. In the event that an amount becomes payable to the Executive after his 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 his termination of employment. Upon the request of the Executive, the Company agrees to promptly provide to him 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 his 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 his separation from service before the date which is six (6) months after the date of his 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.

EX-31.1 4 c76934exv31w1.htm EXHIBIT 31.1 Filed by Bowne Pure Compliance

Exhibit 31.1

I, Rick A. Lepley, certify that:

1. I have reviewed this Form 10-Q 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: November 10, 2008	/s/ Rick A. Lepley
	Rick A. Lepley
	President and Chief Executive Officer (principal executive officer)

EX-31.2 5 c76934exv31w2.htm EXHIBIT 31.2 Filed by Bowne Pure Compliance

Exhibit 31.2

I, Michael G. Zawoysky, certify that:

1. I have reviewed this Form 10-Q of A.C. Moore Arts & Crafts, Inc;

(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: November 10, 2008	/s/ Michael G. Zawoysky
	Michael G. Zawoysky
	Executive Vice President and Chief Financial Officer (principal financial officer)

EX-32.1 6 c76934exv32w1.htm EXHIBIT 32.1 Filed by Bowne Pure Compliance

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-Q of the Company for the quarterly period ended September 30, 2008 (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.


	/s/ Rick A. Lepley
Date: November 10, 2008	Rick A. Lepley
	President and Chief Executive Officer (principal 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 7 c76934exv32w2.htm EXHIBIT 32.2 Filed by Bowne Pure Compliance

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

(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.


	/s/ Michael G. Zawoysky
Date: November 10, 2008	Michael G. Zawoysky
	Executive Vice President and Chief Financial Officer (principal financial officer)

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