Prepared and filed by St Ives Burrups

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

 
(Mark One)
 
     
 
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
    THE SECURITIES EXCHANGE ACT OF 1934
     
 For the quarterly period ended June 30, 2004
     
 OR
     
 
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
    THE SECURITIES EXCHANGE ACT OF 1934
     
 For the transition period from ____________ to ____________

Commission File Number: 000-23157

A.C. MOORE ARTS & CRAFTS, INC.

(Exact name of registrant as specified in charter)


Pennsylvania
 
22-3527763
 

     
 
(State or other jurisdiction of
 
(I.R.S. Employer
 
incorporation or organization)
 
Identification No.)
 


500 University Court, Blackwood, NJ 08012

(Address of principal executive offices) (Zip Code)
 


(856) 228-6700

(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                    No

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

      Yes                    No

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

Class
Outstanding at August 6, 2004

 
Common Stock, no par value
19,496,015
     

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A.C. MOORE ARTS & CRAFTS, INC.

TABLE OF CONTENTS

 
Page
Number

PART I:      FINANCIAL INFORMATION

  Item 1. Financial Statements (Unaudited)
       
    Consolidated Balance Sheets as of June 30, 2004
    and December 31, 2003
       
    Consolidated Statements of Income for the three and six
    month periods ended June 30, 2004 and 2003
       
    Consolidated Statements of Cash Flows for the six
    month periods ended June 30, 2004 and 2003
       
    Notes to Consolidated Financial Statements
       
  Item 2. Management’s Discussion and Analysis of Financial
  Condition and Results of Operations
     
  Item 3. Quantitative and Qualitative Disclosures About
  Market Risk
     
  Item 4. Controls and Procedures

PART II: OTHER INFORMATION

  Item 1. Legal Proceedings
     
  Item 2. Changes in Securities, Use of Proceeds and Issuer
  Purchases of Equity Securities
     
  Item 3. Defaults Upon Senior Securities
     
  Item 4. Submission of Matters to a Vote of Security Holders
     
  Item 5. Other Information
       
  Item 6. Exhibits and Reports on Form 8-K
       
SIGNATURES 

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PART I FINANCIAL INFORMATION

ITEM 1.      FINANCIAL STATEMENTS

A.C. MOORE ARTS & CRAFTS, INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)

      June 30,
2004
    December 31,
2003
 
   

 

 
      (unaudited)        
                              ASSETS              
Current assets:              
   Cash and cash equivalents   $       34,013   $       43,700  
   Marketable securities     13,396      
   Inventories     123,416     121,493  
   Prepaid expenses and other current assets     5,592     2,962  
   

 

 
      176,417     168,155  
Non-current assets:              
   Marketable securities         14,132  
   Property and equipment, net     72,746     47,706  
   Other assets     1,768     1,801  
   

 

 
    $   250,931   $    231,794  
LIABILITIES AND SHAREHOLDERS’ EQUITY  

 

 
Current liabilities:              
   Current portion of long-term debt   $       1,930   $        504  
   Trade accounts payable     27,537     33,558  
   Accrued payroll and payroll taxes     3,747     4,501  
   Accrued expenses     8,733     10,015  
   Income taxes payable     640     6,826  
   

 

 
      42,587     55,404  
Long-term liabilities:  

 

 
   Long-term debt     28,070      
   Deferred tax liability     5,367     4,950  
   Other long-term liabilities     5,241     4,729  
   

 

 
      38,678     9,679  
   

 

 
      81,265     65,083  
SHAREHOLDERS’ EQUITY  

 

 
Preferred stock, no par value, 10,000,000 shares              
   authorized, none issued              
Common stock, no par value, 40,000,000 shares              
   authorized; issued and outstanding 19,467,615 shares at              
   June 30, 2004 and 19,357,541 at December 31, 2003     106,399     105,023  
               
Retained earnings     63,267     61,688  
   

 

 
      169,666     166,711  
   

 

 
    $     250,931   $     231,794  
   

 

 

See accompanying notes to financial statements

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A.C. MOORE ARTS & CRAFTS, INC.
CONSOLIDATED STATEMENT OF INCOME
(dollars in thousands, except per share data)
(unaudited)

      Three months ended
June 30,
    Six months ended
June 30,
 
   




   



 
      2004     2003     2004     2003  
   

 

 

 

 
Net sales   $    101,194   $    93,686   $    212,663   $    185,638  
                           
Cost of sales (including buying and
   distribution costs)
    61,852     58,893     131,391     117,310  
   

 

 

 

 
Gross margin     39,342     34,793     81,272     68,328  
Selling, general and administrative expenses     38,603     32,838     78,129     65,424  
Store pre-opening expenses     253     372     819     750  
   

 

 

 

 
Income from operations     486     1,583     2,324     2,154  
   Net interest (income)     (123 )   (118 )   (243 )   (227 )
   

 

 

 

 
Income before income taxes     609     1,701     2,567     2,381  
   Provision for income taxes     234     650     988     910  
   

 

 

 

 
Net income   $       375   $       1,051   $       1,579   $       1,471  
   

 

 

 

 
Basic net income per share   $      0.02   $      0.06   $     0.08   $      0.08  
   

 

 

 

 
Weighted average shares outstanding     19,438,837     19,033,158     19,407,541     18,939,205  
   

 

 

 

 
Diluted net income per share   $      0.02   $      0.05   $       0.08   $       0.07  
   

 

 

 

 
Weighted average shares outstanding
   plus impact of stock options
    20,108,417     19,762,411     20,044,554     19,620,269  
   

 

 

 

 

See accompanying notes to financial statements

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A.C. MOORE ARTS & CRAFTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)

   
Six Months Ended
June 30,
 
   

 

 
      2004     2003  
   

 

 
Cash flows from operating activities:              
Net income   $      1,579   $        1,471  
               
Adjustments to reconcile net income to net cash (used in) operating activities:              
   Depreciation and amortization     3,764     3,297  
   Provision for deferred income taxes     417     700  
   Changes in assets and liabilities:              
      Inventories     (1,923 )   (6,386 )
      Prepaid expenses and other current assets     (2,630 )   (1,860 )
      Accounts payable, accrued payroll payroll taxes and accrued expenses     (8,057 )   (1,436 )
      Income taxes payable     (5,304 )   (2,141 )
      Other long-term liabilities     512     318  
      Other assets     33     30  
   

 

 
Net cash used in operating activities     (11,609 )   (6,007 )
   

 

 
Cash flows from investing activities:              
   Capital expenditures     (28,804 )   (5,759 )
   Investment in marketable securities     736     (14,189 )
   

 

 
Cash flows used in investing activities     (28,068 )   (19,948 )
   

 

 
Cash flows from financing activities:              
   Exercise of stock options     494     1,559  
   Increase in long-term debt     30,000      
   Repayment of capital leases     (504 )   (685 )
   

 

 
Net cash provided by financing activities     29,990     874  
   

 

 
Net decrease in cash     (9,687 )   (25,081 )
               
Cash and cash equivalents at beginning of period     43,700     61,584  
   

 

 
Cash and cash equivalents at end of period   $    34,013   $     36,503  
   

 

 

See accompanying notes to financial statements

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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 (collectively the “Company”). The Company is a chain of 84 retail stores selling arts and crafts merchandise. The stores are located throughout the eastern United States.

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, 2003. 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 accompanying consolidated financial statements reflect, in the opinion of management, all adjustments necessary for a fair presentation of the interim financial statements. In the opinion of management, all such adjustments are of a normal and recurring nature.

(2)      Management Estimates

The preparation of these consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reported period and related disclosures. Significant estimates made as of and for the three and six month periods ended June 30, 2004 and 2003 include provisions for shrinkage, capitalized buying, warehousing and distribution costs related to inventory, and markdowns of merchandise inventories. Actual results could differ materially from those estimates.

(3)      Marketable Securities

Marketable securities represent investments in fixed financial instruments, are classified as held-to-maturity and recorded at amortized cost. Securities with maturities in excess of 12 months are classified as long-term.

(4)      Change in Accounting Principle

For all vendor contracts entered into or modified after January 1, 2003, the Company has adopted the Emerging Issues Task Force (EITF) 02-16, Accounting by a Customer (including a Reseller) for Cash Consideration Received from a Vendor. EITF 02-16 addresses the accounting for cash consideration received by a customer from a vendor (e.g., slotting fees, cooperative advertising payments, buydowns) and rebates or refunds from a vendor that is payable only if the customer completes a specified cumulative level of purchases or remains a customer for a specified time period. The change in accounting means that vendor monies which support the Company’s advertising programs are now being recorded as a reduction in the cost of inventory, and are recognized as a reduction of cost of goods sold when the inventory is sold. Previously, they were accounted for as an offset to advertising costs. This accounting change results in a timing difference as to when these monies are recognized in the Company’s income statement. The prospective adoption of EITF 02-16 reduced the Company’s second quarter net income by $0.6 million or $0.03 per share and the six months net income by $1.7 million or $0.08 per share. In the second quarter, the change increased gross margin by $2.0 million, increased selling, general and administrative costs by $3.1 million, and decreased inventory by $1.1 million. For the six months, the change increased gross margin by $3.1 million, increased selling, general and administrative costs by $5.8 million, and decreased inventory by $2.7 million.

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(5)       Stock-Based Compensation

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

Had compensation cost for the Company’s stock-based compensation plan been determined based on the fair value at the grant date for awards under those plans, consistent with the requirements of SFAS No. 123, “Accounting for Stock-Based Compensation,” net income and earnings per share would have been reduced to the following pro-forma amounts:

          Three Months Ended     Six Months Ended  
          June 30,     June 30,  
       

 

 
         
2004
 
 
2003
 
 
2004
 
 
2003
 
       

 

 

 

 
Net income   As reported   $ 375,000   $ 1,051,000   $ 1,579,000   $ 1,471,000  
    Compensation cost, net     433,000     277,000     872,000     554,000  
    Pro forma     (58,000 )   774,000     707,000     917,000  
                               
Basic earnings per share   As reported   $ .02   $ .06   $ .08   $ .08  
    Pro forma     .00     .04     .04     .05  
                               
Diluted earnings per share   As reported   $ .02   $ .05   $ .08   $ .07  
    Pro forma     .00     .04     .04     .05  

The pro forma results may not be representative of the effects on reported operations for future years. The fair value of the options was calculated using a Black-Scholes options pricing model with the following weighted-average assumptions: risk-free interest rate of 3.2% for 2003, 4.1% for 2002, 5.1% for 2001, 6.3% for 2000 and; no dividend yield; and a weighted average expected life of the options of 4.5 years for 2003 and seven years for 2002, 2001 and 2000. In accordance with the provisions of SFAS No. 123 the expected stock price volatility was 56.0% for 2003, 45.2% for 2002, 48.4% for 2001, and 46.6% for 2000.

The weighted average shares outstanding includes the impact of stock options in the amount of 669,580 and 729,253 for the second quarter of 2004 and 2003, respectively, and 637,013 and 681,064 for the first six months of 2004 and 2003, respectively. The number of options excluded from the calculation because the options’ exercise price was greater than the average market price of the common shares was 315,350 shares in the first six months of 2004 and 306,350 shares in both the second quarter and six months of 2003. No shares were excluded from the calculations for the three months ended June 30, 2004.

(6)      Long-Term Debt

On October 28, 2003 we signed two mortgage agreements with Wachovia Bank relating to the new corporate offices and distribution center. The mortgages totaling $30.0 million, all of which was outstanding at June 30, 2004, are secured by land, building, and equipment. Of the $30 million, $22.5 million is repayable over 15 years and $7.5 million is repayable over 7 years. Monthly payments totaling $214,000 are anticipated to start in October 2004. The mortgages bear interest at rates that will vary between LIBOR plus 85 basis points and LIBOR plus 135 basis points, depending on the debt service coverage ratio and the length of the mortgage payment. We have the option of fixing the interest rate at any time. The mortgages contain certain financial covenants including those relating to tangible net worth, funded debt and current ratio. The Company was in compliance with these agreements at June 30, 2004.

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

The following discussion and analysis contains certain forward-looking statements. These forward-looking statements do not constitute historical facts and involve risks and uncertainties. Actual results could differ materially from those referred to in the forward-looking statements due to a number of factors, including, but not limited to, the following: the impact of the adoption of EITF Issue 02-16, customer demand, the effect of economic conditions, the impact of adverse weather conditions, the impact of competitors’ locations or pricing, the availability of acceptable real estate locations for new stores, difficulties with respect to new information system technologies, supply constraints or difficulties, the effectiveness of advertising strategies and the impact of the threat of terrorist attacks and war. 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 the heading “Cautionary Statement Relating to Forward-Looking Statements” in our Annual Report on Form 10-K as filed with the Securities and Exchange Commission.

Due to the importance of our peak selling season, which includes Fall/Halloween, Thanksgiving and Christmas, the fourth quarter has historically contributed, and we expect it will continue to contribute, disproportionately to our profitability for the entire year. As a result, our quarterly results of operations may fluctuate. In addition, results of a period shorter than a full year may not be indicative of results expected for the entire year.

Our quarterly results of operations also may fluctuate based upon such factors as the length of holiday seasons, the date on which holidays fall, the number and timing of new store openings, the amount of store pre-opening expenses, the amount of net sales contributed by new and existing stores, the mix of products sold, the amount of sales returns, the timing and level of markdowns and other competitive factors.

Starting in 2004, vendor monies which support our advertising programs are now being recorded as a reduction in the cost of inventory, and are being recognized as a reduction to cost of goods sold when the inventory is sold. Through 2003, they were accounted for as an offset to advertising costs. This accounting change results in a timing difference as to when these monies are recognized in our income statement. The accounting change related to the adoption of EITF 02-16 reduced our second quarter net income by $0.6 million or $0.03 per share. For the six months, the accounting change reduced our net income by $1.7 million or $0.08 per share.

The Financial Accounting Standards Board is working on a project to develop a new standard for accounting for stock-based compensation. Tentative decisions by the FASB indicate that expensing of stock options will be required beginning January 1, 2005. The FASB issued an exposure draft, which is subject to public comment, in the first quarter 2004 and expects to issue its final standard in the second half of 2004.

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Subsequent event:

On July 27, 2004 a section of the roof on the Company’s Blackwood, NJ warehouse and corporate headquarters facility collapsed. The facility employs over 150 team members, none of whom were injured in the incident.

At the time of the incident, the Company had been in the process of constructing a new distribution center in Winslow Township, NJ, less than 9 miles away from the Blackwood facility and the move to the Winslow facility was underway. The move of the offices was expedited and completed on August 4th.

The damage to the Blackwood facility was such that the Company was unable to access inventory in the entire building for one week. At the time of the incident, the facility was holding an estimated $15.0 million of inventory. As of August 6, 2004, $2.5 million of the inventory is still unavailable as approximately 25% of the building is unsafe, and an additional $4.2 million in inventory is currently being relocated to the new distribution center. The remaining inventory in the Blackwood facility is available for shipping to the stores as required.

Two-thirds of the Company’s merchandise in its stores is delivered directly from vendors without going through the Company’s distribution facility, and the Company believes that any disruption in the supply of merchandise to the stores due to the unavailability of Company inventory is temporary. As a result, the Company believes there could be some impact on sales for several weeks but, as management believes the Company is adequately covered by insurance, they anticipate that there will be no material adverse financial impact.

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   Six months ended  
      June 30,   June 30,  
     


 


 
      2004   2003   2004   2003  
     
 
 
 
 
Net sales     100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales     61.1 % 62.9 % 61.8 % 63.2 %
     
 
 
 
 
Gross margin     38.9 % 37.1 % 38.2 % 36.8 %
Selling, general and administrative expenses     38.1 % 35.0 % 36.7 % 35.2 %
Store pre-opening expenses     0.3 % 0.4 % 0.4 % 0.4 %
     
 
 
 
 
Income from operation     0.5 % 1.7 % 1.1 % 1.2 %
Net interest (income) expense     (0.1 )% (0.1 )% (0.1 )% (0.1 )%
     
 
 
 
 
Income before income taxes     0.6 % 1.8 % 1.2 % 1.3 %
Income tax expense     0.2 % 0.7 % 0.5 % 0.5 %
     
 
 
 
 
Net income     0.4 % 1.1 % 0.7 % 0.8 %
     
 
 
 
 
                     
Number of stores open at end of period     84   74          

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Three Months Ended June 30, 2004 Compared to Three Months Ended June 30, 2003

     Net Sales. Net sales increased $7.5 million, or 8.0%, to $101.2 million in the three months ended June 30, 2004 from $93.7 million in the comparable 2003 period. This increase is comprised of (i) net sales of $2.3 million from three new stores opened in 2004, (ii) net sales of $6.3 million from stores opened in 2003 not included in the comparable store base, and (iii) a comparable store sales decrease of $1.1 million, or 1%. Sales during the quarter ended June 30, 2004 were impacted by negative weather conditions compared with the quarter ended June 30, 2003. Stores are added to the comparable store base at the beginning of the fourteenth full month of operation.

     Gross Margin. Gross margin is net sales minus the cost of merchandise and certain distribution and purchasing costs. The gross margin increased to 38.9% of net sales in the three months ended June 30, 2004 from 37.1% in the three months ended June 30, 2003. The impact of the change in accounting in accordance with EITF 02-16 represented an increase of 2.1%. Additional distribution costs associated with the move to our new distribution center and corporate office complex impacted gross margin by 0.7%. The remaining difference of 0.4% is due to the mix of merchandise sold.

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

     Selling, general and administrative expenses increased $5.8 million, or 17.6%, in the three months ended June 30, 2004 to $38.6 million from $32.8 million in the three months ended June 30, 2003. Of the increase $3.1 million represents the impact of the accounting change in accordance with EITF 02-16. The remainder of the increase is principally accountable from stores opened in 2004 and the stores opened in 2003 not in the comparable store base. As a percentage of sales, selling, general and administrative costs was 38.1% and 35.0% of net sales in the three months ended June 30, 2004 and June 30, 2003, respectively. The impact of the accounting change was 3.1% of net sales. As a percentage of sales, other selling, general and administrative costs for the three months ended June 30, 2004 were comparable to the three months ended June 30, 2003.

     Store Pre-Opening Expenses. We expense store pre-opening expenses as incurred. Pre-opening expenses for the store we relocated in the second quarter of 2004 and the stores we opened in July 2004 amounted to $253,000. In the second quarter of 2003, we incurred store pre-opening expenses of $372,000 related to the store opened in that quarter and the two stores opened in July 2003.

     Net Interest (Income). In the second quarter of 2004, we had net interest income of $123,000 compared with net interest income of $118,000 in 2003.

     Income Taxes. Our effective income tax rate was 38.5% for the second quarter ended June 30, 2004 and 38.2% for the second quarter ended June 30, 2003.

Six Months Ended June 30, 2004 Compared to Six Months Ended June 30, 2003

     Net Sales. Net sales increased $27.1 million, or 14.6%, to $212.7 million in the six months ended June 30, 2004 from $185.6 million in the comparable 2003 period. This increase is comprised of (i) net sales of $4.0 million from three new stores opened in 2004, (ii) net sales of $15.6 million from stores opened in 2003 not included in the comparable store base, and (iii) a comparable store sales increase of $7.5 million, or 4%. Sales during the six months ended June 30, 2004 benefited from positive weather conditions in the first quarter but were negatively impacted by weather conditions in the second quarter compared with the comparable periods in 2003.

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     Gross Margin. The gross margin increased to 38.2% of net sales in the six months ended June 30, 2004 from 36.8% in the six months ended June 30, 2003. The impact of the change in accounting in accordance with EITF 02-16 generated an increase of 1.5%. Additional distribution costs impacted the margin negatively by 0.4%. There was a 0.3% increase due to the mix of merchandise sold.

     Selling, General, and Administrative Expenses. Selling, general and administrative expenses increased $12.7 million, or 19.4%, in the six months ended June 30, 2004 to $78.1 million from $65.4 million in the six months ended June 30, 2003. Of the increase $5.8 million represents the impact of the accounting change in accordance with EITF 02-16. The remainder of the increase is principally accountable from stores opened in 2004 and the stores opened in 2003 not in the comparable store base. As a percentage of sales, selling, general and administrative costs was 36.7% of net sales for the six months ended June 30, 2004 compared with 35.2% in the six months ended June 30, 2003. The impact of the accounting change was 2.7% of net sales. Other selling, general and administrative costs decreased 1.2% in the six months ended June 30, 2004 compared with the six months ended June 30, 2003. This decrease came from leveraging our store costs due to our sales increase and leveraging our corporate office costs over a greater sales base. Corporate office costs were reduced to 3.6% of sales in the six months ended June 30, 2004 compared with 3.7% in the same period in the prior year.

     Store Pre-Opening Expenses. Pre-opening expenses for the three new stores opened in the first half of 2004, the two stores we relocated and the stores we opened in July 2004 amounted to $819,000. In the first half of 2003, we incurred store pre-opening expenses of $750,000 related to the three stores opened in that half and the two stores opened in July 2003.

     Net Interest (Income). In the first half of 2004, we had net interest income of $243,000 compared with net interest income of $227,000 in 2003.

     Income Taxes. Our effective income tax rate was 38.5% for the first half of 2004 and 38.2% for the first half of 2003.

Liquidity and Capital Resources

     Our cash is used primarily for working capital to support inventory requirements and capital expenditures, pre-opening expenses and beginning inventory for new stores. In recent years, we have financed our operations and new store openings primarily with cash from operations, the net proceeds we received from our initial public offering in 1997 and from a secondary offering in 2002. In the first half of 2004 we borrowed $30 million under two mortgage agreements we have with Wachovia Bank to finance our new corporate offices and distribution center.

     At June 30, 2004 and December 31, 2003 our working capital was $133.8 million and $112.8 million, respectively. Cash used in operations was $11.6 million for the six months ended June 30, 2004 as a result of an increase in inventory of $1.9 million to support the new stores, a reduction in accounts payable and other accrued expenses of $8.1 million, and a reduction in income tax payables of $5.3 million.

     Net cash used in investing activities during the six months ended June 30, 2004 was $28.1 million of which $28.8 million was for capital expenditures. In 2004, we expect to spend approximately $39.0 million on capital expenditures, which includes approximately $27.5 million related to the building, equipment and systems for our new distribution center, $8.5 million for new store openings, and the remainder for remodeling existing stores, upgrading systems in existing stores, and corporate systems development. The total cost of the new distribution center is estimated to be $45.0 million.

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     On October 28, 2003 we signed two mortgage agreements with Wachovia Bank relating to the new corporate offices and distribution center. The mortgages totaling $30.0 million, all of which was outstanding at June 30, 2004, are secured by land, building, and equipment. Of the $30 million, $22.5 million is repayable over 15 years and $7.5 million is repayable over 7 years. Monthly payments totaling $214,000 are anticipated to start in October 2004. The mortgages bear interest at rates that will vary between LIBOR plus 85 basis points and LIBOR plus 135 basis points, depending on the debt service coverage ratio and the length of the mortgage payment. We have the option of fixing the interest rate at any time. The mortgages contain certain financial covenants including those relating to tangible net worth, funded debt and current ratio. The Company was in compliance with these agreements at June 30, 2004.

     We currently have a $25.0 million line of credit agreement with Wachovia Bank, which expires on January 1, 2005. Borrowing under this line will bear interest at LIBOR plus 95 basis points. At June 30, 2004 there were no borrowings outstanding under this agreement.

     We believe the cash generated from operations during the year, funds received through the financing of the new distribution center and available borrowings under the credit agreement (which we intend to renew) will be sufficient to finance our working capital and capital expenditure requirements for at least the next 12 months.

Change in Accounting Principle

     The costs incurred for advertising are expensed the first time the advertising takes place, and are offset by reimbursements received under cooperative advertising programs with certain vendors. Co-op advertising funds are only recognized when we have performed our contractual obligation under a co-op advertising agreement.

     For all vendor contracts entered into or modified after January 1, 2003, the Company has adopted Emerging Issues Task Force (EITF) 02-16, Accounting by a Customer (including a Reseller) for Cash Consideration Received from a Vendor. EITF 02-16 addresses the accounting for cash consideration received by a customer from a vendor (e.g., slotting fees, cooperative advertising payments, buydowns) and rebates or refunds from a vendor that is payable only if the customer completes a specified cumulative level of purchases or remains a customer for a specified time period. The change in accounting means that vendor monies which support our advertising programs are now being recorded as a reduction in the cost of inventory, and are recognized as a reduction of cost of goods sold when the inventory is sold. Previously, they were accounted for as an offset to advertising costs. This accounting change results in a timing difference as to when these monies are recognized in our income statement. The prospective adoption of EITF 02-16 reduced our first half net income by $1.7 million or $0.08 per share. For the full year 2004, we estimate that the change in the timing of income recognition will reduce EPS by approximately $0.13 per share.

     The adoption of this standard does not change the ultimate cash to be received under these agreements, only the timing of when it is reflected in our net income.

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Critical Accounting Estimates

     Except for the change in accounting principle described above, our accounting policies are fully described in Note 1 of our notes to consolidated financial statements included in our annual report on Form 10-K for the fiscal year ended December 31, 2003. 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 are believed 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:

  merchandise inventories;
  impairment of long-lived assets;
  income taxes; and
  other estimates.

The foregoing critical accounting estimates are more fully described in our annual report on Form 10-K for the fiscal year ended December 31, 2003. During the six months ended June 30, 2004, we did not make any material changes to our estimates or methods by which estimates are derived with regard to our critical accounting estimates.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

     Not Applicable.

ITEM 4.   CONTROLS AND PROCEDURES

     Our management, with the participation of our chief executive officer and chief financial officer, conducted an evaluation as of the end of the period covered by this report, of the effectiveness of our disclosure controls and procedures, as defined in Exchange Act Rule 13a-15(e). Based on that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective in reaching a reasonable level of assurance that management is timely alerted to material information relating to us during the period when our periodic reports are being prepared. During the quarter ended June 30, 2004, there has not occurred any change in our internal control over financial reporting, as defined in Exchange Act Rule 13a-15(f), that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

.

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PART II
OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

     Not Applicable.

ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASERS OF EQUITY SECURITIES

     Not Applicable.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

     Not Applicable.

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

     We held our Annual Meeting of Shareholders on June 18, 2004. At the meeting, shareholders voted on the following:

  1. To elect two Class B directors to hold office for a term of three years until their successors are duly elected and qualified.
  2. To ratify the appointment of PricewaterhouseCoopers LLP as the Company’s independent auditors for the fiscal year ending December 31, 2004.

     The results of the voting was as follows:

      For   Against   Abstain   Withhold Authority  
     
 
 
 
 
Richard J. Bauer     16,792,541   0   1,021,210   0  
Richard J. Drake     14,247,412   0   3,566,339   0  
Ratification of
   PricewaterhouseCoopers LLP
    17,739,888   71,675   2,188   0  

     The term of office for each of the following directors continued after the meeting: William Kaplan, John E. Parker, Lawrence H. Fine, Richard Lesser and Eli J. Segal.

ITEM 5. OTHER INFORMATION

     On June 23, 2004, our board of directors increased the size of the board to eight directors and elected Michael J. Joyce as a director of the Company. Mr. Joyce will serve as a Class B director and will serve until 2007 and until his successor is elected and qualified.

     Mr. Joyce recently retired from the public accounting firm of Deloitte & Touche LLP where he as most recently the New England Managing Partner. Mr. Joyce joined the predecessor firm of Deloitte in 1967 and became an accounting and auditing partner in 1975. Simultaneously with his joining our Board, Mr. Joyce was also appointed to serve on our Audit and Compensation Committees and was designated as our Board’s “audit committee financial expert.”

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     Mr. Joyce currently serves on the board of Brandywine Realty Trust and Heritage Property Investment Trust, Inc. and has served on the boards of numerous civic, cultural and educational institutions, including the Boston Symphony Orchestra, the Greater Boston Chamber of Commerce, the Massachusetts Business Roundtable, the Philadelphia United Way and Board of Visitors of the Northeastern University Business School.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

     (a)     Exhibits.

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

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

               32        Certification of the Company’s Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

      (b)     Reports on Form 8-K furnished in the quarter ended June 30, 2004:

                8-K, Item 12, furnished on April 8, 2004 regarding a Company press release concerning earnings and other information.

                8-K, Item 12, furnished on April 21, 2004 regarding a Company press release concerning earnings and other information.

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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:      August 9, 2004 By: /s/ John E. Parker                        
    John E. Parker
Chief Executive Officer (duly authorized officer and
principal executive officer)
     
Date:      August 9, 2004 By: /s/ Leslie H. Gordon                    
    Leslie H. Gordon
Executive Vice President and Chief Financial Officer
(duly authorized officer and principal financial officer)

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Exhibit Index

Exhibit No.                          Description

31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) promulgated under the Exchange Act.
     
31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) promulgated under the Exchange Act.
     
32 Certification of the Company’s Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.