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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION   FORM 10-Q /X/
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
 FOR THE QUARTERLY PERIOD ENDED MAY 29, 2004 OR /  /
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
 COMMISSION FILE NUMBER 333-84294 AMERICAN ACHIEVEMENT CORPORATION (Exact name of registrant as specified in its charter) DELAWARE
    
    13-4126506(State or other jurisdiction of
    
    (I.R.S. Employer Identification Number)incorporation or organization)
 7211 CIRCLE S ROAD
AUSTIN, TEXAS 78745
(Address of principal executive offices) (Zip Code) REGISTRANTS TELEPHONE NUMBER, INCLUDING AREA CODE (512) 444-0571 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 [X]. Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [  ] No [X]. 100 SHARES OF COMMON STOCK
(Number of shares outstanding as of May 29, 2004)




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AMERICAN ACHIEVEMENT CORPORATION
FOR THE QUARTERLY PERIOD ENDED MAY 29, 2004
INDEX PAGEPART I. FINANCIAL INFORMATIONItem 1. Condensed Consolidated Financial Statements and NotesCondensed Consolidated Balance Sheets
As of May 29, 2004 (Successor) and August 30, 2003
(Predecessor) (unaudited)
    
    
    3Condensed Consolidated Statements of Operations
For the Period March 26, 2004 to May 29, 2004 (Successor) and
the Period February 29, 2004 to March 25, 2004 (Predecessor)
and the Three Months Ended May 31, 2003 (Predecessor)
(unaudited)
    
    
    4Condensed Consolidated Statements of Operations
For the Period March 26, 2004 to May 29, 2004 (Successor) and
The Period August 31, 2003 to March 25, 2004 (Predecessor)
and the Nine Months Ended May 31, 2003 (Predecessor)
(unaudited)
    
    
    5Condensed Consolidated Statements of Cash Flows
For the Period March 26, 2004 to May 29, 2004 (Successor) and
the Period August 31, 2003 to March 25, 2004 (Predecessor)
and the Nine Months Ended May 31, 2003 (Predecessor)
(unaudited)
    
    
    6Condensed Consolidated Statements of Stockholders Equity
For the Period March 26, 2004 to May 29, 2004 (Successor)
and the Period August 31, 2003 to March 25, 2004
(Predecessor) (unaudited)
    
    
    7Notes to Condensed Consolidated Financial Statements
(unaudited)
    
    
    8-21Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    22-30Item 3. Quantitative and Qualitative Disclosures About Market
Risk
    
    
    31Item 4. Controls and Procedures
    
    
    32PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    33Item 6.
Exhibits and Reports on Form  8-K
    
    
    33SIGNATURES
    
    
    35Agreement and Plan of MergerIndentureThird Supplemental IndentureExchange and Registration Rights AgreementCredit and Guaranty AgreementPledge and Security AgreementIntercreditor AgreementFirst Amended and Restated Letter AgreementAddition of Approved Inventory LocationsManagement Advisory AgreementCEO Certification Pursuant to Section 302CFO Certification Pursuant to Section 302CEO Certification Pursuant to Section 906CFO Certification Pursuant to Section 906
  2




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AMERICAN ACHIEVEMENT CORPORATION 
 Condensed Consolidated Balance Sheets
(In thousands, except share data)
(unaudited) (Successor)
    
    (Predecessor)May 29,
    
    August 30,2004
    
    2003(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    2,091
    
    
    $
    1,735Accounts receivable, net of allowance for doubtful accounts of $4,186 and $3,242,
respectively
    
    
    72,443
    
    
    
    44,193Inventories, net
    
    
    24,384
    
    
    
    23,310Prepaid expenses and other current assets, net
    
    
    19,636
    
    
    
    30,317Total current assets
    
    
    118,554
    
    
    
    99,555Property, plant and equipment, net of accumulated depreciation of $2,109 and $46,315, respectively
    
    
    77,619
    
    
    
    65,307Goodwill and other intangible assets, net
    
    
    348,567
    
    
    
    222,273Other assets
    
    
    3,807
    
    
    
    8,366Total assets
    
    $
    548,547
    
    
    $
    395,501LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Bank overdraft
    
    $
    5,281
    
    
    $
    4,877Accounts payable
    
    
    7,197
    
    
    
    6,564Customer deposits
    
    
    34,177
    
    
    
    21,393Accrued expenses
    
    
    39,660
    
    
    
    26,856Deferred revenue
    
    
    309
    
    
    
    5,123Accrued interest
    
    
    4,279
    
    
    
    4,231Current portion of long-term debt
    
    
    1,550
    
    
    
    Total current liabilities
    
    
    92,453
    
    
    
    69,044Long-term debt, net of current portion
    
    
    311,892
    
    
    
    226,710Deferred income taxes
    
    
    12,043
    
    
    
    6,378Other long-term liabilities
    
    
    17,668
    
    
    
    3,476Total liabilities
    
    
    434,056
    
    
    
    305,608Redeemable minority interest in subsidiary
    
    
    
    
    
    
    18,050Commitments and contingenciesStockholders equity:Preferred stock, $.01 par value, 1,200,000 shares authorized, 1,007,366 shares issued and
outstanding; liquidation preference of $100,737 at August 30, 2003
    
    
    
    
    
    
    10Common stock, $.01 par value, 1,250,000 shares authorized, 1,015,426 and 809,775 shares
issued and outstanding, respectively
    
    
    10
    
    
    
    8Additional paid-in capital
    
    
    102,036
    
    
    
    95,350Accumulated earnings (deficit)
    
    
    12,445
    
    
    
    (18,375
    )Accumulated other comprehensive loss
    
    
    
    
    
    
    (5,150
    )Total stockholders equity
    
    
    114,491
    
    
    
    71,843Total liabilities and stockholders equity
    
    $
    548,547
    
    
    $
    395,501
 The accompanying notes are an integral part of these condensed consolidated financial statements. 3




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AMERICAN ACHIEVEMENT CORPORATION 
 Condensed Consolidated Statements of Operations
(In thousands)
(unaudited) (Successor)
    
    (Predecessor)
    
    (Predecessor)For the threeFor the period
    
    For the period
    
    months endedMarch 26, 2004 -
    
    February 29, 2004 -May 29,
    
    March 25,
    
    May 31,2004
    
    2004
    
    2003Net sales
    
    $
    114,621
    
    
    $
    20,275
    
    
    $
    126,237Cost of sales
    
    
    55,088
    
    
    
    8,275
    
    
    
    55,382Gross profit
    
    
    59,533
    
    
    
    12,000
    
    
    
    70,855Selling, general and administrative expenses
    
    
    34,559
    
    
    
    10,622
    
    
    
    40,278Operating income
    
    
    24,974
    
    
    
    1,378
    
    
    
    30,577Interest expense
    
    
    4,572
    
    
    
    2,557
    
    
    
    7,274Income (loss) before income taxes
    
    
    20,402
    
    
    
    (1,179
    )
    
    
    23,303Provision for income taxes
    
    
    7,957
    
    
    
    
    
    
    
    1,165Net income (loss)
    
    
    12,445
    
    
    
    (1,179
    )
    
    
    22,138Preferred dividends
    
    
    
    
    
    
    (100
    )
    
    
    (300
    )Net income (loss) applicable to common stockholders
    
    $
    12,445
    
    
    $
    (1,279
    )
    
    $
    21,838
 The accompanying notes are an integral part of these condensed consolidated financial statements. 4




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AMERICAN ACHIEVEMENT CORPORATION 
 Condensed Consolidated Statements of Operations
(In thousands)
(unaudited) (Successor)
    
    (Predecessor)
    
    (Predecessor)For the nineFor the period
    
    For the period
    
    months endedMarch 26, 2004 -
    
    August 31, 2003 -May 29,
    
    March 25,
    
    May 31,2004
    
    2004
    
    2003Net sales
    
    $
    114,621
    
    
    $
    146,721
    
    
    $
    260,679Cost of sales
    
    
    55,088
    
    
    
    59,857
    
    
    
    113,154Gross profit
    
    
    59,533
    
    
    
    86,864
    
    
    
    147,525Selling, general and administrative expenses
    
    
    34,559
    
    
    
    74,992
    
    
    
    105,315Operating income
    
    
    24,974
    
    
    
    11,872
    
    
    
    42,210Interest expense
    
    
    4,572
    
    
    
    16,455
    
    
    
    21,817Income (loss) before income taxes
    
    
    20,402
    
    
    
    (4,583
    )
    
    
    20,393Provision for income taxes
    
    
    7,957
    
    
    
    
    
    
    
    1,165Net income (loss)
    
    
    12,445
    
    
    
    (4,583
    )
    
    
    19,228Preferred dividends
    
    
    
    
    
    
    (700
    )
    
    
    (900
    )Net income (loss) applicable to common stockholders
    
    $
    12,445
    
    
    $
    (5,283
    )
    
    $
    18,328
 The accompanying notes are an integral part of these condensed consolidated financial statements. 5




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AMERICAN ACHIEVEMENT CORPORATION 
 Condensed Consolidated Statements of Cash Flows
(In thousands)
(unaudited) (Predecessor)(Successor)
    
    (Predecessor)
    
    For the nine monthsFor the period
    
    For the period
    
    endedMarch 26, 2004 -
    
    August 31, 2003 -May 29,
    
    March 25,
    
    May 31,2004
    
    2004
    
    2003Cash flows from operating activities:Net income (loss)
    
    $
    12,445
    
    
    $
    (4,583
    )
    
    $
    19,228Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:Depreciation and amortization
    
    
    4,087
    
    
    
    8,530
    
    
    
    10,637Amortization of debt discount and deferred financing fees
    
    
    251
    
    
    
    1,197
    
    
    
    1,545Provision for doubtful accounts
    
    
    1,088
    
    
    
    (144
    )
    
    
    1,601Changes in assets and liabilities:Accounts receivable
    
    
    (31,952
    )
    
    
    2,758
    
    
    
    (27,146
    )Inventories, net
    
    
    24,905
    
    
    
    (18,963
    )
    
    
    1,168Prepaid expenses and other current assets, net
    
    
    497
    
    
    
    2,573
    
    
    
    7,072Other assets
    
    
    421
    
    
    
    (959
    )
    
    
    (821
    )Customer deposits
    
    
    (29,979
    )
    
    
    42,763
    
    
    
    5,604Deferred revenue
    
    
    (2,579
    )
    
    
    (2,235
    )
    
    
    (5,685
    )Accounts payable, accrued expenses, and other
long-term liabilities
    
    
    11,870
    
    
    
    9,290
    
    
    
    16,487Net cash provided by (used in) operating activities
    
    
    (8,946
    )
    
    
    40,227
    
    
    
    29,690Cash flows from investing activities:Purchases of property, plant and equipment
    
    
    (1,428
    )
    
    
    (12,793
    )
    
    
    (8,840
    )Acquisitions of businesses, net of cash acquired
    
    
    
    
    
    
    (109,406
    )
    
    
    Net cash used in investing activities
    
    
    (1,428
    )
    
    
    (122,199
    )
    
    
    (8,840
    )Cash flows from financing activities:Payments on revolver, net
    
    
    
    
    
    
    (9,500
    )
    
    
    (19,176
    )Proceeds of common stock issuance
    
    
    
    
    
    
    102,046
    
    
    
    Proceeds from term loan
    
    
    
    
    
    
    155,000
    
    
    
    Proceeds from 8.25% senior subordinated notes
    
    
    
    
    
    
    150,000
    
    
    
    Proceeds from credit facility revolver
    
    
    400
    
    
    
    2,000
    
    
    
    Redemption of common and preferred stock
    
    
    
    
    
    
    (95,368
    )
    
    
    Redemption of 11% senior subordinated notes
    
    
    
    
    
    
    (41,355
    )
    
    
    Redemption of 11 5/8% senior unsecured notes
    
    
    
    
    
    
    (170,925
    )
    
    
    Change in bank overdraft
    
    
    2,800
    
    
    
    (2,396
    )
    
    
    41Net cash provided by (used in) financing activities
    
    
    3,200
    
    
    
    89,502
    
    
    
    (19,135
    )Net increase (decrease) in cash and cash equivalents
    
    
    (7,174
    )
    
    
    7,530
    
    
    
    1,715Cash and cash equivalents, beginning of period
    
    
    9,265
    
    
    
    1,735
    
    
    
    1,562Cash and cash equivalents, end of period
    
    $
    2,091
    
    
    $
    9,265
    
    
    $
    3,277Supplemental disclosureCash paid during the period for:Interest
    
    $
    
    
    
    $
    18,873
    
    
    $
    13,628Income taxes
    
    $
    20
    
    
    $
    178
    
    
    $
    349Supplemental Disclosure of noncash financing activitiesAccrued preferred stock dividends
    
    $
    
    
    
    $
    700
    
    
    $
    900
 The accompanying notes are an integral part of these condensed consolidated financial statements. 6




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AMERICAN ACHIEVEMENT CORPORATION 
 Consolidated Statements of Stockholders Equity
(In thousands, except share data)
(unaudited) Preferred Stock
    
    Common Stock
    
    Additional Paid-in
    
    Accumulated other
comprehensive
    
    AccumulatedShares
    
    Amount
    
    Shares
    
    Amount
    
    Capital
    
    income (loss)
    
    earnings (deficit)
    
    TotalBalance, August 31,
2003 (Predecessor)
    
    
    1,007,366
    
    
    $
    10
    
    
    
    809,775
    

    
    $
    8
    
    
    $
    95,350
    
    
    $
    (5,150
    )
    
    $
    (18,375
    )
    
    $
    71,843Comprehensive lossNet loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,583
    )
    
    
    (4,583
    )Adjustment to
minimum pension
liability
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    40
    
    
    
    
    
    
    
    40Total comprehensive
loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    40
    
    
    
    (4,583
    )
    
    
    (4,543
    )Accrued dividends
on minority
interest in CBI
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (700
    )
    
    
    (700
    )Repurchase of
common and
preferred stock
    
    
    (1,007,366
    )
    
    
    (10
    )
    
    
    (809,775
    )
    
    
    (8
    )
    
    
    (95,350
    )
    
    
    
    
    
    
    
    
    
    
    (95,368
    )Issuance of stock
    
    
    
    
    
    
    
    
    
    
    1,015,426
    
    
    
    10
    
    
    
    102,036
    
    
    
    
    
    
    
    
    
    
    
    102,046Effect of purchase
accounting
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,110
    
    
    
    23,658
    
    
    
    28,768Balance, March 25,
2004
    
    
    
    
    
    $
    
    
    
    
    1,015,426
    
    
    $
    10
    
    
    $
    102,036
    
    
    $
    
    
    
    $
    
    
    
    $
    102,046Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,445
    
    
    
    12,445Balance, May 29,
2004 (Successor)
    
    
    
    
    
    $
    
    
    
    
    1,015,426
    
    
    $
    10
    
    
    $
    102,036
    
    
    $
    
    
    
    $
    12,445
    
    
    $
    114,491
 The accompanying notes are an integral part of these condensed consolidated financial statements. 7




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AMERICAN ACHIEVEMENT CORPORATION 
 Notes to Condensed Consolidated Financial Statements
(Dollars in tables in thousands)
(unaudited)  1.
    
    Summary of Significant Accounting Policies Consolidation The condensed consolidated financial statements include the accounts of
American Achievement Corporation (the Company) and its direct and indirect
subsidiaries. All significant intercompany accounts and transactions have been
eliminated in consolidation. The
8 1⁄4% Senior Subordinated Notes Due 2012 (the Senior Sub Notes) are
guaranteed by certain direct and indirect domestic subsidiaries of the Company.
The guarantees by the guarantor subsidiaries are full, unconditional, and joint
and several. American Achievement Corporation is a holding company with no
independent assets or operations other than its investment in its subsidiaries. The accompanying condensed consolidated financial statements have been
prepared without audit pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes the disclosures are adequate to make
the information presented not misleading. In the opinion of management, all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of the financial position and results of operations for the
periods presented have been included. Operating results for the nine months
ended May 29, 2004 are not necessarily indicative of the results that may be
expected for the fiscal year ending August 28, 2004. Effective January 30, 2004, the Company acquired the assets of C-B Graduation
Announcements, LLC, a producer of personalized graduation announcements and
related accessories (the C-B Announcements Acquisition). The maximum purchase
price payable in connection with this acquisition is approximately $5.9 million
in cash, of which approximately $5.0 million was paid at closing (including
$1.0 million placed in escrow), with the escrowed amount and balance of the
purchase price to be paid pending a post-closing purchase price adjustment.
The C-B Announcements Acquisition was accounted for using the purchase method
of accounting. Stock-Based Compensation The Company accounts for equity instruments issued to non-employees in
accordance with the provisions of SFAS No. 123 (SFAS 123), Accounting for
Stock-Based Compensation, as amended by SFAS No. 148 (SFAS 148), Accounting
for Stock-Based Compensation  Transition and Disclosure an amendment of FASB
Statement No. 123. The Company accounts for stock-based employee compensation
arrangements in accordance with the provisions of Accounting Principles Board
Opinion No. 25 (APB No. 25), Accounting for Stock Issued to Employees and
complies with the disclosure provisions of SFAS 123, as amended by SFAS 148. Had compensation expense for the employee stock plans been determined
based on the fair value at the grant date for options granted consistent with
the provisions of SFAS 123, as amended by SFAS 148, the pro forma net income
(loss) would have been reported as follows: (Successor)
    
    (Predecessor)
    
    (Predecessor)
    
    (Successor)
    
    (Predecessor)
    
    (Predecessor)For the period
    
    For the period
    
    For the three
    
    For the period
    
    For the period
    
    For the nineMarch 26, 2004 -
    
    February 29, 2004 -
    
    months ended May
    
    March 26, 2004 -
    
    August 31, 2003 -
    
    monthsMay 29, 2004
    
    March 25, 2004
    
    31, 2003
    
    May 29, 2004
    
    March 25, 2004
    
    ended May 31, 2003Net income (loss)
    
    $
    12,445
    
    
    $
    (1,179
    )
    
    $
    22,138
    
    
    $
    12,445
    
    
    $
    (4,583
    )
    
    $
    19,228Less: stock-based compensation expense,
net of related taxes
    
    
    
    
    
    
    3
    
    
    
    4
    
    
    
    
    
    
    
    11
    
    
    
    12Net income (loss)  pro forma
    
    $
    12,445
    
    
    $
    (1,182
    )
    
    $
    22,134
    
    
    $
    12,445
    
    
    $
    (4,594
    )
    
    $
    19,216
 8




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AMERICAN ACHIEVEMENT CORPORATION Notes to Condensed Consolidated Financial Statements  (Continued)
(Dollars in tables in thousands)
(unaudited) The fair value of each option grant is estimated at the date of grant
using the Black-Scholes pricing model with the following weighted average
assumptions for grants in the fiscal year ended 2003: 2003Risk-free interest rate
    
    
    3.93
    %Expected life
    
    10
    yearsVolatility
    
    
    25
    %Dividend yield
    
    
    
 No options were granted during the nine months ended May 29, 2004.  2.
    
    Merger On December 24, 2003, the Company entered into a merger agreement with AAC
Acquisition Corp. (Acquisition) and AAC Holding Corp. (Holdings), each
Delaware corporations formed by Fenway Partners Capital Fund II, L.P. (Fenway
Partners) for the sole purpose of effecting a merger. On March 25, 2004, as
contemplated by the merger agreement, Acquisition was merged with and into the
Company, with the Company continuing as the surviving corporation and a wholly
owned subsidiary of Holdings (the Merger). Upon consummation of the Merger,
substantially all of the equity interests in Holdings were indirectly held by
an investor group led by Fenway Partners. The Merger was financed by a cash equity investment in Holdings by an
investor group led by Fenway Partners of $102.0 million, the borrowing by the
Company of $155.0 million under a seven-year term loan and $2.0 million under a
six-year revolving loan, each under the Companys new senior secured credit
facility, the issuance by the Company of $150.0 million aggregate principal
amount of its 8.25% senior subordinated notes due 2012, and the untendered
Senior Unsecured Notes of $6.0 million. Proceeds of these financing
arrangements were used to redeem the outstanding Series A Preferred Stock,
refinance the Companys existing indebtedness, including the redemption of the
outstanding Senior Notes of $41.4 million and completion of a debt tender offer
to acquire all of the existing Senior Unsecured Notes, and pay transaction
costs and expenses. Pursuant to the debt tender offer, the Company retired
$170.9 million of outstanding Senior Unsecured Notes for an aggregate $193.8
million and eliminated substantially all of the restrictive covenants
associated with such notes. In addition, as part of the Merger, the Company
terminated its existing Senior Secured Credit Facility and terminated its
management contract with its previous owners. The Company also entered into an
amendment of its existing gold consignment agreement and entered into a new
management agreement with an affiliate of Fenway Partners. Beginning on March 25, 2004, the Company accounted for the Merger as a
purchase in accordance with the provisions of Statement of Financial Accounting
Standards (SFAS) 141, Business Combinations,which results in a new valuation
for the assets and liabilities of the Company based upon the fair values as of
the date of the Merger. As allowed under SEC Staff Accounting Bulletin No. 54,
Push Down Basis of Accounting Required in Certain Limited Circumstances,the
Company has reflected all applicable purchase accounting adjustments in the
consolidated financial statements for all SEC filings covering periods
subsequent to the Merger. As required, the Company has established a new basis
for assets and liabilities based on the amount paid for ownership at March 25,
2004. Accordingly, the purchase price of $419.2 million was allocated to the
assets and liabilities based on their relative fair values and $102.0 million
was reflected in stockholders equity as the value of Fenway Partners
ownership upon completion of the Merger. Immediately prior to the Merger, the
Companys stockholders equity was approximately $66.6 million. The Company has estimated the fair value of its assets and liabilities,
including intangible assets and property, plant and equipment, as of the Merger
date and utilizing information available at the time the unaudited consolidated
financial statements were prepared, including outside third party appraisals.
These estimates are subject to refinement until all pertinent information is
finalized. 9




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##### Table of Contents



AMERICAN ACHIEVEMENT CORPORATION Notes to Condensed Consolidated Financial Statements  (Continued)
(Dollars in tables in thousands)
(unaudited) The purchase price of the Company was as follows: Purchase price
    
    $
    419,200Assets acquired
    
    
    422,456Liabilities assumed
    
    
    (125,731
    )Net assets acquired
    
    
    296,725Excess purchase price over net assets acquired
    
    $
    122,475
 As of March 25, 2004, the Company has preliminarily allocated the excess
purchase price over the book value of net assets acquired in the Merger as
follows: Inventories, net
    
    $
    6,412Property, plant and equipment
    
    
    7,556Goodwill
    
    
    15,311Intangible assets
    
    
    105,885Other assets
    
    
    (1,233
    )Accrued expenses
    
    
    (1,733
    )Long-term debt
    
    
    7,075Deferred income taxes
    
    
    (12,043
    )Other long-term liabilities
    
    
    (4,755
    )Total purchase price allocation
    
    $
    122,475
 As a result of the Merger, the Company has reflected pre-Merger periods
from February 29, 2004 to March 25, 2004 (Predecessor) and from August 31,
2003 to March 25, 2004 (Predecessor) and a post-Merger period from March 26,
2004 to May 29, 2004 (Successor) in its condensed consolidated financial
statements for fiscal 2004. During the period from March 26, 2004 to May 29, 2004, the Company
recognized in its consolidated statements of operations approximately $5.4
million of excess purchase price allocated to inventory as cost of sales and
approximately $1.7 million of additional amortization expense of intangible
assets as selling, general and administrative expenses, all as compared to its
historical basis of accounting prior to the Merger. 10




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##### Table of Contents



AMERICAN ACHIEVEMENT CORPORATION Notes to Condensed Consolidated Financial Statements  (Continued)
(Dollars in tables in thousands)
(unaudited)  3.
    
    Goodwill and Other Intangible Assets The increase in goodwill and other intangible assets is predominantly
attributable to the effect of purchase accounting in connection with the Merger
as discussed in Note 2. Goodwill and other intangible assets consists of the following: Gross
    
    Accumulated
    
    NetAsset
    
    Amortization
    
    AssetAt May 29, 2004 (Successor)Goodwill
    
    $
    181,754
    
    
    $
    
    
    
    $
    181,754Trademarks
    
    
    50,095
    
    
    
    
    
    
    
    50,095Deferred financing costs and other
    
    
    11,112
    
    
    
    (249
    )
    
    
    10,863Patents
    
    
    7,317
    
    
    
    (74
    )
    
    
    7,243Customer lists and distribution contracts
    
    
    100,516
    
    
    
    (1,904
    )
    
    
    98,612Total intangible assets subject to amortization
    
    $
    350,794
    
    
    $
    (2,227
    )
    
    $
    348,567At August 30, 2003 (Predecessor)Goodwill
    
    $
    178,699
    
    
    $
    (16,640
    )
    
    $
    162,059Trademarks
    
    
    47,340
    
    
    
    (5,485
    )
    
    
    41,855Deferred financing costs and other
    
    
    10,344
    
    
    
    (3,286
    )
    
    
    7,058Customer lists and distribution contracts
    
    
    16,072
    
    
    
    (4,771
    )
    
    
    11,301Total intangible assets subject to amortization
    
    $
    252,455
    
    
    $
    (30,182
    )
    
    $
    222,273
 Total
amortization on other intangible assets was $2,227,000 for the period
March 26, 2004 to May 29, 2004 and $2,156,000 for the period August 31, 2003 to
March 25, 2004, for a combined amount of $4,383,000 for the nine months ended May
29, 2004 and $2,507,000 for the nine months ended May 31, 2003, of which
amortization on deferred financing costs is recorded as interest expense and
amortization on patents and customer lists and distribution contracts is
recorded as amortization expense. Deferred financing costs are being amortized
over the term of the related debt with a weighted average life of approximately
7.5 years, patents have a weighted average useful life of approximately 16.5
years, and customer lists and distribution contracts have a weighted average
useful life of approximately 8.8 years. Estimated annual amortization expense
for fiscal years ended 2005 through 2009 is approximately $13.4 million each
year.  4.
    
    Comprehensive Income (Loss) Unrecognized losses on accrued minimum pension liabilities are included in
other comprehensive income (loss). The following amounts were included in
determining the Companys comprehensive income (loss): (Successor)
    
    (Predecessor)
    
    (Predecessor)
    
    (Successor)
    
    (Predecessor)For the period
    
    For the period
    
    For the three
    
    For the period
    
    For the period
    
    (Predecessor)March 26, 2004 -
    
    February 29, 2004 -
    
    months ended May
    
    March 26, 2004 -
    
    August 31, 2003 -
    
    For the nine monthsMay 29, 2004
    
    March 25, 2004
    
    31, 2003
    
    May 29, 2004
    
    March 25, 2004
    
    ended May 31, 2003Net income (loss)
    
    $
    12,445
    
    
    $
    (1,179
    )
    
    $
    22,138
    
    
    $
    12,445
    
    
    $
    (4,583
    )
    
    $
    19,228Adjustment in minimum pension liability
    
    
    
    
    
    
    6
    
    
    
    16
    
    
    
    
    
    
    
    40
    
    
    
    50Total comprehensive income (loss)
    
    $
    12,445
    
    
    $
    (1,185
    )
    
    $
    22,154
    
    
    $
    12,445
    
    
    $
    (4,623
    )
    
    $
    19,278
 11




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##### Table of Contents



AMERICAN ACHIEVEMENT CORPORATION Notes to Condensed Consolidated Financial Statements  (Continued)
(Dollars in tables in thousands)
(unaudited)  5.
    
    Inventories, Net A summary of inventories, net is as follows: (Successor)
    
    (Predecessor)May 29, 2004
    
    August 30, 2003Raw materials
    
    $
    9,246
    
    
    $
    7,876Work in process
    
    
    9,453
    
    
    
    8,043Finished goods
    
    
    6,673
    
    
    
    7,632Less  Reserves
    
    
    (988
    )
    
    
    (241
    )$
    24,384
    
    
    $
    23,310
 Cost
of sales includes depreciation and amortization of $1,510,000 for the
period from March 26, 2004 to May 29, 2004 and $721,000 for the period from
February 29, 2004 to March 25, 2004, for a combined amount
of $2,231,000 for the
three months ended May 29, 2004 and $2,037,000 for the three months ended May 31,
2003. Cost of sales includes depreciation and amortization of
$1,510,000 for the
period March 26, 2004 to May 29, 2004 and $5,062,000 for the period August 31, 2003
to March 25, 2004, for a combined amount of $6,572,000 for the nine months ended
May 29, 2004 and $6,828,000 for the nine months ended May 31, 2003. Cost of sales for the period from March 26, 2004 to May 29, 2004 includes
$5.4 million of excess purchase price that was allocated to inventory as of the
Merger. Inventories as of May 29, 2004 includes $1.0 million of excess
purchase price over acquired book value.  6.
    
    Prepaid Expenses and Other Current Assets, Net Prepaid expenses and other current assets, net on the balance sheet,
include reserves on sales representative advances of $3,126,000 and
$2,516,000 at May
29, 2004 and August 30, 2003, respectively.  7.
    
    Long-term Debt Long-term debt consists of the following: (Successor)
    
    (Predecessor)May 29, 2004
    
    August 30, 20038 1⁄4% Senior subordinated notes due 2012
    
    $
    150,000
    
    
    $
    11 5/8% Senior unsecured notes due 2007 (net of unamortized discount of $33 and $1,145)
    
    
    6,042
    
    
    
    175,85511% Senior subordinated notes due 2007
    
    
    
    
    
    
    41,355Senior secured credit facilityRevolving credit facility due 2010
    
    
    2,400
    
    
    
    Term loan due 2011
    
    
    155,000
    
    
    
    Former senior secured credit facility
    
    
    
    
    
    
    9,500Total
    
    
    313,442
    
    
    
    226,710Less current portion of long-term debt
    
    

    (1,550
    )
    
    
    Total long-term debt
    
    $
    311,892
    
    
    $
    226,710
 12




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##### Table of Contents



AMERICAN ACHIEVEMENT CORPORATION Notes to Condensed Consolidated Financial Statements  (Continued)
(Dollars in tables in thousands)
(unaudited)  8
    
    1⁄4% Senior Subordinated Notes On March 25, 2004, the Company issued $150 million of senior subordinated
notes (the Senior Sub Notes) due in 2012. The Senior Sub Notes bear interest
at a stated rate of 8 1⁄4%. The Senior Sub Notes are unsecured senior
subordinated obligations and are subordinated in right of payment to all of the
Companys existing and future senior indebtedness, including obligations under
the Companys Senior Secured Credit Facility (as defined below), pari passu in
right of payment with any of the Companys future senior subordinated
indebtedness and senior in right of payment to any of the Companys future
subordinated indebtedness. The Senior Sub Notes are guaranteed by certain of
the Companys existing domestic subsidiaries, and will be guaranteed by certain
of the Companys future domestic subsidiaries. The guarantees are subordinated
in right of payment to all existing and future senior indebtedness of the
applicable guarantor, pari passu in right of payment with any future future
senior subordinated debt of such guarantor and senior in right of payment to
any future subordinated indebtedness of such guarantor. The Company may not redeem the Senior Sub Notes until on or after April 1,
2008, except that the Company, in connection with certain equity offerings, may
redeem up to 35 percent of the Senior Sub Notes before the third anniversary of
the issue date of the Senior Sub Notes as long as (a) the Company pays a
specified percentage of the principal amount of the Senior Sub Notes, plus
interest, (b) the Company redeems the Senior Sub Notes within 90 days of
completing a public equity offering and (c) at least 65 percent of the
aggregate principal amount of the Senior Sub Notes originally issued remains
outstanding afterward. If a change in control as defined in the indenture relating to the Senior
Sub Notes (the AAC Indenture) occurs, the Company must give the holders of
the Senior Sub Notes the opportunity to sell their Senior Sub Notes to the
Company at 101 percent of the principal amount of the Senior Sub Notes, plus
accrued interest. The Senior Sub Notes contain customary negative covenants and restrictions
on actions by the Company and its subsidiaries including, without limitation,
restrictions on additional indebtedness, investments, asset dispositions
outside the ordinary course of business, liens, and transactions with
affiliates, among other restrictions (as defined in the AAC Indenture). In
addition, the Senior Sub Notes contain covenants, which restrict the
declaration or payment of dividends by the Company and/or its subsidiaries (as
defined in the AAC Indenture). The Company was in compliance with the Senior
Sub Notes covenants as of May 29, 2004.  11
    
    5/8% Senior Unsecured Notes On February 20, 2002, the Company issued $177 million of senior unsecured
notes (the Unsecured Notes) due in 2007. The Unsecured Notes bear interest at
a stated rate of 11 5/8%. The Unsecured Notes were issued at a discount of
0.872% resulting in net proceeds of approximately $175.5 million before
considering financing costs. The effective rate of the Unsecured Notes after
discount is approximately 13.0%. The Unsecured Notes rank pari passu with the
Companys existing and future senior indebtedness, including obligations under
the Companys Senior Secured Credit Facility (as defined below). The Unsecured
Notes are guaranteed by the Companys domestic subsidiaries, and the guarantees
rank pari passu with the existing Senior Subordinated Notes and future senior
debt of the Company and its subsidiaries. The Unsecured Notes and the
guarantees on the Unsecured Notes are effectively subordinated to any of the
Companys secured debt. On March 25, 2004, as discussed in Note 2, pursuant to the debt tender
offer for the Unsecured Notes, the Company retired $170.9 million of
outstanding Unsecured Notes for an aggregate $193.8 million and eliminated
substantially all of the restrictive covenants associated with such notes. The
remaining $6.0 million of Unsecured Notes outstanding will be redeemable by the
Company on or after January 1, 2005 at its option at 105.813% of the principal
amount thereof (plus accrued and unpaid interest). The Company was in
compliance with the remaining covenants in the Unsecured Notes as of May 29,
2004.  11% Senior Subordinated Notes Commemorative Brands, Inc.s (CBI) 11% senior subordinated notes (the
Subordinated Notes) mature on January 15, 2007. The Subordinated Notes are
redeemable at the option of CBI in whole or in part, at any time on or after
January 15, 2002, at specified redemption prices ranging from 105.5 percent of
the principal amount thereof if redeemed during 2002 and declining to 100
percent of the principal amount thereof if redeemed during the year 2005 or
thereafter, plus accrued and unpaid interest and Liquidated Damages as defined
in the indenture relating to the Subordinated Notes, as amended (the CBI
Indenture), if any, thereon to the date of redemption. 13




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##### Table of Contents



AMERICAN ACHIEVEMENT CORPORATION Notes to Condensed Consolidated Financial Statements  (Continued)
(Dollars in tables in thousands)
(unaudited) On March 25, 2004, as discussed in Note 2, the Company redeemed all of the
outstanding Subordinated Notes for an aggregate of $42.1 million. New Senior Secured Credit Facility In conjunction with the consummation of the Merger, on March 25, 2004, the
Company entered into a $150 million term loan (the Term Loan) and an up to
$40 million senior revolving credit facility (the Senior Revolving Credit
Facility) with various financial institutions. The Term Loan and Revolving
Credit Facility are secured by a first priority security interest in all
existing and after-acquired assets of the Company, Holdings and certain of the
Companys direct and indirect domestic subsidiaries existing and
after-acquired assets, including, without limitation, real property and all of
the capital stock owned by the Company, Holdings, and certain of the Companys
direct and indirect domestic subsidiaries (including certain capital stock of
their direct foreign subsidiaries only to the extent permitted by applicable
law). All of the Companys obligations under the Term Loan and Revolving
Credit Facility are fully and unconditionally guaranteed by Holdings and
certain of the Companys direct and indirect domestic subsidiaries. The
Term Loan is due in March 2011. Quarterly payments of $388,000 are made
through 2011. The Term Loan has an interest rate based on the prime rate, plus
points based on a calculated leverage ratio. The Senior Revolving Credit Facility matures in March 2010. Availability
under the Senior Revolving Credit Facility is restricted to a total revolving
commitment of $40 million as defined in the credit agreement under the Senior
Secured Credit Facility (the Credit Agreement). Availability under the Senior
Revolving Credit Facility as of May 29, 2004 was approximately $35.7 million
with $2.4 million borrowings and $1.9 million in letters of credit outstanding. Advances under the Senior Revolving Credit Facility may be made as base
rate loans or LIBOR loans at the Companys election (except for the initial
loans which were base rate loans). Interest rates payable upon advances are
based upon the base rate or LIBOR depending on the type of loan the Company
chooses, plus an applicable margin based upon a consolidated leverage ratio of
certain outstanding indebtedness to EBITDA (to be calculated in accordance with
the terms specified in the Credit Agreement). Former Senior Secured Credit Facility In conjunction with the issuance of the Unsecured Notes, on February 20,
2002, the Company entered into a $40 million senior revolving credit facility
(the Senior Secured Credit Facility) with various financial institutions,
with all of the Companys current domestic subsidiaries as guarantors. Loans
made pursuant to the Senior Secured Credit Facility are secured by a first
priority security interest in substantially all of the Companys and the
Companys domestic subsidiaries assets and in all of the Companys domestic
subsidiaries capital stock. On March 25, 2004, as discussed in Note 2, the Company terminated its
existing Senior Secured Credit Facility. 14




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##### Table of Contents



AMERICAN ACHIEVEMENT CORPORATION Notes to Condensed Consolidated Financial Statements  (Continued)
(Dollars in tables in thousands)
(unaudited) The Companys long-term debt outstanding as of May 29, 2004 matures as
follows: Fiscal year ending
    
    Amount maturing2004
    
    $
    3882005
    
    
    1,5502006
    
    
    1,5502007
    
    
    7,5922008
    
    
    1,550Thereafter
    
    
    300,812Total
    
    
    313,442Less current portion of long-term debt
    
    
    (1,550
    )$
    311,892
 The weighted average interest rate on debt outstanding as of May 29, 2004
and August 30, 2003 was 7.4% and 12.3%, respectively. The Companys management believes the carrying amount of long-term debt
approximates fair value as of May 29, 2004 and August 30, 2003, based upon
current rates offered for debt with the same or similar debt terms.  8.
    
    Commitments and Contingencies Leases Certain Company facilities and equipment are leased under agreements
expiring at various dates through 2018. Certain Company facilities and
equipment are leased under agreements expiring at various dates through 2018.
The Companys commitments under the noncancellable portion of all operating and
capital leases for each of the five years ending after August 30, 2003 and
thereafter are approximately as follows: Fiscal Year Ending
    
    Operating Expense
    
    Capital2004 (remainder)
    
    $
    647
    
    
    $
    3612005
    
    
    2,204
    
    
    
    1,3872006
    
    
    1,835
    
    
    
    1,3482007
    
    
    1,322
    
    
    
    1,3322008
    
    
    817
    
    
    
    174Thereafter
    
    
    2,719
    
    
    
    Interest
    
    
    
    
    
    
    (345
    )$
    9,544
    
    
    $
    4,257
 Some of the Companys rental property leases contain options to renew the
leased space for periods up to an additional ten years. 15




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##### Table of Contents



AMERICAN ACHIEVEMENT CORPORATION Notes to Condensed Consolidated Financial Statements  (Continued)
(Dollars in tables in thousands)
(unaudited) Employment Contracts The Company has employment agreements with its executive officers, the
terms of which expire at various times through August 2005. Unless terminated,
one executive officers employment agreement adds one day to the term for each
day that passes, and accordingly, there are always two years remaining on the
term. The remaining executive officers terms will be automatically extended
for an additional one year term. Such agreements, which have been revised from
time-to-time, provide for minimum salary levels, adjusted annually for
cost-of-living changes, as well as for incentive bonuses for a certain
executive that are payable if specific management goals are attained. The
aggregate commitment for future salaries as of May 29, 2004, excluding bonuses,
was approximately $2.5 million. Pending Litigation On February 11, 2004, Frederick Goldman, Inc. (the Licensee) filed an
arbitration claim against CBI alleging, among other things, that CBI had
improperly attempted to convert an exclusive license CBI granted to the
Licensee to a non-exclusive license. In addition, on February 10, 2004, the
Licensee commenced a lawsuit in federal district court in New York against CBI
alleging that CBI breached the license agreement by granting third parties
rights in violation of the Licensees exclusive rights under the license
agreement. The district court claim seeks injunctive and monetary relief. No
discovery has been conducted to date, therefore, at this time, it is not
possible to predict with certainty the outcome of these unresolved legal
matters or the range of possible loss or recovery. However, the Company
intends to defend itself vigorously in these proceedings. The Company is not a party to any other pending legal proceedings other
than ordinary routine litigation incidental to its business. In managements
opinion, adverse decisions on legal proceedings, in the aggregate, would not
have a materially adverse impact on the Companys results of operations or
financial position. Gold Consignment Agreement Under the Companys gold consignment financing arrangement, the Company
has the ability to have on consignment the lowest of the dollar value of 27,000
troy ounces of gold, $14.2 million or a borrowing base, determined based upon a
percentage of gold located at the Companys facilities and other approved
locations, as specified by the agreement. The Company expensed consignment fees
of $69,000 for the period from February 29, 2004 to March 25, 2004 and $26,000 for the
period from March 26, 2004 to May 29, 2004, for a combined amount of $95,000 for
the three months ended May 29, 2004 and $90,000 for the three months ended May 31,
2003. The Company expensed consignment fees of $180,000 for the period from August
31, 2003 to March 25, 2004 and $69,000 for the period from March 26, 2004 to May
29, 2004, for a combined amount of $249,000 for the nine months ended May 29, 2004
and $232,000 for the nine months ended May 31, 2003. Under the terms of the
consignment arrangement, the Company does not own the consigned gold nor does
it have risk of loss related to such inventory until the money is received by
the bank from the Company in payment for the gold purchased. Accordingly, the
Company does not include the value of consigned gold in its inventory or the
corresponding liability for financial statement purposes. As of May 29, 2004
and August 30, 2003, the Company held approximately 16,730 ounces and 17,780
ounces, respectively, of gold valued at $6.6 million and $6.7 million,
respectively, on consignment. The gold consignment agreement does not have a
stated period and it can be terminated by either party upon
60 days written
notice.  9.
    
    Income Taxes Due to the impact of purchase accounting on deferred taxes as a result of
the Merger, the Company has recognized a net deferred tax liability.
Therefore, an effective rate has of 39% has been applied to the period March
26, 2004 through May 29, 2004 to represent estimated federal and state income
taxes. 16




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##### Table of Contents



AMERICAN ACHIEVEMENT CORPORATION Notes to Condensed Consolidated Financial Statements  (Continued)
(Dollars in tables in thousands)
(unaudited)  10.
    
    Stockholders Equity Prior to the consummation of the Merger, in the event of any liquidation,
dissolution or winding up of the Company, the holders of the Series A Preferred
Stock were entitled to receive payment of the liquidation value of $100 per
share plus any accrued and unpaid dividends prior to the payment of any
distributions to the holders of the Common Stock of the Company. The
liquidation preference of the Series A Preferred Stock totaled approximately
$100,737 at August 30, 2003. During the nine-month period ended May 31, 2003, the Company granted
28,500 options to employees. These options have an exercise price of $6.02 per
share and, accordingly, the Company did not record any related compensation
expense based upon the estimated fair value of the stock on the date of grant.
A portion of the options, 10,000, vested on the grant date, with the remaining
options vesting ratably over a four year period. Pursuant to an employment agreement entered into between the Company and
its chief executive officer in July 1999, as amended on February 1, 2002, if
the Company achieves certain EBITDA targets as defined by the agreement at any
point from 2002 through 2004, the chief executive is entitled to receive up to
a total of $1 million in face value of the Companys Series A Preferred Stock.
In addition, the plan provided for the immediate issuance of an option to
purchase 12,500 shares of the Companys common stock, and pursuant to this
plan, an option to purchase 12,500 shares was granted in fiscal 2002. The
executive is also entitled to receive discretionary bonuses as directed by the
Board of Directors up to $300,000 annually, of which $225,000 is accrued as of May 29,
2004. On March 25, 2004, as part of the Merger discussed in Note 2, the
Companys parent company issued substantially all of its outstanding equity
interests to an investor group led by Fenway Partners for $102.0 million. All
previously issued shares of preferred stock or common stock of the Company, and
all warrants, options and other rights to acquire preferred stock or common
stock of the Company (including the right and option in the employment
agreement described above) were redeemed, cancelled or exchanged as part of the
Merger discussed in Note 2.  11.
    
    Postretirement Pension and Medical Benefits CBI provides certain healthcare and life insurance benefits for former
employees of the L.G. Balfour Company who retired prior to December 31, 1990.
Certain hourly employees of Taylor are covered by a defined benefit pension
plan (TPC Plan) established by Taylor. The benefits under the CBI and TPC
Plans are based primarily on the employees years of service and compensation
near retirement. The funding policies for these plans are consistent with the
funding requirements of federal laws and regulations. The net periodic postretirement benefit cost, include the following
components: (Successor)
    
    (Predecessor)
    
    (Predecessor)For the period March 26, 2004 -
    
    For the period February 29,
    
    For the three months ended MayMay 29, 2004
    
    2004 - March 25, 2004
    
    31, 2003CBI
    
    
    
    
    
    CBI
    
    
    
    
    
    CBITaylor
    
    post-
    
    Taylor
    
    post-
    
    Taylor
    
    post-pension
    
    retirement
    
    pension
    
    retirement
    
    pension
    
    retirementService costs, benefits
attributed to Service
during the period
    
    $
    14
    
    
    $
    
    
    
    $
    7
    
    
    $
    
    
    
    $
    99
    
    
    $
    Interest cost
    
    
    139
    
    
    
    44
    
    
    
    70
    
    
    
    22
    
    
    
    195
    
    
    
    71Expected return on assets
    
    
    (140
    )
    
    
    
    
    
    
    (70
    )
    
    
    
    
    
    
    (204
    )
    
    
    Amortization of
unrecognized net loss
(gain)
    
    
    36
    
    
    
    9
    
    
    
    18
    
    
    
    4
    
    
    
    17
    
    
    
    8Amortization of
unrecognized net prior
service costs
    
    
    
    
    
    
    16
    
    
    
    
    
    
    
    8
    
    
    
    
    
    
    
    73Net periodic
postretirement benefit
cost (income)
    
    $
    49
    
    
    $
    69
    
    
    $
    25
    
    
    $
    34
    
    
    $
    107
    
    
    $
    152
 17




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##### Table of Contents



AMERICAN ACHIEVEMENT CORPORATION Notes to Condensed Consolidated Financial Statements  (Continued)
(Dollars in tables in thousands)
(unaudited) (Successor)
    
    (Predecessor)
    
    (Predecessor)For the period March 26, 2004 -
    
    For the period August 30, 2003
    
    For the nine months ended MayMay 29, 2004
    
    - March 25, 2004
    
    31, 2003CBI
    
    
    
    
    
    CBI
    
    
    
    
    
    CBITaylor
    
    post-
    
    Taylor
    
    post-
    
    Taylor
    
    post-pension
    
    retirement
    
    pension
    
    retirement
    
    pension
    
    retirementService costs, benefits
attributed to Service
during the period
    
    $
    14
    
    
    $
    
    
    
    $
    50
    
    
    $
    
    
    
    $
    298
    
    
    $
    Interest cost
    
    
    139
    
    
    
    44
    
    
    
    488
    
    
    
    170
    
    
    
    586
    
    
    
    212Expected return on assets
    
    
    (140
    )
    
    
    
    
    
    
    (490
    )
    
    
    
    
    
    
    (611
    )
    
    
    Amortization of
unrecognized net loss
(gain)
    
    
    36
    
    
    
    9
    
    
    
    126
    
    
    
    83
    
    
    
    51
    
    
    
    25Amortization of
unrecognized net prior
service costs
    
    
    
    
    
    
    16
    
    
    
    
    
    
    
    154
    
    
    
    
    
    
    
    218Net periodic
postretirement benefit
cost (income)
    
    $
    49
    
    
    $
    69
    
    
    $
    174
    
    
    $
    407
    
    
    $
    324
    
    
    $
    455
  12.
    
    Related-Party Transactions Amounts paid under a management agreement with Castle Harlan, Inc. totaled
$0 for the period from March 26, 2004 to May 29, 2004 and $750,000 for the period
February 29, 2004 to March 25, 2004, for a combined amount of $750,000 for the
three months ended May 29, 2004 and $1,500,000 for the three months ended May 31,
2003. Amounts paid under the management agreement totaled $0 for the period
from March 26, 2004 to May 29, 2004 and $2,250,000 for the period August 30, 2003
to March 25, 2004, for a combined amount of $2,250,000 for the nine months ended
May 29, 2004 and $2,250,000 for the nine months ended May 31, 2003. As of May 29,
2004 and August 30, 2003, the Company had accrued management fees of
approximately $750,000, respectively. On March 25, 2004 upon consummation of the Merger, the Company entered
into a new management agreement with an affiliate of Fenway Partners pursuant
to which the Company, among other things, agreed to pay such affiliate an
annual fee equal to the greater of $3.0 million or 5% of the previous fiscal
years EBITDA (as defined in the agreement). Amounts paid under the new
management agreement totaled $0 for the period March 26, 2004 to May 29, 2004. 18




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##### Table of Contents



AMERICAN ACHIEVEMENT CORPORATION Notes to Condensed Consolidated Financial Statements  (Continued)
(Dollars in tables in thousands)
(unaudited)  13.
    
    Business Segments The Company operates in two reportable business segments: scholastic
products and recognition and affinity products. The principal products sold in
the scholastic segment are class rings, yearbooks and graduation products,
which include fine paper products and graduation accessories. The scholastic
segment primarily serves the high school and college markets. The recognition
and affinity segment includes publications that recognize the academic
achievement of top students at the high school and college levels, jewelry
commemorating family events, fan affinity jewelry and related products, and
professional sports championship rings. (Predecessor)Three Months
    
    (Successor)
    

    
    For the period February 29, 2004 - MarchEnded May 29, 2004
    
    For the period March 26, 2004 - May 29, 2004
    
    25, 2004Recognition
    
    
    
    
    
    
    
    
    
    RecognitionScholastic
    
    and Affinity
    
    Total
    
    Scholastic
    
    and Affinity
    
    TotalNet sales
    
    $
    108,510
    
    
    $
    6,111
    
    
    $
    114,621
    
    
    $
    19,119
    
    
    $
    1,156
    
    
    $
    20,275Interest expense, net
    
    
    4,115
    
    
    
    457
    
    
    
    4,572
    
    
    
    2,301
    
    
    
    256
    
    
    
    2,557Depreciation and
amortization
    
    
    3,678
    
    
    
    409
    
    
    
    4,087
    
    
    
    1,035
    
    
    
    115
    
    
    
    1,150Segment operating
income
    
    
    24,458
    
    
    
    516
    
    
    
    24,974
    
    
    
    2,445
    
    
    
    (1,067
    )
    
    
    1,378Capital expenditures
    
    
    1,122
    
    
    
    306
    
    
    
    1,428
    
    
    
    1,449
    
    
    
    110
    
    
    
    1,559Trademarks
    
    
    30,695
    
    
    
    19,400
    
    
    
    50,095
    
    
    
    30,695
    
    
    
    19,400
    
    
    
    50,095Goodwill
    
    
    163,579
    
    
    
    18,175
    
    
    
    181,754
    
    
    
    163,533
    
    
    
    18,170
    
    
    
    181,703Other intangible
assets, net
    
    
    102,941
    
    
    
    13,777
    
    
    
    116,718
    
    
    
    93,842
    
    
    
    25,103
    
    
    
    118,945Segment assets
    
    
    459,080
    
    
    
    89,467
    
    
    
    548,547
    
    
    
    494,825
    
    
    
    58,764
    
    
    
    553,589
   [Continued from above table, first column(s) repeated] Three Months
    
    CombinedEnded May 29, 2004
    
    Three Months Ended May 29, 2004RecognitionScholastic
    
    and Affinity
    
    TotalNet sales
    
    $
    127,629
    
    
    $
    7,267
    
    
    $
    134,896Interest expense, net
    
    
    6,416
    
    
    
    713
    
    
    
    7,129Depreciation and
amortization
    
    
    4,713
    
    
    
    524
    
    
    
    5,237Segment operating
income
    
    
    26,903
    
    
    
    (551
    )
    
    
    26,352Capital expenditures
    
    
    2,571
    
    
    
    416
    
    
    
    2,987Trademarks
    
    
    30,695
    
    
    
    19,400
    
    
    
    50,095Goodwill
    
    
    163,579
    
    
    
    18,175
    
    
    
    181,754Other intangible
assets, net
    
    
    102,941
    
    
    
    13,777
    
    
    
    116,718Segment assets
    
    
    459,080
    
    
    
    89,467
    
    
    
    548,547
 Three Months Ended May 31,
    
    (Predecessor)2003
    
    Three Months Ended May 31, 2003Net sales
    
    $
    120,203
    
    
    $
    6,034
    
    
    $
    126,237Interest expense, net
    
    
    6,547
    
    
    
    727
    
    
    
    7,274Depreciation and
amortization
    
    
    3,001
    
    
    
    334
    
    
    
    3,335Segment operating
income
    
    
    29,033
    
    
    
    1,544
    
    
    
    30,577Capital expenditures
    
    
    1,647
    
    
    
    187
    
    
    
    1,834Trademarks
    
    
    24,708
    
    
    
    17,147
    
    
    
    41,855Goodwill
    
    
    115,074
    
    
    
    46,985
    
    
    
    162,059Other intangible
assets, net
    
    
    16,918
    
    
    
    2,297
    
    
    
    19,215Segment assets
    
    
    326,850
    
    
    
    91,497
    
    
    
    418,347
 19




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##### Table of Contents



AMERICAN ACHIEVEMENT CORPORATION Notes to Condensed Consolidated Financial Statements  (Continued)
(Dollars in tables in thousands)
(unaudited) (Successor)
    
    (Predecessor)For the period March 26, 2004 - May 29,
    
    For the period August 31, 2003 - March2004
    
    25, 2004Nine Months Ended
    
    
    
    
    
    Recognition
    
    
    
    
    
    
    
    
    
    RecognitionMay 29, 2004
    
    Scholastic
    
    and Affinity
    
    Total
    
    Scholastic
    
    and Affinity
    
    TotalNet sales
    
    $
    108,510
    
    
    $
    6,111
    
    
    $
    114,621
    
    
    $
    125,215
    
    
    $
    21,506
    
    
    $
    146,721Interest expense, net
    
    
    4,115
    
    
    
    457
    
    
    
    4,572
    
    
    
    14,810
    
    
    
    1,645
    
    
    
    16,455Depreciation and
amortization
    
    
    3,678
    
    
    
    409
    
    
    
    4,087
    
    
    
    7,677
    
    
    
    853
    
    
    
    8,530Segment operating
income
    
    
    24,458
    
    
    
    516
    
    
    
    24,974
    
    
    
    8,193
    
    
    
    3,679
    
    
    
    11,872Capital expenditures
    
    
    1,122
    
    
    
    306
    
    
    
    1,428
    
    
    
    10,858
    
    
    
    1,935
    
    
    
    12,793Trademarks
    
    
    30,695
    
    
    
    19,400
    
    
    
    50,095
    
    
    
    30,695
    
    
    
    19,400
    
    
    
    50,095Goodwill
    
    
    163,579
    
    
    
    18,175
    
    
    
    181,754
    
    
    
    163,533
    
    
    
    18,170
    
    
    
    181,703Other intangible
assets, net
    
    
    102,941
    
    
    
    13,777
    
    
    
    116,718
    
    
    
    93,842
    
    
    
    25,103
    
    
    
    118,945Segment assets
    
    
    459,080
    
    
    
    89,467
    
    
    
    548,547
    
    
    
    494,825
    
    
    
    58,764
    
    
    
    553,589
   [Continued from above table, first column(s) repeated] CombinedNine Months Ended May 29, 2004Nine Months Ended
    
    
    
    
    
    RecognitionMay 29, 2004
    
    Scholastic
    
    and Affinity
    
    TotalNet sales
    
    $
    233,725
    
    
    $
    27,617
    
    
    $
    261,342Interest expense, net
    
    
    18,925
    
    
    
    2,102
    
    
    
    21,027Depreciation and
amortization
    
    
    11,355
    
    
    
    1,262
    
    
    
    12,617Segment operating
income
    
    
    32,651
    
    
    
    4,195
    
    
    
    36,846Capital expenditures
    
    
    11,980
    
    
    
    2,241
    
    
    
    14,221Trademarks
    
    
    30,695
    
    
    
    19,400
    
    
    
    50,095Goodwill
    
    
    163,579
    
    
    
    18,175
    
    
    
    181,754Other intangible
assets, net
    
    
    102,941
    
    
    
    13,777
    
    
    
    116,718Segment assets
    
    
    459,080
    
    
    
    89,467
    
    
    
    548,547
 Nine Months Ended
May 31, 2003
    
    (Predecessor)
Nine Months Ended May 31,
2003Net sales
    
    $
    227,601
    
    
    $
    33,078
    
    
    $
    260,679Interest expense, net
    
    
    19,636
    
    
    
    2,181
    
    
    
    21,817Depreciation and
amortization
    
    
    9,573
    
    
    
    1,064
    
    
    
    10,637Segment operating
income
    
    
    32,716
    
    
    
    9,494
    
    
    
    42,210Capital expenditures
    
    
    7,936
    
    
    
    904
    
    
    
    8,840Trademarks
    
    
    24,708
    
    
    
    17,147
    
    
    
    41,855Goodwill
    
    
    115,074
    
    
    
    46,985
    
    
    
    162,059Other intangible
assets, net
    
    
    16,918
    
    
    
    2,297
    
    
    
    19,215Segment assets
    
    
    326,850
    
    
    
    91,497
    
    
    
    418,347
 The Companys reportable segments are strategic business units that offer
products to different consumer segments. Each segment is managed separately
because each business requires different marketing strategies. The Company
evaluates the performance of each segment based on the profit or loss from
operations before income taxes, excluding nonrecurring gains or losses. 20




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AMERICAN ACHIEVEMENT CORPORATION Notes to Condensed
Consolidated Financial Statements  (Continued)
(Dollars in tables in thousands)
(unaudited)  14.
    
    Recent Accounting Pronouncements In May 2003, SFAS No. 150 (SFAS 150), Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity, was issued,
which establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. The
Company adopted SFAS 150 beginning in September 2003. The adoption of this
standard did not have a significant impact on its financial statements. In January 2003, the FASB issued FIN No. 46 Consolidation of Variable
Interest Entities, an Interpretation of ARB 51. In December 2003, the FASB
revised FIN No. 46 to reflect decisions it made regarding a number of
implementation issues. FIN No. 46, as revised, requires that the primary
beneficiary of a variable interest entity (VIE) consolidate the entity even
if the primary beneficiary does not have a majority voting interest. This
Interpretation applies to certain entities in which equity investors do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support. This Interpretation also identifies
those situations where a controlling financial interest may be achieved through
arrangements that do not involve voting interests. The Interpretation also
establishes additional disclosures which are required regarding an enterprises
involvement with a VIE when it is not the primary beneficiary. The requirements
of this Interpretation are required to be applied to any VIE created after
January 31, 2003. The Company adopted FIN 46 beginning in the first quarter of
fiscal year 2004. The adoption of this standard did not have a significant
impact on its financial statements. In December 2003, the FASB amended SFAS No. 132, Employers Disclosures
about Pensions and Other Postretirement Benefits. The amendment revised
employers disclosures about pension plans and other post retirement benefit
plans to require additional disclosures to those in the original SFAS No. 132
about the assets, obligations, cash flows, and net periodic benefit cost of
defined pension plans and other defined benefit postretirement plans. The
Company adopted the additional disclosure requirements in the third quarter of
2004. 21




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS The following discussion of our consolidated financial condition and
results of operations should be read in conjunction with the information
contained in our consolidated financial statements and the notes thereto. The
following discussion includes forward-looking statements that involve certain
risks and uncertainties. See Special Note Regarding Forward-Looking
Statements. Overview We are one of the leading manufacturers and suppliers of class rings,
yearbooks, graduation products, achievement publications and recognition and
affinity jewelry in the United States. Our two principal business segments are
scholastic products and recognition and affinity products. The scholastic
products division, which serves the high school, college and, to a lesser
extent, elementary and junior high school markets, accounted for approximately
95% and 89% of our net sales for the combined three months and combined nine
months ended May 29, 2004, respectively. Our scholastic product segment
produces, markets, and sells class rings, yearbooks and graduation products,
the last of which includes fine paper products and graduation accessories. The
recognition and affinity products segment accounted for approximately 5% and
11% of our net sales for the combined three months and combined nine months
ended May 29, 2004, respectively. This segment produces, markets, and sells
publications that recognize the academic achievement of top students at the
high school and college levels, as well as the nations most inspiring
teachers, jewelry commemorating family events such as the birth of a child, fan
affinity jewelry and related products and professional sports championship
rings such as World Series rings. On December 24, 2003, we entered into a merger agreement with AAC
Acquisition Corp. (Acquisition) and AAC Holding Corp. (Holdings), each
Delaware corporations formed by Fenway Partners Capital Fund II, L.P. (Fenway
Partners) for the sole purpose of effecting a merger. On March 25, 2004, as
contemplated by the merger agreement, Acquisition was merged with and into us,
with us continuing as the surviving corporation and a wholly owned subsidiary
of Holdings (the Merger). Upon consummation of the Merger, substantially all
of the equity interests in Holdings were indirectly held by an investor group
led by Fenway Partners. The Merger was financed by a cash equity investment in Holdings by an
investor group led by Fenway Partners of $102.0 million, the borrowing by us of
$155.0 million under a seven-year term loan and $2.0 million under a six-year
revolving loan, each under our new senior secured credit facility, the issuance
by us of $150.0 million aggregate principal amount of our 8.25% senior
subordinated notes due 2012, and the untendered Senior Unsecured Notes of $6.0
million. Proceeds of these financing arrangements were used to redeem the
outstanding Series A Preferred Stock, refinance our existing indebtedness,
including the redemption of the outstanding Senior Notes of $41.4 million and
completion of a debt tender offer to acquire all of the existing Senior
Unsecured Notes, and pay transaction costs and expenses. Pursuant to the debt
tender offer, we retired $170.9 million of outstanding Senior Unsecured Notes
for an aggregate $193.8 million and eliminated substantially all of the
restrictive covenants associated with such notes. In addition, as part of the
Merger, we terminated our existing Senior Secured Credit Facility and
terminated our management contract with our previous owners. We also entered
into an amendment of our existing gold consignment agreement and entered into a
new management agreement with an affiliate of Fenway. Beginning on March 25, 2004, we accounted for the Merger as a purchase in
accordance with the provisions of Statement of Financial Accounting Standards
(SFAS) 141, Business Combinations,which results in a new valuation of our
assets and liabilities based upon the fair values as of the date of the Merger.
As allowed under SEC Staff Accounting Bulletin No. 54, Push Down Basis of
Accounting Required in Certain Limited Circumstances,we have reflected all
applicable purchase accounting adjustments in the consolidated financial
statements for all SEC filings covering periods subsequent to the Merger. As
required, we have established a new basis for assets and liabilities based on
the amount paid for ownership at March 25, 2004. Accordingly, the purchase
price of $419.2 million was allocated to the assets and liabilities based on
their relative fair values and $102.0 million was reflected in stockholders
equity as the value of Fenway Partners ownership upon completion of the
Merger. Immediately prior to the Merger, our stockholders equity was
approximately $66.6 million. We estimated the fair value of our assets and liabilities, including intangible
assets and property, plant and equipment, as of the Merger date and utilizing
information available at the time the unaudited consolidated financial
statements were prepared, including outside third party appraisals. These
estimates are subject to refinement until all pertinent information is
finalized. 22




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The purchase price was as follows: Purchase price
    
    $
    419,200Assets acquired
    
    
    422,456Liabilities assumed
    
    
    (125,731
    )Net assets acquired
    
    
    296,725Excess purchase price over net assets acquired
    
    $
    122,475
 As of March 25, 2004, we have preliminarily allocated the excess purchase price
over the book value of net assets acquired in the Merger as follows: Inventories, net
    
    $
    6,412Property, plant and equipment
    
    
    7,556Goodwill
    
    
    15,311Intangible assets
    
    
    105,885Other assets
    
    
    (1,233
    )Accrued expenses
    
    
    (1,733
    )Long-term debt
    
    
    7,075Deferred income taxes
    
    
    (12,043
    )Other long-term liabilities
    
    
    (4,755
    )Total purchase price allocation
    
    $
    122,475
 As a result of the Merger, we have reflected pre-Merger periods from
February 29, 2004 to March 25, 2004 (Predecessor) and from August 31, 2003 to
March 25, 2004 (Predecessor) and a post-Merger period from March 26, 2004 to
May 29, 2004 (Successor) in our condensed consolidated financial statements
for fiscal 2004. During the period from March 26, 2004 to May 29, 2004, we recognized in
our consolidated statements of operations approximately $5.4 million of excess
purchase price allocated to inventory as cost of sales and approximately $1.7
million of additional amortization expense of intangible assets as selling,
general and administrative expenses, all as compared to our historical basis of
accounting prior to the Merger. Company Background Our predecessor was formed in March 1996 for the purpose of acquiring
substantially all of the operations of ArtCarved, which were previously owned
by CJC Holdings, Inc., and the operations of Balfour, which were previously
owned by L. G. Balfour Company, Inc. These acquisitions were consummated on
December 16, 1996. Our company was formed in June 2000 to serve as a holding
company for our predecessor as well as future acquisitions. In June 2000, we
acquired Taylor Senior Holding Company, the parent company of Taylor Publishing
Company (Taylor), whose primary business was designing and printing student
yearbooks. In March 2001, we acquired all of the capital stock of Educational
Communications, Inc. (ECI ), which publishes achievement publications. In
July 2002, we acquired all the outstanding stock and warrants of Milestone
Marketing Incorporated (Milestone), a marketer of class rings and other
graduation products to the college market. C-B Announcement Acquisition.Effective January 30, 2004, we acquired the
assets of C-B Graduation Announcements, LLC, a producer of personalized
graduation announcements and related accessories (the C-B Announcements
Acquisition). The maximum purchase price payable in connection with this
acquisition is approximately $5.9 million in cash, of which approximately $5.0
million was paid at closing (including $1.0 million placed in escrow), with the
escrowed amount and balance of the purchase price to be paid pending a
post-closing purchase price adjustment. The C-B Announcements Acquisition was
accounted for using the purchase method of accounting. 23




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##### Table of Contents



Critical Accounting Policies We prepare our consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America. As
such, we are required to make certain estimates, judgments and assumptions that
we believe are reasonable based upon the information available. These estimates
and assumptions affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the periods presented. The significant accounting policies
which we believe are the most critical to aid in fully understanding and
evaluating our reported financial results include the following: Revenue Recognition.We recognize revenue when the earnings process is
complete, evidenced by an agreement between the customer and us, delivery and
acceptance has occurred, collectibility is reasonably assured and pricing is
fixed and determinable. In accordance with the Securities and Exchange
Commissions Staff Accounting Bulletin No. 101, the recognition of revenue and
related gross profit on sales to independent sales representatives, along with
commissions to independent sales representatives that are directly related to
the revenue, are deferred until the independent sales representative delivers
the product and title passes to our end customer. Provisions for sales returns
and warranty costs are recorded at the time of sale based on historical
information and current trends. Sales Returns and Allowances.We make estimates of potential future

product returns related to current period product revenue. We analyze the
previous five years average historical returns, current economic trends and
changes in customer demand and acceptance of our products when evaluating the
adequacy of the sales returns and allowances. Significant management judgments
and estimates must be made and used in connection with establishing the sales
returns and allowances in any accounting period. Material differences could
result in the amount and timing of our revenue for any period if we made
different judgments or utilized different estimates. Allowance for Doubtful Accounts and Reserve on Sales Representative
Advances.We make estimates of potentially uncollectible customer accounts
receivable and receivables arising from sales representative draws paid in
excess of earned commissions. Our reserves are based on an analysis of
individual customer and salesperson accounts and historical write-off
experience. Our analysis includes the age of the receivable, customer or
salesperson creditworthiness and general economic conditions. We believe the
results could be materially different if historical trends do not reflect
actual results or if economic conditions worsened. Goodwill and Other Intangible Assets.We account for our long-lived assets
with indefinite lives under Statement of Financial Accounting Standards No.
142, Goodwill and Other Intangible Assets (SFAS No. 142), which addresses
the initial recognition and measurement of intangible assets acquired outside
of a business combination and the accounting for goodwill and other intangible
assets subsequent to their acquisition. SFAS No. 142 also provides that
intangible assets with finite useful lives be amortized and that goodwill and
intangible assets with indefinite lives will not be amortized, but will rather
be tested for impairment upon adoption and on an annual basis thereafter. As
of the Merger, a third party valuation was prepared supporting our goodwill and
other intangible assets values. Long-lived Tangible and Intangible Assets with Definite Lives.We test our
long-lived tangible and intangible assets with definite lives for impairment
under Statement of Financial Accounting Standards No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, which requires us to review
long-lived tangible and intangible assets with definite lives whenever events
or changes in circumstances indicate the carrying amount of an asset may not be
recoverable. Recoverability of these assets is measured by comparison of its
carrying amount to future undiscounted cash flows the assets are expected to
generate. If long-lived assets are considered to be impaired, the impairment
to be recognized equals the amount by which the carrying value of the assets
exceeds its fair market value and is recorded in the period the determination
is made. As of the Merger, a third party valuation was prepared supporting our
goodwill and other intangible assets values and lives. 24




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##### Table of Contents



Results of Operations As a result of the Merger, we have reflected the period from March 26,
2004 to May 29, 2004 (Successor) and the period from February 29, 2004 to
March 25, 2004 (Predecessor) and the period from August 31, 2003 to March 25,
2004 (Predecessor) in our condensed consolidated financial statements. During the Successor period from March 26, 2004 to May 29, 2004, we
recognized in our consolidated statements of operations approximately $5.4
million of excess purchase price allocated to inventory as cost of sales and
approximately $1.7 million of additional amortization expense of intangible
assets as selling, general and administrative expenses, all as compared to our
historical basis of accounting prior to the Merger. Our condensed consolidated financial statements for the Predecessor period
ended March 25, 2004, were prepared using our historical basis of accounting.
As a result of our transaction on March 25, 2004, we were required to make the
purchase accounting adjustments discussed in Note 2 of the financial
statements. Although a new basis of accounting began on March 26, 2004, we
have presented results for the three and nine-month periods ended May 29, 2004
on a combined basis as we believe this presentation facilitates the comparison
of our results with the corresponding periods in 2003. The combined operating
results may not reflect the actual results we would have achieved absent the
adjustments and may not be predictive of future results of operations. For the Period March 26, 2004 to May 29, 2004 (Successor) and For the Period
February 29, 2004 to March 25, 2004 (Predecessor) Combined, Compared to Three
Months Ended May 31, 2003 (Predecessor) The following table sets forth selected information from our condensed
consolidated statements of operations expressed on an actual basis and as a
percentage of net sales: Combined
    
    
    
    
    
    (Predecessor)(Successor)
    
    (Predecessor)
    
    For the three
    
    
    
    
    
    For the threeFor the period
    
    For the period
    
    months ended
    
    
    
    
    
    months endedMarch 26, 2004 -
    
    February 29, 2004 -May 29,
    
    March 25,
    
    May 29,
    
    
    
    
    
    May 31,2004
    
    2004
    
    2004
    
    % of Net Sales
    
    2003
    
    % of Net SalesNet sales
    
    $
    114,621
    
    
    $
    20,275
    
    
    $
    134,896
    
    
    
    100.0
    %
    
    $
    126,237
    
    
    
    100.0
    %Cost of sales
    
    
    55,088
    
    
    
    8,275
    
    
    
    63,363
    
    
    
    47.0
    %
    
    
    55,382
    
    
    
    43.9
    %Gross profit
    
    
    59,533
    
    
    
    12,000
    
    
    
    71,533
    
    
    
    53.0
    %
    
    
    70,855
    
    
    
    56.1
    %Selling, general and
administrative expenses
    
    
    34,559
    
    
    
    10,622
    
    
    
    45,181
    
    
    
    33.5
    %
    
    
    40,278
    
    
    
    31.9
    %Operating income (loss)
    
    
    24,974
    
    
    
    1,378
    
    
    
    26,352
    
    
    
    19.5
    %
    
    
    30,577
    
    
    
    24.2
    %Interest expense
    
    
    4,572
    
    
    
    2,557
    
    
    
    7,129
    
    
    
    5.3
    %
    
    
    7,274
    
    
    
    5.8
    %Income (loss) before
income taxes
    
    
    20,402
    
    
    
    (1,179
    )
    
    
    19,223
    
    
    
    14.2
    %
    
    
    23,303
    
    
    
    18.4
    %Provision for income
taxes
    
    
    7,957
    
    
    
    
    
    
    
    7,957
    
    
    
    5.9
    %
    
    
    1,165
    
    
    
    0.9
    %Net income (loss)
    
    $
    12,445
    
    
    $
    (1,179
    )
    
    $
    11,266
    
    
    
    8.3
    %
    
    $
    22,138
    
    
    
    17.5
    %
 Net Sales.Net sales increased $8.7 million or 6.9% to $134.9 million for the
three months ended May 29, 2004 from $126.2 million for the three months ended
May 31, 2003. The increase in net sales was mainly the result of increased
high school on-campus yearbook and graduation product shipments. The following details the changes in net sales during such periods by business
segment.  Scholastic Products.Net sales increased $7.4 million or 6.2% to $127.6
million for the three months ended May 29, 2004 from $120.2 million for the
three months ended May 31, 2003. The increase in net sales was mainly the
result of increased shipments of yearbooks and graduation products as a
result of increases in order volume and selling price. Approximately $2.5
million of the graduation product growth was attributable to the C-B
Announcements acquisition. 25




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##### Table of Contents



Recognition and Affinity Products.Net sales increased $1.3 million or
20.4% to $7.3 million for the three months ended May 29, 2004 from $6.0
million for the three months ended May 31, 2003. The increase was primarily
the result of increased mothers rings shipments during the Mothers Day
selling season. Gross Profit.Gross margin represents gross profit as a percentage of net
sales. Gross margin was 53.0% for the three months ended May 29, 2004, a 3.1
percentage point decrease from 56.1% for the three months ended May 31, 2003.
The decrease was a result of purchase accounting. Gross profit
increased $0.6 million to $71.5 million for the three
months ended May 29, 2004 from $70.9 million for the three
months ended May 31, 2003. Excluding the $5.4 million
impact of purchase accounting, the increase in gross margin was a result of the efficiencies in
the yearbook and graduation product facilities. The major improvement was a
result of yearbook efficiency gains in the pre-press and press area due to
investments made in the page production software and printing equipment. The
increases were partially offset by increased material costs in class rings and
mothers rings as a result of gold price differences period over period and
unfavorable currency fluctuations against the Euro associated with the purchase
of precious, semi-precious and synthetic stones. Selling, General and Administrative Expenses.Selling, general and
administrative expenses increased $4.9 million, or 12.2%, to $45.2 million for
the three months ended May 29, 2004 from $40.3 million for the three months
ended May 31, 2003. As a percentage of net sales, selling, general and
administrative expenses were 33.5% for the three months ended May 29, 2004, a
1.6 percentage point increase from 31.9% for the three months ended May 31,
2003. Included in selling, general and administrative expenses are two
sub-categories: selling and marketing expenses and general and administrative
expenses.  Selling and marketing expenses increased $3.1 million, or 9.7%, to $35.2
million for the three months ended May 29, 2004, or 26.1% of net sales from
$32.1 million, or 25.5% of net sales for the three months ended May 31, 2003.
The majority of the increase in selling and marketing was due to higher
commission expense as a result of increased sales of high school on-campus
yearbooks and graduation products. The remaining increase was due to
increased selling and marketing costs related to college ring programs and
timing of expenses across all divisions.General and administrative expenses increased
$1.8 million or 22.0% to $10.0 million for the three months
ended May 29, 2004, or 7.3% of net sales, as
compared to $8.2 million, or 6.5% of net sales, for the three months ended
May 31, 2003. The increase in general and administrative expense was a
result of the impact of purchase accounting increasing amortization expense
by $1.7 million. Operating Income (Loss).
As a result of the foregoing, operating income was
$26.4 million, or 19.5% of net sales for the three months ended May 29, 2004,
as compared with operating income of $30.6 million, or 24.2% of net sales, for
the three months ended May 31, 2003. Operating income for the three months ended
May 29, 2004 includes a negative impact of $7.1 million due to purchase
accounting. The scholastic products segment reported operating income of
$26.9 million for the three months ended May 29, 2004, compared to operating
income of $29.0 million for the three months ended May 31, 2003. The
recognition and affinity products segment reported an operating loss of
$551,000 for the three months ended May 29, 2004, compared to operating income
of $1.6 million for the three months ended May 31, 2003. Interest Expense.Interest expense was $7.1 million for the three months
ended May 29, 2004 and $7.3 million for the three months ended May 31, 2003.
The average debt outstanding was $285 million for the three months ended May
29, 2004 compared to $231 million for the three months ended May 31, 2003. The
weighted average interest rate of debt outstanding was 9.9% for the three
months ended May 29, 2004 compared to 12.0% the three months ended May 31,
2003. Provision (Benefit) for Income Taxes.For the three months ended May 29, 2004,
we recognized a tax provision of $8.0 million compared to a tax provision of
$1.2 million for the three months ended May 31, 2003. For the period from
March 26, 2004 to May 29, 2004, our tax rates are calculated on basis at 35%
federal and 4% state tax rates, for an overall effective tax rate of 39%. The
tax rate for the period March 26, 2004 to May 29, 2004 reflects the creation of
a net deferred tax liability as a result of the purchase accounting adjustments
made in connection with the Merger. For the period February 29, 2004 to March
25, 2004, no net federal income tax benefit is reflected in the statement of
operations for net operating losses to be carried forward since realization of
the potential benefit of net operating loss carry-forwards is not considered to
be more likely than not. Although state taxes are expected for the year ended
2004, no benefit has been recorded for the period from February 29, 2004 to
March 25, 2004 due to the valuation allowance. For the three months ended May
31, 2003, the effective tax rate reflects the state tax expense expected for
the year. Net Income (loss).As a result of the foregoing, we reported net income of
$11.3 million for the three months ended May 29, 2004 as compared to net income
of $22.1 million for the three months ended May 31, 2003. 26




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##### Table of Contents



For the Period March 26, 2004 to May 29, 2004 (Successor) and For the Period
August 31, 2003 to May 29, 2004 (Predecessor) Combined, Compared to Nine Months
Ended May 31, 2003 (Predecessor) The following table sets forth selected information from our condensed
consolidated statements of operations expressed on an actual basis and as a
percentage of net sales: (Successor)
    
    (Predecessor)
    
    Combined
    
    
    
    
    
    (Predecessor)For the nine months
    
    
    
    
    
    For the nineFor the period
    
    For the period
    
    ended
    
    
    
    
    
    months endedMarch 26, 2004 -
    
    August 31, 2004 -May 29,
    
    March 25,
    
    May 29,
    
    
    
    
    
    May 31,2004
    
    2004
    
    2004
    
    % of Net Sales
    
    2003
    
    % of Net SalesNet sales
    
    $
    114,621
    
    
    $
    146,721
    
    
    $
    261,342
    
    
    
    100.0
    %
    
    $
    260,679
    
    
    
    100.0
    %Cost of sales
    
    
    55,088
    
    
    
    59,857
    
    
    
    114,945
    
    
    
    44.0
    %
    
    
    113,154
    
    
    
    43.4
    %Gross profit
    
    
    59,533
    
    
    
    86,864
    
    
    
    146,397
    
    
    
    56.0
    %
    
    
    147,525
    
    
    
    56.6
    %Selling, general and
administrative expenses
    
    
    34,559
    
    
    
    74,992
    
    
    
    109,551
    
    
    
    41.9
    %
    
    
    105,315
    
    
    
    40.4
    %Operating income (loss)
    
    
    24,974
    
    
    
    11,872
    
    
    
    36,846
    
    
    
    14.1
    %
    
    
    42,210
    
    
    
    16.2
    %Interest expense
    
    
    4,572
    
    
    
    16,455
    
    
    
    21,027
    
    
    
    8.0
    %
    
    
    21,817
    
    
    
    8.4
    %Income (loss) before
income taxes
    
    
    20,402
    
    
    
    (4,583
    )
    
    
    15,819
    
    
    
    6.1
    %
    
    
    20,393
    
    
    
    7.8
    %Provision for income
taxes
    
    
    7,957
    
    
    
    
    
    
    
    7,957
    
    
    
    3.0
    %
    
    
    1,165
    
    
    
    0.4
    %Net income (loss)
    
    $
    12,445
    
    
    $
    (4,583
    )
    
    $
    7,862
    
    
    
    3.1
    %
    
    $
    19,228
    
    
    
    7.4
    %
 Net Sales.Net sales increased $0.6 million, or 0.3%, to $261.3 million for
the nine months ended May 29, 2004 from $260.7 million for the nine months
ended May 31, 2003. The increase in net sales was due to increased high school
on-campus ring, yearbook, and graduation product shipments, offset by lower
sales volumes in recognition and affinity products. The following details the changes in net sales during such periods by business
segment.  Scholastic Products.Net sales increased $6.1 million or 2.7% to $233.7
million for the nine months ended May 29, 2004 from $227.6 million for the
nine months ended May 31, 2003. The increase in net sales was the result of a
$7.8 million or 3.4% increase in high school on-campus rings, yearbooks, and
graduation products as a result of increased unit shipments and price
increases. Graduation products increased an additional $2.9 million or 1.3%
as a result of the C-B Announcements acquisition. These increases were
offset by a 0.9% decline in retail high school shipments as well as a 1.1%
decline in college ring shipments.Recognition and Affinity Products.Net sales decreased $5.5 million or
16.6% to $27.6 million for the nine months ended May 29, 2004 from $33.1
million for the nine months ended May 31, 2003. The decrease was primarily
the result of a $2.8 million decrease in sales related to our not having
published ECI teachers publication in the nine months ended May 29, 2004 and
lower overall sales volumes of ECIs high school publications and collateral
due to order timing coinciding with the beginning of the United States-Iraqi
conflict. ECI teachers publication has historically been produced once
every two years. Beginning August 2004, this publication will be published
annually. Gross Profit.Gross margin represents gross profit as a percentage of net
sales. Gross margin was 56.0% for the nine months ended May 29, 2004, a 0.6
percentage point decrease from 56.6% for the nine months ended May 31, 2003.
Gross profit decreased $1.1 million to $146.4 million for
the nine months ended May 29, 2004 from $147.5 million for
the nine months ended May 31, 2003. The decrease was a result of purchase accounting. Excluding the $5.4 million
impact of purchase accounting,
the increase in gross margin was primarily a result
of the efficiencies in the yearbook and graduation product manufacturing
facilities. The major improvement was a result of yearbook efficiency gains in
the pre-press and press area due to investments made in the page production
software and printing equipment. The increases were partially offset by
increased material costs in the ring manufacturing plant as a result of gold
price increases and unfavorable currency fluctuations against the Euro
associated with the purchase of precious, semi-precious and synthetic stones. 27




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##### Table of Contents



Selling, General and Administrative Expenses.Selling, general and
administrative expenses increased $4.2 million, or 4.0%, to $109.6 million for
the nine months ended May 29, 2004 from $105.3 million for the nine months
ended May 31, 2003. As a percentage of net sales, selling, general and
administrative expenses were 41.9% for the nine months ended May 29, 2004, a
1.5 percentage point increase from 40.4% for the nine months ended May 31,
2003. Included in selling, general and administrative expenses are two
sub-categories: selling and marketing expenses and general and administrative
expenses.  Selling and marketing expenses increased $2.3 million, or 2.9%, to $82.5
million for the nine months ended May 29, 2004 from $80.2 million for the
nine months ended May 31, 2003. The majority of the increase in selling and
marketing is due to higher commission expense as a result of increased sales
of high school on-campus products and incremental expenses in college
marketing.General and administrative expenses increased $1.9 million or 7.7% to $27.1
million, or 10.4% of net sales for the nine months ended May 29, 2004, as
compared to $25.1 million, or 9.6% of net sales, for the nine months ended
May 31, 2003. The increase in general and administrative expense is a result
of the impact of purchase accounting increasing amortization expense by $1.7
million. Operating Income (Loss).As a result of the foregoing, operating income was
$36.8 million, or 14.1% of net sales for the nine months ended May 29, 2004, as
compared with operating income of $42.2 million, or 16.2% of net sales, for the
nine months ended May 31, 2003. Operating income for the nine months ended May 29, 2004 includes a negative impact of $7.1 million due to
purchase accounting. The scholastic products segment reported operating income of $32.7
million for the nine months ended May 29, 2004, compared to operating income of
$32.7 million for the nine months ended May 31, 2003. The recognition and
affinity products segment reported operating income of $4.2 million for the
nine months ended May 29, 2004, compared to operating income of $9.5 million
for the nine months ended May 31, 2003. Interest Expense.Interest expense was $21.0 million for the nine months
ended May 29, 2004 and $21.8 million for the nine months ended May 31, 2003.
The average debt outstanding was $249 million for the nine months ended May 29,
2004 compared to $239 million for the nine months ended May 31, 2003. The
weighted average interest rate of debt outstanding was 11.2% for the nine months
ended May 29, 2004 compared to 11.9% the nine months ended May 31, 2003. Provision (Benefit) for Income Taxes.For the nine months ended May 29, 2004,
we recognized a tax provision of $8.0 million compared to a tax provision of
$1.2 million for the nine months ended May 31, 2003. For the period from March
26, 2004 to May 29, 2004, our tax rates are calculated on basis at 35% federal
and 4% state tax rates, for an overall effective tax rate of 39%. The tax rate
for the period March 26, 2004 to May 29, 2004 reflects the creation of a net
deferred tax liability as a result of the purchase accounting adjustments made
in connection with the Merger. For the period August 30, 2003 to March 25,
2004, no net federal income tax benefit is reflected in the statement of
operations for net operating losses to be carried forward since realization of
the potential benefit of net operating loss carry-forwards is not considered to
be more likely than not. Although state taxes are expected for the year ended
2004, no benefit has been recorded for the period from August 30, 2003 to
March 25, 2004 due to the valuation allowance. For the nine months ended May
31, 2003, the effective tax rate reflects the state tax expense expected for
the year. Net Income (loss).As a result of the foregoing, we reported net income of
$7.9 million for the nine months ended May 29, 2004 as compared to net income
of $19.2 million for the nine months ended May 31, 2003. 28




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##### Table of Contents



Seasonality Our scholastic product sales tend to be seasonal. Class ring sales are highest
during October through December, with most orders made for delivery to students
before the winter holiday season. Sales of fine paper products are
predominantly made during February through April for graduation in April and
June. Yearbook sales are highest during the months of May through June, as
yearbooks are typically shipped to schools prior to summer break. Our
recognition and affinity product line sales are also seasonal. A majority of
achievement publication orders ship in November and August of each year. The
remaining recognition and affinity product line sales are highest during the
winter holiday season and in the period leading up to Mothers Day. As a result of the foregoing, we have historically experienced operating losses
during our fourth fiscal quarter, which includes the summer months when school
is not in session thus reducing related shipments of products. In addition,
our working capital requirements tend to exceed our operating cash flows from
April through August. Liquidity and Capital Resources Operating Activities.Operating activities provided cash of $31.3 million for
nine months ended May 29, 2004 compared to cash provided of $29.7 million for
the nine months ended May 31, 2003. The $1.6 million increase in cash provided
by operating activities was primarily attributable to changes in inventories
of $4.8 million, customer deposits of $7.2 million,
accounts payable, accrued expenses, and other long-term liabilities
of $4.7 million, and deferred revenue of $0.9 million, partially offset
by changes in net income (net of non-cash items) of $10.1 million, prepaid
expenses and other current assets of $4.0 million and accounts receivable of
$2.0 million. Investing Activities.Capital expenditures for the nine months ended May 29,
2004 were $14.2 million compared to capital expenditures of $8.8 million for
the nine months ended May 31, 2003. The primary increase was due to the
investments made in page production software and printing equipment in our
yearbook manufacturing facilities. Our projected capital expenditures for the
entire fiscal year 2004 are expected to be approximately $17.0 million. Financing Activities.Financing activities provided cash of $92.7 million for
the nine months ended May 29, 2004 compared to cash used of $19.1 million for
the nine months ended May 31, 2003. The increase in cash provided was
directly the result of the Merger as discussed in Note 2. Capital Resources.As
of May 29, 2004, $150.0 million of our 8.25% senior
subordinated notes were outstanding and a $155.0 million term
loan and $2.4 million in revolving loans were outstanding under
our new senior secured credit facility. As of August 30, 2003,
$9.5 million was outstanding under our then existing senior
secured credit facility. Our new senior secured
credit facility provides us with a $155.0 million term loan,
maturing in 2011, and up to $40.0 million in available revolving
loan borrowings, maturing in 2010. Our borrowing availability under
the revolver is reduced by approximately $1.9 million of letters
of credit outstanding as of May 29, 2004. Our new senior secured
credit facility contains financial covenants and maintenance tests,
including minimum interest coverage test and a maximum total leverage
test, and restrictive covenants, including restrictions on our
ability to make capital expenditures. Amounts outstanding under the
new senior secured credit facility bear interest, at our option, at a
rate per annum equal to either (i) the base rate defined in our
new senior secured credit facility, plus an applicable margin or
(ii) the eurodollar rate defined in our new senior secured
credit facility plus an applicable margin. The applicable margins for
the term loan and for revolving loans are subject to adjustment based
on the achievement of certain leverage ratio targets. Our new senior
secured credit facility is secured by substantially all of our assets
and the assets of certain of our domestic subsidiaries, if any, and
by a pledge of all of the capital stock certain of our domestic
subsidiaries. We terminated our then existing senior secured credit
facility concurrent with the entering into of our new senior secured
credit facility. Our liquidity needs relate primarily to debt service, working capital, capital
expenditure and general corporate requirements. Historically, cash generated
from operating activities and borrowing under our existing senior secured
credit facility and prior credit facilities have been our principal sources of
liquidity. Following consummation of the Merger, we expect that cash generated
from operating activities and availability under our new senior secured credit
facility will be our principal sources of liquidity. Based on current
operations and our anticipated costs savings and operational improvements, we
believe our cash flow from operations, available cash and available borrowings
under our new senior secured credit facility, will be adequate to meet our
liquidity needs for at least the next twelve months. We cannot assure you,
however, that our business will generate sufficient cash flows from operations,
that currently anticipated costs savings and operational improvements will be
realized on schedule or that future borrowings will be available to us under
our new senior secured credit facility in an amount sufficient to enable us to
fund our liquidity needs. Off Balance-Sheet Obligations Gold Consignment Agreement.As of March 25, 2004, we signed the First Amended
and Restated Letter Agreement for Fee Consignment and Purchase of Gold with The
Bank of Nova Scotia. Under this agreement, we have an ability to have on
consignment gold with aggregate value less than or equal to the lowest of: (i)
the dollar value of 27,000 troy ounces of gold, (ii) $14.2 million and (iii) a
borrowing base, calculated based on a percentage of the value of gold held at
our facilities and other approved locations, as specified by the agreement.
Under the terms of this arrangement, we do not own the consigned gold nor do we
have risk of loss related to such inventory until we pay The Bank of Nova
Scotia for quantities purchased. Accordingly, we do not reflect the value of
consigned gold in our inventory, nor do we reflect the corresponding liability
for financial statement purposes. As of May 29, 2004 and August 30, 2003, the
Company held approximately 16,730 ounces and 17,780 ounces, respectively, of
gold valued at $6.6 million and $6.7 million, respectively, on consignment. 29




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##### Table of Contents



Contractual Obligations As of May 29, 2004, the due dates and amounts of our contractual
obligations are as follows (in thousands): Fiscal
    
    Fiscal
    
    Fiscal
    
    FiscalFiscal 2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    Thereafter
    
    Total8 1/4% Senior subordinated
debt
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    150,000
    
    
    $
    150,00011 5/8% Senior unsecured
notes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,042
    
    
    
    
    
    
    
    
    
    
    
    6,042Interest on fixed rate debt
    
    
    3,270
    
    
    
    13,081
    
    
    
    13,081
    
    
    
    12,728
    
    
    
    12,375
    
    
    
    44,344
    
    
    
    98,879Senior secured credit
facility (b)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,400
    
    
    
    2,400Term loan (b)
    
    
    388
    
    
    
    1,550
    
    
    
    1,550
    
    
    
    1,550
    
    
    
    1,550
    
    
    
    148,412
    
    
    
    155,000Operating leases(a)
    
    
    647
    
    
    
    2,204
    
    
    
    1,835
    
    
    
    1,322
    
    
    
    817
    
    
    
    2,719
    
    
    
    9,544Capital leases
    
    
    361
    
    
    
    1,387
    
    
    
    1,348
    
    
    
    1,332
    
    
    
    174
    
    
    
    
    
    
    
    4,602Total
    
    $
    4,666
    
    
    $
    18,222
    
    
    $
    17,814
    
    
    $
    22,974
    
    
    $
    14,916
    
    
    $
    347,875
    
    
    $
    426,467
   (a)
    
    Some of our rental property leases contain options to renew the
leased space for periods up to an additional ten years.(b)
    
    No interest expense has been included on our obligations with
variable interest rates.(c)
    
    In addition, we entered into a new management
agreement with an affiliate of Fenway Partners pursuant to which we,
among other things, agreed to pay such affiliate an annual fee equal
to the greater of $3.0 million or 5% of the previous fiscal
years EBITDA (as defined in the agreement). Recent Accounting Pronouncements In May 2003, SFAS No. 150 (SFAS 150), Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity, was issued,
which establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. We
adopted SFAS 150 beginning in September 2003. The adoption of this standard did
not have a significant impact on our financial statements. In January 2003, the FASB issued FIN No. 46 Consolidation of Variable Interest
Entities, an Interpretation of ARB 51. In December 2003, the FASB revised FIN
No. 46 to reflect decisions it made regarding a number of implementation
issues. FIN No. 46, as revised, requires that the primary beneficiary of a
variable interest entity (VIE) consolidate the entity even if the primary
beneficiary does not have a majority voting interest. This Interpretation
applies to certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support. This Interpretation also identifies those
situations where a controlling financial interest may be achieved through
arrangements that do not involve voting interests. The Interpretation also
establishes additional disclosures which are required regarding an enterprises
involvement with a VIE when it is not the primary beneficiary. The requirements
of this Interpretation are required to be applied to any VIE created after
January 31, 2003. We adopted FIN 46 beginning in the first quarter of fiscal
year 2004. The adoption of this standard did not have a significant impact on
our financial statements. In December 2003, the FASB amended SFAS No. 132, Employers Disclosures about
Pensions and Other Postretirement Benefits. The amendment revised employers
disclosures about pension plans and other post retirement benefit plans to
require additional disclosures to those in the original SFAS No. 132 about the
assets, obligations, cash flows, and net periodic benefit cost of defined
pension plans and other defined benefit postretirement plans. We adopted the
additional disclosure requirements in the third quarter of 2004. 30




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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Interest Rate Risk.We have market risk exposure relating to changes in
interest rates on our variable rate debt. Our policy is to manage interest
rate exposure through the use of a combination of fixed and floating rate debt
instruments. Our senior secured credit facility (revolver and term loan) and
gold consignment agreement are variable rate arrangements. The interest rates
are based on a floating benchmark rate (such as LIBOR or the Federal Funds
rate) plus a fixed spread. Other financial instruments subject to interest
rate risk consist of long-term debt. As of May 29, 2004, these financial
instruments represented a net liability of $164.2 million. Each quarter point
change in interest rates would result in a $0.5 million change in annual
interest expense on the senior secured credit facility, assuming the entire
revolving loan were drawn. Semi-Precious Stones.We purchase the majority of our semi-precious stones
from a single source supplier in Germany. We believe that all of our major
competitors purchase their semi-precious stones from this same supplier. The
prices for these products are denominated in Euros. In order to hedge market
risk, we have from time-to-time purchased forward currency contracts. During
the nine months ended May 29, 2004, we did not purchase any Euro forward
contracts and did not have any such contracts outstanding. Gold. We purchase all of our gold from The Bank of Nova Scotia through our
existing gold consignment agreement described above. We consign the majority
of our gold and pay for gold as our products are shipped to customers and as
required by the terms of our gold consignment agreement. As of May 29, 2004,
we had hedged most of our gold requirements for fiscal 2004 through the
purchase of gold options. 31




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ITEM 4. CONTROLS AND PROCEDURES We carried out an evaluation, under the supervision and with the participation
of our management, including our President and Chief Executive Officer and our
Chief Financial Officer, of the effectiveness of the design and operation of
our disclosure control and procedures pursuant to Rule 13a-15 under the
Securities Exchange Act of 1934, as amended (the Exchange Act), as of the end
of the period covered by this quarterly report. Based upon this evaluation, our
President and Chief Executive Officer and our Chief Financial Officer concluded
that our disclosure controls and procedures were adequate to ensure that
information required to be disclosed by us in the reports filed or submitted by
us under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the SECs rules and forms. Additionally, our President and Chief Executive Officer and Chief Financial
Officer determined that there were no significant changes in our internal
controls or in other factors that could significantly affect our internal
controls during the period covered by this quarterly report. DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS This report includes forward-looking statements within the meaning of Section
21E of the Securities Exchange Act of 1934, as amended. Although management
believes that the expectations reflected in such forward looking statements are
based upon reasonable assumptions, the Company can give no assurance that these
expectations will be achieved. Any change in or adverse development, including
the following factors may impact the achievement of results in or accuracy of
forward-looking statements: the price of gold and precious, semiprecious and
synthetic stones; the Companys access to students and consumers in schools;
the seasonality of the Companys business; regulatory and accounting rules; the
Companys relationship with its independent sales representatives; fashion and
demographic trends; general economic, business, and market trends and events,
especially during peak buying seasons for the Companys products; the Companys
ability to respond to customer change orders and delivery schedules;
development and operating costs; competitive pricing changes; successful
completion of management initiatives designed to achieve operating
efficiencies; the Companys cash flows; and the Companys ability to draw down
funds under its current bank financings and to enter into new bank financings.
The foregoing factors are not exhaustive. New factors may emerge or changes may
occur that impact the Companys operations and businesses. Forward-looking
statements herein are expressly qualified on the foregoing or such other
factors as may be applicable. 32




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PART II. OTHER INFORMATION 
 ITEM 1. LEGAL PROCEEDINGS On February 11, 2004, Frederick Goldman, Inc. (the Licensee) filed an
arbitration claim against CBI alleging, among other things, that CBI had
improperly attempted to convert an exclusive license CBI granted to the
Licensee to a non-exclusive license. In addition, on February 10, 2004, the
Licensee commenced a lawsuit in federal district court in New York against CBI
alleging that CBI breached the license agreement by granting third parties
rights in violation of the Licensees exclusive rights under the license
agreement. The district court claim seeks injunctive and monetary relief. No
discovery has been conducted to date, therefore, at this time, it is not
possible to predict with certainty the outcome of these unresolved legal
matters or the range of possible loss or recovery. However, the Company
intends to defend itself vigorously in these proceedings. There are no other material pending legal proceedings to which the Company is a
party or to which any of its property is subject. The Company monitors all
claims, and the Company accrues for those, if any, which management believes
may be adversely decided against the Company and result in money damages to a
third party. 
 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K  (a)
    
    Exhibits EXHIBITNUMBER
    
    DESIGNATION2.1
    
    Agreement and Plan of Merger by and among AAC Holding Corp., AAC Acquisition Corp., American
Achievement Corporation and The Stockholders Party Hereto dated as of December 24, 20034.1
    
    Indenture, dated as of
March 25, 2004, among The Bank of New York, as Trustee, and
the Guarantors4.2
    
    Form of 8.25% Senior Subordinated
Notes due April 1, 2012 (Included in Exhibit 4.1)4.3
    
    The Third Supplemental Indenture,
dated as of March 15, 2004, among American Achievement
Corporation, the Guarantors, and The Bank of New York10.1
    
    Exchange and Registration Rights
Agreement, dated March 25, 2004, among American Achievement
Corporation, the Guarantors and the Purchasers10.2
    
    Credit Agreement, dated
March 25, 2004, by and among American Achievement Corporation,
the Guarantors, Goldman Sachs Credit Partners L.P., Deutsche
Bank A.G., Cayman Islands Branch, and Deutsche Bank Securities
Inc.10.3
    
    Pledge and Security Agreement
between the Guarantors and Goldman Sachs Credit Partners L.P.,
dated March 25, 2004.10.4
    
    Intercreditor Agreement between
Goldman Sachs Credit Partners L.P., the Secured Parties, and The
Bank of Nova Scotia, dated March 25, 2004.10.5
    
    First Amended and Restated Letter
Agreement for Fee Consignment and Purchase of Gold between Commemorative Brands, Inc. and The Bank of
Nova Scotia, dated March 25, 2004.10.6
    
    Letter Agreement for Addition of
Approved Inventory Locations between Commemorative Brands, Inc.
and The Bank of Nova Scotia, dated June 9, 2004.10.7
    
    Management Advisory Agreement by
and between AAC Holding Corp., American Achievement Corporation,
and Fenway Partners, Inc., dated March 25, 200431.1
    
    CEO Certification Accompanying Period Report Pursuant to Section 302 of the Sarbanes-Oxley Act
of 200231.2
    
    CFO Certification Accompanying Period Report Pursuant to Section 302 of the Sarbanes-Oxley Act
of 200232.1
    
    CEO Certification Accompanying Period Report Pursuant to Section 906 of the Sarbanes-Oxley Act
of 200232.2
    
    CFO Certification Accompanying Period Report Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
 (b) Reports on Form 8-K None 33




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AMERICAN ACHIEVEMENT CORPORATION
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. Date: July 13, 2004 AMERICAN ACHIEVEMENT CORPORATIONBy:
    
    /s/ DAVID G. FIOREDavid G. FioreCHIEF EXECUTIVE OFFICERBy:
    
    /s/ SHERICE P. BENCHSherice P. BenchCHIEF FINANCIAL OFFICER
 34