UNITED
STATES SECURITIES AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549




FORM
10-K


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


FOR
THE FISCAL YEAR ENDED AUGUST 30, 2008


OR


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





Commission
file numbers 333-137067, 333-121479 and 333-84294





AMERICAN
ACHIEVEMENT GROUP HOLDING CORP.


AAC
GROUP HOLDING CORP.


AMERICAN
ACHIEVEMENT CORPORATION


(Exact
Name of Registrant as Specified in its Charter)


DELAWARE
              DELAWARE
              DELAWARE
              (State
      or Other Jurisdiction of
              Incorporation
      or Organization)
            
            20-4833998
              20-1854833
              13-4126506
              (I.R.S.
      Employer
              Identification
      Number)





7211
CIRCLE S ROAD


AUSTIN,
TEXAS 78745


(Address
of Principal Executive Offices) (Zip Code)


Registrants’
Telephone Number, Including Area Code:(512) 444-0571




Securities
registered pursuant to Section 12(b) of the Act: None.




Securities
registered pursuant to Section 12(g) of the Act: None.




Indicate by check mark if
the registrants are well-known seasoned issuers, as defined in Rule 405 of the
Securities Act. Yes o  
No þ




Indicate by check mark if
the registrant American Achievement Group Holding Corp. is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes þ   No o




Indicate by check mark if
the registrant AAC Group Holding Corp. is not required to file reports pursuant
to Section 13 or Section 15(d) of the Act. Yes þ   No o




Indicate by check mark if
the registrant American Achievement Corporation is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes þ   No o




Indicate
by check mark whether the registrants (1) have 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
registrants were required to file such reports), and (2) have been subject
to such filing requirements for the past 90 days. Yes o   
No þ.




Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrants’ knowledge, in definitive proxy or information statements
incorporated by reference inPart III
of this Form 10-K or any amendment to this Form 10-K. o




Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):Large accelerated filer o          Accelerated filer o          Non-accelerated filer þ




Indicate
by check mark whether any of the registrants are shell companies (as defined in
Rule 12b-2 of the Exchange Act). Yes o   No þ.




Number of
shares of American Achievement Group Holding Corp outstanding as of August 30,
2008: 505,460shares of common stock.




Number of
shares of AAC Group Holding Corp. outstanding as of August 30, 2008: 100
shares of common stock.




Number of
shares of American Achievement Corporation outstanding as of August 30, 2008:
100
shares of common stock.




This Form
10-K is a combined annual report being filed separately by three registrants:
American Achievement Group Holding Corp., AAC Group Holding Corp. and American
Achievement Corporation. Unless the context indicates otherwise, any reference
in this report to “Parent Holdings” refers to American Achievement Group Holding
Corp., “Intermediate Holdings” refers to AAC Group Holding Corp. and “AAC”
refers to American Achievement Corporation, the indirect wholly-owned operating
subsidiary of Intermediate Holdings. The “Company”, “we”, “us” and “our” refer
to American Achievement Group Holding Corp. and AAC Group Holding Corp. together
with American Achievement Corporation.





AMERICAN
ACHIEVEMENT GROUP HOLDING CORP.


AAC
GROUP HOLDING CORP.


AMERICAN
ACHIEVEMENT CORPORATION




FORM
10-K


FOR
THE FISCAL YEAR ENDED AUGUST 30, 2008


INDEX




PagePART
      IItem 1.
      Business
            
            3Item 1A.
      Risk Factors
            
            9Item 1B.
      Unresolved Staff Comments
            
            13Item 2.
      Properties
            
            13Item 3.
      Legal Proceedings
            
            13Item 4.
      Submission of Matters to a Vote of Security Holders
            
            13PART
      IIItem 5.
      Market for Registrants’ Common Equity, Related Stockholder Matters and
      Issuer Purchases of Equity Securities
            
            14Item 6.
      Selected Financial Data
            
            14Item 7.
      Management’s Discussion and Analysis of Financial Condition and Results of
      Operations
            
            20Item 7A.
      Quantitative and Qualitative Disclosures About Market Risk
            
            35Item 8.
      Financial Statements and Supplementary Data
            
            36Item 9.
      Changes in and Disagreements with Accountants on Accounting and Financial
      Disclosure
            
            78Item 9A.
      Controls and Procedures
            
            78PART
      IIIItem 10.
      Directors, Executive Officers and Corporate Governance
            
            79Item 11.
      Executive Compensation
            
            81Item 12.
      Security Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
            
            90Item 13.
      Certain Relationships and Related Transactions and Director
      Independence
            
            90Item 14.
      Principal Accountant Fees and Services
            
            91PART
      IVItem 15.
      Exhibits, Financial Statement Schedules
            
            92Signatures
            
            95Supplemental
      Indenture – American Achievement CorporationSupplemental
      Indenture – AAC Group Holding Corp.
              Supplemental
      Indenture – American Achievement Group Holding Corp.
              Letter
      Agreement – Kris G. RadhakrishnanStatement
      re: Computation of Ratios of Earnings to Fixed ChargesSubsidiariesCertification
      Pursuant to Section 302Certification
      Pursuant to Section 302Certification
      Pursuant to Section 906Certification
      Pursuant to Section 906




Explanatory
Note




This
combined Form 10-K is separately filed by American Achievement Group Holding
Corp., AAC Group Holding Corp. and American Achievement Corporation. Each
Registrant hereto is filing on its own behalf all of the information contained
in this annual report that relates to such Registrant. Each Registrant hereto is
not filing any information that does not relate to such Registrant, and
therefore makes no representation as to any such information.




2


PART
I




Item 1. Business




Registrants




American
Achievement Group Holding Corp. (“Parent Holdings”) was formed in May 2006 and
owns 100% of the shares of common stock of AAC Group Holding Corp.
(“Intermediate Holdings”). Intermediate Holdings, formed in November 2004, owns
100% of the shares of common stock of AAC Holding Corp., which is the holder of
100% of the shares of common stock of American Achievement Corporation (“AAC”).
Intermediate Holdings conducts all of its business through AAC Holding Corp. and
AAC and its subsidiaries. Parent Holdings conducts all of its business through
Intermediate Holdings, AAC Holding Corp. and AAC and its subsidiaries. Parent
Holdings, Intermediate Holdings, and AAC are treated as entities under common
control. Accordingly, the financial results are being presented for Parent
Holdings and Intermediate Holdings for all periods for which the financial
results of AAC are presented. The financial results of Parent Holdings prior to
its formation represent entirely those of its wholly-owned subsidiary,
Intermediate Holdings and its indirect wholly-owned subsidiary, AAC. The
financial results of Intermediate Holdings prior to its formation represent
entirely those of its wholly-owned indirect subsidiary, AAC. The “Company”,
“we”, “us” and “our” refer to Parent Holdings, Intermediate Holdings and AAC,
together with the consolidated subsidiaries.




General




We are
one of the leading manufacturers and suppliers of class rings, yearbooks,
graduation products, and recognition products and affinity jewelry in the United
States. We market and sell yearbooks to the college, high school, junior high
school and elementary markets. We primarily sell our class rings and graduation
products, which include fine paper products and graduation accessories, in the
high school, college and junior high school markets. We also sell jewelry
commemorating family events such as the birth of a child, military and fan
affinity jewelry and related products, professional sports championship rings,
commercial printing and recognition products such as letter
jackets.




As fully
described under the “Significant Developments” section of Management’s
Discussion and Analysis of Financial Condition and Results of Operations, on
October 26, 2007, the Company decided to shut down the operations of its
achievement publications segment, which produced, marketed and sold publications
that recognize the achievements of top students at the high school and college
levels, as well as the nation’s most inspiring teachers.  All shutdown
activities were substantially complete prior to November 24, 2007 and were fully
complete by May 31, 2008.




Company
Background




Our
business was founded when 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., were combined through various
asset purchase agreements in December 1996. AAC was formed in
June 2000 to serve as a holding company for these operations as well as any
future acquisitions. In June 2000, we acquired the Taylor Senior Holding
Company, the parent company of Taylor Publishing Company (“Taylor”), whose
primary business is designing and printing student yearbooks. In July 2002,
AAC acquired all the outstanding stock and warrants of Milestone Marketing, a
marketer of class rings and other graduation products to the college market. In
January 2004, AAC acquired C-B Graduation Announcements, a marketer of
graduation products to the college market.  In April 2007, Commemorative
Brands, Inc. (“CBI”), a wholly-owned subsidiary of AAC, acquired all of the
outstanding stock of BFJ Holdings, Inc. and its wholly owned subsidiary, Powers
Embroidery, Inc. (“Powers”), which companies were immediately merged into and
became an operating division of CBI. Powers is a producer of quality letter
jackets, chenille patches and other school spirit embroidery merchandise and is
located in Waco, Texas.




On
March 25, 2004, AAC Acquisition Corp., a wholly owned subsidiary of AAC
Holding Corp., merged with and into AAC (the “Merger”), with AAC continuing as
the surviving corporation and a wholly-owned subsidiary of AAC Holding Corp. The
Merger was financed by a cash equity investment by an investor group led by
Fenway Partners Capital Fund II, L.P., borrowings under AAC’s senior secured
credit facility and the issuance of AAC’s 8.25% senior subordinated notes due
2012. As a result of the Merger, we have reflected pre-Merger periods
(“Predecessor”) for results of operations through March 25, 2004 and
post-Merger periods (“Successor”) for results of operations subsequent to
March 25, 2004 in our consolidated financial information and statements. In
November 2004, AAC Holding Corp. underwent a recapitalization transaction
pursuant to which its stockholders exchanged their shares of AAC Holding Corp.
common stock for shares of Intermediate Holdings common stock and, as a result,
AAC Holding Corp. became a wholly owned subsidiary of Intermediate
Holdings.




3


On
November 16, 2004, Intermediate Holdings issued $131.5 million
aggregate principal amount at maturity of 10.25% senior discount notes due 2012,
generating net proceeds of $89.3 million. Intermediate Holdings is the sole
obligor of these notes. The net proceeds of this offering were used as a
distribution to stockholders through the repurchase of shares of Intermediate
Holdings’ common stock from its stockholders.




On
January 18, 2006, Intermediate Holdings entered into a Preferred Stock
Purchase Agreement with an investor pursuant to which Intermediate Holdings sold
shares of its mandatory redeemable series A preferred stock. In connection with
this transaction, Intermediate Holdings issued the investor 7,500 shares of the
mandatory redeemable series A preferred stock for an aggregate purchase price of
$7.5 million, which the investor paid to Intermediate Holdings in cash. The
holders of the mandatory redeemable series A preferred stock are entitled to
receive cumulative dividends at a rate of 14% per year, when, as and if declared
by the Board of Directors of Intermediate Holdings.




On
May 8, 2006, the holders of outstanding stock of Intermediate Holdings,
agreed to form a new holding company for Intermediate Holdings, and on
May 30, 2006, reached agreement for their new company, Parent Holdings, to
affect a stock exchange with Intermediate Holdings. Pursuant to that agreement,
each holder of common stock of Intermediate Holdings contributed each of their
shares of such stock then held to Parent Holdings in exchange for a new share of
common stock of Parent Holdings and each holder of series A redeemable preferred
stock of Intermediate Holdings contributed each of their shares of such stock
then held to the Parent Holdings in exchange for a new share of series A
redeemable preferred stock of Parent Holdings. Each new share of capital stock
received in such contribution and exchange had the same rights, preferences and
privileges as the corresponding share of stock of Intermediate Holdings that was
contributed to Parent Holdings. As a result of the foregoing recapitalization,
Intermediate Holdings became a wholly owned subsidiary of Parent
Holdings.




On
June 12, 2006, Parent Holdings issued $150.0 million principal amount
of senior PIK notes due October 1, 2012. The net proceeds of this offering
were used to pay a $140.5 million dividend to the stockholders of Parent
Holdings. Because EBITDA (earnings before interest, taxes, depreciation, and
amortization), as defined in the corresponding agreement, fell below
certain target levels for the four quarters ended February 24, 2007, the rate at
which interest accrues on the senior PIK notes was increased by 2.00% to 14.75%
per annum, commencing on and including February 24, 2007. Because our
consolidated group leverage ratio, as defined in the corresponding
agreement, was greater than 5.0 to 1.0 on August 30, 2008, the rate at
which interest accrues on the senior PIK notes was increased an additional 2.00%
per annum, to a rate of 16.75%, commencing on, and including August 30, 2008.
The senior PIK notes are the unsecured senior obligation of Parent Holdings and
are not guaranteed by Intermediate Holdings or any of its
subsidiaries.




As fully
described under the “Significant Developments” section of Management’s
Discussion and Analysis of Financial Condition and Results of Operations,pursuant
to a Stock Purchase Agreement dated May 15, 2008 among Herff Jones Inc. (the
“Buyer”),Parent
Holdings and the holders of all of Parent Holdings’ equity securities (the
“Equity Holders”), the Equity Holders have agreed to sell all of the equity in
Parent Holdings to the Buyer (the “Transaction”).  The Transaction is
subject to regulatory approvals and customary closing conditions.




Parent
Holdings conducts all of its business through Intermediate Holdings and AAC and
its subsidiaries. The consolidated financial statements of Parent Holdings
include the accounts of its direct wholly-owned subsidiary, Intermediate
Holdings and its indirect wholly-owned subsidiary, AAC. Parent Holdings’
consolidated financial statements are substantially identical to Intermediate
Holdings’ consolidated financial statements, with the exception of costs related
to the Transaction, the series A preferred stock, senior PIK notes, additional
interest expense related to its series A preferred stock and senior PIK notes,
amortization of deferred financing costs, interest income on its cash balances
and the related income taxes.




Intermediate
Holdings’ only direct subsidiary is AAC Holding Corp., whose sole asset is the
stock of AAC.  Intermediate Holdings conducts all of its business
indirectly through AAC and its subsidiaries. The consolidated financial
statements of Intermediate Holdings include the accounts of its indirect
wholly-owned subsidiary, AAC. Intermediate Holdings’ consolidated financial
statements are substantially identical to AAC’s consolidated financial
statements, with the exception of the 10.25% senior discount notes, additional
interest expense related to the 10.25% senior discount notes, amortization of
deferred financing costs, interest income on its cash balances and the related
income taxes.




Business
Segments




Our
product business segments consist of four principal categories:
Class Rings, Yearbooks, Graduation Products and Other. Sales for these
segments for the most recent three fiscal years were:






($
      in thousands)
            
            Fiscal
      Year EndedSegment
            
            August
      30, 2008
            
            August
      25, 2007
            
            August
      26, 2006Class Rings
            
            $
            120,282
            
            $
            120,949
            
            $
            119,451Yearbooks
            
            
            115,084
            
            
            115,207
            
            
            114,883Graduation
      Products
            
            
            45,846
            
            
            44,428
            
            
            43,940Other
            
            
            32,191
            
            
            30,004
            
            
            21,662Total
            
            $
            313,403
            
            $
            310,588
            
            $
            299,936




4


The table
below sets forth our principal product lines, various brand names, and the
distribution channels through which we sell our products.




Product
      Lines
            
            Brand
      Names
            
            Distribution
      ChannelHigh
      School Class Rings:
            
            ArtCarved®
            
            Independent
      jewelry storesJewelry
      chainsArtCarved Class
      Rings®
            
            Independent
      jewelry storesJewelry
      chainsBalfour®
            
            On-campusKeystone®
            
            Mass
      merchandisersMaster®
            
            Mass
      merchandisersR.
      Johns®
            
            Independent
      jewelry storesCollege
      Class Rings:
            
            Balfour®
            
            College
      bookstoresDirect
      marketingYearbooks:
            
            Taylor
      Publishing
            
            On-campusHigh
      School Graduation Products:
            
            Balfour®
            
            On-campusCollege
      Graduation Products:
            
            Balfour®
            
            Direct
      marketingCollege
      bookstoresCB
      Grad
            
            College
      bookstoresAffinity
      Group Jewelry:
            
            Keepsake®
            
            Direct
      marketingR.
      Johns®
            
            Direct
      marketingBalfour®
            
            Direct
      marketingPersonalized
      Fashion Jewelry:
            
            Celebrations of
      Life®
            
            Independent
      jewelry storesJewelry
      chainsArtCarved®
            
            Independent
      jewelry storesJewelry
      chainsMass
      merchandisersKeepsake®
            
            Mass
      merchandisersGenerations of
      Love®
            
            Mass
      merchandisersNamesake®
            
            Mass
      merchandisersFan
      Affinity Sports Jewelry:
            
            Balfour
      Sports®
            
            Mass
      merchandisersCataloguesProfessional
      Sports Championship Jewelry:
            Balfour®
            
            Direct
      marketingCommercial
      Printing:
            
            Taylor
      Publishing
              Taylor
      Specialty Books
            
            Direct
      sales forceOther
      Recognition Products:
            
            Balfour®
            
            On-campusPowers
            
            Sporting
      goods stores


Class Rings




We
manufacture class rings for high school, college and university students and, to
a lesser extent, junior high school students. Our rings are marketed under
various brand names, including ArtCarved, Balfour, R. Johns, Keystone and Master
Class Rings. Our ArtCarved and Balfour brand names have been known in the
market place for over 67 years and 94 years, respectively. For most of
the schools that we serve, we are the sole on-campus class ring supplier. Our
independent sales representatives operate under contracts with us and coordinate
ring design, promotion and order processing.




We custom
manufacture each ring. We maintain an extensive inventory of unique proprietary
ring dies.  The production process takes approximately two to eight
weeks from receipt of the customer’s order to product shipment, depending on
style, option selections and new or custom tooling requirements. We use computer
aided design software to quickly and cost-effectively convert new custom designs
such as school seals, mascots and activities into physical tools capable of
producing rings in large quantities. Rings are generally produced only upon
receipt of a customer order and deposit, which reduces our credit risk. Class
ring products contributed approximately 38%, 39% and 40% of our net sales
in fiscal years 2008, 2007 and 2006, respectively.




Yearbooks




We
produce yearbooks for high school, college, junior high school and elementary
school students. We also publish specialty commercial books including military
yearbooks, which, for example, commemorate naval tours of duty at sea. We are
one of the leading providers of yearbooks. All of our yearbooks are sold under
the Taylor Publishing brand name.


5


We
typically enter into one-year contracts with schools, although some of our
contracts are multi-year agreements. Our independent sales representatives
operate under contracts with us and develop strong relationships with schools as
they assist students and faculty advisors throughout the design process and
provide technical and marketing support. We have made major advances in yearbook
systems and design. We believe we were the first yearbook provider to fully
integrate digital technology throughout our production process which has led to
increased output speed and enhanced print quality. We are also a leading
provider of online desktop publishing technology which provides our customers
with exceptional versatility and productivity in publishing their
yearbook.




We
publish yearbooks in our own facilities. Since 1993, we have made significant
expenditures on proprietary software and hardware to support electronic
platforms for creating, transmitting and managing yearbook production and
printing technology. We also offer full production support for off-the-shelf
desktop publishing tools. In the last six fiscal years, we have upgraded our
printing presses and fully integrated digital technology throughout our
production process to, among other things, increase the speed of output and
automatically monitor ink flow and control color composition. This new
technology allows Taylor to fulfill the dominant customer need in the industry
over the past several years; high-quality full-color printing. The foregoing
technology upgrades and enhancements have enabled us to reduce manufacturing
costs and improve on-time delivery, performance and print quality. Yearbook
products contributed approximately 37% of our net sales in each of the fiscal
years 2008 and 2007 and approximately 38% of our net sales in fiscal year
2006.




Graduation
Products




We offer
a full array of graduation products to high school and college students through
our network of independent class ring sales representatives, as well as through
college bookstores. Our graduation product line includes personalized graduation
announcements, name cards, thank you notes, diplomas, mini diplomas, diploma
covers, certificates, appreciation gifts, graduation soft goods and other fine
paper accessory items. In addition to our fine paper accessories, we also offer
caps and gowns for high school and college students. Our graduation products are
sold under the Balfour and CB Grad brand names.




A
majority of our graduation products are personalized to some degree and have
short production runs and cycles. We manufacture these products at our own
facilities and distribute them through our independent high school class ring
sales representatives and college bookstores.




We have
enhanced our college website to enable students and their parents to order
graduation products online. We believe that, over time, this will increase sales
of our graduation products and, in particular, personalized college
announcements that include a student’s name, degree and other personal
information in the text of the announcement. We also intend to leverage our
existing channels of distribution and, in particular, our presence in college
bookstores, to further increase sales of these products. Graduation products
contributed approximately 15%, 14% and 15% of our net sales
in fiscal years 2008, 2007 and 2006, respectively.




Other




Our other
products are primarily recognition and affinity jewelry, which consist of the
following product categories:




·
            Affinity
      Group Jewelry.Affinity group jewelry is sold to members of large
      groups and associations. The jewelry features emblems of, and otherwise
      commemorates accomplishments within, the group. Through our Balfour brand,
      we provide affinity rings to military personnel that recognize affiliation
      and completion of specialized training ranging from basic training to
      special forces.




·
            Personalized
      Fashion Jewelry.Our personalized fashion jewelry products include
      rings commemorating children’s birth dates, which feature a level of
      personalization, such as birthstones and names, which distinguishes us
      from our competitors. We also sell other personalized jewelry, such as
      necklaces and bracelets, designed to commemorate family events. We provide
      personalized family jewelry under our Celebrations of Life, ArtCarved,
      Generations of Love, Keepsake and Namesake brand
      names.




·
            Professional
      Sports Championship Jewelry.We provide sports championship jewelry
      for professional teams and their members and have, for example, produced
      several World Series, Super Bowl and Stanley Cup rings, including all of
      the rings for the New York Yankees’ 26 championships, and most recently
      supplied the 2007 Boston Celtics National Basketball Association
      Championship ring. We provide sports championship jewelry under the
      Balfour brand.




·
            Commercial
      Printing.We provide a variety of printing products for the
      commercial market. We provide these products under the Taylor Publishing
      and Taylor Specialty Books
brands.




·
            Recognition
      Products. Our
      other recognition products include letter jackets, loose and applied
      chenille, inserts, pins, banners, and embroidered soft goods that
      commemorate accomplishments in sports, band or other school based
      organizations.  Our products are marketed under Balfour to
      on-campus and under Powers to sporting goods retailers.  These
      products  are also marketed to corporations and businesses as
      corporate affinity
      products.




6


Other


We
manufacture many of the products in this segment in our own facilities and some
of the products are also manufactured at independent overseas
manufacturers.  Other products contributed approximately 10% of our
net sales in fiscal years 2008 and 2007 and approximately 7% of our net sales in
fiscal year 2006.




Sales
and Marketing




At the
high school level, class rings are sold through two distribution channels:
independent sales representatives selling directly to students and retail
stores. Our high school class rings are sold by retailers including independent
jewelry retailers, many of the nation’s largest jewelry chains, including Zales,
Gordons and Sterling, and by mass merchandisers, such as Wal-Mart, JC Penney,
and K-Mart. We sell different brands and product lines in retail stores in order
to enable them to differentiate their products from those sold by our
independent sales representatives directly to students at schools. College
rings are sold primarily through college bookstores and colleges by our employee
sales representatives. Historically, college bookstores have been owned and
operated by academic institutions. Over the last several years, an increasing
number of college bookstores have been leased to contract operators, primarily
Barnes and Noble Bookstores and Follett Corporation, with whom we have
longstanding relationships. Decisions to include our products are typically made
on a national basis by each bookstore operator.




Yearbooks
are produced under an exclusive contract with each school for the academic year
and are sold directly to students by the school. Under the terms of the
contract, the school agrees to pay us a base price for producing the yearbook.
This price sometimes increases between order receipt and production as a result
of enhancements to the contract specifications, such as additional color pages.
Our independent yearbook sales representatives call on schools at the contract
stage. Thereafter, they coordinate between the school’s yearbook committee and
our customer service and plant employees to ensure satisfactory quality and
service.




Graduation
products are sold directly to students through our network of independent high
school class ring sales representatives and in college bookstores and colleges
through our network of employee and independent sales representatives. Other
affinity products are sold through a variety of distribution channels, including
direct marketing, mass merchandisers, catalogs and retail stores.




We
compensate our independent sales representatives and college bookstores on a
commission basis. Some colleges also receive compensation in the form of royalty
payments. Most independent sales representatives also receive a monthly advance
against commissions earned, although all expenses, including promotional
materials made available by us, are the responsibility of the representative.
Our independent sales representatives operate under exclusive contracts that
include non-compete arrangements. Our independent high school class ring
and independent yearbook sales representatives have average tenures with our
company of approximately 15 and 11 years, respectively.   Employee
sales representatives receive a combination of salary and sales
incentives.




Intellectual
Property




We have
trademarks, patents and licenses that in the aggregate are an important part of
our business. However, we do not regard our business as being materially
dependent upon any single trademark, patent or license. We have trademark
registration applications pending and intend to pursue other registrations as
appropriate to establish and preserve our intellectual property
rights.




We market
our products under many trademarked brand names, some of which rank among the
most recognized and respected names in jewelry and publications. Generally, a
trademark registration will remain in effect so long as the trademark remains in
use by the registered holder and any required renewals are obtained. We own
several patented ring designs and business process patents.




The
following are some of the more prominent marks, which are registered pursuant to
applicable intellectual property laws and are the property of AAC or its
subsidiaries: “ArtCarved,” “ArtCarved Class Rings”, “Balfour,” “Balfour Sports,”
“Keystone,” “Master,” “R. Johns,”  “Keepsake,” “Celebrations of Life,”
“Generations of Love,” “Namesake,” and the various logos related to the
foregoing brands.




7


Competition




We face
competition for most of our principal products.  While the class ring,
graduation products and yearbook markets were once concentrated, consisting of a
few large national manufacturers (of which we were one) advances in technology
and the emergence of international manufacturing have significantly lowered the
costs of entry.  Major domestic mass merchant and jewelry chain
retailers now effectively compete in the class ring business and the traditional
yearbook and graduation products businesses now face considerable competition
from regional and local printers and internet-based purveyors of yearbook and
alternative web-based virtual products.  Competition from alternative
sales channels is robust in virtually all market categories.




Our
principal competitors in the class ring and graduation products markets are
Jostens, Inc. and Herff Jones, Inc., which compete with us nationally across all
product lines. Our principal competitors in the yearbook market are Jostens,
Herff Jones and Walsworth Publishing Company. All competitors in the scholastic
products market compete primarily on the basis of quality, marketing and
customer service and, to a lesser extent, price.




Our
affinity group jewelry products, fan affinity sports jewelry and products and
our professional sports championship jewelry businesses compete with Jostens
and, to a lesser extent, with various other companies. Our personalized fashion
jewelry products compete mainly with smaller regional companies. We compete with
our affinity product competitors primarily on the basis of quality, marketing,
customer service and price.




Raw
Material and Suppliers




Numerous
raw materials are used in the manufacture of our products. Gold and other
metals, precious, semi-precious and synthetic stones, paper products and ink
comprise the bulk of the raw materials we utilize in the largest segments of our
business. We purchase a majority of our gold from a single supplier. We may
consign a portion of our gold and pay for gold as our products are shipped to
customers. We also purchase the majority of our semi-precious and synthetic
stones from a single supplier who we believe supplies substantially all of these
types of stones to almost all of the class ring manufacturers in the United
States. Synthetic and semi-precious stones are available from other suppliers,
although switching to these suppliers could result in additional costs to
us.




Prices of
these materials, especially gold, continually fluctuate. We periodically reset
our prices to reflect the then current prices of raw materials. In addition, we
may engage in various hedging transactions to reduce the effects of fluctuations
in the price of gold. We also negotiate paper prices on an annual basis so that
we are able to estimate yearbook and graduation announcement costs with greater
certainty.




Seasonality




The
seasonal nature of our various businesses tends to be tempered by our broad
product mix. Class ring sales are highest during October through December and
early spring, with many orders made for delivery to students before the winter
holiday season. Graduation product sales are predominantly made during February
through April prior to the April through June graduation season. Yearbook sales
are highest during the months of April through June, as yearbooks are typically
shipped prior to each school’s summer break. Our recognition and affinity
product line sales are also seasonal, with highest sales during the winter
holiday season and in the period leading up to Mother’s Day.




As a
result of the foregoing, we have experienced operating losses during our first
and fourth fiscal quarters, which includes the beginning of the school year and
the summer months when school is not in session, thus reducing related shipment
of products. In addition, our working capital requirements tend to exceed our
operating cash flows from May through September.




Backlog




Because
of the nature of our business, all orders (except yearbooks) are generally
filled between two and eight weeks after the time of placement. We enter into
yearbook contracts several months prior to delivery. While yearbook base prices
are established at the time of order, final prices are often not calculated at
that time since the content typically changes prior to publication. We estimate
(calculated on the basis of the base price of yearbooks ordered) that the
backlog of orders related to continuing operations was approximately $106
million as of August 30, 2008, almost exclusively related to student yearbooks.
We expect substantially all of this backlog to be filled in fiscal
2009.




8




Employees




Given the
seasonality of our business, the size of our employee base fluctuates throughout
the year, with the number typically being highest during September through May
and lowest from June to August. As of August 30, 2008, we had approximately
1,600employees.
We believe that our employee relations are good.  Some of our
production employees are represented by unions. Hourly production and
maintenance employees located at our Austin, Texas manufacturing facility are
represented by the United Brotherhood of Carpenters and Joiners Union. The
United Brotherhood of Carpenters and Joiners Union signed a collective
bargaining agreement that will expire in May of 2009. Some hourly production
employees at our Dallas facility are represented by the Graphic Communications
Conference/International Brotherhood of Teamsters Local 367M. We have two
collective bargaining agreements in place with this Union.  One
agreement expires in July 2009 and the other in
February 2010.




Environmental




We are
subject to applicable federal, state and local laws, ordinances and regulations
that establish various health and environmental quality standards. Past and
present manufacturing operations subject us to environmental laws and
regulations that seek to protect human health or the environment, governing
among other things the use, handling and disposal or recycling of, or exposure
to, hazardous or toxic substances, the remediation of contaminated sites,
emissions into the air and the discharge of wastewaters. We believe that our
business, operations and facilities are in substantial compliance with all
material environmental laws and regulations, many of which provide for
substantial fines and criminal sanctions for violations. We believe that we have
adequate environmental insurance and indemnities to sufficiently cover any
currently known material environmental liabilities and that we do not currently
face environmental liabilities that could have a material adverse affect on our
financial condition or results of operations.




Item 1A. Risk
Factors




Our
substantial indebtedness could adversely affect our financial health and prevent
us from fulfilling our financial obligations.




We
have a significant amount of indebtedness. On August 30, 2008, Parent Holdings’
total indebtedness is $566.5 million (of which $203.1 million consisted of the
senior PIK notes, $130.4 million consisted of the 10.25% senior discount notes,
$7.5 million consisted of our mandatory redeemable series A preferred
stock, $150.0 million consisted of the existing 8.25% senior subordinated notes
and $75.5 million consisted of indebtedness under the existing senior
secured credit facility).




Our
substantial indebtedness could have important consequences to you.  For
example, it could:




·
              make it more
      difficult for us to satisfy our obligations with respect to our
      indebtedness;·
              increase our
      vulnerability to general adverse economic and industry
    conditions;·
              require us to
      dedicate a substantial portion of our cash flow from operations to
      payments on our indebtedness, thereby reducing the availability of our
      cash flow working capital, capital expenditures, research and development
      efforts and other general corporate purposes;·
              limit our
      flexibility in planning for, or reacting to, changes in our business and
      the industry in which we operate;·
              place us at a
      competitive disadvantage compared to our competitors that have less debt;
      and·
              limit our ability to
      borrow additional funds




To
service our indebtedness, we require a significant amount of cash. Our ability
to generate cash depends on many factors beyond our control.


Our
ability to make payments on and to refinance our indebtedness, including the
notes, and to fund planned capital expenditures and research and development
efforts, depends on our ability to generate cash in the future. Our ability to
do so, to a certain extent, is subject to general economic, financial,
competitive, legislative and other factors that are beyond our
control.


We
cannot assure you that our business will generate sufficient cash flow from
operations and that currently anticipated cost savings and operating
improvements will be realized on schedule or that future borrowings will be
available under the existing senior secured credit facility in an amount
sufficient to enable us to pay our indebtedness or to fund our other liquidity
needs. We may need to refinance all or a portion of our indebtedness, on or
before maturity. We cannot assure you that we will be able to refinance any of
our indebtedness, including the existing senior secured credit facility, the
10.25% senior discount notes, the 8.25% senior subordinated notes and the senior
PIK notes, on commercially reasonable terms or at
all.




9


Restrictions
in the indentures governing the senior PIK notes, the 10.25% senior discount
notes, the 8.25% senior subordinated notes and the existing senior secured
credit facility may prevent us from taking actions that we believe would be in
the best interest of our business.




The
indentures governing the senior PIK notes, the 10.25% senior discount notes, the
8.25% senior subordinated notes and the existing senior secured credit facility
contain customary restrictions on us or our subsidiaries, including covenants
that restrict us or our subsidiaries, as the case may be, from:




·
            incurring
      additional indebtedness and issuing preferred
  stock;


·
            granting
      liens on our assets;


·
            making
      investments;


·
            consolidating
      or merging with, or acquiring, another
business;


·
            selling
      or otherwise disposing of our
assets;


·
            paying
      dividends and making other distributions with respect to our capital
      stock, or purchasing, redeeming or retiring our capital
    stock;


·
            entering
      into transactions with our affiliates;
and


·
            entering
      into sale and leaseback
transactions.





The
existing senior secured credit facility also requires AAC to meet specified
financial ratios. These restrictions may prevent us from taking actions that we
believe would be in the best interest of our business, and may make it difficult
for us to successfully execute our business strategy or effectively compete with
companies that are not similarly restricted.




If
we are unable to maintain our business or further implement our business
strategy, our business and financial condition could be adversely
affected.




Our
ability to meet our debt service and other obligations depends significantly on
how successful we are in maintaining our business and further implementing our
business strategy. Our business plan envisions several long-term growth
initiatives, including the development of new products. We may not be able to do
either of the foregoing and the anticipated results of our strategy may not be
realized. The components of our strategy are subject to significant business,
economic and competitive uncertainties and contingencies, many of which are
beyond our control. If we are unable to continue to successfully maintain our
business and implement our business strategy, our long-term growth and
profitability may be adversely affected.





In
addition, the business strategy that we intend to pursue is based on our
operations and strategic planning process. We may decide to alter or discontinue
parts of this strategy or may adopt alternative or additional strategies. The
strategies implemented may not be successful and may not improve our operating
results. Further, other conditions may occur, including increased competition,
which may offset any improved operating results attributable to our business
strategy.




We
face significant competition from various competitors.




We
face competition for most of our principal products.  While the class
ring, graduation products and yearbook markets were once concentrated,
consisting of a few large national manufacturers (of which we were one) advances
in technology and the emergence of international manufacturing have
significantly lowered the costs of entry.  Major domestic mass
merchant and jewelry chain retailers now effectively compete in the class ring
business and the traditional yearbook and graduation products businesses now
face considerable competition from regional and local printers and
internet-based purveyors of yearbook and alternative web-based virtual
products.  Competition from alternative sales channels is robust in
virtually all market categories.We
may not be able to compete successfully with our competitors, some of whom may
have greater resources, including financial resources, than we
have.




Increased
prices for raw materials or finished goods used in our products could adversely
affect our profitability or revenues.




Numerous
raw materials are used in the manufacture of our products. Gold and other
metals, precious, semi-precious and synthetic stones, paper products and ink
comprise the bulk of the raw materials we utilize in the largest segments of our
business. Prices of these materials, especially gold, continually fluctuate. Any
material long-term increase in the price of one or more of our raw materials
could have a direct adverse impact on our cost of sales. In addition, we may be
unable to pass on the increased costs to our customers. Our inability to pass on
these increased costs could adversely affect our results of operations,
financial condition and cash flow.


10


Our operating results are
dependent upon the market price of gold. We have no control over gold prices,
which can fluctuate widely and are affected by numerous factors, such as supply
and demand and investor sentiment. We will at times, enter into forward sale
contracts and/or, put/call option contracts to hedge the effects of price
fluctuations. We continually evaluate the potential benefits ofengaging in these
strategies based on current market conditions, but there can be no assurance
that we will be able to hedge in the future on similar economic terms, or that
any of the hedges we enter into will be effective. We may be exposed to
nonperformance by counterparties or, during periods of significant price
fluctuation, margin calls as a result of our hedging activities. Each ten
percent change in the price of gold would result in a change of
$3.6 million in cost of goods sold, assuming gold purchase levels
approximate the levels in the fiscal year 2008. An unfavorable change in the
cost of gold, or an improper hedging strategy, could adversely affect our
results of operations.




Currency
exchange rate fluctuations may adversely affect our results of
operations.




We
have been subject to market risk associated with foreign currency exchange
rates. We purchase the majority of our precious, semi-precious and synthetic
stones from a single supplier in Germany. 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; however, during the fiscal years 2008 and
2007, we did not purchase any Euro forward contracts and did not have any such
contracts outstanding. Each ten percent change in the Euro exchange rate would
result in a $0.5 million change in cost of goods sold, assuming stone
purchase levels approximate those levels in the fiscal 2008. An unfavorable
change in the exchange rates could adversely affect our results of
operations.




Many
of our products or components of our products are provided by a limited number
of third-party suppliers.




Virtually
all of the synthetic stones used in our class rings are purchased from a single
supplier. We believe that most of the class ring manufacturers in the United
States purchase substantially all of these types of stones from this supplier.
If this supplier was unable to supply us with stones, or if this supplier’s
inventory of stones significantly decreased, our ability to manufacture rings
featuring these stones would be adversely affected. If we were required to
secure a new source for these stones, we might not be able to do so on terms as
favorable as our current terms, which could adversely affect our results of
operations and financial condition. Even if acceptable alternatives were found,
the process of locating and securing such alternatives might be disruptive to
our business. Extended unavailability of a necessary raw material or finished
good used in our products could cause us to cease manufacturing one or more
products for a period of time.




Our
future operating results are dependent on maintaining our relationships with our
independent sales representatives.




We
rely on the efforts and abilities of our network of independent sales
representatives to sell our class ring, yearbook and graduation products. Most
of our relationships with customers and schools are cultivated and maintained by
our independent sales representatives. If we were to lose a significant number
of our independent sales representatives, it could adversely affect our results
of operations, financial condition and cash flow.




Our
performance may fluctuate with the financial condition of, or loss of, our
retail customers.




A
portion of our jewelry products are sold through major retail stores, including
mass merchandisers, jewelry store chains and independent jewelry stores. As a
result, our business and financial results may be adversely impacted by adverse
changes in the financial conditions of these retailers, loss of the retailer’s
business, the general condition of the retail industry and the economy overall.
Specifically, bankruptcy filings by these retailers could adversely affect our
results of operations, financial condition and cash flow.




The
seasonality of our sales may have an adverse effect on our operations and our
ability to service our debt.




Our
business experiences strong seasonal swings that correspond to the typical U.S.
academic year. Class ring sales are highest during October through December and
early spring, yearbook sales are highest during April and June, and our
graduation product sales are highest during February through
April.  If our sales were to fall substantially below what we would
normally expect during these periods, our annual financial results would be
adversely impacted and our ability to service our debt could also be adversely
affected.




We
are subject to environmental laws and regulations that could impose substantial
costs upon us and may adversely affect our financial results.




We
are subject to applicable federal, state and local laws, ordinances and
regulations that establish various health and environmental quality standards.
Past and present manufacturing operations subject us to environmental laws and
regulations that seek to protect human health or the environment governing,
among other things, the use, handling and disposal or recycling of, or exposure
to, hazardous or toxic substances, the remediation of contaminated sites,
emissions into the air and discharge of wastewaters. In the event that
environmental liabilities are in excess of, or not covered by, our environmental
insurance and indemnities, this could have a material adverse affect on our
results of operations, financial condition and cash flow.


11


Our
business could be adversely affected by unforeseen economic and political
conditions.




Although
we believe that growth in the scholastic products market is determined primarily
by demographics, we are not fully insulated against economic downturns and
unforeseen economic conditions. A weakening of the U.S. economy, an increase in
the unemployment rate, decreased consumer disposable income, decreased consumer
confidence in the economy and other economic factors could adversely affect our
results of operations, financial condition and cash flow.




We
rely on proprietary rights which may not be adequately protected.




Our
efforts to protect and defend our intellectual property rights may not be
successful, and the costs associated with protecting our rights in certain
jurisdictions could be extensive. The loss or reduction of any of our
significant proprietary rights could hurt our ability to distinguish our
products from competitors’ products and retain our market shares.




We
depend on numerous complex information systems, and any failure to successfully
maintain those systems or implement new systems could materially harm our
operations.




We
depend upon numerous information systems for operational and financial
information and billing operations. We may not be able to maintain or enhance
existing or implement new information systems. We intend to continue to invest
in and administer sophisticated management information systems, and we may
experience unanticipated delays, complications and expenses in implementing,
integrating and operating our systems. Furthermore, our information systems may
require modifications, improvements or replacements that may require substantial
expenditures and may require interruptions in operations during periods of
implementation. Moreover, implementation of these systems is subject to the
availability of information technology and skilled personnel to assist us in
creating and implementing the systems. The failure to successfully implement and
maintain operational, financial, testing and billing information systems could
have an adverse effect on our results of operations, financial condition and
cash flow.




Our
results of operations are dependent on certain principal production
facilities.




We
are dependent on certain key production facilities. Any disruption of production
capabilities at our production facilities, including our Dallas yearbook
and Austin class ring facilities, or at independent overseas manufacturers
providing any outsourced manufacturing operations for a significant term could
lead to the loss of customers during any period which production is interrupted,
and could adversely affect our business, financial condition and results of
operations.




Our
stockholders’ interests may conflict with interests of our other
investors.




An
investor group led by Fenway Partners Capital Fund II, L.P. owns substantially
all of Parent Holdings’ outstanding stock. As a result, these investors are in a
position to control all matters affecting us, including controlling decisions
made by our board of directors, such as the approval of acquisitions and other
extraordinary business transactions, the appointment of members of our
management and the approval of mergers or sales of substantially all of our
assets. The interests of these investors in exercising control over our business
may conflict with interests of our other investors.




We
may be adversely affected if the Transaction is not completed.




There is
no assurance that the conditions to the completion of the Transaction will be
satisfied or waived, that the necessary approvals will be obtained, or that we
will be able to successfully consummate the Transaction as provided for under
the Stock Purchase Agreement, if at all. In the event that the Transaction is
not completed, we may be subject to several risks including the following: we
may not realize any or all of the potential benefits of the Transaction,
including any synergies that could result from combining the resources of the
Company and the Buyer; we will remain liable for significant transaction costs,
including legal, accounting, financial advisory and other costs relating to the
Transaction even if it is not consummated; management’s attention from our day
to day business may be diverted; and uncertainties with regards to the
Transaction may adversely affect our relationships with our employees, vendors
and customers.




The
announcement of the Transaction could have an adverse effect on our business in
the near term.




Our business partners and
customers may delay, defer or cancel purchases pending the consummation of the
Transaction. The Transaction may also adversely affect our ability to attract
and retain key personnel. Activities relating to the Transaction and related
uncertainties could divert the attention of our management and employees from
our day-to-day business, which could cause disruptions among our relationships
with business partners and customers, and cause our employees to seek
alternative employment, all of which could detract from our ability to generate
revenue and control costs. In addition, the Stock Purchase Agreement imposes
affirmative and negative restrictions on the operations of our business. Without
the consent of the Buyer, we may be restricted from making
certain acquisitions and taking other specified actions until the
Transactioncloses
or is terminated. These restrictions may prevent us from pursuing otherwise
attractive business opportunities and making other changes to our business prior
to completion of the Transaction or its
termination.


12




Item 1B. Unresolved
Staff Comments




None.


Item 2. Properties




Our
headquarters and principal executive offices are located at 7211 Circle S Road,
Austin, Texas. A summary of the physical properties that we use follows in the
table below.  We believe that our facilities are suitable for their
purpose and adequate to meet our business operations requirements. The extent of
utilization of individual facilities varies due to the seasonal nature of our
business.




Approximate
      Location
            
            Type
      of Property
            
            Leased
      or Owned
            
            Square
      FootageAustin,
      TX
            
            Corporate
      headquarters
            
            Owned
            
            23,000Austin,
      TX
            
            Jewelry
      manufacturing and administration
            
            Owned
            
            108,000Austin,
      TX
            
            Warehouse
      facility
            
            Leased
            
            38,600Dallas,
      TX
            
            Yearbook
      administration and manufacturing
            
            Owned
            
            327,000El
      Paso, TX
            
            Yearbook
      pre-press
            
            Leased
            
            50,000Louisville,
      KY
            
            Graduation
      products manufacturing
            
            Leased
            
            100,000Manhattan,
      KS
            
            Graduation
      products manufacturing
            
            Leased
            
            6,000Juarez,
      Mexico
            
            Jewelry
      manufacturing
            
            Leased
            
            20,000Waco,
      TX
            
            Recognition
      product manufacturing
            
            Leased
            
            51,000




Item 3. Legal
Proceedings




In the
normal course of business, we may be a party to lawsuits and administrative
proceedings before various courts and government agencies. These lawsuits and
proceedings may involve personal injury, contractual issues and other matters.
We cannot predict the ultimate outcome of any pending or threatened litigation
or of actual claims or possible claims.




We
currently are not a party to any pending legal proceedings other than ordinary
routine litigation incidental to our business. In management’s opinion, adverse
decisions on these ordinary legal proceedings, individually or in the aggregate,
would not have a materially adverse impact on our results of operations,
financial condition or cash flows.




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




None.


13


PART
II




Item 5. Market
for Registrants’ Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities




None
of our stock is publicly traded. Parent Holdings has six holders of its common
stock and one holder of its series A redeemable preferred stock.




Item 6. Selected
Financial Data




Parent
Holdings, Intermediate Holdings, and AAC are treated as entities under common
control. The Selected Financial Data of Parent Holdings prior to its formation
date of May 2006 represent entirely those of its wholly-owned subsidiary,
Intermediate Holdings and its indirect wholly-owned subsidiary, AAC. For periods
subsequent to the formation date, other than costs related to the Transaction,
the series A preferred stock, cash and the interest income thereon, debt
obligations related to the senior PIK notes, related deferred issuance costs and
associated accrued liabilities, and related interest expense, net of taxes, all
other assets, liabilities, income, expenses and cash flows presented represent
those of Parent Holdings’ wholly-owned subsidiary Intermediate Holdings and the
indirect subsidiary of Intermediate Holdings, AAC. The Selected Financial Data
of Intermediate Holdings prior to its formation date of November 2004 represents
entirely those of its wholly-owned indirect subsidiary, AAC. For periods
subsequent to the formation date, other than its cash and interest income
thereon, debt obligation related to the 10.25% senior discount notes due 2012,
related deferred issuance costs and associated accrued liabilities and related
interest expense, net of taxes, all other assets, liabilities, income, expenses
and cash flows presented represent those of Intermediate Holdings’ wholly-owned
indirect subsidiary AAC and the direct and indirect subsidiaries of
AAC.




On
March 25, 2004, AAC Acquisition Corp., a wholly owned subsidiary of AAC
Holding Corp., merged with and into AAC (the “Merger”), with AAC continuing as
the surviving corporation and a wholly-owned subsidiary of AAC Holding Corp. In
November 2004, AAC Holding Corp. underwent a recapitalization transaction
pursuant to which its stockholders exchanged their shares of AAC Holding Corp.
common stock for shares of Intermediate Holdings common stock and as a result,
AAC Holding Corp. became a wholly owned subsidiary of Intermediate
Holdings.




As
a result of the Merger, we have reflected pre-Merger periods (“Predecessor”) for
results of operations prior to and including March 25, 2004 and post-Merger
periods (“Successor”) for results of operations including and subsequent to
March 26, 2004 in our consolidated financial information.




The
Predecessor referred to in the table below is our business as it existed prior
to the consummation of the Merger. We completed the Merger as of March 25,
2004 and as a result of adjustments to the carrying value of assets and
liabilities resulting from the Merger, the financial position and results of
operations for periods subsequent to the Merger may not be comparable to those
of our Predecessor company.




The
summary historical consolidated financial data should be read in conjunction
with “Management’s Discussion and Analysis of Financial Condition and Results of
Operations”, the consolidated financial statements and the related notes thereto
appearing elsewhere in this report. The summary historical consolidated
financial data set forth below for and as of the end of the period from
August 31, 2003 to March 25, 2004, has been derived from the
Predecessor audited consolidated financial statements. The summary historical
consolidated financial data set forth below for and as of the period from
March 26, 2004 through August 28, 2004, and the fiscal years ended
August 27, 2005, August 26, 2006, August 25, 2007 and August 30,
2008 has been derived from the Successor audited consolidated financial
statements.




As fully described under
the “Significant Developments” section of Management’s Discussion and Analysis
of Financial Condition and Results of Operations, on October 26, 2007, the
Company decided to shut down the operations of its achievement publications
segment.  The
results of operations of the achievement publications business are reported as
discontinued operations in the consolidated income statements for all periods
presented.


14






Parent
      HoldingsSuccessor
              
              PredecessorThe
      period from
              
              The
      period fromFiscal
      Year Ended
              
              March
      26, 2004
              
              August
      31, 2003August
      30,
              
              August
      25,
              
              August
      26,
              
              August
      27,
              
              to
              
              to($
      in thousands)
              2008
              
              2007
      (1)
              
              2006
              
              2005
              
              August
      28, 2004 (2)
              
              March
      25, 2004 (3)Statement
      of Operations Data:Net
      sales
              
              $
              313,403
              
              
              $
              310,588
              
              
              $
              299,936
              
              
              $
              293,678
              
              
              $
              159,084
              
              
              $
              135,031Cost
      of sales
              
              
              140,373
              
              
              
              138,892
              
              
              
              130,145
              
              
              
              130,755
              
              
              
              82,160
              
              
              
              58,046Gross
      profit
              
              
              173,030
              
              
              
              171,696
              
              
              
              169,791
              
              
              
              162,923
              
              
              
              76,924
              
              
              
              76,985Selling,
      general and administrative expenses (7)
              
              
              140,552
              
              
              
              126,731
              
              
              
              129,334
              
              
              
              133,712
              
              
              
              57,810
              
              
              
              69,574Other
      charges (4)
              
              
              -
              
              
              
              5,262
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Operating
      income
              
              
              32,478
              
              
              
              39,703
              
              
              
              40,457
              
              
              
              29,211
              
              
              
              19,114
              
              
              
              7,411Interest
      expense, net
              
              
              64,479
              
              
              
              59,275
              
              
              
              39,350
              
              
              
              31,271
              
              
              
              10,257
              
              
              
              14,070Income
      (loss) from continuing operations before income taxes
              
              
              (32,001
              )
              
              
              (19,572
              )
              
              
              1,107
              
              
              
              (2,060
              )
              
              
              8,857
              
              
              
              (6,659
              )Provision (benefit)
      for income taxes
              
              
              (8,396
              )
              
              
              (4,319
              )
              
              
              1,401
              
              
              
              (456
              )
              
              
              3,650
              
              
              
              (812
              )Income
      (loss) from continuing operations
              
              
              (23,605
              )
              
              
              (15,253
              )
              
              
              (294
              )
              
              
              (1,604
              )
              
              
              5,207
              
              
              
              (5,847
              )Discontinued
      operations:Income
      (loss) from discontinued operations before income taxes
              
              
              (7,235
              )
              
              
              (28,406
              )
              
              
              2,085
              
              
              
              5,610
              
              
              
              2,068
              
              
              
              2,076Provision
      (benefit) for income taxes
              
              
              (9,123
              )
              
              
              (11,108
              )
              
              
              815
              
              
              
              2,194
              
              
              
              809
              
              
              
              812Income
      (loss) from discontinued operations
              
              
              1,888
              
              
              
              (17,298
              )
              
              
              1,270
              
              
              
              3,416
              
              
              
              1,259
              
              
              
              1,264Net
      income (loss)
              
              $
              (21,717
              )
              
              $
              (32,551
              )
              
              $
              976
              
              
              $
              1,812
              
              
              $
              6,466
              
              
              $
              (4,583
              )Balance
      Sheet Data (at end of period):Total
      assets
              
              $
              459,117
              
              
              $
              476,066
              
              
              $
              511,276
              
              
              $
              512,936
              
              
              $
              530,986
              
              
              $
              553,589Total
      debt (5)
              
              
              566,543
              
              
              
              546,253
              
              
              
              535,790
              
              
              
              388,492
              
              
              
              314,604
              
              
              
              317,504Total
      stockholders’ equity (deficit)
              
              
              (166,180
              )
              
              
              (144,183
              )
              
              
              (117,786
              )
              
              
              23,818
              
              
              
              108,512
              
              
              
              102,046Other
      Data:EBITDA
      (6)
              
              $
              50,472
              
              
              $
              36,289
              
              
              $
              67,618
              
              
              $
              60,102
              
              
              $
              31,526
              
              
              $
              20,402Capital
      expenditures
              
              
              12,579
              
              
              
              10,594
              
              
              
              12,511
              
              
              
              12,795
              
              
              
              3,665
              
              
              
              12,793Depreciation
      and amortization
              
              
              25,229
              
              
              
              25,000
              
              
              
              25,095
              
              
              
              25,281
              
              
              
              10,344
              
              
              
              8,530
  15


Intermediate
      HoldingsSuccessor
            
            PredecessorThe
      period from
            
            The
      period fromFiscal
      Year Ended
            
            March
      26, 2004
            
            August
      31, 2003August
      30,
            
            August
      25,
            
            August
      26,
            
            August
      27,
            
            to
            
            to($
      in thousands)
            2008
            
            2007
      (1)
            
            2006
            
            2005
            
            August
      28, 2004 (2)
            
            March
      25, 2004 (3)Statement
      of Operations Data:Net
      sales
            
            $
            313,403
            
            
            $
            310,588
            
            
            $
            299,936
            
            
            $
            293,678
            
            
            $
            159,084
            
            
            $
            135,031Cost
      of sales
            
            
            140,373
            
            
            
            138,892
            
            
            
            130,145
            
            
            
            130,755
            
            
            
            82,160
            
            
            
            58,046Gross
      profit
            
            
            173,030
            
            
            
            171,696
            
            
            
            169,791
            
            
            
            162,923
            
            
            
            76,924
            
            
            
            76,985Selling,
      general and administrative expenses
            
            
            132,809
            
            
            
            126,731
            
            
            
            129,334
            
            
            
            133,712
            
            
            
            57,810
            
            
            
            69,574Other
      charges (4)
            
            
            -
            
            
            
            5,262
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Operating
      income
            
            
            40,221
            
            
            
            39,703
            
            
            
            40,457
            
            
            
            29,211
            
            
            
            19,114
            
            
            
            7,411Interest
      expense, net
            
            
            32,769
            
            
            
            33,522
            
            
            
            34,265
            
            
            
            31,271
            
            
            
            10,257
            
            
            
            14,070Income
      (loss) from continuing operations before income taxes
            
            
            7,452
            
            
            
            6,181
            
            
            
            6,192
            
            
            
            (2,060
            )
            
            
            8,857
            
            
            
            (6,659
            )Provision (benefit)
      for income taxes
            
            
            3,765
            
            
            
            3,875
            
            
            
            3,170
            
            
            
            (456
            )
            
            
            3,650
            
            
            
            (812
            )Income
      (loss) from continuing operations
            
            
            3,687
            
            
            
            2,306
            
            
            
            3,022
            
            
            
            (1,604
            )
            
            
            5,207
            
            
            
            (5,847
            )Discontinued
      operations:Income
      (loss) from discontinued operations before income taxes
            
            
            (7,235
            )
            
            
            (28,406
            )
            
            
            2,085
            
            
            
            5,610
            
            
            
            2,068
            
            
            
            2,076Provision
      (benefit) for income taxes
            
            
            (9,123
            )
            
            
            (11,108
            )
            
            
            815
            
            
            
            2,194
            
            
            
            809
            
            
            
            812Income
      (loss) from discontinued operations
            
            
            1,888
            
            
            
            (17,298
            )
            
            
            1,270
            
            
            
            3,416
            
            
            
            1,259
            
            
            
            1,264Net
      income (loss)
            
            $
            5,575
            
            
            $
            (14,992
            )
            
            $
            4,292
            
            
            $
            1,812
            
            
            $
            6,466
            
            
            $
            (4,583
            )Balance
      Sheet Data (at end of period):Total
      assets
            
            $
            454,773
            
            
            $
            468,129
            
            
            $
            501,773
            
            
            $
            512,936
            
            
            $
            530,986
            
            
            $
            553,589Total
      debt (5)
            
            
            355,906
            
            
            
            362,909
            
            
            
            374,093
            
            
            
            388,492
            
            
            
            314,604
            
            
            
            317,504Total
      stockholder's equity
            
            
            30,171
            
            
            
            24,876
            
            
            
            36,714
            
            
            
            23,818
            
            
            
            108,512
            
            
            
            102,046Other
      Data:EBITDA
      (6)
            
            $
            58,215
            
            
            $
            36,289
            
            
            $
            67,618
            
            
            $
            60,102
            
            
            $
            31,526
            
            
            $
            20,402Capital
      expenditures
            
            
            12,579
            
            
            
            10,594
            
            
            
            12,511
            
            
            
            12,795
            
            
            
            3,665
            
            
            
            12,793Depreciation
      and amortization
            
            
            25,229
            
            
            
            25,000
            
            
            
            25,095
            
            
            
            25,281
            
            
            
            10,344
            
            
            
            8,530


16


AACSuccessor
            
            PredecessorThe
      period from
            
            The
      period fromFiscal
      Year Ended
            
            March
      26, 2004
            
            August
      31, 2003August
      30,
            
            August
      25,
            
            August
      26,
            
            August
      27,
            
            to
            
            to($
      in thousands)
            2008
            
            2007
      (1)
            
            2006
            
            2005
            
            August
      28, 2004 (2)
            
            March
      25, 2004 (3)Statement
      of Operations Data:Net
      sales
            
            $
            313,403
            
            
            $
            310,588
            
            
            $
            299,936
            
            
            $
            293,678
            
            
            $
            159,084
            
            
            $
            135,031Cost
      of sales
            
            
            140,373
            
            
            
            138,892
            
            
            
            130,145
            
            
            
            130,755
            
            
            
            82,160
            
            
            
            58,046Gross
      profit
            
            
            173,030
            
            
            
            171,696
            
            
            
            169,791
            
            
            
            162,923
            
            
            
            76,924
            
            
            
            76,985Selling,
      general and administrative expenses
            
            
            132,809
            
            
            
            126,731
            
            
            
            129,334
            
            
            
            133,712
            
            
            
            57,810
            
            
            
            69,574Other
      charges (4)
            
            
            -
            
            
            
            5,262
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Operating
      income
            
            
            40,221
            
            
            
            39,703
            
            
            
            40,457
            
            
            
            29,211
            
            
            
            19,114
            
            
            
            7,411Interest
      expense, net
            
            
            19,775
            
            
            
            22,064
            
            
            
            23,308
            
            
            
            23,497
            
            
            
            10,257
            
            
            
            14,070Income
      (loss) from continuing operations before income taxes
            
            
            20,446
            
            
            
            17,639
            
            
            
            17,149
            
            
            
            5,714
            
            
            
            8,857
            
            
            
            (6,659
            )Provision (benefit)
      for income taxes
            
            
            8,122
            
            
            
            7,986
            
            
            
            7,092
            
            
            
            2,423
            
            
            
            3,650
            
            
            
            (812
            )Income
      (loss) from continuing operations
            
            
            12,324
            
            
            
            9,653
            
            
            
            10,057
            
            
            
            3,291
            
            
            
            5,207
            
            
            
            (5,847
            )Discontinued
      operations:Income
      (loss) from discontinued operations before income taxes
            
            
            (7,235
            )
            
            
            (28,406
            )
            
            
            2,085
            
            
            
            5,610
            
            
            
            2,068
            
            
            
            2,076Provision
      (benefit) for income taxes
            
            
            (9,123
            )
            
            
            (11,108
            )
            
            
            815
            
            
            
            2,194
            
            
            
            809
            
            
            
            812Income
      (loss) from discontinued operations
            
            
            1,888
            
            
            
            (17,298
            )
            
            
            1,270
            
            
            
            3,416
            
            
            
            1,259
            
            
            
            1,264Net
      income (loss)
            
            $
            14,212
            
            
            $
            (7,645
            )
            
            $
            11,327
            
            
            $
            6,707
            
            
            $
            6,466
            
            
            $
            (4,583
            )Balance
      Sheet Data (at end of period):Total
      assets
            
            $
            455,114
            
            
            $
            465,319
            
            
            $
            498,542
            
            
            $
            509,552
            
            
            $
            530,986
            
            
            $
            553,589Total
      debt (5)
            
            
            225,485
            
            
            
            245,055
            
            
            
            267,276
            
            
            
            291,836
            
            
            
            314,604
            
            
            
            317,504Total
      stockholder's equity
            
            
            142,987
            
            
            
            129,055
            
            
            
            133,546
            
            
            
            114,263
            
            
            
            108,512
            
            
            
            102,046Other
      Data:EBITDA
      (6)
            
            $
            58,215
            
            
            $
            36,289
            
            
            $
            67,618
            
            
            $
            60,102
            
            
            $
            31,526
            
            
            $
            20,402Capital
      expenditures
            
            
            12,579
            
            
            
            10,594
            
            
            
            12,511
            
            
            
            12,795
            
            
            
            3,665
            
            
            
            12,793Depreciation
      and amortization
            
            
            25,229
            
            
            
            25,000
            
            
            
            25,095
            
            
            
            25,281
            
            
            
            10,344
            
            
            
            8,530






(1)
              Includes
      the results of Powers from April 1, 2007, the date of our acquisition of
      Powers.


(2)
              During
      the period from March 26, 2004 to August 28, 2004, AAC
      recognized in its consolidated statement of operations approximately
      $6.4 million of excess purchase price allocated to inventory as cost
      of sales and approximately $4.3 million of additional amortization
      expense of intangible assets as selling, general and administrative
      expenses, as compared to its historical basis of accounting prior to the
      Merger.


(3)
              Includes
      the results of C-B Graduation Announcements from January 30, 2004,
      the date of our acquisition of C-B Graduation Announcements.


(4)
              Other
      charges includes $4.9 million for the class rings segment related to
      goodwill and trademarks in retail class rings, and $0.4 million for the
      other segment in fiscal  2007 related to trademarks in
      personalized fashion jewelry, as discussed in "Significant Developments"
      below.


(5)
              Total
      debt includes all borrowings outstanding under notes, credit facilities,
      and capital lease obligations. As a result of the mandatory redemption
      requirements, the series A preferred stock has also been
      included.


(6)
              EBITDA
      represents net income (loss) before interest expense, income taxes,
      depreciation, and amortization. EBITDA does not represent net income
      or cash flows from operations, as these terms are defined under generally
      accepted accounting principles, and should not be considered as an
      alternative to net income as an indicator of our operating performance or
      to cash flows as a measure of liquidity. Fiscal 2008 EBITDA of Parent
      Holdings was unfavorably impacted by Transaction related costs of $7.7
      million.  Fiscal 2008 and fiscal 2007 EBITDA were unfavorably
      impacted by other charges of $5.5 million and $28.0 million,
      respectively related to the write-down of certain assets, as
      discussed in “Significant Developments” below.


(7)
              Selling,
      general and administrative expenses for Parent Holdings includes $7.7
      million of costs incurred related to the Transaction.


17





We consider EBITDA to be a key indicator of operating performance as it and
similar measures are instrumental in the determination of compliance with
certain financial covenants in the senior secured credit facility, and is used
by our management in the calculation of the aggregate fee payable under our
management agreement and in determining a portion of compensation for certain of
our employees. We also believe that EBITDA is useful to investors in evaluating
the value of companies in general, and in evaluating the liquidity of companies
with debt service obligations and their ability to service their indebtedness.





EBITDA
is not a defined term under GAAP and should not be considered an alternative to
operating income or net income as a measure of operating results or cash flows
as a measure of liquidity. EBITDA has important limitations as an analytical
tool, and you should not consider it in isolation or as a substitute for
analysis of our results as reported under GAAP. For example, EBITDA:
(i) does not reflect our cash expenditures, or future requirements, for
capital expenditures or contractual commitments; (ii) does not reflect
changes in, or cash requirements for, our working capital needs; (iii) does
not reflect the significant interest expense, or the cash requirements necessary
to service interest or principal payments, on our debts; and (iv) excludes
tax payments that represent a reduction in cash available to us. Despite these
limitations, we believe that EBITDA is useful since it provides investors with
additional information not available in a GAAP presentation. To compensate for
these limitations, however, we rely primarily on our GAAP results and use EBITDA
only supplementally.




The
following sets forth a reconciliation of Parent Holdings’ net income (loss) from
continuing operations and from discontinued operations to EBITDA from continuing
operations and from discontinued operations and from total EBITDA to net cash
provided by (used in) operating activities:





Parent
      HoldingsSuccessor
            
            
            PredecessorThe
      Period from
            
            
            The
      Period fromFiscal
      Year Ended
            
            
            March
      26, 2004 —
            
            
            August
      31, 2003 —($
      in thousands)
            
            August
      30,
            
            
            August
      25,
            
            
            August
      26,
            
            
            August
      27,
            
            
            August
      28,
            
            
            March
      25,2008
            
            
            2007
            
            
            2006
            
            
            2005
            
            
            2004
            
            
            2004Income
      (loss) from continuing operations
            
            $
            (23,605
            )
            
            $
            (15,253
            )
            
            $
            (294
            )
            
            $
            (1,604
            )
            
            $
            5,207
            
            
            $
            (5,847
            )Interest
      expense, net
            
            
            64,479
            
            
            
            59,275
            
            
            
            39,350
            
            
            
            31,271
            
            
            
            10,257
            
            
            
            14,070Provision
      (benefit) for income taxes
            
            
            (8,396
            )
            
            
            (4,319
            )
            
            
            1,401
            
            
            
            (456
            )
            
            
            3,650
            
            
            
            (812
            )Depreciation
      and amortization expense
            
            
            24,829
            
            
            
            23,652
            
            
            
            23,009
            
            
            
            23,304
            
            
            
            9,521
            
            
            
            8,171EBITDA
      from continuing operations
            
            $
            57,307
            
            
            $
            63,355
            
            
            $
            63,466
            
            
            $
            52,515
            
            
            $
            28,635
            
            
            $
            15,582Income
      (loss) from discontinued operations
            
            $
            (1,888
            )
            
            $
            (17,298
            )
            
            $
            1,270
            
            
            $
            3,416
            
            
            $
            1,259
            
            
            $
            1,264Interest
      expense, net
            
            
            -
            
            
            
            (8
            )
            
            
            (19
            )
            
            
            -
            
            
            
            -
            
            
            
            2,385Provision
      (benefit) for income taxes
            
            
            (9,123
            )
            
            
            (11,108
            )
            
            
            815
            
            
            
            2,194
            
            
            
            809
            
            
            
            812Depreciation
      and amortization expense
            
            
            400
            
            
            
            1,348
            
            
            
            2,086
            
            
            
            1,977
            
            
            
            823
            
            
            
            359EBITDA
      from discontinued operations
            
            $
            (6,835
            )
            
            $
            (27,066
            )
            
            $
            4,152
            
            
            $
            7,587
            
            
            $
            2,891
            
            
            $
            4,820Total
      EBITDA
            
            $
            50,472
            
            
            $
            36,289
            
            
            $
            67,618
            
            
            $
            60,102
            
            
            $
            31,526
            
            
            $
            20,402Other
      charges - continuing operations
            
            $
            -
            
            
            $
            5,262
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -Other
      charges - discontinued operations
            
            
            5,542
            
            
            
            22,751
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Changes
      in assets and liabilities
            
            
            11,287
            
            
            
            (11,791
            )
            
            
            (14,955
            )
            
            
            (335
            )
            
            
            (23,970
            )
            
            
            35,227Deferred
      income taxes
            
            
            (18,422
            )
            
            
            (15,506
            )
            
            
            2,061
            
            
            
            1,521
            
            
            
            4,309
            
            
            
            -Interest
      expense, net
            
            
            (64,479
            )
            
            
            (59,267
            )
            
            
            (39,331
            )
            
            
            (31,271
            )
            
            
            (10,257
            )
            
            
            (16,455
            )(Provision)
      benefit for income taxes
            
            
            17,519
            
            
            
            15,427
            
            
            
            (2,216
            )
            
            
            (1,738
            )
            
            
            (4,459
            )
            
            
            -Amortization
      of debt discount and deferred financing fees
            
            
            3,490
            
            
            
            3,491
            
            
            
            2,269
            
            
            
            1,882
            
            
            
            629
            
            
            
            1,197Accretion
      of interest on 10.25% senior discount notes
            
            
            12,567
            
            
            
            11,037
            
            
            
            10,161
            
            
            
            7,387
            
            
            
            -
            
            
            
            -Accretion
      of senior PIK notes
            
            
            27,293
            
            
            
            21,647
            
            
            
            4,197
            
            
            
            -
            
            
            
            -
            
            
            
            -Allowance
      for doubtful accounts
            
            
            198
            
            
            
            (233
            )
            
            
            (464
            )
            
            
            (107
            )
            
            
            (236
            )
            
            
            (144
            )Loss
      (gain) on operating lease agreement
            
            
            (222
            )
            
            
            961
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Loss
      (gain) on sales of plant, property and equipment
            
            
            13
            
            
            
            (1,989
            )
            
            
            79
            
            
            
            -
            
            
            
            -
            
            
            
            -Net
      cash provided by (used in) operating activities
            
            $
            45,258
            
            
            $
            28,079
            
            
            $
            29,419
            
            
            $
            37,441
            
            
            $
            (2,458
            )
            
            $
            40,227







18


The
following sets forth a reconciliation of Intermediate Holdings’ net income
(loss) from continuing operations and from discontinued operations to EBITDA
from continuing operations and from discontinued operations and from total
EBITDA to net cash provided by (used in) operating
activities:


Intermediate
      HoldingsSuccessor
            
            
            PredecessorThe
      Period from
            
            
            The
      Period fromFiscal
      Year Ended
            
            
            March
      26, 2004 —
            
            
            August
      31, 2003 —($
      in thousands)
            
            August
      30,
            
            
            August
      25,
            
            
            August
      26,
            
            
            August
      27,
            
            
            August
      28,
            
            
            March
      25,2008
            
            
            2007
            
            
            2006
            
            
            2005
            
            
            2004
            
            
            2004Income
      (loss) from continuing operations
            
            $
            3,687
            
            
            $
            2,306
            
            
            $
            3,022
            
            
            $
            (1,604
            )
            
            $
            5,207
            
            
            $
            (5,847
            )Interest
      expense, net
            
            
            32,769
            
            
            
            33,522
            
            
            
            34,265
            
            
            
            31,271
            
            
            
            10,257
            
            
            
            14,070Provision
      (benefit) for income taxes
            
            
            3,765
            
            
            
            3,875
            
            
            
            3,170
            
            
            
            (456
            )
            
            
            3,650
            
            
            
            (812
            )Depreciation
      and amortization expense
            
            
            24,829
            
            
            
            23,652
            
            
            
            23,009
            
            
            
            23,304
            
            
            
            9,521
            
            
            
            8,171EBITDA
      from continuing operations
            
            $
            65,050
            
            
            $
            63,355
            
            
            $
            63,466
            
            
            $
            52,515
            
            
            $
            28,635
            
            
            $
            15,582Income
      (loss) from discontinued operations
            
            $
            1,888
            
            
            $
            (17,298
            )
            
            $
            1,270
            
            
            $
            3,416
            
            
            $
            1,259
            
            
            $
            1,264Interest
      expense, net
            
            
            -
            
            
            
            (8
            )
            
            
            (19
            )
            
            
            -
            
            
            
            -
            
            
            
            2,385Provision
      (benefit) for income taxes
            
            
            (9,123
            )
            
            
            (11,108
            )
            
            
            815
            
            
            
            2,194
            
            
            
            809
            
            
            
            812Depreciation
      and amortization expense
            
            
            400
            
            
            
            1,348
            
            
            
            2,086
            
            
            
            1,977
            
            
            
            823
            
            
            
            359EBITDA
      from discontinued operations
            
            $
            (6,835
            )
            
            $
            (27,066
            )
            
            $
            4,152
            
            
            $
            7,587
            
            
            $
            2,891
            
            
            $
            4,820Total
      EBITDA
            
            $
            58,215
            
            
            $
            36,289
            
            
            $
            67,618
            
            
            $
            60,102
            
            
            $
            31,526
            
            
            $
            20,402Other
      charges - continuing operations
            
            $
            -
            
            
            $
            5,262
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -Other
      charges - discontinued operations
            
            
            5,542
            
            
            
            22,751
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Changes
      in assets and liabilities
            
            
            948
            
            
            
            (14,369
            )
            
            
            (15,623
            )
            
            
            (335
            )
            
            
            (23,970
            )
            
            
            35,227Deferred
      income taxes
            
            
            (6,293
            )
            
            
            (7,274
            )
            
            
            3,824
            
            
            
            1,521
            
            
            
            4,309
            
            
            
            -Interest
      expense, net
            
            
            (32,769
            )
            
            
            (33,514
            )
            
            
            (34,246
            )
            
            
            (31,271
            )
            
            
            (10,257
            )
            
            
            (16,455
            )(Provision)
      benefit for income taxes
            
            
            5,358
            
            
            
            7,233
            
            
            
            (3,985
            )
            
            
            (1,738
            )
            
            
            (4,459
            )
            
            
            -Amortization
      of debt discount and deferred financing fees
            
            
            1,976
            
            
            
            1,976
            
            
            
            1,959
            
            
            
            1,882
            
            
            
            629
            
            
            
            1,197Accretion
      of interest on 10.25% senior discount notes
            
            
            12,567
            
            
            
            11,037
            
            
            
            10,161
            
            
            
            7,387
            
            
            
            -
            
            
            
            -Allowance
      for doubtful accounts
            
            
            198
            
            
            
            (233
            )
            
            
            (464
            )
            
            
            (107
            )
            
            
            (236
            )
            
            
            (144
            )Loss
      (gain) on operating lease agreement
            
            
            (222
            )
            
            
            961
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Loss
      (gain) on sales of plant, property and equipment
            
            
            13
            
            
            
            (1,989
            )
            
            
            79
            
            
            
            -
            
            
            
            -
            
            
            
            -Net
      cash provided by (used in) operating activities
            
            $
            45,533
            
            
            $
            28,130
            
            
            $
            29,323
            
            
            $
            37,441
            
            
            $
            (2,458
            )
            
            $
            40,227







19


The
following sets forth a reconciliation of AAC's net income (loss) from continuing
operations and from discontinued operations to EBITDA from continuing operations
and from discontinued operations and from total EBITDA to net cash provided by
(used in) operating activities:


AACSuccessor
            
            
            PredecessorThe
      Period from
            
            
            The
      Period fromFiscal
      Year Ended
            
            
            March
      26, 2004 —
            
            
            August
      31, 2003 —($
      in thousands)
            
            August
      30,
            
            
            August
      25,
            
            
            August
      26,
            
            
            August
      27,
            
            
            August
      28,
            
            
            March
      25,2008
            
            
            2007
            
            
            2006
            
            
            2005
            
            
            2004
            
            
            2004Income
      (loss) from continuing operations
            
            $
            12,324
            
            
            $
            9,653
            
            
            $
            10,057
            
            
            $
            3,291
            
            
            $
            5,207
            
            
            $
            (5,847
            )Interest
      expense, net
            
            
            19,775
            
            
            
            22,064
            
            
            
            23,308
            
            
            
            23,497
            
            
            
            10,257
            
            
            
            14,070Provision
      (benefit) for income taxes
            
            
            8,122
            
            
            
            7,986
            
            
            
            7,092
            
            
            
            2,423
            
            
            
            3,650
            
            
            
            (812
            )Depreciation
      and amortization expense
            
            
            24,829
            
            
            
            23,652
            
            
            
            23,009
            
            
            
            23,304
            
            
            
            9,521
            
            
            
            8,171EBITDA
      from continuing operations
            
            $
            65,050
            
            
            $
            63,355
            
            
            $
            63,466
            
            
            $
            52,515
            
            
            $
            28,635
            
            
            $
            15,582Income
      (loss) from discontinued operations
            
            $
            1,888
            
            
            $
            (17,298
            )
            
            $
            1,270
            
            
            $
            3,416
            
            
            $
            1,259
            
            
            $
            1,264Interest
      expense, net
            
            
            -
            
            
            
            (8
            )
            
            
            (19
            )
            
            
            -
            
            
            
            -
            
            
            
            2,385Provision
      (benefit) for income taxes
            
            
            (9,123
            )
            
            
            (11,108
            )
            
            
            815
            
            
            
            2,194
            
            
            
            809
            
            
            
            812Depreciation
      and amortization expense
            
            
            400
            
            
            
            1,348
            
            
            
            2,086
            
            
            
            1,977
            
            
            
            823
            
            
            
            359EBITDA
      from discontinued operations
            
            $
            (6,835
            )
            
            $
            (27,066
            )
            
            $
            4,152
            
            
            $
            7,587
            
            
            $
            2,891
            
            
            $
            4,820Total
      EBITDA
            
            $
            58,215
            
            
            $
            36,289
            
            
            $
            67,618
            
            
            $
            60,102
            
            
            $
            31,526
            
            
            $
            20,402Other
      charges - continuing operations
            
            $
            -
            
            
            $
            5,262
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -Other
      charges - discontinued operations
            
            
            5,542
            
            
            
            22,751
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Changes
      in assets and liabilities
            
            
            1,508
            
            
            
            (14,382
            )
            
            
            (16,010
            )
            
            
            (379
            )
            
            
            (23,970
            )
            
            
            35,227Deferred
      income taxes
            
            
            (1,940
            )
            
            
            (3,150
            )
            
            
            7,737
            
            
            
            4,392
            
            
            
            4,309
            
            
            
            -Interest
      expense, net
            
            
            (19,775
            )
            
            
            (22,056
            )
            
            
            (23,289
            )
            
            
            (23,497
            )
            
            
            (10,257
            )
            
            
            (16,455
            )(Provision)
      benefit for income taxes
            
            
            1,001
            
            
            
            3,122
            
            
            
            (7,907
            )
            
            
            (4,617
            )
            
            
            (4,459
            )
            
            
            -Amortization
      of debt discount and deferred financing fees
            
            
            1,530
            
            
            
            1,530
            
            
            
            1,498
            
            
            
            1,527
            
            
            
            629
            
            
            
            1,197Allowance
      for doubtful accounts
            
            
            198
            
            
            
            (233
            )
            
            
            (464
            )
            
            
            (107
            )
            
            
            (236
            )
            
            
            (144
            )Loss
      (gain) on operating lease agreement
            
            
            (222
            )
            
            
            961
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Loss
      (gain) on sales of plant, property and equipment
            
            
            13
            
            
            
            (1,989
            )
            
            
            79
            
            
            
            -
            
            
            
            -
            
            
            
            -Net
      cash provided by (used in) operating activities
            
            $
            46,070
            
            
            $
            28,105
            
            
            $
            29,262
            
            
            $
            37,421
            
            
            $
            (2,458
            )
            
            $
            40,227







Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations




The
following discussion of our financial condition and results of operations should
be read together with our consolidated financial statements and the accompanying
notes included elsewhere in this report. The consolidated financial statements,
and the notes thereto, have been prepared in accordance withU.S.GAAP. All amounts are in U.S. dollars except otherwise
indicated.




Uncertainty
of Forward Looking Statements and Information




This
report contains “forward looking statements.” All statements other than
statements of historical facts included in this report that address activities,
events or developments that we expect, believe or anticipate will or may occur
in the future are forward looking statements. Forward looking statements give
our current expectations and projections relating to the financial condition,
results of operations, plans, objectives, future performance and business of our
company. You can identify these statements by the fact that they do not relate
strictly to historical or current facts. These statements may include words such
as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe”
and other words and terms of similar meaning in connection with any discussion
of the timing or nature of future operating or financial performance or other
events.




These
forward looking statements are based on our expectations and beliefs concerning
future events affecting us. They are subject to uncertainties and factors
relating to our operations and business environment, all of which are difficult
to predict and many of which are beyond our control. Although we believe that
the expectations reflected in our forward looking statements are reasonable, we
do not know whether our expectations will prove correct. They can be affected by
inaccurate assumptions we might make or by known or unknown risks and
uncertainties.




20


General




We are
one of the leading manufacturers and suppliers of class rings, yearbooks,
graduation products, and recognition products and affinity jewelry in the United
States. We market and sell yearbooks to the college, high school, junior high
school and elementary markets. We primarily sell our class rings and graduation
products, which include fine paper products and graduation accessories, in the
high school, college and junior high school markets. We also sell jewelry
commemorating family events such as the birth of a child, military and fan
affinity jewelry and related products, professional sports championship rings,
commercial printing and recognition products such as letter
jackets.




As fully
described under the “Significant Developments” section of Management’s
Discussion and Analysis of Financial Condition and Results of Operations, on
October 26, 2007, the Company decided to shut down the operations of its
achievement publications segment, which produced, marketed and sold publications
that recognize the achievements of top students at the high school and college
levels, as well as the nation’s most inspiring teachers.  All shutdown
activities were substantially complete prior to November 24, 2007 and were fully
complete by May 31, 2008.




Our
ability to meet our debt service and other obligations depends in significant
part on how successful we are in maintaining our core businesses and further
implementing our business strategy. Our business plan envisions several
long-term growth initiatives, including the development of new products. The
components of our strategy are subject to significant business, economic and
competitive uncertainties and contingencies.




Numerous
raw materials are used in the manufacture of our products. Gold and other
metals, precious, semiprecious and synthetic stones, paper products and ink
comprise the bulk of the raw materials we utilize in the largest segments of our
business. Prices of these materials, especially gold, continually fluctuate. We
purchase a majority of our gold from a single supplier. We may consign a portion
of our gold and pay for gold as our products are shipped to customers. We also
purchase the majority of our precious, semi-precious and synthetic stones from a
single supplier in Germany. The prices for these stone purchases are denominated
in Euros. We generally are able to pass on price increases in gold and stones to
our customers as such increases are realized by us, however, this may not always
be the case.




We face
competition for most of our principal products.  While the class ring,
graduation products and yearbook markets were once highly concentrated and
consisted primarily of a few large national manufacturers (of which we were one)
advances in technology and the emergence of international manufacturing have
significantly lowered the costs of entry.  Major domestic mass
merchant and jewelry chain retailers now effectively compete in the class ring
business and the traditional yearbook and graduation products businesses now
face considerable competition from regional and local printers and
internet-based purveyors of yearbook and alternative web-based virtual
products.  Competition from alternative sales channels is robust in
virtually all market categories.




We
experience seasonal fluctuations in our net sales tied primarily to the school
year. We recorded 50% of our fiscal year 2008 net sales in our third quarter.
Class ring sales are highest during October through December and early spring,
with many orders made for delivery to students before the winter holiday season.
Graduation product sales are predominantly made during February through April
prior to the April through June graduation season. Yearbook sales are highest
during the months of April through June, as yearbooks are typically shipped
prior to each school’s summer break. Our recognition and affinity product line
sales are seasonal. The recognition and affinity product line sales are highest
during the winter holiday season and in the period leading up to Mother’s Day.
We have experienced operating losses during our first and fourth fiscal
quarters, which includes the beginning of the school year and the summer months
when school is not in session, thus reducing related shipment of products. In
addition, our working capital requirements tend to exceed our operating cash
flows from May through September.




We also
have exposure to market risk relating to changes in interest rates on our
variable rate debt. Our senior secured credit facility (revolver and term loan)
and existing gold consignment agreement are variable rate
arrangements.




Historically,
growth in the class rings, yearbooks and graduation products market has been
driven primarily by demographics. The U.S. Department of Education projects that
the number of high school and college graduates will increase by an average of
6% and 16% nationally, respectively, over the time period from 2004 to 2017.
Additionally, the U.S. Census Bureau projects that the total U.S. population
will increase by 6% over the time period from 2007 to 2015. Both the increased
population and the increased number of high school and college graduates should
expand the market for our products.




Basis
of Presentation




We
present financial information relating to Parent Holdings, Intermediate Holdings
and AAC and its subsidiaries in this discussion and analysis.  Parent
Holdings owns 100% of the shares of common stock of Intermediate
Holdings.  Intermediate Holdings owns 100% of the shares of common
stock of AAC Holding Corp., which is the holder of 100% of the shares of common
stock of AAC.


21




The
Company uses a 52/53-week fiscal year ending on the last Saturday of
August.  Fiscal 2008 was a 53 week year and fiscal 2007 and 2006 were
52 week years.




Company
Background




Our
business was founded when 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., were combined through various
asset purchase agreements in December 1996. AAC was formed in
June 2000 to serve as a holding company for these operations as well as any
future acquisitions. In June 2000, we acquired the Taylor Senior Holding
Company, the parent company of Taylor Publishing Company (“Taylor”), whose
primary business is designing and printing student yearbooks. In July 2002,
AAC acquired all the outstanding stock and warrants of Milestone Marketing, a
marketer of class rings and other graduation products to the college market. In
January 2004, AAC acquired C-B Graduation Announcements, a marketer of
graduation products to the college market.  In April 2007, Commemorative
Brands, Inc. (“CBI”), a wholly-owned subsidiary of AAC, acquired all of the
outstanding stock of BFJ Holdings, Inc. and its wholly owned subsidiary, Powers
Embroidery, Inc. (“Powers”). Powers is a producer of quality letter jackets,
chenille patches and other school spirit embroidery merchandise and is located
in Waco, Texas.





On
March 25, 2004, AAC Acquisition Corp., a wholly owned subsidiary of AAC
Holding Corp., merged with and into AAC (the “Merger”), with AAC continuing as
the surviving corporation and a wholly-owned subsidiary of AAC Holding Corp. The
Merger was financed by a cash equity investment by an investor group led by
Fenway Partners Capital Fund II, L.P., borrowings under AAC’s senior secured
credit facility and the issuance of AAC’s 8.25% senior subordinated notes due
2012. As a result of the Merger, we have reflected pre-Merger periods
(“Predecessor”) for results of operations through March 25, 2004 and
post-Merger periods (“Successor”) for results of operations subsequent to
March 25, 2004 in our consolidated financial information and statements. In
November 2004, AAC Holding Corp. underwent a recapitalization transaction
pursuant to which its stockholders exchanged their shares of AAC Holding Corp.
common stock for shares of Intermediate Holdings common stock and as a result,
AAC Holding Corp. became a wholly owned subsidiary of Intermediate
Holdings.




On
November 16, 2004, Intermediate Holdings issued $131.5 million
aggregate principal amount at maturity of 10.25% senior discount notes due 2012,
generating net proceeds of $89.3 million. Intermediate Holdings is the sole
obligor of these notes. The net proceeds of this offering were used as a
distribution to stockholders through the repurchase of shares of Intermediate
Holdings’ common stock from its stockholders.




On
January 18, 2006, Intermediate Holdings entered into a Preferred Stock
Purchase Agreement with an investor pursuant to which Intermediate Holdings sold
shares of its mandatory redeemable series A preferred stock. In connection with
this transaction, Intermediate Holdings issued the investor 7,500 shares of the
mandatory redeemable series A preferred stock for an aggregate purchase price of
$7.5 million, which the investor paid to Intermediate Holdings in cash. The
holders of the mandatory redeemable series A preferred stock are entitled to
receive cumulative dividends at a rate of 14% per year, when, as and if declared
by the Board of Directors of Intermediate Holdings.




On
May 8, 2006, the holders of outstanding stock of Intermediate Holdings,
agreed to form a new holding company for Intermediate Holdings, and on
May 30, 2006, reached agreement for their new company, Parent Holdings, to
affect a stock exchange with Intermediate Holdings. Pursuant to that agreement,
each holder of common stock of Intermediate Holdings contributed each of their
shares of such stock then held to Parent Holdings in exchange for a new share of
common stock of Parent Holdings and each holder of series A redeemable preferred
stock of Intermediate Holdings contributed each of their shares of such stock
then held to the Parent Holdings in exchange for a new share of series A
redeemable preferred stock of Parent Holdings. Each new share of capital stock
received in such contribution and exchange had the same rights, preferences and
privileges as the corresponding share of stock of Intermediate Holdings that was
contributed to Parent Holdings. As a result of the foregoing recapitalization,
Intermediate Holdings became a wholly owned subsidiary of Parent
Holdings.




On
June 12, 2006, Parent Holdings issued $150.0 million principal amount
of senior PIK notes due October 1, 2012. The net proceeds of this offering
were used to pay a $140.5 million dividend to the stockholders of Parent
Holdings.  Because EBITDA, as defined in the corresponding
agreement, fell below certain target levels for the four quarters ended
February 24, 2007, the rate at which interest accrues on the senior PIK Notes
was increased by 2.00% per annum, to a rate of 14.75%, commencing on and
including February 24, 2007. Because our consolidated group leverage ratio,
as defined in the corresponding agreement, was greater than 5.0 to 1.0 on August
30, 2008, the rate at which interest accrues on the senior PIK notes was
increased an additional 2.00% per annum, to a rate of 16.75%, commencing on, and
including August 30, 2008.  The senior PIK notes are the unsecured
senior obligation of Parent Holdings and are not guaranteed by Intermediate
Holdings or any of its subsidiaries.




As fully
described under the “Significant Developments” section of Management’s
Discussion and Analysis of Financial Condition and Results of Operations,pursuant
to a Stock Purchase Agreement dated May 15, 2008 among Herff Jones Inc. (the
“Buyer”),Parent
Holdings and the holders of all of Parent Holdings’ equity securities (the
“Equity Holders”), the Equity Holders have agreed to sell all of the equity in
Parent Holdings to the Buyer.  The Transaction is subject to
regulatory approvals and customary closing conditions.


22




Other
than the series A preferred stock, debt obligations, cash, costs related to the
Transaction, additional interest expense related to the series A preferred stock
and debt obligations, amortization of deferred financing costs, interest income
on cash balances, and the related income taxes, all other assets, liabilities,
income, expenses and cash flows presented for all periods represent those of
Parent Holdings and Intermediate Holdings’ wholly-owned indirect subsidiary AAC
and the direct and indirect subsidiaries of AAC. Intermediate Holdings’ only
direct subsidiary is AAC Holding Corp., whose sole asset is the stock of AAC.
AAC, Intermediate Holdings and Parent Holdings are treated as entities under
common control.




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:




Allowance
for Product Returns.We make estimates of potential future product
returns related to current period product revenue. We analyze average historical
returns, current economic trends and changes in customer demand and acceptance
of our products when evaluating the adequacy of the allowance for product
returns. Significant management judgments and estimates must be made and used in
connection with establishing the allowance for product returns in any
accounting period. Product returns as a percentage of net sales were
2.1%, 2.3% and 2.1% for the fiscal years 2008, 2007 and 2006, respectively.
A ten percent increase in product returns would result in a reduction of annual
net sales of approximately $0.7 million, based on fiscal year end 2008 rates.
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 Independent Sales Representative Advances.We make estimates of potentially uncollectible customer accounts
receivable and receivables arising from independent sales representative
advances 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. Write-offs of
doubtful accounts as a percentage of net sales were 0.4%, 0.4% and 0.3% for the
fiscal years 2008, 2007 and 2006, respectively. Write-offs of independent sales
representative advances as a percentage of net sales were 0.6%, 0.2% and 0.8%
for the fiscal years ended 2008, 2007 and 2006, respectively. A ten percent
increase in write-offs of doubtful accounts and independent sales representative
advances would result in an increase in expense of approximately $0.1 million
and $0.2 million, respectively, based on fiscal year ended 2008 rates. We
believe that our results could be materially different if historical trends do
not reflect future 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 (“SFAS”) 142,
“Goodwill and Other Intangible Assets” (“SFAS 142”). Under SFAS 142 we are
required to test goodwill and intangible assets with indefinite lives for
impairment annually, or more frequently if impairment indicators occur. The
impairment test requires management to make judgments in connection with
identifying reporting units, assigning assets and liabilities to reporting units
and determining fair value of each reporting unit. Significant judgments
required to estimate the fair value of reporting units include projecting future
cash flows, determining appropriate discount rates and other assumptions. The
projections are based on historical performance and future estimated
results.




As fully
described under “Significant Developments” below, during fiscal 2007 and in the
first quarter of fiscal 2008, we recorded an impairment of our goodwill and
intangible assets with indefinite lives.  We believe that we had no
further impairment as of August 30, 2008; however, unforeseen future events
could adversely affect the reported value of goodwill and indefinite-lived
intangible assets.  As of August 30, 2008 goodwill and and indefinite-lived
intangible assets totaled $207.9 million and represented 45%, 46%, and 46% of
total assets of Parent Holdings, Intermediate Holdings and AAC,
respectively.





Long-lived
Tangible and Intangible Assets with Definite Lives.We test our
long-lived tangible and intangible assets with definite lives for impairment
under SFAS No. 144, “Accounting for the Impairment or Disposal of
Long-Lived Assets” (“SFAS 144”), 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 the 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. In
applying this standard, assets are grouped and evaluated at the lowest level for
which there are identifiable cash flows that are largely independent of the cash
flows of other groups of assets. We consider historical
performance and future estimated results in the evaluation of impairment. We
measure the amount of impairment by comparing the carrying amount of the asset
to its fair value, generally measured by discounting expected future cash flows
at the rate we utilize to evaluate potential
investments.


23





As fully
described under “Significant Developments” below, during fiscal 2007 and first
quarter fiscal 2008, we recorded an impairment of long-lived tangible assets in
our achievement publications segment.  We believe that we had no other
impairment to our long-lived tangible and intangible assets with definite lives
as of August 30, 2008; however, unforeseen future events could adversely affect
the reported value of long-lived tangible and intangible assets with definite
lives. As of August 30, 2008, long-lived tangible and intangible assets with
definite lives totaled $128.7 million and represented 28% of total assets of
Parent Holdings, Intermediate Holdings and AAC.




Revenue
Recognition.Our revenues from product sales are generally recognized at
the time the product is shipped, the risks and rewards of ownership have passed
to the customer and collectibility is reasonably assured. Our stated shipping
terms are FOB shipping point. Provisions for sales returns, warranty costs and
rebate expenses are recorded based upon historical information and current
trends.




Our
accounting method for recognizing revenue and related gross profit on class ring
sales through independent sales representatives, along with commissions to
independent sales representatives that are directly related to the revenue, is
to defer the revenue until the independent sales representative delivers the
product to the end customer.




We
recognize revenue on our publishing operations based upon the completed contract
method, when the products are shipped.




Income
Taxes.As part of the process of preparing consolidated financial
statements, we must assess the likelihood that our deferred income tax assets
will be recovered through future taxable income.  To the extent we believe
that recovery is not likely, a valuation allowance must be established. 
Significant management judgment is required in determining any valuation
allowance recorded against net deferred income tax assets.  Based on our
assessment, we have not recorded a valuation allowance as of August 30, 2008 or
August 25, 2007.  In the event that actual results differ from these
estimates or we make adjustments to these estimates in future periods, we may
need to establish a valuation allowance.




Significant
Developments




Following
are some significant developments in fiscal years 2008 and 2007.




Stock
Purchase Agreement.Pursuant to a Stock Purchase Agreement
dated May 15, 2008 among Herff Jones Inc. (the “Buyer”),Parent
Holdings and the holders of all of Parent Holdings’ equity securities (the
“Equity Holders”), the Equity Holders have agreed to sell all of the equity in
Parent Holdings to the Buyer (the “Transaction”).  The Transaction is
subject to regulatory approvals and customary closing
conditions.




In
connection with the Transaction, each of Parent Holdings, Intermediate Holdings
and AAC embarked upon a consent solicitation to certain amendments to the
indentures governing the senior PIK notes, the 10.25% senior discount notes and
the 8.25% senior subordinated notes, respectively.  After receiving
requisite consents, Parent Holdings, Intermediate Holdings and AAC each entered
into a supplemental indenture incorporating proposed amendments to the
indentures governing the senior PIK notes, the 10.25% senior discount notes and
the 8.25% senior subordinated notes, respectively. In the case of each
supplemental indenture, the applicable amendments consist of (1) a requirement
that upon consummation of the Transaction the applicable company shall redeem
all of its outstanding notes which have delivered a valid consent to the
applicable amendments at a redemption price in cash equal to 101%, 102.8125% and
102.3125% of the aggregate principal amount of the senior PIK notes, the 10.25%
senior discount notes and the 8.25% senior subordinated notes, respectively,
plus accrued and unpaid interest, and (2) the removal of substantially all of
the restrictive and reporting covenants under the applicable indenture, as well
as certain events of default and related provisions, including without
limitation, the covenant that would otherwise require the applicable company to
make an offer to purchase the applicable notes upon consummation of the
Transaction as currently provided in the applicable indenture. In the case of
the senior PIK notes, the covenant removal would remain effective for
non-consenting notes even if the Transaction has not closed. In the case of the
10.25% senior discount notes and the 8.25% senior subordinated notes, the
amendments will only be effective upon the consummation of the
Transaction.




During
fiscal 2008, Parent Holdings incurred $7.7 million in costs related to the
Transaction.  These costs are included in selling, general and
administrative expenses in Parent Holdings' consolidated statement of
operations.




24


Impairment
Charges.In the fourth quarter 2007, we recorded $28.0 million
in impairment charges of which $22.8 million was in our achievement publications
segment, $4.9 million was in the class rings segment related to retail class
rings, and $0.4 million was in our other business segment related to
personalized fashion jewelry.




The sale
or shutdown options being pursued for our achievement publications segment at
fiscal 2007 year end constituted a triggering event requiring that the
assets of our achievement publications segment be tested for recoverability in
accordance with SFAS 144 and SFAS 142.  This analysis indicated that
an impairment in goodwill, trademarks, and tangible assets existed as of
August 25, 2007.  We recorded a charge in August 2007 of $22.8
million, of which $12.1 million reduced the carrying value of trademarks, $9.5
million reduced the carrying value of goodwill, and $1.2 million reduced the
carrying value of fixed assets.  Additionally, as a consequence of the
decision in October 2007 to shutdown the achievement publications business, in
the first quarter of fiscal 2008, we recorded charges of approximately $5.5
million primarily related to the write-off of the remaining carrying value of
tangible and intangible assets of the achievement publications
segment.  These charges are included in loss from discontinued
operations in the accompanying consolidated statements of operations and in
other charges in the consolidated statements of cash flows.




Under the
provisions of SFAS 142, we test goodwill and indefinite-lived intangibles for
impairment on an annual basis or more frequently if impairment indicators occur.
As a result of the annual impairment review performed in the fourth quarter of
fiscal 2007, we recorded an impairment of $4.9 million related to goodwill and
trademarks in our retail class rings business that is included in our class
rings business segment and $0.4 million related to trademarks in
our personalized fashion jewelry business that is included in our other
business segment to adjust the carrying value to the current net realizable
value. These charges are included in other charges in the accompanying
consolidated statements of operations and in other charges in the consolidated
statements of cash flows.  The goodwill impairment in retail class
rings was primarily due to lower revenue forecasts reflecting
the softness in the retail jewelry market serving class rings and the
continued consolidation in the independent jeweler segment. However,
significant judgments were required in the preparation of our forecasts. 
Unforeseen future events could adversely affect such forecasts and thereby the
reported value of goodwill and trademarks in the future. The annual
impairment review performed in 2007 for our other businesses did not reveal any
impairment as we forecast continued profitable performance in all of
our core on-campus businesses and our other retail businesses.




The
annual impairment review performed in the fourth quarter of fiscal 2008 did not
reveal impairment in any of our reporting units.




Discontinued
Operations.The financial performance of our
achievement publications segment took a significant downturn in fiscal 2007,
with sales declining from $21.0 million in 2006 to $5.1 million
in 2007. In addition, operating income declined from $2.1 million in 2006 to a
loss before impairment charges of $5.6 million in 2007.  Given the
decline in operating income and the significantly worsening financial results in
2007, we began to evaluate strategic options for our achievement
publications business late in the fourth quarter of 2007. After carefully
considering plausible alternatives, management determined in August 2007 that
the risks of continuing to operate this business outweighed the probable
benefits. Additionally, management and the Board of Directors wanted to
focus our efforts around the core businesses that offered the most opportunity
for continued growth and earnings.




During
August through October 2007, we had discussions with potential buyers
of the business.  We received only one bona fide indication of
interest to buy but even this offer did not place any definitive value on
the business other than multi-year earn-out provisions that would have required
continued management focus. Accordingly, after evaluating the risks and rewards
associated with this offer, management and the Board of Directors decided not to
accept this offer.  The continued pursuit of the sale option would
have required us to continue to operate the business and incur significant
up-front operating cash costs without any potential cash inflows from revenues
occurring until the fourth quarter of fiscal 2008.  Accordingly, we decided
not to pursue the sale option any further and, on October 26, 2007, management
proposed and the Board of Directors approved the shut down of our achievement
publications business.


The
results of operations of the achievement publications business are reported as
discontinued operations in the consolidated income statements for all periods
presented.


In the
first quarter of fiscal 2008, we recorded charges of approximately $5.5 million
primarily related to the write-off of the remaining carrying value of tangible
and intangible assets of the achievement publications segment and incurred
approximately $0.7 million related to contract termination and employee
severance costs as a consequence of the decision in October 2007 to
shutdown the achievement publications business. These charges are included in
loss from discontinued operations in the accompanying consolidated
statements of operations and as other charges in the consolidated statement of
cash flows.




Business
Acquisition.In April 2007, CBI acquired all of the
outstanding stock of BFJ Holdings, Inc. and its wholly owned subsidiary, Powers.
Powers is a producer of quality letter jackets, chenille patches and other
school spirit embroidery merchandise, located in Waco, Texas. The purchase price
in connection with this acquisition was approximately $6.2 million, including
transaction costs, with up to $1.5 million additional to be paid upon achieving
certain financial goals through August 2010. The Powers acquisition was
accounted for using the purchase method of accounting.


25


Results
of Operations





The
comparative results are presented and discussed for Parent Holdings,
Intermediate Holdings, and AAC for fiscal years 2008, 2007 and
2006.





Parent
      HoldingsFiscal
      Year Ended
            %
      of
            
            
            Fiscal
      Year Ended
            %
      of
            
            
            Fiscal
      Year Ended
            %
      ofAugust
      30, 2008
            Net
      Sales
            
            
            August
      25, 2007
            Net
      Sales
            
            
            August
      26, 2006
            Net
      Sales($
      in millions)Net
      sales
            $
            313.4
            
            100.0
      %
            
            
            $
            310.6
            
            100.0
      %
            
            
            $
            299.9
            
            100.0
      %Cost
      of sales
            
            140.4
            
            44.8
      %
            
            
            
            138.9
            
            44.7
      %
            
            
            
            130.1
            
            43.4
      %Gross
      profit
            
            173.0
            
            55.2
      %
            
            
            
            171.7
            
            55.3
      %
            
            
            
            169.8
            
            56.6
      %Selling,
      general and administrative expenses
            
            140.5
            
            44.8
      %
            
            
            
            126.7
            
            40.8
      %
            
            
            
            129.3
            
            43.1
      %Other
      charges
            
            -
            
            -
      %
            
            
            
            5.3
            
            1.7
      %
            
            
            
            -
            
            - %Operating
      income
            
            32.5
            
            10.4
      %
            
            
            
            39.7
            
            12.8
      %
            
            
            
            40.5
            
            13.5
      %Interest
      expense, net
            
            64.5
            
            20.6
      %
            
            
            
            59.3
            
            19.1
      %
            
            
            
            39.4
            
            13.1
      %Income
      (loss) from continuing operations before income taxes
            
            (32.0)
            
            (10.2)%
            
            
            
            (19.6)
            
            (6.3)%
            
            
            
            1.1
            
            0.4
      %Provision
      (benefit) for income taxes
            
            (8.4)
            
            (2.7)%
            
            
            
            (4.3)
            
            (1.4)%
            
            
            
            1.4
            
            0.5
      %Loss
      from continuing operations
            
            (23.6)
            
            (7.5)%
            
            
            
            (15.3)
            
            (4.9)%
            
            
            
            (0.3)
            
            (0.1)%Discontinued
      operations:Income (loss) from discontinued operations before income
    taxes
            
            (7.2)
            
            (2.3)%
            
            
            
            (28.4)
            
            (9.1)%
            
            
            
            2.1
            
            0.7
      %Provision
      (benefit) for income taxes
            
            (9.1)
            
            (2.9)%
            
            
            
            (11.1)
            
            (3.6)%
            
            
            
            0.8
            
            0.3
      %Income
      (loss) from discontinued operations
            
            1.9
            
            0.6%
            
            
            
            (17.3)
            
            (5.6)%
            
            
            
            1.3
            
            0.4
      %Net
      income (loss)
            $
            (21.7)
            
            (6.9)%
            
            
            $
            (32.6)
            
            (10.5)%
            
            
            $
            1.0
            
            0.3
      %








Intermediate
      HoldingsFiscal
      Year Ended
            %
      of
            
            
            Fiscal
      Year Ended
            %
      of
            
            
            Fiscal
      Year Ended
            %
      ofAugust
      30, 2008
            Net
      Sales
            
            
            August
      25, 2007
            Net
      Sales
            
            
            August
      26, 2006
            Net
      Sales($
      in millions)Net
      sales
            $
            313.4
            
            100.0
      %
            
            
            $
            310.6
            
            100.0
      %
            
            
            $
            299.9
            
            100.0%Cost
      of sales
            
            140.4
            
            44.8
      %
            
            
            
            138.9
            
            44.7
      %
            
            
            
            130.1
            
            43.4
      %Gross
      profit
            
            173.0
            
            55.2
      %
            
            
            
            171.7
            
            55.3
      %
            
            
            
            169.8
            
            56.6
      %Selling,
      general and administrative expenses
            
            132.8
            
            42.4
      %
            
            
            
            126.7
            
            40.8
      %
            
            
            
            129.3
            
            43.1
      %Other
      charges
            
            -
            
            - %
            
            
            
            5.3
            
            1.7
      %
            
            
            
            -
            
            -
      %Operating
      income
            
            40.2
            
            12.8
      %
            
            
            
            39.7
            
            12.8
      %
            
            
            
            40.5
            
            13.5
      %Interest
      expense, net
            
            32.8
            
            10.5
      %
            
            
            
            33.5
            
            10.8
      %
            
            
            
            34.3
            
            11.4
      %Income
      from continuing operations before income taxes
            
            7.4
            
            2.4%
            
            
            
            6.2
            
            2.0 %
            
            
            
            6.2
            
            2.1 %Provision
      for income taxes
            
            3.7
            
            1.2%
            
            
            
            3.9
            
            1.3 %
            
            
            
            3.2
            
            1.1
      %Income
      from continuing operations
            
            3.7
            
            1.2%
            
            
            
            2.3
            
            0.7 %
            
            
            
            3.0
            
            1.0 %Discontinued
      operations:Income (loss) from discontinued operations before income
    taxes
            
            (7.2)
            
            (2.3)%
            
            
            
            (28.4)
            
            (9.1)%
            
            
            
            2.1
            
            0.7 %Provision
      (benefit) for income taxes
            
            (9.1)
            
            (2.9)%
            
            
            
            (11.1)
            
            (3.6)%
            
            
            
            0.8
            
            0.3 %Income
      (loss) from discontinued operations
            
            1.9
            
            0.6%
            
            
            
            (17.3)
            
            (5.6)%
            
            
            
            1.3
            
            0.4 %Net
      income (loss)
            $
            5.6
            
            1.8%
            
            
            $
            (15.0)
            
            (4.8)%
            
            
            $
            4.3
            
            1.4
      %





26


AACFiscal
      Year Ended
            %
      of
            
            
            Fiscal
      Year Ended
            %
      of
            
            
            Fiscal
      Year Ended
            %
      ofAugust
      30, 2008
            Net
      Sales
            
            
            August
      25, 2007
            Net
      Sales
            
            
            August
      26, 2006
            Net
      Sales($
      in millions)Net
      sales
            $
            313.4
            
            100.0
      %
            
            
            $
            310.6
            
            100.0
      %
            
            
            $
            299.9
            
            100.0
      %Cost
      of sales
            
            140.4
            
            44.8
      %
            
            
            
            138.9
            
            44.7
      %
            
            
            
            130.1
            
            43.4
      %Gross
      profit
            
            173.0
            
            55.2
      %
            
            
            
            171.7
            
            55.3
      %
            
            
            
            169.8
            
            56.6
      %Selling,
      general and administrative expenses
            
            132.8
            
            42.4
      %
            
            
            
            126.7
            
            40.8
      %
            
            
            
            129.3
            
            43.1
      %Other
      charges
            
            -
            
            -
      %
            
            
            
            5.3
            
            1.7
      %
            
            
            
            -
            
            -
      %Operating
      income
            
            40.2
            
            12.8
      %
            
            
            
            39.7
            
            12.8
      %
            
            
            
            40.5
            
            13.5
      %Interest
      expense, net
            
            19.8
            
            6.3
      %
            
            
            
            22.0
            
            7.1
      %
            
            
            
            23.3
            
            7.8
      %Income
      from continuing operations before income taxes
            
            20.4
            
            6.5%
            
            
            
            17.7
            
            5.7
      %
            
            
            
            17.2
            
            5.7
      %Provision
      for income taxes
            
            8.1
            
            2.6%
            
            
            
            8.0
            
            2.6
      %
            
            
            
            7.2
            
            2.4
      %Income
      from continuing operations
            
            12.3
            
            3.9%
            
            
            
            9.7
            
            3.1
      %
            
            
            
            10.0
            
            3.3
      %Discontinued
      operations:Income (loss) from discontinued operations before income
    taxes
            
            (7.2)
            
            (2.3)%
            
            
            
            (28.4)
            
            (9.1)%
            
            
            
            2.1
            
            0.7
      %Provision
      (benefit) for income taxes
            
            (9.1)
            
            (2.9)%
            
            
            
            (11.1)
            
            (3.6)%
            
            
            
            0.8
            
            0.3
      %Income
      (loss) from discontinued operations
            
            1.9
            
            0.6%
            
            
            
            (17.3)
            
            (5.6)%
            
            
            
            1.3
            
            0.4
      %Net
      income (loss)
            $
            14.2
            
            4.5%
            
            
            $
            (7.6)
            
            (2.4)%
            
            
            $
            11.3
            
            3.8
      %








Fiscal
Year Ended August 30, 2008 Compared to Fiscal Year Ended August 25,
2007





The
company uses a 52/53 week fiscal year.  Fiscal year 2008 consisted of
53 weeks, whereas fiscal year 2007 consisted of 52 weeks.  As a
result, the current reporting period reflects an extra week of net sales,
expense and operating income as compared to the prior year.





Net Sales.Net sales consist of product sales and are net of product returns and
promotional discounts. Net sales increased $2.8 million, or 0.9%, to $313.4
million in fiscal 2008 from $310.6 million in fiscal 2007. The increase was
primarily a result of the acquisition of Powers in April 2007 and stronger sales
of graduation products, partially offset by lower sales of retail class
rings.





Class Rings.Net sales decreased $0.7 million to $120.3 million in fiscal 2008 from
$121.0 million in fiscal 2007. The decrease in net sales from class rings was
the result of a decline of $1.1 million in retail high school class ring sales,
partially offset by a $0.4 million increase in on-campus class ring sales.
The decrease in retail class ring sales was due to a continuing softness in the
jewelry market offset by an increase in prices.  The increase in
on-campus class ring sales was primarily due to higher average sales
prices.  These increases were partially offset by a volume decrease,
reflecting market softness, and a change in product sales mix caused by
continuing increases in gold prices, causing buyers to purchase lower priced
non-gold rings.





Yearbooks.Net sales decreased $0.1 million to $115.1 million in fiscal 2008 from
$115.2 million in fiscal 2007.  There were no significant changes to sales
volume or prices in fiscal 2008 compared to fiscal 2007.





Graduation
Products.Net sales increased $1.4 million to $45.8 million in fiscal
2008 from $44.4 million in fiscal 2007. The increase was due to an increase
in pricing and volume shipments of high school graduation products.





Other.Net
sales increased $2.2 million to $32.2 million in fiscal 2008 from
$30.0 million in fiscal 2007. The increase in net sales was the result of a
$3.9 million increase in sales of letter jackets related to the acquisition of
Powers in April 2007, a $0.5 million increase in commercial book sales due to
new business and a $0.2 million increase in sales of military
rings.  This increase was partially offset by a $2.2 million decrease
in recognition and affinity jewelry due to a decline in professional
championship rings and affinity jewelry, as well as a product mix shift to rings
with a lower average sales price in our personalized family
jewelry.





27


Gross Profit.Gross margin represents gross profit as a percentage of net sales. Gross
margin was 55.2% in fiscal 2008, a 0.1% decrease from 55.3% in fiscal 2007.
Overall, gross profit increased $1.3 million, or 0.8%. The increase in gross
profit was a result of several factors including the following:


·
            $4.0
      million improvement in yearbooks gross profit resulting mainly from
      efficiencies related to continuous expansion of our on-line publishing
      software, reduced medical costs and savings related to ongoing investments
      in equipment and technology; additionally, fiscal 2007 was impacted by a
      $1.0 million loss recorded on an operating lease
  agreement


·
            $1.1
      million increase in other segment gross profit attributable to increased
      sales resulting from the Powers
acquisition


·
            $0.9
      million increase in graduation products gross profit directly attributable
      to higher sales of high school graduation
  products


·
            $0.3
      million increase in commercial books related to the increase in net sales
      resulting from expansion of product
line





These
increases in gross profit were partially offset by the following:


·
            $2.4
      million decrease in other segment gross profit due to the decline in net
      sales, increased material cost and unfavorable product mix in recognition
      and affinity jewelry


·
            $2.6
      million decline in retail class rings gross profit directly related to the
      decline in net sales, increases in material costs, increased labor costs,
      and outside consulting fees related to productivity improvement
      initiatives.





Selling, General
and Administrative Expenses.Selling, general and administrative expenses
for Intermediate Holdings and AAC increased $6.1 million to $132.8 million
in fiscal 2008 from $126.7 million in fiscal 2007.  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 $0.9 million to $90.8million, or
29.0% of net sales, in fiscal 2008 from $89.9 million, or 28.9% of net
sales, in fiscal 2007. The increase in selling and marketing expenses was
primarily the result of an increase in marketing related to new products in
yearbooks and personalized family jewelry and an increase in commission expenses
related to higher sales of graduation products and military rings, partially
offset by a reduction in selling and marketing expenses in retail class rings as
a result of cost reduction efforts.





General
and administrative expenses in fiscal 2008 were $42.0million, or
13.4% of net sales, as compared to $36.8 million, or 11.9% of net sales, in
fiscal 2007. The $5.2 million increase in general and administrative expenses
was primarily the result of:


·
            $2.0
      million gain on the sale of the frontage property located at our Austin,
      Texas facility recognized during fiscal
2007


·
            $1.0
      million increase as a result of the acquisition of Powers in April
      2007


·
            $0.6
      million increase in employee costs including increased headcount,
      recruiting and relocation expenses


·
            $1.6
      million increase in professional fees, consulting fees and other
      expenses





Selling,
general and administrative expenses at Parent Holdings increased $13.8 million
to $140.5 million in fiscal 2008 due to the reasons discussed above and due to
$7.7 million of costs incurred related to the Transaction.




Other
Charges. As described in “Significant Developments” above, other charges
in fiscal 2007 consist of impairment charges of $4.9 million in our class rings
segment related to retail class rings, and $0.4 million related to personalized
fashion jewelry included in our other segment.





Operating Income.As a result of the foregoing, operating income for Intermediate Holdings
and AAC was $40.2million, or
12.8% of net sales for fiscal 2008, as compared with operating income of $39.7
million, or 12.8% of net sales, for fiscal 2007. Operating income for Parent
Holdings was $32.5 million or 10.4% of net sales for fiscal 2008, as compared to
$39.7 million or 12.8% of net sales, for fiscal 2007. The class rings segment
reported operating income of $7.9 million for fiscal 2008 as compared with
operating income of $7.3 million for fiscal 2007. The yearbooks segment reported
operating income of $28.0 million for fiscal 2008 as compared with operating
income of $25.2 million for fiscal 2007. The graduation products segment
reported operating income of $6.5 million for fiscal 2008 as compared with
operating income of $6.3 million for fiscal 2007. The other segment
reported operating loss of $2.2 million for fiscal 2008 as compared with
operating income of $0.9 million for fiscal 2007.




28


Interest Expense,
Net.For Parent Holdings, net interest expense was $64.5million for
fiscal 2008 and $59.3 million for fiscal 2007. The average debt outstanding of
Parent Holdings for fiscal 2008 and fiscal 2007 was $556 million and
$540 million, respectively.   The weighted average interest rate
on debt outstanding of Parent Holdings for fiscal 2008 and fiscal 2007 was 11.3%
and 10.6%, respectively.





For
Intermediate Holdings, net interest expense was $32.8 million for fiscal 2008
and $33.5million for
fiscal 2007. The average debt outstanding of Intermediate Holdings for fiscal
2008 and fiscal 2007 was $359 million and $368 million, respectively.
The weighted average interest rate on debt outstanding of Intermediate Holdings
for both fiscal 2008 and fiscal 2007 was 8.7%.





For
AAC, net interest expense was $19.8million for
fiscal 2008 and $22.0 million for fiscal 2007. The average debt outstanding
of AAC for fiscal 2008 and fiscal 2007 was $235 million and $256 million,
respectively. The weighted average interest rate on debt outstanding of AAC for
fiscal 2008 and fiscal 2007 was 7.8% and 8.0%, respectively.





Provision
(Benefit) for Income Taxes.For fiscal 2008 and fiscal 2007,
Parent Holdings recorded an income tax benefit of $8.4 million and $4.3 million,
respectively, which represents an effective tax rate of 26% and 22%,
respectively. The effective tax rates for fiscal 2008 and 2007, respectively,
vary from the statutory federal rate due to the impact of state income taxes and
the non-deductibility of a portion of its interest on high-yield
debt.





For
fiscal 2008 and fiscal 2007, Intermediate Holdings recorded an income tax
provision of $3.7 million and $3.9 million, respectively, which represents an
effective tax rate of 50% and 63%, respectively. The effective tax rates for
fiscal 2008 and 2007, respectively, vary from the statutory federal rate due to
the impact of state income taxes and the non-deductibility of a portion of its
interest on high-yield debt.





For
fiscal 2008 and fiscal 2007, AAC recorded an income tax provision of $8.1
million and $8.0 million, respectively, which represents an effective tax
rate of 40% and 45%, respectively. The effective tax rates for the fiscal 2008
and 2007 vary from the statutory federal tax rate due to the impact of state
income taxes.





Loss from
Discontinued Operations.  As described in “Significant
Developments,” the results of operations of the achievement publications
business are reported as discontinued operations.  Loss from
discontinued operations before income taxes for fiscal 2008 and 2007 were $7.2
million and $28.4 million, respectively.  Loss from discontinued
operations for fiscal 2007 included impairment charges of $22.8 million related
to the achievement publications business.  Loss from discontinued
operations for fiscal 2008 included charges recorded in the first quarter of
approximately $5.5 million primarily related to the write-off of the remaining
carrying value of tangible and intangible assets of the achievement publications
segment and approximately $0.7 million related to contract termination and
employee severance costs.





The tax
benefit from discontinued operations was 126% and 39% for fiscal 2008 and 2007,
respectively.  The tax benefit as a percentage of loss from
discontinued segment in fiscal 2008 was impacted by a portion of the tax loss
related to the shutdown of the achievement publications segment creating a
permanent benefit for tax purposes.





Fiscal
Year Ended August 25, 2007 Compared to Fiscal Year Ended August 26,
2006





Net Sales.Net sales consist of product sales and are net of product returns and
promotional discounts. Net sales increased $10.7 million, or 3.6%, to $310.6
million in fiscal 2007 from $299.9 million in fiscal 2006. The increase was
primarily attributable to stronger sales of on-campus class rings,
personalized family jewelry, commercial printing, graduation products,
yearbooks, and sales attributed to the acquisition of Powers in April 2007,
partially offset by lower sales in retail class rings.





Class Rings.Net sales increased $1.6 million to $121 million in fiscal 2007 from
$119.4 million in fiscal 2006. The increase in net sales from class rings was
the result of a $4.2 million increase in on-campus class ring sales,
partially offset by a decline of $2.7 million in retail high school class ring
sales. The increase in on-campus class ring sales was primarily due to price
increases, new products and improved sales of championship
rings.  These increases were partially offset by a volume decrease due
to a number of schools starting one or two weeks later in 2007 than in 2006 and
the change in product sales mix caused by continuing increases in gold prices,
causing buyers to purchase lower priced non-gold rings.  The decline
in retail sales of high school class rings was driven by the continuing softness
in the retail jewelry market, the declining number of independent jewelers and
the change in product mix.





Yearbooks.Net sales increased $0.3 million to $115.2 million in fiscal 2007 from
$114.9 million in fiscal 2006. The increase in net sales was primarily the
result of an increase in yearbook contracts shipped, partially offset by a
decline in average contract value as a result of pricing pressures in the
smaller book segment of the yearbook market.





Graduation
Products.Net sales increased $0.5 million to $44.4 million in fiscal
2007 from $43.9 million in fiscal 2006. The increase was mainly due to an
increase in college graduation products.


29





Other.Net
sales increased $8.3 million to $30.0 million in fiscal 2007 from
$21.7 million in fiscal 2006. The increase in net sales was the result of
increased shipments of personalized fashion jewelry of $2.5 million primarily
resulting from continued expansion of our personalized family jewelry products
in the mass merchant channels and from a favorable competitive environment, $2.5
million of sales of letter jackets related to the acquisition of Powers in April
2007, a $2.0 million increase in commercial book sales, with the remaining
increase resulting from increased sales of military rings and professional
sports championship rings.





Gross Profit.Gross margin represents gross profit as a percentage of net sales. Gross
margin was 55.3% in fiscal 2007, a 1.3% decrease from 56.6% in fiscal 2006.
Overall, gross profit increased $1.9 million, or 1.1%. The increase in gross
profit was a result of several factors including the following:


·
            $1.6
      million increase in graduation products gross profit, mainly due to cost
      benefits resulting from continuing manufacturing improvements and a $0.7
      million write-off of obsolete graduation products inventory in fiscal
      2006


·
            $0.3
      million improvement in yearbooks gross profit resulting mainly from
      efficiencies from continuous improvements in our manufacturing process,
      including ongoing investments in equipment and
  technology


·
            $1.0
      million increase in on-campus ring sales gross profit, primarily related
      to increased revenue partially offset by the impact of gold price
      increases


·
            $1.0
      million increase in other segment gross profit of which $0.7 is
      attributable to the Powers acquisition and the remaining increase is
      mainly due to higher sales offset by unfavorable product
    mix





These increases in gross
profit were partially offset by the following:


·
            $1.9
      million decline in retail class rings gross profit directly related to the
      decline in net sales, the change in product sales mix resulting from
      continuing increases in gold costs and the impact of the gold price
      increases





Selling, General
and Administrative Expenses.Selling, general and administrative expenses
decreased $2.6 million to $126.7 million in fiscal 2007 from $129.3 million
in fiscal 2006.  Included in selling, general and administrative
expenses are two sub-categories: selling and marketing expenses and general and
administrative expenses.





Selling
and marketing expenses decreased $0.7 million to $89.9million or
28.9% of net sales, in fiscal 2007 from $90.6 million or 30.2% of net
sales, in fiscal 2006. The decrease in selling and marketing expenses was
primarily the result of a $1.3 million decrease in yearbook marketing due to the
elimination of the official yearbook college program expenses that were incurred
in fiscal 2006 and reduced field sales expenses. This decrease was partially
offset by $0.5 million in increased yearbook commissions and an additional
increase of $0.5 million related to sales and marketing expenses incurred in the
commercial books area due to an increase in the number of sales
representatives.





General
and administrative expenses in fiscal 2007 were $36.8million, or
11.9% of net sales, as compared to $38.7 million, or 12.9% of net sales, in
fiscal 2006. The $1.9 million decrease in general and administrative expenses
was primarily the result of:


·
            $2.0
      million gain on the sale of the frontage property located at our Austin,
      Texas facility


·
            $1.6
      million decrease in legal settlement costs and legal fees related to the
      settlement with Frederick Goldman, Inc., in fiscal
  2006


·
            $0.9
      million decrease of legal and professional fees and expenses paid in
      connection with the investigation of potential acquisitions in fiscal
      2006




These decreases in
general and administrative expenses were partially offset by:


·
            $0.8
      million increase of fees paid to independent consultants in connection
      with the design and partial implementation of our information technology
      system and assistance in becoming ready to comply with Sarbanes-Oxley
      requirements in fiscal 2008


·
            $0.5
      million increase of management fees and
expenses


·
            $0.4
      million increase in professional
fees


·
            $0.9
      million increase in employee costs including increased headcount,
      recruiting and relocation expenses





Other
Charges. As described in “Significant Developments” above, other charges
in fiscal 2007 consist of impairment charges of $4.9 million in our class rings
segment related to retail class rings and $0.4 million related to personalized
fashion jewelry included in our other segment.




30


Operating Income.As a result of the foregoing, operating income was $39.7million, or
12.8% of net sales, for fiscal 2007 as compared with operating income of $40.5
million, or 13.5% of net sales, for fiscal 2006. The class rings segment
reported operating income of $7.3 million for fiscal 2007 as compared with
operating income of $13.1 million for fiscal 2006. The yearbooks segment
reported operating income of $25.2 million for fiscal 2007 as compared with
operating income of $23.8 million for fiscal 2006. The graduation products
segment reported operating income of $6.3 million for fiscal 2007 as compared
with operating income of $3.3 million for fiscal 2006. The other segment
reported operating income of $0.9 million for fiscal 2007 as compared with
operating income of $0.3 million for fiscal 2006.





Interest Expense,
Net.For Parent Holdings, net interest expense was $59.3million for
fiscal 2007 and $39.4 million for fiscal 2006. The average debt outstanding of
Parent Holdings for fiscal 2007 and fiscal 2006 was $540 million and
$418 million, respectively.  The increase in average debt
outstanding was due to the senior PIK notes being outstanding for the full
fiscal year 2007. The weighted average interest rate on debt outstanding of
Parent Holdings for fiscal 2007 and fiscal 2006 was 10.6% and 8.8%,
respectively.





For
Intermediate Holdings, net interest expense was $33.5million for
fiscal 2007 and $34.3 million for fiscal 2006. The average debt outstanding of
Intermediate Holdings for fiscal 2007 and fiscal 2006 was $368 million and
$383 million, respectively. The weighted average interest rate on debt
outstanding of Intermediate Holdings for fiscal 2007 and fiscal 2006 was 8.7%
and 8.4%, respectively.





For
AAC, net interest expense was $22.0million for
fiscal 2007 and $23.3 million for fiscal 2006. The average debt outstanding
of AAC for fiscal 2007 and fiscal 2006 was $256 million and $281 million,
respectively. The weighted average interest rate on debt outstanding of AAC for
fiscal 2007 and fiscal 2006 was 8.0% and 7.8%, respectively.





Provision
(Benefit) for Income Taxes.For fiscal 2007 and fiscal 2006,
Parent Holdings recorded an income tax benefit of $4.3 million and an income tax
provision of $1.4 million, respectively, which represents an effective tax rate
of 22% (benefit) and 127% (provision), respectively. The effective tax rates for
fiscal 2007 and 2006, respectively, vary from the statutory federal rate due to
the impact of state income taxes and the non-deductibility of a portion of its
interest on high-yield debt.





For
fiscal 2007 and fiscal 2006, Intermediate Holdings recorded an income tax
provision of $3.9 million and $3.2 million, respectively, which represents an
effective tax rate of 63% and 51%, respectively. The effective tax rates for
fiscal 2007 and 2006, respectively, vary from the statutory federal rate due to
the impact of state income taxes and the non-deductibility of a portion of its
interest on high-yield debt.





For
fiscal 2007 and fiscal 2006, AAC recorded an income tax provision of $8.0
million and $7.2 million, respectively, which represents an effective tax
rate of 45% and 42%, respectively. The effective tax rates for the fiscal 2007
and 2006 vary from the statutory federal tax rate due to the impact of state
income taxes.





Income (Loss)
from Discontinued Operations.  As described in “Significant
Developments,” the results of operations of the achievement publications
business are reported as discontinued operations.  Income (loss) from
discontinued operations before income taxes for fiscal 2007 and 2006 were
$(28.4) million and $2.1 million, respectively.  Loss from
discontinued operations for fiscal 2007 includes impairment charges of $22.8
million related to the achievement publications business.





Liquidity
and Capital Resources





Operating
Activities.Operating activities provided $45.3, $45.5 and
$46.1 million of cash from operating activities for Parent Holdings,
Intermediate Holdings and AAC, respectively, during fiscal 2008 after servicing
$18.2 million in interest payments compared to $28.1 million of cash during
fiscal 2007 after servicing $21.0 million in interest payments. Cash provided by
operating activities was higher in fiscal 2008 due to lower interest payments
and lower use of working capital in fiscal 2008 compared to fiscal 2007
primarily as a result of lower inventories and partially due to the extra week
in fiscal 2008.  Additionally, cash provided by operating activities
in fiscal 2007 was negatively impacted by significantly poor earnings of the
achievement publications segment.





Operating
activities provided $28.1 million of cash during fiscal 2007 after servicing
$21.0 million in interest payments compared to $29.3 million during fiscal 2006
after servicing $23.4 million in interest payments. The higher earnings in
business segments other than the achievement publications and lower interest
payments were more than offset by significantly poor earnings of the achievement
publications segment.  Additionally, higher working capital to support
our business was partially offset by a decline in customer deposits in fiscal
2006.




31


Investing
Activities.Capital expenditures in fiscal 2008, fiscal 2007
and fiscal 2006 were $12.6 million, $10.6 million and $12.5 million,
respectively. The majority of capital expenditures in fiscal 2008 were primarily
attributable to purchases of new printing presses, equipment, and information
technology systems and infrastructure. The majority of capital expenditures in
fiscal 2007 were attributable to acquisition and implementation of information
technology systems and fully integrating digital technology throughout our
yearbook production process. The majority of capital expenditures in fiscal 2006
were primarily attributable to purchases of new printing presses and fully
integrating digital technology throughout our yearbook production
process.





Our
projected capital expenditures for fiscal 2009 are expected to be approximately
$7.3 million.  Projected capital expenditures for fiscal 2009 are
lower than fiscal 2008 expenditures mainly due to purchases of printing presses
during 2008.





In
fiscal 2007, there was an additional outflow from investing activities of $5.9
million for the acquisition of Powers and an additional inflow from investing
activities of $4.7 million in net proceeds from the sale of frontage property
located at our Austin, Texas facility.





Financing
Activities.  In fiscal 2008, cash was used to pay down $11.6
million of the term loan, of which $1.1 million were mandatory payments. In
addition, net revolver payments were made of $7.8 million.





In
fiscal 2007, cash was used to pay down $19.4 million of the term loan, of which
$1.9 million were mandatory payments. In addition, net revolver payments were
made of $1.5 million.





In
fiscal 2006, cash was used to pay down $32.6 million of the term loan. This
was partially offset by net revolver borrowings of $9.3 million. Also in
fiscal 2006, $7.5million inproceeds from the sale of preferred stock benefited Parent
Holdings and Intermediate Holdings and resulted in a $7.0 million capital
contribution from Intermediate Holdings to AAC. For Parent Holdings, proceeds of
$150.0 million were received from the senior PIK Notes, which were used to pay
deferred financing fees and to make a distribution to stockholders.





Capital
Resources.In connection with the Merger, AAC entered into its existing
$195.0 million senior secured credit facility and issued $150.0 million of the
8.25% senior subordinated notes. Certain provisions of these financing
arrangements are described below.





The
senior secured credit facility, as amended, provides a $155.0 million term
loan, maturing in 2011, and up to $40.0 million in available revolving loan
borrowings, maturing in 2010. As of August 30, 2008, $75.5 million was
outstanding on the term loan, there was no borrowing outstanding on the
revolving loan and we had commitments for $2.1 million on letters of credit
outstanding. The senior secured credit facility, as amended, imposes certain
restrictions on AAC, including restrictions on its ability to incur
indebtedness, pay dividends, make investments, grant liens, sell assets and
engage in certain other activities. In addition, the senior secured credit
facility, as amended, contains financial covenants and maintenance tests,
including a minimum interest coverage test and a maximum total leverage test,
and restrictive covenants, including restrictions on its ability to make capital
expenditures. The senior secured credit facility, as amended, is secured by
substantially all of the assets of AAC, is guaranteed by and secured by the
assets of its existing and future domestic subsidiaries, if any and by a pledge
of all of the capital stock of its existing and future domestic subsidiaries, if
any. The senior secured credit facility, as amended, is also guaranteed by AAC
Holding Corp.





AAC
is required to pay cash interest on the 8.25% notes semi-annually in arrears on
April 1 and October 1 of each year. The 8.25% notes have no scheduled
amortization and mature on April 1, 2012. The indenture governing the 8.25%
notes contains certain restrictions on AAC, including restrictions on its
ability to incur indebtedness, pay dividends, make investments, grant liens,
sell its assets and engage in certain other activities. The 8.25% notes are
guaranteed by AAC’s existing and future domestic subsidiaries.





In
November 2004, Intermediate Holdings issued $89.3 million (net
proceeds) of 10.25% senior discount notes due 2012. The notes accrete to
$131.5 million aggregate principal amount at maturity. Interest accrues on
the notes in the form of an increase in the accreted value of such notes prior
to October 1, 2008. Thereafter, cash interest on the notes will accrue and
be payable semi-annually in arrears on April 1 and October 1 of each year,
commencing April 1, 2009, at a rate of 10.25% per annum. The notes are
Intermediate Holdings’ unsecured obligation and rank equally with all of its
future senior obligations and senior to its future subordinated indebtedness.
The 10.25% notes are effectively subordinated to Intermediate Holdings’ future
secured indebtedness to the extent of the assets securing that indebtedness and
are structurally subordinated to all indebtedness and other obligations of
Intermediate Holdings’ subsidiaries, including AAC.





In
January 2006, Intermediate Holdings entered into a Preferred Stock Purchase
Agreement with an investor pursuant to which Intermediate Holdings sold shares
of its mandatory redeemable series A preferred stock. In connection with this
transaction, Intermediate Holdings issued the investor 7,500 shares of the
mandatory redeemable series A preferred stock for an aggregate purchase price of
$7.5 million, which the investor paid to Intermediate Holdings in cash. The
holders of the mandatory redeemable series A
preferred stock are entitled to receive cumulative dividends at a rate of 14%
per year, when, as and if declared by the Board of Directors of Intermediate
Holdings.


32


The
holders of Series A Preferred Stock agreed in May 2006 to exchange
their shares of Series A Preferred Stock for new shares of Series A
Redeemable Preferred Stock of Parent Holdings. These new shares have the same
rights, preferences and privileges as the Series A Preferred Stock of
Intermediate Holdings.





In
June 2006, Parent Holdings issued $150.0 million senior PIK notes. On
February 24, 2007, the rate at which interest accrues on the senior PIK notes
increased by 2.00% per annum, to a rate of 14.75% and on August 30, 2008 the
rate was increased an additional 2.00% per annum, to a rate of 16.75%. Through
April 1, 2011, interest on the notes will be payable in the form of
additional notes semi-annually in arrears on April 1 and October 1. On
October 1, 2011, and thereafter, interest will be payable in cash
semi-annually in arrears on April 1 and October 1. The notes mature on
October 1, 2012. At maturity, we are required to repay the notes at a
repayment price of 103.188% of the aggregate principal amount thereof, plus
accrued and unpaid interest and special interest, if any, to the maturity date.
The notes are Parent Holdings’ unsecured obligation and rank equally with all of
its future senior obligations and senior to its future subordinated
indebtedness. The notes are effectively subordinated to Parent Holdings’ future
secured indebtedness to the extent of the assets securing that indebtedness and
are structurally subordinated to all indebtedness and other obligations of
Parent Holdings’ subsidiaries, including Intermediate Holdings and
AAC.





In
connection with the Transaction, each of Parent Holdings, Intermediate Holdings
and AAC embarked upon a consent solicitation to certain amendments to the
indentures governing the senior PIK notes, the 10.25% senior discount notes and
the 8.25% senior subordinated notes, respectively.  After receiving
requisite consents, Parent Holdings, Intermediate Holdings and AAC each entered
into a supplemental indenture incorporating proposed amendments to the
indentures governing the senior PIK notes, the 10.25% senior discount notes and
the 8.25% senior subordinated notes, respectively. In the case of each
supplemental indenture, the applicable amendments consist of (1) a requirement
that upon consummation of the Transaction the applicable company shall redeem
all of its outstanding notes which have delivered a valid consent to the
applicable amendments at a redemption price in cash equal to 101%, 102.8125% and
102.3125% of the aggregate principal amount of the senior PIK notes, the 10.25%
senior discount notes and the 8.25% senior subordinated notes, respectively,
plus accrued and unpaid interest, and (2) the removal of substantially all of
the restrictive and reporting covenants under the applicable indenture, as well
as certain events of default and related provisions, including without
limitation, the covenant that would otherwise require the applicable company to
make an offer to purchase the applicable notes upon consummation of the
Transaction as currently provided in the applicable indenture. In the case of
the senior PIK notes, the covenant removal would remain effective for
non-consenting notes even if the Transaction has not closed. In the case of the
10.25% senior discount notes and the 8.25% senior subordinated notes, the
amendments will only be effective upon the consummation of the
Transaction.





We are currently in compliance with financial covenants in all of the agreements
governing our outstanding indebtedness.





We
have a significant amount of indebtedness. On August 30, 2008, Parent Holdings
had total indebtedness of $566.5 million (of which $203.1 million was senior PIK
notes, $130.4 million was 10.25% senior discount notes, $150.0 million was 8.25%
senior subordinated notes, $75.5 million was indebtedness under the existing
senior secured credit facility, $7.5 million was of our mandatory redeemable
series A preferred stock).





We
expect that cash generated from operating activities and availability under the
senior secured credit facility will be our principal sources of liquidity. Based
on our current level of operations and anticipated cost savings and operational
improvements, we believe our cash flow from operations, available cash and
available borrowings under the senior secured credit facility will be adequate
to meet our liquidity needs for at least the next twelve months.





Off
Balance-Sheet Obligations





Gold Consignment
Agreement.On 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 or (iii) a
borrowing base, calculated based on a percentage of the 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 price variance on 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 August 30, 2008 and August 25,
2007, we held no consigned gold.





The
agreement can be terminated by either us or The Bank of Nova Scotia with
60 days prior written notice to the other party.




33


Letters of
Credit.  As of August 30, 2008 and August 25, 2007, we had
commitments for $2.1 million and $2.3 million, respectively, on letters of
credit outstanding.





Contractual
Obligations





As
of August 30, 2008, the due dates and amounts of our contractual obligations are
as follows (in thousands):





Fiscal
            
            
            Fiscal
            
            
            Fiscal
            
            
            Fiscal
            
            
            Fiscal2009
            
            
            2010
            
            
            2011
            
            
            2012
            
            
            2013
            
            
            Thereafter
            
            
            TotalSenior
      PIK Notes (original principal)
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            150,000
            
            
            $
            -
            
            
            $
            150,000Senior
      PIK Notes (additional principal from PIK interest)
            
            
            - -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            157,801
            
            
            
            -
            
            
            
            157,801Mandatory
      Redeemable Preferred Stock
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            7,500
            
            
            
            -
            
            
            
            7,500Mandatory
      Redeemable Preferred Stock (dividends)
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            12,155
            
            
            
            -
            
            
            
            12,15510.25%
      Notes (principal)
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            131,534
            
            
            
            -
            
            
            
            131,5348.25%
      Senior Subordinated Debt (principal)
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            150,000
            
            
            
            -
            
            
            
            -
            
            
            
            150,000Interest
      on fixed rate debt (a)
            
            
            19,114
            
            
            
            25,854
            
            
            
            25,854
            
            
            
            77,411
            
            
            
            42,328
            
            
            
            -
            
            
            
            190,561Term
      loan (principal)
            
            
            2,908
            
            
            
            788
            
            
            
            71,789
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            75,485Term
      loan (interest) (b)
            
            
            3,590
            
            
            
            3,484
            
            
            
            1,397
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            8,471Operating
      leases (c)
            
            
            1,539
            
            
            
            1,116
            
            
            
            555
            
            
            
            337
            
            
            
            268
            
            
            
            1,320
            
            
            
            5,135Management
      agreement (d)
            
            
            3,309
            
            
            
            3,309
            
            
            
            3,309
            
            
            
            3,309
            
            
            
            3,309
            
            
            
            1,930
            
            
            
            18,475Postretirement
      plans (e)
            
            
            1,033
            
            
            
            1,054
            
            
            
            1,056
            
            
            
            1,062
            
            
            
            1,063
            
            
            
            5,313
            
            
            
            10,581Total
            
            $
            31,493
            
            
            $
            35,605
            
            
            $
            103,960
            
            
            $
            232,119
            
            
            $
            505,958
            
            
            $
            8,563
            
            
            $
            917,698




(a)
            Represents
      interest payments due on the senior PIK notes, 10.25% Notes and 8.25%
      Notes.


(b)
            Assumes
      an interest rate on the term loan of 5.75%, based on the rate as of August
      30, 2008.


(c)
            Some
      of our rental property leases contain options to renew the leased space
      for periods up to an additional five
years.


(d)
            AAC
      and Intermediate Holdings have entered into a management agreement with an
      affiliate of Fenway Partners Capital Fund II, L.P. pursuant to which they,
      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). In arriving at the future
      obligations above, 5% of fiscal 2008 EBITDA was used. This agreement has a
      10-year minimum term. See “Certain Relationships and Related
      Transactions.”


(e)
            CBI
      provides certain healthcare and life insurance benefits for former
      employees of L.G. Balfour Company, Inc. Certain hourly employees of Taylor
      are covered by a defined benefit pension plan established by
      Taylor.




Seasonality





The
seasonal nature of our various businesses tends to be tempered by our broad
product mix. Class ring sales are highest during October through December and
early spring, with many orders made for delivery to students before the winter
holiday season. Graduation product sales are predominantly made during February
through April prior to the April through June graduation season. Yearbook sales
are highest during the months of April through June, as yearbooks are typically
shipped prior to each school’s summer break. Our recognition and affinity
product line sales are also seasonal, with highest sales 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 first and fourth fiscal quarters, which includes the beginning of the
school year and the summer months when school is not in session, thus reducing
related shipment of products. In addition, our working capital requirements tend
to exceed our operating cash flows from May through September.





34
 Recent
Accounting Pronouncements
 
 In
July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN
48”), which prescribes a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. In addition, FIN 48 provides guidance on
derecognition, classification, accounting in interim periods and disclosure
requirements for uncertain tax positions. The accounting provisions of FIN 48
were effective for beginning with its fiscal year 2008. As a result of the
adoption of FIN 48 and as of August 30, 2008, no adjustments to our financial
position and results of operations were required.
 
 In
September 2006, the FASB issued Statement on Financial Accounting Standard
(“SFAS”) No. 157, “Fair Value Measurements” (“SFAS 157”), which defines
fair value, establishes a framework for measuring fair value and expands
disclosures about
fair value measurements. SFAS 157 applies under other accounting pronouncements
that require or permit fair value measurements and does not require any new fair
value measurements. The provisions of SFAS 157 are effective for us beginning
with our fiscal year 2009. We are currently evaluating the impact this standard
will have on our financial position and results of
operations.





In
September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting
for Defined Benefit Pension and Other Postretirement Plans — An Amendment of
FASB Statements No. 87, 88, 106 and 132 (R)” (“SFAS 158”). SFAS 158
requires an employer to recognize the funded status of defined benefit
postretirement plan as an asset or liability in the balance sheet and to
recognize changes in that funded status in the year in which changes occur
through comprehensive income. Additionally, SFAS 158 requires an employer to
measure the funded status of each of its plans as of the date of its year-end
statement of financial position.  We adopted the recognition and disclosure
provisions of SFAS 158 in our fiscal year 2007. The measurement date provisions
of SFAS 158 will be effective for us beginning with our fiscal year 2009. We
have not yet evaluated the impact that the measurement date provisions of this
standard will have on our financial position and results of
operations.





In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities” (“SFAS 159”).  SFAS 159 permits
entities to measure many financial assets and financial liabilities at fair
value.  Unrealized gains and losses on items for which the fair value
option has been elected are reported in earnings.  SFAS 159 is effective
for us beginning with our fiscal year 2009.  The standard is not expected
to have a material impact on our financial position and results of
operations.





Item 7A.
Quantitative And Qualitative
Disclosures About Market Risk





Interest Rate
Risk.We have exposure to market risk 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 existing gold
consignment agreement are variable rate arrangements. Each quarter point change
in interest rates on our senior secured credit facility, which bears interest at
variable rates, would result in a $0.3 million change in annual interest
expense, assuming the entire revolving loan was drawn.





CurrencyExchange Rate Risk.We purchase the majority of our precious, semi-precious and synthetic
stones from a single supplier in Germany. We believe that all of our major
competitors purchase their semi-precious stones from this same supplier. Each
ten percent change in the Euro exchange rate would result in a $0.5 million
change in cost of goods sold, assuming stone purchase levels approximate the
levels of fiscal 2008.





Gold.We
purchase a majority of our gold from a single supplier. We may consign a portion
of our gold and pay for consigned gold as our related products are shipped to
customers. Each ten percent change in the price of gold would result in a
$3.6 million change in cost of goods sold, assuming gold purchase levels
approximate the levels in fiscal 2008.


35


Item 8.
Financial Statement and
Supplementary Data





REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To the
Board of Directors and Stockholders of


American
Achievement Group Holding Corp.





We
have audited the accompanying consolidated balance sheets of American
Achievement Group Holding Corp. and subsidiaries (“Parent Holdings”) as of
August 30, 2008 and August 25, 2007, and the related consolidated statements of
operations, stockholders’ deficit, and cash flows for the years ended August 30,
2008, August 25, 2007 and August 26, 2006. These financial statements are the
responsibility of Parent Holdings’ management. Our responsibility is to express
an opinion on these financial statements based on our audits.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. Parent Holdings is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of Parent Holdings’ internal control over financial
reporting. Accordingly, we express no such opinion.An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.




In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Parent Holdings as of August 30,
2008 and August 25, 2007, and the results of their operations and their cash
flows for the years ended August 30, 2008, August 25, 2007 and August 26,
2006, in conformity with accounting principles generally accepted in the United
States of America.





/s/
DELOITTE & TOUCHE LLP


Austin,
Texas


November
24, 2008





36


REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To the
Board of Directors and Stockholder of


AAC Group
Holding Corp.





We
have audited the accompanying consolidated balance sheets of AAC Group Holding
Corp. and subsidiaries (“Intermediate Holdings”) (wholly-owned subsidiary of
American Achievement Group Holding Corp.) as of August 30, 2008 and August 25,
2007, and the related consolidated statements of operations, stockholder's
equity, and cash flows for the years ended August 30, 2008, August 25,
2007 and August 26, 2006. These financial statements are the responsibility
of Intermediate Holdings’ management. Our responsibility is to express an
opinion on these financial statements based on our audits.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. Intermediate Holdings is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of Intermediate Holdings’ internal control over
financial reporting. Accordingly, we express no such opinion.An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.




In
our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Intermediate Holdings as of August
30, 2008 and August 25, 2007, and the results of their operations and their
cash flows for the years ended August 30, 2008, August 25, 2007 and August
26, 2006, in conformity with accounting principles generally accepted in the
United States of America.





/s/
DELOITTE & TOUCHE LLP


Austin,
Texas


November
24, 2008





37


REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To the
Board of Directors and Stockholder of


American
Achievement Corporation





We
have audited the accompanying consolidated balance sheets of American
Achievement Corporation and subsidiaries (“AAC”) (wholly-owned indirect
subsidiary of AAC Group Holding Corp.) as of August 30, 2008 and August 25,
2007, and the related consolidated statements of operations, stockholder's
equity, and cash flows for the years ended August 30, 2008, August 25,
2007 and August 26, 2006. These financial statements are the responsibility
of AAC’s management. Our responsibility is to express an opinion on these
financial statements based on our audits.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. AAC is not required to have, nor
were we engaged to perform, an audit of its internal control over financial
reporting. Our audits included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of AAC’s internal control over financial reporting. Accordingly,
we express no such opinion.An audit also includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.





In
our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of AAC as of August 30, 2008 and
August 25, 2007, and the results of their operations and their cash flows for
the years ended August 30, 2008, August 25, 2007 and August 26, 2006, in
conformity with accounting principles generally accepted in the United States of
America.





/s/
DELOITTE & TOUCHE LLP


Austin,
Texas


November
24, 2008


38


AMERICAN
ACHIEVEMENT GROUP HOLDING CORP.


Consolidated
Balance Sheet








Parent
      HoldingsAugust
      30, 2008
            
            
            August
      25, 2007(Dollars
      in thousands)ASSETSCash
      and cash equivalents
            
            $
            9,757
            
            
            $
            1,454Accounts
      receivable, net of allowances
            
            
            36,920
            
            
            
            43,039Inventories
            
            
            27,411
            
            
            
            31,158Deferred
      tax assets
            
            
            11,752
            
            
            
            3,731Prepaid
      expenses and other current assets, net
            
            
            17,062
            
            
            
            18,317Total
      current assets
            
            
            102,902
            
            
            
            97,699Property,
      plant and equipment, net
            
            
            68,477
            
            
            
            70,653Goodwill
            
            
            171,073
            
            
            
            173,277Other
      intangible assets, net
            
            
            97,000
            
            
            
            107,855Deferred
      tax assets
            
            
            973
            
            
            
            -Other
      assets, net
            
            
            18,692
            
            
            
            26,582Total
      assets
            
            $
            459,117
            
            
            $
            476,066LIABILITIES
      AND STOCKHOLDERS’ DEFICITBook
      overdraft
            
            $
            61
            
            
            $
            5,082Accounts
      payable
            
            
            10,900
            
            
            
            10,590Customer
      deposits
            
            
            8,102
            
            
            
            11,771Accrued
      expenses
            
            
            22,018
            
            
            
            20,361Deferred
      revenue
            
            
            2,750
            
            
            
            4,460Accrued
      interest
            
            
            5,722
            
            
            
            5,550Current
      portion of long-term debt
            
            
            2,908
            
            
            
            900Total
      current liabilities
            
            
            52,461
            
            
            
            58,714Long-term
      debt, net of current portion
            
            
            556,135
            
            
            
            537,680Mandatory
      redeemable preferred stock, 15,000 shares authorized, 7,500 shares issued
      and outstanding
            
            
            7,500
            
            
            
            7,500Deferred
      tax liabilities
            
            
            -
            
            
            
            9,736Other
      long-term liabilities
            
            
            9,201
            
            
            
            6,619Total
      liabilities
            
            
            625,297
            
            
            
            620,249Commitments
      and contingencies (Note 12)Stockholders’
      deficit:Common
      stock, $.01 par value, 1,250,000 shares authorized, 505,460 shares issued
      and outstanding
            
            
            5
            
            
            
            5Distributions
      in excess of paid-in capital
            
            
            (123,880
            )
            
            
            (124,045
            )Accumulated
      deficit
            
            
            (45,014
            )
            
            
            (23,297
            )Accumulated
      other comprehensive income
            
            
            2,709
            
            
            
            3,154Total
      stockholders’ deficit
            
            
            (166,180
            )
            
            
            (144,183
            )Total
      liabilities and stockholders’ deficit
            
            $
            459,117
            
            
            $
            476,066






The
accompanying notes are an integral part of these consolidated financial
statements.




39


AAC
GROUP HOLDING CORP.


Consolidated
Balance Sheets





Intermediate
      HoldingsAugust
      30, 2008
            
            
            August
      25, 2007(Dollars
      in thousands)ASSETSCash
      and cash equivalents
            
            $
            9,746
            
            
            $
            1,168Accounts
      receivable, net of allowances
            
            
            36,920
            
            
            
            43,039Inventories
            
            
            27,411
            
            
            
            31,158Deferred
      tax assets
            
            
            12,196
            
            
            
            3,731Prepaid
      expenses and other current assets, net
            
            
            19,395
            
            
            
            18,317Total
      current assets
            
            
            105,668
            
            
            
            97,413Property,
      plant and equipment, net
            
            
            68,477
            
            
            
            70,653Goodwill
            
            
            171,073
            
            
            
            173,277Other
      intangible assets, net
            
            
            97,000
            
            
            
            107,855Other
      assets, net
            
            
            12,555
            
            
            
            18,931Total
      assets
            
            $
            454,773
            
            
            $
            468,129LIABILITIES
      AND STOCKHOLDER'S EQUITYBook
      overdraft
            
            $
            61
            
            
            $
            5,082Accounts
      payable
            
            
            10,900
            
            
            
            10,590Customer
      deposits
            
            
            8,102
            
            
            
            11,771Accrued
      expenses
            
            
            16,863
            
            
            
            20,299Deferred
      revenue
            
            
            2,750
            
            
            
            4,460Accrued
      interest
            
            
            5,722
            
            
            
            5,550Current
      portion of long-term debt
            
            
            2,908
            
            
            
            900Total
      current liabilities
            
            
            47,306
            
            
            
            58,652Long-term
      debt, net of current portion
            
            
            352,998
            
            
            
            361,836Deferred
      tax liabilities
            
            
            21,595
            
            
            
            19,731Other
      long-term liabilities
            
            
            2,703
            
            
            
            3,034Total
      liabilities
            
            
            424,602
            
            
            
            443,253Commitments
      and contingencies (Note 12)Stockholder's
      equity:Common
      stock, $.000001 par value, 100 shares authorized, 100 shares issued and
      outstanding
            
            
            -
            
            
            
            -Additional
      paid-in capital
            
            
            24,309
            
            
            
            24,144Accumulated
      earnings (deficit)
            
            
            3,153
            
            
            
            (2,422
            )Accumulated
      other comprehensive income
            
            
            2,709
            
            
            
            3,154Total
      stockholder's equity
            
            
            30,171
            
            
            
            24,876Total
      liabilities and stockholder's equity
            
            $
            454,773
            
            
            $
            468,129







The
accompanying notes are an integral part of these consolidated financial
statements.




40


AMERICAN
ACHIEVEMENT CORPORATION


Consolidated
Balance Sheets








AACAugust
      30, 2008
            
            
            August
      25, 2007(Dollars
      in thousands)ASSETSCash
      and cash equivalents
            
            $
            9,735
            
            
            $
            620Accounts
      receivable, net of allowances
            
            
            36,920
            
            
            
            43,039Inventories
            
            
            27,411
            
            
            
            31,158Deferred
      tax assets
            
            
            14,920
            
            
            
            3,731Prepaid
      expenses and other current assets, net
            
            
            18,839
            
            
            
            18,317Total
      current assets
            
            
            107,825
            
            
            
            96,865Property,
      plant and equipment, net
            
            
            68,477
            
            
            
            70,653Goodwill
            
            
            171,073
            
            
            
            173,277Other
      intangible assets, net
            
            
            97,000
            
            
            
            107,855Other
      assets, net
            
            
            10,739
            
            
            
            16,669Total
      assets
            
            $
            455,114
            
            
            $
            465,319LIABILITIES
      AND STOCKHOLDER'S EQUITYBook
      overdraft
            
            $
            61
            
            
            $
            5,082Accounts
      payable
            
            
            10,900
            
            
            
            10,590Customer
      deposits
            
            
            8,102
            
            
            
            11,771Accrued
      expenses
            
            
            16,852
            
            
            
            20,284Deferred
      revenue
            
            
            2,750
            
            
            
            4,460Accrued
      interest
            
            
            5,722
            
            
            
            5,550Current
      portion of long-term debt
            
            
            2,908
            
            
            
            900Total
      current liabilities
            
            
            47,295
            
            
            
            58,637Long-term
      debt, net of current portion
            
            
            222,577
            
            
            
            243,982Deferred
      tax liabilities
            
            
            39,580
            
            
            
            30,639Other
      long-term liabilities
            
            
            2,675
            
            
            
            3,006Total
      liabilities
            
            
            312,127
            
            
            
            336,264Commitments
      and contingencies (Note 12)Stockholder's
      equity:Common
      stock, $.000001 par value, 100 shares authorized, 100 shares issued and
      outstanding
            
            
            -
            
            
            
            -Additional
      paid-in capital
            
            
            109,211
            
            
            
            109,046Accumulated
      earnings
            
            
            31,067
            
            
            
            16,855Accumulated
      other comprehensive income
            
            
            2,709
            
            
            
            3,154Total
      stockholder's equity
            
            
            142,987
            
            
            
            129,055Total
      liabilities and stockholder's equity
            
            $
            455,114
            
            
            $
            465,319









The
accompanying notes are an integral part of these consolidated financial
statements.





41











AMERICAN
ACHIEVEMENT GROUP HOLDING CORP.


Consolidated
Statement of Operations








Parent
      HoldingsFor
      the year endedAugust
      30, 2008
            
            
            August
      25, 2007
            
            
            August
      26, 2006(Dollars
      in thousands)Net
      sales
            
            $
            313,403
            
            
            $
            310,588
            
            
            $
            299,936Cost
      of sales
            
            
            140,373
            
            
            
            138,892
            
            
            
            130,145Gross
      profit
            
            
            173,030
            
            
            
            171,696
            
            
            
            169,791Selling,
      general and administrative expenses
            
            
            140,552
            
            
            
            126,731
            
            
            
            129,334Other
      charges
            
            
            -
            
            
            
            5,262
            
            
            
            -Operating
      income
            
            
            32,478
            
            
            
            39,703
            
            
            
            40,457Interest
      expense, net
            
            
            64,479
            
            
            
            59,275
            
            
            
            39,350Income
      (loss) from continuing operations before income taxes
            
            
            (32,001
            )
            
            
            (19,572
            )
            
            
            1,107Provision (benefit)
      for income taxes
            
            
            (8,396
            )
            
            
            (4,319
            )
            
            
            1,401Loss
      from continuing operations
            
            
            (23,605
            )
            
            
            (15,253
            )
            
            
            (294
            )Discontinued
      operations:Income
      (loss) from discontinued operations before income taxes
            
            
            (7,235
            )
            
            
            (28,406
            )
            
            
            2,085Provision
      (benefit) for income taxes
            
            
            (9,123
            )
            
            
            (11,108
            )
            
            
            815Income
      (loss) from discontinued operations
            
            
            1,888
            
            
            
            (17,298
            )
            
            
            1,270Net
      income (loss)
            
            $
            (21,717
            )
            
            $
            (32,551
            )
            
            $
            976







The
accompanying notes are an integral part of these consolidated financial
statements.





42


AAC
GROUP HOLDING CORP.


Consolidated
Statements of Operations








Intermediate
      HoldingsFor
      the year endedAugust
      30, 2008
            
            
            August
      25, 2007
            
            
            August
      26, 2006(Dollars
      in thousands)Net
      sales
            
            $
            313,403
            
            
            $
            310,588
            
            
            $
            299,936Cost
      of sales
            
            
            140,373
            
            
            
            138,892
            
            
            
            130,145Gross
      profit
            
            
            173,030
            
            
            
            171,696
            
            
            
            169,791Selling,
      general and administrative expenses
            
            
            132,809
            
            
            
            126,731
            
            
            
            129,334Other
      charges
            
            
            -
            
            
            
            5,262
            
            
            
            -Operating
      income
            
            
            40,221
            
            
            
            39,703
            
            
            
            40,457Interest
      expense, net
            
            
            32,769
            
            
            
            33,522
            
            
            
            34,265Income
      from continuing operations before income taxes
            
            
            7,452
            
            
            
            6,181
            
            
            
            6,192Provision for
      income taxes
            
            
            3,765
            
            
            
            3,875
            
            
            
            3,170Income
      from continuing operations
            
            
            3,687
            
            
            
            2,306
            
            
            
            3,022Discontinued
      operations:Income
      (loss) from discontinued operations before income taxes
            
            
            (7,235
            )
            
            
            (28,406
            )
            
            
            2,085Provision
      (benefit) for income taxes
            
            
            (9,123
            )
            
            
            (11,108
            )
            
            
            815Income
      (loss) from discontinued operations
            
            
            1,888
            
            
            
            (17,298
            )
            
            
            1,270Net
      income (loss)
            
            $
            5,575
            
            
            $
            (14,992
            )
            
            $
            4,292







The
accompanying notes are an integral part of these consolidated financial
statements.





43


AMERICAN
ACHIEVEMENT CORPORATION


Consolidated
Statements of Operations








AACFor
      the year endedAugust
      30, 2008
            
            
            August
      25, 2007
            
            
            August
      26, 2006(Dollars
      in thousands)Net
      sales
            
            $
            313,403
            
            
            $
            310,588
            
            
            $
            299,936Cost
      of sales
            
            
            140,373
            
            
            
            138,892
            
            
            
            130,145Gross
      profit
            
            
            173,030
            
            
            
            171,696
            
            
            
            169,791Selling,
      general and administrative expenses
            
            
            132,809
            
            
            
            126,731
            
            
            
            129,334Other
      charges
            
            
            -
            
            
            
            5,262
            
            
            
            -Operating
      income
            
            
            40,221
            
            
            
            39,703
            
            
            
            40,457Interest
      expense, net
            
            
            19,775
            
            
            
            22,064
            
            
            
            23,308Income
      from continuing operations before income taxes
            
            
            20,446
            
            
            
            17,639
            
            
            
            17,149Provision for
      income taxes
            
            
            8,122
            
            
            
            7,986
            
            
            
            7,092Income
      from continuing operations
            
            
            12,324
            
            
            
            9,653
            
            
            
            10,057Discontinued
      operations:Income
      (loss) from discontinued operations before income taxes
            
            
            (7,235
            )
            
            
            (28,406
            )
            
            
            2,085Provision
      (benefit) for income taxes
            
            
            (9,123
            )
            
            
            (11,108
            )
            
            
            815Income
      (loss) from discontinued operations
            
            
            1,888
            
            
            
            (17,298
            )
            
            
            1,270Net
      income (loss)
            
            $
            14,212
            
            
            $
            (7,645
            )
            
            $
            11,327







The
accompanying notes are an integral part of these consolidated financial
statements.





44


AMERICAN
ACHIEVEMENT GROUP HOLDING CORP.


Consolidated
Statement of Stockholders’ Deficit








Distributions
            
            
            Accumulatedin
      excess of
            
            
            other
            
            
            AccumulatedCommon
      Stock
            
            
            paid-in
            
            
            comprehensive
            
            
            earningsParent
      Holdings
            
            Shares
            
            
            Amount
            
            
            capital
            
            
            income
            
            
            (deficit)
            
            
            Total(Dollars
      in thousands)Balance
      at incorporation,May 30, 2006
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -Issuance
      of stock to Parent Holdings’stockholders
      in exchange for transfer ofIntermediate
      Holdings’ stock
            
            
            505,460
            
            
            
            5
            
            
            
            16,491
            
            
            
            (956
            )
            
            
            8,278
            
            
            
            23,818Dividend
      distribution to stockholders
            
            
            -
            
            
            
            -
            
            
            
            (140,536
            )
            
            
            
            
            
            
            
            
            
            
            (140,536
            )Comprehensive
      income-Net
      income
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            976
            
            
            
            976Adjustment
      to minimum pension liability(net
      of tax impact)
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            956
            
            
            
            -
            
            
            
            956Total
      comprehensive income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,932Balance,
      August 26, 2006
            
            
            505,460
            
            
            $
            5
            
            
            $
            (124,045
            )
            
            $
            -
            
            
            $
            9,254
            
            
            $
            (114,786
            )Comprehensive
      loss -Net
      loss
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (32,551
            )
            
            
            (32,551
            )Total
      comprehensive loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (32,551
            )Adjustment
      for initial adoption ofSFAS
      158, net of tax
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            3,154
            
            
            
            -
            
            
            
            3,154Balance,
      August 25, 2007
            
            
            505,460
            
            
            $
            5
            
            
            $
            (124,045
            )
            
            $
            3,154
            
            
            $
            (23,297
            )
            
            $
            (144,183
            )Issuance
      of CIP units in lieu of bonus
            
            
            
            
            
            
            
            
            
            
            165
            
            
            
            
            
            
            
            
            
            
            
            165Comprehensive
      loss -Net
      loss
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (21,717
            )
            
            
            (21,717
            )Adjustment
      to minimum pension liability(net
      of tax impact)
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (445
            )
            
            
            -
            
            
            
            (445
            )Total
      comprehensive loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (22,162
            )Balance,
      August 30, 2008
            
            
            505,460
            
            
            $
            5
            
            
            $
            (123,880
            )
            
            $
            2,709
            
            
            $
            (45,014
            )
            
            $
            (166,180
            )










The
accompanying notes are an integral part of these consolidated financial
statements.






45


AAC
GROUP HOLDING CORP.


Consolidated
Statements of Stockholder's Equity








AccumulatedAdditional
            
            
            other
            
            
            AccumulatedCommon
      Stock
            
            
            paid-in
            
            
            comprehensive
            
            
            earningsIntermediate
      Holdings
            
            Shares
            
            
            Amount
            
            
            capital
            
            
            income
      (loss)
            
            
            (deficit)
            
            
            Total(Dollars
      in thousands)Balance,
      August 27, 2005
            
            
            505,460
            
            
            $
            5
            
            
            $
            16,491
            
            
            $
            (956
            )
            
            $
            8,278
            
            
            $
            23,818Comprehensive
      income-Net
      income
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            4,292
            
            
            
            4,292Adjustment
      to minimum pensionliability
      (net of tax impact)
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            956
            
            
            
            -
            
            
            
            956Total
      comprehensive income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            5,248Capital
      contribution fromParent
      Holdings
            
            
            -
            
            
            
            -
            
            
            
            7,648
            
            
            
            -
            
            
            
            -
            
            
            
            7,648Exchange
      of Intermediate Holdings’stock
      for stock in Parent Holdings
            
            
            (505,360
            )
            
            
            (5
            )
            
            
            5
            
            
            
            -
            
            
            
            -
            
            
            
            -Balance,
      August 26, 2006
            
            
            100
            
            
            $
            -
            
            
            $
            24,144
            
            
            $
            -
            
            
            $
            12,570
            
            
            $
            36,714Comprehensive
      loss-Net
      loss
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (14,992
            )
            
            
            (14,992
            )Total
      comprehensive loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (14,992
            )Adjustment
      for initial adoption ofSFAS
      158, net of tax
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            3,154
            
            
            
            -
            
            
            
            3,154Balance,
      August 25, 2007
            
            
            100
            
            
            $
            -
            
            
            $
            24,144
            
            
            $
            3,154
            
            
            $
            (2,422
            )
            
            $
            24,876Issuance
      of CIP units in lieu of bonus
            
            
            
            
            
            
            
            
            
            
            165
            
            
            
            
            
            
            
            
            
            
            
            165Comprehensive
      income -Net
      income
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            5,575
            
            
            
            5,575Adjustment
      to minimum pensionliability
      (net of tax impact)
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (445
            )
            
            
            -
            
            
            
            (445
            )Total
      comprehensive loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            5,130Balance,
      August 30, 2008
            
            
            100
            
            
            $
            -
            
            
            $
            24,309
            
            
            $
            2,709
            
            
            $
            3,153
            
            
            $
            30,171







The
accompanying notes are an integral part of these consolidated financial
statements.





46





AMERICAN
ACHIEVEMENT CORPORATION


Consolidated
Statements of Stockholder's Equity








AccumulatedAdditional
            
            
            otherCommon
      Stock
            
            
            paid-in
            
            
            comprehensive
            
            
            AccumulatedAAC
            
            Shares
            
            
            Amount
            
            
            capital
            
            
            income
      (loss)
            
            
            earnings
            
            
            TotalBalance,
      August 27, 2005
            
            
            100
            
            
            $
            -
            
            
            $
            102,046
            
            
            $
            (956
            )
            
            $
            13,173
            
            
            $
            114,263Comprehensive
      income-Net
      income
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            11,327
            
            
            
            11,327Adjustment
      to minimum pensionliability
      (net of tax impact)
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            956
            
            
            
            -
            
            
            
            956Total
      comprehensive income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            12,283Capital
      contribution from Intermediate Holdings
            
            
            -
            
            
            
            -
            
            
            
            7,000
            
            
            
            -
            
            
            
            -
            
            
            
            7,000Balance,
      August 26, 2006
            
            
            100
            
            
            $
            -
            
            
            $
            109,046
            
            
            $
            -
            
            
            $
            24,500
            
            
            $
            133,546Comprehensive
      loss-Net
      loss
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (7,645
            )
            
            
            (7,645
            )Total
      comprehensive loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (7,645
            )Adjustment
      for initial adoption ofSFAS
      158, net of tax
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            3,154
            
            
            
            -
            
            
            
            3,154Balance,
      August 25, 2007
            
            
            100
            
            
            $
            -
            
            
            $
            109,046
            
            
            $
            3,154
            
            
            $
            16,855
            
            
            $
            129,055Issuance
      of CIP units in lieu of bonus
            
            
            
            
            
            
            
            
            
            
            165
            
            
            
            
            
            
            
            
            
            
            
            165Comprehensive
      income -Net
      income
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            14,212
            
            
            
            14,212Adjustment
      to minimum pensionliability
      (net of tax impact)
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (445
            )
            
            
            -
            
            
            
            (445
            )Total
      comprehensive income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            13,767Balance,
      August 30, 2008
            
            
            100
            
            
            $
            -
            
            
            $
            109,211
            
            
            $
            2,709
            
            
            $
            31,067
            
            
            $
            142,987










The
accompanying notes are an integral part of these consolidated financial
statements.








47


AMERICAN
ACHIEVEMENT GROUP HOLDING CORP.


Consolidated
Statement of Cash Flows







Parent
      HoldingsFor
      the year endedAugust
      30, 2008
            
            
            August
      25, 2007
            
            
            August
      26, 2006(Dollars
      in thousands)Cash
      flows from operating activities:Net
      income (loss)
            
            $
            (21,717
            )
            
            $
            (32,551
            )
            
            $
            976Adjustments
      to reconcile net income (loss) to net cash provided by operating
      activities:Other
      charges - continuing operations
            
            
            -
            
            
            
            5,262
            
            
            
            -Other
      charges - discontinued operations
            
            
            5,542
            
            
            
            22,751
            
            
            
            -Depreciation
      and amortization
            
            
            25,229
            
            
            
            25,000
            
            
            
            25,095Deferred
      income taxes
            
            
            (18,422
            )
            
            
            (15,506
            )
            
            
            2,061Amortization
      of deferred financing fees
            
            
            3,490
            
            
            
            3,491
            
            
            
            2,269Accretion
      of interest on 10.25% senior discount notes
            
            
            12,567
            
            
            
            11,037
            
            
            
            10,161Accretion
      of Senior PIK Notes
            
            
            27,293
            
            
            
            21,647
            
            
            
            4,197Loss
      (gain) on sale or disposal of property, plant and
equipment
            
            
            13
            
            
            
            (1,989
            )
            
            
            79Allowance
      for doubtful accounts
            
            
            198
            
            
            
            (233
            )
            
            
            (464
            )Loss
      (gain) on operating lease agreement
            
            
            (222
            )
            
            
            961
            
            
            
            -Changes
      in assets and liabilities:Accounts
      receivable
            
            
            5,921
            
            
            
            (2,632
            )
            
            
            41Inventories
            
            
            3,713
            
            
            
            (951
            )
            
            
            (9,217
            )Prepaid
      expenses and other current assets, net
            
            
            143
            
            
            
            (4,793
            )
            
            
            7,325Other
      assets, net
            
            
            2,263
            
            
            
            90
            
            
            
            (2,143
            )Deferred
      revenue
            
            
            (1,710
            )
            
            
            1,843
            
            
            
            1,613Accounts
      payable, accrued expenses, customer deposits and other long-term
      liabilities
            
            
            957
            
            
            
            (5,348
            )
            
            
            (12,574
            )Net
      cash provided by operating activities
            
            
            45,258
            
            
            
            28,079
            
            
            
            29,419Cash
      flows from investing activities:Purchases
      of property, plant and equipment
            
            
            (12,579
            )
            
            
            (10,594
            )
            
            
            (12,511
            )Business
      acquisitions, net of cash acquired
            
            
            -
            
            
            
            (5,914
            )
            
            
            (539
            )Proceeds
      from sales of property, plant and equipment
            
            
            42
            
            
            
            4,651
            
            
            
            104Net
      cash used in investing activities
            
            
            (12,537
            )
            
            
            (11,857
            )
            
            
            (12,946
            )Cash
      flows from financing activities:Payments
      on term loan
            
            
            (11,592
            )
            
            
            (19,433
            )
            
            
            (32,610
            )Proceeds
      from revolving credit facility
            
            
            14,100
            
            
            
            28,000
            
            
            
            35,050Payments
      on revolving credit facility
            
            
            (21,905
            )
            
            
            (29,495
            )
            
            
            (25,750
            )Proceeds
      from preferred stock issuance
            
            
            -
            
            
            
            -
            
            
            
            7,500Proceeds
      from Senior PIK Notes
            
            
            -
            
            
            
            -
            
            
            
            150,000Distribution
      to stockholders
            
            
            -
            
            
            
            -
            
            
            
            (140,536
            )Deferred
      financing fees
            
            
            -
            
            
            
            (179
            )
            
            
            (9,464
            )Change
      in book overdraft
            
            
            (5,021
            )
            
            
            2,935
            
            
            
            (1,583
            )Net
      cash used in financing activities
            
            
            (24,418
            )
            
            
            (18,172
            )
            
            
            (17,393
            )Net
      increase (decrease) in cash and cash equivalents
            
            $
            8,303
            
            
            $
            (1,950
            )
            
            $
            (920
            )Cash
      and cash equivalents, beginning of year
            
            
            1,454
            
            
            
            3,404
            
            
            
            4,324Cash
      and cash equivalents, end of year
            
            $
            9,757
            
            
            $
            1,454
            
            
            $
            3,404Supplemental
      disclosures of cash flow information:Cash
      paid during the year for:Interest
            
            $
            18,189
            
            
            $
            20,973
            
            
            $
            23,449Income
      taxes
            
            $
            1,547
            
            
            $
            921
            
            
            $
            703Supplemental
      non-cash investing and financing activities disclosure:Additions
      to property, plant and equipment included in accounts payable
            
            $
            192
            
            
            $
            408
            
            
            $
            1,013Transfer
      of preferred stock and accumulated dividends from Intermediate Holdings to
      Parent Holdings
            
            $
            -
            
            
            $
            -
            
            
            $
            7,648





The
accompanying notes are an integral part of these consolidated financial
statements.





48


AAC
GROUP HOLDING CORP.


Consolidated
Statements of Cash Flows








Intermediate
      HoldingsFor
      the year endedAugust
      30, 2008
            
            
            August
      25, 2007
            
            
            August
      26, 2006(Dollars
      in thousands)Cash
      flows from operating activities:Net
      income (loss)
            
            $
            5,575
            
            
            $
            (14,992
            )
            
            $
            4,292Adjustments
      to reconcile net income (loss) to net cash provided by operating
      activities:Other
      charges - continuing operations
            
            
            -
            
            
            
            5,262
            
            
            
            -Other
      charges - discontinued operations
            
            
            5,542
            
            
            
            22,751
            
            
            
            -Depreciation
      and amortization
            
            
            25,229
            
            
            
            25,000
            
            
            
            25,095Deferred
      income taxes
            
            
            (6,293
            )
            
            
            (7,274
            )
            
            
            3,824Amortization
      of deferred financing fees
            
            
            1,976
            
            
            
            1,976
            
            
            
            1,959Accretion
      of interest on 10.25% senior discount notes
            
            
            12,567
            
            
            
            11,037
            
            
            
            10,161Loss
      (gain) on sale or disposal of property, plant and
equipment
            
            
            13
            
            
            
            (1,989
            )
            
            
            79Allowance
      for doubtful accounts
            
            
            198
            
            
            
            (233
            )
            
            
            (464
            )Loss
      (gain) on operating lease agreement
            
            
            (222
            )
            
            
            961
            
            
            
            -Changes
      in assets and liabilities:Accounts
      receivable
            
            
            5,921
            
            
            
            (2,632
            )
            
            
            41Inventories
            
            
            3,713
            
            
            
            (951
            )
            
            
            (9,217
            )Prepaid
      expenses and other current assets, net
            
            
            (2,190
            )
            
            
            (4,793
            )
            
            
            7,325Other
      assets, net
            
            
            2,263
            
            
            
            90
            
            
            
            (2,143
            )Deferred
      revenue
            
            
            (1,710
            )
            
            
            1,843
            
            
            
            1,613Accounts
      payable, accrued expenses, customer deposits and other long-term
      liabilities
            
            
            (7,049
            )
            
            
            (7,926
            )
            
            
            (13,242
            )Net
      cash provided by operating activities
            
            
            45,533
            
            
            
            28,130
            
            
            
            29,323Cash
      flows from investing activities:Purchases
      of property, plant and equipment
            
            
            (12,579
            )
            
            
            (10,594
            )
            
            
            (12,511
            )Business
      acquisitions, net of cash acquired
            
            
            -
            
            
            
            (5,914
            )
            
            
            (539
            )Proceeds
      from sales of property, plant and equipment
            
            
            42
            
            
            
            4,651
            
            
            
            104Net
      cash used in investing activities
            
            
            (12,537
            )
            
            
            (11,857
            )
            
            
            (12,946
            )Cash
      flows from financing activities:Payments
      on term loan
            
            
            (11,592
            )
            
            
            (19,433
            )
            
            
            (32,610
            )Proceeds
      from revolving credit facility
            
            
            14,100
            
            
            
            28,000
            
            
            
            35,050Payments
      on revolving credit facility
            
            
            (21,905
            )
            
            
            (29,495
            )
            
            
            (25,750
            )Proceeds
      from preferred stock issuance
            
            
            -
            
            
            
            -
            
            
            
            7,500Deferred
      financing fees
            
            
            -
            
            
            
            (16
            )
            
            
            (404
            )Change
      in book overdraft
            
            
            (5,021
            )
            
            
            2,935
            
            
            
            (1,583
            )Net
      cash used in financing activities
            
            
            (24,418
            )
            
            
            (18,009
            )
            
            
            (17,797
            )Net
      increase (decrease) in cash and cash equivalents
            
            $
            8,578
            
            
            $
            (1,736
            )
            
            $
            (1,420
            )Cash
      and cash equivalents, beginning of year
            
            
            1,168
            
            
            
            2,904
            
            
            
            4,324Cash
      and cash equivalents, end of year
            
            $
            9,746
            
            
            $
            1,168
            
            
            $
            2,904Supplemental
      disclosures of cash flow information:Cash
      paid during the year for:Interest
            
            $
            18,189
            
            
            $
            20,973
            
            
            $
            23,449Income
      taxes
            
            $
            1,547
            
            
            $
            921
            
            
            $
            703Supplemental
      non-cash investing and financing activities disclosure:Additions
      to property, plant and equipment included in accounts payable
            
            $
            192
            
            
            $
            408
            
            
            $
            1,103Transfer
      of preferred stock and accumulated dividends from Intermediate Holdings to
      Parent Holdings
            
            $
            -
            
            
            $
            -
            
            
            $
            7,648




The
accompanying notes are an integral part of these consolidated financial
statements.







49


AMERICAN
ACHIEVEMENT CORPORATION


Consolidated
Statement of Cash Flows





AACFor
      the year endedAugust
      30, 2008
            
            
            August
      25, 2007
            
            
            August
      26, 2006(Dollars
      in thousands)Cash
      flows from operating activities:Net
      income (loss)
            
            $
            14,212
            
            
            $
            (7,645
            )
            
            $
            11,327Adjustments
      to reconcile net income (loss) to net cash provided by operating
      activities:Other
      charges - continuing operations
            
            
            -
            
            
            
            5,262
            
            
            
            -Other
      charges - discontinued operations
            
            
            5,542
            
            
            
            22,751
            
            
            
            -Depreciation
      and amortization
            
            
            25,229
            
            
            
            25,000
            
            
            
            25,095Deferred
      income taxes
            
            
            (1,940
            )
            
            
            (3,150
            )
            
            
            7,737Amortization
      of deferred financing fees
            
            
            1,530
            
            
            
            1,530
            
            
            
            1,498Loss
      (gain) on sale or disposal of property, plant and
equipment
            
            
            13
            
            
            
            (1,989
            )
            
            
            79Allowance
      for doubtful accounts
            
            
            198
            
            
            
            (233
            )
            
            
            (464
            )Loss
      (gain) on operating lease agreement
            
            
            (222
            )
            
            
            961
            
            
            
            -Changes
      in assets and liabilities:Accounts
      receivable
            
            
            5,921
            
            
            
            (2,632
            )
            
            
            41Inventories
            
            
            3,713
            
            
            
            (951
            )
            
            
            (9,217
            )Prepaid
      expenses and other current assets, net
            
            
            (1,634
            )
            
            
            (4,793
            )
            
            
            7,325Other
      assets, net
            
            
            2,263
            
            
            
            90
            
            
            
            (2,143
            )Deferred
      revenue
            
            
            (1,710
            )
            
            
            1,843
            
            
            
            1,613Accounts
      payable, accrued expenses, customer deposits and other long-term
      liabilities
            
            
            (7,045
            )
            
            
            (7,939
            )
            
            
            (13,629
            )Net
      cash provided by operating activities
            
            
            46,070
            
            
            
            28,105
            
            
            
            29,262Cash
      flows from investing activities:Purchases
      of property, plant and equipment
            
            
            (12,579
            )
            
            
            (10,594
            )
            
            
            (12,511
            )Business
      acquisitions, net of cash acquired
            
            
            -
            
            
            
            (5,914
            )
            
            
            (539
            )Proceeds
      from sales of property, plant and equipment
            
            
            42
            
            
            
            4,651
            
            
            
            104Net
      cash used in investing activities
            
            
            (12,537
            )
            
            
            (11,857
            )
            
            
            (12,946
            )Cash
      flows from financing activities:Payments
      on term loan
            
            
            (11,592
            )
            
            
            (19,433
            )
            
            
            (32,610
            )Proceeds
      from revolving credit facility
            
            
            14,100
            
            
            
            28,000
            
            
            
            35,050Payments
      on revolving credit facility
            
            
            (21,905
            )
            
            
            (29,495
            )
            
            
            (25,750
            )Proceeds
      from preferred stock issuance
            
            
            -
            
            
            
            -
            
            
            
            7,000Deferred
      financing fees
            
            
            -
            
            
            
            (16
            )
            
            
            (135
            )Change
      in book overdraft
            
            
            (5,021
            )
            
            
            2,935
            
            
            
            (1,583
            )Net
      cash used in financing activities
            
            
            (24,418
            )
            
            
            (18,009
            )
            
            
            (18,028
            )Net
      increase (decrease) in cash and cash equivalents
            
            $
            9,115
            
            
            $
            (1,761
            )
            
            $
            (1,712
            )Cash
      and cash equivalents, beginning of year
            
            
            620
            
            
            
            2,381
            
            
            
            4,093Cash
      and cash equivalents, end of year
            
            $
            9,735
            
            
            $
            620
            
            
            $
            2,381Supplemental
      disclosures of cash flow information:Cash
      paid during the year for:Interest
            
            $
            18,189
            
            
            $
            20,973
            
            
            $
            23,449Income
      taxes
            
            $
            1,547
            
            
            $
            921
            
            
            $
            703Supplemental
      non-cash investing and financing activities disclosure:Additions
      to property, plant and equipment included in accounts payable
            
            $
            192
            
            
            $
            408
            
            
            $
            1,013








The
accompanying notes are an integral part of these consolidated financial
statements.





50
 AMERICAN ACHIEVEMENT GROUP
HOLDING CORP.
 AAC
GROUP HOLDING CORP.
 AMERICAN
ACHIEVEMENT CORPORATION
 Notes to
Consolidated Financial Statements
 (Dollars
in thousands, unless otherwise stated)




1.
Summary of Organization and Significant Accounting Policies




Registrants




The consolidated financial statements of American Achievement Group Holding
Corp. (“Parent Holdings”) include the accounts of its wholly-owned subsidiary,
AAC Group Holding Corp. (“Intermediate Holdings”) and its indirect wholly-owned
subsidiary, American Achievement Corporation (“AAC”), all of which are separate
public reporting companies. The consolidated financial statements of
Intermediate Holdings include the accounts of its indirect wholly-owned
subsidiary, AAC. Parent Holdings, Intermediate Holdings, and AAC are treated as
entities under common control. The financial results of Parent Holdings prior to
its formation represent entirely those of its wholly-owned subsidiary,
Intermediate Holdings and its indirect wholly-owned subsidiary, AAC. Parent
Holdings, Intermediate Holdings and AAC together with their consolidated
subsidiaries are referred to as the “Company.” Unless separately stated, the
notes herein relate to Parent Holdings, Intermediate Holdings and
AAC.




Description
of Business




The
Company is a manufacturer and supplier of class rings, yearbooks and other
graduation-related scholastic products for the high school and college markets
and of recognition products, such as letter jackets, and affinity jewelry
designed to commemorate significant events, achievements and affiliations. The
Company markets its products and services primarily in the United States and
operates in four reporting segments; class rings, yearbooks, graduation products
and other. The Company’s corporate office is located in Austin, Texas and its
manufacturing facilities are located in Austin, Dallas, El Paso and Waco, Texas,
Louisville, Kentucky, Manhattan, Kansas, and Juarez, Mexico.




As
described in Note 3, on October 26, 2007 the Company decided to shut down its
achievement publications segment.  This segment sold achievement
publications in the specialty directory publishing industry
nationwide.




Consolidation




The
consolidated financial statements include the accounts of the Company and its
majority owned subsidiaries.  All significant intercompany accounts
and transactions have been eliminated in consolidation.




Parent
Holdings conducts all of its business through Intermediate Holdings and AAC and
its subsidiaries. The consolidated financial statements of Parent Holdings
include the accounts of its direct wholly-owned subsidiary, Intermediate
Holdings and its indirect wholly-owned subsidiary, AAC. Parent Holdings’
consolidated financial statements are substantially identical to Intermediate
Holdings’ consolidated financial statements, with the exception of  the
series A preferred stock, senior PIK notes, costs related to the Transaction
(see Note 2), additional interest expense related to its series A preferred
stock and senior PIK notes, amortization of deferred financing costs, interest
income on its cash balances and the related income taxes.





Intermediate
Holdings conducts all of its business indirectly through AAC and its
subsidiaries. The consolidated financial statements of Intermediate Holdings
include the accounts of its indirect wholly-owned subsidiary, AAC. Intermediate
Holdings’ consolidated financial statements are substantially identical to AAC’s
consolidated financial statements, with the exception of the 10.25% senior
discount notes, additional interest expense related to the 10.25% senior
discount notes, amortization of deferred financing costs, interest income on its
cash balances and the related income taxes.




Fiscal
Year-End




The
Company uses a 52/53-week fiscal year ending on the last Saturday of August. The
fiscal year ended August 30, 2008 was a 53-week fiscal year and all other fiscal
years presented in the consolidated financial statements were 52-week fiscal
years.




Cash
and Cash Equivalents




Cash
and cash equivalents include highly liquid investments with maturities of three
months or less at the date of purchase.




51
 AMERICAN
ACHIEVEMENT GROUP HOLDING CORP.
 AAC
GROUP HOLDING CORP.
 AMERICAN
ACHIEVEMENT CORPORATION
 Notes to
Consolidated Financial Statements
 (Dollars
in thousands, unless otherwise stated)


Allowance
for Doubtful Accounts and Product Returns




The
Company makes estimates of potentially uncollectible customer accounts
receivable. The Company believes that its credit risk for these receivables is
limited because of its large number of customers and the relatively small
account balances for most of its customers. The Company evaluates the adequacy
of the allowance on a periodic basis. The evaluation includes historical loss
experience, length of time receivables are past due, adverse situations that may
affect a customer’s ability to repay and prevailing economic conditions. The
Company makes adjustments to the allowance balance if the evaluation of
allowance requirements differs from the actual aggregate reserve. This
evaluation is inherently subjective and estimates may be revised as more
information becomes available.




Allowances
for doubtful accounts deducted from accounts receivable were as
follows:




Balance
      at
            
            
            
            Balance
      atBeginning
      of
            Charged
      to
            
            
            End
      ofPeriod
            Expense
            
            Write-offs
            PeriodYear
      ended August 30, 2008
            
            $
            1,318
            
            
            $
            1,329
            
            
            $
            (1,131
            )
            
            $
            1,516Year
      ended August 25, 2007
            
            
            1,321
            
            
            
            1,116
            
            
            
            (1,119
            )
            
            
            1,318Year
      ended August 26, 2006
            
            
            1,604
            
            
            
            742
            
            
            
            (1,025
            )
            
            
            1,321




The
Company makes estimates of its potential future product returns based on average
historical returns, current economic trends and changes in customer demand and
acceptance of products. This evaluation is inherently subjective and estimates
may be revised as more information becomes available.




Allowances
for product returns deducted from accounts receivable were as
follows:




Balance
      at
            
            
            
            
            
            Balance
      atBeginning
      of
            
            Reduction
            
            Returns
            
            End
      ofPeriod
            
            of
      Revenue
            
            Processed
            
            PeriodYear
      ended August 30, 2008
            
            $
            557
            
            
            $
            7,994
            
            
            $
            (6,875
            )
            
            $
            1,676Year
      ended August 25, 2007
            
            
            711
            
            
            
            7,016
            
            
            
            (7,170
            )
            
            
            557Year
      ended August 26, 2006
            
            
            665
            
            
            
            6,409
            
            
            
            (6,363
            )
            
            
            711




Inventories




Inventories,
which include raw materials, work-in-process and finished goods, are stated at
the lower of cost or market using the first-in, first-out (FIFO) method,
net of allowance for obsolete inventory.




Independent
Sales Representative Advances and Related Reserve




The
Company advances commissions to independent sales representatives as prepaid
commissions against anticipated earnings. Such advances are offset against
commissions earned by the independent sales representatives on product sales.
The Company provides reserves to cover those amounts which it estimates to be
uncollectible. These amounts are included in prepaid expenses and other current
assets and other assets in the accompanying consolidated balance sheets. The
portion of the advances, net of related reserves, that are not expected to be
earned through commissions during the next fiscal year are classified as other
assets in the accompanying consolidated balance sheets.




The
Company advances commissions to new independent sales representatives that are
developing sales territories and makes payments to predecessor independent sales
representatives on behalf of successor independent sales representatives. Such
amounts are offset against payments for commissions earned by the independent
sales representatives on product sales. The Company provides reserves to cover
those amounts that it estimates to be uncollectible.




52
 AMERICAN
ACHIEVEMENT GROUP HOLDING CORP.
 AAC
GROUP HOLDING CORP.
 AMERICAN
ACHIEVEMENT CORPORATION
 Notes to
Consolidated Financial Statements
 (Dollars
in thousands, unless otherwise stated)


Reserves
on independent sales representative advances deducted from asset accounts were
as follows:




Balance
      atBeginning
      of
            Charged
      to
            
            
            
            Balance
      at End ofPeriod
            Expense
            Write-offs
      (1)
            PeriodYear
      ended August 30, 2008
            
            $
            1,978
            
            
            $
            1,842
            
            
            $
            (1,902
            )
            
            $
            1,918Year
      ended August 25, 2007
            
            
            1,103
            
            
            
            1,590
            
            
            
            (715
            )
            
            
            1,978Year
      ended August 26, 2006
            
            
            1,907
            
            
            
            1,545
            
            
            
            (2,349
            )
            
            
            1,103(1) Represents
      principally write-offs of terminated sales representative amounts and
      forgiveness of amounts by the
Company




Property,
Plant and Equipment




Property,
plant and equipment are stated at historical cost net of accumulated
depreciation. Maintenance, repairs and minor replacements are charged against
operations as incurred; major replacements and betterments are capitalized at
cost. The cost of assets sold or retired and the related accumulated
depreciation are removed from the accounts at the time of disposition, and any
resulting gain or loss is reflected in operating results for the period.
Depreciation is provided using the straight-line method based on estimated
useful lives of the assets as follows:




Description
            
            Useful
      lifeBuildings
      and improvements
            
            10
      to 33 yearsTools
      and dies
            
            8
      yearsMachinery
      and equipment
            
            2
      to 10 yearsLeasehold
      improvements
            
            Shorter
      of useful life or term of lease




Goodwill
and Other Intangible Assets




The
Company accounts for goodwill and other intangible assets in accordance with
Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and
Other Intangible Assets” (“SFAS 142”). Goodwill and other intangible assets
are originally recorded at their fair values at the date of acquisition.
Goodwill and indefinite-lived intangibles are not amortized, but are tested
annually for impairment, or more frequently if impairment indicators occur.
Definite-lived intangibles are amortized over their estimated useful lives and
are evaluated for impairment annually, or more frequently if impairment
indicators are present, using a process similar to that used to test other
long-lived assets for impairment.




The
impairment test for goodwill and intangible assets requires management to make
judgments in connection with identifying reporting units, assigning assets and
liabilities to reporting units and determining fair value of each reporting
unit. Significant judgments required to estimate the fair value of reporting
units include projecting future cash flows, determining appropriate discount
rates and other assumptions. The projections are based on historical performance
and future estimated results.




Impairment
of Long-lived Assets




SFAS No. 144,
“Accounting for the Impairment or Disposal of Long-Lived Assets,” (“SFAS 144”)
requires an entity to review long-lived tangible and intangible assets with
definite lives for impairment 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. In applying SFAS
144, assets are grouped and evaluated at the lowest level for which there are
identifiable cash flows that are largely independent of the cash flows of other
groups of assets. The Company considers historical performance and future
estimated results in its evaluation of impairment. The Company measures the
amount of impairment by comparing the carrying amount of the asset to its fair
value, generally measured by discounting expected future cash flows at the rate
it utilizes to evaluate potential investments.




Customer
Deposits




Amounts
received from customers in the form of cash down payments to purchase goods are
recorded as a liability until the goods are shipped.


53
 AMERICAN
ACHIEVEMENT GROUP HOLDING CORP.
 AAC
GROUP HOLDING CORP.
 AMERICAN
ACHIEVEMENT CORPORATION
 Notes to
Consolidated Financial Statements
 (Dollars
in thousands, unless otherwise stated)


Income
Taxes




In
accordance with SFAS No. 109, “Accounting for Income Taxes,” deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax basis. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. Deferred tax assets are recognized net of any valuation
allowance. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in operations in the period that includes the enactment
date.




Fair
Value of Financial Instruments




The
Company’s financial instruments consist primarily of cash and cash equivalents
and long-term debt (including current maturities). The fair value of
the Parent Holdings', Intermediate Holdings' and AAC's long-term debt
is approximately $71.5 million,  $37.0 million and $21.0 million,
respectively, lower than the carrying value at August 30, 2008 .  The
carrying values of the Company's other financial instruments approximate fair
value due to their short term nature.




Revenue
Recognition and Warranty Costs




The
Company’s revenues from product sales are generally recognized at the time the
product is shipped, the risks and rewards of ownership have passed to the
customer and collectibility is reasonably assured. The Company’s stated shipping
terms are FOB shipping point. Provisions for sales returns, warranty costs and
rebate expenses are recorded based upon historical information and current
trends.




The
Company’s accounting method for recognizing revenue and related gross profit on
class ring sales through independent sales representatives, along with
commissions to independent sales representatives that are directly related to
the revenue, is to defer the revenue until the independent sales representative
delivers the product to the Company’s end customer.




The
Company recognizes revenues on its publishing operations based upon the
completed contract method, when the products are shipped.




Product
warranty liabilities were as follows:




Balance
      atBeginning
      of
            Charged
      to
            
            
            
            Balance
      at End ofPeriod
            Expense
            Claims
            PeriodYear
      ended August 30, 2008
            
            $
            1,155
            
            $
            705
            
            $
            (878)
            
            $
            982Year
      ended August 25, 2007
            
            
            1,116
            
            
            761
            
            
            (722)
            
            
            1,155Year
      ended August 26, 2006
            
            
            1,182
            
            
            348
            
            
            (414)
            
            
            1,116




The
portion of product warranty liabilities that are not expected to be paid during
the next fiscal year are classified as other long-term liabilities in the
accompanying consolidated balance sheets. At August 30, 2008 and August 25, 2007
$518 and $542, respectively, was included in accrued expenses and $464 and $613,
respectively, was included in other long-term liabilities.




54
 AMERICAN
ACHIEVEMENT GROUP HOLDING CORP.
 AAC
GROUP HOLDING CORP.
 AMERICAN
ACHIEVEMENT CORPORATION
 Notes to
Consolidated Financial Statements
 (Dollars
in thousands, unless otherwise stated)


Seasonality




The
seasonal nature of the Company’s various businesses tends to be tempered by its
broad product mix. Class ring sales are highest during October through December
and early spring, with many orders made for delivery to students before the
winter holiday season. Graduation product sales are predominantly made during
February through April prior to the April through June graduation season.
Yearbook sales are highest during the months of April through June, as yearbooks
are typically shipped prior to each school’s summer break. The Company’s
recognition and affinity product line sales are also seasonal, with highest
sales during the winter holiday season and in the period leading up to Mother’s
Day.




As
a result of the foregoing, the Company has historically experienced operating
losses during its first and fourth fiscal quarters, which includes the beginning
of the school year and the summer months when school is not in session, thus
reducing related shipment of products. In addition, the Company’s working
capital requirements tend to exceed its operating cash flows from May through
September.




Concentration
of Credit Risk




Credit
is extended to certain industries, such as retail, which may be affected by
changes in economic or other external conditions. The Company’s policy is to
manage its exposure to credit risk through credit approvals and
limits.




Shipping
and Handling Fees




In
accordance with Emerging Issues Task Force Issue No. 00-10,
“Accounting for Shipping and Handling Fees and Costs,” the Company recognizes as
revenue amounts billed to customers related to shipping and handling, with the
related expense recorded as a component of cost of sales.




Supplier
Concentration




The
Company purchases substantially all precious, semi-precious and synthetic stones
from a single supplier located in Germany. The Company purchases a majority of
its gold from a single supplier.




Advertising




The Company expenses advertising costs as incurred; however in accordance with
AICPA Statement of Position 93-7 “Reporting on Advertising Costs” the Company
defers certain advertising costs until the first time the advertising takes
place. These deferred advertising costs are included in prepaid expenses and
other current assets.




Selling,
general and administrative expenses included in income (loss) from continuing
operations include advertising expenses of $5,088, $5,247 and$6,159for
the years ended August 30, 2008, August 25, 2007 and August 26, 2006,
respectively.





Use
of Estimates




The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements, as well as the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from these
estimates.




55
 AMERICAN
ACHIEVEMENT GROUP HOLDING CORP.
 AAC
GROUP HOLDING CORP.
 AMERICAN
ACHIEVEMENT CORPORATION
 Notes to
Consolidated Financial Statements
 (Dollars
in thousands, unless otherwise stated)


Reclassifications




Certain
prior period amounts in the accompanying consolidated financial statements have
been reclassified to conform to the current year’s presentation.




Deferred
financing costs in the amount of $16,028, $8,377, and $6,115 have been
reclassified from other intangible assets, net to other assets, net as of
August 25, 2007 for Parent Holdings, Intermediate Holdings, and AAC,
respectively.




Reserves
on independent sales representative advances as of August 25, 2007 and August
26, 2006 were adjusted to exclude $523 and $952, respectively, of certain sales
representative liabilities.  Such liabilities are included in accrued
expenses.




Recent
Accounting Pronouncements




In
July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN
48”), which prescribes a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. In addition, FIN 48 provides guidance on
derecognition, classification, accounting in interim periods and disclosure
requirements for uncertain tax positions. The accounting provisions of FIN 48
were effective for the Company beginning with its fiscal year 2008. As a result
of the adoption of FIN 48 and as of August 30, 2008, no material adjustments to
the Company’s financial position and results of operations were
required.




In
September 2006, the FASB issued SFAS No. 157, “Fair Value
Measurements” (“SFAS 157”), which defines fair value, establishes a framework
for measuring fair value and expands disclosures about fair value measurements.
SFAS 157 applies under other accounting pronouncements that require or permit
fair value measurements and does not require any new fair value measurements.
The provisions of SFAS 157 are effective for the Company beginning with its
fiscal year 2009. The Company is currently evaluating the impact this standard
will have on its financial position and results of operations.




In
September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting
for Defined Benefit Pension and Other Postretirement Plans — An Amendment of
FASB Statements No. 87, 88, 106 and 132 (R)” (“SFAS 158”). SFAS 158
requires an employer to recognize the funded status of defined benefit
postretirement plan as an asset or liability in the balance sheet and to
recognize changes in that funded status in the year in which changes occur
through comprehensive income. Additionally, SFAS 158 requires an employer to
measure the funded status of each of its plans as of the date of its year-end
statement of financial position.  The Company adopted the recognition and
disclosure provisions of SFAS 158 in fiscal year 2007 and as a result recorded
an after-tax adjustment to other comprehensive income of $3.2 million to reflect
previously unrecognized net actuarial gains.  The measurement date
provisions of SFAS 158 will be effective for the Company beginning with its
fiscal year 2009. The Company has not yet evaluated the impact that the
measurement date provisions of this standard will have on its financial position
and results of operations.




In
February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities" (“SFAS 159”).  SFAS 159 permits
entities to measure many financial assets and financial liabilities at fair
value.  Unrealized gains and losses on items for which the fair value
option has been elected are reported in earnings.  SFAS 159 is effective
for fiscal years beginning with its fiscal year 2009.  The standard is not
expected to have a material impact on the Company’s financial position and
results of operations.




56
 AMERICAN
ACHIEVEMENT GROUP HOLDING CORP.
 AAC
GROUP HOLDING CORP.
 AMERICAN
ACHIEVEMENT CORPORATION
 Notes to
Consolidated Financial Statements
 (Dollars
in thousands, unless otherwise stated)


2.
Stock Purchase Agreement




Pursuant
to a Stock Purchase Agreement dated May 15, 2008 among Herff Jones Inc. (the
“Buyer”),Parent
Holdings and the holders of all of Parent Holdings’ equity securities (the
“Equity Holders”), the Equity Holders have agreed to sell all of the equity in
Parent Holdings to the Buyer (the “Transaction”).  The Transaction is
subject to regulatory approvals and customary closing conditions.




In
connection with and subsequent to the Transaction, the Company entered into
supplemental indentures incorporating proposed amendments to the indentures
governing the senior PIK notes, the 10.25% senior discount notes and the 8.25%
senior subordinated notes (see Note 10).




During
fiscal 2008, Parent Holdings recorded costs related to the Transaction of
$7.7 million in selling, general and administrative expenses, of which $5.1
million is included in accrued expenses at Parent Holdings at August 30,
2008.




3.
Discontinued Operations




On
October 26, 2007, the Company announced a planned shutdown of the achievement
publications segment. Operations of this segment have ceased and have been
eliminated from the ongoing operations of the Company.  All activities
in connection with the shutdown have been completed and the Company does not
have any significant continuing involvement in this segment.




The
results of operations of the achievement publications business are reported as
discontinued operations in the consolidated statements of operations for all
periods presented.  Prior to the shutdown, the achievement
publications business was included as the Company’s achievement publications
reporting segment.  Certain shared costs that were previously
allocated to the achievement publications segment of $673 and $499 in fiscal
2007 and 2006, respectively, were reallocated to the remaining continuing
segments since such costs will continue to be incurred. Net sales and loss from
discontinued operations for the years ended August 30, 2008, August 25, 2007
and August 26, 2006 are as follows:




For
      the year endedAugust
      30, 2008
            
            
            August
      25, 2007
            
            
            August
      26, 2006Discontinued
      Operations:Net
      sales
            
            $
            1,752
            
            
            $
            5,148
            
            
            $
            20,974Operating
      income (loss)
            
            $
            (7,235
            )
            
            $
            (28,406
            )
            
            $
            2,085Provision
      (benefit) for income taxes
            
            
            (9,123
            )
            
            
            (11,108
            )
            
            
            815Income
      (loss) from discontinued operations
            
            $
            1,888
            
            
            $
            (17,298
            )
            
            $
            1,270




The
Company recognized charges of $5.5 million during the first quarter of
2008, primarily related to the write-off of the remaining carrying value of
tangible and intangible assets upon shutdown of the achievement publications
segment.  These charges are included in the loss from discontinued
operations in the consolidated statements of operations and in other charges in
the consolidated statements of cash flows.




Also
included in loss from discontinued operations for the year ended August 30, 2008
are $0.7 million of costs incurred for contract termination and employee
termination costs related to the shutdown.  The accruals related to
these costs are summarized in the following table:




Contract
      Termination Costs
            
            
            Employee
      Termination Costs
            
            
            TotalBalance,
      August 25, 2007
            
            $
            -
            
            
            $
            -
            
            
            $
            -Accrued
      costs
            
            
            491
            
            
            
            246
            
            
            
            737Payments
      made
            
            
            (491
            )
            
            
            (240
            )
            
            
            (731
            )Balance,
      August 30, 2008
            
            $
            -
            
            
            $
            6
            
            
            $
            6




The
income tax benefit of $9.1 million attributable to discontinued operations for
fiscal 2008 includes a deferred tax benefit of approximately $8.7 million. 
The tax benefit from discontinued operations in fiscal 2008 was impacted by a
portion of the tax loss related to the shutdown of the achievement publications
segment creating a permanent benefit for tax
purposes.


57
 AMERICAN
ACHIEVEMENT GROUP HOLDING CORP.
 AAC
GROUP HOLDING CORP.
 AMERICAN
ACHIEVEMENT CORPORATION
 Notes to
Consolidated Financial Statements
 (Dollars
in thousands, unless otherwise stated)


4.
Business Acquisitions





Effective
April 1, 2007, Commemorative Brands, Inc. (“CBI”), a wholly-owned subsidiary of
AAC, acquired all of the outstanding stock of BFJ Holdings, Inc. and its wholly
owned subsidiary, Powers Embroidery Inc. (“Powers”). Powers is a producer of
quality letter jackets, chenille patches and other school spirit embroidery
merchandise, located in Waco, Texas. The purchase price in connection with this
acquisition was approximately $6.2 million, including transaction costs, with up
to $1.5 million additional to be paid upon achieving certain financial goals
through August 2010. The Powers acquisition was accounted for using the purchase
method of accounting. Pro forma results of operations have not been presented
since the effect of the Powers acquisition on AAC’s financial position and
results of operations is not material.




AAC has
allocated the purchase price of Powers as follows:




Working
      Capital
            
            $
            903Property,
      plant and equipment
            
            
            1,220Goodwill
            
            
            2,912Intangible
      assets
            
            
            2,454Deferred
      income taxes
            
            
            (1,333
            )Total
      purchase price
            
            $
            6,156




5.
Inventories




A
summary of inventories is as follows:


August
      30, 2008
            
            
            August
      25, 2007Raw
      materials
            
            $
            15,840
            
            
            $
            19,357Work
      in process
            
            
            5,431
            
            
            
            4,853Finished
      goods
            
            
            6,540
            
            
            
            7,941Less—Reserves
            
            
            (400
            )
            
            
            (993
            )$
            27,411
            
            
            $
            31,158




The
Company’s cost of sales includes depreciation of $10,783, $10,299 and$9,424for the years ended August 30, 2008, August 25, 2007 and August 26,
2006, respectively.




The
Company expensed gold consignment fees of $49, $49 and $291 for the years ended
August 30, 2008, August 25, 2007 and August 26, 2006, respectively (see Note
12).




58
 AMERICAN
ACHIEVEMENT GROUP HOLDING CORP.
 AAC
GROUP HOLDING CORP.
 AMERICAN
ACHIEVEMENT CORPORATION
 Notes to
Consolidated Financial Statements
 (Dollars
in thousands, unless otherwise stated)


6.
Prepaid Expenses and Other Current Assets, Net




Prepaid
expenses and other current assets, net consist of the following:




August
      30, 2008
            
            
            August
      25, 2007Sales
      representative advances
            
            $
            10,683
            
            
            $
            7,793Less—reserve
      on sales representative advances
            
            
            (1,918
            )
            
            
            (970
            )Deferred
      publication and ring costs
            
            
            313
            
            
            
            1,438Prepaid
      advertising and promotional materials
            
            
            2,009
            
            
            
            2,016Prepaid
      management fees — related party
            
            
            244
            
            
            
            250Prepaid
      commissions
            
            
            1,736
            
            
            
            2,793Other
            
            
            3,995
            
            
            
            4,997Total
      prepaid expenses and other current assets, Parent Holdings
            
            $
            17,062
            
            
            $
            18,317Affiliate
      receivable:Intermediate
      Holdings - due from Parent Holdings
            
            
            2,333
            
            
            
            -AAC
      - due from Parent Holdings
            
            
            1,777
            
            
            
            -Total
      prepaid expenses and other current assets:Intermediate
      Holdings
            
            $
            19,395
            
            
            $
            18,317AAC
            
            $
            18,839
            
            
            $
            18,317




The
affiliate receivable represents amounts receivable from Parent Holdings related
to payments funded by Intermediate Holdings and AAC for costs related to the
Transaction.




7.
Property, Plant and Equipment, Net




Property,
plant and equipment, net consist of the following:




August
      30, 2008
            
            
            August
      25, 2007Land
            
            $
            6,897
            
            
            $
            6,897Buildings
      and improvements
            
            
            10,020
            
            
            
            9,260Tools
      and dies
            
            
            26,771
            
            
            
            25,174Machinery
      and equipment
            
            
            78,856
            
            
            
            69,167Construction
      in progress
            
            
            4,468
            
            
            
            5,627Total
            
            
            127,012
            
            
            
            116,125Less-accumulated
      depreciation
            
            
            (58,535
            )
            
            
            (45,472
            )Property,
      plant, and equipment, net
            
            $
            68,477
            
            
            $
            70,653




The
Company’s depreciation expense recorded in the accompanying consolidated
statements of operations was $14,034, $13,810 and$13,230for the years ended August 30, 2008, August 25, 2007 and August 26,
2006, respectively.




At
August 25, 2007, the Company had a capital lease commitment of $174, which
was paid in fiscal 2008.  Capital lease liabilities included in
accrued expenses are $174 as of August 25, 2007. Gross capital lease assets
included in property, plant and equipment are $5,022 with accumulated
depreciation of $2,053 as of August 25, 2007.  There were no assets under
capital leases as of August 30, 2008.




During
fiscal 2007, the Company recorded an impairment charge of $1.2 million for its
achievement publications segment in accordance with SFAS 144 (see Note
8).  During fiscal 2008, upon shutdown of this segment, the Company
wrote off property, plant and equipment of $1,252 and associated accumulated
depreciation of $373.  These charges are included in discontinued
operations in the accompanying consolidated statements of operations and in
other charges in the consolidated statements of cash flows.




59
 AMERICAN
ACHIEVEMENT GROUP HOLDING CORP.
 AAC
GROUP HOLDING CORP.
 AMERICAN
ACHIEVEMENT CORPORATION
 Notes to
Consolidated Financial Statements
 (Dollars
in thousands, unless otherwise stated)


8.
Goodwill and Other Intangible Assets




Goodwill




The
changes in the net carrying amount of goodwill were as follows:




Class
            
            
            
            
            
            Graduation
            
            
            AchievementRings
            
            
            Yearbooks
            
            
            Products
            
            
            Publications
            
            
            Other
            
            
            TotalBalance
      at August 26, 2006
            
            $
            71,792
            
            
            $
            65,241
            
            
            $
            23,781
            
            
            $
            11,693
            
            
            $
            12,058
            
            
            $
            184,565Goodwill
      from Powers acquisition
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            2,912
            
            
            
            2,912Impairment
      write-down
            
            
            (4,700
            )
            
            
            -
            
            
            
            -
            
            
            
            (9,500
            )
            
            
            -
            
            
            
            (14,200
            )Balance
      at August 25, 2007
            
            $
            67,092
            
            
            $
            65,241
            
            
            $
            23,781
            
            
            $
            2,193
            
            
            $
            14,970
            
            
            $
            173,277Write-off
      related to shutdown of segment
            
            
            
            
            
            
            -
            
            
            
            -
            
            
            
            (2,193
            )
            
            
            -
            
            
            
            (2,193
            )Powers
      purchase price adjustment
            
            
            
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (11
            )
            
            
            (11
            )Balance
      at August 30, 2008
            
            $
            67,092
            
            
            $
            65,241
            
            
            $
            23,781
            
            
            $
            -
            
            
            $
            14,959
            
            
            $
            171,073




Other
Intangible Assets




Other
intangible assets consisted of the following:




August
      30, 2008Estimated
            Gross
            
            Accumulated
            
            NetUseful
      Life
            Asset
            
            Amortization
            
            AssetTrademarks
            Indefinite
            
            $
            36,826
            
            
            $
            -
            
            
            $
            36,826Patents
            14 to 17 years
            
            
            7,317
            
            
            
            (1,960
            )
            
            
            5,357Customer
      lists and distribution contracts
            3
      to 12 years
            
            
            97,740
            
            
            
            (42,923
            )
            
            
            54,817Total
            
            
            $
            141,883
            
            
            $
            (44,883
            )
            
            $
            97,000August
      25, 2007Estimated
            Gross
            
            Accumulated
            
            NetUseful
      Life
            Asset
            
            Amortization
            
            AssetTrademarks
            Indefinite
            
            $
            37,433
            
            
            $
            -
            
            
            $
            37,433Patents
            14 to 17 years
            
            
            7,317
            
            
            
            (1,516
            )
            
            
            5,801Customer
      lists and distribution contracts
            3
      to 12 years
            
            
            102,968
            
            
            
            (38,347
            )
            
            
            64,621Total
            
            
            $
            147,718
            
            
            $
            (39,863
            )
            
            $
            107,855





During
the fourth quarter of fiscal 2007, the Company began evaluating strategic
options for the achievement publications segment due to a financial
downturn in this segment.  At August 25, 2007, it was management’s
expectation that the achievement publications segment would be sold or otherwise
disposed of significantly before the end of its previously estimated useful
life.  As this was an indicator that the carrying amount of the
related assets may not be recoverable, it was considered a triggering event
requiring that the assets of the achievement publications segment be tested for
recoverability in accordance with SFAS 144 and SFAS 142.  The
impairment analysis indicated that an impairment in goodwill,
trademarks, and tangible assets existed as of August 25,
2007.  The Company recorded a charge of $22.8 million, of which $12.1
million reduced the carrying value of trademarks, $9.5 million reduced the
carrying value of goodwill, and $1.2 million reduced the carrying value of fixed
assets in the achievement publications segment. In fiscal 2008, upon the
decision to shutdown this segment in October 2007, the Company wrote off
trademarks of $260, customer lists, which were fully amortized, with a gross
asset value of $5,828 related to the discontinued segment. These
charges are included in discontinued operations in the accompanying consolidated
statements of operations and in other charges in the consolidated statements of
cash flows.




60
 AMERICAN
ACHIEVEMENT GROUP HOLDING CORP.
 AAC
GROUP HOLDING CORP.
 AMERICAN
ACHIEVEMENT CORPORATION
 Notes to
Consolidated Financial Statements
 (Dollars
in thousands, unless otherwise stated)


Under the
provisions of SFAS 142, the Company tests goodwill and indefinite-lived
intangibles for impairment on an annual basis or more frequently if impairment
indicators occur. The annual impairment review performed in fiscal 2008 did not
reveal anyimpairment.  As
a result of the annual impairment review performed in the fourth quarter of
fiscal 2007, the Company recorded an impairment of $4.9 million related to
goodwill and trademarks in its retail class rings business that is included in
the class rings business segment and $0.4 million related to trademarks in
its personalized fashion jewelry business that is included in the other business
segment to adjust the carrying value to the current net realizable value. These
charges are included in other charges in the accompanying consolidated
statements of operations and consolidated statements of cash flows.  The
goodwill impairment in the retail class rings was primarily due to lower
revenue forecasts reflecting the softness in the retail jewelry market
serving class rings and the continued consolidation in the independent
jeweler segment. The annual impairment review performed in the other businesses
did not reveal any impairment.




Total amortization on
other intangible assets was $11,195, $11,190 and $11,865 for the years ended
August 30, 2008, August 25, 2007 and August 26, 2006, respectively, which is
recorded as selling, general and administrative expense.Estimated annual
amortization expense is $10,249, $10,249, $10,249, $9,816, and $9,220,
respectively, for fiscal years 2009 through 2013.





9.
Accrued Expenses




Accrued
expenses consists of the following




August
      30, 2008
            
            August
      25, 2007Parent
      HoldingsCommissions
      and royalties
            
            $
            7,145
            
            
            $
            9,345Compensation
      and related costs
            
            
            3,845
            
            
            
            4,674Accumulated
      pension and postretirement benefit cost
            
            
            271
            
            
            
            270Accrued
      sales and property taxes
            
            
            1,824
            
            
            
            1,962Accrued
      workman’s compensation and medical claims
            
            
            858
            
            
            
            881Capital
      lease obligations, short term
            
            
            -
            
            
            
            173Costs
      related to the Transaction
            
            
            5,149
            
            
            
            -Other
            
            
            2,926
            
            
            
            3,056$
            22,018
            
            
            $
            20,361August
      30, 2008
            
            August
      25, 2007Intermediate
      HoldingsCommissions
      and royalties
            
            $
            7,145
            
            
            $
            9,345Compensation
      and related costs
            
            
            3,845
            
            
            
            4,674Accumulated
      pension and postretirement benefit cost
            
            
            271
            
            
            
            270Accrued
      sales and property taxes
            
            
            1,824
            
            
            
            1,962Accrued
      workman’s compensation and medical claims
            
            
            858
            
            
            
            881Capital
      lease obligations, short term
            
            
            -
            
            
            
            173Other
            
            
            2,920
            
            
            
            2,994$
            16,863
            
            
            $
            20,299August
      30, 2008
            
            August
      25, 2007AACCommissions
      and royalties
            
            $
            7,145
            
            
            $
            9,345Compensation
      and related costs
            
            
            3,845
            
            
            
            4,674Accumulated
      pension and postretirement benefit cost
            
            
            271
            
            
            
            270Accrued
      sales and property taxes
            
            
            1,824
            
            
            
            1,962Accrued
      workman’s compensation and medical claims
            
            
            858
            
            
            
            881Capital
      lease obligations, short term
            
            
            -
            
            
            
            173Other
            
            
            2,909
            
            
            
            2,979$
            16,852
            
            
            $
            20,284




61
 AMERICAN
ACHIEVEMENT GROUP HOLDING CORP.
 AAC
GROUP HOLDING CORP.
 AMERICAN
ACHIEVEMENT CORPORATION
 Notes to
Consolidated Financial Statements
 (Dollars
in thousands, unless otherwise stated)




10.
Long-term Debt




Long-term
debt consists of the following:




August
      30, 2008
            August
      25, 2007Parent
      HoldingsSenior
      PIK Notes due October 1, 2012 (including $53,137 and $25,844 PIK interest,
      respectively)
            
            $
            203,137
            
            
            $
            175,84410.25%
      Senior discount notes due October 1, 2012 (net of unamortized discount of
      $1,079 and $13,646, respectively)
            
            
            130,421
            
            
            
            117,8548.25%
      Senior subordinated notes due April 1, 2012
            
            
            150,000
            
            
            
            150,000Senior
      secured credit facility:Revolving
      credit facility due 2010
            
            
            -
            
            
            
            7,805Term
      loan due 2011
            
            
            75,485
            
            
            
            87,077Total
            
            
            559,043
            
            
            
            538,580Less
      current portion of long-term debt
            
            
            (2,908
            )
            
            
            (900
            )Total
      long-term debt
            
            $
            556,135
            
            
            $
            537,680August
      30, 2008
            August
      25, 2007Intermediate
      Holdings10.25%
      Senior discount notes due October 1, 2012 (net of unamortized discount of
      $1,079 and $13,646, respectively)
            
            $
            130,421
            
            
            $
            117,8548.25%
      Senior subordinated notes due April 1, 2012
            
            
            150,000
            
            
            
            150,000Senior
      secured credit facility:Revolving
      credit facility due 2010
            
            
            -
            
            
            
            7,805Term
      loan due 2011
            
            
            75,485
            
            
            
            87,077Total
            
            
            355,906
            
            
            
            362,736Less
      current portion of long-term debt
            
            
            (2,908
            )
            
            
            (900
            )Total
      long-term debt
            
            $
            352,998
            
            
            $
            361,836August
      30, 2008
            August
      25, 2007AAC8.25%
      Senior subordinated notes due April 1, 2012
            
            $
            150,000
            
            
            $
            150,000Senior
      secured credit facility:Revolving
      credit facility due 2010
            
            
            -
            
            
            
            7,805Term
      loan due 2011
            
            
            75,485
            
            
            
            87,077Total
            
            
            225,485
            
            
            
            244,882Less
      current portion of long-term debt
            
            
            (2,908
            )
            
            
            (900
            )Total
      long-term debt
            
            $
            222,577
            
            
            $
            243,982




Senior
PIK Notes




On
June 12, 2006, Parent Holdings issued $150 million of Senior PIK Notes. The
net proceeds of this offering were used to pay a $140,536 dividend to
stockholders. Because EBITDA (earnings before interest, taxes, depreciation, and
amortization), as defined in the corresponding agreement,  fell below
certain target levels for the four quarters ended February 24, 2007, the rate at
which interest accrues on the senior PIK notes was increased by 2.00% per annum
to 14.75%, commencing on and including February 24, 2007. Because our
consolidated group leverage ratio, as defined in the corresponding agreement,
 was greater than 5.0 to 1.0 on August 30, 2008, the rate at which interest
accrues on the senior PIK notes was increased an additional 2.00% per annum, to
a rate of 16.75%, commencing on, and including August 30, 2008. Through
April 1, 2011, interest on the Senior PIK Notes will be payable in the form
of additional notes semi-annually in arrears on April 1 and October 1. On
October 1, 2011, and thereafter, interest will be payable in cash
semi-annually in arrears on April 1 and October 1.




The
Senior PIK Notes mature on October 1, 2012. At maturity, Parent Holdings is
required to repay the Senior PIK Notes at a repayment price of 103.188% of the
aggregate principal amount thereof, plus accrued and unpaid interest and special
interest, if any, to the maturity date.


62
 AMERICAN
ACHIEVEMENT GROUP HOLDING CORP.
 AAC
GROUP HOLDING CORP.
 AMERICAN
ACHIEVEMENT CORPORATION
 Notes to
Consolidated Financial Statements
 (Dollars
in thousands, unless otherwise stated)


At
any time on or after October 1, 2008, Parent Holdings may redeem the Senior
PIK Notes, in whole or in part, at a redemption price equal to 100% of the
principal amount plus a premium of 9.563%, declining ratably to 3.188%, plus
accrued, unpaid and special interest. At any time prior to October 1, 2008,
Parent Holdings may also redeem 100% (but not less than 100%) of the then
outstanding notes. The Senior PIK Notes are required to be redeemed with the net
cash proceeds of certain equity offerings at a redemption price equal to the
lesser of 109.563% or the then applicable redemption price of the aggregate
principal amount, plus accrued, unpaid and special interest.





If
a change in control as defined in the indenture relating to the Senior PIK Notes
occurs, Parent Holdings must give the holders of the Senior PIK Notes the
opportunity to sell their Senior PIK Notes to Parent Holdings at 101% of the
aggregate principal amount outstanding of the Senior PIK Notes, plus accrued
interest.




In
connection with the Transaction, Parent Holdings has entered into supplemental
indentures incorporating the following amendments to the indenture governing the
Senior PIK Notes: (i) an amendment requiring Parent Holdings, upon consummation
of the Transaction, to redeem at a price of 101% the Senior PIK Notes held by
any holder that timely consents to the proposed amendments and (ii) an
amendment, effective promptly following the completion of the consent
solicitation, to remove substantially all of the restrictive and reporting
covenants under the indenture for the Senior PIK Notes.  The covenant
removal would remain effective for non-consenting notes even if the Transaction
has not closed.  Requisite consents have been obtained to approve such
amendments.




The
terms of the Senior PIK Notes limit Parent Holdings’ ability to, among other
things, incur additional indebtedness, dispose of assets, make acquisitions,
make other investments, pay dividends and make various other payments. As of
August 30, 2008, Parent Holdings was in compliance with all such
provisions.




10.25%
Senior Discount Notes




On
November 16, 2004, Intermediate Holdings issued the 10.25% Notes. The net
proceeds of this offering were used as a distribution to stockholders through
the repurchase of shares of Intermediate Holdings’ common stock from its
stockholders. Interest accrues on the 10.25% Notes in the form of an increase in
the accreted value of the notes prior to October 1, 2008. Thereafter, cash
interest on the 10.25% Notes will accrue and be payable semiannually in arrears
on April 1 and October 1 of each year, commencing April 1, 2009 at a rate
of 10.25% per annum.




At
any time on or after October 1, 2008, Intermediate Holdings may redeem the
10.25% Notes, in whole or in part, at a redemption price equal to 100% of the
principal amount plus a premium of 5.125%, declining ratably to par, plus
accrued and unpaid interest.




If
a change in control as defined in the indenture relating to the 10.25% Notes
occurs prior to October 1, 2008, Intermediate Holdings must give the
holders of the 10.25% Notes the opportunity to sell their 10.25% Notes to
Intermediate Holdings at 101% of the accreted value of the 10.25% Notes, plus
accrued interest. If a change in control as defined in the indenture relating to
the 10.25% Notes occurs following October 1, 2008, Intermediate Holdings
must give the holders of the 10.25% Notes the opportunity to sell their 10.25%
Notes to Intermediate Holdings at 101% of the aggregate principal amount at
maturity of the 10.25% Notes, plus accrued interest.




On July
9, 2008, after receiving requisite consents, Intermediate Holdings entered into
a supplemental indenture incorporating proposed amendments to the
indentures governing the 10.25% Notes.  The applicable amendments
consist of (1) a requirement that upon consummation of the
Transaction, Intermediate Holdings shall redeem all of its outstanding
notes which have delivered a valid consent to the applicable amendments at a
redemption price in cash equal to 102.8125% of the aggregate principal amount of
the 10.25% Notes, plus accrued and unpaid interest, and (2) the removal of
substantially all of the restrictive and reporting covenants under the
applicable indenture, as well as certain events of default and related
provisions, including without limitation, the covenant that would otherwise
require the applicable company to make an offer to purchase the applicable notes
upon consummation of the Transaction as currently provided in the applicable
indenture. The amendments will only be effective upon the consummation of
the Transaction.




The
terms of the 10.25% Notes limit Intermediate Holdings’ ability to, among other
things, incur additional indebtedness, dispose of assets, make acquisitions,
make other investments, pay dividends and make various other payments. The terms
also include cross-default provisions to the indenture governing the 8.25% Notes
and the Senior Credit Facility (as defined below). As of August 30, 2008,
Intermediate Holdings was in compliance with all such
provisions.


63
 AMERICAN
ACHIEVEMENT GROUP HOLDING CORP.
 AAC
GROUP HOLDING CORP.
 AMERICAN
ACHIEVEMENT CORPORATION
 Notes to
Consolidated Financial Statements
 (Dollars
in thousands, unless otherwise stated)




8.25%
Senior Subordinated Notes




On
March 25, 2004, AAC issued $150 million of the 8.25% Notes. The 8.25%
Notes bear interest at a stated rate of 8.25%. The 8.25% Notes are unsecured
senior subordinated obligations and are subordinated in right of payment to all
of AAC’s existing and future senior indebtedness, including obligations under
the Company’s Senior 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 8.25% Notes are guaranteed by the Company’s existing
domestic subsidiaries (non guarantor subsidiaries are minor), 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
passuin right of payment with any 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 8.25% Notes until on or after April 1,
2008.  If a change in control as defined in the indenture relating to
the 8.25% Notes occurs, the Company must give the holders of the 8.25% Notes the
opportunity to sell their 8.25% Notes to the Company at 101 percent of the
principal amount of the 8.25% Notes, plus accrued interest.




On July
9, 2008, after receiving requisite consents, AAC entered into a supplemental
indenture incorporating proposed amendments to the indentures governing the
8.25% Notes.  The applicable amendments consist of (1) a requirement
that upon consummation of the Transaction, AAC shall redeem all of its
outstanding notes which have delivered a valid consent to the applicable
amendments at a redemption price in cash equal to 102.3125% of the aggregate
principal amount of the 8.25% Notes, plus accrued and unpaid interest, and (2)
the removal of substantially all of the restrictive and reporting covenants
under the applicable indenture, as well as certain events of default and related
provisions, including without limitation, the covenant that would otherwise
require the applicable company to make an offer to purchase the applicable notes
upon consummation of the Transaction as currently provided in the applicable
indenture. The amendments will only be effective upon the consummation of
the Transaction.




The
8.25% 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 indenture governing the 8.25% Notes). In
addition, the 8.25% Notes contain covenants, which restrict the declaration or
payment of dividends by the Company and/or its subsidiaries (as defined in the
indenture governing the 8.25% Notes). The Company was in compliance with the
8.25% Notes covenants as of August 30, 2008.




Senior
Secured Credit Facility




On
March 25, 2004, AAC entered into a $195.0 million senior credit
facility (the “Senior Credit Facility”) which includes a $155.0 million term
loan and up to $40.0 million available under a revolving credit facility.
The Senior Credit Facility is secured by a first priority security interest in
all existing and after-acquired assets of AAC, and f AAC’s direct and indirect
domestic subsidiaries’ existing and after-acquired assets, including, without
limitation, real property and all of the capital stock owned by AAC Holding
Corp. and AAC’s direct and indirect domestic subsidiaries (including certain
capital stock of their direct foreign subsidiaries only to the extent permitted
by applicable law). As of August 30, 2008, assets of AAC subject to lien under
the Senior Credit Facility were approximately $284.0 million. All of AAC’s
obligations under the Senior Credit Facility are fully and unconditionally
guaranteed by AAC Holding Corp. and AAC’s direct and indirect domestic
subsidiaries.




The
term loan of the Amended Senior Credit Facility is due in March 2011.
Quarterly payments of $197 are made through 2011. The term loan of the Amended
Senior Credit Facility has an interest rate based on the prime rate, plus points
based on a calculated leverage ratio. The weighted average interest rate on the
term loan of the Amended Senior Credit Facility was approximately 5.1% and 7.7%
at August 30, 2008 and August 25, 2007, respectively.




During
the year ended August 30, 2008, the Company paid down $11.6 million of the term
loan of the Amended Senior Credit Facility, of which $1.1 million were mandatory
payments. In the event that there is Consolidated Excess Cash Flow, as defined
in the credit agreement governing the Amended Senior Credit Facility, the
Company will be required to make an additional prepayment based on the Company’s
Consolidated Excess Cash Flow and Leverage Ratio. Based on the Consolidated
Excess Cash Flow calculated as of August 30, 2008, the Company will repay
approximately $2.1 million on or before December 13, 2008.




64
 AMERICAN
ACHIEVEMENT GROUP HOLDING CORP.
 AAC
GROUP HOLDING CORP.
 AMERICAN
ACHIEVEMENT CORPORATION
 Notes to
Consolidated Financial Statements
 (Dollars
in thousands, unless otherwise stated)


The
revolving credit facility matures in March 2010. Availability under the
revolving credit facility is restricted to a total revolving commitment of
$40 million as defined in the credit agreement governing the Amended Senior
Credit Facility. Availability under the revolving credit facility as of August
30, 2008 was approximately $37.9 million with $2.1 million in letters of
credit outstanding.




Advances under the revolving credit facility may be made as base rate loans or
LIBOR loans at AAC’s election (except for the initial loans which were base rate
loans). Interest rates payable upon advances are based upon the base rate, which
is derived from the Prime Rate or Federal Funds Effective Rate as defined
in the credit agreement, or LIBOR depending on the type of loan AAC
chooses, plus an applicable margin based upon a consolidated leverage ratio of
certain outstanding indebtedness to EBITDA (net income (loss) before
interest expense, income taxes, depreciation and amortization) to be calculated
in accordance with the terms specified in the credit agreement governing the
Amended Senior Credit Facility.




The
Amended Senior Credit Facility contains restrictions on the ability of AAC to
pay dividends and make certain other payments to Parent Holdings and
subsidiaries. Pursuant to each arrangement, AAC may, subject to certain
limitations, pay dividends or make such payments in connection with
(i) repurchases of certain capital stock of Parent Holdings and
(ii) the payment by Parent Holdings of taxes, costs and other expenses
required to maintain its legal existence and legal, accounting and other
overhead costs in the ordinary course of business.




AAC
was in compliance with the Amended Senior Credit Facility’s covenants as of
August 30, 2008.




Long-term debt outstanding as of August 30, 2008 matures as
follows:




Parent
            
            IntermediateHoldings
            
            Holdings
            
            AACAmount
            
            Amount
            
            AmountFiscal
      year ending
            Maturing
            
            Maturing
            
            Maturing2009
            
            $
            2,908
            
            
            $
            2,908
            
            
            $
            2,9082010
            
            
            788
            
            
            
            788
            
            
            
            7882011
            
            
            71,789
            
            
            
            71,789
            
            
            
            71,7892012
            
            
            150,000
            
            
            
            150,000
            
            
            
            150,0002013
            
            
            333,558
            
            
            
            130,421
            
            
            
            -Thereafter
            
            
            -
            
            
            
            -
            
            
            
            -Total
            
            $
            559,043
            
            
            $
            355,906
            
            
            $
            225,485




Parent
Holdings’ weighted average interest rate on debt outstanding as of August 30,
2008 and August 25, 2007 was 11.4% and 10.8%, respectively.


Intermediate
Holdings’ weighted average interest rate on debt outstanding as of August 30,
2008 and August 25, 2007 was 8.3% and 8.8%, respectively.


AAC’s
weighted average interest rate on debt outstanding as of August 30, 2008 and
August 25, 2007 was 7.2% and 8.1%, respectively.




The
following table presents the amount of interest income included in interest
expense, net, for fiscal years 2008, 2007 and 2006:




For
      the year endedAugust
      30, 2008
            
            
            August
      25, 2007
            
            
            August
      26, 2006Parent
      Holdings
            
            $
            571
            
            
            $
            563
            
            
            $
            527Intermediate
      Holdings
            
            
            562
            
            
            
            547
            
            
            
            527AAC
            
            
            543
            
            
            
            523
            
            
            
            468




65
 AMERICAN
ACHIEVEMENT GROUP HOLDING CORP.
 AAC
GROUP HOLDING CORP.
 AMERICAN
ACHIEVEMENT CORPORATION
 Notes to
Consolidated Financial Statements
 (Dollars
in thousands, unless otherwise stated)


11.
Mandatory Redeemable Preferred Stock




On
January 18, 2006, Intermediate Holdings entered into a Preferred Stock
Purchase Agreement (the “Purchase Agreement”) with an investor pursuant to which
Intermediate Holdings sold shares of its Series A Mandatory Redeemable
Preferred Stock (the “Series A Preferred Stock”). In connection with the
Purchase Agreement, the investor was granted (i) registration rights on the
capital stock of Intermediate Holdings held by the investor in the event of an
initial public offering by Intermediate Holdings, (ii) preemptive rights to
purchase additional capital stock of Intermediate Holdings in order to maintain
its percentage ownership in Intermediate Holdings upon the sales of additional
capital stock and (iii) the right to have an observer seat on the Board of
Directors of Intermediate Holdings. Intermediate Holdings issued the investor
7,500 shares of the Series A Preferred Stock for an aggregate purchase
price of $7.5 million, which the investor paid to Intermediate Holdings in
cash. The holders of the Series A Preferred Stock are entitled to receive
cumulative dividends at a rate of 14% per year, when, as and if declared by the
Board of Directors of Intermediate Holdings. All undeclared dividends and
declared but unpaid dividends shall accrue from the date the stock was issued.
Accumulated undeclared dividends for fiscal year 2008, 2007 and 2006 totaled
$3,253, $1,874 and $672, respectively, and are included in other long-term
liabilities in the financial statements. The Series A Preferred Stock may
be redeemed by Intermediate Holdings on or after January 18, 2007 at a
price equal to 104% of the Liquidation Preference (as defined in the Amended and
Restated Certificate of Incorporation of Intermediate Holdings (the “Certificate
of Incorporation”). Such percentage is reduced annually until the purchase price
upon redemption to Intermediate Holdings is equal to 100% of the Liquidation
Preference. In addition, the Series A Preferred Stock is subject to
mandatory redemption on January 18, 2013 or, at the election of the
investor, in the event of a Change in Control or a Public Equity Offering (each
as defined in the Certificate of Incorporation).  As a result of the
mandatory redemption requirements, the Series A Preferred Stock is classified as
part of liabilities rather than equity.




The
holders of Series A Preferred Stock agreed in May 2006 to exchange
their shares of Series A Preferred Stock for new shares of Series A
Redeemable Preferred Stock of Parent Holdings, the parent company of
Intermediate Holdings. These new shares have the same rights, preferences and
privileges as the Series A Preferred Stock of Intermediate
Holdings.




12.
Commitments and Contingencies




Leases




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 leases for each of the five years ending after August 30, 2008
and thereafter are approximately as follows:




OperatingFiscal
      Year Ending
            
            Expense2009
            
            $
            1,5392010
            
            
            1,1162011
            
            
            5552012
            
            
            3372013
            
            
            268Thereafter
            
            
            1,320$
            5,135




Some
of the Company’s rental property leases contain options to renew the leased
space for periods up to an additional five years.




Lease
and rental expense included in income (loss) from continuing operations in the
accompanying consolidated statements of operations was $2,270, $2,287
and $2,553for
the years ended August 30, 2008, August 25, 2007 and August 26, 2006,
respectively. Capital lease assets as of August 25, 2007 are carried on the
balance sheet under machinery and equipment, net and their corresponding
liabilities are carried under accrued expenses (short-term portion) and other
long-term liabilities (long-term portion). There are no assets under capital
leases as of August 30, 2008. Capital lease liabilities were $0 and $174 as of
August 30, 2008 and August 25, 2007, respectively.




66
 AMERICAN
ACHIEVEMENT GROUP HOLDING CORP.
 AAC
GROUP HOLDING CORP.
 AMERICAN
ACHIEVEMENT CORPORATION
 Notes to
Consolidated Financial Statements
 (Dollars
in thousands, unless otherwise stated)


Pending
Litigation




The
Company is not a party to any pending legal proceedings other than ordinary
routine litigation incidental to its business. In management’s opinion, adverse
decisions on these ordinary legal proceedings, individually or in the aggregate,
would not have a materially adverse impact on the Company’s results of
operations, financial condition or cash flows.




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.  Under the terms of the consignment
arrangement, the Company does not own the consigned gold nor does it have risk
of loss related to price variation on such inventory until the Company pays the
supplier for quantities 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 August 30, 2008 and
August 25, 2007, the Company did not hold any gold 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.




Plant
Closure




In
April 2006, AAC announced the closure of its yearbook facility in San
Angelo, Texas. The Company decided to relocate the operations from this facility
to its Dallas, Texas facility, in order to take advantage of the Dallas
facility’s enhanced technology and service delivery. The closure and relocation
was completed by the end of August 2006. In 2006, AAC recorded $757 in one
time termination benefits to employees and closure costs and $82 in impairment
of assets. These costs were recorded in cost of sales and related solely to the
Company’s yearbook segment. As of August 25, 2007, the Company had paid out all
costs originally recorded related to this closure.




During
the fourth quarter of fiscal 2007, management revised its estimated future cash
flows for the San Angelo, Texas operating lease, which is no longer in use by
the Company.  The revision was based on a change in timing and amount
of the estimated sublease rentals that can reasonably be obtained in the current
market.  The cumulative effect of these changes resulted in additional
expense of $961 in fiscal 2007, which was recorded in cost of sales. A similar
analysis performed in 2008 resulted in a reduction of expenses of $222 in the
third quarter and was recorded in cost of sales.   The
consolidated balance sheets as of August 30, 2008 and August 25, 2007 reflect a
current liability of $578 and $593 and a long-term liability of $161 and $368,
respectively, included in accrued liabilities and other long-term liabilities,
respectively.




13.
Employee Compensation and Benefits




Postretirement
Pension and Medical Benefits




CBI
provides certain healthcare and life insurance benefits for former employees of
L.G. Balfour Company, Inc. (“CBI Plan”). Certain hourly employees of Taylor are
covered by a defined benefit pension plan (“TPC Plan”) established by Taylor.
The benefits under the CBI Plan and TPC Plan are based primarily on the
employees’ years of service and compensation near retirement. The CBI Plan
was frozen to new entrants effective January 1991. Effective September 2003, the
TPC Plan is open for enrollment only for certain hourly employees of Taylor. The
funding policies for these plans are consistent with the funding requirements of
federal laws and regulations.




In
September 2006, the FASB issued SFAS 158, which requires an employer
to recognize the funded status of defined benefit postretirement plan as an
asset or liability in the balance sheet and to recognize changes in that funded
status in the year in which changes occur through comprehensive income.
Additionally, SFAS 158 requires an employer to measure the funded status of each
of its plans as of the date of its year-end statement of financial position.
 The Company adopted the recognition and disclosure provisions of SFAS 158
in our fiscal year 2007.  The measurement date provisions of SFAS 158
will be effective for the Company beginning with its fiscal year
2009.




For
fiscal 2008, the measurement date for the CBI Plan was August 30, 2008, and the
measurement date for the TPC Plan was June 30, 2008.  The Company will
use a measurement date as of the end of its fiscal year for both plans
in fiscal 2009.





67
 AMERICAN
ACHIEVEMENT GROUP HOLDING CORP.
 AAC
GROUP HOLDING CORP.
 AMERICAN
ACHIEVEMENT CORPORATION
 Notes to
Consolidated Financial Statements
 (Dollars
in thousands, unless otherwise stated)


The
following table sets forth the funded status of each plan:




August
      30, 2008
            
            
            August
      25, 2007Taylor
      pension
            
            
            CBI
      post-retirement
            
            
            Taylor
      pension
            
            
            CBI
      post-retirementChange
      in benefit obligation:Obligation
      beginning of the year
            
            $
            14,651
            
            
            $
            2,288
            
            
            $
            13,871
            
            
            $
            2,392Service
      cost
            
            
            87
            
            
            
            -
            
            
            
            81
            
            
            
            -Interest
      cost
            
            
            914
            
            
            
            108
            
            
            
            899
            
            
            
            108Actuarial
      loss (gain)
            
            
            (1,890
            )
            
            
            (7
            )
            
            
            496
            
            
            
            51Benefit
      payments
            
            
            (675
            )
            
            
            (240
            )
            
            
            (696
            )
            
            
            (263
            )Amendment
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Obligation,
      end of year
            
            $
            13,087
            
            
            $
            2,149
            
            
            $
            14,651
            
            
            $
            2,288Change
      in fair value of plan assets:Fair
      value of plan assets, beginning of year
            
            $
            14,498
            
            
            $
            -
            
            
            $
            12,089
            
            
            $
            -Actual
      return of plan assets
            
            
            (988
            )
            
            
            -
            
            
            
            2,136
            
            
            
            -Employer
      contributions
            
            
            734
            
            
            
            240
            
            
            
            969
            
            
            
            263Benefit
      payments
            
            
            (675
            )
            
            
            (240
            )
            
            
            (696
            )
            
            
            (263
            )Fair
      value of plan assets, end of year
            
            $
            13,569
            
            
            $
            -
            
            
            $
            14,498
            
            
            $
            -Funded
      status:Funded
      status at measurement date
            
            $
            482
            
            
            $
            (2,149
            )
            
            $
            (153
            )
            
            $
            (2,288
            )Contributions
      from measurement date to period end
            
            
            -
            
            
            
            -
            
            
            
            211
            
            
            
            -Total
      asset (liability)
            
            $
            482
            
            
            $
            (2,149
            )
            
            $
            58
            
            
            $
            (2,288
            )




The
net periodic postretirement benefit cost includes the following
components:




Fiscal
      Year EndedAugust
      30, 2008
            
            
            August
      25, 2007
            
            
            August
      26, 2006Taylor
            
            
            CBI
            
            
            Taylor
            
            
            CBI
            
            
            Taylor
            
            
            CBIpension
            
            
            post-retirement
            
            
            pension
            
            
            post-retirement
            
            
            pension
            
            
            post-retirementService
      costs, benefits attributed to service during the period
            
            $
            87
            
            
            $
            -
            
            
            $
            81
            
            
            $
            -
            
            
            $
            98
            
            
            $
            -Interest
      cost
            
            
            914
            
            
            
            108
            
            
            
            899
            
            
            
            108
            
            
            
            844
            
            
            
            139Expected
      return on assets
            
            
            (1,168
            )
            
            
            -
            
            
            
            (987
            )
            
            
            -
            
            
            
            (892
            )
            
            
            -Amortization
      of unrecognized net loss (gain)
            
            
            (36
            )
            
            
            (310
            )
            
            
            -
            
            
            
            (352
            )
            
            
            -
            
            
            
            (316
            )Amortization
      of unrecognized net prior service costs
            
            
            -
            
            
            
            (149
            )
            
            
            -
            
            
            
            (149
            )
            
            
            -
            
            
            
            (62
            )$
            (203
            )
            
            $
            (351
            )
            
            $
            (7
            )
            
            $
            (393
            )
            
            $
            50
            
            
            $
            (239
            )




Following is information for the CBI Plan, which has an accumulated benefit
obligation in excess of plan assets:




August
      30, 2008
            
            
            August
      25, 2007Projected
      benefit obligation
            
            $
            2,149
            
            
            $
            2,288Accumulated
      benefit obligation
            
            
            2,149
            
            
            
            2,288Fair
      value of plan assets
            
            
            -
            
            
            
            -




68
 AMERICAN
ACHIEVEMENT GROUP HOLDING CORP.
 AAC
GROUP HOLDING CORP.
 AMERICAN
ACHIEVEMENT CORPORATION
 Notes to
Consolidated Financial Statements
 (Dollars
in thousands, unless otherwise stated)


Amounts recognized in accumulated other comprehensive income consist
of:




August
      30, 2008
            
            
            August
      25, 2007Taylor
      pension
            
            
            CBI
      post-retirement
            
            
            Taylor
      pension
            
            
            CBI
      post-retirementNet
      actuarial loss (gain)
            
            $
            (1,727
            )
            
            $
            (1,956
            )
            
            $
            (2,028
            )
            
            $
            (2,259
            )Prior
      service cost
            
            
            -
            
            
            
            (707
            )
            
            
            -
            
            
            
            (856
            )$
            (1,727
            )
            
            $
            (2,663
            )
            
            $
            (2,028
            )
            
            $
            (3,115
            )




The
estimated net gain for the TPC Plan that will be amortized from accumulated
other comprehensive income into net periodic benefit cost over the next fiscal
year is $25.  The estimated net gain and estimated prior service
credit for the CBI Plan that will be amortized from accumulated other income
into net periodic postretirement benefit cost over the next fiscal year are $302
and $149, respectively.




The
significant assumptions used in the measurement of the benefit obligation were
as follows:




August
      30, 2008
            
            
            August
      25, 2007CBI
      Plan:Weighted
      average discount rate
            
            
            4.50
            %
            
            
            5.00
            %Healthcare
      trend rateCurrent
      year trend rate
            
            
            9.00
            %
            
            
            9.00
            %Ultimate
      year trend rate
            
            
            5.00
            %
            
            
            5.00
            %Year
      of ultimate trend rate
            
            2012
            
            
            2011TPC
      Plan:Weighted
      average discount rate
            
            
            6.90
            %
            
            
            6.40
            %Long-term
      rate of return on assets
            
            
            8.00
            %
            
            
            8.00
            %Annual
      salary increases
            
            
            3.25
            %
            
            
            3.25
            %




As
the CBI Plan is unfunded, no assumption is needed as to the long-term rate of
return on assets.




The healthcare cost trend
rate assumption has a significant effect on the amounts reported.  An
increase of one percentage point would increase the accumulated postretirement
benefit obligation by $111 or 5 percent and would increase the aggregate of the
service and benefit cost components of the net periodic postretirement benefit
cost by $6 or 6 percent for fiscal year 2008. A decrease of one percentage point
would decrease the accumulated postretirement benefit obligation by $100 or 5
percent and would decrease the aggregate of the service and benefit cost
components of the net periodic postretirement benefit cost by $6 or 6 percent
for fiscal year 2008.


The
weighted-average asset allocations for TPC Plan as of the measurement date of
2008 and 2007, by asset category, are as follows:




Asset
      Category
            
            2008
            
            
            2007
            
            
            TargetEquity
      securities
            
            
            71.0
            %
            
            
            76.0
            %
            
            
            30%
      - 70
            %Debt
      securities
            
            
            21.0
            %
            
            
            18.0
            %
            
            
            10%
      - 50
            %Other
            
            
            8.0
            %
            
            
            6.0
            %
            
            
            1%
      - 20
            %100.0
            %
            
            
            100.0
            %




The expected long-term rate of return of the plan’s total assets is based on the
expected return of each of the above categories, weighted based on the target
allocation for each class. Long-term historical relationships between equity and
debt securities are considered, along with the general investment principles for
assets of higher volatility generating higher returns over the long-term, and
consideration of current market factors such as inflation and interest rates.
Equity securities are expected to return 8% to 10% over the long-term, while
debt securities are expected to return between 3% and 6%.




69
 AMERICAN
ACHIEVEMENT GROUP HOLDING CORP.
 AAC
GROUP HOLDING CORP.
 AMERICAN
ACHIEVEMENT CORPORATION
 Notes to
Consolidated Financial Statements
 (Dollars
in thousands, unless otherwise stated)


Projections
of future cash flows for the CBI Plan are as follows for each of the fiscal
years ending:




2009
            
            $
            2712010
            
            
            2612011
            
            
            2482012
            
            
            2342013
            
            
            2172014-2018
            
            
            826




Projected
contributions include $80 to the TPC Plan in 2009. The actual amount of
contributions is dependent upon the actual return on plan assets. Future benefit
payments for the TPC Plan, which reflect expected future service, as
appropriate, are expected to be paid as follows for each of the fiscal years
ending:




2009
            
            $
            7622010
            
            
            7932011
            
            
            8082012
            
            
            8282013
            
            
            8462014-2018
            
            
            4,487




The
policy, as established by the Corporate Pension Committee, is to provide for
growth of capital with a moderate level of volatility by investing assets per
the target allocations stated above for equity and debt securities. Equity
investments are diversified across U.S. and non-U.S. stocks as well as growth
and value funds with small and large capitalizations. The asset allocation,
investment risk, investment performance and the investment policy is reviewed on
at least a semi-annual basis to determine if any changes are needed. The Company
employs the services of a leading global financial services firm to advise on
their views of important developments within the economy and securities markets
and recommend actions when appropriate, taking into consideration the stated
policies and objectives.




American
Achievement Corporation 401(K) Plan




The
American Achievement Corporation 401(K) Plan (“Plan”) covers the Austin-based
union employees and substantially all non-union employees of the Company. The
Plan matches 50 percent of participants’ voluntary contributions up to a
discretionary percent determined by the Company. The discretionary percentage in
effect for the Plan year ended December 31, 2006 was up to 4 percent
for salaried and hourly employees, and there have been no changes in this
discretionary percentage through August 2008. The Company made contributions of
approximately $710, $659 and $757 for the fiscal years ended August 30, 2008,
August 25, 2007 and August 26, 2006, respectively.




Cash
Incentive Plan




Certain
members of senior management of the Company and specified members of the Board
of Directors are eligible to participate in the American Achievement Corporation
Executive Cash Incentive Plan (the “CIP”).  Payment from the CIP
occurs upon the occurrence of a qualified liquidity event, e.g. change of
control of the company.  The CIP is intended to reward an ownership
mentality in its members.  Participants in the CIP earn the right to
receive payment depending on the number of “units” held by that
participant.  Units are typically granted by the Compensation
Committee to key employees on hire.  Units may also be granted on a
discretionary basis to recognize exceptional performance.  The maximum
number of units available to all plan participants is 150,000.  Units
may either be awarded to the employee as Liquidity Event Units, which vest
automatically upon occurrence of a qualified liquidity event or as Time-Based
Units, which are vested over time.  Participants become vested in the
Time-Based Units ratably over a 5-year period with one-fifth vesting on each
subsequent anniversary of the unit grant date.  The vesting of all or
any portion of the participants’ units may be accelerated, at any time in the
sole discretion of the Board of Directors.  Following a qualified
liquidity event, a percentage of the participants’ available vested units over
the maximum number of units available determines their right to receive from 5%
to 15% (based on the net proceeds) of the net proceeds available to the
CIP.  The net proceeds available to the CIP are determined by the
amount paid for the company after certain debt and equity interests (including
dividends previously received) of the owners have been realized.  As the
payment under the CIP is contingent on occurrence of a liquidity event which is
not assessed to be probable as the Transaction is subject to regulatory
approval, no expense has been recognized for units granted under the plan
as of August 30, 2008.  Any expense that could result under the CIP
would be recorded at the time of a qualified liquidity event.  At
August 30, 2008 and August 25, 2007, there were 115,418 and 109,483
units, respectively, outstanding under the CIP.


70
 AMERICAN
ACHIEVEMENT GROUP HOLDING CORP.
 AAC
GROUP HOLDING CORP.
 AMERICAN
ACHIEVEMENT CORPORATION
 Notes to
Consolidated Financial Statements
 (Dollars
in thousands, unless otherwise stated)




Certain
members of senior management of the Company are also eligible to participate in
the American Achievement Corporation Supplemental Incentive Plan (the
“SIP”).  Payment from the SIP occurs upon the occurrence of a
qualified liquidity event, e.g. change of control of the company.  The
SIP was designed to provide a one-time incentive award to key senior management
employees.  Participants in the SIP earn the right to receive payment
depending on the number of “units” held by that participant.  Units
are granted on a discretionary basis to recognize exceptional
performance.  The maximum number of units available to all plan
participants is 1,000. Units will vest automatically upon occurrence of a
qualified liquidity event during the term of the participant’s employment with
the Company.  Following a qualified liquidity event, a percentage of
the participants’ available vested units over the maximum number of units
available determines their right to receive a portion of the net proceeds
available to the SIP.  The net proceeds available to the SIP are
determined by the amount paid for the company after certain debt and equity
interests (including dividends previously received) of the owners have been
realized and payments pursuant to the CIP have been made. At August 30,
2008 and August 25, 2007, there were 353 and 428 units, respectively outstanding
under the SIP.




14.
Income Taxes




The
Company and its wholly-owned and majority owned domestic subsidiaries file a
consolidated federal income tax return. Significant components of the provision
(benefit) for income taxes attributable to continuing operations consists of the
following:




Fiscal
      Year EndedAugust
      30, 2008
            August
      25, 2007
            August
      26, 2006Parent
      HoldingsFederal—Current
            
            $
            307
            
            
            $
            501
            
            
            $
            325Deferred
            
            
            (8,172
            )
            
            
            (5,551
            )
            
            
            532State—Current
            
            
            1,037
            
            
            
            2,164
            
            
            
            441Deferred
            
            
            (1,568
            )
            
            
            (1,433
            )
            
            
            103$
            (8,396
            )
            
            $
            (4,319
            )
            
            $
            1,401Fiscal
      Year EndedAugust
      30, 2008
            
            August
      25, 2007
            
            August
      26, 2006Intermediate
      HoldingsFederal—Current
            
            $
            330
            
            
            $
            492
            
            
            $
            331Deferred
            
            
            2,585
            
            
            
            1,358
            
            
            
            2,011State—Current
            
            
            1,044
            
            
            
            2,134
            
            
            
            441Deferred
            
            
            (194
            )
            
            
            (109
            )
            
            
            387$
            3,765
            
            
            $
            3,875
            
            
            $
            3,170Fiscal
      Year EndedAugust
      30, 2008
            
            August
      25, 2007
            
            August
      26, 2006AACFederal—Current
            
            $
            338
            
            
            $
            489
            
            
            $
            340Deferred
            
            
            6,658
            
            
            
            4,819
            
            
            
            5,291State—Current
            
            
            1,046
            
            
            
            2,124
            
            
            
            441Deferred
            
            
            80
            
            
            
            554
            
            
            
            1,020$
            8,122
            
            
            $
            7,986
            
            
            $
            7,092




71
 AMERICAN
ACHIEVEMENT GROUP HOLDING CORP.
 AAC
GROUP HOLDING CORP.
 AMERICAN
ACHIEVEMENT CORPORATION
 Notes to
Consolidated Financial Statements
 (Dollars
in thousands, unless otherwise stated)


The
provision (benefit) for income taxes attributable to continuing operations
differs from the amount that would be computed if the income (loss) from
continuing operations before income taxes were multiplied by the federal
income tax rate (statutory rate) as follows:




Fiscal
      Year EndedAugust
      30, 2008
            
            August
      25, 2007
            
            August
      26, 2006Parent
      HoldingsComputed
      tax provision (benefit) at statutory rate
            
            $
            (11,200
            )
            
            $
            (6,850
            )
            
            $
            387State
      taxes, net of federal benefit
            
            
            (893
            )
            
            
            (26
            )
            
            
            389Non-deductible
      interest on high yield debt
            
            
            3,075
            
            
            
            1,845
            
            
            
            448Other
            
            
            622
            
            
            
            712
            
            
            
            177Total
      income tax provision (benefit)
            
            $
            (8,396
            )
            
            $
            (4,319
            )
            
            $
            1,401Fiscal
      Year EndedAugust
      30, 2008
            
            August
      25, 2007
            
            August
      26, 2006Intermediate
      HoldingsComputed
      tax provision (benefit) at statutory rate
            
            $
            2,608
            
            
            $
            2,163
            
            
            $
            2,167State
      taxes, net of federal benefit
            
            
            485
            
            
            
            1,278
            
            
            
            674Non-deductible
      interest on high yield debt
            
            
            312
            
            
            
            278
            
            
            
            251Other
            
            
            360
            
            
            
            156
            
            
            
            78Total
      income tax provision (benefit)
            
            $
            3,765
            
            
            $
            3,875
            
            
            $
            3,170Fiscal
      Year EndedAugust
      30, 2008
            
            August
      25, 2007
            
            August
      26, 2006AACComputed
      tax provision (benefit) at statutory rate
            
            $
            7,156
            
            
            $
            6,173
            
            
            $
            6,002State
      taxes, net of federal benefit
            
            
            760
            
            
            
            1,934
            
            
            
            1,306Other
            
            
            206
            
            
            
            (121
            )
            
            
            (216
            )Total
      income tax provision (benefit)
            
            $
            8,122
            
            
            $
            7,986
            
            
            $
            7,092




72
 AMERICAN
ACHIEVEMENT GROUP HOLDING CORP.
 AAC
GROUP HOLDING CORP.
 AMERICAN
ACHIEVEMENT CORPORATION
 Notes to
Consolidated Financial Statements
 (Dollars
in thousands, unless otherwise stated)


Deferred
tax assets and liabilities consist of the following:




August
      30, 2008
            
            August
      25, 2007Parent
      HoldingsDeferred
      tax assetsAllowances
      and reserves
            
            $
            2,610
            
            
            $
            2,501Net
      operating loss carryforwards
            
            
            37,478
            
            
            
            29,314Deferred
      revenue (net of commissions expense)
            
            
            1,053
            
            
            
            1,744Accrued
      interest
            
            
            32,733
            
            
            
            20,706Accrued
      liabilities and other
            
            
            5,569
            
            
            
            2,746Prepaids
      and other
            
            
            2,632
            
            
            
            2,802Total
      deferred tax assets
            
            $
            82,075
            
            
            $
            59,813Deferred
      tax liabilitiesDepreciation
            
            
            9,936
            
            
            
            8,903Amortization
      of intangibles
            
            
            58,528
            
            
            
            55,570Prepaids
      and other
            
            
            886
            
            
            
            1,345Total
      deferred tax liabilities
            
            
            69,350
            
            
            
            65,818Net
      deferred tax assets (liabilities)
            
            $
            12,725
            
            
            $
            (6,005
            )Short-term
      deferred tax assets
            
            $
            11,752
            
            
            $
            3,731Long-term
      deferred tax assets (liabilities)
            
            
            973
            
            
            
            (9,736
            )Net
      deferred tax assets (liabilities)
            
            $
            12,725
            
            
            $
            (6,005
            )August
      30, 2008
            
            August
      25, 2007Intermediate
      HoldingsDeferred
      tax assetsAllowances
      and reserves
            
            $
            2,610
            
            
            $
            2,501Net
      operating loss carryforwards
            
            
            36,566
            
            
            
            29,501Deferred
      revenue (net of commissions expense)
            
            
            1,053
            
            
            
            1,744Accrued
      interest
            
            
            14,656
            
            
            
            10,726Accrued
      liabilities and other
            
            
            2,604
            
            
            
            2,746Prepaids
      and other
            
            
            2,764
            
            
            
            2,793Total
      deferred tax assets
            
            $
            60,253
            
            
            $
            50,011Deferred
      tax liabilitiesDepreciation
            
            
            9,936
            
            
            
            8,903Amortization
      of intangibles
            
            
            58,830
            
            
            
            55,763Prepaids
      and other
            
            
            886
            
            
            
            1,345Total
      deferred tax liabilities
            
            
            69,652
            
            
            
            66,011Net
      deferred tax liabilities
            
            $
            (9,399
            )
            
            $
            (16,000
            )Short-term
      deferred tax assets
            
            $
            12,196
            
            
            $
            3,731Long-term
      deferred tax liabilities
            
            
            (21,595
            )
            
            
            (19,731
            )Net
      deferred tax liabilities
            
            $
            (9,399
            )
            
            $
            (16,000
            )


73
 AMERICAN
ACHIEVEMENT GROUP HOLDING CORP.
 AAC
GROUP HOLDING CORP.
 AMERICAN
ACHIEVEMENT CORPORATION
 Notes to
Consolidated Financial Statements
 (Dollars
in thousands, unless otherwise stated)




August
      30, 2008
            
            
            August
      25, 2007AACDeferred
      tax assetsAllowances
      and reserves
            
            $
            2,610
            
            
            $
            2,501Net
      operating loss carryforwards
            
            
            36,196
            
            
            
            29,561Deferred
      revenue (net of commissions expense)
            
            
            1,053
            
            
            
            1,744Accrued
      liabilities and other
            
            
            2,604
            
            
            
            2,746Prepaids
      and other
            
            
            2,776
            
            
            
            2,790Total
      deferred tax assets
            
            $
            45,239
            
            
            $
            39,342Deferred
      tax liabilitiesDepreciation
            
            
            9,935
            
            
            
            8,903Amortization
      of intangibles
            
            
            59,078
            
            
            
            56,002Prepaids
      and other
            
            
            886
            
            
            
            1,345Total
      deferred tax liabilities
            
            
            69,899
            
            
            
            66,250Net
      deferred tax liabilities
            
            $
            (24,660
            )
            
            $
            (26,908
            )Short-term
      deferred tax assets
            
            $
            14,920
            
            
            $
            3,731Long-term
      deferred tax liabilities
            
            
            (39,580
            )
            
            
            (30,639
            )Net
      deferred tax liabilities
            
            $
            (24,660
            )
            
            $
            (26,908
            )





For tax reporting purposes, the Company has a U.S. net operating loss
carryforward of approximately $98 million as of August 30, 2008. Utilization of
the net operating loss carryforwards is contingent on the Company’s ability to
generate income in the future and may be subject to an annual limitation due to
the “change in ownership” provisions of the Internal Revenue Code, as amended.
The net operating loss carryforwards will expire in various years through 2028
if not previously utilized. The annual limitation may result in the expiration
of the net operating losses before utilization.




15.
Stockholders’ Equity





On
May 8, 2006, the holders of outstanding stock of Intermediate Holdings
agreed to form Parent Holdings and on May 30, 2006, reached agreement for
Parent Holdings to affect a stock exchange with Intermediate Holdings. Pursuant
to that agreement, each holder of Common Stock of Intermediate Holdings
contributed each share of such stock then held to Parent Holdings in exchange
for a share of Common Stock of Parent Holdings and each holder of
Series A Preferred Stock of Intermediate Holdings contributed each share of
such stock then held to Parent Holdings in exchange for a share of Series A
Redeemable Preferred Stock of the new parent company. Each new share of capital
stock received in such contribution and exchange had the same rights,
preferences and privileges as the corresponding share of stock of Intermediate
Holdings that was contributed to Parent Holdings. As a result of the foregoing
recapitalization, Intermediate Holdings became a wholly owned subsidiary of
Parent Holdings.




16.
Related-Party Transactions




AAC has a management agreement with an affiliate of the majority
stockholder of the Parent Holdings for management and other advisory
services.  Pursuant to this agreement, AAC 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 expensed by
the Company related to the management agreement totaled $3,404, $3,665 and
$3,333 for the years ended August 30, 2008, August 25, 2007 and August 26,
2006, respectively.




As
of August 30, 2008 and August 25, 2007, respectively, the Company had net
prepaid management fees of approximately $244 and $250,
respectively.




74
 AMERICAN
ACHIEVEMENT GROUP HOLDING CORP.
 AAC
GROUP HOLDING CORP.
 AMERICAN
ACHIEVEMENT CORPORATION
 Notes to
Consolidated Financial Statements
 (Dollars
in thousands, unless otherwise stated)


17.
Business Segments




The
Company is a manufacturer and supplier of class rings, yearbooks and other
graduation-related scholastic products for the high school and college markets
and of recognition products, such as letter jackets, and affinity jewelry
designed to commemorate significant events, achievements and affiliations. The
Company markets its products and services primarily in the United States and
operates in four reporting segments; class rings, yearbooks, graduation products
and other.




The
Company’s operating segments, on campus class rings and retail class rings, have
been aggregated into one reporting segment, class rings, in accordance with
paragraph 26.a. of SFAS 131. The other segment consists primarily of jewelry
commemorating family events such as the birth of a child, military and fan
affinity jewelry and related products, professional sports championship rings,
commercial printing and recognition products such as letter
jackets.




As
discussed in Note 3, the achievement publications business was shut down during
the first quarter of fiscal year 2008.  This business historically was
included as an additional reporting segment.  As all of the results of
operations of the achievement publications business are included in discontinued
operations, they are not presented in the tables below.  Certain shared
assets and costs that were previously allocated to the achievement publications
segment in the years ended August 25, 2007 and August 26, 2006, were reallocated
to the remaining continuing segments since such costs will continue to be
incurred.




During
the year ended August 30, 2008, Parent Holdings incurred certain costs related
to the Transaction, which are not allocated to the operating
segments.  Total unallocated costs included in Parent Holdings
operating income but not included in total segment operating income were $7,743
for year ended August 30, 2008.




Class
            
            
            
            
            
            GraduationRings
            
            
            Yearbooks
            
            
            Products
            
            
            Other
            
            
            TotalYear
      Ended August 30, 2008Net
      sales
            
            $
            120,282
            
            
            $
            115,084
            
            
            $
            45,846
            
            
            $
            32,191
            
            
            $
            313,403Depreciation
      and amortization
            
            
            10,382
            
            
            
            10,223
            
            
            
            1,831
            
            
            
            2,393
            
            
            $
            24,829Segment
      operating income (loss)
            
            
            7,926
            
            
            
            27,975
            
            
            
            6,519
            
            
            
            (2,199
            )
            
            $
            40,221Capital
      expenditures
            
            
            2,854
            
            
            
            8,264
            
            
            
            808
            
            
            
            653
            
            
            $
            12,579Year
      Ended August 25, 2007Net
      sales
            
            $
            120,949
            
            
            $
            115,207
            
            
            $
            44,428
            
            
            $
            30,004
            
            
            $
            310,588Depreciation
      and amortization
            
            
            10,176
            
            
            
            10,000
            
            
            
            1,640
            
            
            
            1,836
            
            
            $
            23,652Segment
      operating income
            
            
            7,311
            
            
            
            25,152
            
            
            
            6,308
            
            
            
            932
            
            
            $
            39,703Capital
      expenditures
            
            
            3,269
            
            
            
            5,160
            
            
            
            1,107
            
            
            
            623
            
            
            $
            10,159Non-cash
      charges:Other
      charges
            
            
            4,917
            
            
            
            -
            
            
            
            -
            
            
            
            345
            
            
            $
            5,262Loss
      on operating lease agreement
            
            
            -
            
            
            
            961
            
            
            
            -
            
            
            
            -
            
            
            $
            961Year
      Ended August 26, 2006Net
      sales
            
            $
            119,451
            
            
            $
            114,883
            
            
            $
            43,940
            
            
            $
            21,662
            
            
            $
            299,936Depreciation
      and amortization
            
            
            8,614
            
            
            
            9,904
            
            
            
            2,917
            
            
            
            1,574
            
            
            $
            23,009Segment
      operating income
            
            
            13,122
            
            
            
            23,812
            
            
            
            3,242
            
            
            
            281
            
            
            $
            40,457Capital
      expenditures
            
            
            3,713
            
            
            
            6,072
            
            
            
            1,257
            
            
            
            711
            
            
            $
            11,753




75
 AMERICAN
ACHIEVEMENT GROUP HOLDING CORP.
 AAC
GROUP HOLDING CORP.
 AMERICAN
ACHIEVEMENT CORPORATION
 Notes to
Consolidated Financial Statements
 (Dollars
in thousands, unless otherwise stated)


Following
is a reconciliation of segment depreciation and amortization and capital
expenditures for the years ended August 30, 2008, August 25, 2007 and August 26,
2006:






Total
      Current Segments
            
            
            Discontinued
      Segment
            
            
            TotalYear
      Ended August 30, 2008Depreciation
      and amortization
            
            $
            24,829
            
            
            $
            400
            
            
            $
            25,229Capital
      expenditures
            
            
            12,579
            
            
            
            -
            
            
            $
            12,579Other
      charges
            
            
            -
            
            
            
            5,542
            
            
            $
            5,542Year
      Ended August 25, 2007Depreciation
      and amortization
            
            $
            23,652
            
            
            $
            1,348
            
            
            $
            25,000Capital
      expenditures
            
            
            10,159
            
            
            
            435
            
            
            $
            10,594Other
      charges
            
            
            5,262
            
            
            
            22,751
            
            
            $
            28,013Year
      Ended August 26, 2006Depreciation
      and amortization
            
            $
            23,009
            
            
            $
            2,086
            
            
            $
            25,095Capital
      expenditures
            
            
            11,753
            
            
            
            758
            
            
            $
            12,511








Parent
      HoldingsClass
            
            
            
            
            
            GraduationRings
            
            
            Yearbooks
            
            
            Products
            
            
            Other
            
            
            TotalAs
      of August 30, 2008Goodwill
            
            $
            67,092
            
            
            $
            65,241
            
            
            $
            23,781
            
            
            $
            14,959
            
            
            $
            171,073Segment
      assets
            
            
            192,538
            
            
            
            165,123
            
            
            
            56,199
            
            
            
            45,257
            
            
            $
            459,117As
      of August 25, 2007Goodwill
            
            $
            67,092
            
            
            $
            65,241
            
            
            $
            23,781
            
            
            $
            14,970
            
            
            $
            171,084Segment
      assets
            
            
            203,637
            
            
            
            168,292
            
            
            
            57,796
            
            
            
            38,731
            
            
            $
            468,456Intermediate
      HoldingsClass
            
            
            
            
            
            
            GraduationRings
            
            
            Yearbooks
            
            
            Products
            
            
            Other
            
            
            TotalAs
      of August 30, 2008Goodwill
            
            $
            67,092
            
            
            $
            65,241
            
            
            $
            23,781
            
            
            $
            14,959
            
            
            $
            171,073Segment
      assets
            
            
            189,633
            
            
            
            162,727
            
            
            
            55,377
            
            
            
            44,703
            
            
            $
            452,440As
      of August 25, 2007Goodwill
            
            $
            67,092
            
            
            $
            65,241
            
            
            $
            23,781
            
            
            $
            14,970
            
            
            $
            171,084Segment
      assets
            
            
            200,330
            
            
            
            165,287
            
            
            
            56,726
            
            
            
            38,176
            
            
            $
            460,519AACClass
            
            
            
            
            
            
            GraduationRings
            
            
            Yearbooks
            
            
            Products
            
            
            Other
            
            
            TotalAs
      of August 30, 2008Goodwill
            
            $
            67,092
            
            
            $
            65,241
            
            
            $
            23,781
            
            
            $
            14,959
            
            
            $
            171,073Segment
      assets
            
            
            189,939
            
            
            
            163,139
            
            
            
            55,541
            
            
            
            44,718
            
            
            $
            453,337As
      of August 25, 2007Goodwill
            
            $
            67,092
            
            
            $
            65,241
            
            
            $
            23,781
            
            
            $
            14,970
            
            
            $
            171,084Segment
      assets
            
            
            199,160
            
            
            
            164,223
            
            
            
            56,347
            
            
            
            37,979
            
            
            $
            457,709




76
 AMERICAN
ACHIEVEMENT GROUP HOLDING CORP.
 AAC
GROUP HOLDING CORP.
 AMERICAN
ACHIEVEMENT CORPORATION
 Notes to
Consolidated Financial Statements
 (Dollars
in thousands, unless otherwise stated)


Following
is a reconciliation of segment assets and goodwill to total assets and goodwill
as of August 30, 2008 and August 25, 2007:




Parent
      HoldingsTotal
      Segment Assets
            
            
            Assets
      of Discontinued Operations
            
            
            Assets
      not Allocated
            
            
            TotalAs
      of August 30, 2008Goodwill
            
            $
            171,073
            
            
            $
            -
            
            
            $
            -
            
            
            $
            171,073Segment
      Assets
            
            
            459,117
            
            
            
            -
            
            
            
            -
            
            
            $
            459,117As
      of August 25, 2007Goodwill
            
            $
            171,084
            
            
            $
            2,193
            
            
            $
            -
            
            
            $
            173,277Segment
      Assets
            
            
            468,456
            
            
            
            7,610
            
            
            
            -
            
            
            $
            476,066Intermediate
      HoldingsTotal
      Segment Assets
            
            
            Assets
      of Discontinued Operations
            
            
            Assets
      not Allocated
            
            
            TotalAs
      of August 30, 2008Goodwill
            
            $
            171,073
            
            
            $
            -
            
            
            $
            -
            
            
            $
            171,073Segment
      Assets
            
            
            452,440
            
            
            
            -
            
            
            
            2,333
            
            
            $
            454,773As
      of August 25, 2007Goodwill
            
            $
            171,084
            
            
            $
            2,193
            
            
            $
            -
            
            
            $
            173,277Segment
      Assets
            
            
            460,519
            
            
            
            7,610
            
            
            
            -
            
            
            $
            468,129AACTotal
      Segment Assets
            
            
            Assets
      of Discontinued Operations
            
            
            Assets
      not Allocated
            
            
            TotalAs
      of August 30, 2008Goodwill
            
            $
            171,073
            
            
            $
            -
            
            
            $
            -
            
            
            $
            171,073Segment
      Assets
            
            
            453,337
            
            
            
            -
            
            
            
            1,777
            
            
            $
            455,114As
      of August 25, 2007Goodwill
            
            $
            171,084
            
            
            $
            2,193
            
            
            $
            -
            
            
            $
            173,277Segment
      Assets
            
            
            457,709
            
            
            
            7,610
            
            
            
            -
            
            
            $
            465,319




Assets
not allocated include affiliate receivables at Intermediate Holdings and
AAC.  The affiliate receivable represents amounts receivable from
Parent Holdings (see Note 6).


77


Item 9.
Changes in and Disagreements
with Accountants on Accounting and Financial Disclosure





None.





Item
9A. Controls and Procedures





EVALUATION
OF DISCLOSURE CONTROLS AND PROCEDURES




The
Company's management evaluated, under the supervision and with the participation
of the Chief Executive Officer and Chief Financial Officer, the effectiveness of
the design and operation of our disclosure controls and procedures pursuant to
Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the
“Exchange Act”), as of the end of the period covered by this report. Disclosure
controls and procedures are designed with the objective of ensuring that (i)
information required to be disclosed in the Company's reports filed under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange Commission's
rules and forms and (ii) the information is accumulated and communicated to
management, including the principal executive officer and principal financial
officer, as appropriate to allow timely decisions regarding required
disclosure.




Based
upon their evaluation, Management including the Chief Executive Officer and
Chief Financial Officer, as indicated in the certifications in Exhibit 31.1
and 31.2 of this report, have concluded that our disclosure controls and
procedures are effective, as of the end of the period covered by this Annual
Report on Form 10-K.





MANAGEMENT’S
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING




Management
is responsible for establishing and maintaining adequate internal control over
financial reporting to provide reasonable assurance regarding the reliability of
our financial reporting and the preparation of the consolidated financial
statements of the Company for external purposes in accordance with generally
accepted accounting principles. The Company’s internal control over
financial reporting includes those policies and procedures that (i) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the Company;
(ii) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of
the Company are being made only in accordance with authorizations of management
and directors of the Company; and (iii) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the Company’s assets that could have a material effect on the
financial statements. Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements. Projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may
deteriorate.




Management
assessed our internal control over financial reporting as of August 30, 2008,
which was the end of our fiscal year. Management based its assessment on
criteria established in the Securities and Exchange Commission's Guidance
Regarding Management's Report on Internal Control Over Financial Reporting Under
Section 13(a) or 15(d) of the Securities Exchange Act of 1934. The guidance sets
forth an approach by which management can conduct a top-down, risk-based
evaluation of internal control over financial reporting.  Management's
assessment included an evaluation of risks to reliable financial reporting,
whether controls exist to address those risks, and management evaluated evidence
about the operation of the controls included in the evaluation based on its
assessment of risk. Management assessed the effectiveness of our internal
control over financial reporting as of August 30, 2008, using criteria set forth
by the Committee of Sponsoring Organizations of the Treadway Commission in
Internal Control - Integrated Framework.




Based on
our assessment, Management has concluded that our internal control over
financial reporting was effective as of the end of the fiscal year to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external reporting purposes in
accordance with generally accepted accounting principles. We reviewed the
results of management's assessment with the Audit Committee of our Board of
Directors.




CHANGES
IN INTERNAL CONTROL OVER FINANCIAL REPORTING




There
have been no changes in our internal control over financial reporting during the
quarter ended August 30, 2008 that have materially affected or are reasonably
likely to materially affect our internal control over financial
reporting.





78


PART
III





Item 10.
Director, Executive Officers
of the Registrants and Corporate Governance





The
following table sets forth information about our boards of directors and
executive officers as of August 30, 2008 (unless stated otherwise, all officers
and directors hold their respective position in Parent Holdings, Intermediate
Holdings, AAC Holding Corp. and AAC):




Name
            
            Age
            
            PositionDonald
      J. Percenti
            
            52
            
            President,
      Chief Executive Officer and DirectorKris
      G. Radhakrishnan
            
            47
            
            Chief
      Financial Officer and TreasurerSherice
      P. Bench
            
            49
            
            Executive
      Vice President and SecretaryTheresa
      Ann Broome
            
            56
            
            Vice
      President of Human Resources, AACMatthew
      Gase
            
            49
            
            General
      Manager—CBIPeter
      Lamm
            
            57
            
            DirectorMac
      LaFollette
            
            44
            
            DirectorW.
      Gregg Smart
            
            48
            
            DirectorJean
      Ann McKenzie
            
            49
            
            DirectorMyles
      Kleeger
            
            33
            
            DirectorAlan
      J. Bowers
            
            53
            
            Director




Donald J.
Percentibecame President and Chief Executive Officer and a member of the
board of directors of AAC in September 2005. Prior to becoming President
and Chief Executive Officer, Mr. Percenti served as Senior Vice
President—On Campus and General Manager—Printing since 1996. From 1991 to 1996,
he was Vice President—Sales and Marketing of L.G. Balfour Company, the prior
owner of Balfour. From 1977 to 1991, Mr. Percenti was employed by Balfour
in various capacities. Mr. Percenti is a member of the Company’s boards of
directors.




Kris G.
Radhakrishnanbecame Chief Financial
Officer and Treasurer in April 2007. From September 2004 to
March 2006, Mr. Radhakrishnan served as the Vice President and Chief
Financial Officer of Resolution Specialty Materials, a global specialty chemical
company. From July 2002 to September 2004, Mr. Radhakrishnan
served as the Vice President and Controller of Celanese Chemicals, and from
August 2001 to July 2002, he served as Director of Finance at Celanese
Chemicals. Mr. Radhakrishnan received an M.B.A.fromNorthern Illinois University
and a Bachelor of Commerce (accounting) from University of Madras,
India.




Sherice P. Benchbecame Executive Vice President in April 2007 and has been our Secretary
since July 2000.  Prior to becoming our Executive Vice President, Ms.
Bench was our Chief Financial Officer and Treasurer from July 2000 to April
2007. From 1996 to July 2000, Ms. Bench was our Vice President and
Controller. From 1989 to 1996, Ms. Bench was Vice President Finance and
Controller for CJC Holdings Inc., the prior owner of ArtCarved. Prior to that
time, Ms. Bench was employed as an audit manager with Arthur Andersen LLP.
Ms. Bench is a Certified Public Accountant and she received a B.B.A. in
Accounting from Texas Tech University.




Theresa Ann
Broome has been Vice President—Human Resources since April, 2006. 
Prior to that, she led her own Human Resources consulting practice and served as
Group Vice President—Human Resources and Director—Compensation and Benefits, for
Coca Cola Enterprises.  She also held several executive operational and
human resources roles in the U. S. Postal Service, including General Manager for
operations in the state of Mississippi.  She holds an M.B.A from
Louisiana State University, a B.S. from the University of Southern
Mississippi and has completed Executive Masters Programs at the University of
Virginia and Duke University.




Matthew Gasehas been General Manager—CBI since February 2006. From 1997 to 2006,
Mr. Gase served in numerous senior executive capacities at ConAgra Foods,
Inc., including Vice President—International Strategic Development. From 1982 to
1997, Mr. Gase held a variety of general management roles at Nestle Purina
Company. Mr. Gase received an M.B.A. from
Loyola Marymount University and a Bachelor of General Studies from the
University of Michigan.




Peter Lammjoined AAC’s board of directors in March 2004 and has served as a
director of Intermediate Holdings and Parent Holdings since their inception. He
is currently a member of the AAC Compensation Committee. Mr. Lamm is the
Chairman and Chief Executive Officer of Fenway Partners. Mr. Lamm founded
Fenway Partners in 1994. He was previously a General Partner of the investment
partnerships managed by Butler Capital Corporation (“BCC”) and a Managing
Director of BCC. Prior to joining Butler Capital in 1982, Mr. Lamm was
involved in launching Photoquick of America, Inc., a family business.
Mr. Lamm received an M.B.A. from Columbia University School of Business and
a B.A. in English Literature from Boston University.




79




Mac LaFollettejoined
AAC’s board of directors in March 2004 and has served as a director of
Intermediate Holdings and Parent Holdings since their inception. He is currently
a member of the Audit Committee and AAC Compensation Committee.
Mr. LaFollette is a Managing Director of Fenway Partners. Prior to joining
Fenway Partners in 2000, Mr. LaFollette was a Director in the Leveraged
Finance group at Credit Suisse First Boston. At First Boston, he identified
leveraged buyout transactions for financial sponsors and financed LBOs in the
bank market and high yield markets. Prior to joining First Boston, he worked in
the Latin America Investment Banking Group at UBS. Mr. LaFollette received
an M.B.A. from Harvard Business School and a Bachelor of Arts from
Harvard College.





W. Gregg Smartjoined AAC’s board of directors in March 2004 and has served as a
director of Intermediate Holdings and Parent Holdings since their inception. He
is currently a member of the Audit Committee and AAC Compensation Committee.
Mr. Smart is a Senior Managing Director and the Chief Operating Officer of
Fenway Partners. Prior to joining Fenway Partners in July 1999,
Mr. Smart spent 13 years at Merrill Lynch & Co. where he was most
recently a Managing Director in the Financial Sponsors Group. Prior to joining
Merrill Lynch & Co., Mr. Smart was with First Union National Bank.
Mr. Smart received an M.B.A. from the Wharton School and a B.A. in
Economics from Davidson College.





Jean Ann McKenziejoined AAC’s board of directors in May 2006. In August 2006, Ms.
McKenzie joined Intermediate Holdings’ and Parent Holdings’ boards of directors.
Ms. McKenzie served as President and Chief Executive Officer of Gateway
Learning Corporation (Hooked on Phonics) from 1999 through 2005. Prior to
joining Gateway Learning Corporation, Ms. McKenzie spent nine years in
various marketing and senior management roles at Mattel, Inc., culminating in
the position of Executive Vice President and General Manager—Worldwide Barbie.
Prior to joining Mattel, Inc., Ms. McKenzie was with Applause, Inc. and
Hallmark Cards, Inc. Ms. McKenzie received a B.S. in Marketing from the
University of Missouri.





Myles Kleegerjoined AAC’s board of directors in June 2006. In August 2006, Mr.
Kleeger joined Intermediate Holdings’ and Parent Holdings’ boards of directors.
Mr. Kleeger is a Managing Director at the Kaplan Thaler Group (KTG) and
heads the marketing unit, KTG Buzz. Before joining KTG, Mr. Kleeger served
as the Senior VP and General Manager of Alloy Marketing & Promotions (AMP
Agency), a full-service marketing agency specializing in experiential and
digital marketing solutions for clients targeting the youth market. Prior to
becoming the General Manager of AMP, Mr. Kleeger served as VP of AMP
Design, the web design and technology services division of the agency.
Mr. Kleeger began his career at Alloy in a sales role and also held
multiple sales and marketing positions at Parade Publications prior to joining
Alloy in 1999. Mr. Kleeger received his undergraduate degree from
Duke University and his M.B.A. in Finance from the NYU Stern School of
Business.





Alan J. Bowersjoined the Company’s boards of directors in August 2006.
Mr. Bowers was also appointed to chair the Audit Committee of the Board of
Directors. Mr. Bowers served as President, Chief Executive Officer and
Board Member of Cape Success, LLC, a consolidated group of service businesses,
from 2001 through 2004. Mr. Bowers previously served as President, Chief
Executive Officer and Board Member of Marketsource Corporation, a
multi-divisional service firm, from 2000 through 2001 and MBL Life Assurance
Corporation, successor to Mutual Benefit Life, from 1995 to 1999. Prior to
joining MBL Life Assurance Corporation, Mr. Bowers was with Coopers &
Lybrand, LLP, predecessor to PricewaterhouseCoopers, from 1978 to 1995. He
became a partner in 1986, working in the Firm’s audit practice and ultimately
becoming an area managing partner. Mr. Bowers received an M.B.A. in Finance
and Economics from St. John’s University and a B.S. in Accounting from
Montclair State University.




Board
Committees





Our board
of directors directs the management of our business and affairs as provided by
Delaware law and conducts its business through meetings of the full board of
directors and two standing committees: the audit committee and the compensation
committee. In addition, from time to time, other committees may be established
under the direction of the board of directors when necessary to address specific
issues.





The
duties and responsibilities of the audit committee include recommending to the
board of directors the appointment or termination of the engagement of our
independent public accountants, otherwise overseeing the independent registered
public accounting firm relationship, reviewing our significant accounting
policies and internal controls and reporting its recommendations and findings to
the full board of directors. Mr. Alan Bowers chairs the audit committee and
has been designated by the board of directors as the audit committee financial
expert within the meaning of Securities and Exchange
Commission regulations. The compensation committee reviews and approves the
compensation of our chief executive officer and administers any cash or equity
incentive plan approved by our board of directors.





Code
of Ethics




Parent
Holdings, Intermediate Holdings and AAC collectively adopted a Code of Ethics
& Business Conduct and an Anti-Fraud Policy, on September 5, 2007, which
applies to all members of management, our executive officers and our board of
directors.  These policies further extend and reinforce the ethical
values of the Company communicated through our Code of Conduct distributed to
all employees upon hire.


80




We review
our Code of Ethics & Business Conduct and our Anti-fraud Policy annually and
amend it, as necessary, to be in compliance with the current laws.  We
require senior management employees and employees with a significant role in
internal control over financial reporting to confirm compliance with the Code
and Policy on an annual basis.  Copies of the Code of Ethics &
Business Conduct and Anti-Fraud Policy are available to any person, upon request
and free of charge.




Item 11.
Executive
Compensation





Compensation
Discussion and Analysis





Philosophy





Our
compensation programs recognize our employees are responsible for our Company’s
growth, achievements and success.  We seek to attract and retain
business leaders that, knowing that we are marking the most significant
milestones in the lives of our customer, have an unwavering commitment to the
high quality of the products we make and the services we provide, while
fostering innovation in the market place.  Our programs support our
drive for excellence in all that we say and do by setting high performance
standards with supporting accountability and responsibility.  We have
a philosophy that values teamwork and the results achieved by working together,
communicating effectively and supporting common goals.





It is our
policy to provide rates of pay which are competitive with the average rates paid
elsewhere in the area for similar work and which reflect fairly the difference
between jobs in the Company.  Individual performance is evaluated
annually and considered in compensation decisions.  We recognize
individual ability and performance as the soundest and most equitable basis for
individual salary adjustments and promotion within the Company.  In
addition, annual results-based incentives are rewarded to executives for
maximizing EBITDA and revenue obtainment.  Our compensation program
recognizes individual performance must go hand-in-hand with the achievement of
Company goals in order to create a meaningful structure to maximize results and
add value to the Company.





Role
of the Compensation Committee





Our
Compensation Committee consists of Peter Lamm, W. Gregg Smart and Mac
LaFollette.  The Compensation Committee generally meets annually to
formally approve annual incentive plans for the next year.  In
addition, more frequent meetings may be held periodically as necessary to timely
address the strategic direction of the compensation
program.  Executive awards under the prior year’s plan are reviewed
and approved subsequent to receipt of audited financial data, generally during
the first or second quarter of each fiscal year.





The
Compensation Committee reviews and considers annual increases, bonus
opportunities and cash incentive awards for key executives.  As part
of this review, the history of all the elements of each executive’s total
compensation are evaluated, including and not limited to a comparison of the
compensation of other similarly situated executive officers based on general
knowledge of market pay, an assessment of personal achievement and business
performance. Typically, our Chief Executive Officer, currently Mr. Percenti,
makes compensation recommendations to the Compensation Committee with respect to
the executive officers who report to him, including the Chief Financial
Officer.  Mr. Percenti bases his recommendations on the impact of the
position, skill level and experience of the individual.  Such
executive officers are not present at the time of these deliberations. The
Compensation Committee has the authority to accept or adjust any such
recommendations. The Chairman of the Compensation Committee then makes
compensation recommendations to the Compensation Committee with respect to the
Chief Executive Officer and the Chief Financial Officer. Neither Mr. Percenti
nor Mr. Radhakrishnan is present at the meeting when their compensation is
discussed by the committee.  The Compensation Committee currently does
not utilize an outside consultant.





Market
Benchmarking and Positioning





We do not
perform formal benchmarking to determine total compensation or any material
element of compensation for our executives.





Overview
of Elements of Executive Compensation





Elements
of compensation for our executives include: base salary, annual bonus, cash
incentive awards and other benefits.  We choose to pay each element of
compensation in order to attract and retain the necessary executive talent,
reward annual performance and provide incentive for their balanced focus on
long-term strategic goals as well as short-term performance.  Listed
below is a description of each element of compensation:





81


Base
Salary


Base
Salary is a necessary element of compensation in order to attract and retain key
talent.  Base Salary is the fixed component of the executive
compensation structure that recognizes the prevailing market rate of pay for
level of responsibility and availability of key skills and experience required
to drive superior performance.  Base Salary is also the basis for
establishing the target payouts of the bonus programs described
below.





Annual
Bonus


The
objective of the bonus plan is to motivate top operating management to maximize
results each year.  In doing so, EBITDA and revenue generation is the
fundamental objective of the Company and therefore, is the basic driver of a
substantial portion of management bonus dollars available.  Individual
performance of senior executives also plays a major role in driving the Company
forward and merits a significant bonus opportunity.  In any given
year, quantitative results alone may not adequately define how well an
individual may have performed and thus, a discretionary component must be
present.





The bonus
plan goals are:


·      To
provide a significant incentive for achieving EBITDA Objective;


·      To
provide additional incentive to exceed EBITDA Objective;


·      To
provide incentive to continue to maximize EBITDA achievement in the face of
significant adverse events; and,


·      To
blend individual performance initiative with EBITDA attainment.





Bonus
opportunity for the executive officers is expressed as a percentage of
qualifying base salary, with an established Basic Plan percentage for payout
based on meeting certain targets or to reward individual extraordinary
performance or contribution and enhanced Supplemental Plan if certain targets
above the established EBITDA goal are met.  The components of the
Basic Bonus Plan include EBITDA, Revenue, Performance Objectives and Discretion,
as described below:





1)        EBITDA component is
awarded based on performance against the approved EBITDA Objective for that
fiscal year.


2)        Revenue component, if
applicable, is awarded based on the net revenue achieved by the Company compared
to the approved revenue objective for that fiscal year.


3)        Performance Objective
component is determined by individual participant performance versus
quantifiable objectives unique to the functional responsibility of the
participant.  There are 2 to 3 objectives per
participant.  Each objective is weighted to determine what portion, if
any, of the base salary bonus is possible to be earned though this
component.  Individual performance objectives recognize the
achievement of specified targets or projects that move the Company forward, or
contribute to exceeding the EBITDA goal.


4)        Discretionary componentis based on the recommendation of the Chief Executive Officer to the
Compensation Committee of the Board of Directors on each individual participant
as to how well he/she performed and the extent to which the individual
contributed to the Company’s result.  It is intended to recognize
factors such as contributions above and beyond expectations.





82


The chart
below summarizes the Basic and Supplemental Plan formulas for the 2008 fiscal
year for the following named executives.





Named
      Executive
            Basic
      Plan
            Supplemental
      Plan
              (performance
      over 100% of EBITDA Objective)Kris
      G. Radhakrishnan, Chief Financial Officer
            35%
      Company EBITDA
              15%
      Performance Objective
              10%
      Discretion
              60%
      Total Basic Bonus
            Determined
      by EBITDA, up to 75% of Base Salary  for maximum total of Basic
      and Supplemental PlansSherice
      P. Bench, Executive Vice President
            35%
      Company EBITDA
              15%
      Performance Objective
              10%
      Discretion
              60%
      Total Basic Bonus
            Determined
      by EBITDA, up to 75% of Base Salary  for maximum total of Basic
      and Supplemental PlansMatthew
      Gase,
              General
      Manager - CBI
            15%
      Company EBITDA
              15%
      Division EBITDA
              10%
      Revenue Goal
              10%
      Performance Objective
              10%
      Discretion
              60%
      Total Basic Bonus
            Determined
      by EBITDA, up to 75% of Base Salary for maximum total of Basic and
      Supplemental PlansTheresa
      Ann Broome, Vice of President Human Resources, AAC
            35%
      Company EBITDA
              15%
      Performance Objective
              10%
      Discretion
              60%
      Total Basic Bonus
            Determined
      by EBITDA, up to 75% of Base Salary for maximum total of Basic and
      Supplemental Plans





The Board
of Directors in its sole discretion determined targets or standards (e.g.
EBITDA, sales) for bonus payment of the Chief Executive Officer.  For
fiscal year 2008, the bonus payable to Mr. Percenti was determined as
follows:





Named
      Executive
            Bonus
      Plan
            Supplemental
      Plan (performance over 100% of EBITDA Objective)Donald
      J. Percenti, President and Chief Executive Officer
            40%
      Company EBITDA
              25%
      Budgeted Sales
              10%
      Budgeted Debt Pay Down
              75%
      Total Bonus
            Not
      Applicable





Certain
members of senior management of the Company and specified members of the Board
of Directors are eligible to participate in the American Achievement Corporation
Executive Cash Incentive Plan (the “CIP”).  Payment from the CIP
occurs upon the occurrence of a qualified liquidity event, e.g. change of
control of the company.  The CIP is intended to reward an ownership
mentality in its members.





Participants
in the CIP earn the right to receive payment depending on the number of “units”
held by that participant.  Units are typically granted by the
Compensation Committee to key employees on hire.  Units may also be
granted on a discretionary basis to recognize exceptional
performance.  The Compensation Committee determines the number of
units to grant based on the estimated value of those units if a future benefit
payment were to be awarded.  The number granted represents what would
be determined equitable to reward that individual.  The Compensation
Committee also considers suggestions from the Chief Executive Officer, Chief
Financial Officer and Vice President of Human Resources, if appropriate,
regarding the number of units to be granted to a participant.  The
maximum number of units available to all plan participants is
150,000.





83


Units may
either be awarded to the employee as Liquidity Event Units, which vest
automatically upon occurrence of a qualified liquidity event or as Time-Based
Units, which are vested over time.  Participants become vested in the
Time-Based Units ratably over a 5-year period with one-fifth vesting on each
subsequent anniversary of the unit grant date.  The vesting of all or
any portion of the participants’ units may be accelerated, at any time in the
sole discretion of the Board of Directors.  Following a qualified
liquidity event, a percentage of the participants’ available vested units over
the maximum number of units available determines their right to receive from 5%
to 15% (based on the net proceeds) of the net proceeds available to the
CIP.  The net proceeds available to the CIP are determined by the
amount paid for the company after certain debt and equity interests (including
dividends previously received) of the owners have been realized. At August 30,
2008 there were 115,418 units outstanding under the CIP.





Although
no payment has been made from the CIP during the last three years, certain
executive officers were awarded a one-time senior management bonus in fiscal
2005 that were based partly on the expected future value of the CIP
benefit.  In the event of a qualified liquidity event, payments from
the CIP will be reduced by the amount of the bonus.





Certain
members of senior management of the Company are also eligible to participate in
the American Achievement Corporation Supplemental Incentive Plan (the
“SIP”).  Payment from the SIP occurs upon the occurrence of a
qualified liquidity event, e.g. change of control of the company.  The
SIP was designed to provide a one-time incentive award to key senior management
employees.





Participants
in the SIP earn the right to receive payment depending on the number of “units”
held by that participant.  Units are granted on a discretionary basis
to recognize exceptional performance.  The Compensation Committee
determines the number of units to grant based on the estimated value of those
units if a future benefit payment were to be awarded.  The number
granted represents what would be determined equitable to reward that
individual.  The Compensation Committee also considers suggestions
from the Chief Executive Officer, Chief Financial Officer and Vice President of
Human Resources, if appropriate, regarding the number of units to be granted to
a participant.  The maximum number of units available to all plan
participants is 1,000.





Units
will vest automatically upon occurrence of a qualified liquidity event during
the term of the participant’s employment with the Company.  Following
a qualified liquidity event, a percentage of the participants’ available vested
units over the maximum number of units available determines their right to
receive a portion of the net proceeds available to the SIP.  The net
proceeds available to the SIP are determined by the amount paid for the company
after certain debt and equity interests (including dividends previously
received) of the owners have been realized and payments pursuant to the CIP have
been made. At August 30, 2008 there were 353 units outstanding under the
SIP.





Other
Benefits





Our
executive officers participate in the same group medical, life, disability
insurance and employee benefit plans as our other salaried employees under the
same terms and conditions.  We also offer participation in our defined
contribution 401(k) plan with a company match on terms consistent with other
eligible employees.  Mr. Percenti is provided with a car
allowance.




Compensation
Committee Interlocks and Insider Participation




No
interlocking relationship exists between the members of AAC’s Board of Directors
or the Compensation Committee and the board of directors or compensation
committee of any other company, nor has any such interlocking relationship
existed in the past.





Compensation
Committee Report





The
Compensation Committee has reviewed and discussed with management the
Compensation Discussion and Analysis provided above.  Based on its
review and discussions, the Compensation Committee recommended to the Board of
Directors that the Compensation Discussion and Analysis be included in this
annual report.








84


Summary
Compensation Table





The
following table provides information concerning all plan and non-plan
compensation awarded to, earned by, or paid to our “named executive officers”
for each of our last three completed fiscal years.  Named executive
officers consist of individuals serving as our principal executive officer,
our principal financial officer and three additional executive officers who were
the most highly compensated for the year ended August 30, 2008.





Name
      and Principal Position
            Year
            
            Salary
      ($)
            
            
            Bonus
      ($)
            
            
            Non-
      Equity Incentive Plan Compensation ($) (1)
            
            
            All
      Other Compensation ($)
            
            
            Total
      ($)Donald
      J. Percenti
            2008
            
            $
            410,015
            
            
            $
            -
            
            
            $
            -
            
            
            $
            9,000
            (7)
            
            $
            419,015President
      and Chief
            2007
            
            $
            396,154
            
            
            $
            -
            
            
            $
            40,000
            (6)
            
            $
            9,000
            (7)
            
            $
            445,154Executive
      Officer
            2006
            
            $
            325,500
            
            
            $
            -
            
            
            $
            37,000
            
            
            $
            9,000
            (7)
            
            $
            371,500David
      G. Fiore (2)
            2008
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -2007
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -2006
            
            $
            67,846
            
            
            $
            -
            
            
            $
            -
            
            
            $
            463,250
            (8)
            
            $
            531,096Kris
      G. Radhakrishnan(3)
            2008
            
            $
            284,423
            
            
            $
            -
            
            
            $
            -
            
            
            $
            59,474
            (9)
            
            $
            343,897Chief
      Financial
            2007
            
            $
            105,769
            
            
            $
            -
            
            
            $
            15,865
            
            
            $
            -
            
            
            $
            121,635Officer
            2006
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -Sherice
      P. Bench(3)
            2008
            
            $
            253,710
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            253,710Executive
      Vice President
            2007
            
            $
            246,271
            
            
            $
            -
            
            
            $
            12,360
            (6)
            
            $
            -
            
            
            $
            258,6312006
            
            $
            239,987
            
            
            $
            -
            
            
            $
            36,624
            
            
            $
            -
            
            
            $
            276,611Matthew
      Gase(4)
            2008
            
            $
            254,269
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            254,269General
      Manager - CBI
            2007
            
            $
            245,769
            
            
            $
            -
            
            
            $
            -
            
            
            $
            102,802
            (9)
            
            $
            348,5712006
            
            $
            138,461
            
            
            $
            -
            
            
            $
            67,200
            
            
            $
            34,446
            (9)
            
            $
            240,107Theresa
      Ann Broome (5)
            2008
            
            $
            191,077
            
            
            $
            -
            
            
            $
            -
            
            
            $
            7,960
            (9)
            
            $
            199,037Vice
      President – Human
            2007
            
            $
            173,769
            
            
            $
            -
            
            
            $
            26,265
            (6)
            
            $
            79,210
            (9)
            
            $
            279,244Resources,
      AAC
            2006
            
            $
            55,577
            
            
            $
            -
            
            
            $
            10,767
            
            
            $
            9,810
            (9)
            
            $
            76,154






(1)
              Amounts
      represent total earned under the annual bonus plan during the fiscal years
      presented.  These amounts are generally paid during the second
      quarter of the following fiscal
year.


(2)
            Mr.
      Fiore served as our President and Chief Executive Officer until September
      2005, at which time Mr. Percenti became our President and Chief Executive
      Officer.


(3)
              Mr.
      Radhakrishnan began employment as our Chief Financial Officer and
      Treasurer in April 2007 at which time Ms. Bench transitioned from Chief
      Financial Officer to Executive Vice President and
    Secretary.


(4)
            Mr.
      Gase began employment as General Manager – CBI in February
      2006.


(5)
              Ms.
      Broome began employment as Vice President – Human Resources, AAC in April
      2006.


(6)
              Fiscal
      year 2007 compensation under the annual bonus plan was paid in the form of
      CIP units as elected by the named executive
  officer.


(7)
            All
      Other Compensation for Mr. Percenti consists of a car allowance paid
      monthly.


(8)
              All
      Other Compensation for Mr. Fiore includes $450,000 in termination
      payments.


(9)
            All
      Other Compensation for Mr. Radhakrishnan, Mr. Gase and Ms. Broome consists
      of relocation allowances.





85


Grants
of Plan-based Awards Table




The
following table provides information concerning each grant of an award made to
our named executive officers during the last completed fiscal year:





Name
            Grant
      Date
            
            
            Estimated
      Possible Payouts Under Non-Equity Incentive Plan Awards(1)
            All
      Other Stock Awards: Number of Shares of Stock or Units (2)Threshold
      ($)
            
            
            Target
      ($)
            
            
            Maximum
      ($)Donald
      J. Percenti
            August
      26, 2007
            
            $
            --
            
            $
            309,000
            
            $
            309,000February
      7, 2008
            
            
            
            
            
            
            
            
            
            1,653
            (3)Kris
      G. Radhakrishnan
            August
      26, 2007
            
            $
            --
            
            $
            180,000
            
            $
            225,000February
      7, 2008
            
            
            
            
            
            
            
            
            
            1,000
            (4)February
      29, 2008
            
            
            
            
            
            
            
            
            
            2,936
            (4)Sherice
      P. Bench
            August
      26, 2007
            
            $
            --
            
            $
            153,000
            
            $
            191,250February
      7, 2008
            
            
            
            
            
            
            
            
            
            1,047
            (5)Matthew
      Gase
            August
      26, 2007
            
            $
            --
            
            $
            154,500
            
            $
            193,125February
      7, 2008
            
            
            
            
            
            
            
            
            
            1,095
            (6)Theresa
      Ann Broome
            August
      26, 2007
            
            $
            --
            
            $
            126,000
            
            $
            157,500February
      7, 2008
            
            
            
            
            
            
            
            
            
            1,096
            (7)


__________________


(1)
              Amounts
      represent estimated possible payouts under the annual bonus
      plan.


(2)
            Amounts
      represent units granted under the CIP.  As the payment under the
      CIP is contingent on occurrence of a liquidity event which is not assessed
      to be probable, and the amount payable under the plan is not reasonably
      estimable as of the date of the financial statements, no expense has been
      recognized for units granted under the
plan.


(3)
              CIP
      units granted on February 7, 2008 are Time-Based
      Units.  At August 30, 2008, Mr. Percenti holds a total of
      22,963 CIP units consisting of 9,960 Liquidity Event Units and 13,003
      Time-Based Units.  Mr. Percenti also holds 203 units awarded
      under the SIP.


(4)
            CIP
      units granted on February 7, 2008 consist of 1,000 Time-Based Units. CIP
      units granted on February 29, 2008 consist of 1,468 Liquidity Event
      Units and 1,468 Time-Based Units.  At August 30, 2008, Mr.
      Radhakrishnan holds a total of 9,936 CIP units consisting of 4,468
      Liquidity Event Units and 5,468 Time-Based
  Units.


(5)
              CIP
      units granted on February 7, 2008 are Time-Based
      Units.  At August 30, 2008, Ms. Bench holds a total of
      14,992 CIP units consisting of 6,584 Liquidity Event Units and 8,338
      Time-Based Units. Ms. Bench also holds 150 units awarded under the
      SIP.


(6)
            CIP
      units granted on February 7, 2008 are Time-Based
      Units.  At August 30, 2008, Mr. Gase holds a total of 8,495
      CIP units consisting of 3,500 Liquidity Event Units and 4,995 Time-Based
      Units.


(7)
              CIP
      units granted on February 7, 2008 are Time-Based
      Units.  At August 30, 2008, Ms. Broome holds a total of
      3,096 CIP units consisting of 1,000 Liquidity Event Units and 2,096
      Time-Based Units.





Employment
Agreements




Donald J.
Percenti.Mr. Percenti has an employment agreement with AAC,
pursuant to which he serves as our Chief Executive Officer. The initial term of
his employment agreement is for two years from August 10, 2005, and is
automatically extended for additional one year terms on August 10th of each
succeeding year thereafter unless earlier terminated by us upon not less than 90
days prior notice. In accordance with the employment agreement,
Mr. Percenti is currently paid an annual salary of $412,000. Under his
employment agreement, Mr. Percenti’s salary is subject to such changes as
our board of directors may determine from time to time.




Mr. Percenti’s
employment agreement provides for an annual bonus in an amount up to 75% of
Mr. Percenti’s salary based upon the achievement of certain targets or
standards as are determined by our board of directors. Mr. Percenti’s
employment agreement also provides that he participates in our employee benefit
plans (including incentive bonus plans and incentive stock plans) as we maintain
and as may be established for our employees from time-to-time on the same basis
as other executive employees are entitled to participate. In addition, we pay
Mr. Percenti a car allowance of up to $750 a month.


86




Mr. Percenti’s
employment agreement provides that in the event his employment is terminated
without “cause” or for “good reason” (each as defined in his employment
agreement), he will be entitled to receive bi-weekly payments equal to the
average of his bi-weekly compensation in effect within the two years preceding
the termination for a period of the greater of 18 months or the remaining term
of his employment agreement. He will also be entitled to elect the continuation
of health benefits at no cost to himself for up to 18 months. Other than
payments under the CIP, Mr. Percenti’s employment agreement does not
provide him with any payments that are contingent upon a “change in
control.”





Kris G.
Radhakrishnan.Mr. Radhakrishnan entered into an employment
agreement with CBI effective April 16, 2007, pursuant to which he serves as
our Chief Financial Officer and Treasurer. The initial term of his employment
agreement is for one year from April 16, 2007, and is automatically
extended for additional one year terms on April 16th of each succeeding
year thereafter unless earlier terminated by us upon not less than 30 days prior
notice. In accordance with the employment agreement, Mr. Radhakrishnan is
currently paid an annual salary of $300,000. Under his employment agreement,
Mr. Radhakrishnan’s salary is subject to such changes as our board of
directors may determine from time to time.





Mr. Radhakrishnan’s
employment agreement provides that he participates in our employee benefit plans
(including incentive bonus plans and incentive stock plans) as we maintain and
as may be established for our employees from time to time on the same basis as
other executive employees are entitled to participate.




Mr. Radhakrishnan’s
employment agreement provides that in the event his employment is terminated
without “cause” or for “good reason” (each as defined in his employment
agreement), he will be entitled to receive 26 bi-weekly payments equal to the
average of his bi-weekly compensation in effect within the two years preceding
the termination. He will also be entitled to elect the continuation of health
benefits at no cost to himself for a period of up to
12 months.





Mr. Radhakrishnan’s
entered into a letter agreement with AAC on May 8, 2008 regarding payments
contingent upon a “change in control.”  Pursuant to the terms of the
letter agreement, Mr. Radhakrishnan is entitled to a $300,000 lump sum cash
payment upon consummation of a “change in control,” as such term is defined in
the CIP, if such "change in control" occurs prior to February 8, 2009.  Mr.
Radhakrishnan is also entitled to payments under the CIP that are contingent
upon a “change in control.”




Sherice P. Bench.Ms. Bench has an amended employment agreement with CBI effective as
of December 16, 1996, pursuant to which she serves as our Executive Vice
President. The initial term of her employment agreement was for two years, and
is automatically extended for additional one year terms on December 15th of
each succeeding year thereafter unless earlier terminated by us upon not less
than 60 days prior notice. In accordance with the employment agreement,
Ms. Bench is currently paid an annual salary of $255,000 and she is
entitled to participate in such employee benefit programs, plans and policies
(including incentive bonus plans and incentive stock option plans) as we
maintain and as may be established for our employees from time-to-time on the
same basis as other executive employees are entitled to
participate.




Ms. Bench’s
amended employment agreement provides that in the event her employment is
terminated without “substantial cause” (as defined in her employment agreement),
she will be entitled to receive 39 bi-weekly severance payments equal to the
average of her bi-weekly compensation in effect within the two years preceding
her termination. She will also be entitled to elect the continuation of health
benefits at no cost to herself for a period of up to 18 months. Other than
payments under the CIP, Ms. Bench’s employment agreement does not provide
her with any payments that are contingent upon a “change in
control.”




Matthew
Gase. Mr. Gase has an employment agreement with CBI, effective
February 1, 2006, pursuant to which he serves as the General Manager of
CBI. The term of his employment agreement is for one year, with automatic
renewals for successive one-year terms unless otherwise terminated upon two
months notice. In accordance with the employment agreement, Mr. Gase is
currently paid an annual base salary of $257,500 and he is entitled to
participate in such employee programs, plans and policies (including incentive
bonus plans and incentive stock option plans) as we maintain and as may be
established for our employees from time-to-time on the same basis as other
executive employees are entitled to participate.




Mr. Gase’s
employment agreement provides that in the event his employment is terminated
without “cause” or for “good reason” (each as defined in his employment
agreement), he will be entitled to receive 26 bi-weekly payments equal to the
average of his bi-weekly base salary in effect within the two years preceding
his termination.  He will also be entitled to elect the continuation
of health benefits at no cost to himself for a period of up to 12 months. Other
than payments under the CIP, Mr. Gase’s employment agreement does not
provide him with any payments that are contingent upon a “change in
control.”




Theresa Ann
Broome. Ms. Broome has an employment agreement with CBI, effective April
18, 2006, pursuant to which she serves as our Vice President Human Resources.
The term of her employment agreement is for one year, with automatic renewals
for successive one-year terms unless otherwise terminated upon two months
notice. In accordance with the employment agreement, Ms. Broome is currently
paid an annual base salary of $210,000 and she is entitled to participate in
such employee programs, plans and policies
(including incentive bonus plans and incentive stock option plans) as we
maintain and as may be established for our employees from time-to-time on the
same basis as other executive employees are entitled to
participate. 87


Ms.
Broome’s employment agreement provides that in the event her employment is
terminated without “cause” or for “good reason” (each as defined in her
employment agreement), she will be entitled to receive 26 bi-weekly payments
equal to the average of her bi-weekly base salary in effect within the two years
preceding her termination. She will also be entitled to elect the continuation
of health benefits at no cost to herself for a period of up to 12 months. Other
than payments under the CIP, Ms. Broome’s employment agreement does not provide
her with any payments that are contingent upon a “change in
control.”




Potential
Payments upon Termination or Change in Control




The
following table quantifies the estimated payments and benefits that would be
provided to our named executive officers in each covered circumstance upon
termination of employment or change in control.  The amounts payable
were calculated assuming the named executive officers’ employment was terminated
on August 30, 2008.





Name
      and Triggering Event
            
            Salary
      (1)
            
            
            Benefits
      (1)
            
            
            Payment
      Under Cash Incentive Plan
            
            
            Other
            
            
            TotalDonald
      J. Percenti -Termination
      without cause or for good reason (2)
            
            $
            609,000
            
            
            $
            25,325
            
            
            $
            --
            
            
            $
            --
            
            
            $
            634,325Change
      in Control
            
            
            --
            
            
            
            --
            
            
            
            (3)Kris
      G. Radhakrishnan -Termination
      without cause or for good reason
            
            $
            300,000
            
            
            $
            16,884
            
            
            $
            --
            
            
            $
            --
            
            
            $
            316,884Change
      in Control
            
            
            --
            
            
            
            --
            
            
            
            (3)
            
            
            
            300,000
            
            
            
            300,000Sherice
      P. Bench -Termination
      without cause or for good reason
            
            $
            376,650
            
            
            $
            25,325
            
            
            $
            --
            
            
            $
            --
            
            
            $
            401,975Change
      in Control
            
            
            --
            
            
            
            --
            
            
            
            (3)Matthew
      Gase -Termination
      without cause or for good reason
            
            $
            253,750
            
            
            $
            16,884
            
            
            $
            --
            
            
            $
            --
            
            
            $
            270,634Change
      in Control
            
            
            --
            
            
            
            --
            
            
            
            (3)Theresa
      Ann Broome -Termination
      without cause or for good reason
            
            $
            195,000
            
            
            $
            5,309
            
            
            $
            --
            
            
            $
            --
            
            
            $
            200,309Change
      in Control
            
            
            --
            
            
            
            --
            
            
            
            (3)


__________________


(1)
              The
      executive officer is generally entitled to receive termination payments
      and health benefits conditioned upon signing a release
      agreement.


(2)
            Mr.  Percenti
      must forgo all entitlement to termination payments or benefits if he
      elects not to be bound by the covenant not to compete in his employment
      agreement.


(3)
            Upon
      change of control of the Company, payment will be made under the CIP
      plan.  The current or future value of the CIP units cannot be
      reasonably estimated.(4)
            If a change
      in control occurs before February 8, 2009, Mr. Radhakrishnan will receive
      a payment pursuant to the letter agreement dated May 8,
    2008.




Compensation
of Directors




The
members of our board of directors who are not employees or affiliated with the
Company may receive compensation for their services as directors in an amount of
$50,000 annually, and the chairman of our audit committee receives $100,000
annually.  All payments are made in quarterly
installments.  In addition, our directors receive reimbursement of
expenses incurred in connection with their participation on the
board.




88


The
following table provides information concerning compensation awarded to, earned
by, or paid to our non-employee directors during the year ended August 30,
2008:




Name
            
            Fees
      Earned or Paid in Cash ($)
            
            
            Stock
      Awards ($)
            
            Total
      ($)Peter
      Lamm (1)
            
            $
            -
            
            
            $
            -
            
            $
            -Mac
      LaFollette (1)
            
            
            -
            
            
            
            -
            
            
            -W.
      Gregg Smart (1)
            
            
            -
            
            
            
            -
            
            
            -Jean
      Ann McKenzie
            
            
            50,000
            
            
            
            -
            (2)
            
            50,000Myles
      Kleeger
            
            
            50,000
            
            
            
            -
            (2)
            
            50,000Alan
      J. Bowers
            
            
            112,500
            
            
            
            -
            
            
            112,500




(1)
              Messrs.
      Lamm, LaFollette and Smart are considered affiliates of the Company
      through their positions with Fenway Partners.  Therefore they do
      not receive compensation for their services as
  directors.


(2)
            Ms.
      McKenzie and Mr. Kleeger were each granted 95 Time-Based Units under the
      CIP during fiscal 2008.  As the payment under the CIP is
      contingent on occurrence of a liquidity event which is not assessed to be
      probable, and the amount payable under the plan is not reasonably
      estimable as of the date of the financial statements, no expense has been
      recognized for units granted under the
plan.







89


Item 12.
Security Ownership of Certain
Beneficial Owners and Management and Related Stockholder
Matters





The
following table provides certain information as of the date of this report with
respect to the beneficial ownership of the interests in Parent Holdings, by
(i) each holder known by us who beneficially owns 5% or more of the
outstanding equity interests of Parent Holdings, (ii) each of the members
of our board of directors, (iii) each of our named executive officers and
(iv) all of the members of our board of directors and our executive
officers as a group. Unless otherwise indicated, the business address of each
person is our corporate address.





Percentage
            
            
            
            
            PercentageOwnership
            
            
            
            
            OwnershipInterest
      in
            
            
            
            
            Interest
      InCommon
            
            
            Common
            
            
            Preferred
            
            PreferredStock
            
            
            Stock
            
            
            Stock
            
            StockAmerican
      Achievement Holdings LLC (1)
            
            
            415,510
            
            
            
            82
            %
            
            —
            
            
            —c/o
      Fenway Partners, LLC.152
      West 57th
      StreetNew
      York, NY 10019Investors
      advised by J.P. Morgan Investment Management Inc. (2)
            
            
            70,729
            
            
            
            14
            %
            
            —
            
            
            —c/o
      J.P.Morgan Investment Management Inc.522
      Fifth AvenueNew
      York, New York 10036Carlyle
      Mezzanine Partners, L.P.
            
            
            —
            
            
            
            —
            
            
            7,500
            
            
            100
            %1001
      Pennsylvania AvenueWashington,
      D.C. 20004-2505Alan
      J. Bowers
            
            
            —
            
            
            
            —
            
            
            —
            
            
            —Myles
      Kleeger
            
            
            —
            
            
            
            —
            
            
            —
            
            
            —Mac
      LaFollettePeter
      Lamm (3)
            
            
            415,510
            
            
            
            82
            %
            
            —
            
            
            —Jean
      Ann McKenzie
            
            
            —
            
            
            
            —
            
            
            —
            
            
            —W.
      Gregg Smart
            
            
            —
            
            
            
            —
            
            
            —
            
            
            —All
      executive officers and directors as a group (13 persons) (4)
            
            
            415,510
            
            
            
            82
            
            
            —
            
            
            —




(1)
            All
      of the voting interests of American Achievement Holdings LLC are held by
      Fenway Partners Capital Fund II, L.P., FPIP, LLC and FPIP Trust, LLC, each
      of which are affiliates of Fenway Partners, LLC. Accordingly, such
      entities may be deemed to beneficially own the shares of common stock held
      by American Achievement LLC. Each of such entities disclaims beneficial
      ownership of such shares except to the extent of its pecuniary interest
      therein.


(2)
            The
      investors are J.P. Morgan U.S. Direct Corporate Finance Institutional
      Investors II LLC (“CFII I”), which holds 67,715 shares of common stock,
      J.P. Morgan U.S. Direct Corporate Finance Private Investors II LLC (“CFII
      P”), which holds 2,660 shares of common stock and 522 Fifth Ave Fund, L.P.
      (“522”), which holds 354 shares of common stock. J.P. Morgan Investment
      Management Inc., a registered investment advisor, controls the voting and
      disposition of these shares as the owner of the managing member of CFII I
      and CFII P and as investment advisor to
522.


(3)
            Mr. Lamm
      is a founder of Fenway Partners, LLC. a managing member of Fenway Partners
      II LLC, the general partner of Fenway Partners Capital Fund II, L.P. and
      is a managing member of each of FPIP, LLC and FPIP Trust, LLC.
      Accordingly, Mr. Lamm may be deemed to beneficially own the shares of
      common stock held by American Achievement Holdings LLC. Mr. Lamm
      disclaims beneficial ownership of such shares except to the extent of his
      pecuniary interests therein.


(4)
            None
      of our named executive officers are currently beneficial owners of
      interests in Parent Holdings and are therefore not listed separately in
      this table.





Item 13.
Certain Relationships and
Related Transactions and DirectorIndependence





Arrangements
with Our Investors





An
investor group led by Fenway Partners Capital Fund II, L.P. owns substantially
all of the outstanding common stock of Parent Holdings. These investors entered
into a stockholders agreement with Parent Holdings, which agreement contains
agreements with respect to the election of directors of our company,
restrictions on issue or transfer of shares, registration rights and other
special corporate governance provisions. The agreement contains customary
indemnification provisions. One of our directors, Peter Lamm, is a managing
member of the general partner of Fenway Partners Capital Fund II,
L.P.




90


Management
Agreement





AAC
Holding Corp. and AAC entered into a management agreement with Fenway Partners,
LLC, an affiliate of Fenway Partners Capital Fund, II, L.P., pursuant to which
Fenway Partners, LLC provides management and other advisory services. Pursuant
to this agreement, Fenway Partners, LLC receives an aggregate annual management
fee equal to the greater of $3.0 million or 5% of the previous fiscal
year’s EBITDA. EBITDA is defined in the management agreement as earnings before
interest, taxes, depreciation, amortization, restructuring charges, management
fees and other one-time non-recurring charges. In addition, the management
agreement provides that Fenway Partners, LLC will also receive customary fees in
connection with certain subsequent financing and acquisition transactions. The
management agreement includes customary indemnification provisions in favor of
Fenway Partners, LLC and its affiliates. Amounts paid under the management
agreement totaled approximately $3.4 million and $3.7 million for the years
ended August 30, 2008 and August 25, 2007, respectively.





Policies
and Procedures for Review of Related-Person Transactions





Minimal
related party activity occurs year to year and all reportable items are
well-known, including Fenway management fees and expenses, board of director
expenses and a building lease at one of our subsidiaries.  Related
party transactions are monitored by the Vice President of Legal
Affairs.





Director
Independence





Although
none of the Company’s securities are listed on any stock exchange, the Board of
Directors is required to select and apply the independence standards of a stock
exchange.  For the purposes of determining the independence of the
Company’s directors and committee members, the Board of Directors selected the
definition used by the NASDAQ Stock Market.  Under the NASDAQ listing
standards, Jean Ann McKenzie, Alan J. Bowers and Myles Kleeger qualify as
independent directors.





The
Board of Directors is also required to review its committees to determine if its
members meet the NASDAQ Stock Market definitions of director independence for
purposes of such committees.  For the audit committee, the Board of
Directors concluded that two of the three members, Mac LaFollette and W. Gregg
Smart, are not independent due to their association with Fenway Partners Capital
Fund II, L.P.  The third audit committee member, Alan J. Bowers, is
independent and qualifies as a financial expert as required by Rule
4350(d)(2)(A) of the NASDAQ listing standards.  Additionally, for the
compensation committee, the Board of Directors concluded that all three of its
members, Mac LaFollette, W. Gregg Smart and Peter Lamm, are not independent
under the NASDAQ listing standards.





Item 14.
Principal Accountant Fees and
Services





The
following table sets forth the aggregate fees billed to the Company for the
fiscal years 2008 and 2007 by Deloitte & Touche LLP:





%
      of ServicesFiscal
      Year Ended
            
            
            Fiscal
      Year EndedAugust
      30, 2008
            
            August
      25, 2007
            
            
            August
      30, 2008
            
            
            August
      25, 2007Audit
      fees
            
            $
            971,000
            
            
            $
            636,000
            
            
            
            81
            %
            
            
            81
            %Tax
      fees
            
            
            152,000
            
            
            
            125,000
            
            
            
            13
            %
            
            
            16
            %All
      other fees
            
            
            79,000
            
            
            
            22,000
            
            
            
            6
            %
            
            
            3
            %Total
      fees
            
            $
            1,202,000
            
            
            $
            783,000
            
            
            
            100
            %
            
            
            100
            %





The
“Audit Fees” billed during the periods above were for professional services
rendered for the annual audit and quarterly reviews of our financial statements.
“Tax Fees” consist of fees billed for professional services rendered for tax
compliance, tax advice and tax planning. “All other fees” relate to services
provided related to the Transaction for the year ended August 30, 2008 and
relate to due diligence as a part of the Powers acquisition for the year ended
August 25, 2007.





The
Audit Committee approved all audit and non-audit services to be performed for
the Company by its independent registered public accounting firm. The Audit
Committee has considered the role of Deloitte & Touche LLP in providing
audit, audit-related and tax services to the Company and has concluded that such
services are compatible with Deloitte & Touche LLP’s role as the Company’s
independent registered public accounting firm.




91


PART
IV





Item 15.
Exhibits, Financial Statement Schedules





(a) Exhibits
and Financial Statement Schedules


The
following documents are filed as part of this report;


1.
Consolidated Financial Statements. See “Index to Consolidated Financial
Statements” — Item 8.


2.
Financial Statement Schedules. No financial statement schedules are submitted
because of the absence of the conditions under which they are required or
because the required information is included in the consolidated financial
statements.


3.
Exhibits. See “Exhibit Index.”





EXHIBIT
INDEX





ExhibitNumber
            
            
            Designation3.1
            
            
            Certificate
      of Incorporation of American Achievement Group Holding Corp. (incorporated
      by reference to Exhibit 3.1 to American Achievement Group Holdings
      Corp.’s Form S-4 as filed on September 1, 2006).3.2
            
            
            Bylaws
      of American Achievement Group Holding Corp. (incorporated by reference to
      Exhibit 3.2 to American Achievement Group Holdings Corp.’s
      Form S-4 as filed on September 1, 2006)3.3
            
            
            Amended
      and Restated Certificate of Incorporation of AAC Group Holding Corp.
      (incorporated by reference to Exhibit 3.1 to AAC Group Holding
      Corp.’s Form 8-K as filed on January 24, 2006).3.4
            
            
            Bylaws
      of AAC Group Holding Corp. (incorporated by reference to Exhibit 3.2
      to AAC Group Holding Corp.’s Form S-4 as filed on December 21,
      2004).3.5
            
            
            Certificate
      of Incorporation of American Achievement Corporation (incorporated by
      reference to Exhibit 3.1 to American Achievement Corporation’s
      Form S-4/A as filed on March 14, 2002).3.6
            
            
            Bylaws
      of American Achievement Corporation (incorporated by reference to
      Exhibit 3.2 to American Achievement Corporation’s Amended
      Form S-4 as filed on April 5, 2002).4.1
            
            
            Indenture,
      dated as of June 12, 2006, among the American Achievement Group
      Holding Corp. and U.S. Bank National Association, as Trustee (incorporated
      by reference to Exhibit 4.1 to American Achievement Group Holdings
      Corp.’s Form S-4 as filed on September 1, 2006).4.2
            
            
            Form
      of 14.75% Senior PIK Note due October 1, 2012 (incorporated by
      reference to Exhibit 4.2 to American Achievement Group Holdings
      Corp.’s Form S-4 as filed on September 1, 2006).4.3
            
            
            Exchange
      and Registration Rights Agreement, dated June 12, 2006, among
      American Achievement Group Holding Corp., Goldman, Sachs & Co. and
      Lehman Brothers Inc. (incorporated by reference to Exhibit 4.3 to
      American Achievement Group Holdings Corp.’s Form S-4 as filed on
      September 1, 2006)4.4
            
            
            Indenture,
      dated as of November 16, 2004, among the AAC Group Holding Corp. and
      U.S. Bank National Association, as Trustee (incorporated by reference to
      Exhibit 4.7 to AAC Group Holding Corp.’s Form S-4 as filed on
      December 21, 2004).4.5
            
            
            Form
      of 10.75% Senior Discount Note due October 1, 2012 (incorporated by
      reference to Exhibit 4.8 to AAC Group Holding Corp.’s Form S-4
      as filed on December 21, 2004).4.6
            
            
            Indenture,
      dated as of March 25, 2004, among The Bank of New York, as Trustee,
      and the Guarantors (incorporated by reference to Exhibit 4.1 to
      American Achievement Corporation’s Report on Form 10-Q, dated
      July 13, 2004).




92




4.7
            
            
            Form
      of 8.25% Senior Subordinated Notes due April 1, 2012 (incorporated by
      reference to Exhibit 4.2 to American Achievement Corporation’s
      Quarterly Report on Form 10-Q as filed on July 13,
      2004).4.8
            
            
            Supplemental
      Indenture, dated as of July 9, 2008, among American Achievement
      Corporation, the Guarantors and The Bank of New York Mellon Trust Company,
      as Trustee.4.9
            
            
            Supplemental
      Indenture, dated as of July 9, 2008, among AAC Group Holding Corp. and
      U.S. Bank National Association, as Trustee.4.10
            
            
            Supplemental
      Indenture, dated as of August 8, 2008, among American Achievement Group
      Holding Corp. and U.S. Bank National Association, as
    Trustee.10.1
            
            
            Credit
      and Guaranty Agreement, dated March 25, 2004, by and among American
      Achievement Corporation, the Guarantors, Goldman Sachs Credit Partners
      L.P. and the other lender parties thereto (incorporated by reference to
      Exhibit 10.2 American Achievement Corporation’s Quarterly Report on
      Form 10-Q as filed on July 13, 2004).10.2
            
            
            Amendment
      to Credit Agreement and Guaranty Agreement, dated August 17, 2006, by
      and among American Achievement Corporation, the Guarantors, Goldman Sachs
      Credit Partners L.P., and such other lender parties thereto (incorporated
      by reference to Exhibit 10.1 American Achievement Corporation’s
      Current Report on Form 8-K as filed on August 18,
      2006).10.3
            
            
            Pledge
      and Security Agreement between the Guarantors and Goldman Sachs Credit
      Partners, L.P., dated March 25, 2004 (incorporated by reference to
      Exhibit 10.3 of American Achievement Corporation’s Quarterly Report
      on Form 10-Q as filed on July 13, 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 (incorporated by
      reference to Exhibit 10.4 of American Achievement Corporation’s
      Quarterly Report on Form 10-Q as filed on July 13,
      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 (incorporated by reference to Exhibit 10.5 of
      American Achievement Corporation’s Quarterly Report on Form 10-Q as
      filed on July 13, 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 (incorporated by reference to Exhibit 10.6 of American
      Achievement Corporation’s Quarterly Report on Form 10-Q as filed on
      July 13, 2004).10.7
            
            
            Management
      Advisory Agreement by and between AAC Holding Corp., American Achievement
      Corporation, and Fenway Partners, Inc., dated March 25, 2004
      (incorporated by reference to Exhibit 10.7 of American Achievement
      Corporation’s Quarterly Report on Form 10-Q as filed on July 13,
      2004).10.8
            
            
            Employment
      Agreement, dated as of December 16, 1996 by and between Commemorative
      Brands, Inc. and Donald J. Percenti (incorporated by reference to
      Exhibit 10.11 of American Achievement Corporation’s Form S-4/A
      as filed on April 5, 2002).10.9
            
            
            First
      Amendment to the Employment Agreement by and between Commemorative Brands,
      Inc. and Donald J. Percenti dated April 9, 2004 (incorporated by
      reference to Exhibit 10.15 of American Achievement Corporation’s
      Form S-4 as filed on July 22, 2004).10.10
            
            
            Employment
      Agreement, dated as of April 16, 2007 by and between Commemorative Brands,
      Inc. and Kris G. Radhakrishnan. (incorporated by reference to Exhibit
      10.10 of American Achievement Corporation’s Annual Report on Form 10-K as
      filed on December 7, 2007)




93




10.11
            
            
            Employment
      Agreement, dated as of December 16, 1996 by and between Commemorative
      Brands, Inc. and Sherice P. Bench, as amended (incorporated by reference
      to Exhibit 10.12 of American Achievement Corporation’s
      Form S-4/A as filed on April 5, 2002)10.12
            
            
            First
      Amendment to the Employment Agreement by and between Commemorative Brands,
      Inc. and Sherice P. Bench, dated July 2, 1999 (incorporated by
      reference to Exhibit 10.13 of American Achievement Corporation’s
      Form S-4 as filed on July 22, 2004).10.13
            
            
            Second
      Amendment to the Employment Agreement by and between Commemorative Brands,
      Inc. and Sherice P. Bench dated April 9, 2004 (incorporated by
      reference to Exhibit 10.14 of American Achievement Corporation’s
      Form S-4 as filed on July 22, 2004).10.14
            
            
            Employment
      Agreement dated as of February 1, 2006 between Commemorative Brands,
      Inc. and Matthew Gase (incorporated by reference to Exhibit 10.1 to
      American Achievement Corporation’s Current Report on Form 8-K as
      filed on June 5, 2006).10.15
            
            
            Employment
      Agreement, dated as of April 18, 2006 by and between Commemorative Brands,
      Inc. and Ann Broome. (incorporated by reference to Exhibit 10.18 of
      American Achievement Corporation’s Annual Report on Form 10-K as filed on
      December 7, 2007)10.16
            
            
            Letter
      Agreement, dated as of May 8, 2006 by and between American Achievement
      Corporation and Kris Radhakrishnan.12.1
            
            
            Statement
      regarding Calculation of Ratio of Earnings to Fixed Charges21.1
            
            
            Subsidiaries
      of American Achievement Group Holding Corp.31.1
            
            
            Certification
      by Donald J. Percenti pursuant to Rule 13a-14(a) and 15d-14(a), as
      adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
      2002.31.2
            
            
            Certification
      by Kris G. Radhakrishnan pursuant to Rule 13a-14(a) and 15d-14(a), as
      adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
      2002.32.1
            
            
            Certification
      by Donald J. Percenti pursuant to Section 1350, Chapter 63 of
      Title 18, United States Code, as adopted pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002.32.2
            
            
            Certification
      by Kris G. Radhakrishnan pursuant to Section 1350, Chapter 63 of
      Title 18, United States Code, as adopted pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002.


94


Signatures





Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrants have duly caused this report to be signed on their
behalf by the undersigned, thereunto duly authorized.





AMERICAN
      ACHIEVEMENT GROUP HOLDING CORP.
              (Registrant)AAC
      GROUP HOLDING CORP.
              (Registrant)AMERICAN
      ACHIEVEMENT CORPORATION
              (Registrant)/s/
      Donald J. Percenti
            
            /s/
      Kris G. RadhakrishnanDonald
      J. Percenti
            
            Kris
      G. RadhakrishnanChief
      Executive Officer
            
            Chief
      Financial Officer





Pursuant
to the requirements of the Securities Exchange Act of 1934, this Annual Report
on Form 10-K has been signed below by the following persons on behalf of the
Registrants and in the capacities as of this 24th day of November,
2008.





Signatures
            
            Title/s/
      Donald J. Percenti
            
            President
      and Chief Executive Officer (Principal Executive Officer) and Director of
      American Achievement Group Holding Corp., AAC Group Holding Corp., and
      American Achievement CorporationDonald
      J. Percenti/s/
      Kris G. Radhakrishnan
            
            Chief
      Financial Officer and Treasurer of American Achievement Group Holding
      Corp., AAC Group Holding Corp., and American Achievement
      CorporationKris
      G. Radhakrishnan/s/
      Mac LaFollette
            
            Director
      of American Achievement Group Holding Corp., AAC Group Holding Corp., and
      American Achievement CorporationMac
      LaFollette/s/
      Peter Lamm
            
            Director
      of American Achievement Group Holding Corp., AAC Group Holding Corp., and
      American Achievement CorporationPeter
      Lamm/s/
      W. Gregg Smart
            
            Director
      of American Achievement Group Holding Corp., AAC Group Holding Corp., and
      American Achievement CorporationW.
      Gregg Smart/s/
      Alan J. Bowers
            
            Director
      of American Achievement Group Holding Corp., AAC Group Holding Corp., and
      American Achievement CorporationAlan
      J. Bowers/s/
      Jean Ann McKenzie
            
            Director
      of American Achievement Group Holding Corp., AAC Group Holding Corp., and
      American Achievement CorporationJean
      Ann McKenzie/s/
      Myles Kleeger
            
            Director
      of American Achievement Group Holding Corp., AAC Group Holding Corp., and
      American Achievement CorporationMyles
      Kleeger


95