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American Achievement Group Holding Corp. (1373768) SEC Filing 10-K Annual report for the fiscal year ending Saturday, August 25, 2007

American Achievement Group Holding Corp.

CIK: 1373768


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 25, 2007
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 in Part 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 25, 2007: 505,460 shares of common stock.

     Number of shares of AAC Group Holding Corp. outstanding as of August 25, 2007: 100 shares of common stock.

     Number of shares of American Achievement Corporation outstanding as of August 25, 2007: 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.
 





AAC GROUP HOLDING CORP.
AMERICAN ACHIEVEMENT CORPORATION

FORM 10-K
FOR THE FISCAL YEAR ENDED AUGUST 25, 2007
INDEX

 
Page
 
       
PART I
     
Item 1. Business
 
3
 
Item 1A. Risk Factors
 
9
 
Item 1B. Unresolved Staff Comments
 
13
 
Item 2. Properties
 
13
 
Item 3. Legal Proceedings
 
13
 
Item 4. Submission of Matters to a Vote of Security Holders
 
13
 
       
PART II
     
Item 5. Market for Registrants’ Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
14
 
Item 6. Selected Financial Data
 
14
 
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
21
 
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
 
35
 
Item 8. Financial Statements and Supplementary Data
 
36
 
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
 
82
 
Item 9A. Controls and Procedures
 
82
 
       
PART III
     
Item 10. Directors, Executive Officers and Corporate Governance
 
83
 
Item 11. Executive Compensation
 
86
 
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
 
94
 
Item 13. Certain Relationships and Related Transactions, and Director Independence
 
95
 
Item 14. Principal Accounting Fees and Services
 
96
 
       
PART IV
     
Item 15. Exhibits, Financial Statement Schedules
 
96
 
Signatures
 
100
 
 Employment Agreement - Kris G. Radhakrishnan
     
 Employment Agreement - Theresa Ann Broome
     
 Statement re: Computation of Ratios of Earnings to Fixed Charges
     
 Subsidiaries
     
 Certification Pursuant to Section 302
     
 Certification Pursuant to Section 302
     
 Certification Pursuant to Section 906
     
 Certification 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.
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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 our consolidated subsidiaries
 
General

     We are one of the leading manufacturers and suppliers of class rings, yearbooks, graduation products, achievement publications 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. Our achievement publications segment produces, markets and sells publications that recognize the achievements of top students at the high school and college levels, as well as the nation’s most inspiring teachers. It consists of various titles including the Who’s Who brand and The National Dean’s List. 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.  The shutdown activities are expected to be substantially complete by the end of the first quarter of fiscal 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 March 2001, AAC acquired all of the capital stock of Educational Communications, Inc. (“ECI”), which publishes achievement publications. 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.
    
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     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 (earnings before interest, taxes, depreciation, and amortization) 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. The senior PIK notes are the unsecured senior obligation of Parent Holdings and are not guaranteed by Intermediate Holdings or any of its subsidiaries.

     Other than the series A preferred stock, debt obligations, related deferred debt issuance costs, associated accrued liabilities and related interest expense, net of 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.

Our Product Business Segments

     Our product business segments consist of five principal categories: Class Rings, Yearbooks, Graduation Products, Achievement Publications and Other. Sales for these segments for the most recent three fiscal years were:
 
($ in thousands)
 
Fiscal Year Ended     
 
Segment
 
2007 
 
2006 
 
 2005
 
Class Rings
 
$
        120,949
 
$
        119,451
 
$
        119,658
 
Yearbooks
   
        115,207
   
        114,883
   
        112,432
 
Graduation Products
   
          44,428
   
          43,940
   
          40,018
 
Achievement Publications
   
            5,148
   
          20,974
   
          20,110
 
Other
   
          30,004
   
          21,662
   
          21,570
 
Total
 
$
        315,736
 
$
        320,910
 
$
        313,788
 
                     

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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 Channel
High School Class Rings:
 
ArtCarved®
 
Independent jewelry stores
 
     
Jewelry chains
 
 
Balfour®
 
On-campus
 
 
Keystone Class Rings®
 
Mass merchandisers
 
 
Master Class Rings®
 
Mass merchandisers
 
 
R. Johns®
 
Independent jewelry stores
College Class Rings:
 
Balfour®
 
College bookstores
 
     
Direct marketing
Yearbooks:
 
Taylor Publishing
 
On-campus
High School Graduation Products:
 
Balfour®
 
On-campus
College Graduation Products:
 
Balfour®
 
Direct marketing
 
     
College bookstores
Achievement Publications:
 
Who’s Who®
 
Direct marketing
 
 
The National Dean’s List®
 
Direct marketing
Affinity Group Jewelry:
 
Keepsake®
 
Direct marketing
 
 
R. Johns®
 
Direct marketing
 
 
Balfour®
 
Direct marketing
Personalized Fashion Jewelry:
 
Celebrations of Life®
 
Independent jewelry stores
 
     
Jewelry chains
   
Keepsake®
 
Mass merchandisers
 
 
Generations of Love®
 
Mass merchandisers
 
 
Namesake®
 
Mass merchandisers
Fan Affinity Sports Jewelry:
 
Balfour Sports®
 
Mass merchandisers
 
     
Catalogues
Professional Sports Championship Jewelry:
Balfour®
 
Direct marketing
Commercial Printing:
 
Taylor Publishing
 
Direct sales force
Other Recognition Products:
 
Balfour®
 
On-campus
   
Powers
 
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 66 years and 93 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 inventory of more than 650,000 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 produced only upon receipt of a customer order and deposit, which reduces our credit risk. Class ring products contributed 38%, 37% and 38% of our net sales in the fiscal years 2007, 2006 and 2005, 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.
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     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. Most recently, 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 five 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 36% of our net sales in each of the fiscal years 2007, 2006 and 2005.

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. Our graduation products are sold under the Balfour brand name.

     The 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. As part of our graduation product line, we also offer caps and gowns for high school and college students.

     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 14%, 14% and 13% of our net sales in the fiscal years 2007, 2006 and 2005, respectively.

Achievement Publications

     We are a provider of academic achievement directories. Our publications recognize the achievements of top high school and college students, as well as the nation’s most inspiring high school teachers. We currently publish three achievement publications, including Who’s Who Among American High School Students, The National Dean’s List, and Who’s Who Among America’s Teachers.
    
    We also sell related products, including plaques, certificates, gold and silver pins and charms, mugs, key chains and paper weights, which commemorate a student’s or teacher’s inclusion in one of our achievement publications. The primary customer base for our achievement publications and related products are the students and teachers featured in the publications and their families. We have an established network of nomination sources that we utilize to identify students and teachers for recognition. Students and teachers are not required to purchase publications in order to be included in them. Printing for our achievement publications is outsourced. Achievement publication products contributed 2%, 7% and 6% of our net sales in the fiscal years 2007, 2006 and 2005, respectively.

    The financial performance of our achievement publications segment took a significant downturn in 2007, with sales declining significantly as compared to fiscal 2006.  As a result of this, after unsuccessful attempts to sell the business, on October 26, 2007, the Company decided to shut down the operations of its achievement publications segment.  See the “Significant Developments” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations for a full description.

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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. For example, through our Keepsake brand, we provide affinity ring awards to the United States Bowling Congress, including recognition rings for bowlers who score a perfect “300” game. 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, 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. 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 brand.
 
     
 
 
Other 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 Powers to sporting goods retailers.  These products are also marketed to corporations and businesses as corporate affinity products.
     
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, which include independent jewelry stores, jewelry chains and mass merchandisers. Our high school class rings are sold by independent jewelry retailers, many of the nation’s largest jewelry chains, including Zales, Gordons and Sterling, and by mass merchandisers, including 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. Achievement publications are sold through direct marketing. Other affinity products are sold through a variety of distribution channels, including direct marketing, mass merchandisers, catalogs and retail stores.

     Our independent high school class ring and independent yearbook sales representatives have average tenures with our company of approximately 13 and 10 years, respectively.  We compensate our independent sales representatives on a commission basis. 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. Employee sales representatives receive a combination of salary and sales incentives.
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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 marks are registered pursuant to applicable intellectual property laws and are the property of AAC or its subsidiaries: “ArtCarved,” “ArtCarved Class Rings”, “Balfour,” “Class Rings, Ltd,” “Keystone,” “Master Class Rings,” “R. Johns,”  “Keepsake,” “Who’s Who,” “The National Dean’s List,” “Celebrations of Life,” “Generations of Love,” “Namesake,” and the various logos related to the foregoing brands.

Competition

     The class rings, yearbooks and graduation products market is highly concentrated and consists primarily of a few large national participants. 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.

     We have limited competition for our student achievement publications, as only a small percentage of the high school and college students included in our publications are also included in the publications of our competitors. We have no direct competition in the teacher recognition market. 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. Our raw materials are purchased from multiple suppliers at market prices, except that we purchase substantially all synthetic and semi-precious 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.

     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. The majority of our achievement publications are shipped in August of each year. The remaining recognition and affinity product line sales are highest during the winter holiday season and in the period leading up to Mother’s Day.

     As a result of the foregoing, we have 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.

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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 $100 million as of August 25, 2007, almost exclusively related to student yearbooks. We expect substantially all of this backlog to be filled in fiscal 2008.

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 25, 2007, we had approximately 1,900 employees. 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 25, 2007, Parent Holdings’ total indebtedness is $546.3 million (of which $175.8 million consisted of the senior PIK notes, $117.9 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, $94.9 million consisted of indebtedness under the existing senior secured credit facility and the balance consisted of capital lease obligations).

     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 to fund 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.
     
9

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.

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.
 
10

We face significant competition from other national competitors.

     We face strong competition for most of our principal products. The class ring and yearbook markets are highly concentrated and consist primarily of a few national manufacturers (of which we are one) and, to a significantly lesser extent, small regional competitors. Our recognition and affinity products compete with one national manufacturer and, to a lesser extent, with various other companies. 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.

     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 of engaging 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 $2.9 million in cost of goods sold, assuming gold purchase levels approximate the levels in the fiscal year 2007. 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 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 2006 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 2007. 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 and semi-precious 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.

11

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

     A significant 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, graduation product sales are highest during February through April and achievement publication sales are highest during August. 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.

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 leading 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 Dallas yearbook or Austin class ring facilities 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.

12

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 Holding’s 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.

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 Footage
Austin, TX
 
Corporate headquarters
 
Owned
 
23,000
 
Austin, TX
 
Jewelry manufacturing and administration
 
Owned
 
108,000
 
Austin, TX
 
Warehouse facility
 
Leased
 
38,600
 
Dallas, TX
 
Yearbook administration and manufacturing
 
Owned
 
327,000
 
El Paso, TX
 
Yearbook pre-press
 
Leased
 
50,000
 
Louisville, KY
 
Graduation products manufacturing
 
Leased
 
100,000
 
Manhattan, KS
 
Graduation products manufacturing
 
Leased
 
10,000
 
Juarez, Mexico
 
Jewelry manufacturing
 
Leased
 
20,000
 
Waco, 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. However, we believe resulting liabilities, if any, will not have a material adverse impact upon our results of operations, financial condition or cash flow.

     On July 17, 2006, in the 128th Judicial District Court of Orange County, Texas, a Seventh Amended Petition (naming over 100 defendants) was filed by the estate of John Estrada and Nancy Estrada adding Taylor back into a long outstanding multi-party toxic tort suit. Taylor was originally brought into this lawsuit in September of 2004 when Mr. Estrada, a former Taylor-San Angelo employee and his wife, filed their Fifth Amended Petition seeking damages for personal injuries allegedly caused by Mr. Estrada’s exposure to benzene in the workplace. On June 21, 2005, the Estrada’s dismissed their case against Taylor, without prejudice, without any payment or other compensation by Taylor. Mr. Estrada is now deceased. This Seventh Amended Petition now seeks damages for his alleged wrongful death and seeks to avoid the Workers’ Compensation bar to employer liability by pleading gross negligence on the part of Taylor. Taylor filed a timely answer to the lawsuit and subsequently negotiated a settlement with prejudice with the Estradas and has subsequently been dismissed from the suit. The amount of the settlement is not material; however, the settlement is covered by a confidentiality and non-disclosure agreement because the case is proceeding in court against the other defendants.

       On July 31, 2007, a former employee of CBI filed a lawsuit against CBI in Travis County, Texas alleging, among other claims, that CBI discriminated and/or retaliated against him in violation of the Texas Labor Code because he had an on-the-job injury.  CBI has filed an answer to the lawsuit denying all allegations.  There have been no monetary demands or settlement offers.  We are unable to assess the likelihood of an adverse judgment or assess the likely range of possible loss to the Company.

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

     None.
13

PART II


     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.


     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 the formation date, other than its series A preferred stock, debt obligation 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 Holding’s wholly-owned subsidiary Intermediate Holdings and the direct and indirect subsidiaries of Intermediate Holdings. 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 the formation date, other than its 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 fiscal year ended August 30, 2003 and the period from August 31, 2003 to March 25, 2004 have 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 and August 25, 2007  has been derived from the Successor audited consolidated financial statements.
14


 
Parent Holdings                
 
 
Successor         
   
Predecessor   
 
                     
The period from
   
The period from
       
 
Fiscal Year Ended      
 
  March 26, 2004
   
August 31, 2003 
 
Fiscal Year Ended
 
   
August 25,
 
August 26,
 
August 27,
 
  to
   
to 
   
August 30,
 
($ in thousands)
 
2007 (1)
 
 2006
 
 2005
 
August 28, 2004(2) 
 
March 25, 2004(3)
   
2003
 
  Statement of Operations Data:
                                       
  Net sales
 
$
   315,736
 
$
   320,910
 
$
  313,788
 
$
    167,350
   
$
   146,721
 
$
  308,431
 
  Cost of sales
   
   140,603
   
   134,258
   
  134,375
   
      83,521
     
     59,857
   
  139,170
 
  Gross profit
   
   175,133
   
   186,652
   
  179,413
   
      83,829
     
     86,864
   
  169,261
 
  Selling, general and administrative expenses
   
   135,831
   
   144,129
   
  144,592
   
      62,647
     
     74,992
   
  129,423
 
  Other charges(4)
   
     28,013
   
               -
   
             -
   
                -
     
               -
   
             -
 
  Operating income
   
     11,289
   
     42,523
   
    34,821
   
      21,182
     
     11,872
   
    39,838
 
  Interest expense, net
   
     59,267
   
     39,331
   
    31,271
   
      10,257
     
     16,455
   
    28,940
 
  Income (loss) before income taxes
   
    (47,978
)  
       3,192
   
      3,550
   
      10,925
     
      (4,583
 
    10,898
 
  Provision (benefit) for income taxes
   
    (15,427
)  
       2,216
   
      1,738
   
        4,459
     
               -
   
         132
 
  Net income (loss)
 
$
    (32,551
)
$
          976
 
$
      1,812
 
$
        6,466
   
$
      (4,583
) 
$
    10,766
 
                                         
  Balance Sheet Data (at end of period):
                                       
  Total assets
 
$
   476,066
 
$
   511,276
 
$
  512,936
 
$
    530,986
   
$
   553,589
 
$
  395,501
 
  Total debt(5)
   
   546,253
   
   535,790
   
  388,492
   
    314,604
     
   317,504
   
  228,928
 
  Total stockholders’ equity (deficit)
   
  (144,183
)  
 (114,786
)  
    23,818
   
    108,512
     
   102,046
   
    71,843
 
                                         
  Other Data:
                                       
  EBITDA(6)
 
$
     36,289
 
$
     67,618
 
$
    60,102
 
$
      31,526
   
$
     20,402
 
$
    53,987
 
  Capital expenditures
   
     10,594
   
     12,511
   
    12,795
   
        3,665
     
     12,793
   
    11,243
 
  Depreciation and amortization
   
     25,000
   
     25,095
   
    25,281
   
      10,344
     
       8,530
   
    14,149
 

15

 
Intermediate Holdings                
 
 
Successor          
 
Predecessor    
                     
The period from
   
The period from
       
 
Fiscal Year Ended      
 
March 26, 2004 
   
August 31, 2003 
 
Fiscal Year Ended
 
   
August 25,
 
August 26,
 
August 27,
 
to 
   
to 
   
August 30,
 
($ in thousands)
 
2007 (1)
 
2006 
 
2005 
 
August 28, 2004(2)
   
March 25, 2004(3)
   
2003
 
  Statement of Operations Data:
                                       
  Net sales
 
$
 315,736
 
$
 320,910
 
$
 313,788
 
$
    167,350
   
$
   146,721
 
$
 308,431
 
  Cost of sales
   
 140,603
   
 134,258
   
 134,375
   
      83,521
     
     59,857
   
 139,170
 
  Gross profit
   
 175,133
   
 186,652
   
 179,413
   
      83,829
     
     86,864
   
 169,261
 
  Selling, general and administrative expenses
   
 135,831
   
 144,129
   
 144,592
   
      62,647
     
     74,992
   
 129,423
 
  Other charges(4)
   
   28,013
   
             -
   
             -
   
                -
     
               -
   
             -
 
  Operating income
   
   11,289
   
   42,523
   
   34,821
   
      21,182
     
     11,872
   
   39,838
 
  Interest expense, net
   
   33,514
   
   34,246
   
   31,271
   
      10,257
     
     16,455
   
   28,940
 
  Income (loss) before income taxes
   
  (22,225
 
     8,277
   
     3,550
   
      10,925
     
      (4,583
 
   10,898
 
  Provision (benefit) for income taxes
   
    (7,233
 
     3,985
   
     1,738
   
        4,459
     
               -
   
        132
 
  Net income (loss)
 
$
  (14,992
) 
$
     4,292
 
$
     1,812
 
$
        6,466
   
$
      (4,583
) 
$
   10,766
 
                                         
  Balance Sheet Data (at end of period):
                                       
  Total assets
 
$
 468,129
 
$
 501,773
 
$
 512,936
 
$
    530,986
   
$
   553,589
 
$
 395,501
 
  Total debt(5)
   
 362,909
   
 374,093
   
 388,492
   
    314,604
     
   317,504
   
 228,928
 
  Total stockholders’ equity
   
   24,876
   
   36,714
   
   23,818
   
    108,512
     
   102,046
   
   71,843
 
                                         
  Other Data:
                                       
  EBITDA(6)
 
$
   36,289
 
$
   67,618
 
$
   60,102
 
$
      31,526
   
$
     20,402
 
$
   53,987
 
  Capital expenditures
   
   10,594
   
   12,511
   
   12,795
   
        3,665
     
     12,793
   
   11,243
 
  Depreciation and amortization
   
   25,000
   
   25,095
   
   25,281
   
      10,344
     
       8,530
   
   14,149
 

16

 
   
AAC                
 
   
Successor         
   
Predecessor   
 
                     
The period from
   
The period from
       
   
Fiscal Year Ended      
 
March 26, 2004 
   
August 31, 2003 
 
Fiscal Year Ended
 
   
August 25,
 
August 26,
 
August 27,
 
to 
   
to 
 
August 30,
 
($ in thousands)
 
2007 (1)
 
2006 
 
2005 
 
August 28, 2004(2)
   
March 25, 2004(3)
 
2003 
 
  Statement of Operations Data:
                                       
  Net sales
 
$
     315,736
 
$
     320,910
 
$
     313,788
 
$
        167,350
   
$
        146,721
 
$
     308,431
 
  Cost of sales
   
     140,603
   
     134,258
   
     134,375
   
          83,521
     
          59,857
   
     139,170
 
  Gross profit
   
     175,133
   
     186,652
   
     179,413
   
          83,829
     
          86,864
   
     169,261
 
  Selling, general and administrative expenses
   
     135,831
   
     144,129
   
     144,592
   
          62,647
     
          74,992
   
     129,423
 
  Other charges(4)
   
       28,013
   
                -
   
                -
   
                    -
     
                   -
   
                -
 
  Operating income
   
       11,289
   
       42,523
   
       34,821
   
          21,182
     
          11,872
   
       39,838
 
  Interest expense, net
   
       22,056
   
       23,289
   
       23,497
   
          10,257
     
          16,455
   
       28,940
 
  Income (loss) before income taxes
   
     (10,767
 
       19,234
   
       11,324
   
          10,925
     
          (4,583
 
       10,898
 
  Provision (benefit) for income taxes
   
       (3,122
 
         7,907
   
         4,617
   
            4,459
     
                   -
   
            132
 
  Net income (loss)
 
$
      (7,645
) 
$
     11,327
 
$
       6,707
 
$
           6,466
   
$
         (4,583
) 
$
     10,766
 
                                         
  Balance Sheet Data (at end of period):
                                       
  Total assets
 
$
     465,319
 
$
     498,542
 
$
     509,552
 
$
        530,986
   
$
        553,589
 
$
     395,501
 
  Total debt(5)
   
     245,055
   
     267,276
   
     291,836
   
        314,604
     
        317,504
   
     228,928
 
  Total stockholders’ equity
   
     129,055
   
     133,546
   
     114,263
   
        108,512
     
        102,046
   
       71,843
 
                                         
  Other Data:
                                       
  EBITDA(6)
 
$
       36,289
 
$
       67,618
 
$
       60,102
 
$
          31,526
   
$
          20,402
 
$
       53,987
 
  Capital expenditures
   
       10,594
   
       12,511
   
       12,795
   
            3,665
     
          12,793
   
       11,243
 
  Depreciation and amortization
   
       25,000
   
       25,095
   
       25,281
   
          10,344
     
            8,530
   
       14,149
 
                                         
(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 write downs of goodwill, intangible assets, and fixed assets of $22.8 million for the achievement publications segment, $4.9 million for the class rings segment related to goodwill and trademarks in retail class rings, and $0.3 million for the other segment 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.
                                     
(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 2007 EBITDA was unfavorably impacted by other charges of $28.0 million discussed above.

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; (iv) excludes tax payments that represent a reduction in cash available to us; and (v) does not reflect any cash requirements for the assets being depreciated and amortized that may have to be replaced in the future. 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) to EBITDA and operating cash flow:
 
 
Parent Holdings                
 
 
Successor         
   
Predecessor   
 
($ in thousands)
                 
The Period from
   
The Period from
 
Fiscal Year
 
 
Fiscal Year Ended      
 
March 26, 2004 —
   
August 31, 2003 —
 
Ended
 
 
August 25,
 
August 26,
 
August 27,
 
August 28,
   
March 25,
 
August 30,
 
 
2007 
 
2006 
 
2005 
 
2004 
   
2004 
 
2003 
 
  Net income (loss)
$
    (32,551
$
           976
 
$
          1,812
 
$
           6,466
   
$
          (4,583
$
      10,766
 
  Interest expense, net of interest income
 
     59,267
   
      39,331
   
       31,271
   
         10,257
     
          16,455
   
     28,940
 
  Provision (benefit) for income taxes
 
    (15,427
 
         2,216
   
         1,738
   
           4,459
     
                     -
   
            132
 
  Depreciation and amortization expense
 
     25,000
   
     25,095
   
      25,281
   
         10,344
     
            8,530
   
       14,149
 
  EBITDA
$
     36,289
 
$
      67,618
 
$
      60,102
 
$
         31,526
   
$
         20,402
 
$
     53,987
 
  Other charges
$
28,013  
$
 
$
 
$
   
$
 
$
 
  Changes in assets and liabilities
 
      (11,791
 
    (14,955
 
         (335
 
      (23,970
 
 
         35,227
 
 
            (92
  Deferred income taxes
 
    (15,506
 
         2,061
   
          1,521
   
           4,309
     
                     -
   
                 -
 
  Interest expense, net
 
   (59,267
 
    (39,331
 
     (31,271
 
       (10,257
)    
        (16,455
 
   (28,940
  (Provision) benefit for income taxes
 
      15,427
   
       (2,216
 
       (1,738
 
         (4,459
   
                     -
   
          (132
  Amortization of debt discount and deferred financing fees
 
         3,491
   
        2,269
   
         1,882
   
              629
     
              1,197
   
         2,051
 
  Accretion of interest on 10.25% senior discount notes
 
       11,037
   
        10,161
   
        7,387
   
                    -
     
                     -
   
                 -
 
  Accretion of senior PIK notes
 
      21,647
   
         4,197
   
                 -
   
                    -
     
                     -
   
                 -
 
  Provision for doubtful accounts
 
         (233
 
         (464
 
          (107
 
            (236
   
              (144
 
         (376
  Loss on operating lease agreement
 
            961
   
                 -
   
                 -
   
                    -
     
                     -
   
                 -
 
  Loss (gain) on sales of plant, property and equipment
 
       (1,989
 
              79
   
                 -
   
                    -
     
                     -
   
                 -
 
  Net cash provided by (used in) operating activities
$
     28,079
 
$
      29,419
 
$
      37,441
 
$
         (2,458
 
$
         40,227
 
$
     26,498
 
                                       

18

The following sets forth a reconciliation of Intermediate Holdings’ net income (loss) to EBITDA and operating cash flow:
 
 
Intermediate Holdings                
 
 
Successor         
   
Predecessor   
 
($ in thousands)
                 
The Period from
   
The Period from
 
Fiscal Year
 
 
Fiscal Year Ended      
 
March 26, 2004 —
   
August 31, 2003 —
 
Ended
 
 
August 25,
 
August 26,
 
August 27,
 
August 28,
   
March 25,
 
August 30,
 
 
2007 
 
2006 
 
2005 
 
2004 
   
2004 
 
2003 
 
  Net income (loss)
$
    (14,992
$
        4,292
 
$
          1,812
 
$
           6,466
   
$
          (4,583
$
      10,766
 
  Interest expense, net of interest income
 
      33,514
   
     34,246
   
       31,271
   
         10,257
     
          16,455
   
     28,940
 
  Provision (benefit) for income taxes
 
      (7,233
 
        3,985
   
         1,738
   
           4,459
     
                     -
   
            132
 
  Depreciation and amortization expense
 
     25,000
   
     25,095
   
      25,281
   
         10,344
     
            8,530
   
       14,149
 
  EBITDA
$
     36,289
 
$
      67,618
 
$
      60,102
 
$
         31,526
   
$
         20,402
 
$
     53,987
 
  Other charges
$
28,013    $  
$
 
$
   
$
 
$
 
  Changes in assets and liabilities
 
    (14,369
 
    (15,623
 
         (335
 
      (23,970
 
 
         35,227
 
 
            (92
  Deferred income taxes
 
      (7,274
 
        3,824
   
          1,521
   
           4,309
     
                     -
   
                 -
 
  Interest expense, net
 
    (33,514
 
   (34,246
 
     (31,271
 
       (10,257
   
        (16,455
 
   (28,940
  (Provision) benefit for income taxes
 
        7,233
   
      (3,985
 
       (1,738
 
         (4,459
   
                     -
   
          (132
  Amortization of debt discount and deferred financing fees
 
         1,976
   
         1,959
   
         1,882
   
              629
     
              1,197
   
         2,051
 
  Accretion of interest on 10.25% senior discount notes
 
       11,037
   
        10,161
   
        7,387
   
                    -
     
                     -
   
                 -
 
  Provision for doubtful accounts
 
         (233
 
         (464
 
          (107
 
            (236
   
              (144
 
         (376
  Loss on operating lease agreement
 
            961
   
                 -
   
                 -
   
                    -
     
                     -
   
                 -
 
  Loss (gain) on sales of plant, property and equipment
 
       (1,989
 
              79
   
                 -
   
                    -
     
                     -
   
                 -
 
  Net cash provided by (used in) operating activities
$
      28,130
 
$
     29,323
 
$
      37,441
 
$
         (2,458
 
$
         40,227
 
$
     26,498
 
                                       

19

The following sets forth a reconciliation of AAC’s net income (loss) to EBITDA and operating cash flow:
 
 
AAC                
 
 
Successor         
   
Predecessor   
 
($ in thousands)
                 
The Period from
   
The Period from
 
Fiscal Year
 
 
Fiscal Year Ended      
 
March 26, 2004 —
   
August 31, 2003 —
 
Ended
 
 
August 25,
 
August 26,
 
August 27,
 
August 28,
   
March 25,
 
August 30,
 
 
2007 
 
2006 
 
2005 
 
2004 
   
2004 
 
2003 
 
  Net income (loss)
$
       (7,645
$
       11,327
 
$
       6,707
 
$
          6,466
   
$
         (4,583
$
      10,766
 
  Interest expense, net of interest income
 
      22,056
   
     23,289
   
     23,497
   
         10,257
     
         16,455
   
     28,940
 
  Provision (benefit) for income taxes
 
        (3,122
 
       7,907
   
        4,617
   
          4,459
     
                    -
   
            132
 
  Depreciation and amortization expense
 
      25,000
   
     25,095
   
      25,281
   
         10,344
     
           8,530
   
       14,149
 
  EBITDA
$
      36,289
 
$
      67,618
 
$
      60,102
 
$
         31,526
   
$
        20,402
 
$
     53,987
 
  Other charges
$
28,013  
$
 
$
 
$
   
$
 
$ 
 
  Changes in assets and liabilities
 
     (14,382
 
     (16,010
 
         (379
 
      (23,970
 
 
        35,227
 
 
           (92
  Deferred income taxes
 
        (3,150
 
       7,737
   
       4,392
   
          4,309
     
                    -
   
                 -
 
  Interest expense, net
 
    (22,056
 
   (23,289
 
   (23,497
 
       (10,257
   
       (16,455
 
   (28,940
  (Provision) benefit for income taxes
 
          3,122
   
     (7,907
 
      (4,617
 
        (4,459
   
                    -
   
          (132
  Amortization of debt discount and deferred financing fees
 
          1,530
   
        1,498
   
        1,527
   
              629
     
             1,197
   
        2,051
 
  Provision for doubtful accounts
 
          (233
 
         (464
 
          (107
 
            (236
   
             (144
 
         (376
  Loss on operating lease agreement
 
             961
   
                 -
   
                 -
   
                    -
     
                    -
   
                 -
 
  Loss (gain) on sales of plant, property and equipment
 
        (1,989
 
             79
   
                 -
   
                    -
     
                    -
   
                 -
 
  Net cash provided by (used in) operating activities
$
       28,105
 
$
     29,262
 
$
      37,421
 
$
        (2,458
 
$
        40,227
 
$
     26,498
 
                                       

20


     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 with U.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.

General

     We are one of the leading manufacturers and suppliers of class rings, yearbooks, graduation products, achievement publications 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. Our achievement publications segment produces, markets and sells publications that recognize the achievements of top students at the high school and college levels, as well as the nation’s most inspiring teachers. It consists of various titles including the Who’s Who brand and The National Dean’s List. 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 such as World Series rings, commercial printing, and 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.  The shutdown activities are expected to be substantially complete by the end of the first quarter of fiscal 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, The Bank of Nova Scotia, through our existing gold consignment agreement. 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 in Germany. The prices for these products 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. The class ring and yearbook markets are highly concentrated and consist primarily of a few national manufacturers (of which we are one) and, to a significantly lesser extent, small regional competitors. We believe that it would be costly and time-consuming for new competitors to replicate the production and distribution capabilities necessary to compete effectively in this market, and as a result, there have been no major new competitors in the last 61 years.
  
21

     We experience seasonal fluctuations in our net sales tied primarily to the school year. We recorded 46% of our fiscal year 2007 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 majority of our achievement publications are shipped in August of each year. The remaining recognition and affinity product line sales are highest during the winter holiday season and in the period leading up to Mother’s Day. 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 graduates will increase by an average of 6% over the time period from 2003 to 2016 and the number of college graduates will increase by an average of 22% over the time period from 2003 to 2016. 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.

     The Company uses a 52/53-week fiscal year ending on the last Saturday of August.

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 March 2001, AAC acquired all of the capital stock of Educational Communications, Inc. (“ECI”), which publishes achievement publications. 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.

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     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 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. If the consolidated group leverage ratio on August 30, 2008, is greater than 5.0 to 1.0, the rate at which interest accrues on the senior PIK notes will increase an additional 2.00% per annum commencing on and including August 30, 2008.  At August 25, 2007, our consolidated group leverage ratio was 7.6.  The senior PIK notes are the unsecured senior obligation of Parent Holdings and are not guaranteed by Intermediate Holdings or any of its subsidiaries.

     Other than the series A preferred stock, debt obligations, related deferred debt issuance costs, associated accrued liabilities and related interest expense, net of 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.

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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:

     Sales Returns and Allowances. We make estimates of potential future product returns related to current period product revenue. We analyze the previous 12 months’ average historical returns, current economic trends and changes in customer demand and acceptance of our products when evaluating the adequacy of the sales returns and allowances. Significant management judgments and estimates must be made and used in connection with establishing the allowance for sales returns and allowances in any accounting period. Product returns as a percentage of net sales were 2.3%, 2.0% and 1.9% for the fiscal years 2007, 2006 and 2005, 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 2007 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%, 0.3% and 0.4% for the fiscal years 2007, 2006 and 2005, respectively. Write-offs of independent sales representative advances as a percentage of net sales were 0.6%, 0.7% and 0.5% for the fiscal years ended 2007, 2006 and 2005, 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 2007 rates. We believe that our results could be materially different if historical trends do not reflect actual results or if economic conditions worsened.

 Goodwill and Other Intangible Assets. We account for our long-lived assets with indefinite lives under Statement of Financial Accounting Standards (“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 of August 25, 2007, a third party valuation, among other factors, was used by management in our impairment analysis of other intangible assets values and the residual goodwill.

     As fully described under “Significant Developments” below, during fiscal 2007 we recorded an impairment of our goodwill and intangible assets with indefinite lives of $26.8 million, related to three of our reporting units.  We believe that we had no other impairment as of August 25, 2007 and August 26, 2006; however, unforeseen future events could adversely affect the reported value of goodwill and indefinite-lived intangible assets. As of August 25, 2007, Parent Holdings’ goodwill and indefinite-lived intangible assets totaled $210.7 million and represented 44% of total assets and (146)% of stockholders' deficit. As of August 25, 2007, Intermediate Holdings’ goodwill and indefinite-lived intangible assets totaled $210.7 million and represented 45% of total assets and 847% of stockholders' equity. As of August 25, 2007, AAC’s goodwill and indefinite-lived intangible assets totaled $210.7 million and represented 45% of total assets and 163% of stockholders' equity.
     
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     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 evaluation of impairment. If the carrying amount of the asset exceeds expected undiscounted future cash flows, 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. As of August 25, 2007, a third party valuation, among other factors, was used in our impairment analysis of long-lived tangible and intangible assets with definite lives.
    
     As fully described under “Significant Developments” below, during fiscal 2007 we recorded a $1.2 million 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 25, 2007 and August 26, 2006; however, unforeseen future events could adversely affect the reported value of long-lived tangible and intangible assets with definite lives. As of August 25, 2007, Parent Holdings’ long-lived tangible and intangible assets with definite lives totaled $157.1 million and represented 33% of total assets and (109)% of stockholders' deficit. As of August 25, 2007, Intermediate Holdings’ long-lived tangible and intangible assets with definite lives totaled approximately $149.5 million and represented 32% of total assets and 601% of stockholders' equity. As of August 25, 2007, AAC’s long-lived tangible and intangible assets with definite lives totaled approximately $147.2 million and represented 32% of total assets and 114% of stockholders' equity.

     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 estimates of taxable income in each jurisdiction in which we operate and the period over which deferred income tax assets will be recoverable, we have not recorded a valuation allowance as of August 25, 2007 or August 26, 2006.  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 2007.
 
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 $0.3 million was in our other business segment related to personalized fashion jewelry.
 
The financial performance of our achievement publications segment took a significant downturn in 2007, with sales declining from $21.0 million in 2006 to $5.1 million in 2007. In addition, operating income declined from $1.6 million in 2006 to a loss before impairment charges of $6.3 million in 2007.  Late in the fourth quarter of 2007, as the results of solicitation mailings made in May and June became known, it was clear that student and teacher responses were coming in well below what was anticipated and necessary to support profitable operations.

Given the decline in operating income in 2006 from that in 2005 of $4.9 million 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. We considered plausible alternatives which included continuing to operate the business, selling it, or shutting it down. After carefully considering the risks of continuing to operate this business and the investment required to do so, 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.

Accordingly, in August 2007, management was considering two options related to the achievement publications business, which were to sell the business or to shut the business down if there was no definitive interest from any parties to buy the business.
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     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 sale or shutdown options being pursued 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. This charge is included in other charges in the accompanying consolidated statements of operations.  Additionally, as a consequence of the decision in October 2007 to shutdown the achievement publications business, in the first quarter of fiscal 2008, we anticipate additional impairment charges of approximately $5.0-$6.0 million and cash charges of approximately $0.5-$1.0 million related to contract termination, committed scholarships and employee severance costs.

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 $0.3 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.  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 our other businesses did not reveal any impairment as we forecast continued profitable performance in all our core on-campus businesses and our other retail businesses.

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.

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Results of Operations

The comparative results are presented and discussed for Parent Holdings, Intermediate Holdings, and AAC for fiscal years 2007, 2006 and 2005.
 
 
Parent Holdings             
 
Fiscal Year Ended
 
% of
 
Fiscal Year Ended
 
% of
 
Fiscal Year Ended
% of
 
 
August 25, 2007 
 
Net Sales
 
August 26, 2006 
 
Net Sales
 
August 27, 2005 
 
Net Sales
 
 
($ in millions)            
 
  Net sales
$
            315.7
 
  100.0 %
 
$
          320.9
 
100.0%
 
$
         313.8
 
100.0%
 
  Cost of sales
 
            140.6
 
    44.5 %
   
          134.3
 
41.8%
   
         134.4
 
42.8%
 
  Gross profit
 
            175.1
 
    55.5 %
   
          186.6
 
58.2%
   
         179.4
 
57.2%
 
  Selling, general and administrative expenses
 
            135.8
 
    43.0 %
   
          144.1
 
44.9%
   
         144.6
 
46.1%
 
  Other charges
 
              28.0
 
      8.9 %
   
                -
 
0.0%
   
               -
 
0.0%
 
  Operating income