AMERICAN ACHIEVEMENT CORP - 10-K Annual Report

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

FORM 10-K

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

FOR THE FISCAL YEAR ENDED AUGUST 30, 2003

OR

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

AMERICAN ACHIEVEMENT CORPORATION
(Exact name of registrant as specified in its charter)

DELAWARE 13-4126506
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)

7211 CIRCLE S ROAD 78745
AUSTIN, TEXAS (Zip Code)
(Address of principal executive offices)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE
(512) 444-0571

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE

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

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 registrant's 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. [X] (Not Applicable)

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [ ] No [X].

809,775 shares of common stock
(Number of shares outstanding as of August 30, 2003)
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AMERICAN ACHIEVEMENT CORPORATION

FORM 10-K
FOR THE FISCAL YEAR ENDED AUGUST 30, 2003

INDEX

1

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This annual report contains forward-looking statements within the meaning
of Section 21E of the Securities Exchange Act of 1934. The words "believe,"
"estimate," "anticipate," "project," "intend," "expect" and similar expressions
are intended to identify forward-looking statements. All forward-looking
statements involve some risks and uncertainties. In light of these risks and
uncertainties, the forward-looking events discussed in this report might not
occur. Factors that may cause actual results or events to differ materially from
those contemplated by the forward-looking statements include, among other
things, the matters discussed under "Item 1. Business" and the following
possibilities:

- future revenues are lower than expected;

- increase in payroll or other costs and/or shortage of an adequate base of
employees;

- loss of significant customers through bankruptcy, industry consolidation
or other factors;

- inability to obtain additional capital due to covenant restrictions or
other factors, and/or increase in debt levels beyond our ability to
support repayment;

- costs or difficulties relating to the integration of businesses that we
acquire are greater than expected;

- expected cost savings or revenues from our acquisitions are not fully
realized or realized within the expected time frame;

- competitive pressures in the industry increase;

- general economic conditions or conditions affecting our industry;

- changes in the interest rate environment, and

You are cautioned not to place undue reliance on forward-looking statements
contained in this report as these speak only as of its date. We undertake no
obligation to publicly update or revise any forward-looking statements, whether
as a result of new information, future events or otherwise except as required by
law.

PART I

ITEM 1. BUSINESS

GENERAL

We are one of the leading manufacturers and suppliers of class rings,
yearbooks, graduation products, achievement publications and recognition and
affinity jewelry in the United States. Many of our products have leading market
share positions that have been developed over many years and are marketed under
well-known names such as ArtCarved, Balfour, Keepsake, Taylor Publishing and
Who's Who Among American High School Students. Our Balfour and ArtCarved brand
names, for example, have been identified with class rings for over 90 years and
45 years, respectively, and the Taylor Publishing brand name has been identified
with yearbooks for over 60 years. We distribute our products through various
distribution channels, including directly to students and through college
bookstores, mass merchandisers, approximately 5,000 independent jewelry stores,
many of the nation's largest jewelry chains and direct marketing. Based on the
number of units sold, we believe that we were one of the top three providers of
class rings and yearbooks in the United States during the 2002-2003 school year.

Our two principal business segments are: scholastic products and
recognition and affinity products. Our scholastic products segment consists of
three principal categories: class rings, yearbooks and graduation products, the
last of which includes fine paper products and graduation accessories. The
scholastic products segment serves the high school, college and, to a lesser
extent, the elementary and

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junior high school markets and accounted for approximately 87% of our net sales
for the year ended August 30, 2003.

Recognition and affinity products include publications that recognize the
academic achievement of top students at the high school and college levels, as
well as the nation's most inspiring teachers, jewelry commemorating family
events such as the birth of a child, fan affinity jewelry and related products
and professional sports championship rings such as World Series, Super Bowl and
Stanley Cup rings. This segment accounted for approximately 13% of our net sales
for the year ended August 30, 2003.

In December 1996, Castle Harlan, Inc., a leading New York private equity
firm, through its affiliate Castle Harlan Partners II ("CHPII"), acquired
substantially all of the ArtCarved operations of CJC Holdings, Inc. and the
Balfour operations of the L.G. Balfour Company, Inc. Castle Harlan's investment
strategy has focused on building a scale competitor in the commemorative
products industry that can provide an extensive range of products and services.
On June 27, 2000, American Achievement Corporation (formerly known as
Commemorative Brands Holding Corporation) (the "Company") was formed as a
holding company for the Commemorative Brands, Inc. ("CBI") operations and future
acquisitions. Since then, we have made several strategic acquisitions and have
introduced new, complementary products across our brands and product lines to
enhance our market position. The following table summarizes our history and
acquisition rationale.

3

BUSINESS SEGMENTS

The following table presents an overview of our business segments,
including the net sales of each segment for the year ended August 30, 2003.

OUR SCHOLASTIC PRODUCTS

Our scholastic products business segment consists of three principal
categories: class rings, yearbooks and graduation products, the last of which
includes fine paper products and graduation accessories. Sales in this segment
were approximately $269.1 million and comprised approximately 87% of our total
net sales for the year ended August 30, 2003.

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

CLASS RINGS

We manufacture class rings for high school and college students and, to a
lesser extent, junior high school students. Our rings are marketed under some of
the most recognized and respected brand names in the industry, including
ArtCarved and Balfour. Our Balfour and ArtCarved brand names have been
identified with class rings for over 90 years and 45 years, respectively. During
the 2002-2003 school year, we sold rings to students at over 5,500 schools.

We offer over 100 styles of class rings ranging from traditional to highly
stylish and fashion-oriented designs. Our rings are available in precious or
nonprecious metal, and most are available with a choice of more than 50
different types of stones in each of several different cuts. More than 400
designs can be placed on or under the stone and emblems of over 100 activities,
sports or achievements can appear on the side of the rings in addition to school
crests and mascots. As a result, students can design highly personal rings to
commemorate their school experience.

We manufacture all of our rings at our own facilities. Each ring is custom
manufactured. We maintain an inventory of more than 650,000 unique proprietary
ring dies that would be expensive and time consuming to replicate. 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 the receipt of a customer order and
deposit, which reduces credit risk.

During the 2000-2001 school year, we launched our Balfour Identity high
school class ring line, which is based on contemporary teen tastes and
preferences. This product line also incorporates state-of-the-art tooling into
its production platform, which has significantly reduced unit production costs.
The same design strategy and production process has been extended to the
majority of the Balfour high school product line, with the new designs and
tooling available during the 2002-2003 school year.

We have been a leader in developing various alloys in response to changing
student preferences. In 2002, we developed a proprietary silver/platinum alloy.
Recognizing the strong teen preferences for white metal jewelry. This new metal
alternative ring has proven immensely popular at attractive margins.

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YEARBOOKS

We sell yearbooks primarily to high school and college students. We also
publish specialty military yearbooks, which, for example, commemorate naval
tours of duty at sea, and yearbooks for elementary and junior high schools. Our
Taylor Publishing brand name was established in 1939. During the 2002-2003
school year, we sold yearbooks to over 7,300 schools and believe that we are one
of the three largest yearbook publishers in the United States.

We publish yearbooks in our own facilities and believe that we are a
technology leader. Since 1994, 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 such as
PageMaker and Quark Xpress. In addition, by upgrading our printing presses and
further integrating digital technology to, among other things, increase the
speed of output and automatically monitor ink flow and control color
composition, we have been able to enhance print quality and reduce manufacturing
costs. The foregoing technology upgrades and enhancements have enabled us to
reduce manufacturing costs and improve on-time delivery, performance and print
quality.

GRADUATION PRODUCTS

Graduation products include graduation announcements, name cards, thank-you
stationery, memory books, diplomas, certificates, appreciation gifts, diploma
covers and other graduation accessory items. All of our graduation products are
customized in varying degrees and therefore have short production runs and
cycles. Graduation products are manufactured in our own facilities. These
products are offered through our independent high school class ring sales
representatives, college bookstores, colleges and direct mail.

We have enhanced our college website to enable students to order graduation
products on-line. 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.

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OUR RECOGNITION AND INFINITY PRODUCTS

Our recognition and affinity products segment consists of two categories:
achievement publications and recognition and affinity jewelry. The latter
category includes affinity group, personalized family, fan affinity sports and
professional sports championship jewelry. Sales in this segment were
approximately $39.3 million and comprised approximately 13% of our total net
sales for the year ended August 30, 2003. The table below sets forth the
principal product lines and brand names of our recognition and affinity products
and the distribution channels through which we sell these products.

ACHIEVEMENT PUBLICATIONS

We produce the following four publications:

Who's Who Among American High School Students. First published in 1967,
this annual publication is the largest academic achievement publication in the
nation honoring high-achieving high school students. The 1st edition recognized
approximately 13,000 students from approximately 4,000 high schools. The current
36th edition honors approximately 850,000 students, from freshmen through
seniors. Nominees represent over 22,000 of the nation's approximately 24,000
private, public and parochial high schools on the basis of academic achievement,
class rank and extracurricular activities.

The National Dean's List. First published in 1978, this publication is the
largest annual recognition publication in the nation honoring exceptional
college students. The 1st edition recognized over 25,000 students from
approximately 700 universities. The most recent 25th edition honors
approximately 200,000 high-achieving students, representing in excess of 2,500
colleges and universities throughout the country.

Who's Who Among America's Teachers. First published in 1990, this
publication pays tribute to the country's most inspiring teachers, who are
nominated for inclusion by current and/or former Who's Who high school students.
Published every two years, the 7th edition was published in 2002 and honored
approximately 140,000 outstanding teachers.

Who's Who Among American High School Students -- Sports Edition. First
published in August 2002, this publication recognized 20,000 high school
accomplished athletes.

7

We also sell related products consisting of plaques, certificates, gold and
silver pins and charms, mugs, key chains, paper weights and other items
commemorating 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 built up over 35
years, which we utilize to recognize students and teachers from the majority of
the private, public and parochial schools in the country. Students and teachers
are not required to purchase publications in order to be included in them.
Printing for our achievement publications is outsourced.

RECOGNITION AND AFFINITY JEWELRY

Recognition and affinity jewelry 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 American Bowling
Congress, including championship rings for bowlers who score a perfect "300"
game.

Personalized Family Jewelry. Our family jewelry products include rings
commemorating children's birth dates, which feature a level of personalization,
such as birthstones and names, that distinguishes us from our competitors. We
also sell other personalized jewelry, such as necklaces and bracelets, designed
to commemorate family events. We began our family jewelry business in 1997 and,
by 2003, we had grown this business to $8.0 million in net sales by leveraging
these products through our existing channels of distribution. We intend to
further grow our family jewelry business through product extensions, including
baby rings for scrapbooks, grandmother's products such as pins and pendants,
daughter's rings and sweet 16 memorabilia. We provide personalized family
jewelry under our Celebrations of Life, Generations of Love and Namesake brand
names.

Fan Affinity Sports Jewelry. We produce a variety of team affiliation
products. For example, we manufacture Balfour Sports brand National Football
League rings, pendants, paperweights and coasters containing team logos, mascots
and colors.

Professional Sports Championship Jewelry. We provide sports championship
jewelry for professional teams and their members and have, for example, produced
several Super Bowl, Stanley Cup and World Series rings, including the rings for
the New York Yankees in 1996, 1998, 1999 and 2000 and the 1999 Japanese World
Series ring. We provide sports championship jewelry under the Balfour brand.

SALES AND MARKETING

We have over 200 independent high school class ring and over 175
independent yearbook sales representatives, with an average tenure with our
company of approximately 14 and 11 years, respectively. We also have
approximately 25 employee college class ring sales representatives and a number
of part-time employees. We compensate our independent sales representatives on a
commission basis. Most independent sales representatives also receive a monthly
draw 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
contain non-compete arrangements. Employee sales representatives receive a
combination of salary and sales incentives.

At the high school level, class rings are sold through two channels of
distribution: independent sales representatives selling directly to students and
retail stores, which include independent jewelry stores, jewelry chains and mass
merchandisers. We believe that we are the leading supplier of high school class
rings to retail stores. Our high school class rings are sold by approximately
5,000 independent jewelry retailers, many of the nation's largest jewelry
chains, including Zales, Gordons and Sterling, and by mass merchants, including
Wal-Mart. We sell different brands and product lines in retail stores in order
to enable them to differentiate their products from those sold by us directly to
students at schools. College

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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 which we have
longstanding relationships. Decisions to include our products are made on a
national basis by the bookstore operator.

Yearbooks are produced under an exclusive contract with the 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, which often increases before 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 sales representatives.
Achievement publications are sold through direct marketing. Other affinity
products are sold through a variety of distribution channels, including team
stores, catalogs and retail stores. These products are sold to wholesale
accounts through employee sales representatives.

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 the jewelry industry,
including ArtCarved, Balfour, Celebrations of Life, Class Rings, Ltd.,
Generations of Love, Keepsake, Keystone, Master Class Rings, Namesake, R. Johns,
Taylor Publishing, The National Dean's List, Who's Who Among American High
School Students and Who's Who Among America's Teachers. 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 also own
several patented ring designs and business process patents. We also have
non-exclusive licensing arrangements with the National Football League and
numerous colleges and universities under which we have the right to use the name
and other trademarks and logos of the NFL and those schools, respectively, on
our products.

COMPETITION

SCHOLASTIC PRODUCTS

The class ring, yearbook and graduation products markets are highly
concentrated and consist primarily of a few large national participants. We
believe that we are one of the three largest competitors nationally within the
scholastic products market (excluding photography). The other two principal
competitors in the class ring market are Jostens, Inc. and Herff Jones, Inc.,
which compete with us nationally across all product lines. Our principal
competitors in the yearbook and graduation products markets are Jostens, Herff
Jones and Walsworth Publishing Company. All competitors in the scholastic
products industry compete primarily on the basis of quality, marketing, customer
service and, to a lesser extent, price.

RECOGNITION AND AFFINITY PRODUCTS

We have limited competition for our student achievement publications, with
only a small percentage of the high school and college students included in our
publications also included in the publications of our competitors. We have no
direct competition in the teacher recognition market. Our affinity group jewelry
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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 family jewelry products compete
mainly with A&A Jewelry and Bogarz. We compete with our affinity product
competitors primarily on the basis of quality, marketing, customer service and
price.

RAW MATERIALS AND SUPPLIERS

The principal raw materials that we purchase are gold and precious,
semi-precious and synthetic stones that we use in our class rings and jewelry
and paper and ink that we use in our yearbook and graduation products. 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 with multiple plants, which 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 may result in additional costs
to us.

We periodically reset our prices to reflect the then current prices of raw
materials. In addition, we engage in various hedging transactions to reduce the
effects of fluctuations in the price of gold. We also purchase paper on an
annual commitment basis so that we are able to estimate yearbook costs with
greater certainty.

ENVIRONMENTAL

We are subject to federal, state and local laws, ordinances and regulations
that establish various health and environmental quality standards and provide
penalties for violations of those standards. Past and present manufacturing
operations subject us to environmental laws that regulate the use, handling and
contracting for disposal or recycling of hazardous or toxic substances, the
discharge of particles into the air and the discharge of process wastewaters
into sewers. We believe that we are in substantial compliance with all material
environmental laws. We believe that we have adequate environmental insurance and
indemnities to sufficiently cover any liabilities that may exist and that we do
not currently face environmental liabilities that could have a material adverse
affect on our financial position or results of operations.

BACKLOG

Because of the nature of our business, generally all orders (except
yearbooks) are filled between two and eight weeks after the time of placement.
We enter into yearbook contracts several months prior to delivery. While the
base prices of the yearbooks are established at the time of order, the final
prices of the yearbooks are often not calculated at that time since the content
of the books generally change 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 $92.3 million as of August
30, 2003, almost exclusively related to student yearbooks. We expect
substantially all of the backlog at August 30, 2003 to be filled in fiscal 2004.

EMPLOYEES

Given the seasonality of our business, the number of our employees
fluctuates throughout the year, with the number typically being highest during
September through May and lowest from June to August. As of August 30, 2003, we
employed approximately 2,344 employees.

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. CBI and the United Brotherhood of Carpenters and Joiners Union signed a
collective bargaining agreement that will expire in May, 2006. Some hourly
production employees at our Dallas facility are represented by the Graphics
Communication International Union. Taylor Publishing Company and the Graphics
Communication International Union signed two collective bargaining agreements
that will expire in February 2004 and July 2006, respectively.
10

ITEM 2. PROPERTIES

Our principal headquarters and executive offices are located at 7211 Circle
S Road, Austin, Texas. We believe that our facilities are suitable for their
purpose and adequate to support our business. The extent of utilization of
individual facilities varies due to the seasonal nature of our business.

A summary of the physical properties that we use are as follows:

ITEM 3. LEGAL PROCEEDINGS

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

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

None.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

There is no established public trading market for the Company's common
stock, par value $0.01 per share. At August 30, 2003, there were 21 holders of
record of the common stock.

The Company has never declared dividends on its common stock. The Company
is restricted from paying dividends by certain of its bank debt covenants and
the indenture pursuant to which its senior subordinated notes were issued (see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources") and by provisions of the
Company's outstanding class of preferred stock. The Company intends to retain
any earnings for internal investment and debt reduction, and does not intend to
declare dividends on its common stock in the foreseeable future.

DESCRIPTION OF CAPITAL STOCK

Our authorized capital stock consists of 1,250,000 shares of common stock,
par value $0.01 per share, of which 809,775 shares are issued and outstanding,
and 1,250,000 shares of preferred stock, par value $0.01 per share. Of the
amount of authorized preferred stock, 1,200,000 shares of our preferred stock
are designated series A preferred stock and 1,007,366 shares are issued and
outstanding.

11

COMMON STOCK

The holders of our common stock are entitled to one vote per share on all
matters submitted to a vote of stockholders, including the election of
directors, and vote together as a class with the holders of the series A
preferred stock. Dividends may be paid on the common stock, when declared by our
board of directors. We do not expect to pay dividends on the common stock in the
foreseeable future.

PREFERRED STOCK

Our Board of Directors has the authority, by adopting resolutions, to issue
shares of preferred stock in one or more series, with the designations and
preferences for each series set forth in the adopting resolutions. Our
certificate of incorporation authorizes our Board of Directors to determine,
among other things, the rights, preferences and limitations pertaining to each
series of preferred stock.

SERIES A PREFERRED STOCK

Ranking. The series A preferred stock is senior to all of our capital
stock as to dividend payments and distributions upon liquidation, dissolution or
winding up.

Dividends. Dividends on the series A preferred stock are payable in cash,
when, as and if declared by our board of directors. All such declared dividends
are paid pro rata to the holders of series A preferred stock. Accrued and unpaid
dividends on the series A preferred stock do not bear interest or dividends.

Redemption. We do not have the right to redeem the series A preferred
stock.

Liquidation. Upon the liquidation, dissolution or winding up of the
Company, the holders of the series A preferred stock are entitled to receive
payment at a liquidation value of $100 per share plus all accrued and unpaid
dividends on the series A preferred stock, prior to the payment of any
distributions to the holders of our common stock.

Restrictions on Payment of Other Dividends. So long as any share of the
series A preferred stock remains outstanding, we may not declare, pay or set
aside for payment dividends or other distributions with respect to any other
shares of our capital stock ranking, as to dividend rights and rights upon
liquidation, dissolution or winding up, junior to the series A preferred stock,
other than dividends payable in common stock or in another stock ranking junior
to the series A preferred stock as to dividend rights and rights on liquidation,
dissolution and winding up.

Voting. The holders of our series A preferred stock are entitled to one
vote per share of series A preferred stock on all matters submitted to a vote of
stockholders, including the election of directors, and vote together as a class
with the holders of the common stock. We are not permitted to amend, alter or
repeal any of the provisions of our certificate of incorporation or bylaws, or
merge with or into or consolidate with any other entity, as to affect adversely
any of the preferences, rights, powers or privileges of the series A preferred
stock or its holders, without first obtaining the approval of at least a
majority of the outstanding shares of series A preferred stock voting separately
as one class.

WARRANTS

We have outstanding warrants to purchase 21,405 shares of our common stock
at an exercise price of $6.67 per share. The warrants expire on January 31, 2008
and if exercised in full represent less than 2.3% of our common stock on a fully
diluted basis. Of this amount, warrants to purchase 19,820 shares of common
stock are held by CHPIII and warrants to purchase 1,585 shares of common stock
are held by Deutsche Banc Alex. Brown Inc., formerly Deutsche Bank Securities,
Inc.

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CBI SERIES A PREFERRED STOCK

Of CBI's authorized preferred stock, 100,000 shares of preferred stock are
designated series A preferred stock, which is referred to as the "CBI A
Preferred", all of which are issued and outstanding and held by CHPIII.

Ranking. The CBI A Preferred is senior to all other capital stock of CBI
as to dividend payments and distribution upon liquidation, dissolution or
winding up.

Dividends. Dividends on the CBI A Preferred are payable in cash, when and
if declared by the board of directors of CBI on a quarterly basis. Dividends
accrue from the date of issuance, which was December 16, 1996 or the last date
to which dividends have been paid at a rate of 12% per annum, whether or not
such dividends have been declared and whether or not there shall be funds
legally available for the payment of such dividends. Any dividends which are
declared are payable pro rata to the holders. No dividends or interest accrue on
any accrued and unpaid dividends. The notes and our credit facility each
restrict CBI's ability to pay dividends on the CBI A Preferred.

Redemption. The CBI A Preferred is not subject to mandatory redemption but
is redeemable at any time at the option of CBI; however, the notes offered
hereby and our new credit facility will each restrict CBI's ability to redeem
the CBI A Preferred.

Liquidation. Upon the liquidation, dissolution or winding up of CBI, the
holders of the CBI A Preferred are entitled to receive payment at a liquidation
value of $100 per share plus all accrued and unpaid dividends on the CBI A
Preferred, prior to the payment of any distributions to the holders of CBI's
other capital stock.

Restrictions on Payment of Other Dividends. So long as any share of the
CBI A Preferred remains outstanding, CBI may not declare, pay or set aside for
payment dividends or other distributions with respect to any other shares of its
capital stock ranking, as to dividend rights and rights upon liquidation,
dissolution or winding up, junior to the CBI A Preferred, other than dividends
payable in common stock or in another stock ranking junior to the CBI A
Preferred as to dividend rights and rights on liquidation, dissolution and
winding up.

Voting. Generally, the holders of the CBI A Preferred are not entitled to
any voting rights. However, CBI is not permitted to amend, alter or repeal any
of the provisions of its certificate of incorporation or bylaws, or merge with
or into or consolidate with any other entity, as to affect adversely any of the
preferences, rights, powers or privileges of the CBI A Preferred or its holders,
without first obtaining the approval of at least a majority of the outstanding
shares of CBI A Preferred voting separately as one class.

13

ITEM 6. SELECTED FINANCIAL DATA

The following table presents summary historical financial and other data
for the Company and should be read in conjunction with the financial statements
of the Company and the notes thereto and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" included in Item 7 herein.

- ---------------

(1) EBITDA represents earnings before interest expense, taxes, depreciation and
amortization and excludes extraordinary gains and losses and other expense
related to interest rate swaps. 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. We have included information concerning EBITDA because
we use such information as a method of assessing our cash flow and ability
to service debt. The EBITDA measure presented herein is not necessarily
comparable to similarly titled measures reported by other companies.

14

Reconciliation of operating income to EBITDA for the year ended:

(2) Excludes bank overdraft.

(3) Includes the results of operations for Taylor Publishing, from its
acquisition on July 27, 2000.

(4) Includes the results of operations for ECI, from its acquisition on March
30, 2001. ECI sales are highly seasonal with most shipments generally
occurring in the first four months of our fiscal year.

(5) Includes the results of operations of Milestone Marketing, from its
acquisition on July 15, 2002.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The following discussion of our consolidated financial condition and
results of operations should be read in conjunction with the information
contained in our consolidated financial statements and the notes thereto. The
following discussion includes forward-looking statements that involve certain
risks and uncertainties. See "Special Note Regarding Forward-Looking
Statements."

OVERVIEW

We are one of the leading manufacturers and suppliers of class rings,
yearbooks, graduation products, academic achievement publications and
recognition and affinity jewelry in the United States. Our two principal
business segments are: scholastic products and recognition and affinity
products. The scholastic products segment serves the high school, college and,
to a lesser extent, the elementary and junior high school markets and accounted
for approximately 87% of our net sales for the year ended August 30, 2003. Our
scholastic products segment consists of three principal categories: class rings,
yearbooks and graduation products, the last of which includes fine paper
products and graduation accessories.

The recognition and affinity products segment accounted for approximately
13% of our net sales for the year ended August 30, 2003. This segment provides,
among other things, publications that recognize the academic achievement of top
students at the high school and college levels, as well as the nation's most
inspiring teachers, jewelry commemorating family events such as the birth of a
child, fan affinity jewelry and related products and professional sports
championship rings such as World Series rings.

COMPANY BACKGROUND

CBI was initially formed by CHPII, a private equity investment fund, in
March 1996 for the purpose of acquiring substantially all of the ArtCarved
operations of CJC Holdings, Inc. and the Balfour operations of L. G. Balfour
Company, Inc. These acquisitions were consummated on December 16, 1996. Until
such date, CBI engaged in no business activities other than in connection with
the completion of the acquisitions and the financing thereof.

Our Company was formed on June 27, 2000 to serve as a holding company for
the CBI operations and future acquisitions. Upon formation, each share of CBI's
issued and outstanding common stock was converted into one share of our common
stock, and each share of CBI's issued and outstanding series B preferred stock
was converted into one share of our Series A Preferred Stock. The original
holders of CBI's series A preferred stock continued to hold such shares. We
changed our name from Commemorative Brands Holding Corporation to American
Achievement Corporation on January 23, 2002.

15

Taylor Acquisition. On February 11, 2000, Castle Harlan Partners III, L.P.
("CHPIII"), one of our stockholders and an affiliate of CHPII, acquired Taylor
for a purchase price of approximately $30.0 million, whose primary business is
the designing and printing of student yearbooks. On July 27, 2000, we acquired
all issued and outstanding shares of Taylor Senior Holding Corp ("TSHC"),
Taylor's parent, through the issuance of 320,929 shares of our common stock and
393,482 shares of our series A preferred stock (the "Taylor Acquisition"). The
Taylor Acquisition was accounted for under the purchase method of accounting. As
a result of this transaction, our consolidated financial statement for 2000
include the results of operations for Taylor for the period from February 11,
2000 to August 26, 2000.

ECI Acquisition. On March 30, 2001, we acquired all of the capital stock
of ECI for a purchase price of approximately $58.7 million (the "ECI
Acquisition"). ECI has been in the academic achievement publication business
since 1967 and publishes such well-known titles as, Who's Who Among American
High School Students, The National Dean's List and Who's Who Among America's
Teachers. The ECI Acquisition was accounted for under the purchase method of
accounting. As a result of this transaction, our consolidated financial
statements for 2001 include the results of operations for ECI for the period
from March 30, 2001 to August 25, 2001.

Milestone Acquisition. Effective July 15, 2002, we acquired all the
outstanding stock and warrants of Milestone for a total purchase price of $16.3
million (the "Milestone Acquisition"). The Milestone Acquisition was accounted
for using the purchase method of accounting. Milestone is a specialty marketer
of class rings and other graduation products to the college market. Goodwill and
trademarks related to Milestone are not amortized in accordance with SFAS No.
142. As a result of this transaction, our consolidated financial statements for
2002 include the results of operations for Milestone for the period from July
15, 2002 to August 31, 2002.

Effective December 31, 2002, Milestone merged into CBI, with CBI as the
surviving entity. In conjunction with the merger, for each share of Milestone
common stock held by us, we received one share of CBI common stock. The existing
common stock and warrants of Milestone were cancelled in connection with this
transaction.

CRITICAL ACCOUNTING POLICIES

We prepare our consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America. As
such, we are required to make certain estimates, judgments and assumptions that
we believe are reasonable based upon the information available. These estimates
and assumptions affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the periods presented. The significant accounting policies which
we believe are the most critical to aid in fully understanding and evaluating
our reported financial results include the following:

Revenue Recognition. We recognize revenue when the earnings process is
complete, evidenced by an agreement between the customer and us, delivery and
acceptance has occurred, collectibility is reasonably assured and pricing is
fixed and determinable. In accordance with the Securities and Exchange
Commissions Staff Accounting Bulletin No. 101, the recognition of revenue and
related gross profit on sales to independent sales representatives, along with
commissions to independent sales representatives that are directly related to
the revenue, are deferred until the independent sales representative delivers
the product and title passes to our end customer. Provisions for sales returns
and warranty costs are recorded at the time of sale based on historical
information and current trends.

Sales Returns and Allowances. We make estimates of potential future
product returns related to current period product revenue. We analyze historical
returns, current economic trends and changes in customer demand and acceptance
of our products when evaluating the adequacy of the sales returns and
allowances. Significant management judgments and estimates must be made and used
in connection with establishing the sales returns and allowances in any
accounting period. Material differences could result in the amount and timing of
our revenue for any period if we made different judgments or utilized different
estimates.
16

Allowance for Doubtful Accounts and Reserve on Sales Representative
Advances. We make estimates of potentially uncollectible customer accounts
receivable and receivables arising from sales representative draws paid in
excess of earned commissions. Our reserves are based on an analysis of customer
and salesperson accounts and historical write-off experience. Our analysis
includes the age of the receivable, customer or salesperson creditworthiness and
general economic conditions. We believe the results could be materially
different if historical trends do not reflect actual results or if economic
conditions worsened.

Goodwill and Other Intangible Assets. On September 1, 2002, we adopted
SFAS No. 142, "Goodwill and Other Intangible Assets," which addresses the
initial recognition and measurement of intangible assets acquired outside of a
business combination and the accounting for goodwill and other intangible assets
subsequent to their acquisition. SFAS No. 142 also provides that intangible
assets with finite useful lives be amortized and that goodwill and intangible
assets with indefinite lives will not be amortized, but will rather be tested
for impairment upon adoption and on an annual basis thereafter. We completed the
initial impairment test and concluded that goodwill was not impaired as of
August 30, 2003. The adoption of SFAS No. 142 during the fiscal year ended 2003
did not have a material impact on our consolidated balance sheets or our
statements of operations, shareholders' equity or cash flows.

RESULTS OF OPERATIONS

The following table sets forth selected information from our consolidated
statements of operations expressed on an actual basis and as a percentage of net
sales.

17

The following table sets forth sales by business segment expressed on an
actual basis and as a percentage of net sales.

YEAR ENDED AUGUST 30, 2003 COMPARED TO YEAR ENDED AUGUST 31, 2002

Net Sales. Net sales increased $4.0 million, or 1.3%, to $308.4 million in
2003, from $304.4 million in 2002. This increase was due primarily to the
inclusion of $5.4 million of net sales from Milestone in 2003, which was
acquired effective July 15, 2002, as compared to $1.0 million in 2002 and an
increase in sales of $3.9 million from ECI, mainly as a result of the bi-annual
publication of the Who's Who Among America's Teachers in 2003. These increases
were partially offset by a decrease in yearbook sales of $3.9 million, as a
result of the fourth quarter of fiscal year 2002 containing an extra week of
heavy shipping volumes.

The following details the changes in net sales during such periods by
business segment.

Scholastic Products. Net sales decreased slightly to $269.1 million
in 2003 from $269.4 million in 2002. Of this decrease, $3.9 million was due
to decreased yearbook contracts and $1.4 million decrease due to a decline
in unit volumes of high school and college class rings. These decreases
were offset by a $4.4 million increase in Milestone net sales and a $0.7
million increase in graduation products.

Recognition and Affinity Products. Net sales increased $4.3 million
to $39.3 million in 2003 from $35.0 million in 2002. The increase was
primarily the result of $3.9 million increased net sales attributable to
ECI and $2.8 million increased sales of specialty products, partially
offset by $2.2 million decrease resulting from the discontinuation of
reunion services in fiscal year 2002.

Gross Profit. Gross margin was 54.9% in 2003, a 3.2 percentage point
increase from 51.7% in 2002. The gross margin increase in 2003 was the
result of an increase in margins of our yearbooks associated with the
implementation of new technology and our class rings due to increased labor
efficiencies and the introduction of the new white metal, partially offset
by the discontinuation of reunion services in fiscal year 2002.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased $0.3 million to $129.4 million in 2003
from $129.7 million in 2002. As a percentage of net sales, selling, general
and administrative expenses decreased 0.6 percentage points in 2003
compared to 2002. Included in selling, general and administrative expenses
are two sub-categories: selling and marketing expenses and general and
administrative expenses. Selling and marketing expenses increased $5.9
million to $96.5 million, or 31.3% of net sales, in 2003 from $90.6
million, or 29.8% of net sales, in 2002. The increase in selling and
marketing expenses as a percentage of net sales was largely a result of
increased marketing efforts in class rings, yearbooks and graduation
products, an increase of $2.7 million as a result of the Milestone
Acquisition, and increased marketing costs related to ECI's bi-annual
teachers publication. General and administrative expenses in 2003 were
$33.0 million, or 10.7% of net sales, as compared to $39.1 million, or
12.9% of net sales, in 2002. The decrease in general and administrative
expenses as a percentage of revenue was primarily the result of a $5.6
million decrease related to the adoption of SFAS No. 142, in which goodwill
and trademarks are no longer amortized.

18

Loss on Extinguishment of Debt. In conjunction with the issuance of
the Unsecured Notes and the Senior Secured Credit Facility on February 20,
2002, the Company paid off the then outstanding term loans and revolver
under the former credit facility and bridge notes to affiliates. As a
result, a loss of $5.7 million was recognized relating to the write-off of
unamortized deferred financing costs.

Operating Income. As a result of the foregoing, operating income was
$39.8 million, or 12.9% of net sales, in 2003 as compared with $22.1
million, or 7.3% of net sales, in 2002. The scholastic products segment
reported operating income of $30.3 million and the recognition and affinity
products segment reported operating income of $9.5 million for 2003. The
adoption of SFAS No. 145 required us to reclassify the $5.7 million loss
from extinguishment of debt from extraordinary items into operating
expenses for 2002. Without this reclassification the operating income for
2002 would have been $27.7 million, consisting of $23.2 million operating
income from the scholastic products segment and $4.5 million operating
income from the recognition and affinity products segment for 2002.

Interest Expense, Net. Net interest expense was $28.9 million in 2003
and $26.0 million in 2002. The average debt outstanding in 2003 and in 2002
was $235.9 million and $225.7 million, respectively. The weighted average
interest rate of debt outstanding in 2003 and in 2002 was 12.3% and 11.5%
respectively.

Other Expense. Other expense was $0 for 2003 and $2.8 million for
2002. Out of the $2.8 million in 2002, $2.6 million was a result of the
termination and reclassification of interest rate swaps that occurred in
conjunction with the issuance of the Unsecured Notes and the entering into
of our Senior Secured Credit Facility on February 20, 2002. The remaining
interest rate swap agreement represented a notional amount of $25 million
that was classified as a trading derivative in 2002. As such, changes in
the fair value of this derivative resulted in a charge of $0.2 million for
2002. As of August 31, 2002, the fair value of this derivative represented
a liability of approximately $0.9 million and it expired during 2003.

(Provision) Benefit for Income Taxes. For 2003 and 2002, the Company
recorded an income tax provision of $132,000 and an income tax benefit of
$1,171,000, respectively. The Company's provision in 2003 relates to state
income taxes. No federal expense is being reported due to a tax loss that
is expected for the year. The Company's benefit related to the net
operating loss carryback generated in years ended August 31, 2002
attributable to TSHC. No net federal income tax benefit is reflected in the
statement of operations for net operating losses to be carried forward
since realization of the potential benefit of net operating loss
carry-forwards is not considered to be more likely than not.

Net Income (Loss). As a result of the foregoing, we reported net
income of $10.8 million in 2003 as compared to a net loss of $5.5 million
in 2002.

YEAR ENDED AUGUST 31, 2002 COMPARED TO YEAR ENDED AUGUST 25, 2001

Net Sales. Net sales increased $23.3 million, or 8.3%, to $304.4 million
in 2002, from $281.1 million in 2001. This increase was due primarily to the
inclusion of $16.2 million of net sales from ECI in 2002, which was acquired on
March 30, 2001, as compared to $0.7 million in 2001 and an increase in sales of
other product lines.

The following details the changes in net sales during such periods by
business segment.

Scholastic Products. Net sales increased $10.9 million, or 4.2% to
$269.4 million in 2002 from $258.4 million in 2001. Of this increase, $5.2
million was due to increased unit volumes and selling prices of high school
and college class rings and a $4.7 million increase in graduation products
and yearbook revenues. The remaining increase was due to the July 15, 2002
acquisition of Milestone.

Recognition and Affinity Products. Net sales increased $12.4 million
to $35.0 million in 2002 from $22.6 million in 2001. The increase was
primarily the result of $16.2 million of net sales attributable to ECI,
partially offset by lower sales of sports fan affinity jewelry.

19

Gross Profit. Gross margin was 51.7% in 2002, a 2.3 percentage point
increase from 49.4% in 2001. The gross margin increase in 2002 was partially the
result of the inclusion of the ECI operations for this period. Excluding ECI,
gross margin would have been 50.1% in 2002 compared to 49.4% in 2001. The 0.7
percentage point increase in gross margins was primarily the result of increased
operating efficiencies.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $9.8 million, or 8.1%, to $129.7 million in
2002 from $120.0 million in 2001. As a percentage of net sales, selling, general
and administrative expenses decreased 0.1 percentage points in 2002 compared to
2001. Included in selling, general and administrative expenses are two
sub-categories: selling and marketing expenses and general and administrative
expenses. Selling and marketing expenses increased $7.9 million to $90.6
million, or 29.8% of net sales, in 2002 from $82.7 million, or 29.4% of net
sales, in 2001. General and administrative expenses in 2002 were $39.1 million,
or 12.9% of net sales, as compared to $37.3 million, or 13.3% of net sales, in
2001. This decrease in general and administrative expenses as a percentage of
revenue was a result of realization of the balance of the synergy savings
related to the Taylor Acquisition, partially offset by increased employee health
insurance costs.

Loss on Extinguishment of Debt. In conjunction with the issuance of the
Unsecured Notes and the Senior Secured Credit Facility on February 20, 2002, the
Company paid off the then outstanding term loans and revolver under the former
credit facility and bridge notes to affiliates. As a result, a loss of $5.7
million was recognized relating to the write-off of unamortized deferred
financing costs.

Operating Income. As a result of the foregoing, operating income was $22.1
million, or 7.3% of net sales, in 2002 as compared with $18.9 million, or 6.7%
of net sales, in 2001. The scholastic products segment reported operating income
of $20.8 million and the recognition and affinity products segment reported an
operating loss of $1.9 million in 2001. The adoption of SFAS No. 145 required us
to reclassify the $5.7 million loss from extinguishment of debt from
extraordinary items into operating expenses for 2002. Without this
reclassification the operating income for 2002 would have been $27.7 million,
consisting of $23.2 million operating income from the scholastic products
segment and $4.5 million operating income from the recognition and affinity
products segment for 2002. This increase in the recognition and affinity product
segment was primarily attributable to favorable impact of approximately $5.9
million from the ECI Acquisition on March 30, 2001.

Interest Expense, Net. Net interest expense was $26.0 million in 2002 and
$22.8 million in 2001. The average debt outstanding in 2002 and in 2001 was
$225.7 million and $201.2 million, respectively. The weighted average interest
rate of debt outstanding in 2002 and in 2001 was 11.5% and 11.4% respectively.

Other Expense. Other expense was $2.8 million in 2002, of which $2.6
million was a result of the termination and reclassification of interest rate
swaps that occurred in conjunction with the issuance of the Unsecured Notes and
the entering into of our Senior Secured Credit Facility on February 20, 2002.
The remaining interest rate swap agreement representing a notional amount of $25
million has been classified as a trading derivative. As such, changes in the
fair value of this derivative resulted in a charge of $0.2 million for the
period February 20, 2002 to August 31, 2002. As of August 31, 2002, the fair
value of this derivative represented a liability of approximately $0.9 million.

Benefit for Income Taxes. For 2002 and 2001, the Company recorded income
tax benefit of $1,171,000 and $1,443,000. The Company's benefit relates to the
expected annual benefits from the net operating loss carryback generated in
years ended August 31, 2002 and August 25, 2001 attributable to TSHC. No net
federal income tax benefit is reflected in the statement of operations for net
operating losses to be carried forward since realization of the potential
benefit of net operating loss carry-forwards is not considered to be more likely
than not.

Cumulative Effect of Change in Accounting Principle. The cumulative effect
of change in accounting principle, representing a loss of $1.8 million, was
recorded due to the adoption of SAB 101 as of August 27, 2000.

Net Loss. As a result of the foregoing, we reported a net loss of $5.5
million in 2002 as compared to a net loss of $4.3 million in 2001.
20

SEASONALITY

The Company's scholastic product sales tend to be seasonal. Class ring
sales are highest during October through December (which overlaps the Company's
first and second fiscal quarters), when students have returned to school after
the summer recess and orders are taken for class rings for delivery to students
before the winter holiday season. Sales of the Company's fine paper products are
predominantly made during February through April (which overlaps the Company's
second and third fiscal quarters) for graduation in April and June. The Company
has historically experienced operating losses during the period of the Company's
fourth fiscal quarter, which includes the summer months when school is not in
session, thus reducing related shipment of products. Yearbook sales are highest
during the months of May through June, as yearbooks are typically shipped to
schools prior to the school's summer break. The Company's recognition and
affinity product line sales are also seasonal. The majority of the sales of
achievement publications are shipped in November of each year. The remaining
recognition and affinity product line sales are highest during the winter
holiday season and in the period prior to Mother's Day. As a result, the effects
of the seasonality of the class ring business on the Company are somewhat
tempered by the Company's relatively broad product mix. As a result of the
foregoing, the Company's working capital requirements tend to exceed its
operating cash flows from July through December.

LIQUIDITY AND CAPITAL RESOURCES

Operating Activities. Operating activities provided cash flows of $26.5
million for fiscal 2003 as compared to $23.3 million in fiscal 2002. The $3.2
million increase in cash flows from operating activities between the two periods
was primarily the result of an increase in operating cash from net income before
depreciation, amortization and other non-cash charges of $5.7 million and
increases in the change in prepaid expenses and other assets of $2.8 million,
inventories of $0.7 million, and income tax receivable of $0.7 million. These
increases in cash flows were partially offset by decreases in the changes in
receivables of $1.1 million, deferred revenue of $1.1 million, and accounts
payable, accrued expenses and other long-term liabilities of $4.1 million.
Operating activities provided cash flows of $23.3 million for fiscal 2002 as
compared to $10.3 million in fiscal 2001. The $13.0 million increase in cash
flows from operating activities between the two periods was primarily the result
of an increase in operating cash from net income before depreciation,
amortization and other non-cash charges of $3.9 million, a decrease in accounts
receivable and income tax receivable of $14.5 million, a decrease in inventories
of $0.5 million and a decrease in other assets of $1.9 million. These increases
in cash flows were partially offset by an increase in prepaid expenses, other
assets and deferred revenue of $6.7 million and a decrease in accounts payable,
accrued expenses and other long-term liabilities of $1.0 million.

Investing Activities. Capital expenditures in 2003, 2002 and 2001 were
$11.2 million, $14.2 million and $7.5 million, respectively. The increase in
capital expenditures in 2002 was primarily attributable to the purchase of two
new printing presses at Taylor. Also affecting investing activities in 2002 and
2001 were the Milestone Acquisition and the ECI Acquisition.

Financing Activities. Net cash used in financing activities in 2003 was
$15.1 million, primarily used to pay down bank revolver borrowings. Net cash
provided from financing activities in 2002 and 2001 was $4.7 million and $48.4
million, respectively. In February 2002, we issued $177.0 million of Unsecured
Notes due 2007 and entered into a new $40.0 million Senior Secured Credit
Facility. The Company paid off the then outstanding term loans and revolver
under the former credit agreement, its bridge notes to affiliates and settled
all but $25.0 million in notional amount of its interest rate swap agreements.
In 2001, in connection with the acquisition of ECI, we entered into the second
amended and restated credit agreement whereby we borrowed approximately $27.3
million to fund a portion of the acquisition. In addition, CHPIII provided us
with approximately $24.5 million in cash in return for the issuance of a bridge
note representing an obligation of $8.5 million and the issuance of series A
preferred stock and common stock for $16.0 million.

Capital Resources. In February 2002, we entered into the Senior Secured
Credit Facility. As of August 30, 2003, $9.5 million under that facility was
outstanding.

21

In connection with the Taylor Acquisition, CBI signed a gold consignment
financing agreement with a bank. Under its gold consignment financing agreement,
CBI has the ability to have on consignment the lowest of (i) the dollar value of
27,000 troy ounces of gold, (ii) $10.1 million and (iii) a borrowing base,
determined based upon a percentage of gold located at CBI's facilities and other
approved locations, as specified by the agreement. Under the terms of the
consignment arrangement, CBI does not own the consigned gold nor have risk of
loss related to such inventory until the money is received by the bank from CBI
in payment for the gold purchased. Accordingly, CBI does not include the values
of consigned gold in its inventory or the corresponding liability for financial
statement purposes. As a result, as of August 30, 2003 and August 31, 2002, CBI
held approximately 17,780 ounces and 14,380 ounces, respectively, of gold valued
at $6.7 million and $4.6 million, respectively, on consignment from the bank.

Cash generated from operating activities and availability under our Senior
Secured Credit Facility and prior credit facilities which were paid off in
February 2002 have been our principal sources of liquidity. Our liquidity needs
arise primarily from debt service, working capital, capital expenditure and
general corporate requirements. As of August 30, 2003, we had approximately
$28.3 million available under our credit facility.

We believe that cash flow from our operating activities combined with the
availability of funds under our Senior Secured Credit Facility will be
sufficient to support our operations and liquidity requirements for the
foreseeable future.

CONTRACTUAL OBLIGATIONS

We have contractual obligations due as follows (in thousands):

- ---------------

(1) Also outstanding is $2.1 million in the form of letters of credit.

RECENT ACCOUNTING PRONOUNCEMENTS

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections". This statement requires, among other things, that gains and losses
on the early extinguishments of debt be classified as extraordinary only if they
meet the criteria for extraordinary treatment set forth in Accounting Principles
Board Opinion No. 30. The provisions of this statement related to classification
of gains and losses on the early extinguishments of debt became effective for
fiscal years beginning after May 15, 2002. The adoption of SFAS No. 145 required
us to reclassify certain items from extraordinary items into operating income
(loss).

In June 2002, SFAS No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities," was issued, which addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." This statement requires
recognition of a liability for a cost associated with an exit or disposal
activity when the liability is incurred as opposed to the date of an entity's
commitment

22

to an exit plan or disposal activity. The adoption of SFAS No. 146 in January
2003 did not have a material effect on our financial statements.

In December 2002, SFAS 148 was issued, which amends SFAS 123, to provide
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. It also amends the
disclosure requirements of SFAS 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. Certain disclosure requirements were effective for us beginning
December 15, 2002 and we have complied with those requirements. The adoption of
the additional reporting requirements of SFAS 148 in December 2002 did not have
a material effect on our financial statements.

In December 2002, FASB Interpretation No. 45 ("FIN 45"), "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others an interpretation of FASB Statements No. 5,
57, and 107 and rescission of FASB Interpretation No. 34", was issued, which
addresses the disclosures to be made by a guarantor in its interim and annual
financial statements about its obligation under guarantees and clarifies the
requirements related to the recognition of a liability by a guarantor at the
inception of a guarantee for the obligations the guarantor has undertaken in
issuing that guarantee. The adoption of FIN 45 in December 2002 did not have a
material effect on our financial statements.

In April 2003, SFAS No. 149 ("SFAS 149"), "Amendments of Statement 133 on
Derivative Instruments and Hedging Activities", was issued, which amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under FASB
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities". The adoption of SFAS 149 in the third quarter of fiscal year ended
2003 did not have a significant impact on our financial statements.

In May 2003, SFAS No. 150 ("SFAS 150"), "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity", was issued,
which establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. We
will adopt SFAS 150 beginning our first quarter of fiscal year 2004. We are
currently reviewing the impact this statement will have on our financial
statements.

In May 2003, FIN 46, "Consolidation of Variable Interest Entities", was
issued, which clarifies the application of Accounting Research Bulletin No. 51,
"Consolidated Financial Statements", to certain entities in which equity
investors do not have the characteristics of a controlling financial interest or
do not have sufficient equity at risk for the entity to finance its activities
without additional subordinated financial support from other parties. We will
adopt FIN 46 beginning our first quarter of fiscal year 2004 and we are
currently reviewing the impact this statement will have on our financial
statements.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

Interest Rate Risk. We have market risk exposure from changes in interest
rates on our variable rate debt. Our policy is to manage interest rate exposure
through the use of a combination of fixed and floating rate debt instruments and
through the use of interest rate swaps. Our Senior Secured Credit Facility and
our gold consignment agreement are variable rate facilities. The interest rates
under those facilities are based on a floating benchmark rate (such as LIBOR or
the Federal Funds rate) plus a fixed spread. In fiscal year 2002, upon
consummation of the issuance of our senior unsecured notes we terminated
approximately $1.7 million of our existing swap agreements and interest rate
swaps representing a notional amount of $25.0 million remained in place. As of
August 31, 2003, $0 remained in place.

Our derivatives and other financial instruments subject to interest rate
risk consist of long-term debt (including current portion), an interest rate
swap and notional amount under the gold consignment agreement. The net fair
value of these financial instruments at August 30, 2003 and August 31, 2002
represented a current liability of $0 and $0.9 million, respectively.

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If the interest rate on our variable debt increased or decreased by 1% in
the fiscal year ended 2003, our interest expense would have changed by
approximately $0.1 million during the same period. As of August 30, 2003 and
August 31, 2002, the fair value of our debt approximated its carrying value and
is estimated based on quoted market prices for comparable instruments.

Semi-Precious Stones. We purchase the majority of our semi-precious stones
from a single source supplier in Germany. We believe that all of our major
competitors purchase their semi-precious stones from this same supplier. The
purchases beginning fiscal 2002 are payable in Euros and in 2001 were payable in
Deutsche Marks. During 2001, in order to hedge our foreign currency risks, we
purchased a total of $2.0 million in forward Deutsche Mark contracts with
various maturity dates resulting in a net gain of $0.1 million. In the fiscal
years ended 2003 and 2002 we did not purchase any forward contracts.

Gold. We purchase all of our gold requirements from The Bank of Nova
Scotia through our revolving credit and gold consignment agreement. We consign
the majority of our gold from The Bank of Nova Scotia and pay for gold as the
product is shipped to customers and as required by the terms of the gold
consignment agreement. As of August 30, 2003, we had hedged most of our gold
requirements for the fiscal year ending August 28, 2004 through the purchase of
gold options.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders of
American Achievement Corporation

We have audited the accompanying consolidated balance sheets of American
Achievement Corporation and subsidiaries (the "Company") as of August 30, 2003
and August 31, 2002 and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended August 30, 2003. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of August 30,
2003, and August 31, 2002, and the results of their operations and their cash
flows for each of the three years in the period ended August 30, 2003 in
conformity with accounting principles generally accepted in the United States of
America.

As discussed in Note 2 to the consolidated financial statements, the
Company changed its method of accounting for goodwill and other intangible
assets as of September 1, 2002 upon the adoption of Statement of Financial
Accounting Standard No. 142,"Goodwill and Other Intangible Assets."

/s/ DELOITTE & TOUCHE LLP

Austin, Texas
November 17, 2003

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AMERICAN ACHIEVEMENT CORPORATION

CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of these consolidated financial
statements.
26

AMERICAN ACHIEVEMENT CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

The accompanying notes are an integral part of these consolidated financial
statements.
27

AMERICAN ACHIEVEMENT CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

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

28

AMERICAN ACHIEVEMENT CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS