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EX-32.1 - EXHIBIT 32.1 - AMERICAN ACHIEVEMENT CORPexhibit_32-1.htm
EX-31.1 - EXHIBIT 31.1 - AMERICAN ACHIEVEMENT CORPexhibit_31-1.htm
EX-31.2 - EXHIBIT 31.2 - AMERICAN ACHIEVEMENT CORPexhibit_31-2.htm
EX-32.2 - EXHIBIT 32.2 - AMERICAN ACHIEVEMENT CORPexhibit_32-2.htm


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

FORM 10-Q
     
þ
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED February 27, 2010

OR

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

COMMISSION FILE NUMBERS 333-121479 AND 333-84294

AAC GROUP HOLDING CORP.
AMERICAN ACHIEVEMENT CORPORATION
(Exact name of registrant as specified in its charter)
     
DELAWARE
 
20-1854833
DELAWARE
 
13-4126506
(State or other jurisdiction of incorporation or
 
(I.R.S. Employer Identification Number)
organization)
   

7211 CIRCLE S ROAD
AUSTIN, TEXAS 78745
(Address of principal executive offices) (Zip Code)
Registrants’ Telephone Number, Including Area Code (512) 444-0571

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  No .  Although the registrants are not subject to the filing requirements of Section 13 or 15(d) of the Exchange Act, the registrants have filed all reports for the preceding 12 months.

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  No 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
 Large accelerated filer         Accelerated filer 
 Non-accelerated filer þ (do not check if smaller reporting company)    Smaller reporting company 
 
Indicate by check mark whether the registrants are shell companies (as defined in Rule 12b-2 of the Exchange Act). Yes  No þ.

Number of shares outstanding of AAC Group Holding Corp. as of March 31, 2010: 100 shares of common stock.
Number of shares of American Achievement Corporation outstanding as of March 31, 2010: 100 shares of common stock.

This Form 10-Q is a combined quarterly report being filed separately by AAC Group Holding Corp. and American Achievement Corporation. Unless the context indicates otherwise, any reference in this report to “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 AAC Group Holding Corp. together with American Achievement Corporation. 
 
 

 



FOR THE QUARTERLY PERIOD ENDED FEBRUARY 27, 2010
INDEX


   
PAGE
 
PART I. FINANCIAL INFORMATION
     
Item 1. Condensed Consolidated Financial Statements and Notes
     
Condensed Consolidated Balance Sheets (unaudited) — As of February 27, 2010 and August 29, 2009
    3  
Condensed Consolidated Statements of Operations (unaudited) — For the Three and Six Months Ended February 27, 2010 and the Three and Six Months Ended February 28, 2009
    5  
Condensed Consolidated Statements of Cash Flows (unaudited) — For the Six Months Ended February 27, 2010 and the Six Months Ended February 28, 2009
    7  
Notes to Condensed Consolidated Financial Statements (unaudited)
    9  
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
    18  
Item 3. Quantitative and Qualitative Disclosures About Market Risk
    28  
Item 4. Controls and Procedures
    28  
         
PART II. OTHER INFORMATION
       
Item 1. Legal Proceedings
    29  
Item 6. Exhibits
    29  
         
SIGNATURES
    30  
 Certification of CEO Pursuant to Section 302
       
 Certification of CFO Pursuant to Section 302
       
 Certification of CEO Pursuant to Section 906
       
 Certification of CFO Pursuant to Section 906
       




Explanatory Note

This combined Form 10-Q is separately filed by AAC Group Holding Corp. and American Achievement Corporation. Each Registrant hereto is filing on its own behalf all of the information contained in this quarterly 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.

Unless the context indicates otherwise, any reference in this report to “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 AAC Group Holding Corp. together with American Achievement Corporation.





 
2

 


AAC GROUP HOLDING CORP.
Condensed Consolidated Balance Sheets
(unaudited)

             
   
Intermediate Holdings
 
   
February 27, 2010
   
August 29, 2009
 
   
(Dollars in thousands)
 
ASSETS
           
Cash and cash equivalents
  $ 16,202     $ 12,403  
Accounts receivable, net of allowances
    29,452       32,267  
Inventories
    37,372       24,704  
Deferred tax assets
    17,854       10,167  
Prepaid expenses and other current assets, net
    17,120       14,574  
Total current assets
    118,000       94,115  
                 
Property, plant and equipment, net
    52,225       56,526  
Goodwill
    158,608       158,608  
Other intangible assets, net
    81,928       86,752  
Other assets, net
    10,526       12,534  
Total assets
  $ 421,287     $ 408,535  
                 
LIABILITIES AND STOCKHOLDER'S DEFICIT
               
Book overdraft
  $ 408     $ 1,391  
Accounts payable
    6,622       8,490  
Customer deposits
    49,141       7,743  
Accrued expenses
    14,638       13,617  
Deferred revenue
    3,750       2,710  
Accrued interest
    11,198       11,379  
Current portion of long-term debt
    2,659       4,000  
Total current liabilities
    88,416       49,330  
                 
Long-term debt, net of current portion
    308,594       324,253  
Deferred tax liabilities
    33,749       33,816  
Other long-term liabilities
    5,942       5,954  
Total liabilities
    436,701       413,353  
                 
Commitments and contingencies (Note 6)
               
                 
Stockholder's deficit:
               
Common stock
    -       -  
Distributions in excess of paid-in capital
    (5,648 )     (4,648 )
Accumulated deficit
    (9,489 )     -  
Accumulated other comprehensive loss
    (277 )     (170 )
Total stockholder's deficit
    (15,414 )     (4,818 )
                 
Total liabilities and stockholder's deficit
  $ 421,287     $ 408,535  


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



 
3

 


AMERICAN ACHIEVEMENT CORPORATION
Condensed Consolidated Balance Sheets
(unaudited)

   
AAC
 
   
February 27, 2010
   
August 29, 2009
 
   
(Dollars in thousands)
 
ASSETS
           
Cash and cash equivalents
  $ 15,635     $ 11,836  
Accounts receivable, net of allowances
    29,452       32,267  
Inventories
    37,372       24,704  
Deferred tax assets
    11,156       7,193  
Prepaid expenses and other current assets, net
    17,120       14,574  
Total current assets
    110,735       90,574  
                 
Property, plant and equipment, net
    52,225       56,526  
Goodwill
    158,608       158,608  
Other intangible assets, net
    81,928       86,752  
Other assets, net
    9,378       11,163  
Total assets
  $ 412,874     $ 403,623  
                 
LIABILITIES AND STOCKHOLDER'S EQUITY
               
Book overdraft
  $ 408     $ 1,391  
Accounts payable
    6,622       8,490  
Customer deposits
    49,141       7,743  
Accrued expenses
    14,758       13,740  
Deferred revenue
    3,750       2,710  
Accrued interest
    5,582       5,763  
Current portion of long-term debt
    2,659       4,000  
Total current liabilities
    82,920       43,837  
                 
Long-term debt, net of current portion
    177,094       192,753  
Deferred tax liabilities
    50,853       50,920  
Other long-term liabilities
    5,909       5,921  
Total liabilities
    316,776       293,431  
                 
Commitments and contingencies (Note 6)
               
                 
Stockholder's equity:
               
Common stock
    -       -  
Additional paid-in capital
    82,055       82,055  
Accumulated earnings
    14,320       28,307  
Accumulated other comprehensive loss
    (277 )     (170 )
Total stockholder's equity
    96,098       110,192  
                 
Total liabilities and stockholder's equity
  $ 412,874     $ 403,623  


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



 
4

 


AAC GROUP HOLDING CORP.
Condensed Consolidated Statements of Operations
(unaudited)

   
Intermediate Holdings
 
   
For the three months ended
   
For the six months ended
 
   
February 27, 2010
   
February 28, 2009
   
February 27, 2010
   
February 28, 2009
 
    (Dollars in thousands)  
                         
Net sales
  $ 52,747     $ 56,114     $ 100,733     $ 105,327  
Cost of sales
    23,469       25,107       46,972       50,158  
Gross profit
    29,278       31,007       53,761       55,169  
Selling, general and administrative expenses
    28,591       31,030       55,362       57,519  
Operating income (loss)
    687       (23 )     (1,601 )     (2,350 )
Interest expense, net
    7,692       7,413       15,575       15,286  
Loss before income taxes
    (7,005 )     (7,436 )     (17,176 )     (17,636 )
Benefit for income taxes
    (3,244 )     (3,320 )     (7,687 )     (7,638 )
Net loss
  $ (3,761 )   $ (4,116 )   $ (9,489 )   $ (9,998 )


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



 
5

 


AMERICAN ACHIEVEMENT CORPORATION
Condensed Consolidated Statements of Operations
(unaudited)

   
AAC
 
   
For the three months ended
   
For the six months ended
 
   
February 27, 2010
   
February 28, 2009
   
February 27, 2010
   
February 28, 2009
 
   
(Dollars in thousands)
 
                         
Net sales
  $ 52,747     $ 56,114     $ 100,733     $ 105,327  
Cost of sales
    23,469       25,107       46,972       50,158  
Gross profit
    29,278       31,007       53,761       55,169  
Selling, general and administrative expenses
    28,591       31,030       55,362       57,519  
Operating income (loss)
    687       (23 )     (1,601 )     (2,350 )
Interest expense, net
    4,211       3,931       8,610       8,368  
Loss before income taxes
    (3,524 )     (3,954 )     (10,211 )     (10,718 )
Benefit for income taxes
    (1,383 )     (1,501 )     (3,963 )     (4,120 )
Net loss
  $ (2,141 )   $ (2,453 )   $ (6,248 )   $ (6,598 )


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




 
6

 


AAC GROUP HOLDING CORP.
Condensed Consolidated Statements of Cash Flows
(unaudited)

   
Intermediate Holdings
 
   
For the six months ended
 
   
February 27, 2010
   
February 28, 2009
 
   
(Dollars in thousands)
 
Cash flows from operating activities:
           
Net loss
  $ (9,489 )   $ (9,998 )
Adjustments to reconcile net loss to net cash provided by operating activities:
               
Depreciation and amortization
    10,444       11,316  
Deferred income taxes
    (7,687 )     (7,673 )
Amortization of deferred financing fees
    1,374       988  
Accretion of interest on 10.25% senior discount notes
    -       1,079  
Allowance for doubtful accounts
    599       67  
Changes in assets and liabilities:
               
Accounts receivable
    2,216       4,456  
Inventories
    (11,083 )     (4,238 )
Prepaid expenses and other current assets, net
    (2,546 )     342  
Other assets, net
    34       (1,021 )
Customer deposits
    41,398       43,193  
Deferred revenue
    1,040       846  
Accounts payable, accrued expenses, accrued interest and other long-term liabilities
    (1,174 )     1,505  
Net cash provided by operating activities
    25,126       40,862  
Cash flows from investing activities:
               
Purchases of property, plant and equipment
    (2,261 )     (3,072 )
Business acquisition, purchase price adjustment
    (83 )     (83 )
Net cash used in investing activities
    (2,344 )     (3,155 )
Cash flows from financing activities:
               
Payments on revolving credit facility
    (5,000 )     (6,000 )
Proceeds from revolving credit facility
    5,000       6,000  
Payments on term loan
    (17,000 )     (28,485 )
Distribution to AAIH
    (1,000 )     -  
Contribution of capital
    -       400  
Change in book overdraft
    (983 )     338  
Net cash used in financing activities
    (18,983 )     (27,747 )
Net increase in cash and cash equivalents
  $ 3,799     $ 9,960  
Cash and cash equivalents, beginning of period
    12,403       9,746  
Cash and cash equivalents, end of period
  $ 16,202     $ 19,706  
                 
Supplemental disclosures of cash flow information:
               
Cash paid during the period for:
               
Interest
  $ 14,565     $ 8,251  
Income taxes, net of refunds
  $ 138     $ 521  
                 
Supplemental non-cash investing and financing activities disclosure:
               
Additions to property, plant and equipment included in accounts payable
  $ 47     $ 119  
Increase in goodwill for purchase price adjustment included in other long-term liabilities
  $ -     $ 167  
Non-cash distribution of net operating loss deferred tax asset to Parent Holdings
  $ -     $ 27,556  


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


 
7

 


AMERICAN ACHIEVEMENT CORPORATION
Condensed Consolidated Statements of Cash Flows
(unaudited)

   
AAC
 
   
For the six months ended
 
   
February 27, 2010
   
February 28, 2009
 
   
(Dollars in thousands)
 
Cash flows from operating activities:
           
Net loss
  $ (6,248 )   $ (6,598 )
Adjustments to reconcile net loss to net cash provided by operating activities:
               
Depreciation and amortization
    10,444       11,316  
Deferred income taxes
    (3,963 )     (4,155 )
Amortization of deferred financing fees
    1,151       765  
Allowance for doubtful accounts
    599       67  
Changes in assets and liabilities:
               
Accounts receivable
    2,216       4,456  
Inventories
    (11,083 )     (4,238 )
Prepaid expenses and other current assets, net
    (2,546 )     (214 )
Other assets, net
    34       (1,021 )
Customer deposits
    41,398       43,193  
Deferred revenue
    1,040       846  
Accounts payable, accrued expenses, accrued interest and other long-term liabilities
    (1,177 )     (4,111 )
Net cash provided by operating activities
    31,865       40,306  
Cash flows from investing activities:
               
Purchases of property, plant and equipment
    (2,261 )     (3,072 )
Business acquisition, purchase price adjustment
    (83 )     (83 )
Net cash used in investing activities
    (2,344 )     (3,155 )
Cash flows from financing activities:
               
Payments on revolving credit facility
    (5,000 )     (6,000 )
Proceeds from revolving credit facility
    5,000       6,000  
Payments on term loan
    (17,000 )     (28,485 )
Distribution to Intermediate Holdings
    (7,739 )     -  
Contribution of capital
    -       400  
Change in book overdraft
    (983 )     338  
Net cash used in financing activities
    (25,722 )     (27,747 )
Net increase in cash and cash equivalents
  $ 3,799     $ 9,404  
Cash and cash equivalents, beginning of period
    11,836       9,735  
Cash and cash equivalents, end of period
  $ 15,635     $ 19,139  
                 
Supplemental disclosures of cash flow information:
               
Cash paid during the period for:
               
Interest
  $ 7,826     $ 8,251  
Income taxes, net of refunds
  $ 138     $ 521  
                 
Supplemental non-cash investing and financing activities disclosure:
               
Additions to property, plant and equipment included in accounts payable
  $ 47     $ 119  
Increase in goodwill for purchase price adjustment included in other long-term liabilities
  $ -     $ 167  
Non-cash distribution of net operating loss deferred tax asset to Intermediate Holdings
  $ -     $ 27,556  


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


 
8

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


1. Summary of Organization and Significant Accounting Policies

Registrants

The consolidated financial statements of AAC Group Holding Corp. (“Intermediate Holdings”) include the accounts of its indirect wholly-owned subsidiary, American Achievement Corporation (“AAC”), each of which are separate public reporting companies.  Intermediate Holdings is a wholly-owned subsidiary of American Achievement Intermediate Holding Corp. (“AAIH”), a wholly-owned subsidiary of American Achievement Group Holding Corp. (“Parent Holdings”).  Intermediate Holdings holds its interest in AAC through its wholly-owned subsidiary, AAC Holding Corp.

Intermediate Holdings and AAC are treated as entities under common control.  Intermediate Holdings and AAC together with their consolidated subsidiaries are referred to as the “Company.” Unless separately stated, the notes herein relate to Intermediate Holdings and AAC.

Description of Business

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

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

The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes the disclosures are adequate to make the information presented not misleading. In the opinion of management, all adjustments necessary for a fair presentation of the financial position and results of operations for the periods presented have been included. Operating results for the six months ended February 27, 2010 are not necessarily indicative of the results that may be expected for the fiscal year ending August 28, 2010. The interim condensed consolidated financial statements and accompanying notes included herein should be read in conjunction with the consolidated financial statements for the year ended August 29, 2009 included in the Company’s Report on Form 10-K (File No. 333-84294 and 333-121479) filed on November 18, 2009.


 
9

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


Use of Estimates

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

Assets Held for Sale

During the quarter ended November 28, 2009, the Company committed to a plan to sell some land, a building and related improvements located in Austin, Texas. The Company believed that it was probable that the property would be sold within the next twelve months based on a purchase agreement with a prospective buyer. The purchase agreement was terminated in the quarter ended February 27, 2010. The Company now believes that it is unlikely that the property will be sold within the next twelve months and has reclassified the property as held and used in property, plant and equipment.

Recent Accounting Pronouncements
 
The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles:  In June 2009, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance establishing the FASB Accounting Standards Codification (the “Codification”) as the single source of authoritative generally accepted accounting principles. The Codification supersedes all existing non-SEC accounting and reporting standards. The guidance did not change generally accepted accounting principles; it did, however, change the applicable citations and naming conventions used when referencing generally accepted accounting principles. The guidance was effective for the Company beginning with the first quarter of fiscal year 2010 and did not have an impact on the Company’s financial position and results of operations.

Employer’s Disclosure about Postretirement Benefit Plan Assets:  In December 2008, the FASB issued a pronouncement providing guidance on an employer’s disclosure about plan assets of a defined benefit pension or other postretirement plan and is effective for fiscal years ending after December 15, 2009, that is, beginning with the Company’s fiscal year 2010. The adoption of this pronouncement did not have an impact on the Company’s financial position and results of operations.

Business Combinations: In December 2007, the FASB issued a pronouncement requiring the acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction and establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed in a business combination. Certain provisions of this pronouncement impact the determination of acquisition-date fair value of consideration paid in a business combination (including contingent consideration); exclude transaction costs from acquisition accounting; and change accounting practices for acquired contingencies, acquisition-related restructuring costs, in-process research and development, indemnification assets and tax benefits. The pronouncement is effective for business combinations and adjustments to an acquired entity’s deferred tax asset and liability balances for the first annual reporting period beginning after December 15, 2008, that is, beginning with the Company’s fiscal year 2010. The adoption of this pronouncement did not have an impact on the Company’s financial position and results of operations.


 
10

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


2. Comprehensive Loss

The following amounts were included in determining comprehensive loss for the three and six months ended February 27, 2010 and February 28, 2009.

 
For the three months ended
 
For the six months ended
 
 
February 27, 2010
 
February 28, 2009
 
February 27, 2010
 
February 28, 2009
 
Intermediate Holdings
                       
Net loss
  $ (3,761 )   $ (4,116 )   $ (9,489 )   $ (9,998 )
Amortization of net actuarial gain and prior service costs - pension and postretirement plans, net of tax
    (54 )     (74 )     (107 )     (148 )
Total comprehensive loss
  $ (3,815 )   $ (4,190 )   $ (9,596 )   $ (10,146 )
                                 
 
For the three months ended
 
For the six months ended
 
 
February 27, 2010
 
February 28, 2009
 
February 27, 2010
 
February 28, 2009
 
AAC
                               
Net loss
  $ (2,141 )   $ (2,453 )   $ (6,248 )   $ (6,598 )
Amortization of net actuarial gain and prior service costs - pension and postretirement plans, net of tax
    (54 )     (74 )     (107 )     (148 )
Total comprehensive loss
  $ (2,195 )   $ (2,527 )   $ (6,355 )   $ (6,746 )

3. Inventories

   
February 27, 2010
   
August 29, 2009
 
             
Raw materials
  $ 16,616     $ 12,858  
Work in process
    14,452       5,457  
Finished goods
    7,265       6,722  
Less—Reserves
    (961 )     (333 )
Total
  $ 37,372     $ 24,704  

The Company’s cost of sales includes depreciation of $1.6 million and $1.9 million for the three months ended February 27, 2010 and February 28, 2009, respectively, and $3.9 million and $4.1 million for the six months then ended, respectively.


 
11

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


4. Goodwill and Other Intangible Assets

Goodwill

   
February 27, 2010
   
August 29, 2009
 
Class Rings
  $ 61,812     $ 61,812  
Yearbooks
    60,442       60,442  
Graduation Products
    22,032       22,032  
Other
    14,322       14,322  
Total
  $ 158,608     $ 158,608  

The gross amount of goodwill is $174.1 million.  As of February 27, 2010, the Company has recorded accumulated impairment losses of $15.5 million, resulting in a net balance of $158.6 million.
 
Other Intangible Assets
 
 
February 27, 2010
 
 
Estimated
Gross
 
Accumulated
 
Net
 
 
Useful Life
Asset
 
Amortization
 
Asset
 
Trademarks
Indefinite
  $ 36,826     $ -     $ 36,826  
Patents
14 to 17 years
    7,317       (2,622 )     4,695  
Customer lists and distribution   contracts
3 to 12 years
    97,740       (57,333 )     40,407  
                           
Total
    $ 141,883     $ (59,955 )   $ 81,928  
                           
 
August 29, 2009
 
 
Estimated
Gross
 
Accumulated
 
Net
 
 
Useful Life
Asset
 
Amortization
 
Asset
 
Trademarks
Indefinite
  $ 36,826     $ -     $ 36,826  
Patents
14 to 17 years
    7,317       (2,400 )     4,917  
Customer lists and distribution contracts
3 to 12 years
    97,740       (52,731 )     45,009  
                           
Total
    $ 141,883     $ (55,131 )   $ 86,752  

Total amortization on other intangible assets for the three and six months ended February 27, 2010 and February 28, 2009 was $2.7 million and $5.4 million, respectively, which is recorded as selling, general and administrative expenses. Estimated annual amortization expense is as follows:

Year
 
Amount
 
2010
  $ 10,849  
2011
    10,249  
2012
    9,816  
2013
    9,220  
2014
    5,970  
Thereafter
    4,422  



 
12

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


5. Long-term Debt

 
February 27, 2010
August 29, 2009
Intermediate Holdings
           
10.25% Senior discount notes due October 1, 2012
  $ 131,500     $ 131,500  
8.25% Senior subordinated notes due April 1, 2012
    150,000       150,000  
Senior secured credit facility:
               
   Revolving credit facility due March 25, 2011
    -       -  
   Term loan due March 25, 2011
    29,753       46,753  
Total
    311,253       328,253  
Less current portion of long-term debt
    (2,659 )     (4,000 )
Total long-term debt
  $ 308,594     $ 324,253  
                 
 
February 27, 2010
August 29, 2009
AAC
               
8.25% Senior subordinated notes due April 1, 2012
  $ 150,000     $ 150,000  
Senior secured credit facility:
               
   Revolving credit facility due March 25, 2011
    -       -  
   Term loan due March 25, 2011
    29,753       46,753  
Total
    179,753       196,753  
Less current portion of long-term debt
    (2,659 )     (4,000 )
Total long-term debt
  $ 177,094     $ 192,753  

Senior Secured Credit Facility

The term loan of the senior secured credit facility (as amended, the “Amended Senior Credit Facility”) is due in March 2011. Quarterly payments of $0.7 million are required through February 28, 2011. The term loan of the Amended Senior Credit Facility has an interest rate based upon the higher of 3.0% or the base rate, which is derived from the Prime Rate or Federal Funds Effective Rate as defined in the credit agreement, or the higher of 2.0% or London Interbank Offered Rate (“LIBOR”) depending on the type of loan AAC chooses, plus an applicable margin based on a calculated leverage ratio as defined in the agreement. The interest rate on the term loan of the Amended Senior Credit Facility was 6.25% at February 27, 2010.  During the six months ended February 27, 2010 and February 28, 2009, the Company paid down $17.0 million and $28.5 million, respectively, of the term loan of the Amended Senior Credit Facility, of which $2.0 million and $2.5 million, respectively, were mandatory payments.

The revolving credit facility matures in March 2011. Availability under the revolving credit facility is restricted to a total revolving commitment of $25.0 million as defined in the credit agreement governing the Amended Senior Credit Facility. Availability under the revolving credit facility as of February 27, 2010 was approximately $23.1 million with $1.9 million in letters of credit outstanding.

AAC was in compliance with the Amended Senior Credit Facility’s covenants as of February 27, 2010.

10.25% Senior Discount Notes

Interest accrued on the 10.25% senior discount notes in the form of an increase in the accreted value of the notes through October 1, 2009. Thereafter, cash interest accrues and is payable semiannually in arrears on April 1 and October 1 of each year, at a rate of 10.25% per annum.  An interest payment of $6.7 million was funded by AAC on October 1, 2009, and was accounted for as a capital distribution from AAC and reflected as a reduction of AAC’s accumulated earnings.

Interest income included in interest expense, net was $0.1 million and $0.2 million for the three and six months ended February 27, 2010 and February 28, 2009, respectively.

 
13

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


6. Commitments and Contingencies

Pending Litigation

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

7. Fair Value Measurements

The Company follows the authoritative guidance for fair value measurements relating to financial and nonfinancial assets and liabilities including presentation of required disclosures. This guidance defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements

The guidance also establishes a three-tiered fair value hierarchy that prioritizes inputs to valuation techniques used in fair value calculations. The three levels of inputs are defined as follows:
 
·  
Level 1 - Unadjusted quoted market prices for identical assets or liabilities in active markets that the Company has the ability to access

·  
Level 2 - Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in inactive markets; or valuations based on models where the significant inputs are observable or can be corroborated by observable market data.

·  
Level 3 - Valuations based on models where significant inputs are not observable. The unobservable inputs reflect the Company’s own assumptions about the assumptions that market participants would use.

The guidance requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs. If a financial instrument uses inputs that fall in different levels of the hierarchy, the instrument will be categorized based upon the lowest level of input that is significant to the fair value calculation.

The Company’s financial assets and liabilities measured at fair value on a recurring basis consist of cash and cash equivalents, which include highly liquid investments. Fair value is determined based on observable quotes from banks at the reporting date. Cash and cash equivalents are classified as Level 1 because they are valued using quoted prices and other relevant information generated by market transactions involving identical assets and liabilities.

Intermediate Holdings’ long-term debt (including current maturities) at February 27, 2010 had a carrying value of $311.3 million and a fair value of approximately $310.9 million.  AAC’s long-term debt (including current maturities) at February 27, 2010 had a carrying value of $179.8 million and a fair value of approximately $179.4 million.  The fair value is based on current rates available to the Company for debt with the same or similar terms.


 
14

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


8. Postretirement Pension and Medical Benefits

Commemorative Brands, Inc., a wholly owned subsidiary of AAC, provides certain healthcare and life insurance benefits for former employees of L.G. Balfour Company, Inc. (“CBI Plan”). Certain hourly employees of Taylor Publishing Company (“Taylor”), a wholly owned subsidiary of AAC, are covered by a defined benefit pension plan (“TPC Plan”) established by Taylor. The benefits under the CBI Plan and TPC Plan are based primarily on the employees’ years of service and compensation near retirement. The CBI Plan was frozen to new entrants effective January 1991. Effective September 2009, the TPC Plan was amended to cease future benefit accruals and to fully vest any accrued pension benefits not fully vested as of September 30, 2009.   The funding policies for these plans are consistent with the funding requirements of federal laws and regulations.  The Company uses a measurement date as of the end of its fiscal year for both plans.

The net periodic postretirement benefit income includes the following components:

 
For the three months ended
 
 
February 27, 2010
 
February 28, 2009
 
 
TPC Plan
 
CBI Plan
 
TPC Plan
 
CBI Plan
 
Service costs, benefits attributed to service during the period
  $ 3     $ -     $ 18     $ -  
Interest cost
    211       17       220       22  
Expected return on assets
    (227 )     -       (265 )     -  
Amortization of unrecognized net loss (gain)
    21       (71 )     (6 )     (75 )
Amortization of unrecognized net prior service credits
    -       (37 )     -       (37 )
Net periodic postretirement benefit cost (income)
  $ 8     $ (91 )   $ (33 )   $ (90 )
                                 
 
For the six months ended
 
 
February 27, 2010
 
February 28, 2009
 
 
TPC Plan
 
CBI Plan
 
TPC Plan
 
CBI Plan
 
Service costs, benefits attributed to service during the period
  $ 6     $ -     $ 36     $ -  
Interest cost
    422       34       439       45  
Expected return on assets
    (454 )     -       (529 )     -  
Amortization of unrecognized net loss (gain)
    42       (142 )     (12 )     (151 )
Amortization of unrecognized net prior service credits
    -       (74 )     -       (74 )
Net periodic postretirement benefit cost (income)
  $ 16     $ (182 )   $ (66 )   $ (180 )


 
15

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


Amounts recognized in other comprehensive income consist of:

   
February 27, 2010
   
August 29, 2009
 
   
TPC Plan
   
CBI Plan
   
TPC Plan
   
CBI Plan
 
Net actuarial loss (gain)
  $ 2,696     $ (1,765 )   $ 2,738     $ (1,907 )
Prior service cost
    -       (483 )     -       (557 )
Total
  $ 2,696     $ (2,248 )   $ 2,738     $ (2,464 )

The estimated net loss for the TPC Plan that will be amortized from accumulated other comprehensive income into net periodic benefit cost in fiscal year 2010 is $0.1 million. The estimated net gain and estimated prior service credit for the CBI Plan that will be amortized from accumulated other comprehensive income into net periodic postretirement benefit cost in fiscal year 2010 are $0.3 million and $0.1 million, respectively.

9. Income Taxes

As part of the process of preparing consolidated financial statements, the Company assesses the likelihood that its deferred income tax assets will be recovered through future taxable income.  To the extent that recovery is not likely, a valuation allowance is established.  Based on this assessment, the Company has not recorded a valuation allowance as of February 27, 2010 or August 29, 2009.  In the event that actual results differ from these estimates or adjustments are made to these estimates in future periods, a valuation allowance may need to be established.

10. Related-Party Transactions

On March 25, 2004, AAC entered into a management agreement with Fenway Partners Inc. (now Fenway Partners LLC) pursuant to which AAC, among other things, agreed to pay an annual fee equal to the greater of $3.0 million or 5% of the previous fiscal year’s EBITDA (as defined in the agreement) and certain additional fees in connection with significant transactions. Amounts expensed by the Company under the management agreement related to the annual fee totaled $0.9 million and $1.7 million for the three and six months ended February 27, 2010 and February 28, 2009, respectively.

Under the provisions of the management agreement, Fenway Partners LLC can, at its discretion, charge AAC for services related to any significant transaction, as defined in the agreement.  In December 2009, Fenway Partners LLC charged AAC a management fee of $1.5 million, which is included in selling, general and administrative expenses for the six months ended February 27, 2010. Additionally, AAC funded a $1.0 million payment to Fenway Partners LLC on behalf of AAIH.  This payment was accounted for as a capital distribution by AAC to Intermediate Holdings to AAIH and is reflected as a reduction of accumulated earnings to the extent that it exists, and then to additional (distributions in excess of) paid-in capital.

As of February 27, 2010 and August 29, 2009, the Company had prepaid annual fees under the management agreement of approximately $0.2 million.


 
16

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


11. Business Segments

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

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

   
 
Class
     
Graduation
   
 
Rings
Yearbooks
Products
Other
Total
Three Months Ended February 27, 2010
                             
Net sales
  $ 27,384     $ 2,168     $ 15,339     $ 7,856     $ 52,747  
Segment operating income (loss)
    3,246       (5,622 )     2,725       338       687  
                                         
Three Months Ended February 28, 2009
                                       
Net sales
  $ 29,182     $ 1,698     $ 15,765     $ 9,469     $ 56,114  
Segment operating income (loss)
    1,731       (4,886 )     3,103       29       (23 )
                                         
Six Months Ended February 27, 2010
                                       
Net sales
  $ 57,589     $ 11,344     $ 18,509     $ 13,291     $ 100,733  
Segment operating income (loss)
    6,914       (9,113 )     1,101       (503 )     (1,601 )
                                         
Six Months Ended February 28, 2009
                                       
Net sales
  $ 59,806     $ 10,074     $ 19,075     $ 16,372     $ 105,327  
Segment operating income (loss)
    4,932       (8,606 )     1,983       (659 )     (2,350 )

 
Intermediate Holdings
   
Class
         
Graduation
             
   
Rings
   
Yearbooks
   
Products
   
Other
   
Total
 
Segment assets
                             
February 27, 2010
  $ 175,389     $ 145,726     $ 58,318     $ 41,854     $ 421,287  
August 29, 2009
    170,381       148,242       51,041       38,871       408,535  
                                         
 
AAC
   
Class
           
Graduation
                 
   
Rings
   
Yearbooks
   
Products
   
Other
   
Total
 
Segment assets
                                       
February 27, 2010
  $ 171,859     $ 142,746     $ 57,324     $ 40,945     $ 412,874  
August 29, 2009
    168,325       146,537       50,489       38,272       403,623  

12. Subsequent Events

The Company evaluated subsequent events through the time of filing this Quarterly Report on Form 10-Q. The Company is not aware of any significant events that occurred subsequent to the balance sheet date but prior to the filing of this report that would have a material impact on its condensed consolidated financial statements.


 
17

 

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

The following discussion of our condensed consolidated financial condition and results of operations should be read in conjunction with the information contained in our condensed consolidated financial statements and accompanying notes included elsewhere in this report. The condensed consolidated financial statements and the notes thereto have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations (see Note 1 in our condensed consolidated financial statements). The following discussion includes forward looking statements that involve certain risks and uncertainties. See “Disclosure Regarding Forward Looking Statements.”

DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS

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.

Although management believes that the expectations reflected in such forward looking statements are based upon reasonable assumptions, we can give no assurance that these expectations will be achieved. Any change in or adverse development, including the following factors, may impact the achievement of results in or accuracy of forward-looking statements:

·  
the price of gold and precious, semiprecious and synthetic stones;
·  
our access to students and consumers in schools;
·  
the seasonality of our business;
·  
regulatory and accounting rules;
·  
our relationship with our independent sales representatives;
·  
fashion and demographic trends;
·  
general economic, business, and market trends and events, especially during peak buying seasons for our products;
·  
our ability to respond to customer change orders and delivery schedules;
·  
development and operating costs;
·  
competitive pricing changes;
·  
successful completion of management initiatives designed to achieve operating efficiencies;
·  
our ability to maintain our existing complex information systems or implement new systems;
·  
our cash flows; and
·  
our ability to draw down funds under current bank financings and to enter into new bank financings.

 
The foregoing factors are not exhaustive. New factors may emerge or changes may occur that impact our operations and businesses. Forward-looking statements herein are expressly qualified by the foregoing or such other factors as may be applicable.

You should consider the risks described in our Form 10-K filed with the Securities and Exchange Commission on November 18, 2009 as you review this quarterly report.



 
18

 

General

We are one of the leading manufacturers and suppliers of class rings, yearbooks, graduation products, recognition products and affinity jewelry in the United States. We market and sell yearbooks to the college, high school, junior high school and elementary school markets. We primarily sell our class rings and graduation products, which include fine paper products and graduation accessories, in the high school, college and junior high school markets. We also sell jewelry commemorating family events such as the birth of a child, military and fan affinity jewelry and related products, professional sports championship rings, commercial printing and recognition products such as letter jackets.
 
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, semi-precious and synthetic stones, paper products and ink comprise the bulk of the raw materials we utilize in the largest segments of our business. We purchase a majority of our gold from a single supplier. We also purchase the majority of our precious, semi-precious and synthetic stones from a single supplier in Germany.  Synthetic and semi-precious stones are available from other suppliers, although switching to these suppliers could result in additional costs to us.  Prices of these materials, especially gold, continually fluctuate. We generally are able to pass on price increases in gold and stones to our customers as such increases are realized by us.  However, this may not always be the case.

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

We experience seasonal fluctuations in our net sales tied primarily to the school year. We recorded 50% of our fiscal year 2009 net sales in our third quarter. Class ring sales are highest during October through December and early spring, with many orders made for delivery to students before the winter holiday season. Graduation product sales are predominantly made during February through April prior to the April through June graduation season. Yearbook sales are highest during the months of April through June, as yearbooks are typically shipped prior to each school’s summer break. Our recognition and affinity product line sales are seasonal. The recognition and affinity product line sales are highest during the winter holiday season and in the period leading up to Mother’s Day. We have experienced operating losses during our first and fourth fiscal quarters, which includes the beginning of the school year and the summer months when school is not in session, thus reducing related shipment of products. In addition, our working capital requirements tend to exceed our operating cash flows from May through September.
 
We also have exposure to market risk relating to changes in interest rates on our variable rate debt. Our senior secured credit facility (revolver and term loan) is a variable rate arrangement.
  

 
19

 

Company Background

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

On March 25, 2004, AAC Acquisition Corp., a wholly owned subsidiary of AAC Holding Corp., merged with and into AAC, 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.  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.

Basis of Presentation

We present financial information relating to Intermediate Holdings, AAC and its subsidiaries in this discussion and analysis.  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.

Other than debt obligations, cash, interest expense related to the debt obligations, amortization of deferred financing costs, interest income on cash balances, and the related income taxes, all other assets, liabilities, income, expenses and cash flows presented for all periods represent those of 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 and Intermediate Holdings are treated as entities under common control.

We use a 52/53-week fiscal year ending on the last Saturday of August.

Critical Accounting Policies

As of February 27, 2010, there have been no significant changes with regard to the critical accounting policies disclosed in our Annual Reports on Form 10-K for the year ended August 29, 2009.  The policies disclosed included allowance for product returns, allowance for doubtful accounts and reserve on independent sales representative advances, goodwill and other intangible assets, long-lived tangible and intangible assets with definite lives, revenue recognition and income taxes. 


 
20

 

Results of Operations

Three Months Ended February 27, 2010 Compared to Three Months Ended February 28, 2009

The following tables set forth selected information for Intermediate Holdings and AAC from our condensed consolidated statements of operations expressed on an actual basis and as a percentage of net sales:

 
Intermediate Holdings
 
($ in millions)
Three Months Ended
February 27, 2010
 
% of
Net Sales
     
Three Months Ended
February 28, 2009
 
% of
Net Sales
     
Increase/
(Decrease)
 
                                           
Net sales
 
$
             52.7
   
   100.0
  %    
$
             56.1
   
   100.0
   
$
        (3.4
)
Cost of sales
   
             23.4
   
     44.4
  %      
             25.1
   
     44.7
     
        (1.7
Gross profit
   
             29.3
   
     55.6
  %      
             31.0
   
     55.3
     
        (1.7
)
Selling, general and administrative expenses
   
             28.6
   
     54.3
  %      
             31.0
   
     55.3
     
        (2.4
)
Operating income (loss)
   
               0.7
   
       1.3
  %      
                   -
   
           -
  %    
          0.7
 
Interest expense, net
   
               7.7
   
     14.6
  %      
               7.4
   
     13.2
  %    
          0.3
 
Loss before income taxes
   
              (7.0
 
   (13.3
) %      
              (7.4
)  
   (13.2
) %    
          0.4
 
Benefit for income taxes
   
              (3.2
 
     (6.1
     
              (3.3
)  
     (5.9
) %    
          0.1
 
Net loss
 
$
              (3.8
 
     (7.2
)    
$
              (4.1
)  
     (7.3
)  
$
          0.3
 

 
AAC
 
($ in millions)
Three Months Ended
February 27, 2010
 
% of
Net Sales
     
Three Months Ended
February 28, 2009
 
% of
Net Sales
     
Increase/
(Decrease)
 
                                           
Net sales
 
$
             52.7
   
   100.0
  %    
$
             56.1
   
   100.0
   
$
        (3.4
)
Cost of sales
   
             23.4
   
     44.4
  %      
             25.1
   
     44.7
     
        (1.7
Gross profit
   
             29.3
   
     55.6
  %      
             31.0
   
     55.3
     
        (1.7
)
Selling, general and administrative expenses
   
             28.6
   
     54.3
  %      
             31.0
   
     55.3
     
        (2.4
)
Operating income (loss)
   
               0.7
   
       1.3
  %      
                   -
   
           -
  %    
          0.7
 
Interest expense, net
   
               4.2
   
     8.0
  %      
               3.9
   
     7.0
  %    
          0.3
 
Loss before income taxes
   
              (3.5
 
   (6.7
) %      
              (3.9
)  
   (7.0
) %    
          0.4
 
Benefit for income taxes
   
              (1.4
 
     (2.7
     
              (1.5
)  
     (2.7
) %    
          0.1
 
Net loss
 
$
              (2.1
 
     (4.0
)    
$
              (2.4
)  
     (4.3
)  
$
          0.3
 

 
Net Sales. Net sales consist of product sales and are net of product returns and promotional discounts. Net sales decreased $3.4 million, or 6%, to $52.7 million for the three months ended February 27, 2010 from $56.1 million for the three months ended February 28, 2009. The following details the changes in net sales during such periods by business segment.

Class Rings. Net sales decreased $1.8 million to $27.4 million for the three months ended February 27, 2010 from $29.2 million for the three months ended February 28, 2009.  The decrease in net sales in class ring sales was primarily a result of lower sales volumes of high school class rings and change in product mix from gold to other metals with lower selling prices due to softness in the economy, offset by increased sales volumes of college class rings and higher selling prices as a result of higher gold costs.

Yearbooks. Net sales increased $0.5 million to $2.2 million for the three months ended February 27, 2010 from $1.7 million for the three months ended February 28, 2009. The increase in net sales was primarily the result of an increase in the average contract value from the second quarter of fiscal 2009 due to contract mix.

Graduation Products. Net sales decreased $0.5 million to $15.3 million for the three months ended February 27, 2010 from $15.8 million for the three months ended February 28, 2009.  The decrease is primarily due to lower volume due to the soft economy and competition from on-line channels.


 
21

 

Other. Net sales decreased $1.7 million to $7.8 million for the three months ended February 27, 2010 from $9.5 million for the three months ended February 28, 2009. The decrease in net sales was primarily related to a decrease in professional championship rings and to the softness of the economy impacting sales of commercial printing products, personalized family jewelry and affinity jewelry.

Gross Profit. Gross margin represents gross profit as a percentage of net sales. Gross margin was 55.6% for the three months ended February 27, 2010, a 0.3 percentage point increase from 55.3% for the three months ended February 28, 2009. The improvement in gross margin from the three months ended February 28, 2009 is primarily a result of savings from productivity and cost reduction measures, partially offset by higher gold costs.  Overall, gross profit decreased $1.7 million compared with the three months ended February 28, 2009 as a result of lower sales and higher gold costs, partially offset by savings from productivity and cost reduction measures.

Selling, General and Administrative Expenses. Selling, general and administrative expenses for Intermediate Holdings and AAC decreased $2.4 million, or 8%, to $28.6 million for the three months ended February 27, 2010 from $31.0 million for the three months ended February 28, 2009. Included in selling, general and administrative expenses are two sub-categories: selling and marketing expenses and general and administrative expenses.

Selling and marketing expenses decreased $2.3 million to $18.5 million, or 35% of net sales, for the three months ended February 27, 2010 from $20.8 million or 37% of net sales, for the three months ended February 28, 2009 due to decreased marketing expenditures and decreased commissions.

General and administrative expenses decreased $0.1 million to $10.1 million, or 19% of net sales, for the three months ended February 27, 2010 from $10.2 million, or 18% of net sales, for the three months ended February 28, 2009.

Operating Income (Loss).  As a result of the foregoing, operating income was $0.7 million, or 1% of net sales, for the three months ended February 27, 2010 as compared with $0.0 million or less than 0.1% of net sales, for the three months ended February 28, 2009.

The class rings segment reported operating income of $3.3 million for the three months ended February 27, 2010 as compared with operating income of $1.7 million for the three months ended February 28, 2009. The yearbooks segment reported operating loss of $5.6 million for the three months ended February 27, 2010 as compared with operating loss of $4.9 million for the three months ended February 28, 2009. The graduation products segment reported operating income of $2.7 million for the three months ended February 27, 2010 as compared with operating income of $3.1 million for the three months ended February 28, 2009. The other segment reported operating income of $0.3 million for the three months ended February 27, 2010 as compared with $0.0 million for the three months ended February 28, 2009.

Interest Expense, Net. For Intermediate Holdings, net interest expense was $7.7 million for the three months ended February 27, 2010 and $7.4 million for the three months ended February 28, 2009. The average debt outstanding of Intermediate Holdings for the three months ended February 27, 2010 and the three months ended February 28, 2009 was $317 million and $341 million, respectively. The weighted average interest rate on debt outstanding of Intermediate Holdings for the three months ended February 27, 2010 and the three months ended February 28, 2009 was 9.0% and 8.4%, respectively.

For AAC, net interest expense was $4.2 million for the three months ended February 27, 2010 and $3.9 million for the three months ended February 28, 2009. The average debt outstanding of AAC for the three months ended February 27, 2010 and the three months ended February 28, 2009 was $185 million and $209 million, respectively. The weighted average interest rate on debt outstanding of AAC for the three months ended February 27, 2010 and the three months ended February 28, 2009 was 8.0% and 7.0%, respectively.

Benefit for Income Taxes. For the three months ended February 27, 2010 and February 28, 2009, Intermediate Holdings recorded an income tax benefit of $3.2 million and $3.3 million, respectively, which represents an effective tax rate of 46% and 45%, respectively. The effective tax rate varies from the statutory federal rate due to the impact of state income taxes and the non-deductibility of a portion of interest on high-yield debt. Intermediate Holdings’ effective rates for the three months ended February 27, 2010 and February 28, 2009 represent an estimate of the annual federal and state income tax rate.

For the three months ended February 27, 2010 and February 28, 2009, AAC recorded an income tax benefit of $1.4 million and $1.5 million, respectively, which represents an effective tax rate of 39% and 38%, respectively.  The effective tax rate varies from the statutory federal rate due to the impact of state income taxes. AAC’s effective rates for the three months ended February 27, 2010 and February 28, 2009 represent an estimate of the annual federal and state income tax rate.


 
22

 

Six Months Ended February 27, 2010 Compared to Six Months Ended February 28, 2009
 
The following tables set forth selected information Intermediate Holdings and AAC from our condensed consolidated statements of operations expressed on an actual basis and as a percentage of net sales:
 
 
Intermediate Holdings
 
($ in millions)
Six Months Ended
February 27, 2010
 
% of
Net Sales
     
Six Months Ended
February 28, 2009
 
% of
Net Sales
     
Increase/
(Decrease)
 
                                           
Net sales
 
$
             100.7
   
   100.0
  %    
$
             105.3
   
   100.0
   
$
        (4.6
)
Cost of sales
   
             46.9
   
     46.6
  %      
             50.1
   
     47.6
     
        (3.2
Gross profit
   
             53.8
   
     53.4
  %      
             55.2
   
     52.4
     
        (1.4
)
Selling, general and administrative expenses
   
             55.4
   
     55.0
  %      
             57.5
   
     54.6
     
        (2.1
)
Operating income (loss)
   
               (1.6
 
       (1.6
%      
                   (2.3
 
         (2.2
%    
          0.7
 
Interest expense, net
   
               15.6
   
     15.5
  %      
               15.3
   
     14.5
  %    
          0.3
 
Loss before income taxes
   
              (17.2
 
   (17.1
) %      
              (17.6
)  
   (16.7
) %    
          0.4
 
Benefit for income taxes
   
              (7.7
 
     (7.6
     
              (7.6
)  
     (7.2
) %    
          (0.1
Net loss
 
$
              (9.5
 
     (9.4
)    
$
              (10.0
)  
     (9.5
)  
$
          0.5
 

 
AAC
 
($ in millions)
Six Months Ended
February 27, 2010
 
% of
Net Sales
     
Six Months Ended
February 28, 2009
 
% of
Net Sales
     
Increase/
(Decrease)
 
                                           
Net sales
 
$
             100.7
   
   100.0
  %    
$
             105.3
   
   100.0
   
$
        (4.6
)
Cost of sales
   
             46.9
   
     46.6
  %      
             50.1
   
     47.6
     
        (3.2
Gross profit
   
             53.8
   
     53.4
  %      
             55.2
   
     52.4
     
        (1.4
)
Selling, general and administrative expenses
   
             55.4
   
     55.0
  %      
             57.5
   
     54.6
     
        (2.1
)
Operating income (loss)
   
               (1.6
 
       (1.6
%      
                   (2.3
 
         (2.2
%    
          0.7
 
Interest expense, net
   
               8.6
   
     8.5
  %      
               8.4
   
     8.0
  %    
          0.2
 
Loss before income taxes
   
              (10.2
 
   (10.1
) %      
              (10.7
)  
   (10.2
) %    
          0.5
 
Benefit for income taxes
   
              (4.0
 
     (4.0
     
              (4.1
)  
     (3.9
) %    
          0.1
 
Net loss
 
$
              (6.2
 
     (6.1
)    
$
              (6.6
)  
     (6.3
)  
$
          0.4
 


Net Sales. Net sales consist of product sales and are net of product returns and promotional discounts. Net sales decreased $4.6 million, or 4%, to $100.7 million for the six months ended February 27, 2010 from $105.3 million for the six months ended February 28, 2009. The following details the changes in net sales during such periods by business segment.
 
Class Rings. Net sales decreased $2.2 million to $57.6 million for the six months ended February 27, 2010 from $59.8 million for the six months ended February 28, 2009. The decrease in net sales in class ring sales was primarily a result of lower sales volumes of high school class rings and change in product mix from gold to other metals with lower selling prices due to softness in the economy, offset by increased sales of college class rings due in part to timing of sales from the fourth quarter of fiscal 2009 to the first quarter of fiscal 2010 and higher selling prices as a result of higher gold costs.
 
Yearbooks. Net sales increased $1.2 million to $11.3 million for the six months ended February 27, 2010 from $10.1 million for the six months ended February 28, 2009. The increase in net sales was primarily the result of timing of shipments between the fourth quarter of 2009 and the first quarter of 2010 and between the fourth quarter of 2008 and the first quarter of 2009.  This increase was partially offset by a decrease in the average contract value from the six months ended February 28, 2009.
 
Graduation Products. Net sales decreased $0.6 million to $18.5 million for the six months ended February 27, 2010 from $19.1 million for the six months ended February 28, 2009. The decrease is primarily due to lower volume and product mix due to the soft economy and competition from on-line channels.


 
23

 

Other. Net sales decreased $3.1 million to $13.3 million for the six months ended February 27, 2010 from $16.4 million for the six months ended February 28, 2009.  The decrease in net sales was primarily related to a decrease in professional championship rings and to the softness in the economy impacting sales of commercial printing products, personalized family jewelry and affinity jewelry.
 
Gross Profit. Gross margin represents gross profit as a percentage of net sales. Gross margin was 53.4% for the six months ended February 27, 2010, a 1.0 percentage point increase from 52.4% for the six months ended February 28, 2009. The improvement in gross margin from the three months ended February 28, 2009 is primarily a result of savings from productivity and cost reduction measures, partially offset by higher gold costs.  Overall, gross profit decreased $1.4 million primarily as a result of lower sales and higher gold costs, partially offset by savings from productivity and cost reduction measures.

Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased $2.1 million, or 4%, to $55.4 million for the six months ended February 27, 2010 from $57.5 million for the six months ended February 28, 2009. Included in selling, general and administrative expenses are two sub-categories: selling and marketing expenses and general and administrative expenses.
 
Selling and marketing expenses decreased $2.7 million to $34.8 million or 35% of net sales, for the six months ended February 27, 2010 from $37.5 million or 36% of net sales, for the six months ended February 28, 2009 due to decreased marketing expenditures and lower commissions.
 
General and administrative expenses increased $0.6 million to $20.6 million, or 20% of net sales for the six months ended February 27, 2010 from $20.0 million, or 19% of net sales, for the six months ended February 28, 2009. The increase in general and administrative expenses was due to a $1.5 million management fee incurred during the first quarter of fiscal 2010, partially offset by decreases in professional fees, consulting fees and employee costs.
 
Operating Loss.  As a result of the foregoing, operating loss was $1.6 million, or 2% of net sales, for the six months ended February 27, 2010 as compared with operating loss of $2.3 million, or 2% of net sales, for the six months ended February 28, 2009.
 
The class rings segment reported operating income of $6.9 million for the six months ended February 27, 2010 as compared with operating income of $4.9 million for the six months ended February 28, 2009. The yearbooks segment reported operating loss of $9.1 million for the six months ended February 27, 2010 as compared with operating loss of $8.6 million for the six months ended February 28, 2009. The graduation products segment reported operating income of $1.1 million for the six months ended February 27, 2010 as compared with operating income of $2.0 million for the six months ended February 28, 2009. The other segment reported an operating loss of $0.5 million for the six months ended February 27, 2010 as compared with operating loss of $0.6 million for the six months ended February 28, 2009.
 
Interest Expense, Net. For Intermediate Holdings, net interest expense was $15.6 million for the six months ended February 27, 2010 and $15.3 million for the six months ended February 28, 2009. The average debt outstanding of Intermediate Holdings for the six months ended February 27, 2010 and the six months ended February 28, 2009 was $323 million and $350 million, respectively. The weighted average interest rate on debt outstanding of Intermediate Holdings for the six months ended February 27, 2010 and the six months ended February 28, 2009 was 8.9% and 8.4%, respectively.
 
For AAC, net interest expense was $8.6 million for the six months ended February 27, 2010 and $8.4 million for the six months ended February 28, 2009. The average debt outstanding of AAC for the six months ended February 27, 2010 and the six months ended February 28, 2009 was $191 million and $218 million, respectively. The weighted average interest rate on debt outstanding of AAC for the six months ended February 27, 2010 and the six months ended February 28, 2009 was 8.0% and 7.2%, respectively.
 
Benefit for Income Taxes. For the six months ended February 27, 2010 and February 28, 2009, Intermediate Holdings recorded an income tax benefit of $7.7 million and $7.6 million, respectively, which represents an effective tax rate of 45% and 43%, respectively. The effective tax rates vary from the statutory federal rate due to the impact of state income taxes and the non-deductibility of a portion of interest on high-yield debt. Intermediate Holdings’ effective rates for the six months ended February 27, 2010 and February 28, 2009 represent an estimate of the annual federal and state income tax rate.
 
For the six months ended February 27, 2010 and February 28, 2009, AAC recorded an income tax benefit of $4.0 million and $4.1 million, respectively, which represents an effective tax rate of 39% and 38%, respectively.  The effective tax rates vary from the statutory federal rate due to the impact of state income taxes. AAC’s effective rates for the six months ended February 27, 2010 and February 28, 2009 represent an estimate of the annual federal and state income tax rate.
 

 
24

 

Liquidity and Capital Resources
 
Cash Flows
 
Operating Activities.  Operating activities for AAC provided $31.9 million of cash for the six months ended February 27, 2010 compared to cash provided of $40.3 million for the six months ended February 28, 2009. The $8.4 million decrease in cash provided by operating activities was mainly attributable to a higher use of working capital in the first six months of fiscal year 2010.
 
Operating activities for Intermediate Holdings provided $25.1 million of cash for the six months ended February 27, 2010 compared to cash provided of $40.9 million for the six months ended February 28, 2009.  In addition to the items impacting cash flow from operating activities of AAC, cash provided by operating activities for the six months ended February 27, 2010 for Intermediate Holdings was further impacted by a $6.7 million cash interest payment related to the 10.25% senior discount notes.
 
During the six months ended February 27, 2010 and the six months ended February 28, 2009, cash was used to make interest payments of $6.2 million on the 8.25% senior subordinated notes.  
 
During the six months ended February 27, 2010, cash was used to make an interest payment of $6.7 million on the 10.25% senior discount notes.  During the six months ended February 28, 2009, no interest payments were made on the 10.25% senior discount notes due to the fact that interest accrued in the form of an increase in the accreted value of the notes through October 1, 2009. 
 
Investing Activities.  Capital expenditures for the six months ended February 27, 2010 were $2.3 million compared to capital expenditures of $3.1 million for the six months ended February 28, 2009. Our projected capital expenditures for fiscal year 2010 are expected to be approximately $9.0 million.

Financing Activities.   During the six months ended February 27, 2010, cash was used to pay down $17.0 million of the term loan, of which $2.0 million were mandatory payments.  We also made a discretionary payment of $5.0 million in March 2010.  During the six months ended February 27, 2010, AAC paid $6.7 million related to an interest payment on the 10.25% senior discount notes of Intermediate Holdings which is reflected as a cash distribution to Intermediate Holdings.  Additionally, AAC funded a $1.0 million payment to Fenway Partners LLC on behalf of AAIH, which is reflected as a capital distribution by AAC to Intermediate Holdings to AAIH.  During the six months ended February 28, 2009, cash was used to pay down $28.5 million of the term loan, of which $2.5 million were mandatory payments

Debt Arrangements
 
We have a significant amount of indebtedness. On February 27, 2010, Intermediate Holdings had total indebtedness of $311.3 million, of which $131.5 million was 10.25% senior discount notes, $150.0 million was 8.25% senior subordinated notes and $29.8 million was indebtedness under the existing senior secured credit facility. As of February 27, 2010, we also have up to $23.1 million in available revolving loan borrowings under our senior secured credit facility. We are currently in compliance with financial covenants in all of the agreements governing our outstanding indebtedness.
 
Senior Secured Credit Facility.  On March 25, 2004, AAC entered into a senior credit facility, which was subsequently amended on August 17, 2006 and May 20, 2009 (as amended, our “Amended Senior Credit Facility”).  The term loan of the Amended Senior Credit Facility is due in March 2011. Quarterly payments of $0.7 million are required through February 28, 2011. The term loan of the Amended Senior Credit Facility has an interest rate based upon the higher of 3.0% or the base rate, which is derived from the Prime Rate or Federal Funds Effective Rate as defined in the credit agreement, or the higher of 2.0% or London Interbank Offered Rate (“LIBOR”) depending on the type of loan AAC chooses, plus an applicable margin based on a calculated leverage ratio as defined in the agreement. The interest rate on the term loan of the Amended Senior Credit Facility was 6.25% at February 27, 2010.
 
The revolving credit facility that is part of the Amended Senior Credit Facility matures in March 2011. Availability under the revolving credit facility is restricted to a total revolving commitment of $25.0 million as defined in the credit agreement governing the Amended Senior Credit Facility. Advances under the revolving credit facility may be made as base rate loans or LIBOR loans at AAC’s election. Interest rates on base rate loans are based upon the higher of 3.0% or the base rate, which is derived from the Prime Rate or Federal Funds Effective Rate as defined in the credit agreement, plus an applicable margin based on a leverage ratio as defined in the agreement.  Interest rates on LIBOR loans are based upon the higher of 2.0% or LIBOR plus an applicable margin based on a leverage ratio as defined in the agreement.  Availability under the revolving credit facility as of February 27, 2010 was approximately $23.1 million with $1.9 million in letters of credit outstanding.
 

 
25

 

8.25% Senior Subordinated Notes.  On March 25, 2004, AAC issued the 8.25% senior subordinated notes pursuant to an indenture.  $150.0 million of the 8.25% senior subordinated notes was outstanding on February 27, 2010.  AAC is required to pay cash interest on the 8.25% senior subordinated notes semi-annually in arrears on April 1 and October 1 of each year.  The 8.25% senior subordinated notes have no scheduled amortization and mature on April 1, 2012. The 8.25% senior subordinated notes are guaranteed by AAC’s existing and future domestic subsidiaries.
 
10.25% Senior Discount Notes.  On November 16, 2004, Intermediate Holdings issued the 10.25% senior discount notes pursuant to an indenture.  $131.5 million of the 10.25% senior discount notes was outstanding on February 27, 2010.  Interest accrued on the 10.25% senior discount notes in the form of an increase in the accreted value of the notes through October 1, 2008. Thereafter, cash interest on the 10.25% senior discount notes accrues and is payable semiannually in arrears on April 1 and October 1 of each year, at a rate of 10.25% per annum.  An interest payment of $6.7 million was made on October 1, 2009.  This payment was funded by AAC and was accounted for as a capital distribution and reflected as a reduction of AAC’s accumulated earnings. Interest payments due in the next twelve months are also expected to be funded by AAC.  The 10.25% senior discount notes have no scheduled amortization and mature on October 1, 2012.  The 10.25% senior discount notes are solely obligations of Intermediate Holdings and are not guaranteed by any of its subsidiaries, including AAC.
 
Capital Resources  
 
We expect that cash generated from operating activities and availability under the Amended Senior Credit Facility will be our principal sources of liquidity. Due to the current unfavorable economic environment, we expect continued softness in sales for the rest of this year.  We expect our productivity initiatives and cost containment measures to partially offset the impact of lower sales on our operating income. Most of our net operating loss carryforward will be utilized by the end of fiscal year 2010; therefore, we expect higher future cash outflows for income taxes.  Based on our current and planned level of operations, we believe our cash flow from operations, available cash on hand and available borrowings under the Amended Senior Credit Facility will be adequate to meet our liquidity needs for at least the next twelve months.
 
Nonetheless, we continually explore various sources of liquidity to ensure financing flexibility, including issuing new or refinancing existing debt, and raising equity through private or public offerings. If favorable opportunities are available to us, we may seek to refinance our debt or complete public or private offerings of debt.  In addition, we and our subsidiaries, affiliates and significant equityholders may from time to time seek to retire or purchase our outstanding debt (including publicly issued debt) through cash purchases and/or exchanges, in open market purchases, privately negotiated transactions, by tender offer or otherwise. Such repurchases or exchanges, if any, will depend on prevailing market conditions, liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.
 
Notes and Preferred Stock of the Parent Companies
 
On February 27, 2010, American Achievement Intermediate Holding Corp. (“AAIH”), the direct parent company of Intermediate Holdings, had $15.7 million of series A preferred stock outstanding. The holders of the series A preferred stock of AAIH are entitled to receive cumulative dividends at a rate of 25% per annum, when, as and if declared by its board of directors. AAIH is obligated to redeem its series A preferred stock upon the occurrence of certain events of default, in the event of a change of control or upon an adjusted EBITDA shortfall event, as such terms are defined in AAIH’s certificate of incorporation. Accumulated undeclared dividends of AAIH’s series A preferred stock at February 27, 2010 totaled $0.6 million.

On February 27, 2010, American Achievement Group Holding Corp. (“Parent Holdings”), the indirect parent company of Intermediate Holdings, had indebtedness in addition to the indebtedness at Intermediate Holdings and AAC of $59.3 million, of which $51.8 million consisted of senior PIK notes due October 1, 2012 (“Parent Holdings Notes”) and $7.5 million consisted of mandatory redeemable series A preferred stock. Interest accrues on the Parent Holdings Notes at 16.75% per annum.  Through April 2011, interest on the Parent Holdings Notes is payable in the form of additional notes semi-annually in arrears on April 1 and October 1 of each year.  On October 1, 2011 and thereafter, interest on the Parent Holdings Notes will be payable in cash semi-annually in arrears on April 1 and October 1 of each year.  The Parent Holdings Notes mature on October 1, 2012.  At maturity, Parent Holdings is required to repay the notes at a repayment price of 103.188% of the aggregate principal amount thereof, plus accrued and unpaid interest through the maturity date.  The Parent Holdings Notes are American Achievement Group Holding Corp.’s unsecured obligation and rank equally with all of its future senior obligations and senior to its future subordinated indebtedness.
 
 

 
26

 

 
The holders of the mandatory redeemable series A preferred stock of Parent Holdings are entitled to receive cumulative dividends at a rate of 14% per annum, when, as and if declared by its board of directors.  Additionally, the redemption obligation for the mandatory redeemable series A preferred stock of Parent Holdings matures in January 2013.  Accumulated undeclared dividends of Parent Holdings’ series A preferred stock at February 27, 2010 totaled $5.7 million.
 
Although the series A preferred stock of AAIH, the Parent Holdings Notes and mandatory redeemable series A preferred stock of Parent Holdings are not obligations of the Company, if Parent Holdings is unable to refinance its obligations to pay interest in cash on the Parent Holdings Notes and to repay the Parent Holdings Notes upon maturity or redeem the shares of series A preferred stock, we expect or Parent Holdings to rely on AAC to fund such obligations as they become due.  No assurances can be made that such funding will be available, however, and if AAC is not permitted to make cash distributions to Parent Holdings to pay such interest, Parent Holdings will be required to raise additional proceeds through equity or debt financings in order to fund such obligations.  Such financing may not be available on acceptable terms, if at all.  Currently, the terms of the Amended Senior Credit Facility, the 8.25% senior subordinated notes and the 10.25% senior discount notes place certain limitations on the ability of AAC to distribute cash to AAIH or to Parent Holdings.  Under the terms of the Amended Senior Credit Facility, AAC may make payments to its parent companies up to an aggregate amount of $15.0 million to repay, redeem or repurchase of indebtedness of Intermediate Holdings or Parent Holdings, of which amount $9.3 million has been paid as of February 27, 2010.

Off Balance-Sheet Obligations
 
Letters of Credit.  As of February 27, 2010 and August 29, 2009, we had commitments for $1.9 million and $2.0 million letters of credit outstanding, respectively.
 
Seasonality
 
The seasonal nature of our various businesses tends to be tempered by our broad product mix. Class ring sales are highest during October through December and early spring, with many orders made for delivery to students before the winter holiday season. Graduation product sales are predominantly made during February through April prior to the April through June graduation season. Yearbook sales are highest during the months of April through June, as yearbooks are typically shipped prior to each school’s summer break. Our recognition and affinity product line sales are also seasonal, with highest sales during the winter holiday season and in the period leading up to Mother’s Day.
 
As a result of the foregoing, we have historically experienced operating losses during our first and fourth fiscal quarters, which includes the beginning of the school year and the summer months when school is not in session, thus reducing related shipment of products. In addition, our working capital requirements tend to exceed our operating cash flows from May through September.
 
Recent Accounting Pronouncements

The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles:  In June 2009, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance establishing the FASB Accounting Standards Codification (the “Codification”) as the single source of authoritative generally accepted accounting principles. The Codification supersedes all existing non-SEC accounting and reporting standards. The guidance did not change generally accepted accounting principles; it did, however, change the applicable citations and naming conventions used when referencing generally accepted accounting principles. The guidance was effective for us beginning with the first quarter of fiscal year 2010 and did not have an impact on our financial position and results of operations.

Employer’s Disclosure about Postretirement Benefit Plan Assets:  In December 2008, the FASB issued a pronouncement providing guidance on an employer’s disclosure about plan assets of a defined benefit pension or other postretirement plan and is effective for fiscal years ending after December 15, 2009, that is, beginning with our fiscal year 2010. The adoption of this pronouncement did not have an impact on our financial position and results of operations.

 
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Business Combinations: In December 2007, the FASB issued a pronouncement requiring the acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction and establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed in a business combination. Certain provisions of this pronouncement impact the determination of acquisition-date fair value of consideration paid in a business combination (including contingent consideration); exclude transaction costs from acquisition accounting; and change accounting practices for acquired contingencies, acquisition-related restructuring costs, in-process research and development, indemnification assets and tax benefits. The pronouncement is effective for business combinations and adjustments to an acquired entity’s deferred tax asset and liability balances for the first annual reporting period beginning after December 15, 2008, that is, beginning with our fiscal year 2010. The adoption of this pronouncement did not have an impact on our financial position and results of operations.
 
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk. We have exposure to market risk relating to changes in interest rates on our variable rate debt. Our policy is to manage interest rate exposure through the use of a combination of fixed and floating rate debt instruments.  The Amended Senior Credit Facility (revolver and term loan) is a variable rate arrangement. The Second Amendment to the Amended Senior Credit Facility provides that the Eurodollar rate used in determining our interest rate shall not be less than 2.0%.  Because current market rates are significantly below this threshold, our exposure to market rate risk is limited at this time.  However, should market rates increase, each quarter point above the 2% threshold would result in a $0.1 million change in annual interest expense, assuming the entire revolving loan was drawn.

Currency Exchange Rate Risk. We purchase the majority of our precious, semi-precious and synthetic stones from a single supplier in Germany. The prices for these products may be impacted by fluctuations in the Euro exchange rate. Each ten percent change in the Euro exchange rate would result in a $0.5 million annual change in cost of goods sold, assuming stone purchase levels approximate the levels of fiscal 2009.

Gold. Each ten percent change in the price of gold would result in a $2.2 million annual change in cost of goods sold, assuming gold purchase levels approximate the levels in fiscal 2009.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures. The Company's management evaluated, under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer, the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this report.  Disclosure controls and procedures are designed with the objective of ensuring that (i) information required to be disclosed in the Company's reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and (ii) the information is accumulated and communicated to management, including the principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
 
Based upon our evaluation, management including the Chief Executive Officer and Chief Financial Officer, as indicated in the certifications in Exhibit 31.1 and 31.2 of this report, have concluded that our disclosure controls and procedures are effective, as of the end of the period covered by this Quarterly Report on Form 10-Q.

Changes in internal control over financial reporting.  There have been no changes in our internal control over financial reporting during the quarter ended February 27, 2010 that materially affected or are reasonably likely to materially affect our internal control over financial reporting.

 
 
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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS
 
In the normal course of business, we may be a party to lawsuits and administrative proceedings before various courts and government agencies. These lawsuits and proceedings may involve personal injury, contractual issues and other matters. We cannot predict the ultimate outcome of any pending or threatened litigation or of actual claims or possible claims.
 
We currently are not a party to any pending legal proceedings other than ordinary routine litigation incidental to our business. In management’s opinion, adverse decisions on these ordinary legal proceedings, individually or in the aggregate, would not have a materially adverse impact on our results of operations, financial condition or cash flows.


ITEM 6. EXHIBITS

(a) Exhibits

     
EXHIBIT
   
NUMBER
 
DESIGNATION
31.1
 
CEO Certification Accompanying Period Report Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
     
31.2
 
CFO Certification Accompanying Period Report Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
     
32.1
 
CEO Certification Accompanying Period Report Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
     
32.2
 
CFO Certification Accompanying Period Report Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002



 
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AAC GROUP HOLDING CORP.
AMERICAN ACHIEVEMENT CORPORATION

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrants have duly caused this report to be signed on their behalf by the undersigned thereunto duly authorized.

Date: April 9, 2010

             
   
AAC GROUP HOLDING CORP.
   
   
AMERICAN ACHIEVEMENT CORPORATION
   
             
   
By:
 
/s/ DONALD J. PERCENTI
   
       
Donald J. Percenti
   
       
CHIEF EXECUTIVE OFFICER
   
       
(principal executive officer)
   
             
             
   
By:
 
/s/ KRIS G. RADHAKRISHNAN
   
       
Kris G. Radhakrishnan