AMERICAN ACHIEVEMENT CORP - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

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FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED MAY 25, 2002
OR

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

COMMISSION FILE NUMBER 333-84294

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AMERICAN ACHIEVEMENT CORPORATION

(Exact name of registrant as specified in its charter)

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

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

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

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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ ] No [X]. Prior to April 8,
2002, registrant was not subject to such filing requirements.

809,351 shares of common stock
(Number of shares outstanding as of July 9, 2002)

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AMERICAN ACHIEVEMENT CORPORATION
FOR THE QUARTERLY PERIOD ENDED MAY 25, 2002
INDEX

2

PART I. FINANCIAL INFORMATION

On May 29, 2002, American Achievement Corporation (the "Company") filed a
Form 8-K, reporting its termination of its relationship with Arthur Andersen LLP
as its independent public accountants. In accordance with Temporary Note 2T to
Article 3 of Regulation S-X ("Temporary Note 2T"), the Company elected not to
have Arthur Andersen LLP review the accompanying unaudited condensed
consolidated financial statements.

In addition, as further discussed in Note 2 to the accompanying unaudited
condensed consolidated financial statements, the Company has determined that it
must restate (1) its unaudited condensed consolidated financial statements for
the quarterly periods ended November 24, 2001 and February 23, 2002 and for all
quarterly periods during the year ended August 25, 2001 and (2) its consolidated
financial statements for the year ended August 25, 2001. The restatement, as
more fully discussed in Note 2, relates to (1) the Company changing its revenue
recognition on certain sales to independent sales representatives in order to
comply with the provisions of Securities and Exchange Commission Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements
("SAB101") and (2) an income tax benefit related to a net operating loss
carryback attributable to one of the Company's subsidiaries, which should have
been recognized during the year ended August 25, 2001, representing a future
cash benefit to the Company of approximately $1.6 million.

Under SAB 101, the recognition of revenue and related gross profit on sales
to independent sales representatives, along with commissions to independent
sales representatives that are directly related to the revenue should be
deferred until the independent sales representative delivers the product and
title passes to the Company's end customer. Previously, the Company recognized
revenue from these transactions upon shipment of product to the independent
sales representative, net of estimates for possible returns and allowances. The
cumulative effect of the change in accounting principle resulted in an increase
of $1.8 million to the net loss for the year ended August 25, 2001. This change
had no impact on the Company's cash flows from operations.

The Company's consolidated financial statements for the year ended
August 25, 2001 are being reaudited by the Company's current independent
auditors. The Company's independent auditors have advised the Company that they
will not be in a position to complete their review of the Company's unaudited
condensed consolidated financial statements for the three and nine month periods
ended May 25, 2002 and May 26, 2001 until the reaudit is completed as permitted
by Temporary Note 2T. As a result, the unaudited condensed consolidated
financial statements included in this Quarterly Report on Form 10-Q have not
been reviewed by independent public accountants in accordance with
Rule 10-01(d) of Regulation S-X. However, management believes that the unaudited
condensed consolidated financial statements included herein contain all the
information and necessary adjustments for a fair presentation of these financial
statements and footnotes.

Upon completion of the review by the Company's current independent auditors,
if a change is required to the accompanying unaudited condensed consolidated
financial statements, the Company will amend this Quarterly Report on Form 10-Q
to present the reviewed unaudited condensed consolidated financial statements
and a discussion of any material changes made. If, upon completion of the
review, no change is required to the accompanying unaudited condensed
consolidated financial statements, the Company will disclose that there are no
material changes as a result of the review on or prior to September 9, 2002.

Upon completion of the reaudit and the review, the Company expects to amend
its Quarterly Report on Form 10-Q for the quarterly period ended February 23,
2002 to include restated unaudited condensed consolidated financial statements.
In addition, the Company expects to issue restated consolidated financial
statements for the year ended August 25, 2001 upon filing of its Annual Report
on Form 10-K for the year ended August 31, 2002.

3

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND NOTES

AMERICAN ACHIEVEMENT CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)

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

4

AMERICAN ACHIEVEMENT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
(UNAUDITED)

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

5

AMERICAN ACHIEVEMENT CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(IN THOUSANDS)
(UNAUDITED)

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

6

AMERICAN ACHIEVEMENT CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)
(UNAUDITED)

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

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AMERICAN ACHIEVEMENT CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

CONSOLIDATION

The condensed consolidated financial statements include the accounts of
American Achievement Corporation and its direct and indirect subsidiaries (the
"Company"). All material intercompany accounts and transactions have been
eliminated in consolidation.

The 11 5/8% Senior Unsecured Notes Due 2007 (the "Unsecured Notes") are
guaranteed by every direct and indirect domestic subsidiary of the Company. The
guarantees by the guarantor subsidiaries are full, unconditional, and joint and
several. All of the guarantor subsidiaries are wholly owned. American
Achievement Corporation is a holding company with no independent assets or
operations other than its investment in its subsidiaries.

The accompanying condensed consolidated financial statements have been
prepared without audit pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes the disclosures are adequate to make
the information presented not misleading. In the opinion of management, all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of the financial position and results of operations for the
periods presented have been included. Operating results for the nine months
ended May 25, 2002 are not necessarily indicative of the results that may be
expected for the fiscal year ending August 31, 2002.

Effective August 27, 2000, the Company changed its accounting method for
recognizing revenue on certain sales to independent sales representatives, in
order to comply with the provisions of Securities and Exchange Commission Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements ("SAB
101"). Under SAB 101, the recognition of revenue and related gross profit on
sales to independent sales representatives, along with commissions to
independent sales representatives that are directly related to the revenue
should be deferred until the independent sales representative delivers the
product and title passes to the Company's end customer. Previously, the Company
recognized revenue from these transactions upon shipment of product to the
independent sales representative, net of estimates for possible returns and
allowances. The cumulative effect of the change in accounting principle resulted
in an increase of $1.8 million to the net loss for the year ended August 25,
2001. This change had no impact on the Company's cash flows from operations.

(2) RESTATEMENT OF FINANCIAL STATEMENTS

Subsequent to the issuance of its consolidated financial statements as of
and for the three and six month periods ended February 23, 2002, for the three
month period ended November 24, 2001, and for the year ended August 25, 2001,
management of the Company determined that a change in its revenue recognition
policy for recognizing revenue on certain sales to representatives should have
been made as of August 27, 2000, in order to comply with the provisions of SAB
101, and that an income tax benefit related to the net operating loss carryback
attributable to one of the Company's subsidiaries, Taylor Senior Holding Corp,
should have been recognized during the year ended August 25, 2001 representing a
future cash benefit to the Company of approximately $1.6 million. As a result,
the accompanying condensed consolidated financial statements have been restated
from the amounts previously reported.

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AMERICAN ACHIEVEMENT CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

(2) RESTATEMENT OF FINANCIAL STATEMENTS (CONTINUED)
A summary of the significant effects of the restatement is as follows (in
thousands):

(3) SIGNIFICANT ACQUISITIONS

Effective March 30, 2001, Honors Acquisition Corporation, a wholly owned
subsidiary of the Company, purchased all the outstanding stock of Educational
Communications, Inc. ("ECI"), for a total purchase price of $58.7 million. The
acquisition of ECI was accounted for using the purchase method of accounting
and, accordingly, the purchase price has been allocated to assets acquired and
liabilities assumed based upon estimated fair values. Subsequent to the
transaction, Honors Acquisition Corporation was merged into the Company, and ECI
remained the surviving wholly owned subsidiary of the Company. ECI's primary
business is the sales and marketing of achievement publications of the specialty
directory publishing industry.

The estimated fair value of assets acquired and liabilities assumed relating
to the ECI acquisition, in accordance with accounting principles generally
accepted in the United States, is summarized below (in thousands):

Working capital............................................. $ 5,534
Property, plant and equipment............................... 400
Other intangibles........................................... 17,240
Goodwill.................................................... 35,492
Other long-term assets...................................... 44
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$58,710
=======

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AMERICAN ACHIEVEMENT CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

(3) SIGNIFICANT ACQUISITIONS (CONTINUED)
Goodwill and other intangibles related to ECI are amortized on a
straight-line basis over their useful lives which range from three to 40 years.

The Company incurred approximately $2.4 million in financing costs
associated with the purchase agreement. These costs have been capitalized and
are included in the accompanying condensed consolidated balance sheets as of
May 25, 2002 and August 25, 2001. These costs were subsequently written off in
connection with the early extinguishment of debt (see Note 4).

As a result of this transaction, the consolidated financial statements of
the Company for the nine months ended May 25, 2002 include the results of
operations of ECI for the nine months ended May 25, 2002, while the condensed
consolidated financial statements of the Company for the nine months ended
May 26, 2001 include the results of operations of ECI for the period from
March 30, 2001, to May 26, 2001.

The following unaudited pro forma data summarizes the results of operations
for the periods indicated as if the ECI acquisition had been completed as of the
beginning of the periods presented (in thousands):

(4) COMPREHENSIVE INCOME (LOSS)

Beginning in the fiscal year 2001, the effective portion of the loss on
derivatives and unrecognized losses on accrued minimum pension liabilities were
included in other comprehensive income (loss). The following amounts were
included in determining the Company's comprehensive income (loss) for the three
and nine month periods ended May 25, 2002 and May 26, 2001.

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AMERICAN ACHIEVEMENT CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

(5) INVENTORIES, NET

A summary of inventories, net is as follows (in thousands):

Cost of sales includes depreciation and amortization of $6,060,000 and
$5,452,000 for the nine months ended May 25, 2002 and May 26, 2001,
respectively.

(6) LONG-TERM DEBT

Long-term debt consists of the following (in thousands):

11 5/8% SENIOR UNSECURED NOTES

On February 20, 2002, the Company issued $177 million of senior unsecured
notes (the "Unsecured Notes") due in 2007. The Unsecured Notes bear interest at
a stated rate of 11 5/8%. The Unsecured Notes were issued at a discount of
0.872% resulting in net proceeds of approximately $175.5 million before
considering financing costs. The effective rate of the Unsecured Notes after
discount is approximately 11.87%. The Unsecured Notes rank pari passu with the
Company's existing and future senior indebtedness, including obligations under
the Company's Senior Secured Credit Facility (as defined below). The Unsecured
Notes are guaranteed by the Company's domestic subsidiaries, and the guarantees
rank pari passu with existing and future senior debt of the Company and its
subsidiaries. The Unsecured Notes and the guarantees on the Unsecured Notes are
effectively subordinated to any of the Company's secured debt.

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AMERICAN ACHIEVEMENT CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

(6) LONG-TERM DEBT (CONTINUED)
The Company may not redeem the Unsecured Notes until 2005, except that the
Company may redeem up to 35 percent of the Unsecured Notes before the third
anniversary of the issue date of the Unsecured Notes as long as (a) the Company
pays a certain percentage of the principal amount of the Unsecured Notes, plus
interest, (b) the Company redeems the Unsecured Notes within 90 days of
completing a public equity offering and (c) at least 65 percent of the aggregate
principal amount of the Unsecured Notes issued remains outstanding afterward.

If a change in control, as defined in the indenture relating to the
Unsecured Notes (the "AAC Indenture"), occurs, the Company must give the holders
of the Unsecured Notes the opportunity to sell their Unsecured Notes to the
Company at 101 percent of the principal amount of the Unsecured Notes, plus
accrued interest.

The Unsecured Notes contain customary negative covenants and restrictions on
actions by the Company and its subsidiaries including, without limitation,
restrictions on additional indebtedness, investments, asset dispositions outside
the ordinary course of business, liens, and transactions with affiliates, among
other restrictions (as defined in the AAC Indenture). In addition, the Unsecured
Notes contain covenants, which restrict the declaration or payment of dividends
by the Company and/or its subsidiaries (as defined in the AAC Indenture). The
Unsecured Notes also require that the Company meet certain financial covenants
including a minimum fixed charge coverage ratio (as defined in the AAC
Indenture). The Company was in compliance with the Unsecured Notes covenants as
of May 25, 2002.

11% PERCENT SENIOR SUBORDINATED NOTES

Commemorative Brands, Inc.'s ("CBI") 11 percent senior subordinated notes
(the "Subordinated Notes") mature on January 15, 2007. The Subordinated Notes
are redeemable at the option of CBI in whole or in part, at any time on or after
January 15, 2002, at specified redemption prices ranging from 105.5 percent of
the principal amount thereof if redeemed during 2002 and declining to
100 percent of the principal amount thereof if redeemed during the year 2005 or
thereafter, plus accrued and unpaid interest and Liquidated Damages as defined
in the indenture relating to the Subordinated Notes, as amended (the "CBI
Indenture"), if any, thereon to the date of redemption. The Company has not
redeemed any of the Subordinated Notes as of May 25, 2002.

In the event of a Change of Control (as defined in the CBI Indenture), each
holder of the Subordinated Notes will have the right to require CBI to purchase
all or any part of such holder's Subordinated Notes at a purchase price in cash
equal to 101 percent of the aggregate principal amount thereof, plus accrued and
unpaid interest and Liquidated Damages, if any, thereon to the date of purchase.

In the event of an Asset Sale (as defined in the CBI Indenture), CBI is
required to apply any Net Proceeds (as defined in the CBI Indenture) to
permanently reduce senior indebtedness, to acquire another business or long-term
assets or to make capital expenditures. To the extent such amounts are not so
applied within 365 days and the amount not applied exceeds $5.0 million, CBI is
required to make an offer to all holders of the Subordinated Notes to purchase
an aggregate principal amount of Subordinated Notes equal to such excess amount
at a purchase price in cash equal to 100 percent of

12

AMERICAN ACHIEVEMENT CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

(6) LONG-TERM DEBT (CONTINUED)
the principal amount thereof, plus accrued and unpaid interest and Liquidated
Damages, if any, thereon to the date of purchase.

The Subordinated Notes contain certain covenants that, among other things,
limit the ability of CBI to engage in certain business transactions such as
mergers, consolidations or sales of assets that would decrease the value of CBI
or cause an event of default.

SENIOR SECURED CREDIT FACILITY

In conjunction with the issuance of the Unsecured Notes, on February 20,
2002, the Company entered into a new $40 million senior revolving credit
facility (the "Senior Secured Credit Facility") with various financial
institutions, with all of the Company's current domestic subsidiaries as
guarantors. Loans made pursuant to the Senior Secured Credit Facility are
secured by a first priority security interest in substantially all of the
Company's and the Company's domestic subsidiaries' assets and in all of the
Company's domestic subsidiaries' capital stock.

Availability under the Senior Secured Credit Facility is restricted to the
lesser of (1) $40 million or (2) the Borrowing Base Amount as defined in the
credit agreement under the Senior Secured Credit Facility (the "Credit
Agreement"). Availability under the Senior Secured Credit Facility as of
May 25, 2002 was approximately $38.6 million with $0.1 million borrowings
outstanding. The Senior Secured Credit Facility matures on February 20, 2006.

Advances under the Senior Secured Credit Facility may be made as base rate
loans or LIBOR loans at the Company's election (except for the initial loans
which were base rate loans). Interest rates payable upon advances are based upon
the base rate or LIBOR depending on the type of loan the Company chooses, plus
an applicable margin based upon a consolidated leverage ratio of certain
outstanding indebtedness to EBITDA (to be calculated in accordance with the
terms specified in the Credit Agreement). The effective rate on borrowings for
the nine months ended May 25, 2002 was 8.5%.

The Credit Agreement contains customary negative covenants and restrictions
on actions by the Company and its subsidiaries including, without limitation,
restrictions on indebtedness, declaration or payment of dividends, liens, and
the gold consignment agreement, among other restrictions. In addition, the
Credit Agreement requires that the Company meet certain financial covenants,
ratios and tests, including capital expenditure limits, a maximum secured
leverage ratio, a minimum interest coverage ratio, and a minimum fixed charge
coverage ratio. The Company was in compliance with the Credit Agreement
covenants as of May 25, 2002.

EARLY EXTINGUISHMENT OF DEBT

In conjunction with the issuance of the Unsecured Notes and entrance into
the Senior Secured Credit Facility, the Company paid off the then outstanding
term loans and revolver under the former credit facility, the bridge notes to
affiliates and settled all but $25 million in notional amount of the interest
rate swap agreements. The Company recognized an extraordinary charge in
February 2002 of approximately $5.3 million, net of income tax benefit, relating
to the write-off of unamortized deferred financing costs and, due to the
termination and reclassification of interest rate swaps, the Company recorded a
charge to other expense for approximately $2.6 million.

13

AMERICAN ACHIEVEMENT CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

(6) LONG-TERM DEBT (CONTINUED)
As a result of the early prepayment of certain debt obligations, the
remaining interest rate swap agreement representing a notional amount of
$25 million has been reclassified as a freestanding derivative. As such, any
changes in the fair value of this derivative will result in a mark-to-market
adjustment of the carrying value with any changes being reported to other income
or loss. As of May 25, 2002, the fair value of this derivative represented a
liability of approximately $1.1 million.

GOLD CONSIGNMENT AGREEMENT

Under the Company's gold consignment financing arrangement, the Company has
the ability to have on consignment the lowest of the dollar value of 27,000 troy
ounces of gold, $10.1 million or a borrowing base, determined based upon a
percentage of gold located at the Company's facilities and other approved
locations, as specified by the agreement. For the nine months ended May 25, 2002
and May 26, 2001, the Company expensed consignment fees of approximately
$186,000 and $162,600, respectively. Under the terms of the consignment
arrangement, the Company does not own the consigned gold nor does it have risk
of loss related to such inventory until the money is received by the bank from
the Company in payment for the gold purchased. Accordingly, the Company does not
include the value of consigned gold in its inventory or the corresponding
liability for financial statement purposes. As of May 25, 2002 and August 25,
2001, the Company held approximately 22,720 ounces and 14,620 ounces,
respectively, of gold valued at $7.3 million and $4.0 million, respectively, on
consignment from the bank.

The Company's long-term debt outstanding as of May 25, 2002 matures as
follows (in thousands):

The weighted average interest rate of debt outstanding as of May 25, 2002
and August 25, 2001 was 11.0% and 11.4%, respectively.

The Company's management believes the carrying amount of long-term debt,
including the current maturities, approximates fair value as of May 25, 2002 and
August 25, 2001, based upon current rates offered for debt with the same or
similar debt terms.

(7) COMMITMENTS AND CONTINGENCIES

LEASES

Certain Company facilities and equipment are leased under agreements
expiring at various dates through 2008.

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AMERICAN ACHIEVEMENT CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

(7) COMMITMENTS AND CONTINGENCIES (CONTINUED)
CONTRACTS WITH SALES REPRESENTATIVES

The Company is a party to certain contracts with some of its independent
sales representatives whereby the independent sales representatives have
purchased from their predecessors the right to sell the Company's products in a
territory. The contracts generally provide that the value of those rights is
primarily determined by the amount of business achieved by a successor
independent sales representative and is therefore not determinable in advance of
performance by the successor independent sales representative.

PENDING LITIGATION

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

(8) INCOME TAXES

For the nine months ended May 25, 2002 and May 26, 2001, the company
recorded an income tax provision of $5,620,000 and $2,073,000, respectively,
which represents an effective tax rate of 54% and 36%, respectively, on income
from continuing operations. The Company's effective tax rate relates primarily
to the expected annual benefits from the net operating loss carryback
attributable to Taylor Senior Holding Corp (THSC) as a percentage of the
Company's expected annual pretax loss from continuing operations. No net federal
income tax benefit is reflected in the income statement for net operating losses
to be carried forward since the potential benefit of net operating loss
carry-forwards have been offset by a valuation allowance.

(9) STOCKHOLDERS' EQUITY

During the nine months ended May 25, 2002, 5,500 shares of the Series A
Preferred Stock of the Company were issued to an executive pursuant to a bonus
provided for in fiscal 2001. In the event of any liquidation, dissolution or
winding up of the Company, the holders of the Series A Preferred Stock shall
receive payment of the liquidation value of $100 per share plus any accrued and
unpaid dividends prior to the payment of any distributions to the holders of the
Common Stock of the Company. The liquidation preference of the Series A
Preferred Stock totaled approximately $100,685,000 and $100,135,000 at May 25,
2002, and August 25, 2001, respectively.

STOCK-BASED COMPENSATION

During the nine months ended May 25, 2002, the Company issued an option to
purchase 12,500 shares of Company Common Stock at fair market value to an
executive. The terms of the option are the same as provided for in the Company's
2000 Stock Option Plan, with the exception that the option vested on the date of
grant.

Incentive stock options for 69,853 shares and 28,596 shares and nonqualified
stock options for 2,230 and 1,874 shares of the Company's Common Stock were
outstanding as of May 25, 2002, and August 25, 2001, respectively.

15

AMERICAN ACHIEVEMENT CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

(9) STOCKHOLDERS' EQUITY (CONTINUED)
Pursuant to an employment agreement entered into between the Company and its
chief executive officer in July 1999, and as amended as of February 1, 2002, if
the Company achieves a certain consolidated EBITDA target, as defined by the
agreement, for the fiscal years commencing with fiscal 2002 and ending in fiscal
2004, the chief executive officer is entitled to receive up to a total of
$1 million in face value of the Company's Series A Preferred Stock during the
period. As of May 25, 2002, the Company has accrued approximately $225,000
related to the employment agreement.

(10) RELATED-PARTY TRANSACTIONS

The Company entered into a management agreement on March 30, 2001 with
Castle Harlan, Inc. (the "Manager"), pursuant to which the Manager agreed to
provide business and organization strategy, financial and investment management
and merchant and investment banking services to the Company and its
subsidiaries. The Company has agreed to indemnify the Manager against
liabilities, costs, charges and expenses relating to the Manager's performance
of its duties, other than such of the foregoing resulting from the Manager's
gross negligence or willful misconduct. The agreement is for a term of
10 years, renewable automatically from year to year unless Castle Harlan
Partners III, L.P. or Castle Harlan Partners II, L.P., affiliates of the
Manager, shall own less than 5 percent of the then outstanding capital stock of
the Company. Beginning fiscal year 2002, the Company is required to pay a
management fee equal to $3,000,000, unless otherwise prohibited by the Company's
Credit Agreement. The Company was subject to a similar management agreement with
the Manager, which was signed on July 27, 2000, and an agreement signed on
December 16, 1996. Amounts paid under all management agreements totaled
approximately $1,825,000 and $650,000 for the nine months ended May 25, 2002 and
May 26, 2001, respectively. As of May 25, 2002 and August 25, 2001, the Company
had accrued management fees of approximately $750,000 and $688,000,
respectively. Included in deferred financing costs for the ECI acquisition is
approximately $557,000 of management fees.

In connection with the ECI acquisition, the Company has a receivable from
the Castle Harlan group relating to the acquisition expenses, which was to be
reimbursed to the Company. The amount of such receivable was approximately
$58,000 and $130,000 as of May 25, 2002 and August 25, 2001, respectively.

In conjunction with the issuance of the Unsecured Notes and entrance into
the Senior Secured Credit Facility (See Note 4), the Company paid off its bridge
notes to affiliates.

(11) BUSINESS SEGMENTS

The Company operates in two reportable business segments: scholastic
products, and recognition and affinity products. The principal products sold in
the scholastic segment are class rings, yearbooks and graduation products, which
include fine paper products and graduation accessories. The scholastic segment
primarily serves the high school and college markets. The recognition and
affinity segment includes publications that recognize the academic achievement
of top students at the high school and

16

AMERICAN ACHIEVEMENT CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

(11) BUSINESS SEGMENTS (CONTINUED)
college levels, jewelry commemorating family events, fan affinity jewelry and
related products, and professional sports championship rings.

The Company's reportable segments are strategic business units that offer
products to different consumer segments. Each segment is managed separately
because each business requires different marketing strategies. The Company
evaluates the performance of each segment based on the profit or loss from
operations before income taxes, excluding nonrecurring gains or losses.

(12) REGISTRATION WITH SECURITIES AND EXCHANGE COMMISSION

On March 14, 2002, the Company filed a registration statement on Form S-4
(Commission File No. 333-84294) with the Securities and Exchange Commission (the
"Registration Statement"), relating

17

AMERICAN ACHIEVEMENT CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

(12) REGISTRATION WITH SECURITIES AND EXCHANGE COMMISSION (CONTINUED)
to the offer to exchange $177 million of the Company's 11 5/8% Senior Notes due
2007, Series B (the "New Notes") for any and all outstanding Unsecured Notes.
The terms of the New Notes and the Unsecured Notes are identical, except that
the New Notes have been registered under the Securities Act of 1933, as amended.
References elsewhere herein to the Unsecured Notes include the New Notes. The
Registration Statement was declared effective on April 8, 2002 and the exchange
offer was completed on May 16, 2002.

(13) NEW ACCOUNTING PRONOUNCEMENTS

On July 23, 2001, the Financial Accounting Standards Board released for
issuance SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and
Other Intangible Assets." SFAS No. 141 requires that all business combinations
subsequent to June 30, 2001, be accounted for under the purchase method of
accounting. The pooling-of-interests method is no longer allowed. Under SFAS
No. 142, goodwill and intangible assets with indefinite lives are no longer
amortized but are reviewed annually (or more frequently if impairment indicators
arise) for impairment. Separable intangible assets that are not deemed to have
indefinite lives will continue to be amortized over their useful lives (but with
no maximum life).

The Company will adopt SFAS No. 142 beginning on September 1, 2002, the
first day of fiscal year 2003. The Company is evaluating the impact of the
adoption of these standards and have not yet determined the effect of adoptions
on its financial position and results of operations. The impact of adoption may
be material. Upon adoption of these standards, goodwill amortization will cease
and certain intangibles such as workforce in place will be reclassified into
goodwill.

In August 2001, the Financial Accounting Standards Board released SFAS
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS
No. 144 establishes a single accounting model, based upon the framework
established in SFAS No. 121, for long-lived assets to be disposed of by sale.
SFAS No. 144 broadens the presentation of discontinued operations to include
more disposal transactions, and also provides additional implementation guidance
with SFAS No. 121. SFAS No. 144 is effective for fiscal years beginning after
December 15, 2001. The Company anticipates adopting SFAS No. 144 effective
September 1, 2002, and does not expect the adoption to have a material impact on
its financial position and results of operations.

In April 2002, the FASB issued SFAS No. 145, RECISSION OF FASB STATEMENTS
NO. 4, 44 AND 64, AMENDMENT OF FASB STATEMENT NO. 13, AND TECHNICAL CORRECTIONS,
which rescinds FASB Statement No. 4, Reporting Gains and Losses from
Extinguishments o f Debt, and an amendment of that Statement FASB Statement
No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements. The
Statement also rescinds FASB Statement No. 44, Accounting for Intangible Assets
of Motor Carriers. The Statement amends FASB Statement No. 13, Accounting for
Leases, to eliminate an inconsistency between the required accounting for
sale-leaseback transactions and the required accounting for certain lease
modifications that have economic effects that are similar to sale-leaseback
transactions. The Company will adopt SFAS No. 145 in September 2002 and does not
expect this adoption to have a material effect on the financial statements,
except for the reclassification of the extraordinary item, loss on early
extinguishments of debt.

18

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

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

OVERVIEW

We are one of the leading manufacturers and suppliers of class rings,
yearbooks, academic achievement publications and recognition and affinity
jewelry in the United States. Our two principal business segments are:
scholastic products and recognition and affinity products. The scholastic
products segment serves the high school, college and, to a lesser extent, the
elementary and junior high school markets and accounted for approximately 87.7%
of our net sales for the Nine Months Ended May 25, 2002. Our scholastic products
segment consists of three principal categories: class rings, yearbooks and
graduation products, the last of which includes fine paper products and
graduation accessories.

The recognition and affinity products segment accounted for approximately
12.3% of our net sales for the Nine Months Ended May 25, 2002. This segment
provides, among other things, publications that recognize the academic
achievement of top students at the high school and college levels, as well as
the nation's most inspiring teachers, jewelry commemorating family events such
as the birth of a child, fan affinity jewelry and related products and
professional sports championship rings such as World Series rings.

COMPANY BACKGROUND

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

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

TAYLOR ACQUISITION. On February 11, 2000, Castle Harlan Partners III, L.P.
("CHPIII"), one of our stockholders and an affiliate of CHPII, acquired Taylor,
whose primary business is the designing and printing of student yearbooks. On
July 27, 2000, we acquired all issued and outstanding shares of Taylor Senior
Holding Corp ("TSHC"), Taylor's parent, through the issuance of 320,929 shares
of our common stock and 393,482 shares of our series A preferred stock (the
"Taylor Acquisition"). The Taylor Acquisition was accounted for under the
purchase method of accounting.

ECI ACQUISITION. On March 30, 2001, we acquired all of the capital stock of
ECI for a purchase price of approximately $58.7 million (the "ECI Acquisition").
ECI has been in the academic achievement publication business since 1967 and
publishes such well-known titles as, Who's Who Among American High School
Students, The National Dean's List and Who's Who Among America's Teachers. The
ECI Acquisition was accounted for under the purchase method of accounting. As a

19

result of this transaction, our consolidated financial statements for the Nine
Months Ended May 25, 2002 include the results of operations for ECI for the Nine
Months Ended May 25, 2002, while our consolidated financial statements for the
Nine Months Ended May 26, 2001 include the results of operations for the period
from March 30, 2001 to May 26, 2001.

RESULTS OF OPERATIONS

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

THREE MONTHS ENDED MAY 25, 2002 COMPARED WITH THREE MONTHS ENDED MAY 26, 2001.

NET SALES. Net sales consist of product sales and are net of product
returns and promotional discounts. Net sales increased $7.0 million, or 6.1%, to
$121.5 million for the Three Months Ended May 25, 2002 from $114.5 million for
the Three Months Ended May 26, 2001. This increase in net sales was due
primarily to timing of shipments.

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

SCHOLASTIC PRODUCTS. Net sales increased $5.1 million to $115.4 million for
the Three Months Ended May 25, 2002 from $110.3 million for the Three Months
Ended May 26, 2001. The increase in net sales was the result of a $5.1 million
timing difference from yearbook shipments and college ring shipments.

RECOGNITION AND AFFINITY PRODUCTS. Net sales increased $1.9 million to
$6.1 million for the Three Months Ended May 25, 2002 from $4.2 million for the
Three Months Ended May 26, 2001. The increase was primarily the result of a
$1.3 million increase in sales of personalized family jewelry for Mother's Day.
The remaining increase was made up of collateral sales related to the ECI
teacher's publication and other specialty products.

GROSS PROFIT. Gross margin represents gross profit as a percentage of net
sales. Gross margin was 53.8% for the Three Months Ended May 25, 2002, a
0.8 percentage point decrease from 54.6% for the Three Months Ended May 26,
2001. The decrease was the result of a combination of a decrease in class ring
margins due to cost per unit increases in labor and material as well as a shift
in metal mix

20

from precious to nonprecious, and a decrease in yearbook margins due to
increased labor costs as a result of difficulties associated with the
implementation of new technology. A portion of the decline in gross margins was
offset by more favorable gross margins in graduation products.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $2.0 million, or 5.0%, to $41.0 million for
the Three Months Ended May 25, 2002 from $39.0 million for the Three Months
Ended May 26, 2001. Included in selling, general and administrative expenses are
two sub-categories: selling and marketing expenses and general and
administrative expenses. Selling and marketing expenses increased $1.9 million
to $31.3 million or 25.8% of net sales, for the Three Months Ended May 25, 2002
from $29.4 million or 25.7% of net sales, for the Three Months Ended May 26,
2001. General and administrative expenses for the Three Months Ended May 25,
2002 were $9.7 million, or 7.9% of net sales, as compared to $9.6 million, or
8.3% of net sales, for the Three Months Ended May 26, 2001. The decrease in
General and Administrative expenses as a percentage of sales is a result of
continued synergy savings as a result of the Taylor Acquisition partially offset
by increased medical expenses.

OPERATING INCOME. As a result of the foregoing, operating income was
$24.4 million, or 20.1% of net sales, for the Three Months Ended May 25, 2002 as
compared with operating income of $23.5 million, or 20.5% of net sales, for the
Three Months Ended May 26, 2001. The scholastic products segment reported
operating income of $24.9 million for the Three Months Ended May 25, 2002 as
compared with $24.6 million for the Three Months Ended May 26, 2001. The
recognition and affinity products segment reported an operating loss of
$0.5 million for the Three Months Ended May 25, 2002 as compared with an
operating loss of $1.1 million for the Three Months Ended May 26, 2001.

INTEREST EXPENSE, NET. Net interest expense was $7.2 million for the Three
Months Ended May 25, 2002 and $6.0 million for the Three Months Ended May 26,
2001. The average debt outstanding for the Three Months Ended May 25, 2002 and
the Three Months Ended May 26, 2001 was $228 million and $200 million,
respectively. The weighted average interest rate of debt outstanding for the
Three Months Ended May 25, 2002 and the Three Months Ended May 26, 2001 was
12.4% and 11.8%, respectively.

OTHER EXPENSE. Other expense was $35,000 for the Three Months Ended
May 25, 2002. The $35,000 was a result of changes in the fair value of an
interest rate swap agreement representing a notional amount of $25.0 million
classified as freestanding derivative. As of May 25, 2002, the fair value of
this derivative represented a liability of approximately $1.1 million.

PROVISION (BENEFIT) FOR INCOME TAXES. For the Three Months Ended May 25,
2002 and May 26, 2001, the Company recorded an income tax provision of
$6,888,000 and $4,934,000, respectively, which represents an effective tax rate
of 54% and 36%, respectively, on income from continuing operations. The
Company's effective tax rate relates primarily to the expected annual benefits
from the net operating loss carryback attributable to Taylor Senior Holding Corp
(THSC) as a percentage of the Company's expected annual pretax loss from
continuing operations. No net federal income tax benefit is reflected in the
income statement for net operating losses to be carried forward since the
potential benefit of net operating loss carry-forwards have been offset by a
valuation allowance.

NET INCOME. As a result of the foregoing, we reported net income of
$10.3 million for the Three Months Ended May 25, 2002 as compared to net income
of $12.6 million for the Three Months Ended May 26, 2001.

NINE MONTHS ENDED MAY 25, 2002 COMPARED WITH NINE MONTHS ENDED MAY 26, 2001.

NET SALES. Net sales increased $19.9 million, or 8.7%, to $248.9 million
for the Nine Months Ended May 25, 2002, from $229.0 million for the Nine Months
Ended May 26, 2001. The increase was

21

due primarily to the inclusion of $14.5 million of net sales from ECI, which we
acquired on March 30, 2001, and an increase in sales of other product lines.

SCHOLASTIC PRODUCTS. Net sales increased $6.5 million, or 3.1% to
$218.3 million for the Nine Months Ended May 25, 2002 from $211.8 million for
the Nine Months Ended May 26, 2001. The increase was due primarily to increased
unit volume of in-store high school ring sales and in-school high school ring
sales of $2.5 million and a $2.2 million increase in the in-school high school
segment of graduation products. The remaining increase is due to timing of
college rings and yearbooks.

RECOGNITION AND AFFINITY PRODUCTS. Net sales increased $13.5 million to
$30.6 million for the Nine Months Ended May 25, 2002 from $17.1 million for the
Nine Months Ended May 26, 2001. The increase was primarily the result of
$14.5 million of net sales attributable to ECI. The increase was partially
offset by a decline in lower sales of affinity and sports jewelry.

GROSS PROFIT. Gross margin was 54.3% for the Nine Months Ended May 25,
2002, a 1.7 percentage point increase from 52.6% for the Nine Months Ended
May 26, 2001. The gross margin increase for the Nine Months Ended May 25, 2002
primarily the result of the inclusion of the ECI operations for this period.
Excluding ECI, gross margin would have been 52.6% for the Nine Months Ended
May 25, 2002 and May 26, 2001.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $6.3 million, or 6.5%, to $103.8 million for
the Nine Months Ended May 25, 2002 from $97.5 million for the Nine Months Ended
May 26, 2001. As a percentage of net sales, however, selling, general and
administrative expenses decreased 0.9 percentage points for the Nine Months
Ended May 25, 2002 compared with the nine months ended May 26, 2001. Included in
selling, general and administrative expenses are two sub-categories: selling and
marketing expenses and general and administrative expenses. Selling and
marketing expenses increased $4.8 million to $74.1 million, or 29.8% of net
sales, for the Nine Months Ended May 25, 2002 from $69.3 million, or 30.3% of
net sales, for the Nine Months Ended May 26, 2001. Excluding ECI, selling and
marketing expenses would have been 30.5% of net sales as compared to 30.3% of
net sales for the Nine Months Ended May 26, 2001. General and administrative
expenses for the Nine Months Ended May 25, 2002 were $29.7 million, or 11.9% of
net sales, as compared to $28.2 million, or 12.6% of net sales, for the Nine
Months Ended May 26, 2001. Excluding ECI, general and administrative expenses
for the Nine Months Ended May 25, 2002 would have been $26.3 million or 11.2% of
net sales, a 1.4 percentage point decrease from the Nine Months Ended May 26,
2001. This decrease in general and administrative expenses was a result of
synergy savings realized from the Taylor Acquisition partially offset by
increased medical expenses.

OPERATING INCOME. As a result of the foregoing, operating income was
$31.4 million, or 12.6% of net sales, for the Nine Months Ended May 25, 2002 as
compared with $22.9 million, or 10.0% of net sales, for the Nine Months Ended
May 26, 2001. The scholastic products segment reported operating income of
$26.0 million for the Nine Months Ended May 25, 2002 and $24.8 million for the
Nine Months Ended May 26, 2001. The recognition and affinity products segment
reported operating income of $5.4 million for the Nine Months Ended May 25, 2002
as compared with an operating loss of $1.9 million for the Nine Months Ended
May 26, 2001. The increase in the recognition and affinity product segment was
due to the inclusion of $6.1 million of operating income from ECI, which was
acquired on March 30, 2001.

OTHER EXPENSE. Other expense was $2.6 million for the Nine Months Ended
May 25, 2002. The $2.6 million was a result of the termination and
reclassification of the interest rate swaps that occurred in conjunction with
the issuance of the Unsecured Notes and the Senior Secured Credit Facility on
February 20, 2002. The remaining interest rate swap agreement representing a
notional amount of $25 million has been classified as a freestanding derivative.
As such, any changes in the fair value of this derivative will result in a
mark-to-market adjustment of the carrying value with any changes being

22

reported to other income or loss. As of May 25, 2002, the fair value of this
derivative represented a liability of approximately $1.1 million.

INTEREST EXPENSE, NET. Net interest expense was $18.4 million for the Nine
Months Ended May 25, 2002 and $17.1 million for the Nine Months Ended May 26,
2001. The average debt outstanding for the Nine Months Ended May 25, 2002 and
the Nine Months Ended May 26, 2001 was $220 million and $193 million,
respectively. The weighted average interest rate of debt outstanding for the
Nine Months Ended May 25, 2002 and the Nine Months Ended May 26, 2001 was 11.0%
and 11.7% respectively.

PROVISION/(BENEFIT) FOR INCOME TAXES. For the Nine Months Ended May 25,
2002 and May 26, 2001, the Company recorded an income tax provision of
$5,620,000 and $2,073,000, respectively, which represents an effective tax rate
of 54% and 36%, respectively, on income from continuing operations. The
Company's effective tax rate relates primarily to the expected annual benefits
from the net operating loss carryback attributable to Taylor Senor Holding Corp
(THSC) as a percentage of the Company's expected annual pretax loss from
continuing operations. No net federal income tax benefit is reflected in the
income statement for net operating losses to be carried forward since the
potential benefit of net operating loss carry-forwards have been offset by a
valuation allowance.

LOSS ON EXTINGUISHMENTS OF DEBT. In conjunction with the issuance of the
Unsecured Notes and the Senior Secured Credit Facility on February 20, 2002, the
Company paid off the then outstanding term loans and revolver under the former
credit facility and bridge notes to affiliates. As a result, a loss of
$5.3 million, net of tax benefit, was recognized relating to the write-off of
unamortized deferred financing costs.

CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE. The cumulative effect
of change in accounting principle, representing a loss of $1.8 million, was
recorded due to the adoption of SAB 101 as of August 27, 2000. See Note 2.

NET INCOME. As a result of the foregoing, we reported a net loss of
$0.5 million for the Nine Months Ended May 25, 2002 as compared to net income of
$1.9 million for the Nine Months Ended May 26, 2001.

SEASONALITY

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

23

LIQUIDITY AND CAPITAL RESOURCES

OPERATING ACTIVITIES. Operating activities provided cash of $24.5 million
for the Nine Months Ended May 25, 2002 as compared with $9.6 million for the
Nine Months Ended May 26, 2001. The $14.9 million increase in cash provided by
operating activities was primarily attributable to a decrease in accounts
receivable of $5.8 million, an increase in bank overdraft, accounts payable, and
accrued expenses of $12.8 million and an increase in operating cash from net
income before depreciation and amortization and other noncash charges of
$2.7 million. The increases were partially offset by a decrease in customer
deposits of $4.1 million.

INVESTING ACTIVITIES. Capital expenditures for the Nine Months Ended
May 25, 2002 and May 26, 2001 were $8.2 million and $5.5 million, respectively.
Our projected capital expenditures for 2002 are expected to be $15.0 million.

FINANCING ACTIVITIES. Net cash used in financing activities was
$16.9 million for the Nine Months Ended May 25, 2002 and net cash provided by
financing activities was $45.2 million for the Nine Months Ended May 26, 2001.
For the Nine Months Ended May 25, 2002, the cash provided by operating
activities and the proceeds received on February 20, 2002 from the issuance of
the $177 million of Unsecured Notes, $167.3 million net of financing fees, were
used to pay off the old term loans, revolver and bridge notes. For the Nine
Months Ended May 26, 2001, borrowings were made on the revolver and the term
loan facility in connection with the acquisition of ECI on March 30, 2001.

CAPITAL RESOURCES. In connection with the Taylor Acquisition, we amended
and restated our original credit agreement as of July 27, 2000 and increased the
amounts available under the term loan A, term loan B and the revolving credit
facility. On March 31, 2001, in connection with the ECI Acquisition, we entered
into a second amendment to the credit agreement to increase the amounts
available under the term loan A and term loan B. As of February 20, 2002, the
Company issued $177 million of Unsecured Notes due in 2007 and entered into a
new $40 million Senior Secured Credit Facility. With these proceeds, the Company
paid off the then outstanding term loans and revolver under the former credit
facility.

In connection with the Taylor Acquisition, CBI signed a gold consignment
financing agreement with a bank. Under its gold consignment financing agreement,
CBI has the ability to have on consignment the lowest of (i) the dollar value of
27,000 troy ounces of gold, (ii) $10.1 million and (iii) a borrowing base,
determined based upon a percentage of gold located at CBI's facilities and other
approved locations, as specified by the agreement. Under the terms of the
consignment arrangement, CBI does not own the consigned gold nor have risk of
loss related to such inventory until the money is received by the bank from CBI
in payment for the gold purchased. Accordingly, CBI does not include the values
of consigned gold in its inventory or the corresponding liability for financial
statement purposes. As a result, as of May 25, 2002 and May 26, 2001, CBI held
approximately 22,720 ounces and 18,640 ounces, respectively, of gold valued at
$7.3 million and $5.1 million, respectively, on consignment from the bank.

As of February 20, 2002, the Company issued $177 million of Unsecured Notes
due in 2007 and entered into a new $40 million Senior Secured facility. With the
proceeds thereof, the Company paid off the TP Holding Corp. convertible
subordinated bridge promissory notes owing to CHPIII of approximately
$19.0 million in the aggregate, including accrued interest, which were due on
February 28, 2003 and the convertible subordinated bridge promissory note due to
CHPIII of approximately $9.4 million, including accrued interest, which was due
on February 28, 2003.

Cash generated from operating activities and availability under our existing
credit facilities have been our principal sources of liquidity. Our liquidity
needs arise primarily from debt service, working capital, capital expenditure
and general corporate requirements. As of May 25, 2002 we had

24

approximately $38.6 million available under our Senior Secured Credit Facility.
We believe that cash flow from our operating activities combined with the
availability of funds under our new senior secured credit facility will be
sufficient to support our operations and liquidity requirements for the
foreseeable future.

NEW ACCOUNTING PRONOUNCEMENTS

On July 23, 2001, the Financial Accounting Standards Board released for
issuance SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and
Other Intangible Assets." SFAS No. 141 requires that all business combinations
subsequent to June 30, 2001, be accounted for under the purchase method of
accounting. The pooling-of-interests method is no longer allowed. Under SFAS
No. 142, goodwill and intangible assets with indefinite lives are no longer
amortized but are reviewed annually (or more frequently if impairment indicators
arise) for impairment. Separable intangible assets that are not deemed to have
indefinite lives will continue to be amortized over their useful lives (but with
no maximum life).

We anticipate adopting SFAS No. 142 beginning on September 1, 2002, the
first day of fiscal year 2003. We are evaluating the impact of the adoption of
these standards and have not yet determined the effect of adoption on our
financial position and results of operations. The impact of adoption may be
material. Upon adoption of these standards, goodwill amortization will cease and
certain intangibles such as workforce in place will be reclassified into
goodwill.

In August 2001, the Financial Accounting Standards Board released SFAS
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS
No. 144 establishes a single accounting model, based upon the framework
established in SFAS No. 121, for long-lived assets to be disposed of by sale.
SFAS No. 144 broadens the presentation of discontinued operations to include
more disposal transactions, and also provides additional implementation guidance
for SFAS No. 121. SFAS No. 144 is effective for fiscal years beginning after
December 15, 2001. We anticipate adopting SFAS No. 144 effective September 1,
2002, and we do not expect the adoption to have a material impact on our
financial position and results of operations.

In April 2002, the FASB issued SFAS No. 145, RESCISSION OF FASB STATEMENTS
NO. 4, 44, AND 64, AMENDMENT OF FASB STATEMENT NO. 13, AND TECHNICAL
CORRECTIONS, which rescinds FASB Statement No. 4, Reporting Gains and Losses
from Extinguishments of Debt, and an amendment of that Statement, FASB Statement
No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements. The
Statement also rescinds FASB Statement No. 44, Accounting for Intangible Assets
of Motor Carriers. The Statement amends FASB Statement No. 13, Accounting for
Leases, to eliminate an inconsistency between the required accounting for
sale-leaseback transactions and the required accounting for certain lease
modifications that have economic effects that are similar to sale-leaseback
transactions. We will adopt SFAS No. 145 in September 2002 and does not expect
this adoption to have a material effect on the financial statements, except for
the reclassification of the extraordinary item, loss on early extinguishments of
debt.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

INTEREST RATE RISK. We have market risk exposure from changes in interest
rates on our variable rate debt. Our policy is to manage interest rate exposure
through the use of a combination of fixed and floating rate debt instruments and
through the use of interest rate swaps. Our Credit Agreement and our gold
consignment agreement are variable rate facilities. The interest rates under
these facilities are based on a floating benchmark rate (such as LIBOR or the
Federal Funds rate) plus a fixed spread. We do not use derivatives or other
financial instruments for trading purposes. Upon the issuance of the Unsecured
Notes and the new Senior Secured Credit Facility on February 20, 2002, we
settled a portion of our existing swap agreements representing a notional amount
of $37.5 million and the

25

remaining interest rate swap agreement representing a notional amount of
$25 million has been reclassified as a free-standing derivative. As such, any
changes in the fair value of this derivative will result in a mark-to-market
adjustment of the carrying value with any changes being reported to other income
or loss. As of May 25, 2002, the fair value of this derivative represented a
liability of approximately $1.1 million.

Our derivatives and other financial instruments subject to interest rate
risk consist of (a) borrowings under the senior revolving credit facility (b) a
freestanding derivative and (c) the notional amount under the gold consignment
agreement. The net market value of these financial instruments at May 25, 2002
represented a net liability of $8.5 million.

SEMI-PRECIOUS STONES. We purchase the majority of our semi-precious stones
from a single source supplier in Germany. We believe that all of our major
competitors purchase their semi-precious stones from this same supplier. The
purchases are payable in Euros. In order to hedge our market risk, we have from
time-to-time purchased forward currency contracts. During 2002, we did not
purchase any forward currency contracts. During 2001, we purchased a total of
$2.0 million in forward currency contracts with various maturity dates resulting
in a net gain of $0.1 million.

GOLD. We purchase all of our gold requirements from a bank through our
revolving credit and gold consignment agreement. We consign the majority of our
gold from a bank and pay for gold as the product is shipped to customers and as
required by the terms of the gold consignment agreement. As of May 25, 2002, we
had hedged our gold requirements for the fiscal year ending August 31, 2002 by
covering the majority of our estimated gold requirements through the purchase of
gold options. At May 25, 2002, we held options to purchase 12,000 ounces of gold
at an average price of $310 per ounce, which expire on a monthly basis, ending
July 2002.

DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS

This report includes forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended. Although
management believes that the expectations reflected in such forward looking
statements are based upon reasonable assumptions, the Company can give no
assurance that these expectations will be achieved. Any change in or adverse
development, including the following factors may impact the achievement of
results in or accuracy of forward-looking statements: the price of gold and
precious, semiprecious and synthetic stones; the Company's access to students
and consumers in schools; the seasonality of the Company's business; regulatory
and accounting rules; the Company's relationship with its independent sales
representatives; fashion and demographic trends; general economic, business, and
market trends and events, especially during peak buying seasons for the
Company's products; the Company's ability to respond to customer change orders
and delivery schedules; development and operating costs; competitive pricing
changes; successful completion of management initiatives designed to achieve
operating efficiencies; the Company's cash flows; and the Company's ability to
draw down funds under its current bank financings and to enter into new bank
financings. The foregoing factors are not exhaustive. New factors may emerge or
changes may occur that impact the Company's operations and businesses.
Forward-looking statements herein are expressly qualified on the foregoing or
such other factors as may be applicable.

26

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

There are no materials pending legal proceedings to which the Company is a
party or to which any of its property is subject. The Company monitors all
claims, and the Company accrues for those, if any, which management believes may
be adversely decided against the Company and result in money damages to a third
party.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

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

None

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

None

(b) Reports on Form 8-K

A Form 8-K dated May 24, 2002 and filed May 29, 2002 announcing the
dismissal of Arthur Andersen LLP as our independent public accountants
and the engagement of Deloitte & Touche LLP as our new independent public
accountants.

27

AMERICAN ACHIEVEMENT CORPORATION
SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on July 9, 2002.

AMERICAN ACHIEVEMENT CORPORATION

By:
-----------------------------------------
David G. Fiore
CHIEF EXECUTIVE OFFICER

By:
-----------------------------------------
Sherice P. Bench
CHIEF FINANCIAL OFFICER