UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED MAY 29, 2004

OR

COMMISSION FILE NUMBER 333-84294

AMERICAN ACHIEVEMENT CORPORATION

(Exact name of registrant as specified in its charter)

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

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

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].

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

100 SHARES OF COMMON STOCK
(Number of shares outstanding as of May 29, 2004)

AMERICAN ACHIEVEMENT CORPORATION
FOR THE QUARTERLY PERIOD ENDED MAY 29, 2004
INDEX

2

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.

3

AMERICAN ACHIEVEMENT CORPORATION

Condensed Consolidated Statements of Operations
(In thousands)
(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 Cash Flows
(In thousands)
(unaudited)

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

6

AMERICAN ACHIEVEMENT CORPORATION

Consolidated Statements of Stockholders’ Equity
(In thousands, except share data)
(unaudited)

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

7

AMERICAN ACHIEVEMENT CORPORATION

Notes to Condensed Consolidated Financial Statements
(Dollars in tables in thousands)
(unaudited)

1.

Summary of Significant Accounting Policies

Consolidation

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

     The 8 ¼% Senior Subordinated Notes Due 2012 (the “Senior Sub Notes”) are guaranteed by certain direct and indirect domestic subsidiaries of the Company. The guarantees by the guarantor subsidiaries are full, unconditional, and joint and several. 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 29, 2004 are not necessarily indicative of the results that may be expected for the fiscal year ending August 28, 2004.

Effective January 30, 2004, the Company acquired the assets of C-B Graduation Announcements, LLC, a producer of personalized graduation announcements and related accessories (the “C-B Announcements Acquisition”). The maximum purchase price payable in connection with this acquisition is approximately $5.9 million in cash, of which approximately $5.0 million was paid at closing (including $1.0 million placed in escrow), with the escrowed amount and balance of the purchase price to be paid pending a post-closing purchase price adjustment. The C-B Announcements Acquisition was accounted for using the purchase method of accounting.

Stock-Based Compensation

     The Company accounts for equity instruments issued to non-employees in accordance with the provisions of SFAS No. 123 (“SFAS 123”), “Accounting for Stock-Based Compensation,” as amended by SFAS No. 148 (“SFAS 148”), “Accounting for Stock-Based Compensation — Transition and Disclosure an amendment of FASB Statement No. 123.” The Company accounts for stock-based employee compensation arrangements in accordance with the provisions of Accounting Principles Board Opinion No. 25 (“APB No. 25”), “Accounting for Stock Issued to Employees” and complies with the disclosure provisions of SFAS 123, as amended by SFAS 148.

     Had compensation expense for the employee stock plans been determined based on the fair value at the grant date for options granted consistent with the provisions of SFAS 123, as amended by SFAS 148, the pro forma net income (loss) would have been reported as follows:

8

AMERICAN ACHIEVEMENT CORPORATION

Notes to Condensed Consolidated Financial Statements — (Continued)
(Dollars in tables in thousands)
(unaudited)

     The fair value of each option grant is estimated at the date of grant using the Black-Scholes pricing model with the following weighted average assumptions for grants in the fiscal year ended 2003:

     No options were granted during the nine months ended May 29, 2004.

2.

Merger

     On December 24, 2003, the Company entered into a merger agreement with AAC Acquisition Corp. (“Acquisition”) and AAC Holding Corp. (“Holdings”), each Delaware corporations formed by Fenway Partners Capital Fund II, L.P. (“Fenway Partners”) for the sole purpose of effecting a merger. On March 25, 2004, as contemplated by the merger agreement, Acquisition was merged with and into the Company, with the Company continuing as the surviving corporation and a wholly owned subsidiary of Holdings (the “Merger”). Upon consummation of the Merger, substantially all of the equity interests in Holdings were indirectly held by an investor group led by Fenway Partners.

     The Merger was financed by a cash equity investment in Holdings by an investor group led by Fenway Partners of $102.0 million, the borrowing by the Company of $155.0 million under a seven-year term loan and $2.0 million under a six-year revolving loan, each under the Company’s new senior secured credit facility, the issuance by the Company of $150.0 million aggregate principal amount of its 8.25% senior subordinated notes due 2012, and the untendered Senior Unsecured Notes of $6.0 million. Proceeds of these financing arrangements were used to redeem the outstanding Series A Preferred Stock, refinance the Company’s existing indebtedness, including the redemption of the outstanding Senior Notes of $41.4 million and completion of a debt tender offer to acquire all of the existing Senior Unsecured Notes, and pay transaction costs and expenses. Pursuant to the debt tender offer, the Company retired $170.9 million of outstanding Senior Unsecured Notes for an aggregate $193.8 million and eliminated substantially all of the restrictive covenants associated with such notes. In addition, as part of the Merger, the Company terminated its existing Senior Secured Credit Facility and terminated its management contract with its previous owners. The Company also entered into an amendment of its existing gold consignment agreement and entered into a new management agreement with an affiliate of Fenway Partners.

     Beginning on March 25, 2004, the Company accounted for the Merger as a purchase in accordance with the provisions of Statement of Financial Accounting Standards (SFAS) 141, “Business Combinations,” which results in a new valuation for the assets and liabilities of the Company based upon the fair values as of the date of the Merger. As allowed under SEC Staff Accounting Bulletin No. 54, “Push Down Basis of Accounting Required in Certain Limited Circumstances,” the Company has reflected all applicable purchase accounting adjustments in the consolidated financial statements for all SEC filings covering periods subsequent to the Merger. As required, the Company has established a new basis for assets and liabilities based on the amount paid for ownership at March 25, 2004. Accordingly, the purchase price of $419.2 million was allocated to the assets and liabilities based on their relative fair values and $102.0 million was reflected in stockholders’ equity as the value of Fenway Partners’ ownership upon completion of the Merger. Immediately prior to the Merger, the Company’s stockholders’ equity was approximately $66.6 million.

The Company has estimated the fair value of its assets and liabilities, including intangible assets and property, plant and equipment, as of the Merger date and utilizing information available at the time the unaudited consolidated financial statements were prepared, including outside third party appraisals. These estimates are subject to refinement until all pertinent information is finalized.

9

AMERICAN ACHIEVEMENT CORPORATION

Notes to Condensed Consolidated Financial Statements — (Continued)
(Dollars in tables in thousands)
(unaudited)

     The purchase price of the Company was as follows:

As of March 25, 2004, the Company has preliminarily allocated the excess purchase price over the book value of net assets acquired in the Merger as follows:

     As a result of the Merger, the Company has reflected pre-Merger periods from February 29, 2004 to March 25, 2004 (“Predecessor”) and from August 31, 2003 to March 25, 2004 (“Predecessor”) and a post-Merger period from March 26, 2004 to May 29, 2004 (“Successor”) in its condensed consolidated financial statements for fiscal 2004.

     During the period from March 26, 2004 to May 29, 2004, the Company recognized in its consolidated statements of operations approximately $5.4 million of excess purchase price allocated to inventory as cost of sales and approximately $1.7 million of additional amortization expense of intangible assets as selling, general and administrative expenses, all as compared to its historical basis of accounting prior to the Merger.

10

AMERICAN ACHIEVEMENT CORPORATION

Notes to Condensed Consolidated Financial Statements — (Continued)
(Dollars in tables in thousands)
(unaudited)

3.

Goodwill and Other Intangible Assets

     The increase in goodwill and other intangible assets is predominantly attributable to the effect of purchase accounting in connection with the Merger as discussed in Note 2.

     Goodwill and other intangible assets consists of the following:

     Total amortization on other intangible assets was $2,227,000 for the period March 26, 2004 to May 29, 2004 and $2,156,000 for the period August 31, 2003 to March 25, 2004, for a combined amount of $4,383,000 for the nine months ended May 29, 2004 and $2,507,000 for the nine months ended May 31, 2003, of which amortization on deferred financing costs is recorded as interest expense and amortization on patents and customer lists and distribution contracts is recorded as amortization expense. Deferred financing costs are being amortized over the term of the related debt with a weighted average life of approximately 7.5 years, patents have a weighted average useful life of approximately 16.5 years, and customer lists and distribution contracts have a weighted average useful life of approximately 8.8 years. Estimated annual amortization expense for fiscal years ended 2005 through 2009 is approximately $13.4 million each year.

4.

Comprehensive Income (Loss)

     Unrecognized losses on accrued minimum pension liabilities are included in other comprehensive income (loss). The following amounts were included in determining the Company’s comprehensive income (loss):

11

AMERICAN ACHIEVEMENT CORPORATION

Notes to Condensed Consolidated Financial Statements — (Continued)
(Dollars in tables in thousands)
(unaudited)

5.

Inventories, Net

     A summary of inventories, net is as follows:

     Cost of sales includes depreciation and amortization of $1,510,000 for the period from March 26, 2004 to May 29, 2004 and $721,000 for the period from February 29, 2004 to March 25, 2004, for a combined amount of $2,231,000 for the three months ended May 29, 2004 and $2,037,000 for the three months ended May 31, 2003. Cost of sales includes depreciation and amortization of $1,510,000 for the period March 26, 2004 to May 29, 2004 and $5,062,000 for the period August 31, 2003 to March 25, 2004, for a combined amount of $6,572,000 for the nine months ended May 29, 2004 and $6,828,000 for the nine months ended May 31, 2003.

     Cost of sales for the period from March 26, 2004 to May 29, 2004 includes $5.4 million of excess purchase price that was allocated to inventory as of the Merger. Inventories as of May 29, 2004 includes $1.0 million of excess purchase price over acquired book value.

6.

Prepaid Expenses and Other Current Assets, Net

     Prepaid expenses and other current assets, net on the balance sheet, include reserves on sales representative advances of $3,126,000 and $2,516,000 at May 29, 2004 and August 30, 2003, respectively.

7.

Long-term Debt

     Long-term debt consists of the following:

12

AMERICAN ACHIEVEMENT CORPORATION

Notes to Condensed Consolidated Financial Statements — (Continued)
(Dollars in tables in thousands)
(unaudited)

8

¼% Senior Subordinated Notes

     On March 25, 2004, the Company issued $150 million of senior subordinated notes (the “Senior Sub Notes”) due in 2012. The Senior Sub Notes bear interest at a stated rate of 8 ¼%. The Senior Sub Notes are unsecured senior subordinated obligations and are subordinated in right of payment to all of the Company’s existing and future senior indebtedness, including obligations under the Company’s Senior Secured Credit Facility (as defined below), pari passu in right of payment with any of the Company’s future senior subordinated indebtedness and senior in right of payment to any of the Company’s future subordinated indebtedness. The Senior Sub Notes are guaranteed by certain of the Company’s existing domestic subsidiaries, and will be guaranteed by certain of the Company’s future domestic subsidiaries. The guarantees are subordinated in right of payment to all existing and future senior indebtedness of the applicable guarantor, pari passu in right of payment with any future future senior subordinated debt of such guarantor and senior in right of payment to any future subordinated indebtedness of such guarantor.

     The Company may not redeem the Senior Sub Notes until on or after April 1, 2008, except that the Company, in connection with certain equity offerings, may redeem up to 35 percent of the Senior Sub Notes before the third anniversary of the issue date of the Senior Sub Notes as long as (a) the Company pays a specified percentage of the principal amount of the Senior Sub Notes, plus interest, (b) the Company redeems the Senior Sub Notes within 90 days of completing a public equity offering and (c) at least 65 percent of the aggregate principal amount of the Senior Sub Notes originally issued remains outstanding afterward.

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

     The Senior Sub 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 Senior Sub 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 Company was in compliance with the Senior Sub Notes covenants as of May 29, 2004.

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 13.0%. 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 the existing Senior Subordinated Notes 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.

     On March 25, 2004, as discussed in Note 2, pursuant to the debt tender offer for the Unsecured Notes, the Company retired $170.9 million of outstanding Unsecured Notes for an aggregate $193.8 million and eliminated substantially all of the restrictive covenants associated with such notes. The remaining $6.0 million of Unsecured Notes outstanding will be redeemable by the Company on or after January 1, 2005 at its option at 105.813% of the principal amount thereof (plus accrued and unpaid interest). The Company was in compliance with the remaining covenants in the Unsecured Notes as of May 29, 2004.

11% Senior Subordinated Notes

     Commemorative Brands, Inc.’s (“CBI”) 11% 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.

13

AMERICAN ACHIEVEMENT CORPORATION

Notes to Condensed Consolidated Financial Statements — (Continued)
(Dollars in tables in thousands)
(unaudited)

     On March 25, 2004, as discussed in Note 2, the Company redeemed all of the outstanding Subordinated Notes for an aggregate of $42.1 million.

New Senior Secured Credit Facility

     In conjunction with the consummation of the Merger, on March 25, 2004, the Company entered into a $150 million term loan (the “Term Loan”) and an up to $40 million senior revolving credit facility (the “Senior Revolving Credit Facility”) with various financial institutions. The Term Loan and Revolving Credit Facility are secured by a first priority security interest in all existing and after-acquired assets of the Company, Holdings and certain of the Company’s direct and indirect domestic subsidiaries’ existing and after-acquired assets, including, without limitation, real property and all of the capital stock owned by the Company, Holdings, and certain of the Company’s direct and indirect domestic subsidiaries (including certain capital stock of their direct foreign subsidiaries only to the extent permitted by applicable law). All of the Company’s obligations under the Term Loan and Revolving Credit Facility are fully and unconditionally guaranteed by Holdings and certain of the Company’s direct and indirect domestic subsidiaries.

     The Term Loan is due in March 2011. Quarterly payments of $388,000 are made through 2011. The Term Loan has an interest rate based on the prime rate, plus points based on a calculated leverage ratio.

     The Senior Revolving Credit Facility matures in March 2010. Availability under the Senior Revolving Credit Facility is restricted to a total revolving commitment of $40 million as defined in the credit agreement under the Senior Secured Credit Facility (the “Credit Agreement”). Availability under the Senior Revolving Credit Facility as of May 29, 2004 was approximately $35.7 million with $2.4 million borrowings and $1.9 million in letters of credit outstanding.

     Advances under the Senior Revolving 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).

Former Senior Secured Credit Facility

     In conjunction with the issuance of the Unsecured Notes, on February 20, 2002, the Company entered into a $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.

     On March 25, 2004, as discussed in Note 2, the Company terminated its existing Senior Secured Credit Facility.

14

AMERICAN ACHIEVEMENT CORPORATION

Notes to Condensed Consolidated Financial Statements — (Continued)
(Dollars in tables in thousands)
(unaudited)

     The Company’s long-term debt outstanding as of May 29, 2004 matures as follows:

     The weighted average interest rate on debt outstanding as of May 29, 2004 and August 30, 2003 was 7.4% and 12.3%, respectively.

     The Company’s management believes the carrying amount of long-term debt approximates fair value as of May 29, 2004 and August 30, 2003, based upon current rates offered for debt with the same or similar debt terms.

8.

Commitments and Contingencies

Leases

     Certain Company facilities and equipment are leased under agreements expiring at various dates through 2018. Certain Company facilities and equipment are leased under agreements expiring at various dates through 2018. The Company’s commitments under the noncancellable portion of all operating and capital leases for each of the five years ending after August 30, 2003 and thereafter are approximately as follows:

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

15

AMERICAN ACHIEVEMENT CORPORATION

Notes to Condensed Consolidated Financial Statements — (Continued)
(Dollars in tables in thousands)
(unaudited)

Employment Contracts

     The Company has employment agreements with its executive officers, the terms of which expire at various times through August 2005. Unless terminated, one executive officer’s employment agreement adds one day to the term for each day that passes, and accordingly, there are always two years remaining on the term. The remaining executive officers’ terms will be automatically extended for an additional one year term. Such agreements, which have been revised from time-to-time, provide for minimum salary levels, adjusted annually for cost-of-living changes, as well as for incentive bonuses for a certain executive that are payable if specific management goals are attained. The aggregate commitment for future salaries as of May 29, 2004, excluding bonuses, was approximately $2.5 million.

Pending Litigation

     On February 11, 2004, Frederick Goldman, Inc. (the “Licensee”) filed an arbitration claim against CBI alleging, among other things, that CBI had improperly attempted to convert an exclusive license CBI granted to the Licensee to a non-exclusive license. In addition, on February 10, 2004, the Licensee commenced a lawsuit in federal district court in New York against CBI alleging that CBI breached the license agreement by granting third parties rights in violation of the Licensee’s exclusive rights under the license agreement. The district court claim seeks injunctive and monetary relief. No discovery has been conducted to date, therefore, at this time, it is not possible to predict with certainty the outcome of these unresolved legal matters or the range of possible loss or recovery. However, the Company intends to defend itself vigorously in these proceedings.

     The Company is not a party to any other 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.

Gold Consignment Agreement

     Under the Company’s gold consignment financing arrangement, the Company has the ability to have on consignment the lowest of the dollar value of 27,000 troy ounces of gold, $14.2 million or a borrowing base, determined based upon a percentage of gold located at the Company’s facilities and other approved locations, as specified by the agreement. The Company expensed consignment fees of $69,000 for the period from February 29, 2004 to March 25, 2004 and $26,000 for the period from March 26, 2004 to May 29, 2004, for a combined amount of $95,000 for the three months ended May 29, 2004 and $90,000 for the three months ended May 31, 2003. The Company expensed consignment fees of $180,000 for the period from August 31, 2003 to March 25, 2004 and $69,000 for the period from March 26, 2004 to May 29, 2004, for a combined amount of $249,000 for the nine months ended May 29, 2004 and $232,000 for the nine months ended May 31, 2003. 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 29, 2004 and August 30, 2003, the Company held approximately 16,730 ounces and 17,780 ounces, respectively, of gold valued at $6.6 million and $6.7 million, respectively, on consignment. The gold consignment agreement does not have a stated period and it can be terminated by either party upon 60 days written notice.

9.

Income Taxes

     Due to the impact of purchase accounting on deferred taxes as a result of the Merger, the Company has recognized a net deferred tax liability. Therefore, an effective rate has of 39% has been applied to the period March 26, 2004 through May 29, 2004 to represent estimated federal and state income taxes.

16

AMERICAN ACHIEVEMENT CORPORATION

Notes to Condensed Consolidated Financial Statements — (Continued)
(Dollars in tables in thousands)
(unaudited)

10.

Stockholders’ Equity

     Prior to the consummation of the Merger, in the event of any liquidation, dissolution or winding up of the Company, the holders of the Series A Preferred Stock were entitled to 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 $100,737 at August 30, 2003.

     During the nine-month period ended May 31, 2003, the Company granted 28,500 options to employees. These options have an exercise price of $6.02 per share and, accordingly, the Company did not record any related compensation expense based upon the estimated fair value of the stock on the date of grant. A portion of the options, 10,000, vested on the grant date, with the remaining options vesting ratably over a four year period.

     Pursuant to an employment agreement entered into between the Company and its chief executive officer in July 1999, as amended on February 1, 2002, if the Company achieves certain EBITDA targets as defined by the agreement at any point from 2002 through 2004, the chief executive is entitled to receive up to a total of $1 million in face value of the Company’s Series A Preferred Stock. In addition, the plan provided for the immediate issuance of an option to purchase 12,500 shares of the Company’s common stock, and pursuant to this plan, an option to purchase 12,500 shares was granted in fiscal 2002. The executive is also entitled to receive discretionary bonuses as directed by the Board of Directors up to $300,000 annually, of which $225,000 is accrued as of May 29, 2004.

     On March 25, 2004, as part of the Merger discussed in Note 2, the Company’s parent company issued substantially all of its outstanding equity interests to an investor group led by Fenway Partners for $102.0 million. All previously issued shares of preferred stock or common stock of the Company, and all warrants, options and other rights to acquire preferred stock or common stock of the Company (including the right and option in the employment agreement described above) were redeemed, cancelled or exchanged as part of the Merger discussed in Note 2.

11.

Postretirement Pension and Medical Benefits

     CBI provides certain healthcare and life insurance benefits for former employees of the L.G. Balfour Company who retired prior to December 31, 1990. Certain hourly employees of Taylor are covered by a defined benefit pension plan (“TPC Plan”) established by Taylor. The benefits under the CBI and TPC Plans are based primarily on the employees’ years of service and compensation near retirement. The funding policies for these plans are consistent with the funding requirements of federal laws and regulations.

     The net periodic postretirement benefit cost, include the following components:

17

AMERICAN ACHIEVEMENT CORPORATION

Notes to Condensed Consolidated Financial Statements — (Continued)
(Dollars in tables in thousands)
(unaudited)

12.

Related-Party Transactions

     Amounts paid under a management agreement with Castle Harlan, Inc. totaled $0 for the period from March 26, 2004 to May 29, 2004 and $750,000 for the period February 29, 2004 to March 25, 2004, for a combined amount of $750,000 for the three months ended May 29, 2004 and $1,500,000 for the three months ended May 31, 2003. Amounts paid under the management agreement totaled $0 for the period from March 26, 2004 to May 29, 2004 and $2,250,000 for the period August 30, 2003 to March 25, 2004, for a combined amount of $2,250,000 for the nine months ended May 29, 2004 and $2,250,000 for the nine months ended May 31, 2003. As of May 29, 2004 and August 30, 2003, the Company had accrued management fees of approximately $750,000, respectively.

     On March 25, 2004 upon consummation of the Merger, the Company entered into a new management agreement with an affiliate of Fenway Partners pursuant to which the Company, among other things, agreed to pay such affiliate an annual fee equal to the greater of $3.0 million or 5% of the previous fiscal year’s EBITDA (as defined in the agreement). Amounts paid under the new management agreement totaled $0 for the period March 26, 2004 to May 29, 2004.

18

AMERICAN ACHIEVEMENT CORPORATION

Notes to Condensed Consolidated Financial Statements — (Continued)
(Dollars in tables in thousands)
(unaudited)

13.

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 college levels, jewelry commemorating family events, fan affinity jewelry and related products, and professional sports championship rings.

[Continued from above table, first column(s) repeated]

19

AMERICAN ACHIEVEMENT CORPORATION

Notes to Condensed Consolidated Financial Statements — (Continued)
(Dollars in tables in thousands)
(unaudited)

[Continued from above table, first column(s) repeated]

     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.

20

AMERICAN ACHIEVEMENT CORPORATION

Notes to Condensed Consolidated Financial Statements — (Continued)
(Dollars in tables in thousands)
(unaudited)

14.

Recent Accounting Pronouncements

     In May 2003, SFAS No. 150 (“SFAS 150”), “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity,” was issued, which establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. The Company adopted SFAS 150 beginning in September 2003. The adoption of this standard did not have a significant impact on its financial statements.

     In January 2003, the FASB issued FIN No. 46 “Consolidation of Variable Interest Entities, an Interpretation of ARB 51.” In December 2003, the FASB revised FIN No. 46 to reflect decisions it made regarding a number of implementation issues. FIN No. 46, as revised, requires that the primary beneficiary of a variable interest entity (“VIE”) consolidate the entity even if the primary beneficiary does not have a majority voting interest. This Interpretation applies to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support. This Interpretation also identifies those situations where a controlling financial interest may be achieved through arrangements that do not involve voting interests. The Interpretation also establishes additional disclosures which are required regarding an enterprise’s involvement with a VIE when it is not the primary beneficiary. The requirements of this Interpretation are required to be applied to any VIE created after January 31, 2003. The Company adopted FIN 46 beginning in the first quarter of fiscal year 2004. The adoption of this standard did not have a significant impact on its financial statements.

     In December 2003, the FASB amended SFAS No. 132, “Employers’ Disclosures about Pensions and Other Postretirement Benefits.” The amendment revised employers’ disclosures about pension plans and other post retirement benefit plans to require additional disclosures to those in the original SFAS No. 132 about the assets, obligations, cash flows, and net periodic benefit cost of defined pension plans and other defined benefit postretirement plans. The Company adopted the additional disclosure requirements in the third quarter of 2004.

21

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 “Special Note Regarding Forward-Looking Statements.”

Overview

     We are one of the leading manufacturers and suppliers of class rings, yearbooks, graduation products, achievement publications and recognition and affinity jewelry in the United States. Our two principal business segments are scholastic products and recognition and affinity products. The scholastic products division, which serves the high school, college and, to a lesser extent, elementary and junior high school markets, accounted for approximately 95% and 89% of our net sales for the combined three months and combined nine months ended May 29, 2004, respectively. Our scholastic product segment produces, markets, and sells 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 5% and 11% of our net sales for the combined three months and combined nine months ended May 29, 2004, respectively. This segment produces, markets, and sells 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.

     On December 24, 2003, we entered into a merger agreement with AAC Acquisition Corp. (“Acquisition”) and AAC Holding Corp. (“Holdings”), each Delaware corporations formed by Fenway Partners Capital Fund II, L.P. (“Fenway Partners”) for the sole purpose of effecting a merger. On March 25, 2004, as contemplated by the merger agreement, Acquisition was merged with and into us, with us continuing as the surviving corporation and a wholly owned subsidiary of Holdings (the “Merger”). Upon consummation of the Merger, substantially all of the equity interests in Holdings were indirectly held by an investor group led by Fenway Partners.

     The Merger was financed by a cash equity investment in Holdings by an investor group led by Fenway Partners of $102.0 million, the borrowing by us of $155.0 million under a seven-year term loan and $2.0 million under a six-year revolving loan, each under our new senior secured credit facility, the issuance by us of $150.0 million aggregate principal amount of our 8.25% senior subordinated notes due 2012, and the untendered Senior Unsecured Notes of $6.0 million. Proceeds of these financing arrangements were used to redeem the outstanding Series A Preferred Stock, refinance our existing indebtedness, including the redemption of the outstanding Senior Notes of $41.4 million and completion of a debt tender offer to acquire all of the existing Senior Unsecured Notes, and pay transaction costs and expenses. Pursuant to the debt tender offer, we retired $170.9 million of outstanding Senior Unsecured Notes for an aggregate $193.8 million and eliminated substantially all of the restrictive covenants associated with such notes. In addition, as part of the Merger, we terminated our existing Senior Secured Credit Facility and terminated our management contract with our previous owners. We also entered into an amendment of our existing gold consignment agreement and entered into a new management agreement with an affiliate of Fenway.

     Beginning on March 25, 2004, we accounted for the Merger as a purchase in accordance with the provisions of Statement of Financial Accounting Standards (SFAS) 141, “Business Combinations,” which results in a new valuation of our assets and liabilities based upon the fair values as of the date of the Merger. As allowed under SEC Staff Accounting Bulletin No. 54, “Push Down Basis of Accounting Required in Certain Limited Circumstances,” we have reflected all applicable purchase accounting adjustments in the consolidated financial statements for all SEC filings covering periods subsequent to the Merger. As required, we have established a new basis for assets and liabilities based on the amount paid for ownership at March 25, 2004. Accordingly, the purchase price of $419.2 million was allocated to the assets and liabilities based on their relative fair values and $102.0 million was reflected in stockholders’ equity as the value of Fenway Partners’ ownership upon completion of the Merger. Immediately prior to the Merger, our stockholders’ equity was approximately $66.6 million.

We estimated the fair value of our assets and liabilities, including intangible assets and property, plant and equipment, as of the Merger date and utilizing information available at the time the unaudited consolidated financial statements were prepared, including outside third party appraisals. These estimates are subject to refinement until all pertinent information is finalized.

22

The purchase price was as follows:

As of March 25, 2004, we have preliminarily allocated the excess purchase price over the book value of net assets acquired in the Merger as follows:

     As a result of the Merger, we have reflected pre-Merger periods from February 29, 2004 to March 25, 2004 (“Predecessor”) and from August 31, 2003 to March 25, 2004 (“Predecessor”) and a post-Merger period from March 26, 2004 to May 29, 2004 (“Successor”) in our condensed consolidated financial statements for fiscal 2004.

     During the period from March 26, 2004 to May 29, 2004, we recognized in our consolidated statements of operations approximately $5.4 million of excess purchase price allocated to inventory as cost of sales and approximately $1.7 million of additional amortization expense of intangible assets as selling, general and administrative expenses, all as compared to our historical basis of accounting prior to the Merger.

Company Background

     Our predecessor was formed in March 1996 for the purpose of acquiring substantially all of 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. These acquisitions were consummated on December 16, 1996. Our company was formed in June 2000 to serve as a holding company for our predecessor as well as future acquisitions. In June 2000, we acquired Taylor Senior Holding Company, the parent company of Taylor Publishing Company (“Taylor”), whose primary business was designing and printing student yearbooks. In March 2001, we acquired all of the capital stock of Educational Communications, Inc. (“ECI “), which publishes achievement publications. In July 2002, we acquired all the outstanding stock and warrants of Milestone Marketing Incorporated (“Milestone”), a marketer of class rings and other graduation products to the college market.

     C-B Announcement Acquisition. Effective January 30, 2004, we acquired the assets of C-B Graduation Announcements, LLC, a producer of personalized graduation announcements and related accessories (the “C-B Announcements Acquisition”). The maximum purchase price payable in connection with this acquisition is approximately $5.9 million in cash, of which approximately $5.0 million was paid at closing (including $1.0 million placed in escrow), with the escrowed amount and balance of the purchase price to be paid pending a post-closing purchase price adjustment. The C-B Announcements Acquisition was accounted for using the purchase method of accounting.

23

Critical Accounting Policies

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

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

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

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

     Goodwill and Other Intangible Assets. We account for our long-lived assets with indefinite lives under Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”), which addresses the initial recognition and measurement of intangible assets acquired outside of a business combination and the accounting for goodwill and other intangible assets subsequent to their acquisition. SFAS No. 142 also provides that intangible assets with finite useful lives be amortized and that goodwill and intangible assets with indefinite lives will not be amortized, but will rather be tested for impairment upon adoption and on an annual basis thereafter. As of the Merger, a third party valuation was prepared supporting our goodwill and other intangible assets values.

     Long-lived Tangible and Intangible Assets with Definite Lives. We test our long-lived tangible and intangible assets with definite lives for impairment under Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” which requires us to review long-lived tangible and intangible assets with definite lives whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of these assets is measured by comparison of its carrying amount to future undiscounted cash flows the assets are expected to generate. If long-lived assets are considered to be impaired, the impairment to be recognized equals the amount by which the carrying value of the assets exceeds its fair market value and is recorded in the period the determination is made. As of the Merger, a third party valuation was prepared supporting our goodwill and other intangible assets values and lives.

24

Results of Operations

     As a result of the Merger, we have reflected the period from March 26, 2004 to May 29, 2004 (“Successor”) and the period from February 29, 2004 to March 25, 2004 (“Predecessor”) and the period from August 31, 2003 to March 25, 2004 (“Predecessor”) in our condensed consolidated financial statements.

     During the Successor period from March 26, 2004 to May 29, 2004, we recognized in our consolidated statements of operations approximately $5.4 million of excess purchase price allocated to inventory as cost of sales and approximately $1.7 million of additional amortization expense of intangible assets as selling, general and administrative expenses, all as compared to our historical basis of accounting prior to the Merger.

     Our condensed consolidated financial statements for the Predecessor period ended March 25, 2004, were prepared using our historical basis of accounting. As a result of our transaction on March 25, 2004, we were required to make the purchase accounting adjustments discussed in Note 2 of the financial statements. Although a new basis of accounting began on March 26, 2004, we have presented results for the three and nine-month periods ended May 29, 2004 on a combined basis as we believe this presentation facilitates the comparison of our results with the corresponding periods in 2003. The combined operating results may not reflect the actual results we would have achieved absent the adjustments and may not be predictive of future results of operations.

For the Period March 26, 2004 to May 29, 2004 (Successor) and For the Period February 29, 2004 to March 25, 2004 (Predecessor) Combined, Compared to Three Months Ended May 31, 2003 (Predecessor)

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: