AMERICAN ACHIEVEMENT CORP - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

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 MARCH 1, 2003

OR

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

COMMISSION FILE NUMBER 333-84294

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 Number)
incorporation or organization)

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 [X] No [ ]. 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 March 1, 2003)

AMERICAN ACHIEVEMENT CORPORATION
FOR THE QUARTERLY PERIOD ENDED MARCH 1, 2003
INDEX

2

PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND NOTES

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

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
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(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 significant 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 American
Achievement Corporation. The guarantees by the guarantor subsidiaries are full,
unconditional, and joint and several. All of the guarantor subsidiaries are
wholly owned, with the exception of Commemorative Brands, Inc., which is
majority 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 three months and
six months ended March 1, 2003 are not necessarily indicative of the results
that may be expected for the fiscal year ending August 30, 2003.

2. AMORTIZATION OF GOODWILL AND OTHER INTANGIBLE ASSETS

The Company adopted Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets" ("SFAS 142"), which revises the
accounting for purchased goodwill and intangible assets, effective September 1,
2002. This Statement was applied to all goodwill and other intangible assets
recognized on the balance sheet, regardless of when those assets were initially
recorded. Effective September 1, 2002, goodwill and trademarks were no longer
amortized. Goodwill was $162,059 and $159,308 at March 1, 2003 and August 31,
2002, respectively, and trademarks were $41,855 at March 1, 2003 and August 31,
2002. During the six months ended March 1, 2003, goodwill increased primarily
due to a $2.4 million reclassification of work force in place from other
intangible assets.

The impact of the implementation of SFAS No. 142 and comparison to the prior
year period is as follows:

7

AMERICAN ACHIEVEMENT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(UNAUDITED)

2. AMORTIZATION OF GOODWILL AND OTHER INTANGIBLE ASSETS (CONTINUED)

The Company includes other intangible assets subject to amortization in other
assets on the balance sheet. The other intangible assets subject to amortization
are as follows:

Total amortization on intangible assets above was $808 and $1,640 for the three
months and six months ended March 1, 2003, respectively, of which amortization
on deferred financing costs is recorded as interest expense and amortization on
customer lists and distribution contracts is recorded as amortization expense.
Estimated annual amortization expense for fiscal years ended 2003 through 2007
is approximately $3.3 million each year.

3. SIGNIFICANT ACQUISITIONS

Effective July 15, 2002, American Achievement purchased all the outstanding
stock and warrants of Milestone Marketing Incorporated ("Milestone") for a total
purchase price of $16.3 million. The acquisition of Milestone 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. Milestone is a specialty marketer of class rings and other
graduation products to the college market. Effective December 31, 2002,
Milestone merged into Commemorative Brands, Inc. ("CBI"), with CBI as the
surviving entity. In conjunction with the merger, for each share of Milestone
common stock held by the Company, the Company received one share of CBI common
stock. The existing common stock and warrants of Milestone were cancelled in
connection with this transaction.

The estimated fair value of assets acquired and liabilities assumed relating to
the Milestone acquisition, which is preliminary and subject to further
refinements in accordance with accounting principles generally accepted in the
United States of America, is summarized below:

Working capital .................................................. $ (2,413)
Property, plant and equipment .................................... 113
Other intangibles ................................................ 2,500
Goodwill ......................................................... 16,047
Other long-term assets ........................................... 28
------------
$ 16,275
============

8

AMERICAN ACHIEVEMENT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
(UNAUDITED)

3. SIGNIFICANT ACQUISITIONS (CONTINUED)

During the six months ended March 1, 2003, goodwill was increased by
approximately $378 primarily related to professional services incurred in
connection with the Milestone acquisition. Goodwill and trademarks related to
Milestone are not amortized in accordance with SFAS No. 142.

As a result of this transaction, the consolidated financial statements of the
Company include the results of operations of Milestone for the three months and
six months ended March 1, 2003, while the consolidated financial statements of
the Company do not include the results of operations of Milestone for the three
months and six months ended February 23, 2002.

The following unaudited pro forma data summarizes the results of operations for
the periods indicated as if the Milestone acquisition had been completed as of
August 26, 2001:

4. COMPREHENSIVE INCOME (LOSS)

Beginning with 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 six month periods ended March 1, 2003 and February 23, 2002.

9

AMERICAN ACHIEVEMENT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
(UNAUDITED)

5. INVENTORIES, NET

A summary of inventories, net is as follows:

Cost of sales includes depreciation and amortization of $2,537 and $1,995 for
the three months ended March 1, 2003 and February 23, 2002, respectively. Cost
of sales includes depreciation and amortization of $4,791 and $3,902 for the six
months ended March 1, 2003 and February 23, 2002, respectively.

6. LONG-TERM DEBT

Long-term debt consists of the following:

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.

10

AMERICAN ACHIEVEMENT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
(UNAUDITED)

6. LONG-TERM DEBT (CONTINUED)

The Company may not redeem the Unsecured Notes until 2005, except that the
Company, in connection with a public equity offering, 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 March 1, 2003.

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. The Company has not
redeemed any of the Subordinated Notes as of March 1, 2003.

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 the principal amount thereof,
plus accrued and unpaid interest and Liquidated Damages, if any, thereon to the
date of purchase.

11

AMERICAN ACHIEVEMENT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
(UNAUDITED)

6. LONG-TERM DEBT (CONTINUED)

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. The Company was in compliance with the Subordinated Notes
covenants as of March 1, 2003.

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 March
1, 2003 was approximately $31.3 million with $6.5 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 six months ended March 1, 2003 was 7.3%.

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
changing the provisions of 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 March 1, 2003.

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. During the fiscal year ended August 31, 2002, the Company
recognized an extraordinary charge in February 2002 of approximately $5.7
million, net of income tax benefit, relating to the write-off of unamortized
deferred financing costs. Upon adoption of SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections," the Company reclassed this amount to operating expenses. Due to
the termination and reclassification of interest rate swaps, the Company
recorded a charge to other expense of approximately $2.6 million.

12

AMERICAN ACHIEVEMENT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
(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 trading derivative in other current liabilities. As such,
any changes in the fair value of this derivative are recognized in other income
or expense. As of March 1, 2003, the fair value of this derivative represented a
liability of approximately $325 and is included in current liabilities.

The Company's long-term debt outstanding as of March 1, 2003 matures as follows:

The weighted average interest rate of debt outstanding as of March 1, 2003 and
August 31, 2002 was 11.7% and 11.5%, respectively.

The Company's management believes the carrying amount of long-term debt
approximates fair value as of March 1, 2003 and August 31, 2002, 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.

EMPLOYMENT CONTRACTS

The Company has employment agreements with its executive officers, the terms of
which expire at various times through July 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 can 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 March 1, 2003, excluding bonuses, was
approximately $2.7 million.

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.

13

AMERICAN ACHIEVEMENT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
(UNAUDITED)

7. COMMITMENTS AND CONTINGENCIES (CONTINUED)

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 three months ended March 1,
2003 and February 23, 2002, the Company expensed consignment fees of
approximately $74 and $57, respectively. For the six months ended March 1, 2003
and February 23, 2002, the Company expensed consignment fees of approximately
$142 and $117, 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 March 1, 2003 and August 31, 2002, the
Company held approximately 17,648 ounces and 14,830 ounces, respectively, of
gold valued at $6.1 million and $4.6 million, respectively, on consignment.

8. INCOME TAXES

For the year ending August 30, 2003, the annual effective tax rate is expected
to be 5% on pretax income from operations. The effective tax rate shown for each
quarter of the fiscal years ended 2003 and 2002 may fluctuate due to limitations
on the maximum year-to-date tax benefits allowed to be recorded. For the six
months ended March 1, 2003 and February 23, 2002, the Company recorded an income
tax benefit of $0 and $1,268, respectively, which represents an effective tax
rate of none and 18%, respectively. The effective tax rate for the six months
ending March 1, 2003 represents the anticipated annual tax rate primarily
attributable to state taxes. No federal tax expense is anticipated as a result
of the expected change in the Company's valuation allowance. No net federal
income tax benefit is reflected in the statement of operations for net operating
losses to be carried forward since realization of the potential benefit of net
operating loss carry-forwards is not considered to be more likely than not. The
Company's effective tax rate for the six months ending February 23, 2002 related
to the expected annual benefits from the net operating loss carryback
attributable to Taylor Senior Holding Corp (TSHC) as a percentage of the
Company's expected annual pretax loss from continuing operations.

9. STOCKHOLDERS' EQUITY

During the year ended August 31, 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 are 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 $100,685 at March 1, 2003 and August 31,
2002, respectively.

STOCK-BASED COMPENSATION

During fiscal year 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.

14

AMERICAN ACHIEVEMENT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
(UNAUDITED)

9. STOCKHOLDERS' EQUITY (CONTINUED)

Incentive stock options for 97,233 shares and 69,853 shares and nonqualified
stock options for 2,230 and 2,230 shares of the Company's Common Stock were
outstanding as of March 1, 2003 and August 31, 2002, respectively.

During the six-month period ended March 1, 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 fair market 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.

The Company applies Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations in accounting for its
stock option plans. Had compensation cost for the Company's stock-based
compensation plan been determined based on the fair value at the grant date for
awards consistent with the method of SFAS No. 123, "Accounting for Stock-Based
Compensation," the Company's net loss applicable to common stockholders for the
periods ended March 1, 2003 and February 23, 2002 would not have been materially
impacted.

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 with a discretionary option to
purchase shares. An option to purchase 12,500 shares was granted in fiscal 2002
pursuant to this plan. The executive is also entitled to receive discretionary
bonuses as directed by the Board of Directors up to $300 annually, of which $150
has been accrued as of March 1, 2003.

10. RELATED PARTY TRANSACTIONS

The Company entered into a management agreement on March 30, 2001 with Castle
Harlan, Inc., its majority shareholder, (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. The Company is required to pay a management fee equal to $3.0
million, unless otherwise prohibited by the Company's Credit Agreement. Amounts
paid under the management agreement totaled approximately $0 and $325 for the
three months ended March 1, 2003 and February 23, 2002, respectively. Amounts
paid under the management agreement totaled approximately $750 and $1,075 for
the six months ended March 1, 2003 and February 23, 2002, respectively. As of
March 1, 2003 and August 31, 2002, the Company had accrued management fees of
approximately $1,500 and $750, respectively.

In connection with a previous acquisition, the Company has a receivable from the
Castle Harlan group relating to the acquisition expenses, along with other
reimbursible expenses which was to be reimbursed to the Company. The amount of
such receivable was approximately $11 and $26 as of March 1, 2003 and August 31,
2002, respectively.

15

AMERICAN ACHIEVEMENT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
(UNAUDITED)

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 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.

16

AMERICAN ACHIEVEMENT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
(UNAUDITED)

12. NEW ACCOUNTING PRONOUNCEMENTS

In August 2001, Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 143, "Accounting for Asset
Retirement Obligations." This statement requires that the fair value of a
liability for an asset retirement obligation be recognized in the period in
which it is incurred if a reasonable estimate of fair value can be made. The
associated asset retirement costs are capitalized as part of the carrying amount
of the long-lived asset. SFAS No. 143 became effective for the Company in fiscal
year 2003. The adoption of SFAS No. 143 did not have a significant impact on the
Company's financial statements.

In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," that was effective for financial statements
issued for fiscal years beginning after December 15, 2001. The adoption of SFAS
No. 144 did not have a significant impact on the Company's financial statements.

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
This statement requires, among other things, that gains and losses on the early
extinguishments of debt be classified as extraordinary only if they meet the
criteria for extraordinary treatment set forth in Accounting Principles Board
Opinion No. 30. The provisions of this statement related to classification of
gains and losses on the early extinguishments of debt are effective for fiscal
years beginning after May 15, 2002. The adoption of this standard required the
Company to reclassify a $5.7 million loss from early extinguishment from
extraordinary items into operating income (loss) for the three and six months
ended February 23, 2002.

In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." This Statement requires recording costs
associated with exit or disposal activities at their fair values when a
liability has been incurred. Under previous guidance, certain exit costs were
accrued upon management's commitment to an exit plan, which is generally before
an actual liability has been incurred. The provisions of this statement are
effective for exit or disposal activities that are initiated after December 31,
2002. The adoption of SFAS No. 146 did not have a significant impact on the
Company's financial statements.

In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure," which amends SFAS No. 123,
"Accounting for Stock-Based Compensation." SFAS No. 148, which is effective for
fiscal years ending after December 15, 2002, provides alternative methods of
transition for a voluntary change to the fair value-based method and requires
more prominent and more frequent disclosures in the financial statements about
the effects of stock-based compensation. At this time, the Company has elected
not to adopt the voluntary expense recognition provisions of SFAS No. 123.

In December 2002 the FASB issued FASB Interpretation No. 45 ("FIN No. 45")
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others an interpretation of FASB
Statements No. 5, 57, and 107 and rescission of FASB Interpretation No. 34,"
which addresses the disclosures to be made by a guarantor in its interim and
annual financial statements about its obligations under guarantees and clarifies
the requirements related to the recognition of a liability by a guarantor at the
inception of a guarantee for the obligations the guarantor has undertaken in
issuing that guarantee. FIN No. 45 becomes effective for financial statements of
interim or annual periods ending after December 15, 2002. The adoption of FIN
No. 45 did not have a significant impact on the Company's financial statements.

17

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." "We,"
"us," "our," and comparable terms refer to the Company.

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 89.5% and 79.9% of our net sales
for the three months and six months ended March 1, 2003, respectively. 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 10.5%
and 20.1% of our net sales for the three months and six months ended March 1,
2003, respectively. 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, licensing of jewelry,
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.

18

Milestone Acquisition. Effective July 15, 2002, we acquired all the outstanding
stock and warrants of Milestone for a total purchase price of $16.3 million (the
"Milestone Acquisition"). The Milestone Acquisition was accounted for using the
purchase method of accounting. Milestone is a specialty marketer of class rings
and other graduation products to the college market. Goodwill and trademarks
related to Milestone are not amortized in accordance with SFAS No. 142.

As a result of this transaction, our consolidated financial statements include
the results of operations of Milestone for the three months and six months ended
March 1, 2003, while our consolidated financial statements do not include the
results of operations of Milestone for the three months and six months ended
February 23, 2002.

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

CRITICAL ACCOUNTING POLICIES

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

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

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

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

19

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

RESULTS OF OPERATIONS

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

THREE MONTHS ENDED MARCH 1, 2003 COMPARED TO THREE MONTHS ENDED FEBRUARY 23,
2002

Net Sales. Net sales consist of product sales and are net of product returns and
promotional discounts. Net sales increased $4.4 million, or 8.1%, to $59.4
million for the three months ended March 1, 2003 from $55.0 million for the
three months ended February 23, 2002. This increase in net sales was due
primarily to timing of shipments and college ring sales related to the Milestone
acquisition.

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

Scholastic Products. Net sales increased $3.5 million to $53.2 million
for the three months ended March 1, 2003 from $49.7 million for the
three months ended February 23, 2002. The increase in net sales was the
result of a timing difference from early graduation products shipments
and college ring sales related to the Milestone acquisition.

Recognition and Infinity Products. Net sales increased $900,000 to $6.2
million for the three months ended March 1, 2003 from $5.3 million for
the three months ended February 23, 2002. The increase was primarily
due to an increase in licensing of jewelry products.

Gross Profit. Gross margin represents gross profit as a percentage of net sales.
Gross margin was 59.7% for the three months ended March 1, 2003, a 0.7
percentage point increase from 59.0% for the three months ended February 23,
2002. The overall increase was mainly the result of an increase in margins of
class rings and jewelry commemorating family events.

20

Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased $600,000, or 1.7%, to $31.4 million for the
three months ended March 1, 2003 from $32.0 million for the three months ended
February 23, 2002. Included in selling, general and administrative expenses are
two sub-categories: selling and marketing expenses and general and
administrative expenses. Selling and marketing expenses increased $1.3 million
to $23.1 million, or 38.9% of net sales, for the three months ended March 1,
2003 from $21.8 million, or 39.6% of net sales, for the three months ended
February 23, 2002. The decrease in selling and marketing expenses as a
percentage of net sales was a result of the timing of expenses, slightly offset
by increased expenses related to graduation products shipments and their
associated commissions.

General and administrative expenses for the three months ended March 1, 2003
were $8.3 million, or 14.0% of net sales, as compared to $10.2 million, or 18.5%
of net sales, for the three months ended February 23, 2002. The decrease in
general and administrative expenses as a percentage of net sales was primarily a
result of the adoption of SFAS No. 142, in which goodwill and trademarks are no
longer amortized.

Loss on Extinguishment of Debt. In conjunction with the issuance of the
Unsecured Notes and the Senior Secured Credit Facility on February 20, 2002, the
Company paid off the then outstanding term loans and revolver under the former
credit facility and bridge notes to affiliates. As a result, a loss of $5.7
million was recognized for the three months ended February 23, 2002 relating to
the write-off of unamortized deferred financing costs.

Operating Income (Loss). As a result of the foregoing, operating income was $4.0
million, or 6.8% of net sales, for the three months ended March 1, 2003, as
compared with an operating loss of $5.2 million, or 9.5% of net sales, for the
three months ended February 23, 2002. The scholastic products segment reported
operating income of $4.1 million and the for the recognition and affinity
products segment reported an operating loss of $100,000 for the three months
ended March 1, 2003. The adoption of SFAS No. 145 required the Company to
reclassify the $5.7 million loss from early extinguishment of debt into
operating income (loss) for the three months ended February 23, 2002. Without
this reclassification, operating income for the three months ended February 23,
2002 would have been $500,000, consisting of $3.1 million operating income from
the scholastic products segment and a $2.6 million operating loss from the
recognition and affinity products segment for the three months ended February
23, 2002.

Interest Expense, Net. Net interest expense was $7.2 million for the three
months ended March 1, 2003 and $5.3 million for the three months ended February
23, 2002. The average debt outstanding for the three months ended March 1, 2003
and the three months ended February 23, 2002 was $236 million and $209 million,
respectively. The weighted average interest rate of debt outstanding for the
three months ended March 1, 2003 and the three months ended February 23, 2002
was 12.4% and 10.0%, respectively.

Other Expense. Other expense was $0 for the three months ended March 1, 2003 and
$2.6 million for the three months ended February 23, 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 reclassified as
a trading derivative to other current liabilities. As such, any changes in the
fair value of the 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
March 1, 2003, the fair value of this derivative represented a liability of
approximately $325,000.

Provision (Benefit) for Income Taxes. For the year ending August 30, 2003, the
annual effective tax rate is expected to be 5% on pretax income from operations.
The effective tax rate shown for each quarter of the fiscal years ended 2003 and
2002 may fluctuate due to limitations on the maximum year-to-date tax benefits
allowed to be recorded. For the three months ended March 1, 2003 and February
23, 2002, the Company recorded an income tax benefit of $18,000 and $1,507,000,
respectively, which represents an effective tax rate of none and 20%,
respectively. The effective tax rate for the quarter ended March 1, 2003
represents the anticipated annual tax rate primarily attributable to state
taxes. No federal tax expense or

21

benefit is anticipated as a result of the expected change in the Company's
valuation allowance. No net federal income tax benefit is reflected in the
statement of operations for net operating losses to be carried forward since
realization of the potential benefit of net operating loss carry-forwards is not
considered to be more likely than not. The Company's effective tax rate for the
quarter ended February 23, 2002 relates 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.

Net Loss. As a result of the foregoing, we reported a net loss of $3.1 million
for the three months ended March 1, 2003 as compared to a net loss of $11.6
million for the three months ended February 23, 2002.

SIX MONTHS ENDED MARCH 1, 2003 COMPARED TO SIX MONTHS ENDED FEBRUARY 23, 2002

Net Sales. Net sales increased $7.8 million, or 6.2%, to $134.4 million for the
six months ended March 1, 2003 from $126.6 million for the six months ended
February 23, 2002. This increase in net sales was due primarily to timing of
shipments and college ring sales related to the Milestone acquisition.

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

Scholastic Products. Net sales increased $5.3 million to $107.4 million
for the six months ended March 1, 2003 from $102.1 million for the six
months ended February 23, 2002. The increase in net sales was the
result of timing differences from high school ring deliveries made by
our independent sales representatives and price increases, increases in
college ring sales related to the Milestone acquisition, and timing
differences of early graduation products shipments, all totaling $9.6
million. These increases were partially offset by a decrease of $4.3
million of timing differences from yearbook shipments as a result of
the fourth quarter of fiscal year 2002 containing an extra week of
heavy shipping volumes that normally would have occurred in the first
quarter of fiscal year 2003.

Recognition and Infinity Products. Net sales increased $2.5 million to
$27.0 million for the six months ended March 1, 2003 from $24.5 million
for the six months ended February 23, 2002. The increase of $4.9
million was primarily the result of an increase in sales related to the
ECI teacher's publication (published bi-annually versus our annual
other publications) and price increases on ECI's publications and
products, as well as, an increase in licensing of jewelry products and
jewelry commemorating family events, partially offset by a $2.4 million
decrease resulting in the discontinuation of reunion services in fiscal
year 2002.

Gross Profit. Gross margin represents gross profit as a percentage of net sales.
Gross margin was 57.0% for the six months ended March 1, 2003, a 2.3 percentage
point increase from 54.7% for the six months ended February 23, 2002. The
overall increase was the result of an increase in margins of our class rings and
jewelry commemorating family events, partially offset by a lesser gross margin
on the ECI teacher's publication (published bi-annually) and the discontinuation
of reunion services in fiscal year 2002.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $2.5 million, or 4.1%, to $65.0 million for
the six months ended March 1, 2003 from $62.5 million for the six months ended
February 23, 2002. Selling and marketing expenses increased $5.6 million to
$48.1 million, or 35.7% of net sales, for the six months ended March 1, 2003
from $42.5 million, or 33.5% of net sales, for the six months ended February 23,
2002. The increase in selling and marketing expenses as a percentage of net
sales was largely a result of the timing of expenses, additional marketing
efforts for high school rings sold by independent retail jewelers and yearbooks
sold by independent representatives, as well as, the timing of graduation
products shipments and their associated commissions expense, and increased
marketing costs related to ECI's teachers publication.

General and administrative expenses for the six months ended March 1, 2003 were
$17.0 million, or 12.6% of net sales, as compared to $20.0 million, or 15.8% of
net sales, for the six months ended February 23, 2002. The decrease in general
and administrative expenses as a percentage of sales is mainly a result of the
elimination of the amortization of goodwill and trademarks as a result of the
adoption of SFAS No. 142.

22

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

Operating Income. As a result of the foregoing, operating income was $11.6
million, or 8.7% of net sales, for the six months ended March 1, 2003 as
compared with operating income of $1.2 million, or 0.9% of net sales, for the
six months ended February 23, 2002. The scholastic products segment reported
operating income of $3.7 million and the for the recognition and affinity
products segment reported operating income of $7.9 million for the six months
ended March 1, 2003. The adoption of SFAS No. 145 required us to reclassify the
$5.7 million loss from early extinguishment from extraordinary items into
operating income (loss) for the six months ended February 23, 2002. Without this
reclassification the operating income for the six months ended February 23, 2002
would have been $6.8 million, consisting of $1.3 million operating income from
the scholastic products segment and $5.5 million operating income from the
recognition and affinity products segment for the six months ended February 23,
2002.

Interest Expense, Net. Net interest expense was $14.5 million for the six months
ended March 1, 2003 and $11.2 million for the six months ended February 23,
2002. The average debt outstanding for the six months ended March 1, 2003 and
the six months ended February 23, 2002 was $245 million and $216 million,
respectively. The weighted average interest rate of debt outstanding for the six
months ended March 1, 2003 and the six months ended February 23, 2002 was 11.7%
and 10.4%, respectively.

Other Expense. Other expense was $0 for the six months ended March 1, 2003 and
$2.6 million for the six months ended February 23, 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 reclassified as
a trading derivative to other current liabilities. As such, any changes in the
fair value of the 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
March 1, 2003, the fair value of this derivative represented a liability of
approximately $325,000.

Provision (Benefit) for Income Taxes. For the year ending August 30, 2003, the
annual effective tax rate is expected to be 5% on pretax income from operations.
The effective tax rate shown for each quarter of the fiscal years ended 2003 and
2002 may fluctuate due to limitations on the maximum year-to-date tax benefits
allowed to be recorded. For the six months ended March 1, 2003 and February 23,
2002, the Company recorded an income tax benefit of $0 and $1,268,000,
respectively, which represents an effective tax rate of none and 18%,
respectively. No federal tax expense or benefit is anticipated as a result of
the expected change in the Company's valuation allowance. No net federal income
tax benefit is reflected in the income statement for net operating losses to be
carried forward since realization of the potential benefit of net operating loss
carry-forwards is not considered to be more likely than not. The Company's
effective tax rate for the quarter ending February 23, 2002 relates to the
expected annual benefits from the net operating loss carryback attributable to
Taylor Senior Holding Corp (TSHC) as a percentage of the Company's expected
annual pretax loss from continuing operations.

Net Loss. As a result of the foregoing, we reported a net loss of $2.9 million
for the six months ended March 1, 2003 as compared to a net loss of $11.4
million for the six months ended February 23, 2002.

23

SEASONALITY

Our scholastic product sales tend to be seasonal. Class ring sales are highest
during October through December (which overlaps our 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 our fine paper products are predominantly made during
February through April (which overlaps our second and third fiscal quarters) for
graduation in May and June. We have historically experienced operating losses
during the period of our 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. Our
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 us are somewhat
tempered by our relatively broad product mix. As a result of the foregoing, our
working capital requirements tend to exceed our operating cash flows from July
through December.

LIQUIDITY AND CAPITAL RESOURCES

Operating Activities. Operating activities provided cash of $28.3 million for
the six months ended March 1, 2003 as compared with $23.0 million for the six
months ended February 23, 2002. The $5.3 million increase in cash provided by
operating activities was attributable to an increase in customer deposits of
$5.5 million, a decrease in prepaid expenses, other current assets, and other
assets of $4.6 million, an increase in accounts payable, accrued expenses, and
other long-term liabilities of $2.1 million, and decrease in net loss net of
adjustments of $0.7 million. These items were partially offset by a decrease in
deferred revenue of $3.7 million, a decrease in accounts receivable of $3.3
million, and a decrease in inventories, net of $0.7 million.

Investing Activities. Capital expenditures for the six months ended March 1,
2003 and February 23, 2002 were $7.0 million and $3.7 million, respectively. Our
projected capital expenditures for 2003 are expected to be approximately $12.0
million.

Financing Activities. Net cash used in financing activities was $19.6 million
for the six months ended March 1, 2003 and was $16.6 million for the six months
ended February 23, 2002. For the six months ended March 1, 2003, cash was
generated from customer deposits and payments and used to pay down $18.7 million
of the Senior Secured Credit Facility. For the six months ended February 23,
2002, payments were made on our former term loan facility and partially offset
by borrowings on the revolver.

Capital Resources. In February 2002, we issued $177 million of Unsecured Notes
due in 2007 and entered into a new $40 million Senior Secured Credit Facility.
As of March 1, 2003, $6.5 million under the Senior Secured Credit Facility was
outstanding.

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 of March 1, 2003 and August 31, 2002, CBI held
approximately 17,650 ounces and 14,830 ounces, respectively, of gold valued at
$6.1 million and $4.6 million, respectively, on consignment from the bank.

24

Cash generated from operating activities and availability under our Senior
Secured Credit Facility and our prior facilities, which were paid off in
February 2002, have been our principal sources of liquidity. Our liquidity needs
arise primarily from debt service, working capital, capital expenditure and
general corporate requirements. As of March 1, 2003 we had approximately $31.3
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 senior secured credit facility will be
sufficient to support our operations and liquidity requirements for the
foreseeable future.

NEW ACCOUNTING PRONOUNCEMENTS

In August 2001, Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 143, "Accounting for Asset
Retirement Obligations." This statement requires that the fair value of a
liability for an asset retirement obligation be recognized in the period in
which it is incurred if a reasonable estimate of fair value can be made. The
associated asset retirement costs are capitalized as part of the carrying amount
of the long-lived asset. SFAS No. 143 became effective for us in fiscal year
2003. The adoption of SFAS No. 143 did not have a significant impact on our
financial statements.

In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," that was effective for financial statements
issued for fiscal years beginning after December 15, 2001. The adoption of SFAS
No. 144 did not have a significant impact on our financial statements.

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
This statement requires, among other things, that gains and losses on the early
extinguishments of debt be classified as extraordinary only if they meet the
criteria for extraordinary treatment set forth in Accounting Principles Board
Opinion No. 30. The provisions of this statement related to classification of
gains and losses on the early extinguishments of debt are effective for fiscal
years beginning after May 15, 2002. The adoption of this standard required us to
reclassify a $5.7 million loss from early extinguishment from extraordinary
items into operating income (loss) for the three and six months ended February
23, 2002.

In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." This Statement requires recording costs
associated with exit or disposal activities at their fair values when a
liability has been incurred. Under previous guidance, certain exit costs were
accrued upon management's commitment to an exit plan, which is generally before
an actual liability has been incurred. The provisions of this statement are
effective for exit or disposal activities that are initiated after December 31,
2002. The adoption of SFAS No. 146 did not have a significant impact on our
financial statements.

In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure," which amends SFAS No. 123,
"Accounting for Stock-Based Compensation." SFAS No. 148, which is effective for
fiscal years ending after December 15, 2002, provides alternative methods of
transition for a voluntary change to the fair value-based method and requires
more prominent and more frequent disclosures in the financial statements about
the effects of stock-based compensation. At this time, we have elected not to
adopt the voluntary expense recognition provisions of SFAS No. 123.

In December 2002 the FASB issued FASB Interpretation No. 45 ("FIN No. 45")
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others an interpretation of FASB
Statements No. 5, 57, and 107 and rescission of FASB Interpretation No. 34,"
which addresses the disclosures to be made by a guarantor in its interim and
annual financial statements about its obligations under guarantees and clarifies
the requirements related to the recognition of a liability by a guarantor at the
inception of a guarantee for the obligations the guarantor has undertaken in
issuing that guarantee. FIN No. 45 becomes effective for financial statements of
interim or annual periods ending after December 15, 2002. The adoption of FIN
No. 45 did not have a significant impact on our financial statements.

25

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 Senior Secured Facility and our gold
consignment facility 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. Upon the issuance of the Unsecured
Notes and the Senior Secured Credit Facility on February 20, 2002, we terminated
approximately $1.7 million of our existing swap agreements and interest rate
swaps representing a notional amount of $25.0 million remained in place. As of
March 1, 2003, the fair value of this derivative represented a liability of
approximately $325,000.

Our derivatives and other financial instruments subject to interest rate risk
consist of long-term debt, an interest rate swap and notional amount under the
gold consignment agreement. The net market value of these financial instruments
at March 1, 2003 represented a net liability of $12.9 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 the six months ended
March 1, 2003, we did not purchase any forward contracts.

Gold. We purchase all of our gold requirements from The Bank of Nova Scotia
through our revolving credit and gold consignment agreement. We consign the
majority of our gold from The Bank of Nova Scotia and pay for gold as the
product is shipped to customers and as required by the terms of the gold
consignment agreement. As of March 1, 2003, we had hedged a majority of our gold
requirements for the fiscal year ending August 31, 2003 by covering the majority
of our estimated gold requirements through the purchase of gold options.

26

ITEM 4. CONTROLS AND PROCEDURES

As of a date within 90 days of the date of this report (the "Evaluation Date"),
we carried out an evaluation, under the supervision and with the participation
of our management, including our President and Chief Executive Officer and our
Chief Financial Officer, of the effectiveness of the design and operation of our
disclosure control and procedures pursuant to Rule 13a-14 under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). Based upon this
evaluation, our President and Chief Executive Officer and our Chief Financial
Officer concluded that, as of the Evaluation Date, our disclosure controls and
procedures were adequate to ensure that information required to be disclosed by
us in the reports filed or submitted by us under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms.

Additionally, our President and Chief Executive Officer and Chief Financial
Officer determined, as of a date within 90 days of the date of this report, that
there were no significant changes in our internal controls or in other factors
that could significantly affect our internal controls subsequent to the date of
their evaluation.

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.

27

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

There are no material 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

99.1 CEO Certification Pursuant to 18 U.S.C. Section 1350, As
Adopted Pursuant To Section 906 of the Sarbanes-Oxley Act of
2002

99.2 CFO Certification Pursuant to 18 U.S.C. Section 1350, As
Adopted Pursuant To Section 906 of the Sarbanes-Oxley Act of
2002

(b) Reports on Form 8-K

None

28

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 April 10, 2003.

AMERICAN ACHIEVEMENT CORPORATION

By: /s/ DAVID G. FIORE
---------------------------------
David G. Fiore
CHIEF EXECUTIVE OFFICER

By: /s/ SHERICE P. BENCH
---------------------------------
Sherice P. Bench
CHIEF FINANCIAL OFFICER

29

CERTIFICATION ACCOMPANYING PERIODIC REPORT
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
(18 U.S.C. SEC. 1350)

I, David G. Fiore, President and Chief Executive Officer of American Achievement
Corporation, certify that:

1. I have reviewed this quarterly report on Form 10-Q of American Achievement
Corporation;

2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and

c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):

a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and

6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

Date: April 10, 2003

/s/ DAVID G. FIORE
--------------------------------------
Name: David G. Fiore
Title: President and Chief Executive
Officer

CERTIFICATION ACCOMPANYING PERIODIC REPORT
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
(18 U.S.C. SEC. 1350)

I, Sherice P. Bench, Chief Financial Officer of American Achievement
Corporation, certify that:

1. I have reviewed this quarterly report on Form 10-K of American Achievement
Corporation;

2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which statements were
made, not misleading with respect to the period covered by this quarterly
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

(a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;

(b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and

(c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):

(a) all significant deficiencies in the design or operation of internal controls
which could adversely effect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and

(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and

6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

Date: April 10, 2003

/s/ SHERICE P. BENCH
--------------------------------------
Name: Sherice P. Bench
Title: Chief Financial Officer

INDEX TO EXHIBITS