##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 
 FORM 10-Q/A 
  
 o
    
    QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(D) OF THESECURITIES EXCHANGE ACT OF 1934
 
 FOR THE QUARTERLY PERIOD ENDED NOVEMBER 27, 2004 OR o
    
    TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(D) OF THESECURITIES EXCHANGE ACT OF 1934
 COMMISSION FILE NUMBER 333-121479
COMMISSION FILE NUMBER 333-84294 AAC GROUP HOLDING CORP.
AMERICAN ACHIEVEMENT CORPORATION (Exact name of registrant as specified in its charter) DELAWARE
DELAWARE
(State or other jurisdiction of
incorporation or organization)
    
    20-1854833
13-4126506
(I.R.S. Employer Identification Number)
 7211 CIRCLE S ROAD
AUSTIN, TEXAS 78745
(Address of principal executive offices) (Zip Code) REGISTRANTS TELEPHONE NUMBER, INCLUDING AREA CODE (512) 444-0571 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
o No þ. Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act
Rule 12b-2). Yes o No þ. 
 The
number of shares outstanding of AAC Group Holding Corp. as of January
10, 2005 was 505,460 shares of common stock, par value $.01. The
number of shares outstanding of American Achievement Corporation as
of January 10, 2005 was 100 shares of common stock, par value $.01.




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FOR THE QUARTERLY PERIOD ENDED NOVEMBER 27, 2004
INDEX  
 
 PAGEPART I.
    
    FINANCIAL INFORMATIONItem 1.
    
    Condensed Consolidated Financial Statements and NotesCondensed
Consolidated Balance Sheets (unaudited) 
As of November 27, 2004 (Successor) and August 28, 2004 (Successor)
    
    3Condensed
Consolidated Statements of Operations (unaudited) 
For the Three Months Ended November 27, 2004 (Successor) and the Three Months Ended November 29, 2003 (Predecessor)
    
    4Condensed
Consolidated Statements of Cash Flows (unaudited) 
For the Three Months Ended November 27, 2004 (Successor) and the Three Months Ended November 29, 2003 (Predecessor)
    
    5Condensed
Consolidated Statements of Stockholders Equity (unaudited) 
For the Three Months Ended November 27, 2004 (Successor)
    
    6Notes to Condensed Consolidated Financial Statements (unaudited)
    
    7-17Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    18-23Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    24Item 4.
    
    Controls and Procedures
    
    25PART II.
    
    OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    26Item 6.
    
    Exhibits and Reports on Form 8-K
    
    26SIGNATURES
    
    
    
    27CEO Certification Pursuant to Section 302CFO Certification Pursuant to Section 302CEO Certification Pursuant to Section 906CFO Certification Pursuant to Section 906
 
  Explanatory Note This
Form 10-Q/A is a combined quarterly report being filed separately by two registrants: AAC Group
Holding Corp. and American Achievement Corporation. Unless the context indicates otherwise, any
reference in this report to Group Holdings refers to AAC Group Holding Corp. and any reference to
AAC refers to American Achievement Corporation, the wholly-owned operating subsidiary of Group
Holdings. The Company, we, us, and our refer to AAC Group Holding Corp., together with
American Achievement Corporation and its consolidated subsidiaries. Each Registrant hereto is
filing on its own behalf all of the information contained in this quarterly report that relates to
such Registrant. Each Registrant hereto is not filing any information that does not relate to such
Registrant, and therefore makes no representation as to any such information. 
 This Amendment No. 1 to this Quarterly Report on Form 10-Q/A
(Amendment 1) is being filed in order to restate
the previously issued segment information as disclosed in the historical condensed consolidated financial statements
for the period ended November 27, 2004 initially filed with the
Securities and Exchange Commission (the SEC) on January 11,
2005 (Original Filing). 
 
 Subsequent to the Original Filing, we restated the segment disclosure from two to five reporting segments.
See Note 13: Business Segments under Condensed Consolidated Financial Statements and Notes included in Item 1,
Notes to Condensed Consolidated Financial Statements
(unaudited). Item 2 has been updated for the effects of the
restatement. The restatement had no impact on previously reported total current assets, total assets, working capital
position, results of operations or cash flows. We have updated our disclosure to reflect the aforementioned changes and have
otherwise updated information where necessary. 
 
 
 2




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AAC GROUP HOLDING CORP.
AMERICAN ACHIEVEMENT CORPORATION 
 Condensed Consolidated Balance Sheets
(In thousands, except share data)
(unaudited) 
 AAC Group Holding Corp.
    
    
    American Achievement Corporation(Successor)
    
    
    (Successor)November 27,
    
    
    
    November 27,
    
    
    August 28,2004
    
    
    
    2004
    
    
    2004ASSETSCurrent assets:Cash and cash equivalents
    
    $
    5,146
    
    
    
    $
    4,916
    
    
    $
    3,038Accounts receivable, net
    
    
    42,098
    
    
    
    
    42,098
    
    
    
    43,321Inventories, net
    
    
    25,512
    
    
    
    
    25,512
    
    
    
    23,023Prepaid expenses and other current assets, net
    
    
    34,311
    
    
    
    
    34,311
    
    
    
    36,395Total current assets
    
    
    107,067
    
    
    
    
    106,837
    
    
    
    105,777Property, plant and equipment, net
    
    
    77,891
    
    
    
    
    77,891
    
    
    
    76,565Goodwill and other intangible assets, net
    
    
    345,892
    
    
    
    
    342,424
    
    
    
    345,553Other assets
    
    
    4,701
    
    
    
    
    4,701
    
    
    
    3,091Total assets
    
    $
    535,551
    
    
    
    $
    531,853
    
    
    $
    530,986LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Bank overdraft
    
    $
    5,146
    
    
    
    $
    5,146
    
    
    $
    5,733Accounts payable
    
    
    12,006
    
    
    
    
    12,006
    
    
    
    9,842Customer deposits
    
    
    24,889
    
    
    
    
    24,889
    
    
    
    17,807Accrued expenses
    
    
    24,338
    
    
    
    
    24,338
    
    
    
    30,314Deferred revenue
    
    
    7,526
    
    
    
    
    7,526
    
    
    
    5,503Accrued interest
    
    
    3,890
    
    
    
    
    3,890
    
    
    
    7,334Current portion of long-term debt
    
    
    1,550
    
    
    
    
    1,550
    
    
    
    1,550Total current liabilities
    
    
    79,345
    
    
    
    
    79,345
    
    
    
    78,083Long-term debt, net of current portion
    
    
    403,773
    
    
    
    
    314,123
    
    
    
    309,108Deferred income taxes
    
    
    23,605
    
    
    
    
    23,963
    
    
    
    25,844Other long-term liabilities
    
    
    9,122
    
    
    
    
    9,122
    
    
    
    9,439Total liabilities
    
    
    515,845
    
    
    
    
    426,553
    
    
    
    422,474Commitments and contingenciesStockholders equity:Common stock
    
    
    5
    
    
    
    
    
    
    
    
    Additional paid-in capital
    
    
    16,491
    
    
    
    
    102,046
    
    
    
    102,046Accumulated earnings
    
    
    3,210
    
    
    
    
    3,254
    
    
    
    6,466Total stockholders equity
    
    
    19,706
    
    
    
    
    105,300
    
    
    
    108,512Total liabilities and stockholders equity
    
    $
    535,551
    
    
    
    $
    531,853
    
    
    $
    530,986
 
 The accompanying notes are an integral part of these condensed consolidated financial statements. 3




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AAC GROUP HOLDING CORP.
AMERICAN ACHIEVEMENT CORPORATION 
 Condensed Consolidated Statements of Operations
(In thousands)
(unaudited) AAC Group Holding Corp.
    
    
    American Achievement CorporationFor the three
    
    
    (Successor)
    

    
    (Predecessor)months ended
    
    
    For the three months endedNovember 27,
    
    
    
    November 27,
    

    
    November 29,2004
    
    
    
    2004
    

    
    2003Net sales
    
    $
    63,282
    
    
    
    $
    63,282
    

    
    $
    67,928Cost of sales
    
    
    27,316
    
    
    
    
    27,316
    

    
    
    30,044Gross profit
    
    
    35,966
    
    
    
    
    35,966
    

    
    
    37,884Selling, general and administrative expenses
    
    
    35,603
    
    
    
    
    35,603
    

    
    
    32,460Operating income
    
    
    363
    
    
    
    
    363
    

    
    
    5,424Interest expense
    
    
    6,118
    
    
    
    
    5,716
    

    
    
    6,981Loss before income taxes
    
    
    (5,755
    )
    
    
    
    (5,353
    )

    
    
    (1,557
    )Benefit for income taxes
    
    
    (2,499
    )
    
    
    
    (2,141
    )

    
    
    Net loss
    
    
    (3,256
    )
    
    
    
    (3,212
    )

    
    
    (1,557
    )Preferred dividends
    
    
    
    
    
    
    
    
    

    
    
    (300
    )Net loss applicable to common stockholders
    
    $
    (3,256
    )
    
    
    $
    (3,212
    )

    
    $
    (1,857
    )
 The accompanying notes are an integral part of these condensed consolidated financial statements. 4




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AAC GROUP HOLDING CORP.
AMERICAN ACHIEVEMENT CORPORATION 
 Condensed Consolidated Statements of Cash Flows
(In thousands)
(unaudited) AAC GroupHolding Corp.
    
    American Achievement CorporationFor the three
    
    (Successor)
    

    
    (Predecessor)months ended
    
    For the three months endedNovember 27,
    
    
    November 27,
    

    
    November 29,2004
    
    
    2004
    

    
    2003Cash flows from operating activities:Net loss
    
    $
    (3,256
    )
    
    $
    (3,212
    )

    
    $
    (1,557
    )Adjustments to reconcile net loss to net cash provided by (used
in) operating activities:Depreciation and amortization
    
    
    6,316
    
    
    
    6,316
    

    
    
    3,798Amortization of debt discount and deferred financing fees
    
    
    779
    
    
    
    377
    

    
    
    515Provision for doubtful accounts
    
    
    (97
    )
    
    
    (97
    )

    
    
    374Changes in assets and liabilities:Accounts receivable
    
    
    1,320
    
    
    
    1,320
    

    
    
    (487
    )Inventories, net
    
    
    (2,489
    )
    
    
    (2,489
    )

    
    
    (309
    )Prepaid expenses and other current assets, net
    
    
    2,084
    
    
    
    2,084
    

    
    
    1,818Other assets
    
    
    (5,311
    )
    
    
    (1,822
    )

    
    
    (965
    )Customer deposits
    
    
    7,082
    
    
    
    7,082
    

    
    
    6,592Deferred revenue
    
    
    2,023
    
    
    
    2,023
    

    
    
    2,591Accounts payable, accrued expenses, and other
long-term liabilities
    
    
    (9,812
    )
    
    
    (9,454
    )

    
    
    7,143Net cash provided by (used in) operating activities
    
    
    (1,361
    )
    
    
    2,128
    

    
    
    19,513Cash flows from investing activities:Purchases of property, plant and equipment
    
    
    (4,676
    )
    
    
    (4,676
    )

    
    
    (6,593
    )Net cash used in investing activities
    
    
    (4,676
    )
    
    
    (4,676
    )

    
    
    (6,593
    )Cash flows from financing activities:Payments on revolver, net
    
    
    
    
    
    
    
    

    
    
    (9,500
    )Proceeds from credit facility revolver
    
    
    5,400
    
    
    
    5,400
    

    
    
    Payments on term loan
    
    
    (387
    )
    
    
    (387
    )

    
    
    Proceeds from 10 1/4% notes
    
    
    89,269
    
    
    
    
    

    
    
    Distribution to shareholders
    
    
    (85,550
    )
    
    
    
    

    
    
    Change in bank overdraft
    
    
    (587
    )
    
    
    (587
    )

    
    
    (1,921
    )Net cash provided by (used in) financing activities
    
    
    8,145
    
    
    
    4,426
    

    
    
    (11,421
    )Net increase in cash and cash equivalents
    
    
    2,108
    
    
    
    1,878
    

    
    
    1,499Cash and cash equivalents, beginning of period
    
    
    3,038
    
    
    
    3,038
    

    
    
    1,735Cash and cash equivalents, end of period
    
    $
    5,146
    
    
    $
    4,916
    

    
    $
    3,234Supplemental disclosureCash paid during the period for:Interest
    
    $
    8,771
    
    
    $
    8,771
    

    
    $
    357Income taxes
    
    $
    28
    
    
    $
    28
    

    
    $
    124Supplemental Disclosure of noncash financing activitiesAccrued preferred stock dividends
    
    $
    
    
    
    $
    
    

    
    $
    300
 The accompanying notes are an integral part of these condensed consolidated financial statements. 5




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AAC GROUP HOLDING CORP.
AMERICAN ACHIEVEMENT CORPORATION 
 Consolidated Statements of Stockholders Equity
(In thousands, except share data)
(unaudited) 
 AdditionalAAC Group Holding
    
    Common Stock
    
    
    Paid-in
    
    
    AccumulatedCorp.
    
    Shares
    
    
    Amount
    
    
    Capital
    
    
    earnings
    
    
    TotalBalance,
August 28, 2004
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Issuance
of common stock, $.01 par value, 1,250,000 shares authorized
    
    
    1,015,426
    
    
    $
    10
    
    
    $
    102,036
    
    
    $
    6,466
    
    
    $
    108,512Distribution to
shareholders
    
    
    (509,966
    )
    
    
    (5
    )
    
    
    (85,545
    )
    
    
    
    
    
    
    (85,550
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,256
    )
    
    
    (3,256
    )Balance, November
27, 2004
    
    
    505,460
    
    
    $
    5
    
    
    $
    16,491
    
    
    $
    3,210
    
    
    $
    19,706
 
   American
    
    
    
    
    
    
    
    
    
    AdditionalAchievement
    
    Common Stock
    
    
    Paid-in
    
    
    AccumulatedCorporation
    
    Shares
    
    
    Amount
    
    
    Capital
    
    
    earnings
    
    
    TotalBalance, August 28,
2004 (Successor) $.01 par value, 1,000 shares authorized
    
    
    100
    
    
    $
    
    
    
    $
    102,046
    
    
    $
    6,466
    
    
    $
    108,512Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,212
    )
    
    
    (3,212
    )Balance, November
27, 2004
(Successor)
    
    
    100
    
    
    $
    
    
    
    $
    102,046
    
    
    $
    3,254
    
    
    $
    105,300
 The accompanying notes are an integral part of these condensed consolidated financial statements. 6




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##### Table of Contents



AAC GROUP HOLDING CORP.
AMERICAN ACHIEVEMENT CORPORATION 
 Notes to Condensed Consolidated Financial Statements
(Dollars in thousands, unless otherwise stated)
(unaudited) 1. Summary of Significant Accounting Policies Consolidation 
 The unaudited condensed consolidated financial statements of AAC Group Holding Corp. (Group
Holdings) include the accounts of its wholly-owned subsidiary, American Achievement Corporation
(AAC, a separate public reporting company, together with
Group Holdings, the Company). Group Holdings was formed
on November 8, 2004. On
November 16, 2004, the shareholders of AAC Holding Corp. participated in an exchange, pursuant to
which they exchanged their shares of common stock in AAC Holding Corp. for a like amount of shares
in Group Holdings. Following the exchange, AAC Holding Corp. became a wholly-owned subsidiary of
Group Holdings. 
 On
November 16, 2004, Group Holdings issued $131.5 million aggregate principal amount at maturity
of 10 1/4% senior discount notes due 2012, generating net proceeds
of $89.3 million. Group Holdings is the sole obligor of these notes. The net proceeds of this
offering were used as distributions to stockholders through the
repurchase of shares of Group Holdings common stock from its
stockholders.
Other than this debt obligation, related deferred issuance costs and associated accrued
liabilities, and related interest expense, net of taxes, all other assets, liabilities, income,
expenses and cash flows presented for all periods represent those of Group Holdings wholly-owned
indirect subsidiary AAC and the direct and indirect subsidiaries of
AAC. Group Holdings only direct
subsidiary is AAC Holding Corp., whose sole asset is AAC. All significant intercompany accounts
and transactions have been eliminated in consolidation. 
 The
accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or omitted pursuant to
such rules and regulations, although the Company believes the disclosures are adequate to make the
information presented not misleading. In the opinion of management, all adjustments (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 ended November 27, 2004 are not necessarily indicative of the results that may be
expected for the fiscal year ending August 27, 2005.
Accordingly, the interim condensed consolidated
financial statements and accompanying notes included herein should be read in conjunction with the
consolidated financial statements for the year ended August 28, 2004 included in AACs Report on
Form 10-K/A (File No. 333-84294) filed on August 5, 2005. 
 Unless separately stated, the notes herein relate to both Group Holdings and AAC. 
 Effective January 30, 2004, AAC 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 upon achieving certain financial targets. The C-B Announcements
Acquisition was accounted for using the purchase method of
accounting. The results of the C-B Announcements Acquisition have
been included in the Companys consolidated results of operations since the date of
acquisition. 
 Use of Estimates The preparation of
financial statements in conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements, as well as the reported amounts of
revenues and expenses during the reporting period.  Actual results could differ from these
estimates. Stock-Based Compensation AAC
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. AAC 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, AACs pro forma net loss would not have been materially impacted. No options were
granted during the three months ended November 27, 2004 or the three months ended November 29,
2003. 7




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AAC GROUP HOLDING CORP.
AMERICAN ACHIEVEMENT CORPORATION Notes to Condensed Consolidated Financial Statements  (Continued)
(Dollars in thousands, unless otherwise stated)
(unaudited) 2. Merger On March 25, 2004, AAC Acquisition Corp., a wholly-owned subsidiary of AAC Holding Corp.,
merged with and into AAC, with AAC continuing as the surviving corporation and a wholly-owned
subsidiary of AAC Holding Corp (the Merger). 
 The Merger was financed
by a cash equity investment in AAC Holding Corp. by an investor group led by Fenway Partners
of $102.0 million, the borrowing by AAC of $155.0 million under a seven-year term loan and
$2.0 million under a nine-year revolving loan, each under AACs senior secured credit
facility and the issuance by AAC of $150.0 million aggregate principal amount of 8 1/4 %
senior subordinated notes due 2012 (the 8 1/4% Notes). Proceeds of these financing
arrangements were used to redeem the outstanding Series A Preferred Stock of AAC, refinance
AACs existing indebtedness, including the redemption of $41.4
million of AACs then
outstanding 11% senior notes due 2007 (the 11% Notes) and completion of a debt tender
offer to acquire all of AACs existing 11 5/8% senior unsecured notes due 2007 (the 11 5/8%
Notes), and pay transaction costs and expenses. Pursuant to the debt tender offer, AAC retired
$170.9 million of the 11 5/8% Notes for an aggregate of $193.8 million and eliminated
substantially all of the restrictive covenants associated with such notes. The tender
for the $177.0 million 11 5/8% Notes and the $41.4 million 11% Notes was the direct result
of the Merger. The consummation of the Merger was subject to the consent and a debt tender
offer to acquire these notes. The subsequent tender offer costs and early redemption expenses
of the debt directly related to the cost of the transaction and was included as part of the
purchase price. In addition, as part of the Merger, AAC terminated its former senior secured
credit facility and terminated its management contract with its previous owners. AAC 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 26, 2004, AAC 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 AAC based upon
the fair values as of the date of the Merger. As required under SEC Staff Accounting Bulletin No.
54, Push Down Basis of Accounting Required in Certain Limited Circumstances,AAC has reflected
all applicable purchase accounting adjustments in the consolidated financial statements covering
periods subsequent to the Merger. As required, AAC 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. 
 The purchase price was as follows: 
 
 Purchase price
    
    
    
    
    
    $
    419,200Assets acquired
    
    
    197,714Liabilities assumed
    
    
    (125,731
    )Net assets acquired
    
    
    
    
    
    
    71,983Excess purchase price over net assets acquired
    
    
    
    
    
    $
    347,217
 
 
 Subsequent to the issuance of the
 Companys 2004 consolidated financial statements, management determined that assets acquired required restatement
in the above table to remove goodwill and intangible assets reflected in the pre-Merger consolidated financial statements.
 Previously reported assets acquired was $422,456.  This correction had no impact on the purchase price or the purchase
price allocation in the table below. 
 AAC has preliminarily allocated the purchase price in the Merger as follows: Current assets
    
    $
    123,407Property, plant and equipment
    
    
    78,301Goodwill
    
    
    181,361Intangible assets
    
    
    157,928Other assets
    
    
    15,390Current liabilities
    
    
    (116,102
    )Deferred income taxes
    
    
    (12,043
    )Other long-term liabilities
    
    
    (9,042
    )Total purchase price
    
    $
    419,200
 
 As a result of the Merger, AAC has reflected pre-Merger periods from August 31, 2003 to
November 29, 2003 (Predecessor) and a post-Merger period from August 29, 2004 to November 27,
2004 (Successor) in its condensed consolidated financial statements for fiscal 2005. 8




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AAC GROUP HOLDING CORP.
AMERICAN ACHIEVEMENT CORPORATION Notes to Condensed Consolidated Financial Statements  (Continued)
(Dollars in thousands, unless otherwise stated)
(unaudited) 
 During the three
months ended November 27, 2004, AAC recognized in its consolidated statements of operations
approximately $3.0 million of amortization expense of intangible assets as selling, general
and administrative expenses, as compared to approximately $0.6 million for the three months
ended November 29, 2003. 
 3. Goodwill and Other Intangible Assets Goodwill For
Group Holdings, the carrying amount of goodwill was $182,292 as
of November 27, 2004. For
AAC, the carrying amount of goodwill was $182,292 and $182,080 as
of November 27, 2004 and August 28, 2004, respectively. Other Intangible Assets For Group Holdings, other intangible assets consisted of the following: Estimated
    
    
    Gross
    
    
    Accumulated
    
    
    NetUseful Life
    
    
    Asset
    
    
    Amortization
    
    
    AssetAt November 27, 2004Trademarks
    
    Indefinite
    
    $
    50,095
    
    
    $
    
    
    
    $
    50,095Deferred financing costs and other
    
    
    7 to 8 years
    
    
    
    14,601
    
    
    
    (1,019
    )
    
    
    13,582Patents
    
    
    14 to 17 years
    
    
    
    7,317
    
    
    
    (296
    )
    
    
    7,021Customer lists and distribution contracts
    
    
    3 to 12 years
    
    
    
    100,516
    
    
    
    (7,614
    )
    
    
    92,902$
    172,529
    
    
    $
    (8,929
    )
    
    $
    163,600
 For Group Holdings, total amortization on other intangible assets was $3,362 for
the three months ended November 27, 2004 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. Estimated annual
amortization expense for fiscal years ended 2005 through 2009 is approximately $13.8 million each
year. 9




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AAC GROUP HOLDING CORP.
AMERICAN ACHIEVEMENT CORPORATION Notes to Condensed Consolidated Financial Statements  (Continued)
(Dollars in thousands, unless otherwise stated)
(unaudited) For AAC, other intangible assets consisted of the following: Estimated
    
    
    Gross
    
    
    Accumulated
    
    
    NetUseful Life
    
    
    Asset
    
    
    Amortization
    
    
    AssetAt November 27, 2004 (Successor)Trademarks
    
    Indefinite
    
    $
    50,095
    
    
    $
    
    
    
    $
    50,095Deferred financing costs and other
    
    
    7 to 8 years
    
    
    
    11,112
    
    
    
    (998
    )
    
    
    10,114Patents
    
    
    14 to 17 years
    
    
    
    7,317
    
    
    
    (296
    )
    
    
    7,021Customer lists and distribution contracts
    
    
    3 to 12 years
    
    
    
    100,516
    
    
    
    (7,614
    )
    
    
    92,902$
    169,040
    
    
    $
    (8,908
    )
    
    $
    160,132At August 28, 2004 (Successor)Trademarks
    
    Indefinite
    
    $
    50,095
    
    
    $
    
    
    
    $
    50,095Deferred financing costs and other
    
    
    7 to 8 years
    
    
    
    11,112
    
    
    
    (624
    )
    
    
    10,488Patents
    
    
    14 to 17 years
    
    
    
    7,317
    
    
    
    (185
    )
    
    
    7,132Customer lists and distribution contracts
    
    
    3 to 12 years
    
    
    
    100,516
    
    
    
    (4,758
    )
    
    
    95,758$
    169,040
    
    
    $
    (5,567
    )
    
    $
    163,473
 For AAC, total amortization on other intangible assets was $3,341 and $1,020 for the three
months ended November 27, 2004 and November 29, 2003, respectively, 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. Estimated annual amortization
expense for fiscal years ended 2005 through 2009 is approximately $13.4 million each year. 4. Comprehensive Loss Unrecognized losses on accrued minimum pension liabilities are included in other comprehensive
loss. The following amounts were included in determining comprehensive loss: AAC Group Holding Corp.
    
    
    
    American Achievement Corporation(Successor)
    

    
    (Predecessor)For the threemonths ended
    
    
    
    For the three months endedNovember 27, 2004
    
    
    
    November 27, 2004
    

    
    November 29, 2003Net loss
    
    $
    (3,256
    )
    
    
    $
    (3,212
    )

    
    $
    (1,557
    )Adjustment in minimum pension liability
    
    
    
    
    
    
    
    
    

    
    
    17Total comprehensive loss
    
    $
    (3,256
    )
    
    
    $
    (3,212
    )

    
    $
    (1,540
    )
 5. Inventories, Net A summary of inventories, net is as follows: AAC Group
Holding Corp.
    
    
    American Achievement Corporation(Successor)
    
    
    (Successor)November 27, 2004
    
    
    
    November 27, 2004
    
    
    August 28, 2004Raw materials
    
    $
    9,571
    
    
    
    $
    9,571
    
    
    $
    8,853Work in process
    
    
    7,614
    
    
    
    
    7,614
    
    
    
    7,380Finished goods
    
    
    8,815
    
    
    
    
    8,815
    
    
    
    6,978LessReserves
    
    
    (488
    )
    
    
    
    (488
    )
    
    
    (188
    )$
    25,512
    
    
    
    $
    25,512
    
    
    $
    23,023
 10




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##### Table of Contents



AAC GROUP HOLDING CORP.
AMERICAN ACHIEVEMENT CORPORATION Notes to Condensed Consolidated Financial Statements  (Continued)
(Dollars in thousands, unless otherwise stated)
(unaudited) For
Group Holdings, cost of sales includes depreciation and amortization
of $2,384 for the three months ended November 27, 2004. For
AAC, cost of sales includes depreciation and amortization of $2,384 and $2,163 for the three months
ended November 27, 2004 and November 29, 2003, respectively. 6. Prepaid Expenses and Other Current Assets, Net For
Group Holdings, prepaid expenses and other current assets, net on the
balance sheet, include reserves on sales representative advances of
$2,374 at November 27, 2004. For
AAC, prepaid expenses and other current assets, net on the balance sheet, include reserves on sales
representative advances of $2,374 and $2,383 at November 27, 2004 and August 28, 2004,
respectively. 7. Long-term Debt Long-term debt consists of the following: AAC Group Holding Corp.
    
    
    American Achievement Corporation(Successor)
    
    
    (Successor)August 28,November 27, 2004
    
    
    
    November 27, 2004
    
    
    200410 1/4% Senior discount notes due
2012 (net of unamortized discount of $41,850)
    
    $
    89,650
    
    
    
    $
    
    
    
    $
    8 1/4% Senior subordinated notes due 2012
    
    
    150,000
    
    
    
    
    150,000
    
    
    
    150,00011 5/8% Senior unsecured
notes due 2007 (net of unamortized discount of
$33 and $1,145)
    
    
    6,048
    
    
    
    
    6,048
    
    
    
    6,045Senior secured credit facilityRevolving credit facility due 2010
    
    
    5,400
    
    
    
    
    5,400
    
    
    
    Term loan due 2011
    
    
    154,225
    
    
    
    
    154,225
    
    
    
    154,613Total
    
    
    405,323
    
    
    
    
    315,673
    
    
    
    310,658Less current portion of long-term debt
    
    
    (1,550
    )
    
    
    
    (1,550
    )
    
    
    (1,550
    )Total long-term debt
    
    $
    403,773
    
    
    
    $
    314,123
    
    
    $
    309,108
 10 1/4% Senior Discount Notes On November 16, 2004 Group Holdings issued $131.5 million aggregate principal amount at
maturity ($89.3 million gross proceeds) of 10 1/4% Senior Discount
Notes due 2012 (the 10 1/4% Notes). The net proceeds of this offering were used to repurchase
shares of Group Holdings common stock from its shareholders. Group Holdings was formed on November
8, 2004 and has no operations. Interest will accrue on the 10 1/4% Notes in the form of an increase
in the accreted value of the note prior to October 1, 2008. Thereafter, cash interest on the 10 1/4%
Notes will accrue and be payable semiannually in arrears on April 1 and October 1 of each year,
commencing April 1, 2009 at a rate of 10 1/4% per annum. Group
Holdings has no independent operating assets or liabilities other than its investment in AAC. At any time on or after October 1, 2008, Group Holdings may redeem the 10 1/4% Notes, in
whole or in part, at a redemption price equal to 100% of the principal amount plus a premium,
declining ratably to par, plus accrued and unpaid interest. At any time on or prior to October 1,
2007, Group Holdings may redeem up to 35% of the aggregate accreted value of the 10 1/4% Notes with
the proceeds of qualified equity offerings at a redemption price equal to 110.25% of the accreted
value. 
 If a change in control
as defined in the indenture relating to the 10 1/4% Notes occurs prior to October 1, 2008,
Group Holdings must give the holders of the 10 1/4% Notes the opportunity to sell their 10 1/4%
Notes to Group Holdings at 101% of the accreted value of the 10 1/4% Notes, plus accrued
interest.  If a change in control as defined in the indenture relating to the 10 1/4% Notes
occurs following October 1, 2008, Group Holdings must give the holders of the 10 1/4% Notes
the opportunity to sell their 10 1/4% Notes to Group Holdings at 101% of the aggregate
principal amount at maturity of the 10 1/4% Notes, plus accrued interest. 
 
 Additionally, the
terms of the 10 1/4% Notes limit Group Holdings ability to, among other things, incur
additional indebtedness, dispose of assets, make acquisitions, make other investments,
pay dividends and make various other payments. The terms also include cross-default
provisions to the indenture governing the 8 1/4% Notes and the Senior Secured Credit Facility. 
 As of November 27, 2004, Group Holdings was in compliance with all such provisions. 11




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AAC GROUP HOLDING CORP.
AMERICAN ACHIEVEMENT CORPORATION Notes to Condensed Consolidated Financial Statements  (Continued)
(Dollars in thousands, unless otherwise stated)
(unaudited) 8 1/4% Senior Subordinated Notes On March 25, 2004, AAC issued $150.0 million of 8 1/4% senior subordinated notes (the 8 1/4%
Notes) due in 2012. The 8 1/4% Notes bear interest at a stated
rate of 8 1/4%. The 8 1/4%
Notes are unsecured senior subordinated obligations and are subordinated in right of payment to all
of AACs existing and future senior indebtedness, including obligations under AACs senior secured
credit facility, pari passu in right of payment with any of AACs future senior subordinated
indebtedness and senior in right of payment to any of AACs future subordinated indebtedness. The 8
1/4% Notes are guaranteed by certain of AACs existing domestic subsidiaries, and will be guaranteed
by certain of AAC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 senior subordinated debt of such guarantor and senior in right of
payment to any future subordinated indebtedness of such guarantor. AAC may not redeem the 8 1/4% Notes until on or after April 1, 2008, except that AAC, in connection with certain equity offerings, may redeem up to 35 percent of the 8 1/4% Notes
before the third anniversary of the issue date of the 8 1/4% Notes as long as (a) AAC pays a
specified percentage of the principal amount of the 8 1/4% Notes, plus interest, (b) AAC
redeems the 8 1/4% Notes within 90 days of completing a public equity offering and (c) at least 65
percent of the aggregate principal amount of the 8 1/4% Notes originally issued remains outstanding
afterward. If a change in control as defined in the indenture relating to the 8 1/4% Notes occurs, AAC must give the holders of the 8 1/4% Notes the opportunity to sell their 8 1/4% Notes to AAC at 101 percent of the principal amount of the 8 1/4% Notes, plus accrued interest. The 8 1/4% Notes contain customary negative covenants and restrictions on actions by AAC
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 included in the indenture governing the 8 1/4% Notes . In
addition, the 8 1/4% Notes contain covenants, which restrict the declaration or payment of dividends
by AAC and/or its subsidiaries (as defined in the indenture governing the 8 1/4% Notes). AAC was in compliance with the 8 1/4% Notes covenants as of November 27, 2004. 11 5/8% Senior Unsecured Notes On February 20, 2002, AAC issued $177.0 million of 11 5/8% senior
unsecured notes (the 11 5/8% Notes) due in 2007. The 11 5/8% Notes bear interest at a stated rate of 11 5/8%. The
11 5/8% 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
11 5/8% Notes after discount is approximately 13.0%. The 11 5/8% Notes rank pari passu with AACs existing and future senior indebtedness,
including obligations under AACs senior secured credit facility. The 11 5/8%
Notes are guaranteed by AACs domestic subsidiaries, and the guarantees rank pari passu with the
existing 8 1/4% Notes and future senior debt of AAC and its
subsidiaries. The 11 5/8% Notes and the guarantees on the 11 5/8% Notes are
effectively subordinated to any of AACs secured debt. On
March 25, 2004, as discussed in Note 2, pursuant to the debt tender offer for the 11 5/8% Notes, AAC retired $170.9 million of
outstanding 11 5/8% 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 11 5/8% Notes outstanding will be redeemable by AAC on or after January 1,
2005 at its option at 105.813% of the principal amount thereof (plus accrued and unpaid interest).
AAC was in compliance with the remaining covenants in the 11 5/8%
Notes as of November 27, 2004. 11% Senior Subordinated Notes Commemorative Brands, Inc.s (CBI) 11% senior subordinated notes (the 11% Notes) mature on
January 15, 2007. The 11% 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 11% Notes, as amended (the CBI
Indenture), if any, thereon to the date of redemption. On March 25, 2004, as discussed in Note 2, AAC redeemed all of the outstanding 11%
Notes for an aggregate of $42.1 million. The tender for the $177.0 million 11 5/8% Notes and the $41.4 million 11% Notes was the direct
result of the Merger. The consummation of the Merger was subject to the consent and a debt tender
offer to acquire these notes. The subsequent tender offer costs and early redemption expenses of
the debt directly related to the cost of the transaction and was included as part of the purchase
price. 12




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AAC GROUP HOLDING CORP.
AMERICAN ACHIEVEMENT CORPORATION Notes to Condensed Consolidated Financial Statements  (Continued)
(Dollars in thousands, unless otherwise stated)
(unaudited) Senior Secured Credit Facility In conjunction with the consummation of the Merger, on March 25, 2004, AAC entered into a
$195.0 million senior credit facility (the Senior Credit Facility) which includes a $155.0
million term loan and up to $40.0 million available under a revolving credit facility. The Senior
Credit Facility is secured by a first priority security interest in all existing and after-acquired
assets of AAC, and certain of AACs direct and indirect domestic subsidiaries existing and
after-acquired assets, including, without limitation, real property and all of the capital stock
owned by AAC Holding Corp. and certain of AACs direct and indirect domestic subsidiaries
(including certain capital stock of their direct foreign subsidiaries only to the extent permitted
by applicable law). As of November 27, 2004, assets of AAC subject to
lien under the Senior Credit Facility were approximately $345.9
million. All of AACs obligations under the Senior Credit Facility are fully and
unconditionally guaranteed by AAC Holding Corp. and certain of AACs direct and indirect domestic
subsidiaries. The term loan of the Senior Credit Facility is due in March 2011. Quarterly payments of $388
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 revolving credit facility matures in March 2010. Availability under the revolving credit
facility is restricted to a total revolving commitment of $40 million as defined in the credit
agreement governing the Senior Credit Facility. Availability under the revolving credit facility as
of November 27, 2004 was approximately $32.2 million with $5.4 million borrowings and $2.4 million
in letters of credit outstanding. Advances under the revolving credit facility may be made as base rate loans or LIBOR loans at
AAC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 AAC 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 governing the Senior Credit Facility). The Senior Credit Facility and the indenture governing the 8.25% Notes each contain
restrictions on the ability of AAC to pay dividends and make certain other payments to AAC Holding
Corp. Pursuant to each arrangement, AAC may, subject to certain limitations, pay dividends or make
such payments in connection with (i) repurchases of certain capital stock of AAC Holding Corp. and
(ii) the payment by AAC Holding Corp. of taxes, costs and other expenses required to maintain its
legal existence and legal, accounting and other overhead costs in the ordinary course of business. AAC
was in compliance with the Senior Credit Facilitys covenants as
of November 27, 2004. Group Holdings weighted average interest rate on debt outstanding as of November 27, 2004 was 7.2%. AACs weighted average interest rate on debt outstanding as of November 27, 2004 and August
28, 2004 was 6.3% and 6.1%, respectively. AACs management believes the carrying amount of long-term debt approximates fair
value as of November 27, 2004 and August 28, 2004, based upon current rates offered for debt with
the same or similar debt terms. 8. Commitments and Contingencies Pending Litigation 
 On February 11, 2004, Frederick Goldman, Inc. (the Licensee) filed an arbitration claim
against AACs subsidiary, CBI, for an unspecified monetary
amount alleging, among other things, that CBI had improperly
attempted to convert an exclusive license CBI granted to the Licensee to a non-exclusive license.
The arbitration proceedings have concluded with the arbitrator ruling
that the Licensee has an 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. The Licensee has
not specified the exact amount of monetary relief that it seeks, but
has asked for an amount not less than $10.0 million. CBI intends to
defend itself vigorously, and pursue its own claims aggressively, in these proceedings. 
 13




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AAC GROUP HOLDING CORP.
AMERICAN ACHIEVEMENT CORPORATION Notes to Condensed Consolidated Financial Statements  (Continued)
(Dollars in thousands, unless otherwise stated)
(unaudited) 
 On
August 2, 2004, AACs subsidiary Taylor Publishing Company
(Taylor) filed a motion in United
States Bankruptcy Court, Eastern District of Virginia, Norfolk Division, Case No. 03-75562-SCS to
recover certain data and documents pursuant to a teleservices contract between Taylor and Abacus Communications, LC (Abacus), the chapter 11 debtor. Subsequent to court approval of
Abacus turning over the documents and data requested, Abacus filed a counterclaim against Taylor for approximately $840,000 plus interest for unpaid billings that it claims are owed
under the teleservices contract with Taylor.
Taylor Publishing denies that it is liable to pay
such amount and has asserted that such
amounts are in excess of the amounts owed by
Taylor Publishing. In the action, Taylor Publishing
has also filed a claim against Abacus for damages
as a result of Abacus refusal to release the data
and information. The action is in the discovery stage
and AAC is unable to make a determination of the outcome
at this time or the range of possible loss or recovery.
AAC 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 AACs gold consignment financing arrangement, AAC 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 AACs facilities
and other approved locations, as specified by the agreement. AAC expensed consignment fees
of $87 for the three months ended November 27, 2004 and $67 for the three months ended November 29,
2003. Under the terms of the consignment arrangement, AAC 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 AAC in payment for the gold purchased. Accordingly, AAC does not include
the value of consigned gold in its inventory or the corresponding liability for financial statement
purposes. As of November 27, 2004 and August 28, 2004, AAC held approximately 22,540 ounces
and 19,460 ounces, respectively, of gold valued at $10.2 million and $7.9 million, respectively, on
consignment. The gold consignment agreement does not have a stated period and it can be terminated
by either party upon 60 day written notice. 9. Income Taxes AAC has recognized a net deferred tax liability. AAC has an effective rate of 40% for the
three months ended November 27, 2004 to represent estimated federal and state income taxes. Group
Holdings has an effective rate of 43% for the three months ended November 27, 2004 to represent
estimated federal and state income taxes and the non-deductibility of a portion of its interest on
high-yield debt. 10. Stockholders Equity Pursuant to an employment agreement entered into between AAC and its chief executive
officer in July 1999, as amended on February 1, 2002, if AAC achieved certain EBITDA targets as
defined by the agreement at any point from 2002 through 2004, the chief executive was entitled to
receive up to a total of $1 million in face value of the AACs Series A Preferred Stock. In
addition, the plan provided for the immediate issuance of an option to purchase 12,500 shares of
the AACs common stock, and pursuant to this plan, an option to purchase 12,500 shares was granted
in fiscal 2002. The executive was also entitled to receive discretionary bonuses as directed by the
Board of Directors up to $300 annually, of which $75 was accrued as of November 27, 2004. On March 25, 2004, as part of the Merger discussed in Note 2, AAC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 AAC, and
all warrants, options and other rights to acquire preferred stock or common stock of AAC (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. 14




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

    
    (Predecessor)For the three months
    

    
    For the three months endedended November 27, 2004
    

    
    November 29, 2003CBI
    

    
    
    
    
    
    CBITaylor
    
    
    post-
    

    
    Taylor
    
    
    post-pension
    
    
    retirement
    

    
    pension
    
    
    retirementService costs,
benefits attributed to
Service during the
period
    
    $
    19
    
    
    $
    
    

    
    $
    28
    
    
    $
    Interest cost
    
    
    209
    
    
    
    37
    

    
    
    269
    
    
    
    74Expected return on assets
    
    
    (208
    )
    
    
    
    

    
    
    (270
    )
    
    
    Amortization of
unrecognized net loss
(gain)
    
    
    
    
    
    
    (74
    )

    
    
    69
    
    
    
    39Amortization of
unrecognized net prior
service costs
    
    
    
    
    
    
    
    

    
    
    
    
    
    
    73Net periodic
postretirement benefit
cost (income)
    
    $
    20
    
    
    $
    (37
    )

    
    $
    96
    
    
    $
    186
 
 In May 2004, the Financial Accounting Standards Board (FASB) issued FASB Staff Position (FSP) 106-2 as a result of the Medicare Prescription
Drug, Improvement and Modernization Act of 2003 (the Medicare Subsidy Act). The Medicare Subsidy
Act entitles employers who provide certain prescription drug benefits for retirees to receive a
federal subsidy beginning in calendar 2006, thereby creating the potential for significant benefit
cost savings. FSP 106-2 requires companies to record the amount expected to be received under the
Medicare Subsidy Act as an actuarial gain, to the extent the related post-retirement medical plans
total unrecognized actuarial gains or losses exceed certain thresholds, to be amortized into income
over time. The Company has adopted the provisions of this
pronouncement and noted a reduction of service costs of $93 as a
component of net postretirement health care costs attributable to
current services. 
 12. Related-Party Transactions On March 25, 2004 upon consummation of the Merger, AAC entered into a new management agreement
with an affiliate of Fenway Partners pursuant to which AAC, 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 $765
for the three months ended November 27, 2004. As of November 27, 2004 and August 28, 2004, AAC had
accrued management fees of approximately $515 and $500, respectively. In 2001, AAC entered into a management agreement with a prior stockholder. This agreement was
terminated on March 25, 2004. Amounts paid under this management agreement totaled $750 for the
three months ended November 29, 2003. 15




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AAC GROUP HOLDING CORP.
AMERICAN ACHIEVEMENT CORPORATION Notes to Condensed Consolidated Financial Statements  (Continued)
(Dollars in thousands, unless otherwise stated)
(unaudited) 13. Business
Segments (Restated) 
 Previously the Company
had aggregated and presented two reportable segments  Scholastic Products and Recognition
and Affinity Products.  Subsequent to the issuance of the
Companys financial statements for
the period ended November 27, 2004, management of the Company determined that it should have
disaggregated its segments into five separate segments; namely, Yearbooks, Class Rings,
Graduation Products, Achievement Publications and Other. Accordingly, the following information
pertaining to the Companys operating segments has been restated to present such segment
disclosures. 
 
 The Company
manufactures, markets and sells class rings, yearbooks and graduation products, which
includes fine paper products and graduation accessories, to high school, college and, to a
lesser extent, elementary and junior high school markets in the United States. The achievement
publications segment produces, markets, and sells publications that recognize the achievements
of top students at the high school and college levels, as well as the
nations most inspiring
teachers.  The other segment consists primarily of 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. 
 
 AAC Group Holding Corp.SegmentOperatingIncome
    
    
    SegmentNet Sales
    
    
    (Loss)
    
    
    AssetsThree Months Ended
November 27, 2004Class Rings
    
    $
    34,851
    
    
    $
    5,646
    
    
    $
    223,374Yearbooks
    
    
    12,951
    
    
    
    (5,496
    )
    
    
    169,615Graduation Products
    
    
    2,958
    
    
    
    (1,750
    )
    
    
    72,315Achievement Publications
    
    
    8,799
    
    
    
    2,732
    
    
    
    33,663Other
    
    
    3,723
    
    
    
    (769
    )
    
    
    36,584Total
    
    $
    63,282
    
    
    $
    363
    
    
    $
    535,551
 
 
 American Achievement Corporation(Successor)SegmentOperatingIncome
    
    
    SegmentNet Sales
    
    
    (Loss)
    
    
    AssetsThree Months Ended
November 27, 2004Class Rings
    
    $
    34,851
    
    
    $
    5,646
    
    
    $
    221,931Yearbooks
    
    
    12,951
    
    
    
    (5,496
    )
    
    
    168,304Graduation Products
    
    
    2,958
    
    
    
    (1,750
    )
    
    
    71,848Achievement Publications
    
    
    8,799
    
    
    
    2,732
    
    
    
    33,428Other
    
    
    3,723
    
    
    
    (769
    )
    
    
    36,342Total
    
    $
    63,282
    
    
    $
    363
    
    
    $
    531,853
 
 
 (Predecessor)SegmentOperatingIncomeNet Sales
    
    
    (Loss)Three Months Ended
November 29, 2003Class Rings
    
    $
    36,710
    
    
    $
    6,142Yearbooks
    
    
    13,644
    
    
    
    (3,947
    )Graduation Products
    
    
    2,652
    
    
    
    (1,882
    )Achievement Publications
    
    
    11,186
    
    
    
    5,392Other
    
    
    3,736
    
    
    
    (281
    )Total
    
    $
    67,928
    
    
    $
    5,424
 
 16




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##### Table of Contents



AAC GROUP HOLDING CORP.
AMERICAN ACHIEVEMENT CORPORATION Notes to Condensed Consolidated Financial Statements  (Continued)
(Dollars in thousands, unless otherwise stated)
(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 May 2004, FASB issued FASB Staff Position (FSP) 106-2 as a result of the Medicare Prescription
Drug, Improvement and Modernization Act of 2003 (the Medicare Subsidy Act). The Medicare Subsidy
Act entitles employers who provide certain prescription drug benefits for retirees to receive a
federal subsidy beginning in calendar 2006, thereby creating the potential for significant benefit
cost savings. FSP 106-2 requires companies to record the amount expected to be received under the
Medicare Subsidy Act as an actuarial gain, to the extent the related post-retirement medical plans
total unrecognized actuarial gains or losses exceed certain thresholds, to be amortized into income
over time. The Company has adopted the provisions of this
pronouncement and noted a reduction of service costs of $93 as a
component of net postretirement health care costs attributable to
current services. In November 2004, FASB issued SFAS No. 151 Inventory Costs, an Amendment of ARB No. 43 Chapter 4
(FAS 151). FAS 151 requires that items such as idle facility expense, excessive spoilage,
double freight, and rehandling be recognized as current-period charges rather than being included
in inventory regardless of whether the costs meet the criterion of abnormal as defined in ARB 43.
FAS 151 is applicable for inventory costs incurred during fiscal years beginning after June 15,
2005. The Company will adopt this standard beginning the first quarter of fiscal year 2006 and
does not believe the adoption will have a material impact on its financial statements as such costs
have historically been expensed as incurred. 
 In December 2004, FASB issued SFAS No. 153,
Exchanges of Nonmonetary Assets  an amendment of APB Opinion No. 29 which addresses the
measurement of exchanges of nonmonetary assets and eliminates the exception from fair value
accounting for nonmonetary exchanges of similar productive assets and replaces it with an exception
for exchanges that do not have commercial substance. SFAS No. 153 specifies that a nonmonetary
exchange has commercial substance if the future cash flows of an entity are expected to change
significantly as a result of the exchange. This statement is effective for the Company beginning
the first quarter of fiscal year 2006 and is not expected to have a significant impact on the
Companys financial statements. 
 
 In December 2004, FASB issued SFAS No. 123 (Revised 2004) Share-Based Payment: an Amendment of
FASB Statements No. 123 and 95 (FAS 123R). FAS 123R sets accounting requirements for
share-based compensation to employees, requires companies to recognize in the income statement
the grant-date fair value of stock options and other equity-based compensation issued to employees
and disallows the use of the intrinsic value method of accounting for stock compensation. FAS 123R
is applicable for all interim and annual periods for fiscal years beginning after June 15, 2005. This statement is effective for
the Company beginning the first quarter of fiscal year 2006 and is not expected to have a significant impact on its financial statements. 
 17




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 
 The
following discussion of our condensed consolidated financial condition and results of operations
should be read in conjunction with the information contained in our
condensed consolidated financial
statements and the notes thereto.
The consolidated financial statements, and the notes thereto, have been prepared in accordance with U.S. GAAP.
The comparative financial information contains the pre-Merger period for the three months ended November 29, 2003
(Predecessor) and the post-Merger period for the three
months ended November 28, 2004 (Successor).  In reviewing
this comparative financial information, readers should remember that the Predecessor period results of operations do
not reflect the effects of the acquisition and the application of purchase accounting.
The following discussion includes forward-looking statements that
involve certain risks and uncertainties. See Special Note Regarding Forward-Looking Statements. 
 The
following managements discussion
and analysis gives effect of the restatement as discussed in Note 13. Basis of Presentation We present financial information relating to American Achievement Corporation (AAC) and
its subsidiaries in this report, including in this discussion and analysis. AACs consolidated
financial statements are substantially identical to what AAC Group Holding Corp.s (Group
Holdings, a separate public company, together with AAC, the Company) consolidated financial
statements would look like had Group Holdings prepared separate financial statements for this
report. Group Holdings was formed in November 2004. Its only assets are 100% of the shares of
common stock of AAC Holding Corp., which is the holder of 100% of the shares of common stock of
AAC. Group Holdings conducts all of its business through AAC and its subsidiaries. 
 Recent Developments On April 25, 2005, David G. Fiore, our President and Chief Executive Officer informed us of his plans to retire. On
July 20, 2005, we announced that Donald J. Percanti was appointed to replace Mr. Fiore as our Chief Executive Officer effective
September 1, 2005. Mr. Percanti has most recently served as our Senior Vice President On Corpus and General Manager for Printing. 
 General 
 We are one of the
leading manufacturers and suppliers of class rings, yearbooks, graduation products,
achievement publications and recognition and affinity jewelry in the United States. We
serve the high school, college and, to a lesser extent, elementary and junior high school
markets. We market and sell yearbooks in all of the markets we serve.  We primarily sell
our class rings and graduation products, which include fine paper products and graduation
accessories, in the high school, college and junior high school markets. Our achievement
publications segment produces, markets, and sells publications that recognize the achievements
of top students at the high school and college levels, as well as the
nations most inspiring
teachers.  Our other segment consists primarily of 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. 
 Our ability to meet our debt service and other obligations depends in significant part on how
successful we are in maintaining our business and further implementing our business strategy. Our
business plan envisions several long-term growth initiatives, including the development of new
products. The components of our strategy are subject to significant business, economic and
competitive uncertainties and contingencies. Numerous raw materials are used in the manufacture of our products. Gold, precious,
semiprecious and synthetic stones, paper products and ink comprise the bulk of the raw materials we
utilize in the largest segments of our business. Prices of these materials, especially gold,
continually fluctuate. We purchase all of our gold from a single supplier, The Bank of Nova Scotia,
through our existing gold consignment agreement. We consign the majority of our gold and pay for
gold as our products are shipped to customers. We also purchase the majority of our semi-precious
stones from a single supplier in Germany. The prices for these products are denominated in Euros.
We generally are able to pass on price increases in gold and stones to our customers as such
increases are realized by us, however, this may not always be the case. Gold prices have increased
and the U.S. dollar has continued to lose valuation when compared to the Euro during the first
quarter of our fiscal year 2005. We expect these trends to continue at least through the end of our
fiscal year 2005, and perhaps thereafter. 
 We face strong competition for most of our principal products. The class ring and
yearbook markets are highly concentrated and consist primarily of a few national manufacturers (of
which we are one) and, to a significantly lesser extent, small regional competitors. Our
achievement publications with one national manufacturer and, to a lesser extent,
with various other companies. We believe that it would be costly and time-consuming for new
competitors to replicate the production and distribution capabilities necessary to compete
effectively in this market, and as a result, there have been no major new competitors in the last
60 years. 
 We experience seasonal fluctuations in our net sales tied primarily to the school year.
We recorded 22% and 43% of our fiscal year 2004 net sales in our first and third quarters,
respectively. Class ring sales are highest during October through December, with most orders made
for delivery to students before the winter holiday season. Graduation product sales are
predominantly made during February through April prior to the April through June graduation season.
Yearbook sales are highest during the months of April through June, as yearbooks are typically
shipped prior to each schools summer break. We have historically experienced operating losses
during our fourth fiscal quarter, which includes the summer months when school is not in session,
thus reducing related shipment of products. In addition, our working capital requirements tend to
exceed our operating cash flows from April through August. We also have exposure to market risk relating to changes in interest rates on our
variable rate debt. Our senior secured credit facility (revolver and term loan) and existing gold
consignment agreement are variable rate arrangements. The interest rates are based on a floating
benchmark rate (such as LIBOR or the Federal Funds rate) plus a fixed spread. 
 Historically,
growth in the class rings, year books and graduation products market has been driven primarily by
demographics. The U.S. Department of Education projects that the number of high school and college
graduates will grow by an average of 2.1% and 1.7% per year, respectively, from 2004 to 2008.
Additionally, the U.S. Census Bureau projects that the total U.S. population will increase by 9.5%
between 2000 and 2010. Both the increased population, and the increased number of high school and
college graduates should expand the market for our products. 
 Company Background In November of 2004, the shareholders of
AAC Holding Corp. participated in an exchange, pursuant to which they exchanged their shares of common stock
in AAC Holding Corp. for a like amount of shares in Group Holdings. In November 2004, Group Holdings
issued $131.5 million of 10 1/4% senior discount notes generating
net proceeds of $89.3 million (the 10 1/4% Notes) . Group Holdings is the sole obligor of these
notes. The net proceeds of this offering were used to repurchase shares of Group Holdings common
stock from its stockholders. On December 24, 2003, AAC entered into a merger agreement with AAC Acquisition Corp.
(Acquisition) and 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 AAC, with AAC 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 AAC Holding Corp. by an investor group
led by Fenway Partners of $102.0 million, the borrowing by AAC of $155.0 million under a seven-year
term loan and $2.0 million under a six-year revolving loan, each under AACs senior secured credit
facility, the issuance by AAC of $150.0 million aggregate principal amount of 8 1/4% senior
subordinated notes due 2012 (the 8 1/4% Notes). Proceeds of these financing arrangements were used
to redeem the outstanding Series A Preferred Stock of AAC, refinance AACs existing indebtedness,
including the redemption of $41.4 million of AACs 11% subordinated notes due 2007 and completion
of a debt tender offer to acquire all of AACs existing 11 5/8% senior
unsecured notes due 2007 (the 11 5/8% Notes), and pay transaction costs and
expenses. Pursuant to the debt tender offer, AAC retired $170.9 million of the 11
5/8% Notes for an aggregate price of $193.8 million and eliminated
substantially all of the restrictive covenants associated with such notes. In addition, as part of
the Merger, AAC terminated its then existing senior secured credit facility and terminated its
management contract with its previous owners. AAC also entered into an amendment of its existing
gold consignment agreement and entered into a new management agreement with an affiliate of Fenway
Partners. As a result of the Merger, AAC has reflected pre-Merger periods from August 31, 2003 to
November 29, 2003 (Predecessor) and a post-Merger period from August 29, 2004 to November 27,
2004 (Successor) in its condensed consolidated financial statements. During the three months
ended November 27, 2004, AAC recognized in its consolidated statements of operations approximately
$2.4 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. Our predecessor was founded when the operations of ArtCarved, which were previously owned
by CJC Holdings, Inc., and the operations of Balfour, which were previously owned by L. G. Balfour
Company, Inc., were combined in December 1996. AAC was formed in June 2000 to serve as a holding
company for these operations as well as any future acquisitions. In June 2000, we acquired the
Taylor Senior Holding Company, the parent company of Taylor Publishing, whose primary business was
designing and printing student yearbooks. In March 2001, AAC acquired all of the capital stock of
ECI, which publishes achievement publications. In July 2002, AAC acquired all the outstanding stock
and warrants of Milestone Marketing, a marketer of class rings and other graduation products to the
college market. In January 2004, AAC acquired C-B Graduation Announcements, a marketer of
graduation products to the college market. 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 required 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 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. 18




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##### Table of Contents



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: 
 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. Product returns as a percentage of net sales have been 1.8%, 1.9% and 2.2%
for the fiscal years ended 2004, 2003 and 2002, respectively. Product warranty costs as a
percentage of net sales have been 0.3%, 0.2% and 0.4% for the fiscal years ended 2004, 2003 and
2002, respectively. A ten percent increase in product returns and product warranty costs would
result in a reduction of annual net sales of approximately $0.6 million and $0.1 million, respectively,
based on fiscal year end 2004 rates. 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. Write-offs of doubtful accounts as a percentage of net sales have been 0.6%,
0.5% and 0.5% for the fiscal years ended 2004, 2003 and 2002, respectively. Write-offs of sales
representative advances as a percentage of net sales have been 0.7%, 0.9% and 0.9% for the fiscal
years ended 2004, 2003 and 2002, respectively. A ten percent increase in write-offs of doubtful
accounts and sales representative advances would result in a
reduction of annual net sales of
approximately $0.2 million and $0.2 million, respectively, based on fiscal year ended 2004 rates.
We believe that our 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 or SFAS No. 142. Under SFAS No. 142 we are required to test goodwill and
intangible assets with indefinite lives for impairment annually, or more frequently if impairment
indicators occur. The impairment test requires management to make judgments in connection with
identifying reporting units, assigning assets and liabilities to reporting units and determining
fair value of each reporting unit. Significant judgments required to estimate the fair value of
reporting units include projecting future cash flows, determining appropriate discount rates and
other assumptions. The projections are based on historical performance and future estimated
results. As of the Merger, a third party valuation, among other factors, was used by management in
formulating other intangible assets values and the residual goodwill. We believe that we had no unrecorded impairment as of August 28, 2004 and August 30,
2003; however, unforeseen future events could adversely affect the reported value of goodwill and
indefinite-lived intangible assets. As of August 28, 2004, goodwill and indefinite-lived intangible
assets totaled $232.2 million and represented 44% of total assets and 214% of equity. 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 the
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. In applying this standard, assets are grouped and evaluated at the lowest level for which
there are identifiable cash flows that are largely independent of the cash flows of other groups of
assets. We consider historical performance and future estimated results in evaluation of
impairment. If the carrying amount of the asset exceeds expected undiscounted future cash flows, we
measure the amount of impairment by comparing the carrying amount of the asset to its fair value,
generally measured by discounting expected future cash flows at the rate we utilize to evaluate
potential investments. As of the Merger, a third party valuation was used in formulating our
long-lived tangible and intangible assets with definite lives. 19




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##### Table of Contents



Results of Operations Three Months Ended November 27, 2004 (Successor) Compared to Three Months Ended November 29, 2003
(Predecessor) Group Holdings was not formed until November of 2004. We are therefore comparing our results
of operations for the three months ended November 27, 2004, which include results of operations for
both Group Holdings and AAC, with the results of operations of AAC by itself for the three months
ended November 29, 2003. The inclusion of the results of Group Holdings for the three months ended
November 27, 2004 only adds additional interest expense from the issuance of the notes and an
increased tax benefit. The following table sets forth selected information for Group Holdings and AAC from our
condensed consolidated statements of operations expressed on an actual basis and as a percentage of
net sales: AAC Group Holding Corp.
    
    American Achievement Corporation(Successor)
    
    
    
    
    

    
    (Predecessor)For the three
    
    
    
    
    
    
    For the three
    
    
    
    
    

    
    For the threemonths ended
    
    
    
    
    
    
    months ended
    
    
    
    
    

    
    months endedNovember 27
    
    
    
    
    
    
    November 27
    
    
    % of Net
    

    
    November 29,
    
    
    % of Net2004
    
    

    % of Net Sales
    
    
    2004
    
    
    Sales
    

    
    2003
    
    
    SalesNet sales
    
    $
    63,282
    
    
    
    100.0
    %
    
    $
    63,282
    
    
    
    100.0
    %

    
    $
    67,928
    
    
    
    100.0
    %Cost of sales
    
    
    27,316
    
    
    
    43.2
    %
    
    
    27,316
    
    
    
    43.2
    %

    
    
    30,044
    
    
    
    44.2
    %Gross profit
    
    
    35,966
    
    
    
    56.8
    %
    
    
    35,966
    
    
    
    56.8
    %

    
    
    37,884
    
    
    
    55.8
    %Selling, general and
administrative expenses
    
    
    35,603
    
    
    
    56.3
    %
    
    
    35,603
    
    
    
    56.3
    %

    
    
    32,460
    
    
    
    47.8
    %Operating income
    
    
    363
    
    
    
    0.5
    %
    
    
    363
    
    
    
    0.5
    %

    
    
    5,424
    
    
    
    8.0
    %Interest expense, net
    
    
    6,118
    
    
    
    9.6
    %
    
    
    5,716
    
    
    
    9.0
    %

    
    
    6,981
    
    
    
    10.3
    %Loss before
income taxes
    
    
    (5,755
    )
    
    
    (9.1
    )%
    
    
    (5,353
    )
    
    
    (8.5
    )%

    
    
    (1,557
    )
    
    
    (2.3
    )%Benefit for income taxes
    
    
    (2,499
    )
    
    
    (4.0
    )%
    
    
    (2,141
    )
    
    
    (3.4
    )%

    
    
    
    
    
    
    0.0
    %Net loss
    
    $
    (3,256
    )
    
    
    (5.1
    )%
    
    $
    (3,212
    )
    
    
    (5.1
    )%

    
    $
    (1,557
    )
    
    
    (2.3
    )%
 Net Sales.Net sales consist of product sales and are net of product returns and promotional
discounts. Net sales decreased $4.6 million, or 6.8%, to $63.3 million for the three months ended
November 27, 2004 from $67.9 million for the three months ended November 29, 2003. This decrease in
net sales was due primarily to lower sales volumes in college and retail high school ring shipments
and achievement publications. The following details the changes in net sales during such periods by business segment. 
 Class
Rings. Net sales decreased $1.8 million to $34.9 million for the
three months ended November 27, 2004 from $36.7 million for the
three months ended November 29, 2003. The decrease in net sales was
mainly the result of timing differences from college ring shipments
and a decline in retail high school ring units. 
 
 Yearbooks.
Net sales decreased
$0.6 million to $13.0 million for the three months ended November 27,
2004 from $13.6 million for the three months ended November 29, 2003.
The decrease in net sales was due to timing of yearbook shipments. 
 
 Graduation Products. Net sales
increased $0.3 million to $3.0 million for the three months ended
November 27, 2004 from $2.7 million for the three months ended
November 29, 2003. The increase in net sales was the result of an
increase in shipments of graduation products. 
 
 Achievement Publications. Net
sales decreased $2.4 million to $8.8 million for the three months
ended November 27, 2004 from $11.2 million for the three months ended
November 29, 2003. The decrease in net sales was the result of not
publishing The National Deans List (the Deans List Book), our publication honoring exceptional
college students, in November 2004. In fiscal year 2004, this book
was published in both November 2003 and August 2004, while in fiscal
year 2005, it will only be published in August 2005. 
 
 Other.
Net sales were $3.7 million for both the three months ended November
27, 2004 and the three months ended November 29, 2003. 
 Gross Profit.Gross margin represents gross profit as a percentage of net sales. Gross margin was
56.8% for the three months ended November 27, 2004, a 1.0 percentage point increase from 55.8% for
the three months ended November 29, 2003. The increase was a result of continued gross margin
improvement in all areas of the business. Overall, gross profit decreased $1.9 million as a result
of lower sales. Selling, General and Administrative Expenses.Selling, general and administrative expenses
increased $3.1 million, or 9.5%, to $35.6 million for the three months ended November 27, 2004 from
$32.5 million for the three months ended November 29, 2003. 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 $1.5 million to $25.1 million or
39.7% of net sales, for the three months ended November 27, 2004 from $23.6 million or 34.8% of net
sales, for the three months ended November 29, 2003. The increase in selling and marketing expenses
was primarily the result of increased marketing expenses related to yearbooks and graduation
products. 20




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##### Table of Contents



General and administrative expenses for the three months ended November 27, 2004 were $10.5
million, or 16.6% of net sales, as compared to $8.9 million, or 13.0% of net sales, for the three
months ended November 29, 2003. The increase in general and administrative expenses was a result
of the impact of purchase accounting increasing amortization expense by $2.4 million. 
 Operating Income.As a result of the foregoing, operating income was $0.4 million, or 0.5% of net
sales, for the three months ended November 27, 2004 as compared with operating income of $5.4 million,
or 8.0% of net sales, for the three months ended November 29,
2003. Approximately $2.4 million of the $5.0 million decline was a
result of the impact of purchase accounting increasing amortization.
The class rings segment reported operating income of $5.6 million
for the three months ended November 27, 2004 as compared with
operating income of $6.1 million for the three months ended November
29, 2003. The yearbooks segment reported an operating loss of $5.5
million for the three months November 27, 2004 as compared with an
operating loss of $3.9 million for the three months ended November
29, 2003. The graduation products segment reported an operating loss
of $1.8 million for the three months ended November 27, 2004 as
compared with an operating loss of $1.9 million for the three months
ended November 29, 2003. The achievement publications segment
reported operating income of $2.7 million for the three months ended
November 27, 2004 as compared with operating income of $5.4 million
for the three months ended November 29, 2003. The other segment
reported an operating loss of $0.8 million for the three months ended
November 27, 2004 as compared with an operating loss of $0.3 million
for the three months ended November 29, 2003. 
 Interest Expense, Net.For AAC, net interest expense was $5.7 million for the three months
ended November 27, 2004 and $7.0 million for the three months ended November 29, 2003. The average
debt outstanding of AAC for the three months ended November 27, 2004 and the three months ended
November 29, 2003 was $327 million and $234 million, respectively. The weighted average interest
rate on debt outstanding of AAC for the three months ended November 27, 2004 and the three months
ended November 29, 2003 was 6.9% and 11.8%, respectively. For Group Holdings, net interest expense was $6.1 million for the three months ended
November 27, 2004. The average debt outstanding of Group Holdings for the three months ended
November 27, 2004 was $339 million. The weighted average interest rate on debt outstanding of Group
Holdings for the three months ended November 27, 2004 was 7.1%. Benefit for Income Taxes.For the three months ended November 27, 2004 and November
30, 2003, AAC recorded an income tax benefit of $2.1 million and a provision of $0, respectively,
which represents an effective tax rate of 40% and 0%, respectively. Due to the impact of purchase
accounting on deferred taxes as a result of the Merger, AAC has recognized a net deferred tax
liability. AAC has an effective rate of 40% for the three months ended November 27, 2004 to
represent estimated federal and state income taxes. For the quarter ended November 29, 2003, 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. Although state taxes are expected for the year ended
2004, no benefit has been recorded for the quarter ended November 29, 2003 due to the valuation
allowance. For the three months ended November 27, 2004, Group Holdings recorded an income tax
benefit of $2.5 million, which represents an effective tax rate of 43%. Due to the impact of
purchase accounting on deferred taxes as a result of the Merger, Group Holdings has recognized a
net deferred tax liability. Group Holdings has an effective rate of 43% for the three months ended
November 27, 2004 to represent estimated federal and state income taxes and the non-deductibility
of a portion of its interest on high-yield debt. Net Loss.As a result of the foregoing, AAC reported a net loss of $3.2 million for
the three months ended November 27, 2004 as compared to a net loss of $1.6 million for the three
months ended November 29, 2003. As a result of the foregoing, Group Holdings reported a net loss of $3.3 million for the
three months ended November 27, 2004. 21




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Liquidity and Capital Resources Operating Activities.For AAC, operating activities provided cash of $2.1 million for the three months ended November 27,
2004 compared to cash provided of $19.5 million for the three months ended November 29, 2003. The
$17.4 million decrease in cash used in operating activities was primarily attributable to a
decrease in accounts payable, accrued expenses, and other long-term liabilities of $16.6 million,
an increase in inventories of $2.2 million, and an increase in other assets of $0.9 million,
partially offset by decreases in accounts receivable of $1.8 million and net income (net of
non-cash items) of $0.2 million. For Group Holdings, operating activities used cash of $1.4 million for
the three months ended November 27, 2004. Investing Activities.Capital expenditures for the three months ended November 27, 2004 were
$4.7 million compared to capital expenditures of $6.6 million for the three months ended November
29, 2003. Our projected capital expenditures for the entire fiscal year 2005 are expected to be
approximately $14.5 million. Financing Activities.For AAC, financing activities provided cash of $4.4 million for the three months ended November 27,
2004 compared to cash used of $11.4 million for the three months ended November 29, 2003. For Group Holdings, financing activities provided cash of $8.1 million for
the three months ended November 27, 2004. Capital Resources.In February 2002, AAC issued $177.0 million of unsecured
senior notes due 2007 and entered into a $40.0 million senior secured revolving credit facility. At
that time, AAC repaid in full all outstanding term loans and revolving loans under the former
credit agreement, as well as the outstanding bridge note, and settled all but $25.0 million
(notional amount) of our interest rate swap agreements. As of the date of the Merger, all amounts
outstanding under this senior secured revolving credit facility and $170.0 of the unsecured senior
notes due 2007 were repaid. In connection with the Merger, AAC entered into its existing $195.0 million senior
secured credit facility and issued $150.0 million of the 8.25% senior subordinated notes. The senior secured credit facility provides a $155.0 million term loan, maturing in 2011,
and up to $40.0 million in available revolving loan borrowings, maturing in 2010. As of November
27, 2004, the revolver was undrawn. The senior secured credit facility imposes certain restrictions
on AAC, including restrictions on its ability to incur indebtedness, pay dividends, make
investments, grant liens, sell assets and engage in certain other activities. In addition, the
senior secured credit facility contains financial covenants and maintenance tests, including a
minimum interest coverage test and a maximum total leverage test, and restrictive covenants,
including restrictions on its ability to make capital expenditures. The senior secured credit
facility is secured by substantially all of the assets of AAC, is guaranteed by and secured by the
assets of some of its existing and future domestic subsidiaries, if any, and by a pledge of all of
the capital stock of some of its existing and future domestic subsidiaries, if any. The senior
secured credit facility is also guaranteed by Holdings. AAC is required to pay cash interest on the 8.25% notes semi-annually in arrears on April
1 and October 1 of each year. The 8.25% notes have no scheduled amortization and mature on April 1,
2012. The indenture governing the 8.25% notes contains certain restrictions on AAC, including
restrictions on its ability to incur indebtedness, pay dividends, make investments, grant liens,
sell its assets and engage in certain other activities. The 8.25% notes are guaranteed by certain
of AACs existing and future domestic subsidiaries. In November 2004, Group Holdings issued $89.3 million (gross proceeds) of the outstanding
notes. The notes accrete to $131.5 million aggregate principal amount at maturity. Interest accrues
on the notes in the form of an increase in the accreted value of such notes prior to October 1,
2008. Thereafter, cash interest on the notes will accrue and be payable semiannually in arrears on
April 1 and October 1 of each year, commencing April 1, 2009, at a rate of 10.25% per annum. The
notes are Group Holdings unsecured obligation and rank equally
with all of its future senior obligations and senior to its future subordinated indebtedness.
The notes are effectively subordinated to Group Holdings future secured indebtedness to the extent
of the assets securing that indebtedness and are structurally subordinated to all indebtedness and
other obligations of Group Holdings subsidiaries, including AAC. We are currently in compliance
with financial covenants in all of the agreements governing our outstanding indebtedness. We expect that cash generated from operating activities and availability under the senior
secured credit facility will be our principal sources of liquidity. Based on our current level of
operations and anticipated cost savings and operational improvements, we believe our cash flow from
operations, available cash and available borrowings under the senior secured credit facility will
be adequate to meet our liquidity needs for at least the next twelve months. We cannot assure you,
however, that our business will generate sufficient cash flow from operations, that currently
anticipated cost savings and operating improvements will be realized on schedule or that future
borrowings will be available to us under the senior secured credit facility in amounts sufficient
to enable us to repay our indebtedness, including the notes, or to fund our other liquidity needs.
To service our indebtedness, we will require a significant amount of cash. Our ability to generate
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Off Balance-Sheet Obligations Gold Consignment
Agreement. Under AACs gold consignment financing arrangement, AAC 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 AACs facilities
and other approved locations, as specified by the agreement. AAC expensed consignment fees
of $87 for the three months ended November 27, 2004 and $67 for the three months ended November 29,
2003. Under the terms of the consignment arrangement, AAC 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 AAC in payment for the gold purchased. Accordingly, AAC does not include
the value of consigned gold in its inventory or the corresponding liability for financial statement
purposes. As of November 27, 2004 and August 28, 2004, AAC held approximately 22,540 ounces
and 19,460 ounces, respectively, of gold valued at $10.2 million and $7.9 million, respectively, on
consignment. The gold consignment agreement does not have a stated period and it can be terminated
by either party upon 60 day written notice. Seasonality The seasonal nature of our various businesses tends to be tempered by our broad product
mix. Class ring sales are highest during October through December, with most orders made for
delivery to students before the winter holiday season. Graduation product sales are predominantly
made during February through April prior to the April through June graduation season. Yearbook
sales are highest during the months of April through June, as yearbooks are typically shipped prior
to each schools summer break. Our recognition and affinity product line sales are also seasonal.
The majority of our achievement publications are shipped in November and August of each year. The
remaining recognition and affinity product line sales are highest during the winter holiday season
and in the period leading up to Mothers Day. As a result of the foregoing, we have historically experienced operating losses during
our fourth fiscal quarter, which includes the summer months when school is not in session, thus
reducing related shipment of products. In addition, our working capital requirements tend to exceed
our operating cash flows from April through August. 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. We adopted SFAS 150 beginning in September 2003. The adoption of this
standard did not have a significant impact on our financial statements. In May 2004, FASB issued FASB Staff Position (FSP) 106-2 as a result of the Medicare
Prescription Drug, Improvement and Modernization Act of 2003 (the Medicare Subsidy Act). The
Medicare Subsidy Act entitles employers who provide certain prescription drug benefits for retirees
to receive a federal subsidy beginning in calendar 2006, thereby creating the potential for
significant benefit cost savings. FSP 106-2 requires companies to record the amount expected to be
received under the Medicare Subsidy Act as an actuarial gain, to the extent the related
post-retirement medical plans total unrecognized actuarial gains or losses exceed certain
thresholds, to be amortized into income over time. We have adopted the provisions of this
pronouncement and noted a reduction of service costs of $93 as a
component of net postretirement health care costs attributable to
current services. In November 2004, FASB issued SFAS No. 151 Inventory Costs, an Amendment of ARB No. 43
Chapter 4 (FAS 151). FAS 151 requires that items such as idle facility expense, excessive
spoilage, double freight, and rehandling be recognized as current-period charges rather than being
included in inventory regardless of whether the costs meet the criterion of abnormal as defined in
ARB 43. FAS 151 is applicable for inventory costs incurred during fiscal years beginning after June
15, 2005. We will adopt this standard beginning the first quarter of fiscal year 2006 and do not
believe the adoption will have a material impact on our financial statements as such costs have
historically been expensed as incurred. 
 In December 2004, FASB issued SFAS No. 153,
Exchanges of Nonmonetary Assets  an amendment of APB Opinion No. 29 which addresses the
measurement of exchanges of nonmonetary assets and eliminates the exception from fair value
accounting for nonmonetary exchanges of similar productive assets and replaces it with an exception
for exchanges that do not have commercial substance. SFAS No. 153 specifies that a nonmonetary
exchange has commercial substance if the future cash flows of an entity are expected to change
significantly as a result of the exchange. This statement is effective for us beginning the first
quarter of fiscal year 2006 and is not expected to have a significant impact on our financial
statements. 
 
 In December 2004, FASB issued SFAS No. 123 (Revised 2004) Share-Based Payment: an Amendment
of FASB Statements No. 123 and 95 (FAS 123R). FAS 123R sets accounting requirements for
share-based compensation to employees, requires companies to recognize in the income statement
the grant-date fair value of stock options and other equity-based compensation issued to employees
and disallows the use of the intrinsic value method of accounting for stock compensation. FAS 123R
is applicable for all interim and annual periods for fiscal years beginning after June 15, 2005. This statement is effective for
us beginning the first quarter of fiscal year 2006 and is not expected to have a significant impact on our financial statements. 
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Interest Rate Risk.We have market risk exposure relating to changes in interest rates on our
variable rate debt. Our policy is to manage interest rate exposure through the use of a
combination of fixed and floating rate debt instruments. Our senior secured credit facility
(revolver and term loan) and gold consignment agreement are variable rate arrangements. The
interest rates are based on a floating benchmark rate (such as LIBOR or the Federal Funds rate)
plus a fixed spread. Other financial instruments subject to interest rate risk consist of
long-term debt. As of November 27, 2004, these financial instruments represented a net liability of
$169.8 million. Each quarter point change in interest rates would result in a $0.5 million change
in annual interest expense on the senior secured credit facility, assuming the entire revolving
loan were drawn. 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 prices for these products are denominated in Euros.
Each ten percent change in the Euro exchange rate would result in a $0.8 million change in
cost of goods sold, assuming stone purchase levels approximate the
levels in fiscal 2004. In order
to hedge market risk, we have from time-to-time purchased forward currency contracts. During the
three months ended November 27, 2004, we did not purchase any Euro forward contracts and did not
have any such contracts outstanding. Gold. We purchase all of our gold from The Bank of Nova Scotia through our existing gold
consignment agreement described above. We consign the majority of our gold and pay for gold as our
products are shipped to customers and as required by the terms of our gold consignment agreement.
Each ten percent change in the price of gold would result in a $2.3 million change in cost of
goods sold, assuming gold purchase levels approximate the levels in fiscal 2004.
As of November 27, 2004, we had hedged a majority of our gold requirements for fiscal 2005 through the purchase
of gold options. 24




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ITEM 4. CONTROLS AND PROCEDURES 
 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 controls and procedures pursuant to Rule
13a-15 under the Securities Exchange Act of 1934, as amended (the Exchange Act), as of the end of
the period covered by this quarterly report. Based upon this evaluation, our President and Chief
Executive Officer and our Chief Financial Officer concluded that our disclosure controls and
procedures were effective 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.
In addition, our President and Chief Executive Officer and our Chief Financial Officer
concluded that our disclosure controls and procedures were also effective to ensure that
information required to be disclosed in the reports that we file or submit under the Exchange Act
is accumulated and communicated to our management, including our President and Chief Executive
Officer and our Chief Financial Officer, to allow timely decisions regarding required disclosure. 
 
 Additionally, our President and Chief Executive Officer and Chief Financial Officer determined that
there were no changes in our internal controls or in other factors
that have materially affected, or are reasonably likely to materially affect our internal controls during the period covered by this quarterly report. 
 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. You should consider the risks described in Group Holdings Registration Statement on Form S-4 (File
No. 333-121479) filed on December 21, 2004 as you review this quarterly report. 25




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PART II. OTHER INFORMATION 
 ITEM 1. LEGAL PROCEEDINGS 
 On February 11, 2004, Frederick Goldman, Inc. (the Licensee) filed an arbitration claim
against the Companys subsidiary, CBI, for an unspecified
monetary amount alleging, among other things, that CBI had improperly
attempted to convert an exclusive license CBI granted to the Licensee to a non-exclusive license.
The arbitration proceedings have concluded with the arbitrator ruling
that the Licensee has an 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. The Licensee has
not specified the exact monetary relief it seeks, but has asked for
not less than $10.0 million.
The parties have agreed to submit to non-binding mediation in an attempt
to resolve this action in its early stages of litigation. The mediation is
scheduled for August 16, 2005. The district court has agreed to effectively stay the proceedings until the conclusion of the mediation. 
 
 On
August 2, 2004, the Companys subsidiary Taylor Publishing
Company (Taylor) filed a motion in United
States Bankruptcy Court, Eastern District of Virginia, Norfolk Division, Case No. 03-75562-SCS to
recover certain data and documents pursuant to a teleservices
contract between Taylor and Abacus Communications, LC (Abacus), the chapter 11 debtor. Subsequent to court approval of
Abacus turning over the documents and data requested, Abacus filed a counterclaim against Taylor
 for approximately $840,000 plus interest for unpaid billings that it claims are owed
under the teleservices contract with Taylor. In February
2005, the Company reached a settlement with Abacus,
which did not
have a material impact on the Companys financial position. 
 There are no other 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 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits EXHIBITNUMBER
    
    DESIGNATION3.1
    
    Certificate of Incorporation of AAC Group Holding Corp. (incorporated by
reference to the corresponding Exhibit number of AAC Group Holding Corp.s
Registration Statement on Form S-4, dated December 21, 2004).3.2
    
    Bylaws of AAC Group Holding Corp. (incorporated by reference to the corresponding
Exhibit number of AAC Group Holding Corp.s Registration Statement on Form S-4,
dated December 21, 2004).4.7
    
    Indenture, dated as of November 16, 2004, among the Registrant and U.S. Bank
National Association, as Trustee (incorporated by reference to the corresponding
Exhibit number of AAC Group Holding Corp.s Registration Statement on Form S-4,
dated December 21, 2004).4.8
    
    Form of 10.25% Senior Discount Note due October 1, 2012 (included in Exhibit 4.7).4.9
    
    Exchange and Registration Rights Agreement, dated November 16, 2004, among AAC
Group Holding Corp. and Goldman, Sachs & Co. (incorporated by reference to the
corresponding Exhibit number of AAC Group Holding Corp.s Registration Statement
on Form S-4, dated December 21, 2004).10.1
    
    Purchase Agreement, dated November 16, 2004, among AAC Group Holding Corp. and
Goldman, Sachs & Co. (incorporated by reference to the corresponding Exhibit
number of AAC Group Holding Corp.s Registration Statement on Form S-4, dated
December 21, 2004).31.1
    
    CEO Certification Accompanying Period Report Pursuant to Section 302 of the
Sarbanes-Oxley Act of 200231.2
    
    CFO Certification Accompanying Period Report Pursuant to Section 302 of the
Sarbanes-Oxley Act of 200232.1
    
    CEO Certification Accompanying Period Report Pursuant to Section 906 of the
Sarbanes-Oxley Act of 200232.2
    
    CFO Certification Accompanying Period Report Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
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AAC GROUP HOLDING CORP.
AMERICAN ACHIEVEMENT CORPORATION 
 SIGNATURES
 Pursuant to the requirements of the Securities Exchange Act of 1934, the registrants have duly
caused this report to be signed on their behalf by the undersigned thereunto duly authorized. 
 Date: August 5, 2005 
 AAC GROUP HOLDING
CORP.
AMERICAN ACHIEVEMENT CORPORATIONBy:
    
    /s/ DAVID G. FIOREDavid G. FioreCHIEF EXECUTIVE OFFICER(principal executive officer)By:
    
    /s/ SHERICE P. BENCHSherice P. BenchCHIEF FINANCIAL OFFICER(principal financial officer)
 27