##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 FORM 10-Q o
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
 FOR THE QUARTERLY PERIOD ENDED MAY 28, 2005 OR o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
 COMMISSION FILE NUMBER 333-121479
COMMISSION FILE NUMBER 333-84294 AAC GROUP HOLDING CORP.
AMERICAN ACHIEVEMENT CORPORATION  DELAWAREDELAWARE
    
    20-1854833(State or other jurisdiction of
    
    13-4126506incorporation or organization)
    
    (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 July 8, 2005 was 505,460 shares
of common stock, par value $.01. The number of shares outstanding of American Achievement
Corporation
as of July 8, 2005 was 100 shares of common stock, par value $.01.   1




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FOR THE QUARTERLY PERIOD ENDED MAY 28, 2005 INDEX PAGEPART I. FINANCIAL INFORMATIONItem 1. Condensed Consolidated Financial Statements and NotesCondensed Consolidated Balance Sheets (unaudited)   As of May
28, 2005 (Successor) and August 28, 2004 (Successor)
    
    
    3Condensed Consolidated Statements of Operations (unaudited) 
For the Three Months Ended May 28, 2005 (Successor) and For the
Period March 26, 2004 to May 29, 2004 (Successor) and the
Period February 29, 2004 to March 25, 2004 (Predecessor)
    
    
    4Condensed Consolidated Statements of Operations (unaudited) 
For the Nine Months Ended May 28, 2005 (Successor)and For the
Period March 26, 2004 to May 29, 2004 (Successor) and the
Period August 31, 2003 to March 25, 2004 (Predecessor)
    
    
    5Condensed Consolidated Statements of Cash Flows (unaudited) 
For the Nine Months Ended May 28, 2005 (Successor) and For the
Period March 26, 2004 to May 29, 2004 (Successor) and the
Period August 31, 2003 to March 25, 2004 (Predecessor)
    
    
    6Condensed Consolidated Statements of Stockholders Equity
(unaudited)   For the Nine Months Ended May 28, 2005
(Successor)
    
    
    7Notes to Condensed Consolidated Financial Statements (unaudited)
    
    
    8-23Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    24-36Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    37Item 4. Controls and Procedures
    
    
    38PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    39Item 6. Exhibits
    
    
    40SIGNATURES
    
    
    41CEO 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 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. The Company will amend its Form 10-K for the year ended August 28, 2004 and its Form 10-Qs for the periods ended November 27, 2004 and
February 26, 2005 to restate its segment disclosure, as more fully discussed in Note 13. 2




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AAC GROUP HOLDING CORP.
AMERICAN ACHIEVEMENT CORPORATION 
 Condensed Consolidated Balance Sheets
(In thousands)
(unaudited) AAC GroupHoldingCorp.
    
    
    American Achievement Corporation(Successor)
    
    
    (Successor)May 28,
    
    
    May 28,
    
    
    August 28,2005
    
    
    2005
    
    
    2004ASSETSCurrent assets:Cash and cash equivalents
    
    $
    3,978
    
    
    $
    3,748
    
    
    $
    3,038Accounts receivable, net
    
    
    71,581
    
    
    
    71,581
    
    
    
    43,321Inventories, net
    
    
    22,724
    
    
    
    22,724
    
    
    
    23,023Prepaid expenses and other current assets, net
    
    
    32,774
    
    
    
    32,774
    
    
    
    36,395Total current assets
    
    
    131,057
    
    
    
    130,827
    
    
    
    105,777Property, plant and equipment, net
    
    
    76,243
    
    
    
    76,243
    
    
    
    76,565Goodwill and other intangible assets, net
    
    
    339,115
    
    
    
    335,851
    
    
    
    345,553Other assets
    
    
    3,378
    
    
    
    3,378
    
    
    
    3,091Total assets
    
    $
    549,793
    
    
    $
    546,299
    
    
    $
    530,986LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Bank overdraft
    
    $
    6,267
    
    
    $
    6,267
    
    
    $
    5,733Accounts payable
    
    
    10,044
    
    
    
    10,044
    
    
    
    9,842Customer deposits
    
    
    35,861
    
    
    
    35,861
    
    
    
    17,807Accrued expenses
    
    
    35,217
    
    
    
    35,198
    
    
    
    30,314Deferred revenue
    
    
    210
    
    
    
    210
    
    
    
    5,503Accrued interest
    
    
    2,857
    
    
    
    2,857
    
    
    
    7,334Current portion of long-term debt
    
    
    1,550
    
    
    
    1,550
    
    
    
    1,550Total current liabilities
    
    
    92,006
    
    
    
    91,987
    
    
    
    78,083Long-term debt, net of current portion
    
    
    386,717
    
    
    
    292,423
    
    
    
    309,108Deferred income taxes
    
    
    31,744
    
    
    
    33,354
    
    
    
    25,844Other long-term liabilities
    
    
    8,485
    
    
    
    8,485
    
    
    
    9,439Total liabilities
    
    
    518,952
    
    
    
    426,249
    
    
    
    422,474Commitments and contingenciesStockholders equity:Common stock
    
    
    5
    
    
    
    
    
    
    
    Additional paid-in capital
    
    
    16,491
    
    
    
    102,046
    
    
    
    102,046Accumulated earnings
    
    
    14,345
    
    
    
    18,004
    
    
    
    6,466Total stockholders equity
    
    
    30,841
    
    
    
    120,050
    
    
    
    108,512Total liabilities and stockholders equity
    
    $
    549,793
    
    
    $
    546,299
    
    
    $
    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 GroupHolding Corp.
    
    
    American Achievement Corporation(Successor)
    
    
    (Successor)
    
    
    
    (Predecessor)For the three
    
    
    For the threemonths ended
    
    
    months ended
    
    
    For the periodMarch 26, 2004 -
    
    
    
    February 29, 2004 -May 28, 2005
    
    
    May 28, 2005
    
    
    May 29, 2004
    
    
    
    March 25, 2004Net sales
    
    $
    137,123
    
    
    $
    137,123
    
    
    $
    114,621
    
    
    
    $
    20,275Cost of sales
    
    
    56,527
    
    
    
    56,527
    
    
    
    55,088
    
    
    
    
    8,275Gross profit
    
    
    80,596
    
    
    
    80,596
    
    
    
    59,533
    
    
    
    
    12,000Selling, general
and administrative
expenses
    
    
    43,928
    
    
    
    43,928
    
    
    
    34,559
    
    
    
    
    10,622Operating income
    
    
    36,668
    
    
    
    36,668
    
    
    
    24,974
    
    
    
    
    1,378Interest expense
    
    
    8,776
    
    
    
    6,309
    
    
    
    4,572
    
    
    
    
    2,557Income (loss)
before income taxes
    
    
    27,892
    
    
    
    30,359
    
    
    
    20,402
    
    
    
    
    (1,179
    )Provision for
income taxes
    
    
    12,299
    
    
    
    12,144
    
    
    
    7,957
    
    
    
    
    Net income (loss)
    
    
    15,593
    
    
    
    18,215
    
    
    
    12,445
    
    
    
    
    (1,179
    )Preferred dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (100
    )Net income (loss)
applicable to common
stockholders
    
    $
    15,593
    
    
    $
    18,215
    
    
    $
    12,445
    
    
    
    $
    (1,279
    )
 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 Operations
(In thousands)
(unaudited) AAC GroupHolding Corp.
    
    
    American Achievement Corporation(Successor)
    
    
    (Successor)
    
    
    
    (Predecessor)For the nine
    
    
    For the ninemonths ended
    
    
    months ended
    
    
    For the periodMarch 26, 2004 -
    
    
    
    August 31, 2003 -May 28, 2005
    
    
    May 28, 2005
    
    
    May 29, 2004
    
    
    
    March 25, 2004Net sales
    
    $
    259,228
    
    
    $
    259,228
    
    
    $
    114,621
    
    
    
    $
    146,721Cost of sales
    
    
    106,993
    
    
    
    106,993
    
    
    
    55,088
    
    
    
    
    59,857Gross profit
    
    
    152,235
    
    
    
    152,235
    
    
    
    59,533
    
    
    
    
    86,864Selling, general
and administrative
expenses
    
    
    115,208
    
    
    
    115,208
    
    
    
    34,559
    
    
    
    
    74,992Operating income
    
    
    37,027
    
    
    
    37,027
    
    
    
    24,974
    
    
    
    
    11,872Interest expense
    
    
    23,066
    
    
    
    17,797
    
    
    
    4,572
    
    
    
    
    16,455Income (loss)
before income taxes
    
    
    13,961
    
    
    
    19,230
    
    
    
    20,402
    
    
    
    
    (4,583
    )Provision for
income taxes
    
    
    6,082
    
    
    
    7,692
    
    
    
    7,957
    
    
    
    
    Net income (loss)
    
    
    7,879
    
    
    
    11,538
    
    
    
    12,445
    
    
    
    
    (4,583
    )Preferred dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (700
    )Net income (loss)
applicable to common
stockholders
    
    $
    7,879
    
    
    $
    11,538
    
    
    $
    12,445
    
    
    
    $
    (5,283
    )
 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 
 Condensed Consolidated Statements of Cash Flows
(In thousands)
(unaudited) AAC GroupHolding Corp.
    
    
    American Achievement Corporation(Successor)
    
    
    (Successor)
    
    
    
    (Predecessor)For the nine
    
    
    For the ninemonths ended
    
    
    months ended
    
    
    For the periodMarch 26, 2004 -
    
    
    
    August 31, 2003 -May 28, 2005
    
    
    May 28, 2005
    
    
    May 29, 2004
    
    
    
    March 25, 2004Cash flows from operating activities:Net income (loss)
    
    $
    7,879
    
    
    $
    11,538
    
    
    $
    12,445
    
    
    
    $
    (4,583
    )Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:Depreciation and amortization
    
    
    18,975
    
    
    
    18,975
    
    
    
    4,087
    
    
    
    
    8,530Amortization of debt discount and deferred
financing fees
    
    
    6,422
    
    
    
    1,153
    
    
    
    251
    
    
    
    
    1,197Provision (recovery) for doubtful accounts
    
    
    574
    
    
    
    574
    
    
    
    1,088
    
    
    
    
    (144
    )Changes in assets and liabilities:Accounts receivable
    
    
    (28,834
    )
    
    
    (28,834
    )
    
    
    (31,952
    )
    
    
    
    2,758Inventories, net
    
    
    299
    
    
    
    299
    
    
    
    24,905
    
    
    
    
    (18,963
    )Prepaid expenses and other current assets, net
    
    
    3,621
    
    
    
    3,621
    
    
    
    497
    
    
    
    
    2,573Other assets
    
    
    (4,114
    )
    
    
    (606
    )
    
    
    421
    
    
    
    
    (959
    )Customer deposits
    
    
    18,054
    
    
    
    18,054
    
    
    
    (29,979
    )
    
    
    
    42,763Deferred revenue
    
    
    (5,293
    )
    
    
    (5,293
    )
    
    
    (2,579
    )
    
    
    
    (2,235
    )Accounts payable, accrued expenses, and other
long-term liabilities
    
    
    5,574
    
    
    
    7,165
    
    
    
    11,870
    
    
    
    
    9,290Net cash provided by (used in) operating
activities
    
    
    23,157
    
    
    
    26,646
    
    
    
    (8,946
    )
    
    
    
    40,227Cash flows from investing activities:Purchases of property, plant and equipment
    
    
    (9,755
    )
    
    
    (9,755
    )
    
    
    (1,428
    )
    
    
    
    (12,793
    )Acquisition, net of cash acquired
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (109,406
    )Net cash used in investing activities
    
    
    (9,755
    )
    
    
    (9,755
    )
    
    
    (1,428
    )
    
    
    
    (122,199
    )Cash flows from financing activities:Payments on revolver
    
    
    (28,950
    )
    
    
    (28,950
    )
    
    
    
    
    
    
    
    (9,500
    )Proceeds on common stock issuance
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    102,046Proceeds on term loan
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    155,000Proceeds from 8 1/4% senior subordinated notes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    150,000Proceeds from credit facility revolver
    
    
    33,450
    
    
    
    33,450
    
    
    
    400
    
    
    
    
    2,000Redemption of common and preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (95,368
    )Redemption of 11% senior subordinated notes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (41,355
    )Redemption of 11 5/8% senior unsecured notes
    
    
    (6,075
    )
    
    
    (6,075
    )
    
    
    
    
    
    
    
    (170,925
    )Payments on term loan
    
    
    (15,140
    )
    
    
    (15,140
    )
    
    
    
    
    
    
    
    Proceeds from 10 1/4% notes
    
    
    89,269
    
    
    
    
    
    
    
    
    
    
    
    
    Distribution to stockholders
    
    
    (85,550
    )
    
    
    
    
    
    
    
    
    
    
    
    Change in bank overdraft
    
    
    534
    
    
    
    534
    
    
    
    2,800
    
    
    
    
    (2,396
    )Net cash provided by (used in) financing
activities
    
    
    (12,462
    )
    
    
    (16,181
    )
    
    
    3,200
    
    
    
    
    89,502Net increase (decrease) in cash and cash
equivalents
    
    
    940
    
    
    
    710
    
    
    
    (7,174
    )
    
    
    
    7,530Cash and cash equivalents, beginning of period
    
    
    3,038
    
    
    
    3,038
    
    
    
    9,265
    
    
    
    
    1,735Cash and cash equivalents, end of period
    
    $
    3,978
    
    
    $
    3,748
    
    
    $
    2,091
    
    
    
    $
    9,265Supplemental disclosureCash paid during the period for:Interest
    
    $
    20,939
    
    
    $
    20,939
    
    
    $
    
    
    
    
    $
    18,873Income taxes
    
    $
    199
    
    
    $
    199
    
    
    $
    20
    
    
    
    $
    178Supplemental Disclosure of noncash financing
activitiesAccrued preferred stock dividends
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    
    $
    700
 The accompanying notes are an integral part of these condensed consolidated financial statements. 6




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AAC GROUP HOLDING CORP.
AMERICAN ACHIEVEMENT CORPORATION 
 Condensed 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 stockholders
    
    
    (509,966
    )
    
    
    (5
    )
    
    
    (85,545
    )
    
    
    
    
    
    
    (85,550
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,879
    
    
    
    7,879Balance, May 28, 2005
    
    
    505,460
    
    
    $
    5
    
    
    $
    16,491
    
    
    $
    14,345
    
    
    $
    30,841
 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 income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,538
    
    
    
    11,538Balance, May 28, 2005 (Successor)
    
    
    100
    
    
    $
    
    
    
    $
    102,046
    
    
    $
    18,004
    
    
    $
    120,050
 The accompanying notes are an integral part of these condensed consolidated financial statements. 7




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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 stockholders 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 (the 10 1/4% Notes) , 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 a distribution 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. AAC and
Group Holdings are treated as entities under common control and therefore, the statements of
operations and cash flows presented for Group Holdings combine the results of AAC to the beginning
of the period presented. 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 and nine months ended May 28, 2005 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 (File No. 333-84294) filed on November 5, 2004, which will be amended to restate segment disclosure as more fully discussed in Note 13. 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 8




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purchase method of accounting. The results of operations 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. 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) Stock-Based Compensation The Company accounts for equity instruments issued to non-employees in accordance with the
provisions of SFAS No. 123 (SFAS 123), Accounting for Stock-Based Compensation, as amended by
SFAS No. 148 (SFAS 148), Accounting for Stock-Based Compensation  Transition and Disclosure an
amendment of FASB Statement No. 123. The Company accounts for stock-based employee compensation
arrangements in accordance with the provisions of Accounting Principles Board Opinion No. 25 (APB
No. 25), Accounting for Stock Issued to Employees and complies with the disclosure provisions of
SFAS 123, as amended by SFAS 148. Had compensation expense for the employee stock plans been determined based on the fair value
at the grant date for options granted consistent with the provisions of SFAS 123, as amended by
SFAS 148, the Companys pro forma net income (loss) would not have been materially impacted. No
options were granted during the three months and nine months ended May 28, 2005 or the three months
and nine months ended May 29, 2004. 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. 10




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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) 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
 During the period ended May 28, 2005, the
Company corrected assets acquired in the above table to remove goodwill and intangible assets
reflected in the pre-Merger consolidated financial statements. This correction had no impact on
the purchase price or the purchase price allocation in the table below. AAC has 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
    )Long-term debt
    
    
    
    
    
    
    7,075Deferred income taxes
    
    
    
    
    
    
    (12,043
    )Other long-term liabilities
    
    
    
    
    
    
    (16,117
    )Total purchase price
    
    
    
    
    
    $
    419,200
 As a result of the Merger, AAC has reflected pre-Merger periods from February 29,
2004 to March 25, 2004 and August 31, 2003 to March 25, 2004 (Predecessor) and post-Merger
periods from March 26, 2004 to May 29, 2004 and three months ended and nine months ended May 28,
2005 (Successor) in its condensed consolidated financial statements. During the three months ended May 28, 2005, 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 $2.0 million for the period from
March 26, 2004 to May 29, 2004 and $0.1 million for the period February 29, 2004 to March 25, 2004.
During the nine months ended May 28, 2005, amortization expense was approximately $8.9 million as
compared to approximately $2.0 million for the period from March 26, 2004 to May 29, 2004 and $1.1
million for the period August 31, 2003 to March 25, 2004. 3. Goodwill and Other Intangible Assets Goodwill For Group Holdings, the net carrying amount of goodwill was $182,399 as of May 28, 2005. Since
the date of the Merger, goodwill increased due to finalization of previously estimated transaction
costs associated with professional services. For AAC, the net carrying amount of goodwill was $182,399 and $182,080 as of May 28, 2005 and
August 28, 2004, respectively. Since the date of the Merger, goodwill increased due to finalization
of previously estimated transaction costs associated with professional services. 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) Other Intangible Assets For Group Holdings, other intangible assets consisted of the following: Estimated
    
    
    Gross
    
    
    Accumulated
    
    
    NetUseful Life
    
    
    Asset
    
    
    Amortization
    
    
    AssetAt May 28, 2005Trademarks
    
    Indefinite
    
    $
    50,095
    
    
    $
    
    
    
    $
    50,095Deferred financing costs and other
    
    
    7 to 8 years
    
    
    
    14,620
    
    
    
    (1,990
    )
    
    
    12,630Patents
    
    
    14 to 17 years
    
    
    
    7,317
    
    
    
    (518
    )
    
    
    6,799Customer lists and distribution contracts
    
    
    3 to 12 years
    
    
    
    100,516
    
    
    
    (13,324
    )
    
    
    87,192$
    172,548
    
    
    $
    (15,832
    )
    
    $
    156,716
 For Group Holdings, total amortization on other intangible assets was $3,452 and
$10,266 for the three and nine months ended May 28, 2005, respectively, of which amortization on
deferred financing costs is recorded as interest expense using the effective interest rate method
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. For AAC, other intangible assets consisted of the following: Estimated
    
    
    Gross
    
    
    Accumulated
    
    
    NetUseful Life
    
    
    Asset
    
    
    Amortization
    
    
    AssetAt May 28, 2005 (Successor)Trademarks
    
    Indefinite
    
    $
    50,095
    
    
    $
    
    
    
    $
    50,095Deferred financing costs and other
    
    
    7 to 8 years
    
    
    
    11,112
    
    
    
    (1,746
    )
    
    
    9,366Patents
    
    
    14 to 17 years
    
    
    
    7,317
    
    
    
    (518
    )
    
    
    6,799Customer lists and distribution contracts
    
    
    3 to 12 years
    
    
    
    100,516
    
    
    
    (13,324
    )
    
    
    87,192$
    169,040
    
    
    $
    (15,588
    )
    
    $
    153,452At 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 for the three
months ended May 28, 2005 and $2,227 for the period March 26, 2004 to May 29, 2004 and $285 for the
period February 29, 2004 to March 25, 2004. Total amortization on other intangible assets was
$10,022 for the nine months ended May 28, 2005 and $2,227 for the period March 26, 2004 to May 29,
2004 and $2,156 for the period August 31, 2003 to March 25, 2004. Amortization on deferred
financing costs is recorded as interest expense using the effective interest rate method 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. 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) 4. Comprehensive Income (Loss) Unrecognized losses on accrued minimum pension liabilities are included in other comprehensive
income (loss). The following amounts were included in determining comprehensive income (loss): AAC GroupHolding Corp.
    
    
    American Achievement Corporation(Successor)
    
    
    (Successor)
    
    
    
    (Predecessor)For the three
    
    
    For the threemonths ended
    
    
    months ended
    
    
    For the periodMarch 26, 2004 -
    
    
    
    February 29, 2004 -May 28, 2005
    
    
    May 28, 2005
    
    
    May 29, 2004
    
    
    
    March 25, 2004Net income (loss)
    
    $
    15,593
    
    
    $
    18,215
    
    
    $
    12,445
    
    
    
    $
    (1,179
    )Adjustment in minimum pension
liability
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6Total comprehensive income (loss)
    
    $
    15,593
    
    
    $
    18,215
    
    
    $
    12,445
    
    
    
    $
    (1,185
    )
 AAC GroupHolding Corp.
    
    
    American Achievement Corporation(Successor)
    
    
    (Successor)
    
    
    
    (Predecessor)For the nine
    
    
    For the ninemonths ended
    
    
    months ended
    
    
    For the periodMay 28, 2005
    
    
    May 28, 2005
    
    
    March 26, 2004 -
    
    
    
    August 31, 2003 -May 29, 2004
    
    
    
    March 25, 2004Net income (loss)
    
    $
    7,879
    
    
    $
    11,538
    
    
    $
    12,445
    
    
    
    $
    (4,583
    )Adjustment in minimum pension
liability
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    40Total comprehensive income (loss)
    
    $
    7,879
    
    
    $
    11,538
    
    
    $
    12,445
    
    
    
    $
    (4,623
    )
 5. Inventories, Net A summary of inventories, net is as follows: AAC GroupHolding Corp.
    
    
    American Achievement Corporation(Successor)
    
    
    (Successor)May 28, 2005
    
    
    May 28, 2005
    
    
    August 28, 2004Raw materials
    
    $
    9,852
    
    
    $
    9,852
    
    
    $
    8,853Work in process
    
    
    7,335
    
    
    
    7,335
    
    
    
    7,380Finished goods
    
    
    6,531
    
    
    
    6,531
    
    
    
    6,978Less  Reserves
    
    
    (994
    )
    
    
    (994
    )
    
    
    (188
    )$
    22,724
    
    
    $
    22,724
    
    
    $
    23,023
 For Group Holdings, cost of sales includes depreciation and amortization of $2,213
and $6,996 for the three months and nine months ended May 28, 2005, respectively. For AAC, cost of sales includes depreciation and amortization of $2,213 for the three months
ended May 28, 2005 and $1,510 for the period March 26, 2004 to May 29, 2004 and $721 for the period
February 29, 2004 to March 25, 2004. For AAC, cost of sales includes depreciation and amortization
of $6,996 for the nine months ended May 28, 2005 and $1,510 for the period March 26, 2004 to May
29, 2004 and $5,062 for the period August 31, 2003 to March 25, 2004. 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) 6. Prepaid Expenses and Other Current Assets, Net For Group Holdings, prepaid expenses and other current assets, net include reserves on sales
representative advances of $3,418 at May 28, 2005. For AAC, prepaid expenses and other current assets, net include reserves on sales
representative advances of $3,418 and $2,383 at May 28, 2005 and August 28, 2004, respectively. 7. Long-term Debt Long-term
debt consisted of the following: AAC GroupHolding Corp.
    
    
    American Achievement Corporation(Successor)
    
    
    (Successor)May 28, 2005
    
    
    May 28, 2005
    
    
    August 28, 200410 1/4% Senior discount notes due
2012 (net of unamortized discount of
$37,206)
    
    $
    94,294
    
    
    $
    
    
    
    $
    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 $30)
    
    
    
    
    
    
    
    
    
    
    6,045Senior
secured credit facility:Revolving credit facility due 2010
    
    
    4,500
    
    
    
    4,500
    
    
    
    Term loan due 2011
    
    
    139,473
    
    
    
    139,473
    
    
    
    154,613Total
    
    
    388,267
    
    
    
    293,973
    
    
    
    310,658Less current portion of long-term debt
    
    
    (1,550
    )
    
    
    (1,550
    )
    
    
    (1,550
    )Total long-term debt
    
    $
    386,717
    
    
    $
    292,423
    
    
    $
    309,108
 10 1/4% Senior Discount Notes On November 16, 2004 Group Holdings issued the 10 1/4% Notes. The net proceeds of this
offering were used as a distribution to stockholders through the repurchase of shares of Group
Holdings common stock from its stockholders. Group Holdings was formed on November 8, 2004 and has
no operations separate from its ownership in AAC. Interest accrues on the 10 1/4% Notes in the form
of an increase in the accreted value of the notes 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 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) 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 May 28, 2005, Group Holdings was in compliance with all such provisions. 8 1/4% Senior Subordinated Notes On March 25, 2004, AAC issued the 8 1/4% Notes. 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

April 1, 2007 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%
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 May 28, 2005. 11 5/8% Senior Unsecured Notes On February 20, 2002, AAC issued the 11 5/8% Notes. 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 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) 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, pursuant to the debt tender offer for the 11 5/8% Notes described in Note
2, 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. On May 15, 2005, the Company redeemed the remaining outstanding $6.1 million of 11 5/8% Notes.
In accordance with the indenture governing the 11 5/8% Notes, the redemption price was 105.813% of
the principal amount of notes redeemed, plus accrued and unpaid interest. 11% Senior Subordinated Notes Commemorative Brands, Inc.s (CBI) 11% Notes were scheduled to mature on January 15, 2007.
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. 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 May 28, 2005, assets of AAC subject to lien under the Senior Credit
Facility were approximately $360.9 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. During the nine months ended May 28, 2005, the Company paid down $15.1 million of the term
loan of the Senior Credit Facility, of which $1.1 million were three mandatory quarterly payments. 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 May 28, 2005 was approximately $33.6 million with $4.5 million of borrowings and $1.9 million in
letters of credit outstanding. 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) 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 (net income (loss) before interest expense, income taxes, depreciation and amortization)
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 1/4% 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 May 28, 2005. Group Holdings weighted average interest rate on debt outstanding as of May 28, 2005 was
7.6%. AACs weighted average interest rate on debt outstanding as of May 28, 2005 and August 28,
2004 was 6.8% and 6.1%, respectively. AACs management believes the carrying amount of long-term debt approximates fair value as of
May 28, 2005 and August 28, 2004, based upon current rates offered for debt with the same or
similar debt terms. 17




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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) 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 it seeks, but has asked for an amount not
less than $10.0 million. On June 10, 2005, CBI filed its answer to the New York Complaint, and
filed several counterclaims against the Licensee for, among other things, breach of contract,
fraud, violation of the Lanham Act, and the New York anti-dilution statute. A status conference is
scheduled for July 14, 2005. CBI intends to defend itself vigorously, and pursue its own claims
aggressively, in these proceedings. 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. In February 2005, the Company reached a settlement
with Abacus which did not have a material impact on the Companys financial position. 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 $90 for the three months
ended May 28, 2005 and $69 for the period from February 29, 2004 to March 25, 2004 and $26 for the
period from March 26, 2004 to May 29, 2004. AAC expensed consignment fees of $264 for the nine
months ended May 28, 2005 and $180 for the period from August 31, 2003 to March 25, 2004 and $69
for the period from March 26, 2004 to May 29, 2004. 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 May 28, 2005 and August 28, 2004, AAC held
approximately 20,930 ounces and 19,460 ounces, respectively, of gold valued at $8.8 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 days written notice. 18




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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) 9. Income Taxes The Company has recognized a net deferred tax liability. AAC has an effective rate of 40% for
the three and nine months ended May 28, 2005 to represent an estimated federal and state income tax
provision. Group Holdings has an effective rate of 45% for the three and nine months ended May 28,
2005 to represent an estimated federal and state income tax provision 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, the executive is entitled to receive discretionary
bonuses as directed by the Board of Directors up to $300 annually, of which $110 was accrued as of
May 28, 2005. 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. 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 (income), include the following components: American Achievement Corporation(Successor)
    
    
    (Successor)
    
    
    
    (Predecessor)For the three months ended
    
    
    For the periodMay 28, 2005
    
    
    March 26, 2004 - May 29, 2004
    
    
    
    February 29, 2004 - March 25, 2004CBI post-
    
    
    
    
    
    
    CBI post-
    
    
    
    
    
    
    CBI post-Taylor pension
    
    
    retirement
    
    
    Taylor pension
    
    
    retirement
    
    
    
    Taylor pension
    
    
    retirementService costs, benefits
attributed to Service
during the period
    
    $
    19
    
    
    $
    
    
    
    $
    14
    
    
    $
    
    
    
    
    $
    7
    
    
    $
    Interest cost
    
    
    209
    
    
    
    37
    
    
    
    139
    
    
    
    44
    
    
    
    
    70
    
    
    
    22Expected return on
assets
    
    
    (208
    )
    
    
    
    
    
    
    (140
    )
    
    
    
    
    
    
    
    (70
    )
    
    
    Amortization of
unrecognized net loss
(gain)
    
    
    
    
    
    
    (74
    )
    
    
    36
    
    
    
    9
    
    
    
    
    18
    
    
    
    4Amortization of
unrecognized net prior
service costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16
    
    
    
    
    
    
    
    
    8Net periodic
postretirement benefit
cost (income)
    
    $
    20
    
    
    $
    (37
    )
    
    $
    49
    
    
    $
    69
    
    
    
    $
    25
    
    
    $
    34
 19




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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) American Achievement Corporation(Successor)
    
    
    (Successor)
    
    
    
    (Predecessor)For the nine months ended
    
    
    For the periodMay 28, 2005
    
    

    March 26, 2004 - May 29, 2004
    
    
    

August
31, 2003 - March 25, 2004CBI post-
    
    
    
    
    
    
    CBI post-
    
    
    
    
    
    
    
    CBI post-Taylor pension
    
    
    retirement
    
    
    Taylor pension
    
    
    retirement
    
    
    
    Taylor pension
    
    
    retirementService costs, benefits
attributed to Service
during the period
    
    $
    57
    
    
    $
    
    
    
    $
    14
    
    
    $
    
    
    
    
    $
    50
    
    
    $
    Interest cost
    
    
    627
    
    
    
    111
    
    
    
    139
    
    
    
    44
    
    
    
    
    488
    
    
    
    170Expected return on assets
    
    
    (624
    )
    
    
    
    
    
    
    (140
    )
    
    
    
    
    
    
    
    (490
    )
    
    
    Amortization of
unrecognized net loss
(gain)
    
    
    
    
    
    
    (222
    )
    
    
    36
    
    
    
    9
    
    
    
    
    126
    
    
    
    83Amortization of
unrecognized net prior
service costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16
    
    
    
    
    
    
    
    
    154Net periodic
postretirement benefit
cost (income)
    
    $
    60
    
    
    $
    (111
    )
    
    $
    49
    
    
    $
    69
    
    
    
    $
    174
    
    
    $
    407
 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. During
the first quarter of fiscal 2005, the Company adopted the provisions of this pronouncement and
noted a reduction of service costs for fiscal 2005 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 $1.0 million and $2.5 million for the three months and nine months ended May 28, 2005,
respectively. As of May 28, 2005, AAC had a net prepaid management fee balance of $210 and as of
August 28, 2004, AAC had accrued management fees of approximately $500. In 2001, AAC entered into a management agreement with a prior stockholder, Castle Harlan, Inc.
This agreement was terminated on March 25, 2004. Amounts paid under this management agreement totaled $0 for the period from March 26, 2004 to May
29, 2004 and $750 for the period February 29, 2004 to March 25, 2004 and $0 for the period from
March 26, 2004 to May 29, 2004 and $2,250 for the period
August 31, 2003 to March 25, 2004. 13. Business Segments Previously the Company had aggregated and presented two reportable segments  Scholastic Products
and Recognition and Affinity Products. Subsequent to the fiscal year ended August 28, 2004 and
during the quarter ended May 28, 2005, 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 prior period financial
information 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. 20




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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) AAC Group Holding Corp.Three Months Ended
    
    
    
    
    
    Segment OperatingMay 28, 2005
    
    Net Sales
    
    
    Income (Loss)
    
    
    Segment AssetsClass Rings
    
    $
    35,938
    
    
    $
    6,017
    
    
    $
    216,902Yearbooks
    
    
    73,362
    
    
    
    25,353
    
    
    
    193,480Graduation Products
    
    
    19,724
    
    
    
    4,699
    
    
    
    69,003Achievement Publications
    
    
    780
    
    
    
    (674
    )
    
    
    38,465Other
    
    
    7,319
    
    
    
    1,273
    
    
    
    31,943Totals
    
    $
    137,123
    
    
    $
    36,668
    
    
    $
    549,793
 American Achievement Corporation(Successor)SegmentThree Months
    
    

    
    
    
    Operating
    
    
    SegmentEnded May 28, 2005
    
    Net Sales
    
    
    Income (Loss)
    
    
    AssetsClass Rings
    
    $
    35,938
    
    
    $
    6,017
    
    
    $
    215,514Yearbooks
    
    
    73,362
    
    
    
    25,353
    
    
    
    192,242Graduation Products
    
    
    19,724
    
    
    
    4,699
    
    
    
    68,562Achievement Publications
    
    
    780
    
    
    
    (674
    )
    
    
    38,243Other
    
    
    7,319
    
    
    
    1,273
    
    
    
    31,738Totals
    
    $
    137,123
    
    
    $
    36,668
    
    
    $
    546,299
 (Successor)
    
    
    
    
    (Predecessor)For the period March 26, 2004 - May 29, 2004
    
    
    
    
    For the period February 29, 2004 - March 25, 2004Segment
    
    
    
    
    
    
    
    
    SegmentOperating
    
    
    
    
    
    
    
    
    OperatingThree Months Ended
    
    
    
    
    
    Income
    
    
    
    
    
    
    
    
    IncomeMay 29, 2004
    
    Net Sales
    
    
    (Loss)
    
    
    
    
    Net Sales
    
    
    (Loss)Class Rings
    
    $
    29,504
    
    
    $
    6,651
    
    
    
    
    $
    6,917
    
    
    $
    (785
    )Yearbooks
    
    
    67,739
    
    
    
    17,902
    
    
    
    
    
    4,071
    
    
    
    292Graduation
Products
    
    
    11,267
    
    
    
    469
    
    
    
    
    
    8,131
    
    
    
    2,456Achievement
Publications
    
    
    715
    
    
    
    (667
    )
    
    
    
    
    56
    
    
    
    (420
    )Other
    
    
    5,396
    
    
    
    619
    
    
    
    
    
    1,100
    
    
    
    (165
    )Totals
    
    $
    114,621
    
    
    $
    24,974
    
    
    
    
    $
    20,275
    
    
    $
    1,378
 21




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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) AAC Group Holding Corp.Nine Months Ended
    
    
    
    
    
    Segment OperatingMay 28, 2005
    
    Net Sales
    
    
    Income
    
    
    Segment AssetsClass Rings
    
    $
    104,385
    
    
    $
    14,735
    
    
    $
    216,902Yearbooks
    
    
    89,291
    
    
    
    14,564
    
    
    
    193,480Graduation Products
    
    
    39,043
    
    
    
    5,815
    
    
    
    69,003Achievement Publications
    
    
    10,074
    
    
    
    830
    
    
    
    38,465Other
    
    
    16,435
    
    
    
    1,083
    
    
    
    31,943Totals
    
    $
    259,228
    
    
    $
    37,027
    
    
    $
    549,793
 American Achievement Corporation(Successor)SegmentNine Months
    
    
    
    
    
    OperatingEnded May 28, 2005
    
    Net Sales
    
    
    Income
    
    
    Segment AssetsClass Rings
    
    $
    104,385
    
    
    $
    14,735
    
    
    $
    215,514Yearbooks
    
    
    89,291
    
    
    
    14,564
    
    
    
    192,242Graduation Products
    
    
    39,043
    
    
    
    5,815
    
    
    
    68,562Achievement Publications
    
    
    10,074
    
    
    
    830
    
    
    
    38,243Other
    
    
    16,435
    
    
    
    1,083
    
    
    
    31,738Totals
    
    $
    259,228
    
    
    $
    37,027
    
    
    $
    546,299
 (Successor)
    


    (Predecessor)For the period March 26, 2004 - May 29, 2004
    

    For the period August 31, 2003 - March 25, 2004SegmentSegment
    


    
    
    
    
    OperatingNine Months Ended
    
    
    
    
    
    Operating
    



    
    
    
    
    IncomeMay 29, 2004
    
    Net Sales
    
    

Income
(Loss)
    




    Net Sales
    
    
    (Loss)Class Rings
    
    $
    29,504
    
    
    $
    6,651
    



    $
    77,628
    
    
    $
    7,187Yearbooks
    
    
    67,739
    
    
    
    17,902
    



    
    20,236
    
    
    
    (6,870
    )Graduation
Products
    
    
    11,267
    
    
    
    469
    



    
    27,351
    
    
    
    7,101Achievement
Publications
    
    
    715
    
    
    
    (667
    )



    
    11,690
    
    
    
    4,175Other
    
    
    5,396
    
    
    
    619
    



    
    9,816
    
    
    
    279Totals
    
    $
    114,621
    
    
    $
    24,974
    



    $
    146,721
    
    
    $
    11,872
 22




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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 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. During the first quarter of fiscal 2005, the
Company adopted the provisions of this pronouncement and noted a reduction of service costs for
fiscal 2005 of $93 as a component of net postretirement health care costs attributable to current
services. In November 2004, FASB issued Statement of Financial Accounting Standard (SFAS) No. 151 Inventory
Costs, an Amendment of ARB No. 43 Chapter 4. SFAS 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. SFAS 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, the 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. SFAS 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. SFAS 123R
is applicable for all interim and annual periods for fiscal periods 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. 23




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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. For ease of comparison purposes, the financial data for
the pre-Merger periods from February 29, 2004 to March 25, 2004 and August 31, 2003 to March 25,
2004 (Predecessor) and the post-Merger period from March 26, 2004 to May 29, 2004 (Successor)
have been combined to arrive at a pro forma three months ended and pro forma nine months ended May
29, 2004. The consolidated financial statements, and the notes thereto, have been prepared in
accordance with U.S. GAAP. In reviewing this comparative financial information, readers should
remember that 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 Disclosure Regarding
Forward-Looking Statements. 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. It owns 100% of the shares of common stock
of AAC Holding Corp., which is the holder of 100% of the shares of common stock of AAC. Group
Holdings conducts all of its business through AAC and its subsidiaries. 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
three quarters of our fiscal year 2005. We expect these trends to continue at least through the end
of our fiscal year 2005, and perhaps thereafter. 24




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##### Table of Contents



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 compete 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 pro forma 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 stockholders 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 as a
distribution to stockholders through the repurchase of 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 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 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 25




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##### Table of Contents



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 February 29, 2004 to
March 25, 2004 and August 31, 2003 to March 25, 2004 (Predecessor) and post-Merger periods from
March 26, 2004 to May 29, 2004 and three months ended and nine months ended May 28, 2005
(Successor) in its condensed consolidated financial statements. During the three months ended and
nine months ended May 28, 2005, AAC recognized in its consolidated statements of operations
approximately $0.9 million and $5.8 million, respectively 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, AAC 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. 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. 26




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##### Table of Contents



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. Results of Operations Predecessor and Successor Company and Fiscal Period Comparisons Our consolidated financial statements for the predecessor period from August 31, 2003 through
March 25, 2004, were prepared using our historical basis of accounting. As a result of the Merger,
we applied purchase accounting as discussed above under Company Background. Since a new basis of
accounting began on March 26, 2004, we have presented results for the three-month and nine-month
fiscal periods ended May 29, 2004 on a pro forma unaudited basis as we believe this presentation
facilitates the 27




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##### Table of Contents



comparison of our results with the corresponding periods for the three-month and nine-month fiscal
periods ended May 28, 2005. Three Months Ended May 28, 2005 (Successor) Compared to Pro Forma Three Months Ended May 29, 2004 Group Holdings was not formed until November of 2004. We are therefore comparing our results
of operations for the three months ended May 28, 2005, 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
May 29, 2004. The inclusion of the results of Group Holdings for the three months ended May 28,
2005 only adds additional interest expense of $2.5 million from the issuance of the 10 1/4% Notes
and increases the tax provision by $0.2 million. 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: American Achievement CorporationAAC Group Holding Corp.
    
    
    (Successor)
    
    
    
    
    
    
    (Successor)
    
    
    
    (Predecessor)
    
    
    Pro formaFor the three
    
    
    % of
    
    
    For the three months
    
    
    % of
    
    
    For the period
    
    
    For the three
    
    
    % ofmonths ended
    
    
    Net
    
    
    ended
    
    
    Net
    
    
    March 26, 2004 -
    
    
    
    February 29, 2004 -
    
    
    months ended
    
    
    NetMay 28, 2005
    
    
    Sales
    
    
    May 28, 2005
    
    
    Sales
    
    
    May 29, 2004
    
    
    
    March 25, 2004
    
    
    May 29, 2004
    
    
    SalesNet sales
    
    $
    137,123
    
    
    
    100.0
    %
    
    $
    137,123
    
    
    
    100.0
    %
    
    $
    114,621
    
    
    
    $
    20,275
    
    
    $
    134,896
    
    
    
    100.0
    %Cost of sales
    
    
    56,527
    
    
    
    41.2
    %
    
    
    56,527
    
    
    
    41.2
    %
    
    
    55,088
    
    
    
    
    8,275
    
    
    
    63,363
    
    
    
    47.0
    %Gross profit
    
    
    80,596
    
    
    
    58.8
    %
    
    
    80,596
    
    
    
    58.8
    %
    
    
    59,533
    
    
    
    
    12,000
    
    
    
    71,533
    
    
    
    53.0
    %Selling, general
and administrative
expenses
    
    
    43,928
    
    
    
    32.0
    %
    
    
    43,928
    
    
    
    32.0
    %
    
    
    34,559
    
    
    
    
    10,622
    
    
    
    45,181
    
    
    
    33.5
    %Operating income
    
    
    36,668
    
    
    
    26.8
    %
    
    
    36,668
    
    
    
    26.8
    %
    
    
    24,974
    
    
    
    
    1,378
    
    
    
    26,352
    
    
    
    19.5
    %Interest expense
    
    
    8,776
    
    
    
    6.4
    %
    
    
    6,309
    
    
    
    4.6
    %
    
    
    4,572
    
    
    
    
    2,557
    
    
    
    7,129
    
    
    
    5.3
    %Income (loss)
before income taxes
    
    
    27,892
    
    
    
    20.4
    %
    
    
    30,359
    
    
    
    22.2
    %
    
    
    20,402
    
    
    
    
    (1,179
    )
    
    
    19,223
    
    
    
    14.2
    %Provision for
income taxes
    
    
    12,299
    
    
    
    9.0
    %
    
    
    12,144
    
    
    
    8.9
    %
    
    
    7,957
    
    
    
    
    
    
    
    
    7,957
    
    
    
    5.9
    %Net income (loss)
    
    
    15,593
    
    
    
    11.4
    %
    
    
    18,215
    
    
    
    13.3
    %
    
    
    12,445
    
    
    
    
    (1,179
    )
    
    
    11,266
    
    
    
    8.3
    %Preferred dividends
    
    
    
    
    
    
    0.0
    %
    
    
    
    
    
    
    0.0
    %
    
    
    
    
    
    
    
    (100
    )
    
    
    (100
    )
    
    
    0.0
    %Net income (loss)
applicable to
common stockholders
    
    $
    15,593
    
    
    
    11.4
    %
    
    $
    18,215
    
    
    
    13.3
    %
    
    $
    12,445
    
    
    
    $
    (1,279
    )
    
    $
    11,166
    
    
    
    8.3
    %
 Net Sales.Net sales consist of product sales and are net of product returns and promotional
discounts. Net sales increased $2.2 million, or 1.7%, to $137.1 million for the three months ended
May 28, 2005 from $134.9 million for the pro forma three months ended May 29, 2004. This increase
in net sales was due primarily to higher yearbook shipments and recognition and affinity ring
shipments. The following details the changes in net sales during such periods by business segment. 28




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##### Table of Contents



Class Rings.Net sales decreased $0.5 million to $35.9 million for the three months ended May
28, 2005 from $36.4 million for the pro forma three months ended May 29, 2004. The decrease in
net sales was the result of a decline in high school ring shipments. Yearbooks.Net sales increased $1.6 million to $73.4 million for the three months ended May 28,
2005 from $71.8 million for the pro forma three months ended May 29, 2004. The increase in net
sales was the result of an increase in yearbook shipments. Graduation Products.Net sales increased $0.3 million to $19.7 million for the three months
ended May 28, 2005 from $19.4 million for the pro forma three months ended May 29, 2004. The
increase in net sales was the result of an increase in shipments of graduation products. Achievement Publications.Net sales were $0.8 million for the three months ended May 28, 2005
and for the pro forma three months ended May 29, 2004. Other.Net sales increased $0.8 million to $7.3 million for the three months ended May 28, 2005
from $6.5 million for the pro forma three months ended May 29, 2004. The increase in net sales
was directly related to increased shipments of family jewelry for Mothers Day. Gross Profit.Gross margin represents gross profit as a percentage of net sales. Gross margin was
58.8% for the three months ended May 28, 2005, a 5.8 percentage point increase from 53.0% for the
pro forma three months ended May 29, 2004. Overall, gross profit increased $9.1 million. Excluding
the $5.4 million negative impact of purchase accounting in the pro forma three months ended May 29,
2004, the increase was a result of improvements in both our yearbook and ring manufacturing
facilities. Selling, General and Administrative Expenses.Selling, general and administrative expenses
decreased $1.3 million, or 2.8%, to $43.9 million for the three months ended May 28, 2005 from
$45.2 million for the pro forma three months ended May 29, 2004. Included in selling, general and
administrative expenses are two sub-categories: selling and marketing expenses and general and
administrative expenses. Selling and marketing expenses decreased $1.8 million to $33.4 million or
24.4% of net sales, for the three months ended May 28, 2005 from $35.2 million or 26.1% of net
sales, for the pro forma three months ended May 29, 2004. The decrease in selling and marketing
expenses was primarily the result of decreased selling and marketing expenses in class rings and
the timing of expenses related to graduation products. General and administrative expenses for the three months ended May 28, 2005 were $10.5 million, or
7.6% of net sales, as compared to $10.0 million, or 7.3% of net sales, for the pro forma three
months ended May 29, 2004. The increase in general and administrative expenses was primarily the
result of increased amortization expense of $0.9 million. Operating Income.As a result of the foregoing, operating income was $36.7 million, or 26.8% of net
sales, for the three months ended May 28, 2005 as compared with operating income of $26.4 million,
or 19.5% of net sales, for the pro forma three months ended May 29, 2004. Operating income for the
three months ended May 28, 2005 included a negative impact of $0.9 million due to additional
amortization expense. Included in the pro forma three months ended May 29, 2004 was a $5.4 million
negative impact due to purchase accounting. The class rings segment reported operating income of
$6.0 million for the three months ended May 28, 2005 as compared with operating income of $5.9
million for the pro forma three months ended May 29, 2004. The yearbooks segment reported operating
income of $25.4 million for the three months ended May 28, 2005 as compared with operating income
of $18.2 million for the pro forma three months ended May 29, 2004. The graduation products segment
reported operating income of $4.7 million for the three months ended May 28, 2005 as compared with
operating income of $2.9 million for the pro forma three months ended May 29, 2004. The achievement
publications segment reported an operating loss of $0.7 million for the three months ended May 28,
2005 as compared with an operating loss of $1.1 million for the pro forma three months ended May
29, 2004. The other segment reported operating income of $1.3 million for the three months ended
May 28, 2005 as compared with operating income of $0.5 million for the pro forma three months ended
May 29, 2004. 29




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##### Table of Contents



Interest Expense, Net.For AAC, net interest expense was $6.3 million for the three months ended
May 28, 2005 and $7.1 million for the pro forma three months ended May 29, 2004. The average debt
outstanding of AAC for the three months ended May 28, 2005 and the pro forma three months ended May
29, 2004 was $299 million and $285 million, respectively. The weighted average interest rate on
debt outstanding of AAC for the three months ended May 28, 2005 and the pro forma three months
ended May 29, 2004 was 7.9% and 9.9%, respectively. For Group Holdings, net interest expense was $8.8 million for the three months ended May 28,
2005. The average debt outstanding of Group Holdings for the three months ended May 28, 2005 was
$392 million. The weighted average interest rate on debt outstanding of Group Holdings for the
three months ended May 28, 2005 was 8.4%. Provision for Income Taxes.For the three months ended May 28, 2005 and May 29, 2004, AAC
recorded an income tax provision of $12.1 million and $8.0 million, respectively, which represents
an effective tax rate of 40% and 41%, 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 May 28, 2005 to represent an estimated federal
and state income tax provision. For the successor period from March 26, 2004 to May 29, 2004, our
tax rates are calculated on basis at 35% federal and 4% state tax rates, for an overall effective
tax rate of 39%. The tax rate for the successor period March 26, 2004 to May 29, 2004 reflects the
creation of a net deferred tax liability as a result of the Merger. For the predecessor period
February 29, 2004 to March 25, 2004, 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 were expected for the year ended 2004, no benefit was recorded for the
predecessor period from February 29, 2004 to March 25, 2004 due to the valuation allowance. For the three months ended May 28, 2005, Group Holdings recorded an income tax provision of
$12.3 million, which represents an effective tax rate of 44%. 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 44% for the three months ended May
28, 2005 to represent an estimated federal and state income tax provision and the non-deductibility
of a portion of its interest on high-yield debt. Net Income.As a result of the foregoing, AAC reported net income of $18.2 million for the
three months ended May 28, 2005 as compared to $11.3 million for the pro forma three months ended
May 29, 2004. As a result of the foregoing, Group Holdings reported net income of $15.6 million for the three
months ended May 28, 2005. For the Period March 26, 2004 to May 29, 2004 (Successor) Net sales were $114.6 million and cost of sales were $55.1 million for the successor period from
March 26, 2004 to May 29, 2004. Gross profit was $59.5 million, or 51.9% of net sales for the same
period. The decline in gross profit as a percentage of sales for the successor period versus the
predecessor period was primarily a result of a purchase accounting inventory step-up adjustment of
$5.4 million recorded in the successor period. Selling, general and administrative expenses were
$34.6 million for the successor period. Operating income was $25.0 million for the same period.
The increase in operating income for the successor period versus the predecessor period relates
primarily to the seasonality of our graduation and yearbook products being shipped in the April
through June time frame. Interest expense for AAC was $4.6 million for the successor period. The
increase in interest expense in the successor period was primarily due to the successor period
containing two months versus the one month of the predecessor period. Net income of AAC for the
successor period was $12.5 million. For the Period February 29, 2004 to March 25, 2004 (Predecessor) Net sales were $20.3 million and cost of sales were $8.3 million for the predecessor period from
February 29, 2004 to March 25, 2004. Gross profit was $12.0 million, or 59.2% of net sales for the
same period. Selling, general and administrative expenses were $10.6 million for the predecessor
period. Operating income was $1.4 million for the same period. Interest expense for AAC was $2.6
million for the 30




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##### Table of Contents



predecessor period. For the period February 29, 2004 to March 25, 2004, 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. As a result of the foregoing, net loss of AAC for the predecessor
period was $1.2 million. Nine Months Ended May 28, 2005 (Successor) Compared to Pro Forma Nine Months Ended May 29, 2004 Group Holdings was not formed until November of 2004. We are therefore comparing our results
of operations for the nine months ended May 28, 2005, which include results of operations for both
Group Holdings and AAC, with the results of operations of AAC by itself for the pro forma nine
months ended May 29, 2004. The inclusion of the results of Group Holdings for the nine months ended
May 28, 2005 only adds additional interest expense of $5.3 million from the issuance of the 10 1/4%
Notes and decreases the tax provision by $1.6 million. 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: American Achievement CorporationAAC Group Holding Corp.
    
    
    (Successor)
    
    
    
    
    
    
    (Successor)
    
    
    
    (Predecessor)
    
    
    Pro formaFor the nine
    
    
    
    
    
    
    For the nine months
    
    
    % of
    
    
    For the period
    
    
    For the ninemonths ended
    
    
    % of Net
    
    
    ended
    
    
    Net
    
    
    March 26, 2004 -
    
    
    
    August 31, 2003 -
    
    
    months ended
    
    
    % of NetMay 28, 2005
    
    
    Sales
    
    
    May 28, 2005
    
    
    Sales
    
    
    May 29, 2004
    
    
    
    March 25, 2004
    
    
    May 29, 2004
    
    
    SalesNet sales
    
    $
    259,228
    
    
    
    100.0
    %
    
    $
    259,228
    
    
    
    100.0
    %
    
    $
    114,621
    
    
    
    $
    146,721
    
    
    $
    261,342
    
    
    
    100.0
    %Cost of sales
    
    
    106,993
    
    
    
    41.3
    %
    
    
    106,993
    
    
    
    41.3
    %
    
    
    55,088
    
    
    
    
    59,857
    
    
    
    114,945
    
    
    
    44.0
    %Gross profit
    
    
    152,235
    
    
    
    58.7
    %
    
    
    152,235
    
    
    
    58.7
    %
    
    
    59,533
    
    
    
    
    86,864
    
    
    
    146,397
    
    
    
    56.0
    %Selling, general and
administrative expenses
    
    
    115,208
    
    
    
    44.4
    %
    
    
    115,208
    
    
    
    44.4
    %
    
    
    34,559
    
    
    
    
    74,992
    
    
    
    109,551
    
    
    
    41.9
    %Operating income
    
    
    37,027
    
    
    
    14.3
    %
    
    
    37,027
    
    
    
    14.3
    %
    
    
    24,974
    
    
    
    
    11,872
    
    
    
    36,846
    
    
    
    14.1
    %Interest expense
    
    
    23,066
    
    
    
    8.9
    %
    
    
    17,797
    
    
    
    6.9
    %
    
    
    4,572
    
    
    
    
    16,455
    
    
    
    21,027
    
    
    
    8.0
    %Income (loss) before
income taxes
    
    
    13,961
    
    
    
    5.4
    %
    
    
    19,230
    
    
    
    7.4
    %
    
    
    20,402
    
    
    
    
    (4,583
    )
    
    
    15,819
    
    
    
    6.1
    %Provision for income taxes
    
    
    6,082
    
    
    
    2.4
    %
    
    
    7,692
    
    
    
    3.0
    %
    
    
    7,957
    
    
    
    
    
    
    
    
    7,957
    
    
    
    3.0
    %Net income (loss)
    
    
    7,879
    
    
    
    3.0
    %
    
    
    11,538
    
    
    
    4.4
    %
    
    
    12,445
    
    
    
    
    (4,583
    )
    
    
    7,862
    
    
    
    3.1
    %Preferred dividends
    
    
    
    
    
    
    0.0
    %
    
    
    
    
    
    
    0.0
    %
    
    
    
    
    
    
    
    (700
    )
    
    
    (700
    )
    
    
    (0.4
    %)Net income (loss)
applicable to common
stockholders
    
    $
    7,879
    
    
    
    3.0
    %
    
    $
    11,538
    
    
    
    4.4
    %
    
    $
    12,445
    
    
    
    $
    (5,283
    )
    
    $
    7,162
    
    
    
    2.7
    %
 Net Sales.Net sales consist of product sales and are net of product returns and promotional
discounts. Net sales decreased $2.1 million, or 0.8%, to $259.2 million for the nine months ended
May 28, 2005 from $261.3 million for the pro forma nine months ended May 29, 2004. This decrease in
net sales was due to
timing of shipments in achievement publications and a decline in class ring shipments, partially
offset by increased yearbook sales, graduation product sales and recognition and affinity jewelry
shipments. 31




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The following details the changes in net sales during such periods by business segment. Class Rings.Net sales decreased $2.7 million to $104.4 million for the nine months ended May
28, 2005 from $107.1 million for the pro forma nine months ended May 29, 2004. The decrease in
net sales was the result of a decline in high school and college ring shipments. Yearbooks.Net sales increased $1.3 million to $89.3 million for the nine months ended May 28,
2005 from $88.0 million for the pro forma nine months ended May 29, 2004. The increase in net
sales was the result of an increase in yearbook shipments. Graduation Products.Net sales increased $0.4 million to $39.0 million for the nine months
ended May 28, 2005 from $38.6 million for the pro forma nine months ended May 29, 2004. The
increase in net sales was the result of an increase in shipments of graduation products. Achievement Publications.Net sales decreased $2.3 million to $10.1 million for the nine months
ended May 28, 2005 from $12.4 million for the pro forma nine months ended May 29, 2004. 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 increased $1.2 million to $16.4 million for the nine months ended May 28, 2005
from $15.2 million for the pro forma nine months ended May 29, 2004. The increase in net sales
was the result of increased ring shipments of family jewelry. Gross Profit.Gross margin represents gross profit as a percentage of net sales. Gross margin was
58.7% for the nine months ended May 28, 2005, a 2.7 percentage point increase from 56.0% for the
pro forma nine months ended May 29, 2004. Overall, gross profit increased $5.8 million. Excluding
the $5.4 million impact of purchase accounting in the pro forma nine months ended May 29, 2004, the
increase was a result of improvements in both our yearbook and graduation products manufacturing
facilities. Selling, General and Administrative Expenses.Selling, general and administrative expenses
increased $5.6 million, or 5.2%, to $115.2 million for the nine months ended May 28, 2005 from
$109.6 million for the pro forma nine months ended May 29, 2004. Included in selling, general and
administrative expenses are two sub-categories: selling and marketing expenses and general and
administrative expenses. Selling and marketing expenses decreased $1.0 million to $81.5 million or
31.5% of net sales, for the nine months ended May 28, 2005 from $82.5 million or 31.6% of net
sales, for the pro forma nine months ended May 29, 2004. The decrease in selling and marketing
expenses was primarily the result of decreased marketing expenses and selling commissions as a
result of lower sales of class rings. General and administrative expenses for the nine months ended May 28, 2005 were $33.7 million, or
13.0% of net sales, as compared to $27.1 million, or 10.4% of net sales, for the pro forma nine
months ended May 29, 2004. The increase in general and administrative expenses was the result of
increased amortization expense of $5.8 million and a one-time
management bonus. Operating Income.As a result of the foregoing, operating income was $37.0 million, or 14.3% of net
sales, for the nine months ended May 28, 2005 as compared with operating income of $36.8 million,
or 14.1% of net sales, for the pro forma nine months ended May 29, 2004. Operating income for the
nine months ended May 28, 2005 includes a negative impact of
$5.8 million due to additional
amortization expense and a one-time management bonus of $2.1 million. Operating income for the pro
forma nine months ended May 29, 2004 included a negative impact of $5.4 million inventory step up
due to purchase accounting. The class rings segment reported operating income of $14.7 million for
the nine months ended May 28, 2005 as compared with operating income of $13.8 million for the pro
forma nine months ended May 29, 2004. The
yearbooks segment reported operating income of $14.6 million for the nine months ended May 28, 2005
as compared with operating income of $11.0 million for the pro forma nine months ended May 29,
2004. The graduation products segment reported operating income of $5.8 million for the nine months
ended May 28, 32




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##### Table of Contents



2005 as compared with operating income of $7.6 million for the pro forma nine months
ended May 29, 2004. The achievement publications segment reported operating income of $0.8 million
for the nine months ended May 28, 2005 as compared with operating income of $3.5 million for the
pro forma nine months ended May 29, 2004. The other segment reported operating income of $1.1
million for the nine months ended May 28, 2005 as compared with operating income of $0.9 million
for the pro forma nine months ended May 29, 2004. Interest Expense, Net.For AAC, net interest expense was $17.8 million for the nine months ended
May 28, 2005 and $21.0 million for the pro forma nine months ended May 29, 2004. The average debt
outstanding of AAC for the nine months ended May 28, 2005 and the pro forma nine months ended May
29, 2004 was $317 million and $249 million, respectively. The weighted average interest rate on
debt outstanding of AAC for the nine months ended May 28, 2005 and the pro forma nine months ended
May 29, 2004 was 6.9% and 11.2%, respectively. For Group Holdings, net interest expense was $23.1 million for the nine months ended May 28,
2005. The average debt outstanding of Group Holdings for the nine months ended May 28, 2005 was
$384 million. The weighted average interest rate on debt outstanding of Group Holdings for the nine
months ended May 28, 2005 was 7.5%. Provision for Income Taxes.For the nine months ended May 28, 2005 and the pro forma nine
months ended May 29, 2004, AAC recorded an income tax provision of $7.7 million and $8.0 million,
respectively, which represents an effective tax rate of 40% and 50%, 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 nine months ended May 28, 2005 to
represent an estimated federal and state income tax provision. For the successor period from March
26, 2004 to May 29, 2004, our tax rates are calculated on basis at 35% federal and 4% state tax
rates, for an overall effective tax rate of 39%. The tax rate for the successor period March 26,
2004 to May 29, 2004 reflects the creation of a net deferred tax liability as a result of the
Merger. For the predecessor period August 30, 2003 to March 25, 2004, 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 were expected for the year ended 2004, no benefit
was recorded for the predecessor period from August 30, 2003 to March 25, 2004 due to the valuation
allowance. For the nine months ended May 28, 2005, Group Holdings recorded an income tax provision of
$6.1 million, which represents an effective tax rate of 44%. 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 44% for the nine months ended May
28, 2005 to represent an estimated federal and state income tax provision and the non-deductibility
of a portion of its interest on high-yield debt. Net Income.As a result of the foregoing, AAC reported net income of $11.5 million for the
nine months ended May 28, 2005 as compared to net income of $7.9 million for the pro forma nine
months ended May 29, 2004. As a result of the foregoing, Group Holdings reported net income of $7.9 million for the nine
months ended May 28, 2005. For the Period March 26, 2004 to May 29, 2004 (Successor) Net sales were $114.6 million and cost of sales were $55.1 million for the successor period from
March 26, 2004 to May 29, 2004. Gross profit was $59.5 million, or 51.9% of net sales for the same
period. The decline in gross profit as a percentage of sales for the successor period versus the
predecessor period was primarily a result of a purchase accounting inventory step-up adjustment of
$5.4 million recorded in the
successor period. Selling, general and administrative expenses were $34.6 million for the
successor period. Operating income was $25.0 million for the same period. The increase in
operating income for the successor period versus the predecessor period relates primarily to the
seasonality of our graduation and 33




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yearbook products being shipped in the April through June time
frame. Interest expense for AAC was $4.6 million for the successor period. The increase in
interest expense in the successor period was primarily due to the successor period containing two
months versus the one month of the predecessor period. Net income of AAC for the successor period
was $12.5 million. For the Period August 31, 2003 to March 25, 2004 (Predecessor) Net sales were $146.7 million and cost of sales were $59.9 million for the predecessor period from
August 31, 2003 to March 25, 2004. Gross profit was $86.9 million, or 59.2% of net sales for the
same period. Selling, general and administrative expenses were $75.0 million for the predecessor
period. Operating income was $11.9 million for the same period. Interest expense for AAC was
$16.5 million for the predecessor period. For the period August 31, 2003 to March 25, 2004, 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. As a result of the foregoing, net loss of AAC for
the predecessor period was $4.6 million. Liquidity and Capital Resources Operating Activities.For AAC, operating activities provided cash of $26.6 million for the nine
months ended May 28, 2005 compared to cash provided of $31.3 million for the pro forma nine months
ended May 29, 2004. The $4.7 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 $14.0 million, an increase in inventories of $5.6 million and a decrease in deferred revenue
of $0.5 million, partially offset by an increase in net income (net of non-cash items) of $9.4
million, an increase in customer deposits of $5.3 million, a decrease in prepaid expenses and other
assets of $0.6 million and a decrease in accounts receivable of $0.4 million. For Group Holdings, operating activities provided cash of $23.2 million for the nine months ended
May 28, 2005. Investing Activities.Capital expenditures for the nine months ended May 28, 2005 were $9.8 million
compared to capital expenditures of $14.2 million for the pro forma nine months ended May 29, 2004.
The acquisition of CB Announcements was $5.0 million during the pro forma nine months ended May 29,
2004. Our projected capital expenditures for the entire fiscal year 2005 are expected to be
approximately $14.5 million. Financing Activities.For AAC, financing activities used cash of $16.2 million for the nine months
ended May 28, 2005 compared to cash provided of $92.7 million for the pro forma nine months ended
May 29, 2004. For Group Holdings, financing activities used cash of $12.5 million for the nine months ended May
28, 2005. For related discussion, see Note 7 to the condensed consolidated financial statements. 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 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 1/4% 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 May 28, 2005,
$4.5 million was drawn on the revolver. 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 34




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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 1/4% Notes semi-annually in arrears on April 1
and October 1 of each year. The 8 1/4% Notes have no scheduled amortization and mature on April 1,
2012. The indenture governing the 8 1/4% 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 1/4% 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 10 1/4% Notes.
The 10 1/4% Notes accrete to $131.5 million aggregate principal amount at maturity. Interest
accrues on the 10 1/4% Notes in the form of an increase in the accreted value of such notes 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. The 10 1/4% Notes are Group Holdings unsecured obligation and rank equally
with all of its future senior obligations and senior to its future subordinated indebtedness. The
10 1/4% 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
cash depends on many factors beyond our control. 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 $90 for
the three months ended May 28, 2005 and $95 for the pro forma three months ended May 29, 2004. AAC
expensed consignment fees of $264 for the nine months ended May 28, 2005 and $249 for the pro forma
nine months ended May 29, 2004. 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 May 28, 2005 and August 28, 2004, AAC held approximately 20,930 ounces and 19,460
ounces, respectively, of gold valued at $8.8 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 35




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##### Table of Contents



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 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. During the first quarter of fiscal 2005, we
adopted the provisions of this pronouncement and noted a reduction of service costs for fiscal 2005
of $93 as a component of net postretirement health care costs attributable to current services. In
November 2004, FASB issued Statement of Financial Accounting
Standard (SFAS) No. 151 Inventory Costs, an Amendment of ARB No. 43
Chapter 4. SFAS 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. SFAS 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. SFAS 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. SFAS 123R
is applicable for all interim and annual periods for fiscal periods 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. 36




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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 May 28, 2005,
these financial instruments represented a net liability of $152.8 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 May 28, 2005, 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 May 28, 2005, we
had hedged a majority of our gold requirements for fiscal 2005 through the purchase of gold
options. 37




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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. 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
Amendment No. 3 (File No. 333-121479) filed on June 7, 2005 as you review this quarterly report. 38




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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 amount of monetary relief that it seeks, but has asked for
an amount not less than $10.0 million. On June 10, 2005, CBI filed its answer to the New York
complaint, and filed several counterclaims against the Licensee for, among other things, breach of
contract, fraud, violation of the Lanham Act, and the New York anti-dilution statute. A status
conference is scheduled for July 14, 2005. CBI intends to defend itself vigorously, and pursue its
own claims aggressively, in these proceedings. 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. 39




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ITEM 6. EXHIBITS (a) Exhibits EXHIBITNUMBER
    
    DESIGNATION31.1
    
    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
 40




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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: July 12, 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)
 41