UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON,
D.C. 20549
 
 FORM
10-Q
 þ
              
              QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
      1934
 
 FOR
THE QUARTERLY PERIOD ENDED February 28, 2009
 
 OR
 
 ⁭
              
              TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
      1934
 
 COMMISSION
FILE NUMBERS 333-121479 AND 333-84294
 
 AAC
GROUP HOLDING CORP.
 AMERICAN
ACHIEVEMENT CORPORATION
 (Exact
name of registrant as specified in its charter)
  DELAWARE
              
              20-1854833DELAWARE
              
              13-4126506(State
      or other jurisdiction of incorporation or
              
              (I.R.S.
      Employer Identification Number)organization)
  7211
CIRCLE S ROAD
 AUSTIN,
TEXAS 78745
 (Address
of principal executive offices) (Zip Code)
 Registrants’
Telephone Number, Including Area Code (512) 444-0571
 
 Indicate
by check mark whether the registrants (1) have 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
registrants were required to file such reports), and (2) have been subject
to such filing requirements for the past 90 days. Yes ⁭ No þ.
  Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):
 Large
accelerated filer
⁭                                                                                                            Accelerated
filer ⁭
 Non-accelerated
filer þ(do
not check if smaller reporting
company)                                
Smaller reporting company ⁭
  Indicate
by check mark whether the registrants are shell companies (as defined in
Rule 12b-2 of the Exchange Act). Yes ⁭ No þ.
  Number
of shares outstanding of AAC Group Holding Corp. as of March 31, 2009: 100
shares of common stock.
 Number
of shares of American Achievement Corporation outstanding as of March 31, 2009:
100 shares of common stock.
  This Form 10-Q is
a combined quarterly report being filed separatelybyAAC Group Holding
Corp.and American
Achievement Corporation. Unless the context indicates otherwise, any reference
in this report to “Intermediate Holdings” refers to AAC Group Holding Corp. and
“AAC” refers to American Achievement Corporation, the indirect wholly-owned
operating subsidiary ofIntermediate
Holdings. The “Company”, “we”, “us”, and “our” refer AAC Group Holding Corp.
together with American Achievement
Corporation.
  
  
 FOR
THE QUARTERLY PERIOD ENDED FEBRUARY 28, 2009
 INDEX
 
 
 
 PAGEPART
      I. FINANCIAL INFORMATIONItem 1.
      Condensed Consolidated Financial Statements and NotesCondensed
      Consolidated Balance Sheets (unaudited) — As of February 28, 2009 and
      August 30, 2008
                3Condensed
      Consolidated Statements of Operations (unaudited) — For the Three and Six
      Months Ended February 28, 2009 and the Three and Six Months Ended
      February 23, 2008
                5Condensed
      Consolidated Statements of Cash Flows (unaudited) — For the Six Months
      Ended February 28, 2009 and the Six Months Ended February 23,
      2008
                7Notes
      to Condensed Consolidated Financial Statements (unaudited)
                9Item 2.
      Management’s Discussion and Analysis of Financial Condition and Results of
      Operations
                18Item 3.
      Quantitative and Qualitative Disclosures About Market Risk
                27Item 4.
      Controls and Procedures
                27PART
      II. OTHER INFORMATIONItem 1.
      Legal Proceedings
                28Item 6.
      Exhibits
                29SIGNATURES
                30Certification of CEO Pursuant to Section
      302Certification
      of CFO Pursuant to Section 302Certification
      of CEO Pursuant to Section 906Certification
      of CFO Pursuant to Section 906
 
 
 
 
 Explanatory
Note
 
 This
combined Form 10-Q is separately filed by AAC Group Holding Corp. and American
Achievement Corporation. 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.
  Unless
the context indicates otherwise, any reference in this report to “Intermediate
Holdings” refers to AAC Group Holding Corp. and “AAC” refers to American
Achievement Corporation, the indirect wholly-owned operating subsidiary of
Intermediate Holdings. The “Company”, “we”, “us”, and “our” refer to AAC Group
Holding Corp. together with American Achievement Corporation.
  
  2
  AAC
GROUP HOLDING CORP.
 Condensed
Consolidated Balance Sheets
 (unaudited)
  Intermediate
      HoldingsFebruary
      28, 2009
                          
                          
                          August
      30, 2008(Dollars
      in thousands)ASSETSCash
      and cash equivalents
                          
                          $
                          19,706
                          
                          
                          $
                          9,746Accounts
      receivable, net of allowances
                          
                          
                          32,397
                          
                          
                          
                          36,920Inventories
                          
                          
                          33,373
                          
                          
                          
                          27,411Deferred
      tax assets
                          
                          
                          17,714
                          
                          
                          
                          12,196Prepaid
      expenses and other current assets, net
                          
                          
                          19,053
                          
                          
                          
                          19,395Total
      current assets
                          
                          
                          122,243
                          
                          
                          
                          105,668Property,
      plant and equipment, net
                          
                          
                          64,094
                          
                          
                          
                          68,477Goodwill
                          
                          
                          171,323
                          
                          
                          
                          171,073Other
      intangible assets, net
                          
                          
                          92,176
                          
                          
                          
                          97,000Other
      assets, net
                          
                          
                          11,975
                          
                          
                          
                          12,555Total
      assets
                          
                          $
                          461,811
                          
                          
                          $
                          454,773LIABILITIES
      AND STOCKHOLDER'S EQUITY (DEFICIT)Book
      overdraft
                          
                          $
                          399
                          
                          
                          $
                          61Accounts
      payable
                          
                          
                          8,069
                          
                          
                          
                          10,900Customer
      deposits
                          
                          
                          51,295
                          
                          
                          
                          8,102Accrued
      expenses
                          
                          
                          16,603
                          
                          
                          
                          16,863Deferred
      revenue
                          
                          
                          3,596
                          
                          
                          
                          2,750Accrued
      interest
                          
                          
                          10,833
                          
                          
                          
                          5,722Current
      portion of long-term debt
                          
                          
                          493
                          
                          
                          
                          2,908Total
      current liabilities
                          
                          
                          91,288
                          
                          
                          
                          47,306Long-term
      debt, net of current portion
                          
                          
                          328,007
                          
                          
                          
                          352,998Deferred
      tax liabilities
                          
                          
                          46,905
                          
                          
                          
                          21,595Other
      long-term liabilities
                          
                          
                          2,742
                          
                          
                          
                          2,703Total
      liabilities
                          
                          
                          468,942
                          
                          
                          
                          424,602Commitments
      and contingencies (Note 7)Stockholder's
      equity (deficit):Common
      stock
                          
                          
                          -
                          
                          
                          
                          -Additional
      (distributions in excess of) paid-in capital
                          
                          
                          (2,847
                          )
                          
                          
                          24,309Accumulated
      earnings (deficit)
                          
                          
                          (6,845
                          )
                          
                          
                          3,153Accumulated
      other comprehensive income
                          
                          
                          2,561
                          
                          
                          
                          2,709Total
      stockholder's equity (deficit)
                          
                          
                          (7,131
                          )
                          
                          
                          30,171Total
      liabilities and stockholder's equity (deficit)
                          
                          $
                          461,811
                          
                          
                          $
                          454,773
  The
accompanying notes are an integral part of these condensed consolidated
financial statements.
  3
  AMERICAN
ACHIEVEMENT CORPORATION
 Condensed
Consolidated Balance Sheets
 (unaudited)
  AACFebruary
      28, 2009
                        
                        
                        August
      30, 2008(Dollars
      in thousands)ASSETSCash
      and cash equivalents
                        
                        $
                        19,139
                        
                        
                        $
                        9,735Accounts
      receivable, net of allowances
                        
                        
                        32,397
                        
                        
                        
                        36,920Inventories
                        
                        
                        33,373
                        
                        
                        
                        27,411Deferred
      tax assets
                        
                        
                        17,303
                        
                        
                        
                        14,920Prepaid
      expenses and other current assets, net
                        
                        
                        19,053
                        
                        
                        
                        18,839Total
      current assets
                        
                        
                        121,265
                        
                        
                        
                        107,825Property,
      plant and equipment, net
                        
                        
                        64,094
                        
                        
                        
                        68,477Goodwill
                        
                        
                        171,323
                        
                        
                        
                        171,073Other
      intangible assets, net
                        
                        
                        92,176
                        
                        
                        
                        97,000Other
      assets, net
                        
                        
                        10,382
                        
                        
                        
                        10,739Total
      assets
                        
                        $
                        459,240
                        
                        
                        $
                        455,114LIABILITIES
      AND STOCKHOLDER'S EQUITYBook
      overdraft
                        
                        $
                        399
                        
                        
                        $
                        61Accounts
      payable
                        
                        
                        8,069
                        
                        
                        
                        10,900Customer
      deposits
                        
                        
                        51,295
                        
                        
                        
                        8,102Accrued
      expenses
                        
                        
                        16,592
                        
                        
                        
                        16,852Deferred
      revenue
                        
                        
                        3,596
                        
                        
                        
                        2,750Accrued
      interest
                        
                        
                        5,217
                        
                        
                        
                        5,722Current
      portion of long-term debt
                        
                        
                        493
                        
                        
                        
                        2,908Total
      current liabilities
                        
                        
                        85,661
                        
                        
                        
                        47,295Long-term
      debt, net of current portion
                        
                        
                        196,507
                        
                        
                        
                        222,577Deferred
      tax liabilities
                        
                        
                        65,273
                        
                        
                        
                        39,580Other
      long-term liabilities
                        
                        
                        2,714
                        
                        
                        
                        2,675Total
      liabilities
                        
                        
                        350,155
                        
                        
                        
                        312,127Commitments
      and contingencies (Note 7)Stockholder's
      equity:Common
      stock
                        
                        
                        -
                        
                        
                        
                        -Additional
      paid-in capital
                        
                        
                        82,055
                        
                        
                        
                        109,211Accumulated
      earnings
                        
                        
                        24,469
                        
                        
                        
                        31,067Accumulated
      other comprehensive income
                        
                        
                        2,561
                        
                        
                        
                        2,709Total
      stockholder's equity
                        
                        
                        109,085
                        
                        
                        
                        142,987Total
      liabilities and stockholder's equity
                        
                        $
                        459,240
                        
                        
                        $
                        455,114
 
 The
accompanying notes are an integral part of these condensed consolidated
financial statements.
  4
  AAC
GROUP HOLDING CORP.
 Condensed
Consolidated Statements of Operations
 (unaudited)
  Intermediate
      HoldingsFor
      the three months ended
                                  
                                  
                                  For
      the six months endedFebruary
      28, 2009
                                  
                                  
                                  
                                  February
      23, 2008
                                  
                                  
                                  
                                  February
      28, 2009
                                  
                                  
                                  
                                  February
      23, 2008(Dollars
      in thousands)Net
      sales
                                  
                                  $
                                  56,114
                                  
                                  
                                  $
                                  60,628
                                  
                                  
                                  $
                                  105,327
                                  
                                  
                                  $
                                  112,568Cost
      of sales
                                  
                                  
                                  25,107
                                  
                                  
                                  
                                  26,865
                                  
                                  
                                  
                                  50,158
                                  
                                  
                                  
                                  52,182Gross
      profit
                                  
                                  
                                  31,007
                                  
                                  
                                  
                                  33,763
                                  
                                  
                                  
                                  55,169
                                  
                                  
                                  
                                  60,386Selling,
      general and administrative expenses
                                  
                                  
                                  31,030
                                  
                                  
                                  
                                  31,744
                                  
                                  
                                  
                                  57,519
                                  
                                  
                                  
                                  61,090Operating
      income (loss)
                                  
                                  
                                  (23
                                  )
                                  
                                  
                                  2,019
                                  
                                  
                                  
                                  (2,350
                                  )
                                  
                                  
                                  (704
                                  )Interest
      expense, net
                                  
                                  
                                  7,413
                                  
                                  
                                  
                                  8,350
                                  
                                  
                                  
                                  15,286
                                  
                                  
                                  
                                  16,521Loss
      from continuing operations before income taxes
                                  
                                  
                                  (7,436
                                  )
                                  
                                  
                                  (6,331
                                  )
                                  
                                  
                                  (17,636
                                  )
                                  
                                  
                                  (17,225
                                  )Benefit
      for income taxes
                                  
                                  
                                  (3,320
                                  )
                                  
                                  
                                  (2,948
                                  )
                                  
                                  
                                  (7,638
                                  )
                                  
                                  
                                  (7,540
                                  )Loss
      from continuing operations
                                  
                                  
                                  (4,116
                                  )
                                  
                                  
                                  (3,383
                                  )
                                  
                                  
                                  (9,998
                                  )
                                  
                                  
                                  (9,685
                                  )Discontinued
      operations:Loss
      from discontinued operations before income taxes
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (38
                                  )
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (7,128
                                  )Benefit
      for income taxes
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (15
                                  )
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (2,787
                                  )Loss
      from discontinued operations
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (23
                                  )
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (4,341
                                  )Net
      loss
                                  
                                  $
                                  (4,116
                                  )
                                  
                                  $
                                  (3,406
                                  )
                                  
                                  $
                                  (9,998
                                  )
                                  
                                  $
                                  (14,026
                                  )
 
 
 The
accompanying notes are an integral part of these condensed consolidated
financial statements.
  5
  AMERICAN
ACHIEVEMENT CORPORATION
 Condensed
Consolidated Statements of Operations
 (unaudited)
  AACFor
      the three months ended
                                  
                                  
                                  For
      the six months endedFebruary
      28, 2009
                                  
                                  
                                  
                                  February
      23, 2008
                                  
                                  
                                  
                                  February
      28, 2009
                                  
                                  
                                  
                                  February
      23, 2008(Dollars
      in thousands)Net
      sales
                                  
                                  $
                                  56,114
                                  
                                  
                                  $
                                  60,628
                                  
                                  
                                  $
                                  105,327
                                  
                                  
                                  $
                                  112,568Cost
      of sales
                                  
                                  
                                  25,107
                                  
                                  
                                  
                                  26,865
                                  
                                  
                                  
                                  50,158
                                  
                                  
                                  
                                  52,182Gross
      profit
                                  
                                  
                                  31,007
                                  
                                  
                                  
                                  33,763
                                  
                                  
                                  
                                  55,169
                                  
                                  
                                  
                                  60,386Selling,
      general and administrative expenses
                                  
                                  
                                  31,030
                                  
                                  
                                  
                                  31,744
                                  
                                  
                                  
                                  57,519
                                  
                                  
                                  
                                  61,090Operating
      income (loss)
                                  
                                  
                                  (23
                                  )
                                  
                                  
                                  2,019
                                  
                                  
                                  
                                  (2,350
                                  )
                                  
                                  
                                  (704
                                  )Interest
      expense, net
                                  
                                  
                                  3,931
                                  
                                  
                                  
                                  5,176
                                  
                                  
                                  
                                  8,368
                                  
                                  
                                  
                                  10,281Loss
      from continuing operations before income taxes
                                  
                                  
                                  (3,954
                                  )
                                  
                                  
                                  (3,157
                                  )
                                  
                                  
                                  (10,718
                                  )
                                  
                                  
                                  (10,985
                                  )Benefit
      for income taxes
                                  
                                  
                                  (1,501
                                  )
                                  
                                  
                                  (1,258
                                  )
                                  
                                  
                                  (4,120
                                  )
                                  
                                  
                                  (4,348
                                  )Loss
      from continuing operations
                                  
                                  
                                  (2,453
                                  )
                                  
                                  
                                  (1,899
                                  )
                                  
                                  
                                  (6,598
                                  )
                                  
                                  
                                  (6,637
                                  )Discontinued
      operations:Loss
      from discontinued operations before income taxes
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (38
                                  )
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (7,128
                                  )Benefit
      for income taxes
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (15
                                  )
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (2,787
                                  )Loss
      from discontinued operations
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (23
                                  )
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (4,341
                                  )Net
      loss
                                  
                                  $
                                  (2,453
                                  )
                                  
                                  $
                                  (1,922
                                  )
                                  
                                  $
                                  (6,598
                                  )
                                  
                                  $
                                  (10,978
                                  )
 
 
 The
accompanying notes are an integral part of these condensed consolidated
financial statements.
  6
  AAC
GROUP HOLDING CORP.
 Condensed
Consolidated Statements of Cash Flows
 (unaudited)
 Intermediate
      HoldingsFor
      the six months endedFebruary
      28, 2009
                            
                            
                            February
      23, 2008(Dollars
      in thousands)Cash
      flows from operating activities:Net
      loss
                            
                            $
                            (9,998
                            )
                            
                            $
                            (14,026
                            )Adjustments
      to reconcile net loss to net cash provided by operating
      activities:Other
      charges
                            
                            
                            -
                            
                            
                            
                            5,542Depreciation
      and amortization
                            
                            
                            11,316
                            
                            
                            
                            10,255Deferred
      income taxes
                            
                            
                            (7,673
                            )
                            
                            
                            (10,294
                            )Amortization
      of deferred financing fees
                            
                            
                            988
                            
                            
                            
                            987Accretion
      of interest on 10.25% senior discount notes
                            
                            
                            1,079
                            
                            
                            
                            6,030Gain
      (loss) on disposal of property, plant and equipment
                            
                            
                            27
                            
                            
                            
                            (12
                            )Allowance for
      doubtful accounts
                            
                            
                            67
                            
                            
                            
                            586Changes
      in assets and liabilities:Accounts
      receivable
                            
                            
                            4,456
                            
                            
                            
                            6,323Inventories
                            
                            
                            (4,238
                            )
                            
                            
                            (6,607
                            )Prepaid
      expenses and other current assets, net
                            
                            
                            342
                            
                            
                            
                            (2,381
                            )Other
      assets, net
                            
                            
                            (1,021
                            )
                            
                            
                            2,583Customer
      deposits
                            
                            
                            43,193
                            
                            
                            
                            43,575Deferred
      revenue
                            
                            
                            846
                            
                            
                            
                            (1,071
                            )Accounts
      payable, accrued expenses, accrued interest and other long-term
      liabilities
                            
                            
                            1,478
                            
                            
                            
                            (2,523
                            )Net
      cash provided by operating activities
                            
                            
                            40,862
                            
                            
                            
                            38,967Cash
      flows from investing activities:Purchases
      of property, plant and equipment
                            
                            
                            (3,072
                            )
                            
                            
                            (5,443
                            )Proceeds
      from sales of property, plant and equipment
                            
                            
                            -
                            
                            
                            
                            61Business
      acquisition, purchase price adjustment
                            
                            
                            (83
                            )
                            
                            
                            -Net
      cash used in investing activities
                            
                            
                            (3,155
                            )
                            
                            
                            (5,382
                            )Cash
      flows from financing activities:Payments
      on revolving credit facility
                            
                            
                            (6,000
                            )
                            
                            
                            (21,905
                            )Proceeds
      from revolving credit facility
                            
                            
                            6,000
                            
                            
                            
                            14,100Payments
      on term loan
                            
                            
                            (28,485
                            )
                            
                            
                            (6,185
                            )Contribution
      of capital
                            
                            
                            400
                            
                            
                            
                            -Change
      in book overdraft
                            
                            
                            338
                            
                            
                            
                            (3,726
                            )Net
      cash used in financing activities
                            
                            
                            (27,747
                            )
                            
                            
                            (17,716
                            )Net
      increase in cash and cash equivalents
                            
                            
                            9,960
                            
                            
                            
                            15,869Cash
      and cash equivalents, beginning of period
                            
                            
                            9,746
                            
                            
                            
                            1,168Cash
      and cash equivalents, end of period
                            
                            $
                            19,706
                            
                            
                            $
                            17,037Supplemental
      disclosures of cash flow information:Cash
      paid during the period for:Interest
                            
                            $
                            8,251
                            
                            
                            $
                            10,030Income
      taxes
                            
                            $
                            521
                            
                            
                            $
                            887Supplemental
      non-cash investing and financing activities disclosure:Additions
      to property, plant and equipment included in accounts
    payable
                            
                            $
                            119
                            
                            
                            $
                            4,479Increase
      in goodwill for purchase price adjustment included in other long-term
      liabilities
                            
                            $
                            167
                            
                            
                            
                            -Non-cash
      distribution of net operating loss deferred tax asset to American
      Achievement Group Holding Corp.
                            
                            $
                            27,556
                            
                            
                            $
                            -
 
 The
accompanying notes are an integral part of these condensed consolidated
financial statements.
  7
  AMERICAN
ACHIEVEMENT CORPORATION
 Condensed
Consolidated Statements of Cash Flows
 (unaudited)
  AACFor
      the six months endedFebruary
      28, 2009
                              
                              
                              February
      23, 2008(Dollars
      in thousands)Cash
      flows from operating activities:Net
      loss
                              
                              $
                              (6,598
                              )
                              
                              $
                              (10,978
                              )Adjustments
      to reconcile net loss to net cash provided by operating
      activities:Other
      charges
                              
                              
                              -
                              
                              
                              
                              5,542Depreciation
      and amortization
                              
                              
                              11,316
                              
                              
                              
                              10,255Deferred
      income taxes
                              
                              
                              (4,155
                              )
                              
                              
                              (7,136
                              )Amortization
      of deferred financing fees
                              
                              
                              765
                              
                              
                              
                              765Gain
      (loss) on disposal of property, plant and equipment
                              
                              
                              27
                              
                              
                              
                              (12
                              )Allowance for
      doubtful accounts
                              
                              
                              67
                              
                              
                              
                              586Changes
      in assets and liabilities:Accounts
      receivable
                              
                              
                              4,456
                              
                              
                              
                              6,323Inventories
                              
                              
                              (4,238
                              )
                              
                              
                              (6,607
                              )Prepaid
      expenses and other current assets, net
                              
                              
                              (214
                              )
                              
                              
                              (2,381
                              )Other
      assets, net
                              
                              
                              (1,021
                              )
                              
                              
                              2,583Customer
      deposits
                              
                              
                              43,193
                              
                              
                              
                              43,575Deferred
      revenue
                              
                              
                              846
                              
                              
                              
                              (1,071
                              )Accounts
      payable, accrued expenses, accrued interest and other long-term
      liabilities
                              
                              
                              (4,138
                              )
                              
                              
                              (2,489
                              )Net
      cash provided by operating activities
                              
                              
                              40,306
                              
                              
                              
                              38,955Cash
      flows from investing activities:Purchases
      of property, plant and equipment
                              
                              
                              (3,072
                              )
                              
                              
                              (5,443
                              )Proceeds
      from sales of property, plant and equipment
                              
                              
                              -
                              
                              
                              
                              61Business
      acquisition, purchase price adjustment
                              
                              
                              (83
                              )
                              
                              
                              -Net
      cash used in investing activities
                              
                              
                              (3,155
                              )
                              
                              
                              (5,382
                              )Cash
      flows from financing activities:Payments
      on revolving credit facility
                              
                              
                              (6,000
                              )
                              
                              
                              (21,905
                              )Proceeds
      from revolving credit facility
                              
                              
                              6,000
                              
                              
                              
                              14,100Payments
      on term loan
                              
                              
                              (28,485
                              )
                              
                              
                              (6,185
                              )Contribution
      of capital
                              
                              
                              400Change
      in book overdraft
                              
                              
                              338
                              
                              
                              
                              (3,726
                              )Net
      cash used in financing activities
                              
                              
                              (27,747
                              )
                              
                              
                              (17,716
                              )Net
      increase in cash and cash equivalents
                              
                              
                              9,404
                              
                              
                              
                              15,857Cash
      and cash equivalents, beginning of period
                              
                              
                              9,735
                              
                              
                              
                              620Cash
      and cash equivalents, end of period
                              
                              $
                              19,139
                              
                              
                              $
                              16,477Supplemental
      disclosures of cash flow information:Cash
      paid during the period for:Interest
                              
                              $
                              8,251
                              
                              
                              $
                              10,030Income
      taxes
                              
                              $
                              521
                              
                              
                              $
                              887Supplemental
      non-cash investing and financing activities disclosure:Additions
      to property, plant and equipment included in accounts
    payable
                              
                              $
                              119
                              
                              
                              $
                              4,479Increase
      in goodwill for purchase price adjustment included in other long-term
      liabilities
                              
                              $
                              167
                              
                              
                              
                              -Non-cash
      distribution of net operating loss deferred tax asset to Intermediate
      Holdings
                              
                              $
                              27,556
                              
                              
                              $
                              -
 
 The
accompanying notes are an integral part of these condensed consolidated
financial statements.
  8
 AAC
GROUP HOLDING CORP.
 AMERICAN
ACHIEVEMENT CORPORATION
 Notes
to Condensed Consolidated Financial Statements
 (Dollars
in thousands, unless otherwise stated)
 (unaudited)
  1.
Summary of Organization and Significant Accounting Policies
 
 Organization
 
 The
consolidated financial statements of AAC Group Holding Corp. (“Intermediate
Holdings”) include the accounts of its indirect wholly-owned subsidiary,
American Achievement Corporation (“AAC”), each of which are separate public
reporting companies.  Intermediate Holdings is a wholly-owned
subsidiary of American Achievement Group Holding Corp. (“Parent
Holdings”).
  Intermediate
Holdings and AAC are treated as entities under common control. 
Intermediate Holdings and AAC together with their consolidated subsidiaries are
referred to as the “Company.” Unless separately stated, the notes herein relate
to Intermediate Holdings and AAC.
 
 Description
of Business
 
 The
Company is a manufacturer and supplier of class rings, yearbooks and other
graduation-related scholastic products for the high school, college, junior high
school and elementary school markets and of recognition products, such as letter
jackets, and affinity jewelry designed to commemorate significant events,
achievements and affiliations. The Company markets its products and services
primarily in the United States and operates in four reporting segments: class
rings, yearbooks, graduation products and other. The Company’s corporate office
is located in Austin, Texas and its manufacturing facilities are located in
Austin, Dallas, El Paso and Waco, Texas, Louisville, Kentucky, Manhattan,
Kansas, and Juarez, Mexico.
  As
described in Note 3, during the first quarter of fiscal year 2008, the Company
decided to shut down its achievement publications segment.  This
segment sold achievement publications in the specialty directory publishing
industry nationwide.
 
 Consolidation
 
 The
consolidated financial statements include the accounts of the Company and its
majority owned subsidiaries.  All intercompany accounts and
transactions have been eliminated in consolidation.
  Intermediate
Holdings conducts all of its business indirectly through AAC and its
subsidiaries. The consolidated financial statements of Intermediate Holdings
include the accounts of its indirect wholly-owned subsidiary, AAC. Intermediate
Holdings’ consolidated financial statements are substantially identical to AAC’s
consolidated financial statements, with the exception of the 10.25% senior
discount notes, additional interest expense related to the 10.25% senior
discount notes, amortization of deferred financing costs, interest income on its
cash balances and the related income taxes.
  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 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 and six months ended February 28, 2009 are not necessarily
indicative of the results that may be expected for the fiscal year ending
August 29, 2009. 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 30, 2008 included in
the Company’s Report on Form 10-K (File No. 333-84294 and 333-121479) filed
on November 25, 2008.
 
 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
 AAC
GROUP HOLDING CORP.
 AMERICAN
ACHIEVEMENT CORPORATION
 Notes
to Condensed Consolidated Financial Statements
 (Dollars
in thousands, unless otherwise stated)
 (unaudited)
  Recent
Accounting Pronouncements
  In
September 2006, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value
Measurements” (“SFAS 157”), which defines fair value, establishes a framework
for measuring fair value and expands disclosures about fair value measurements.
SFAS 157 applies under other accounting pronouncements that require or permit
fair value measurements and does not require any new fair value measurements.
The provisions of SFAS 157 are effective for the Company beginning with its
fiscal year 2009. The adoption of the standard did not have a material impact on
the Company’s financial position and results of operations.
  In
September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting
for Defined Benefit Pension and Other Postretirement Plans — An Amendment of
FASB Statements No. 87, 88, 106 and 132 (R)” (“SFAS 158”). SFAS 158
requires an employer to recognize the funded status of defined benefit
postretirement plans as an asset or liability in the balance sheet and to
recognize changes in that funded status in the year in which changes occur
through comprehensive income. Additionally, SFAS 158 requires an employer to
measure the funded status of each of its plans as of the date of its year-end
statement of financial position.   The Company adopted the recognition and
disclosure provisions of SFAS 158 in fiscal 2007. The measurement date
provisions of SFAS 158 will be effective for the Company beginning with its
fiscal year 2009 and the Company will use a measurement date as of the end of
its fiscal year for its defined benefit postretirement plans in fiscal
2009.
  In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities” (“SFAS 159”).  SFAS 159 permits
entities to measure many financial assets and financial liabilities at fair
value.  Unrealized gains and losses on items for which the fair value
option has been elected are reported in earnings.  SFAS 159 is effective
for the Company for fiscal years beginning with its fiscal year 2009.  The
standard did not have a material impact on the Company’s financial position and
results of operations.
 
 2.
Comprehensive Loss
 
 The
following amounts were included in determining comprehensive loss for the
three and six months ended February 28, 2009 and February 23, 2008.
 
 
 For
      the three months ended
                                  
                                  For
      the six months endedFebruary
      28, 2009
                                  
                                  February
      23, 2008
                                  
                                  February
      28, 2009
                                  
                                  February
      23, 2008Intermediate
      HoldingsNet
      loss
                                  
                                  $
                                  (4,116
                                  )
                                  
                                  $
                                  (3,406
                                  )
                                  
                                  $
                                  (9,998
                                  )
                                  
                                  $
                                  (14,026
                                  )Amortization
      of net actuarial gain and prior service costs - pension and postretirement
      plans, net of tax
                                  
                                  
                                  (74
                                  )
                                  
                                  
                                  (78
                                  )
                                  
                                  
                                  (148
                                  )
                                  
                                  
                                  (151
                                  )Total
      comprehensive loss
                                  
                                  $
                                  (4,190
                                  )
                                  
                                  $
                                  (3,484
                                  )
                                  
                                  $
                                  (10,146
                                  )
                                  
                                  $
                                  (14,177
                                  )For
      the three months ended
                                  
                                  For
      the six months endedFebruary
      28, 2009
                                  
                                  February
      23, 2008
                                  
                                  February
      28, 2009
                                  
                                  February
      23, 2008AACNet
      loss
                                  
                                  $
                                  (2,453
                                  )
                                  
                                  $
                                  (1,922
                                  )
                                  
                                  $
                                  (6,598
                                  )
                                  
                                  $
                                  (10,978
                                  )Amortization
      of net actuarial gain and prior service costs - pension and postretirement
      plans, net of tax
                                  
                                  
                                  (74
                                  )
                                  
                                  
                                  (78
                                  )
                                  
                                  
                                  (148
                                  )
                                  
                                  
                                  (151
                                  )Total
      comprehensive loss
                                  
                                  $
                                  (2,527
                                  )
                                  
                                  $
                                  (2,000
                                  )
                                  
                                  $
                                  (6,746
                                  )
                                  
                                  $
                                  (11,129
                                  )
 
  10
 AAC
GROUP HOLDING CORP.
 AMERICAN
ACHIEVEMENT CORPORATION
 Notes
to Condensed Consolidated Financial Statements
 (Dollars
in thousands, unless otherwise stated)
 (unaudited)
  3.
Discontinued Operations
 
 On
October 26, 2007, the Company announced a planned shutdown of the achievement
publications segment. Operations of this segment have ceased and have been
eliminated from the ongoing operations of the Company as a result of the
shutdown. All activities in connection with the shutdown were completed
prior to May 31, 2008, and the Company has not had any significant continuing
involvement in this segment since then.
  The
results of operations of the achievement publications business are reported as
discontinued operations in the condensed consolidated income statements for the
three and six months ended February 23, 2008.  Prior to the shutdown,
the achievement publications business was included as the Company’s achievement
publications reporting segment.  Net sales and loss from discontinued
operations for the three and six months ended February 23, 2008 are as
follows:
  
 For
      the three months ended
                        
                        
                        For
      the six months endedFebruary
      23, 2008
                        
                        
                        February
      23, 2008Discontinued
      operations:Net
      sales
                        
                        $
                        -
                        
                        
                        $
                        1,758Operating
      loss
                        
                        $
                        (38
                        )
                        
                        $
                        (7,128
                        )Benefit
      for income taxes
                        
                        
                        (15
                        )
                        
                        
                        (2,787
                        )Loss
      from discontinued operations
                        
                        $
                        (23
                        )
                        
                        $
                        (4,341
                        )
 
 
 The
Company recognized charges of $5.5 million during the six months ended February
23, 2008 primarily related to the write-off of the remaining carrying value of
tangible and intangible assets upon shutdown of the achievement publications
segment.  These charges are included in the loss from discontinued
operations in the condensed consolidated statements of operations and in other
charges in the condensed consolidated statements of cash flows. Also
included in loss from discontinued operations for the six months ended February
23, 2008, are $0.7 million of costs incurred for contract termination and
employee termination costs related to the shutdown.  All such costs
had been paid as of November 29, 2008.
 
 4.
Inventories
 
 
 February
      28, 2009
                      
                      
                      August
      30, 2008Raw
      materials
                      
                      $
                      9,341
                      
                      
                      $
                      15,840Work
      in process
                      
                      
                      16,950
                      
                      
                      
                      5,431Finished
      goods
                      
                      
                      7,743
                      
                      
                      
                      6,540Less—Reserves
                      
                      
                      (661
                      )
                      
                      
                      (400
                      )$
                      33,373
                      
                      
                      $
                      27,411
  The
Company’s cost of sales includes depreciation of $1,867 and $1,639 for the three
months ended February 28, 2009 and February 23, 2008, respectively, and
$4,135 and $3,681 for the six months then ended, respectively.
 
  11
 AAC
GROUP HOLDING CORP.
 AMERICAN
ACHIEVEMENT CORPORATION
 Notes
to Condensed Consolidated Financial Statements
 (Dollars
in thousands, unless otherwise stated)
 (unaudited)
  5.
Goodwill and Other Intangible Assets
 
 Goodwill
 
 
 Segment:
                      
                      February
      28, 2009
                      
                      
                      August
      30, 2008Class Rings
                      
                      $
                      67,092
                      
                      
                      $
                      67,092Yearbooks
                      
                      
                      65,241
                      
                      
                      
                      65,241Graduation
      Products
                      
                      
                      23,781
                      
                      
                      
                      23,781Other
                      
                      
                      15,209
                      
                      
                      
                      14,959Total
                      
                      $
                      171,323
                      
                      
                      $
                      171,073
  On
January 6, 2009, Commemorative Brands, Inc. (“CBI”) ”), a wholly owned
subsidiary of AAC, entered into an amendment to the stock purchase
agreement related to the acquisition of Powers Embroidery Inc. in fiscal
2007.  The amended agreement provides for $250 of additional purchase
price instead of the provision in the original agreement that provided
for up to $1.5 million additional purchase price payment that was contingent
upon the acquired business achieving certain financial goals through August
2010.  The $250 of additional purchase price is to be paid over three years
beginning January 2009.
 
 Other
Intangible Assets
  February
      28, 2009Estimated
                          Gross
                          
                          Accumulated
                          
                          NetUseful
      Life
                          Asset
                          
                          Amortization
                          
                          AssetTrademarks
                          Indefinite
                          
                          $
                          36,826
                          
                          
                          $
                          -
                          
                          
                          $
                          36,826Patents
                          14 to 17 years
                          
                          
                          7,317
                          
                          
                          
                          (2,180
                          )
                          
                          
                          5,137Customer
      lists and distribution contracts
                          3
      to 12 years
                          
                          
                          98,340
                          
                          
                          
                          (48,127
                          )
                          
                          
                          50,213Total
                          
                          
                          $
                          142,483
                          
                          
                          $
                          (50,307
                          )
                          
                          $
                          92,176August
      30, 2008Estimated
                          Gross
                          
                          Accumulated
                          
                          NetUseful
      Life
                          Asset
                          
                          Amortization
                          
                          AssetTrademarks
                          Indefinite
                          
                          $
                          36,826
                          
                          
                          $
                          -
                          
                          
                          $
                          36,826Patents
                          14 to 17 years
                          
                          
                          7,317
                          
                          
                          
                          (1,960
                          )
                          
                          
                          5,357Customer
      lists and distribution contracts
                          3
      to 12 years
                          
                          
                          97,740
                          
                          
                          
                          (42,923
                          )
                          
                          
                          54,817Total
                          
                          
                          $
                          141,883
                          
                          
                          $
                          (44,883
                          )
                          
                          $
                          97,000
  Under
the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS
142”), the Company tests goodwill and indefinite-lived intangibles for
impairment on an annual basis or more frequently if impairment indicators occur.
If
the fair value of each reporting unit exceeds its carrying value, goodwill is
not considered to be impaired.  The Company determines the fair value
of each reporting unit using a discounted cash flow analysis to measure the
present value of anticipated future net cash flows of the reporting
unit.  Significant judgments and assumptions including projecting
future cash flows, determining appropriate discount rates and other assumptions
are inherent in the discounted cash flow analysis.  Actual results may
vary from the assumptions used in the Company’s fair value
calculations.
  12
 AAC
GROUP HOLDING CORP.
 AMERICAN
ACHIEVEMENT CORPORATION
 Notes
to Condensed Consolidated Financial Statements
 (Dollars
in thousands, unless otherwise stated)
 (unaudited)
  The
recent and current weak economic conditions have had an unfavorable impact on
the Company’s sales and results of operations, which is expected to continue for
the rest of this fiscal year and into next year.  This change in the
Company’s forecasts constituted a triggering event requiring an interim
impairment analysis as of February 28, 2009. At February 28, 2009, the estimated
fair value of each of the Company’s reporting units exceeded its carrying value,
thus indicating that no impairment existed as of that
date.  Significant judgments were required in the preparation of the
forecasts. Unforeseen future events could adversely affect such forecasts and
thereby the reported value of goodwill in the future.
  Total
amortization on other intangible assets was $2,712 and $5,424 for the three and
six months ended February 28, 2009, respectively, and was $2,692 and $5,254
for the three and six months ended February 23, 2008, respectively, which is
recorded as selling, general and administrative expenses. Estimated annual
amortization expense is as follows:




Year
                                            
                                            Amount2009
                                            
                                            $
                                            10,8492010
                                            
                                            
                                            10,2492011
                                            
                                            
                                            10,2492012
                                            
                                            
                                            9,8162013
                                            
                                            
                                            9,220








6.
Long-term Debt





February
      28, 2009
                              August
      30, 2008Intermediate
      Holdings10.25%
      Senior discount notes due October 1, 2012 (net of unamortized discount of
      $0 and $1,079, respectively)
                              
                              $
                              131,500
                              
                              
                              $
                              130,4218.25%
      Senior subordinated notes due April 1, 2012
                              
                              
                              150,000
                              
                              
                              
                              150,000Senior
      secured credit facility:Revolving
      credit facility due 2010
                              
                              
                              -
                              
                              
                              
                              -Term
      loan due 2011
                              
                              
                              47,000
                              
                              
                              
                              75,485Total
                              
                              
                              328,500
                              
                              
                              
                              355,906Less
      current portion of long-term debt
                              
                              
                              (493
                              )
                              
                              
                              (2,908
                              )Total
      long-term debt
                              
                              $
                              328,007
                              
                              
                              $
                              352,998February
      28, 2009
                              August
      30, 2008AAC8.25%
      Senior subordinated notes due April 1, 2012
                              
                              $
                              150,000
                              
                              
                              $
                              150,000Senior
      secured credit facility:Revolving
      credit facility due 2010
                              
                              
                              -
                              
                              
                              
                              -Term
      loan due 2011
                              
                              
                              47,000
                              
                              
                              
                              75,485Total
                              
                              
                              197,000
                              
                              
                              
                              225,485Less
      current portion of long-term debt
                              
                              
                              (493
                              )
                              
                              
                              (2,908
                              )Total
      long-term debt
                              
                              $
                              196,507
                              
                              
                              $
                              222,577








13
 AAC
GROUP HOLDING CORP.
 AMERICAN
ACHIEVEMENT CORPORATION
 Notes to
Condensed Consolidated Financial Statements
 (Dollars
in thousands, unless otherwise stated)
 (unaudited)





During
the six months ended February 28, 2009 and February 23, 2008, the Company paid
down $28.5 million and $6.2 million of the term loan of the Amended Senior
Credit Facility, of which $2.5 million and $0.7 million were mandatory
payments.




Availability
under the revolving credit facility is restricted to a total revolving
commitment of $40.0 million as defined in the credit agreement governing
the Amended Senior Credit Facility. Availability under the revolving credit
facility as of February 28, 2009 was approximately $38.3 million with $1.7
million in letters of credit outstanding.




The
following table represents the amount of interest income included in interest
expense, net, for the three and six months ended February 28, 2009 and February
23, 2008:





For
      the three months ended
                    
                    
                    For
      the six months endedFebruary
      28, 2009
                    
                    
                    February
      23, 2008
                    
                    
                    February
      28, 2009
                    
                    
                    February
      23, 2008Intermediate
      Holdings
                    
                    $
                    109
                    
                    
                    $
                    229
                    
                    
                    $
                    224
                    
                    
                    $
                    348AAC
                    
                    
                    109
                    
                    
                    
                    224
                    
                    
                    
                    224
                    
                    
                    
                    336








7.
Commitments and Contingencies





Pending
Litigation





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





Gold
Consignment Agreement





Under
the Company’s gold consignment financing agreement, the Company has the ability
to have on consignment the lowest of the dollar value of 27,000 troy ounces of
gold, $14.2 million or a borrowing base, determined based upon a percentage of
gold located at the Company’s facility and other approved locations, as
specified in the agreement. Under the terms of the consignment arrangement, the
Company does not own the consigned gold nor does it have risk of loss related to
price variation on such inventory until the Company pays the supplier for
quantities purchased. Accordingly, the Company does not include the value of
consigned gold in its inventory or the corresponding liability for financial
statement purposes. As of February 28, 2009, the Company held consigned gold
valued at $3.2 million, while as of August 30, 2008, the Company held no gold on
consignment.




On
March 4, 2009, the Company received notice from The Bank of Nova Scotia electing
to terminate the consignment agreement in accordance with its
terms.  The termination will be effective May 5, 2009.  The
Company does not anticipate replacing the consignment agreement at this time and
instead may use availability under its revolving credit facility to finance its
purchases of gold going forward.





8.
Income Taxes





The
Company had recorded a deferred tax benefit related to net operating losses with
the expectation that the net operating loss carryforward would be used to offset
future earnings at AAC.  During the quarter ended February 28, 2009,
$27,556 of this deferred tax benefit was transferred from AAC to Intermediate
Holdings and then to Parent Holdings to be utilized to offset income generated
by Parent Holdings in the consolidated income tax return.  This
transfer has been accounted for as a distribution by the Company to Parent
Holdings and is reflected as a reduction to additional paid-in capital and a
reduction of deferred tax assets as of February 28, 2009.








14
 AAC
GROUP HOLDING CORP.
 AMERICAN
ACHIEVEMENT CORPORATION
 Notes to
Condensed Consolidated Financial Statements
 (Dollars
in thousands, unless otherwise stated)
 (unaudited)





9.
Postretirement Pension and Medical Benefits





CBI provides
certain healthcare and life insurance benefits for former employees of L.G.
Balfour Company, Inc. (“CBI Plan”). Certain hourly employees of Taylor
Publishing Company (“Taylor”), a wholly owned subsidiary of AAC, are covered by
a defined benefit pension plan (“TPC Plan”) established by Taylor. The benefits
under the CBI Plan and TPC Plan are based primarily on the employees’ years of
service and compensation near retirement. The CBI Plan was frozen to new
entrants effective January 1991. Effective September 2003, the TPC Plan is open
for enrollment only for certain hourly employees of Taylor. The funding policies
for these plans are consistent with the funding requirements of federal laws and
regulations.




For
fiscal 2008, the measurement date for the CBI Plan was August 30, 2008, and the
measurement date for the TPC Plan was June 30, 2008.  The Company will
use a measurement date as of the end of its fiscal year for both plans in fiscal
2009.




The
net periodic postretirement benefit income includes the following
components:




For
      the three months ended
                                  
                                  For
      the three months endedFebruary
      28, 2009
                                  
                                  February
      23, 2008CBI
      post-
                                  
                                  
                                  
                                  
                                  CBI
      post-Taylor
      pension
                                  
                                  retirement
                                  
                                  Taylor
      pension
                                  
                                  retirementService
      costs, benefits attributed to service during the period
                                  
                                  $
                                  18
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  22
                                  
                                  
                                  $
                                  -Interest
      cost
                                  
                                  
                                  220
                                  
                                  
                                  
                                  22
                                  
                                  
                                  
                                  228
                                  
                                  
                                  
                                  27Expected
      return on assets
                                  
                                  
                                  (265
                                  )
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (292
                                  )
                                  
                                  
                                  -Amortization
      of unrecognized net gain
                                  
                                  
                                  (6
                                  )
                                  
                                  
                                  (75
                                  )
                                  
                                  
                                  (9
                                  )
                                  
                                  
                                  (78
                                  )Amortization
      of unrecognized net prior service costs
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (37
                                  )
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (37
                                  )Net
      periodic postretirement benefit income
                                  
                                  $
                                  (33
                                  )
                                  
                                  $
                                  (90
                                  )
                                  
                                  $
                                  (51
                                  )
                                  
                                  $
                                  (88
                                  )For
      the six months ended
                                  
                                  For
      the six months endedFebruary
      28, 2009
                                  
                                  February
      23, 2008CBI
      post-
                                  
                                  
                                  
                                  
                                  
                                  CBI
      post-Taylor
      pension
                                  
                                  retirement
                                  
                                  Taylor
      pension
                                  
                                  retirementService
      costs, benefits attributed to service during the period
                                  
                                  $
                                  36
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  44
                                  
                                  
                                  $
                                  -Interest
      cost
                                  
                                  
                                  439
                                  
                                  
                                  
                                  45
                                  
                                  
                                  
                                  457
                                  
                                  
                                  
                                  54Expected
      return on assets
                                  
                                  
                                  (529
                                  )
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (584
                                  )
                                  
                                  
                                  -Amortization
      of unrecognized net gain
                                  
                                  
                                  (12
                                  )
                                  
                                  
                                  (151
                                  )
                                  
                                  
                                  (18
                                  )
                                  
                                  
                                  (155
                                  )Amortization
      of unrecognized net prior service costs
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (74
                                  )
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (74
                                  )Net
      periodic postretirement benefit income
                                  
                                  $
                                  (66
                                  )
                                  
                                  $
                                  (180
                                  )
                                  
                                  $
                                  (101
                                  )
                                  
                                  $
                                  (175
                                  )











15
 AAC
GROUP HOLDING CORP.
 AMERICAN
ACHIEVEMENT CORPORATION
 Notes to
Condensed Consolidated Financial Statements
 (Dollars
in thousands, unless otherwise stated)
 (unaudited)





Amounts
recognized in accumulated other comprehensive income consist of:





February
      28, 2009
                
                
                August
      30, 2008Taylor
      pension
                
                
                CBI
      post-retirement
                
                
                Taylor
      pension
                
                
                CBI
      post-retirementNet
      actuarial gain
                
                $
                (1,715
                )
                
                $
                (1,805
                )
                
                $
                (1,727
                )
                
                $
                (1,956
                )Prior
      service cost
                
                
                -
                
                
                
                (633
                )
                
                
                -
                
                
                
                (707
                )$
                (1,715
                )
                
                $
                (2,438
                )
                
                $
                (1,727
                )
                
                $
                (2,663
                )




The
estimated net gain for the TPC Plan that will be amortized from accumulated
other comprehensive income into net periodic benefit cost in fiscal year 2009 is
$25.  The estimated net gain and estimated prior service credit for
the CBI Plan that will be amortized from accumulated other comprehensive income
into net periodic postretirement benefit cost in fiscal year 2009 are $302 and
$149, respectively.





10.
Related-Party Transactions





On
March 25, 2004, AAC entered into a 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 expensed by
the Company related to the management agreement totaled $943 and $1,693 for the
three and six months ended February 28, 2009, respectively, and $949 and $1,699
for the three and six months ended February 23, 2008, respectively.




As
of February 28, 2009 and August 30, 2008, the Company had prepaid management
fees of approximately $244.





11.
Business Segments





The
Company is a manufacturer and supplier of class rings, yearbooks and other
graduation-related scholastic products for the high school, college, junior high
school and elementary school markets and of recognition products, such as letter
jackets, and affinity jewelry designed to commemorate significant events,
achievements and affiliations. The Company markets its products and services
primarily in the United States and operates in four reporting segments: class
rings, yearbooks, graduation products and other.




The
Company’s operating segments, on-campus class rings and retail class rings, have
been aggregated into one reporting segment, class rings, in accordance with
paragraph 26.a. of SFAS 131. The other segment consists primarily of jewelry
commemorating family events such as the birth of a child, military and fan
affinity jewelry and related products, professional sports championship rings,
commercial printing and recognition products such as letter
jackets.




As
discussed in Note 3, the achievement publications business was shut down during
the first quarter of fiscal year 2008.  This business historically was
included as an additional reporting segment.  As all of the results of
operations of the achievement publications business are included in discontinued
operations, they are not presented in the tables below.




Assets
not allocated to the operating segments as of August 30, 2008 represent
affiliate receivables from Parent Holdings and are presented in the tables
below. The affiliate receivables were fully repaid prior to February 28,
2009.




16
 AAC
GROUP HOLDING CORP.
 AMERICAN
ACHIEVEMENT CORPORATION
 Notes to
Condensed Consolidated Financial Statements
 (Dollars
in thousands, unless otherwise stated)
 (unaudited)








Class
                
                
                
                
                
                GraduationRings
                
                
                Yearbooks
                
                
                Products
                
                
                Other
                
                
                TotalThree
      Months Ended February 28, 2009Net
      sales
                
                $
                29,182
                
                
                $
                1,698
                
                
                $
                15,765
                
                
                $
                9,469
                
                
                $
                56,114Segment
      operating income (loss)
                
                
                1,731
                
                
                
                (4,886
                )
                
                
                3,103
                
                
                
                29
                
                
                
                (23
                )Three
      Months Ended February 23, 2008Net
      sales
                
                $
                32,855
                
                
                $
                2,335
                
                
                $
                15,478
                
                
                $
                9,960
                
                
                $
                60,628Segment
      operating income (loss)
                
                
                3,779
                
                
                
                (5,486
                )
                
                
                3,793
                
                
                
                (67
                )
                
                
                2,019Six
      Months Ended February 28, 2009Net
      sales
                
                $
                59,806
                
                
                $
                10,074
                
                
                $
                19,075
                
                
                $
                16,372
                
                
                $
                105,327Segment
      operating income (loss)
                
                
                4,932
                
                
                
                (8,606
                )
                
                
                1,983
                
                
                
                (659
                )
                
                
                (2,350
                )Six
      Months Ended February 23, 2008Net
      sales
                
                $
                65,516
                
                
                $
                11,955
                
                
                $
                18,942
                
                
                $
                16,155
                
                
                $
                112,568Segment
      operating income (loss)
                
                
                6,539
                
                
                
                (8,793
                )
                
                
                2,053
                
                
                
                (503
                )
                
                
                (704
                )














Intermediate
      HoldingsClass
                
                
                
                
                
                Graduation
                
                
                
                
                
                Assets
      notRings
                
                
                Yearbooks
                
                
                Products
                
                
                Other
                
                
                Allocated
                
                
                TotalAs
      of February 28, 2009Goodwill
                
                $
                67,092
                
                
                $
                65,241
                
                
                $
                23,781
                
                
                $
                15,209
                
                
                $
                -
                
                
                $
                171,323Segment
      assets
                
                
                188,376
                
                
                
                161,186
                
                
                
                64,338
                
                
                
                47,911
                
                
                
                -
                
                
                
                461,811As
      of August 30, 2008Goodwill
                
                $
                67,092
                
                
                $
                65,241
                
                
                $
                23,781
                
                
                $
                14,959
                
                
                $
                -
                
                
                $
                171,073Segment
      assets
                
                
                189,633
                
                
                
                162,727
                
                
                
                55,377
                
                
                
                44,703
                
                
                
                2,333
                
                
                
                454,773











AACClass
                
                
                
                Graduation
                
                Assets
      notRings
                Yearbooks
                Products
                Other
                Allocated
                TotalAs
      of February 28, 2009Goodwill
                
                $
                67,092
                
                
                $
                65,241
                
                
                $
                23,781
                
                
                $
                15,209
                
                
                $
                -
                
                
                $
                171,323Segment
      assets
                
                
                187,282
                
                
                
                160,333
                
                
                
                64,070
                
                
                
                47,555
                
                
                
                -
                
                
                
                459,240As
      of August 30, 2008Goodwill
                
                $
                67,092
                
                
                $
                65,241
                
                
                $
                23,781
                
                
                $
                14,959
                
                
                $
                -
                
                
                $
                171,073Segment
      assets
                
                
                189,939
                
                
                
                163,139
                
                
                
                55,541
                
                
                
                44,718
                
                
                
                1,777
                
                
                
                455,114











17







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 accompanying
notes included elsewhere in this report. The condensed consolidated financial
statements and the notes thereto 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 (see Note 1 in our condensed
consolidated financial statements). The following discussion includes forward
looking statements that involve certain risks and uncertainties. See “Disclosure
Regarding Forward Looking Statements.”




General




We
are one of the leading manufacturers and suppliers of class rings, yearbooks,
graduation products, and recognition products and affinity jewelry in the United
States. We market and sell yearbooks to thecollege,
high school,
junior high school and elementary school markets. 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. We also sell jewelry commemorating family events such as the birth of a
child, military and fan affinity jewelry and related products, professional
sports championship rings, commercial printing and recognition products such as
letter jackets.




As
fully described under the “Significant Developments” section of Management’s
Discussion and Analysis of Financial Condition and Results of Operations, during
the first quarter of fiscal year 2008, the Company decided to shut down the
operations of its achievement publications segment, which produced, marketed and
sold publications that recognize the achievements of top students at the high
school and college levels, as well as the nation’s most inspiring
teachers.  All shutdown activities were substantially complete prior
to November 24, 2007 and were fully complete by May 31, 2008.




Our
ability to meet our debt service and other obligations depends in significant
part on how successful we are in maintaining our core businesses 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 and other
metals, precious, semi-precious 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 a majority of our gold from a single supplier. We also purchase the
majority of our precious, semi-precious and synthetic stones from a single
supplier in Germany. 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.




We
face competition for most of our principal products.  While the class
ring, graduation products and yearbook markets were once highly concentrated and
consisted primarily of a few large national manufacturers (of which we were one)
advances in technology and the emergence of international manufacturing have
significantly lowered the costs of entry.  Major domestic mass
merchant and jewelry chain retailers now effectively compete in the class ring
business and the traditional yearbook and graduation products businesses now
face considerable competition from regional and local printers and
internet-based purveyors of yearbook and alternative web-based virtual
products.  Competition from alternative sales channels is robust in
virtually all market categories.




We
experience seasonal fluctuations in our net sales tied primarily to the school
year. We recorded 50% of our fiscal year 2008 net sales in our third quarter.
Class ring sales are highest during October through December and early spring,
with many orders made for delivery to students before the winter holiday season.
Graduation product sales are predominantly made during February through April
prior to the April through June graduation season. Yearbook sales are highest
during the months of April through June, as yearbooks are typically shipped
prior to each school’s summer break. Our recognition and affinity product line
sales are seasonal. The recognition and affinity product line sales are highest
during the winter holiday season and in the period leading up to Mother’s Day.
We have experienced operating losses during our first and fourth fiscal
quarters, which includes the beginning of the school year and 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 May through September.






18




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.




Historically,
growth in the class rings, yearbooks 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 increase by an average of
6% and 16% nationally, respectively, over the time period from 2004 to 2017.
Additionally, the U.S. Census Bureau projects that the total U.S. population
will increase by 6% over the time period from 2007 to 2015. Both the increased
population and the increased number of high school and college graduates should
expand the market for our products.





Company
Background




Our
business 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 through various
asset purchase agreements in December 1996. AAC was formed in
June 2000 to serve as a holding company for these operations as well as any
future acquisitions. In June 2000, we acquired the Taylor Senior Holding
Company, the parent company of Taylor Publishing Company (“Taylor”), whose
primary business is designing and printing student yearbooks. 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.  In April 2007, Commemorative
Brands, Inc. (“CBI”), a wholly-owned subsidiary of AAC, acquired all of the
outstanding stock of BFJ Holdings, Inc. and its wholly owned subsidiary, Powers
Embroidery, Inc. (“Powers”). Powers is a producer of quality letter jackets,
chenille patches and other school spirit embroidery merchandise.




Basis
of Presentation




We
present financial information relating to Intermediate Holdings, AAC and its
subsidiaries in this discussion and analysis.  Intermediate Holdings
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.




Other
than debt obligations, cash, interest expense related to the debt obligations,
amortization of deferred financing costs, interest income on cash balances, and
the related income taxes, all other assets, liabilities, income, expenses and
cash flows presented for all periods represent those of Intermediate Holdings’
wholly-owned indirect subsidiary AAC and the direct and indirect subsidiaries of
AAC. Intermediate Holdings’ only direct subsidiary is AAC Holding Corp., whose
sole asset is the stock of AAC. AAC and Intermediate Holdings are treated as
entities under common control.




The
Company uses a 52/53-week fiscal year ending on the last Saturday of
August.





Significant
Developments




Impairment
Analysis.Under the
provisions of SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”),
we test goodwill and indefinite-lived intangibles for impairment on an annual
basis or more frequently if impairment indicators occur. If
the fair value of each reporting unit exceeds its carrying value, goodwill is
not considered to be impaired.  We determine the fair value of each
reporting unit using a discounted cash flow analysis to measure the present
value of anticipated future net cash flows of the reporting
unit.  Significant judgments and assumptions including projecting
future cash flows, determining appropriate discount rates and other assumptions
are inherent in the discounted cash flow analysis.  Actual results may
vary from the assumptions used in our fair value
calculations. 
 The
recent and current weak economic conditions have had an unfavorable impact on
our sales and results of operations, which is expected to continue for the rest
of this fiscal year and into next year.  This change in our forecasts
constituted a triggering event requiring an interim impairment analysis as of
February 28, 2009. At February 28, 2009, the estimated fair value of each of our
reporting units exceeded its carrying value, thus indicating that no impairment
existed as of that date.  Significant judgments were required in the
preparation of the forecasts. Unforeseen future events could adversely affect
such forecasts and thereby the reported value of goodwill in the
future.


Termination
of Gold Consignment Agreement.  On
March 4, 2009, we received notice from The Bank of Nova Scotia electing to
terminate the First Amended and Restated Agreement for Fee Consignment and
Purchase of Gold dated March 25, 2004. The termination is pursuant to a
provision in the agreement allowing either party to terminate the agreement upon
60 days written notice without cause. The termination will be effective May 5,
2009. We do not anticipate replacing the agreement at this time and instead may
use availability under our revolving credit facility as necessary to finance
purchases of gold going forward.






19




Discontinued
Operations.In
the first quarter of fiscal 2008, we recorded charges of approximately $5.5
million primarily related to the write-off of the remaining carrying value of
tangible and intangible assets of the achievement publications segment and
incurred approximately $0.7 million related to contract termination and employee
severance costs as a consequence of the decision in October 2007 to shutdown the
achievement publications business. These charges are included in loss from
discontinued operations for the six months ended February 23, 2008 in the
accompanying condensed consolidated statements of
operations.




The
results of operations of the achievement publications business are reported as
discontinued operations in the condensed consolidated statements of operations
for all periods presented.




Parent
Holdings Transactions.  On
December 5, 2008, the parent company of Intermediate Holdings, American
Achievement Group Holdings Corp. (“Parent Holdings”), and Herff Jones, Inc.,
together with the equity holders of Parent Holdings, announced that such parties
had terminated the proposed transaction pursuant to which Parent Holdings would
be sold to Herff Jones, Inc.  Parent Holdings received proceeds in
connection with that termination that, after considering transaction related
costs incurred by Parent Holdings, amounted to net proceeds of approximately
$26.5 million.  On February 25, 2009, Parent Holdings announced the
repurchase of $104.3 million aggregate principal amount of its outstanding
12.75% Senior PIK Notes due October 1, 2012 (the “Parent Holdings Notes”) for
$24.0 million.  This repurchase was funded from the net proceeds
received by Parent Holdings in connection with the aforementioned
settlement.  Prior to that repurchase, Parent Holdings entered into a
supplemental indenture to the indenture governing Parent Holdings Notes to
remove substantially all of the restrictive and reporting covenants set forth in
such indenture, as well as certain events of default and related
provisions.  Accordingly, Parent Holdings is no longer obligated to
file reports with the Securities and Exchange Commission.  As of
February 28, 2009 (after the repurchase described herein) there was
approximately $108.7 million of indebtedness related to Parent Holdings
Notes.




Deferred
tax benefits of net operating losses generated by AAC that will be utilized by
Parent Holdings in the 2009 consolidated tax return to offset the income
generated from the aforementioned settlement and repurchase transactions were
transferred from AAC to Intermediate Holdings and then to Parent Holdings in the
second quarter of 2009.  This transfer was accounted for as a distribution
by AAC to Intermediate Holdings and then to Parent Holdings which is reflected
as a reduction to paid in capital and a reduction of a deferred tax asset at AAC
and Intermediate Holdings.






Results
of Operations




Three
Months Ended February 28, 2009 Compared to Three Months Ended February 23,
2008




The
following tables set forth selected information for Intermediate Holdings and
AAC from our condensed consolidated statements of operations expressed on an
actual basis and as a percentage of net sales:




Intermediate
      HoldingsFor
      the Three
                                            
                                            
                                            %
      of
                                            
                                            For
      the Three
                                            
                                            
                                            %
      of(in
      thousands)
                                            
                                            Months
      Ended
                                            
                                            
                                            Net
                                            
                                            Months
      Ended
                                            
                                            
                                            NetFebruary
      28, 2009
                                            
                                            
                                            Sales
                                            
                                            February
      23, 2008
                                            
                                            
                                            SalesNet
      sales
                                            
                                            $
                                            56,114
                                            
                                            
                                            
                                            100.0
                                            
                                            %
                                            
                                            $
                                            60,628
                                            
                                            
                                            
                                            100.0
                                            
                                            %Cost
      of sales
                                            
                                            
                                            25,107
                                            
                                            
                                            
                                            44.7
                                            
                                            %
                                            
                                            
                                            26,865
                                            
                                            
                                            
                                            44.3
                                            
                                            %Gross
      profit
                                            
                                            
                                            31,007
                                            
                                            
                                            
                                            55.3
                                            
                                            %
                                            
                                            
                                            33,763
                                            
                                            
                                            
                                            55.7
                                            
                                            %Selling,
      general & administrative expenses
                                            
                                            
                                            31,030
                                            
                                            
                                            
                                            55.3
                                            
                                            %
                                            
                                            
                                            31,744
                                            
                                            
                                            
                                            52.4
                                            
                                            %Operating
      income (loss)
                                            
                                            
                                            (23
                                            )
                                            
                                            
                                            (0.0
                                            )
                                            %
                                            
                                            
                                            2,019
                                            
                                            
                                            
                                            3.3
                                            
                                            %Interest
      expense, net
                                            
                                            
                                            7,413
                                            
                                            
                                            
                                            13.2
                                            
                                            %
                                            
                                            
                                            8,350
                                            
                                            
                                            
                                            13.7
                                            
                                            %Loss
      from continuing operations before income taxes
                                            
                                            
                                            (7,436
                                            )
                                            
                                            
                                            (13.2
                                            )
                                            %
                                            
                                            
                                            (6,331
                                            )
                                            
                                            
                                            (10.4
                                            )
                                            %Benefit for
      income taxes
                                            
                                            
                                            (3,320
                                            )
                                            
                                            
                                            (5.9
                                            )
                                            %
                                            
                                            
                                            (2,948
                                            )
                                            
                                            
                                            (4.9
                                            )
                                            %Loss
      from continuing operations
                                            
                                            
                                            (4,116
                                            )
                                            
                                            
                                            (7.3
                                            )
                                            %
                                            
                                            
                                            (3,383
                                            )
                                            
                                            
                                            (5.5
                                            )
                                            %Discontinued
      operations:Loss
      from discontinued operations before income taxes
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            %
                                            
                                            
                                            (38
                                            )
                                            
                                            
                                            (0.1
                                            )
                                            %Benefit
      for income taxes
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            %
                                            
                                            
                                            (15
                                            )
                                            
                                            
                                            (0.0
                                            )
                                            %Loss
      from discontinued operations
                                            
                                            
                                            -
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            (23
                                            )
                                            
                                            
                                            (0.1
                                            )
                                            %Net
      loss
                                            
                                            $
                                            (4,116
                                            )
                                            
                                            
                                            (7.3
                                            )
                                            %
                                            
                                            $
                                            (3,406
                                            )
                                            
                                            
                                            (5.6
                                            )
                                            %






20






AACFor
      the Three
                        
                        
                        %
      of
                        
                        For
      the Three
                        
                        
                        %
      of(in
      thousands)
                        
                        Months
      Ended
                        
                        
                        Net
                        
                        Months
      Ended
                        
                        
                        NetFebruary
      28, 2009
                        
                        
                        Sales
                        
                        February
      23, 2008
                        
                        
                        SalesNet
      sales
                        
                        $
                        56,114
                        
                        
                        
                        100.0
                        
                        %
                        
                        $
                        60,628
                        
                        
                        
                        100.0
                        
                        %Cost
      of sales
                        
                        
                        25,107
                        
                        
                        
                        44.7
                        
                        %
                        
                        
                        26,865
                        
                        
                        
                        44.3
                        
                        %Gross
      profit
                        
                        
                        31,007
                        
                        
                        
                        55.3
                        
                        %
                        
                        
                        33,763
                        
                        
                        
                        55.7
                        
                        %Selling,
      general & administrative expenses
                        
                        
                        31,030
                        
                        
                        
                        55.3
                        
                        %
                        
                        
                        31,744
                        
                        
                        
                        52.4
                        
                        %Operating
      loss
                        
                        
                        (23
                        )
                        
                        
                        (0.0
                        )
                        %
                        
                        
                        2,019
                        
                        
                        
                        3.3
                        
                        %Interest
      expense, net
                        
                        
                        3,931
                        
                        
                        
                        7.0
                        
                        %
                        
                        
                        5,176
                        
                        
                        
                        8.5
                        
                        %Loss
      from continuing operations before income taxes
                        
                        
                        (3,954
                        )
                        
                        
                        (7.0
                        )
                        %
                        
                        
                        (3,157
                        )
                        
                        
                        (5.2
                        )
                        %Benefit
      for income taxes
                        
                        
                        (1,501
                        )
                        
                        
                        (2.7
                        )
                        %
                        
                        
                        (1,258
                        )
                        
                        
                        (2.1
                        )
                        %Loss
      from continuing operations
                        
                        
                        (2,453
                        )
                        
                        
                        (4.4
                        )
                        %
                        
                        
                        (1,899
                        )
                        
                        
                        (3.1
                        )
                        %Discontinued
      operations:Loss
      from discontinued operations before income taxes
                        
                        
                        -
                        
                        
                        
                        -
                        
                        %
                        
                        
                        (38
                        )
                        
                        
                        (0.1
                        )
                        %Benefit
      for income taxes
                        
                        
                        -
                        
                        
                        
                        -
                        
                        %
                        
                        
                        (15
                        )
                        
                        
                        (0.0
                        )
                        %Loss
      from discontinued operations
                        
                        
                        -
                        
                        
                        
                        -
                        
                        %
                        
                        
                        (23
                        )
                        
                        
                        (0.1
                        )
                        %Net
      loss
                        
                        $
                        (2,453
                        )
                        
                        
                        (4.4
                        )
                        %
                        
                        $
                        (1,922
                        )
                        
                        
                        (3.2
                        )
                        %






Net
Sales.Net sales consist of product sales and are net of product returns and
promotional discounts. Net sales decreased $4.5 million, or 7.4%, to
$56.1 million for the three months ended February 28, 2009 from
$60.6 million for the three months ended February 23, 2008. The following
details the changes in net sales during such periods by business
segment.




Class Rings.Net sales decreased $3.7 million to $29.2 million for the three
months ended February 28, 2009 from $32.9 million for the three months ended
February 23, 2008. The decrease in net sales in class ring sales was primarily a
result of lower sales volumes and change in product mix from gold to other
metals due to softness in the economy.




Yearbooks.Net sales decreased $0.6 million to $1.7 million for the three
months ended February 28, 2009 from $2.3 million for the three months ended
February 23, 2008. The decrease in net sales was primarily the result of lower
contract volume and a decrease in the average contract value from the second
quarter of fiscal 2008 due to contract mix and softness in the
economy.




Graduation
Products.Net sales increased $0.3 million to $15.8 million for the
three months ended February 28, 2009 from $15.5 million for the three months
ended February 23, 2008. The increase in net sales was primarily the result of
timing of shipments between the second and third quarters of fiscal 2009
compared to the comparable quarters of fiscal 2008.  This increase was
partially offset by a decrease due to lower sales volume and product
mix.




Other.Net sales decreased $0.5 million to $9.5 million for the three
months ended February 28, 2009 from $10.0 million for the three months
ended February 23, 2008. The decrease in net sales was primarily related to a
decline in sales of personalized family jewelry due to softness in the
economy, partially offset by an increase in professional championship
rings.




Gross
Profit.Gross margin represents gross profit as a percentage of net sales. Gross
margin was 55.3% for the three months ended February 28, 2009, a
0.4 percentage point decrease from 55.7% for the three months ended
February 23, 2008. Overall, gross profit decreased $2.8 million. The decrease in
gross profit was primarily a result of the sales declines and higher cost of
gold, partially offset by cost savings from efficiencies realized from
improvements in our manufacturing processes.






21




Selling,
General and Administrative Expenses.Selling, general and administrative expenses decreased $0.7 million,
or 2.2%, to $31.0 million for the three months ended February 28, 2009 from
$31.7 million for the three months ended February 23, 2008. 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 $0.7 million to $20.8 million or 37.1% of
net sales, for the three months ended February 28, 2009 from $21.5 million
or 35.6% of net sales, for the three months ended February 23, 2008 due to
decreased marketing expenditures.




General
and administrative expenses for the three months ended February 28, 2009
were $10.2 million, or 18.2% of net sales, as compared to $10.2 million, or
16.8% of net sales, for the three months ended February 23, 2008.




Operating
Loss.As
a result of the foregoing, operating loss was $0.02 million, or less than 0.1%
of net sales, for the three months ended February 28, 2009 as compared with
operating income of $2.0 million, or 3.3% of net sales, for the three
months ended February 23, 2008.




The class
rings segment reported operating income of $1.7 million for the three
months ended February 28, 2009 as compared with operating income of
$3.8 million for the three months ended February 23, 2008. The yearbooks
segment reported operating loss of $4.8 million for the three months ended
February 28, 2009 as compared with operating loss of $5.5 million for the three
months ended February 23, 2008. The graduation products segment reported
operating income of $3.1 million for the three months ended February 28,
2009 as compared with operating income of $3.8 million for the three months
ended February 23, 2008. The other segment reported an operating income of $0.0
million for the three months ended February 28, 2009 as compared with operating
loss of $0.1 million for the three months ended February 23, 2008.




Interest
Expense, Net.For
Intermediate Holdings, net interest expense was $7.4 million for the three
months ended February 28, 2009 and $8.4 million for the three months ended
February 23, 2008. The average debt outstanding of Intermediate Holdings for the
three months ended February 28, 2009 and the three months ended February 23,
2008 was $340 million and $362 million, respectively. The weighted
average interest rate on debt outstanding of Intermediate Holdings for the three
months ended February 28, 2009 and the three months ended February 23, 2008 was
8.4% and 8.7%, respectively.




For
AAC, net interest expense was $3.9 million for the three months ended
February 28, 2009 and $5.2 million for the three months ended February 23,
2008. The average debt outstanding of AAC for the three months ended February
28, 2009 and the three months ended February 23, 2008 was $209 million and
$239 million, respectively. The weighted average interest rate on debt
outstanding of AAC for the three months ended February 28, 2009 and the three
months ended February 23, 2008 was 7.0% and 7.8%, respectively.




Benefit
for Income Taxes.For the three months ended February 28, 2009 and February 23, 2008,
Intermediate Holdings recorded an income tax benefit of $3.3million and
$2.9 million, respectively, which represents an effective tax rate of 45%
and 47%, respectively. The effective tax rates vary from the statutory
federal rate due to the impact of state income taxes and the non-deductibility
of a portion of interest on high-yield debt. Intermediate Holdings’ effective
rates for the three months ended February 28, 2009 and February 23, 2008
represent an estimate of the annual federal and state income tax
rate.




For
the three months ended February 28, 2009 and February 23, 2008, AAC recorded an
income tax benefit of $1.5 million and $1.3 million, respectively, which
represents an effective tax rate of 38% and 40%, respectively.  The
effective tax rates vary from the statutory federal rate due to the impact
of state income taxes. AAC’s effective rates for the three months ended February
28, 2009 and February 23, 2008 represent an estimate of the annual federal and
state income tax rate.




Loss
from Discontinued Operations.  As described in “Significant
Developments”, the results of operations of the achievement publications
business are reported as discontinued operations.  Loss from
discontinued operations before income taxes during the three months ended
February 23, 2008 was $0.04 million.






22




Six
Months Ended February 28, 2009 Compared to Six Months Ended February 23,
2008




The
following tables set forth selected information Intermediate Holdings and AAC
from our condensed consolidated statements of operations expressed on an actual
basis and as a percentage of net sales:






Intermediate
      HoldingsFor
      the Six
                        
                        
                        %
      of
                        
                        
                        For
      the Six
                        
                        
                        %
      of(in
      thousands)
                        
                        Months
      Ended
                        
                        
                        Net
                        
                        
                        Months
      Ended
                        
                        
                        NetFebruary
      28, 2009
                        
                        
                        Sales
                        
                        
                        February
      23, 2008
                        
                        
                        SalesNet
      sales
                        
                        $
                        105,327
                        
                        
                        
                        100.0
                        
                        %
                        
                        $
                        112,568
                        
                        
                        
                        100.0
                        
                        %Cost
      of sales
                        
                        
                        50,158
                        
                        
                        
                        47.6
                        
                        %
                        
                        
                        52,182
                        
                        
                        
                        46.4
                        
                        %Gross
      profit
                        
                        
                        55,169
                        
                        
                        
                        52.4
                        
                        %
                        
                        
                        60,386
                        
                        
                        
                        53.6
                        
                        %Selling,
      general & administrative expenses
                        
                        
                        57,519
                        
                        
                        
                        54.6
                        
                        %
                        
                        
                        61,090
                        
                        
                        
                        54.2
                        
                        %Operating
      loss
                        
                        
                        (2,350
                        )
                        
                        
                        (2.2
                        )
                        %
                        
                        
                        (704
                        )
                        
                        
                        (0.6
                        )
                        %Interest
      expense, net
                        
                        
                        15,286
                        
                        
                        
                        14.5
                        
                        %
                        
                        
                        16,521
                        
                        
                        
                        14.7
                        
                        %Loss
      from continuing operations before income taxes
                        
                        
                        (17,636
                        )
                        
                        
                        (16.7
                        )
                        %
                        
                        
                        (17,225
                        )
                        
                        
                        (15.3
                        )
                        %Benefit for
      income taxes
                        
                        
                        (7,638
                        )
                        
                        
                        (7.3
                        )
                        %
                        
                        
                        (7,540
                        )
                        
                        
                        (6.7
                        )
                        %Loss
      from continuing operations
                        
                        
                        (9,998
                        )
                        
                        
                        (9.5
                        )
                        %
                        
                        
                        (9,685
                        )
                        
                        
                        (8.6
                        )
                        %Discontinued
      operations:Loss
      from discontinued operations before income taxes
                        
                        
                        -
                        
                        
                        
                        -
                        
                        %
                        
                        
                        (7,128
                        )
                        
                        
                        (6.3
                        )
                        %Benefit
      for income taxes
                        
                        
                        -
                        
                        
                        
                        -
                        
                        %
                        
                        
                        (2,787
                        )
                        
                        
                        (2.4
                        )
                        %Loss
      from discontinued operations
                        
                        
                        -
                        
                        
                        
                        
                        
                        
                        
                        
                        (4,341
                        )
                        
                        
                        (3.9
                        )
                        %Net
      loss
                        
                        $
                        (9,998
                        )
                        
                        
                        (9.5
                        )
                        %
                        
                        $
                        (14,026
                        )
                        
                        
                        (12.5
                        )
                        %








AACFor
      the Six
                    
                    
                    %
      of
                    
                    
                    For
      the Six
                    
                    
                    %
      of(in
      thousands)
                    
                    Months
      Ended
                    
                    
                    Net
                    
                    
                    Months
      Ended
                    
                    
                    NetFebruary
      28, 2009
                    
                    
                    Sales
                    
                    
                    February
      23, 2008
                    
                    
                    SalesNet
      sales
                    
                    $
                    105,327
                    
                    
                    
                    100.0
                    
                    %
                    
                    $
                    112,568
                    
                    
                    
                    100.0
                    
                    %Cost
      of sales
                    
                    
                    50,158
                    
                    
                    
                    47.6
                    
                    %
                    
                    
                    52,182
                    
                    
                    
                    46.4
                    
                    %Gross
      profit
                    
                    
                    55,169
                    
                    
                    
                    52.4
                    
                    %
                    
                    
                    60,386
                    
                    
                    
                    53.6
                    
                    %Selling,
      general & administrative expenses
                    
                    
                    57,519
                    
                    
                    
                    54.6
                    
                    %
                    
                    
                    61,090
                    
                    
                    
                    54.2
                    
                    %Operating
      loss
                    
                    
                    (2,350
                    )
                    
                    
                    (2.2
                    )
                    %
                    
                    
                    (704
                    )
                    
                    
                    (0.6
                    )
                    %Interest
      expense, net
                    
                    
                    8,368
                    
                    
                    
                    7.9
                    
                    %
                    
                    
                    10,281
                    
                    
                    
                    9.2
                    
                    %Loss
      from continuing operations before income taxes
                    
                    
                    (10,718
                    )
                    
                    
                    (10.2
                    )
                    %
                    
                    
                    (10,985
                    )
                    
                    
                    (9.8
                    )
                    %Benefit
      for income taxes
                    
                    
                    (4,120
                    )
                    
                    
                    (3.9
                    )
                    %
                    
                    
                    (4,348
                    )
                    
                    
                    (3.9
                    )
                    %Loss
      from continuing operations
                    
                    
                    (6,598
                    )
                    
                    
                    (6.3
                    )
                    %
                    
                    
                    (6,637
                    )
                    
                    
                    (5.9
                    )
                    %Discontinued
      operations:Loss
      from discontinued operations before income taxes
                    
                    
                    -
                    
                    
                    
                    -
                    
                    %
                    
                    
                    (7,128
                    )
                    
                    
                    (6.3
                    )
                    %Benefit
      for income taxes
                    
                    
                    -
                    
                    
                    
                    -
                    
                    %
                    
                    
                    (2,787
                    )
                    
                    
                    (2.4
                    )
                    %Loss
      from discontinued operations
                    
                    
                    -
                    
                    
                    
                    -
                    
                    %
                    
                    
                    (4,341
                    )
                    
                    
                    (3.9
                    )
                    %Net
      loss
                    
                    $
                    (6,598
                    )
                    
                    
                    (6.3
                    )
                    %
                    
                    $
                    (10,978
                    )
                    
                    
                    (9.8
                    )
                    %






23




Net
Sales.Net sales consist of product sales and are net of product returns and
promotional discounts. Net sales decreased $7.3 million, or 6.5%, to
$105.3 million for the six months ended February 28, 2009 from
$112.6 million for the six months ended February 23, 2008. The following
details the changes in net sales during such periods by business
segment.




Class Rings.Net sales decreased $5.7 million to $59.8 million for the six
months ended February 28, 2009 from $65.5 million for the six months ended
February 23, 2008. The decrease in net sales in class ring sales was primarily a
result of lower sales volumes and change in product mix from gold to other
metals due to softness in the economy, partially offset by an increase in
average selling price of college class rings.




Yearbooks.Net sales decreased $1.9 million to $10.1 million for the six
months ended February 28, 2009 from $12.0 million for the six months ended
February 23, 2008. The decrease in net sales was the result of timing of
shipments between the fourth quarter of 2008 and the first quarter of 2009 and a
result of softness in the economy. This decrease was partially offset by a
higher average contract value due to contract mix.




Graduation
Products.Net sales increased $0.2 million to $19.1 million for the
six months ended February 28, 2009 from $18.9 million for the six months ended
February 23, 2008. The increase in net sales was primarily the result of timing
of shipments between the second and third quarters of fiscal 2009 compared to
the comparable quarters of fiscal 2008.  This increase was partially
offset by a decrease due to lower sales volume and product
mix.




Other.Net sales increased $0.2 million to $16.4 million for the six
months ended February 28, 2009 from $16.2 million for the six months ended
February 23, 2008. The increase in net sales was primarily related to an
increase in professional championship rings, partially offset by a decline
in sales of personalized family jewelry due to softness in the
economy.




Gross
Profit.Gross margin represents gross profit as a percentage of net sales. Gross
margin was 52.4% for the six months ended February 28, 2009, a
1.2 percentage point decrease from 53.6% for the six months ended February
23, 2008. Overall, gross profit decreased $5.2 million. The decrease in gross
profit was primarily a result of the sales declines and higher cost of gold,
partially offset by cost savings from efficiencies realized from
improvements in our manufacturing processes.




Selling,
General and Administrative Expenses.Selling, general and administrative expenses decreased $3.6 million,
or 5.9%, to $57.5 million for the six months ended February 28, 2009 from
$61.1 million for the six months ended February 23, 2008. 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 $3.1 million to $37.5 million or 35.6% of
net sales, for the six months ended February 28, 2009 from $40.6 million or
36.1% of net sales, for the six months ended February 23, 2008 due to decreased
marketing expenditures and lower commissions.




General
and administrative expenses for the six months ended February 28, 2009 were
$20.0 million, or 19.0% of net sales, as compared to $20.5 million, or 18.2% of
net sales, for the six months ended February 23, 2008. The decrease in general
and administrative expenses was primarily the result of decreases in
professional fees and consulting fees.




Operating
Loss.As
a result of the foregoing, operating loss was $2.4 million, or 2.2% of net
sales, for the six months ended February 28, 2009 as compared with operating
loss of $0.7 million, or 0.6% of net sales, for the six months ended
February 23, 2008.




The class
rings segment reported operating income of $4.9 million for the six months
ended February 28, 2009 as compared with operating income of $6.5 million
for the six months ended February 23, 2008. The yearbooks segment reported
operating loss of $8.6 million for the six months ended February 28, 2009
as compared with operating loss of $8.8 million for the six months ended
February 23, 2008. The graduation products segment reported operating income of
$2.0 million for the six months ended February 28, 2009 as compared with
operating income of $2.1 million for the six months ended February 23,
2008. The other segment reported an operating loss of $0.7 million for the six
months ended February 28, 2009 as compared with operating loss of $0.5 million
for the six months ended February 23, 2008.






24




Interest
Expense, Net.For
Intermediate Holdings, net interest expense was $15.3 million for the six
months ended February 28, 2009 and $16.5 million for the six months ended
February 23, 2008. The average debt outstanding of Intermediate Holdings for the
six months ended February 28, 2009 and the six months ended February 23, 2008
was $350 million and $365 million, respectively. The weighted average
interest rate on debt outstanding of Intermediate Holdings for the six months
ended February 28, 2009 and the six months ended February 23, 2008 was 8.4% and
8.7%, respectively.




For
AAC, net interest expense was $8.4 million for the six months ended
February 28, 2009 and $10.3 million for the six months ended February 23,
2008. The average debt outstanding of AAC for the six months ended February 28,
2009 and the six months ended February 23, 2008 was $218 million and
$244 million, respectively. The weighted average interest rate on debt
outstanding of AAC for the six months ended February 28, 2009 and the six months
ended February 23, 2008 was 7.2% and 8.0%, respectively.




Benefit
for Income Taxes.For the six months ended February 28, 2009 and February 23, 2008,
Intermediate Holdings recorded an income tax benefit of $7.6 million and
$7.5 million, respectively, which represents an effective tax rate of 43%
and 44%, respectively. The effective tax rates vary from the statutory
federal rate due to the impact of state income taxes and the non-deductibility
of a portion of interest on high-yield debt. Intermediate Holdings’ effective
rates for the six months ended February 28, 2009 and February 23, 2008 represent
an estimate of the annual federal and state income tax
rate.




For
the six months ended February 28, 2009 and February 23, 2008, AAC recorded an
income tax benefit of $4.1 million and $4.3 million, respectively, which
represents an effective tax rate of 38% and 40%, respectively.  The
effective tax rates vary from the statutory federal rate due to the impact
of state income taxes. AAC’s effective rates for the six months ended February
28, 2009 and February 23, 2008 represent an estimate of the annual federal and
state income tax rate.




Loss
from Discontinued Operations.  As described in “Significant
Developments”, the results of operations of the achievement publications
business are reported as discontinued operations.  Loss from
discontinued operations before income taxes during the six months ended February
23, 2008 was $7.1 million and included charges of $5.5 million primarily
related to the write-off of the remaining carrying value of tangible and
intangible assets of the achievement publications segment and charges of
approximately $0.7 million related to contract termination and employee
severance costs.




Liquidity
and Capital Resources




Operating
Activities.  Operating activities for Intermediate Holdings
provided $41.0 million of cash for the six months ended February 28, 2009
compared to cash provided of $39.0 million for the six months ended
February 23, 2008. Operating activities for AAC provided $40.5 million of
cash for the six months ended February 28, 2009 compared to cash provided of
$39.0 million for the six months ended February 23, 2008. Cash provided by
operating activities during fiscal year 2009 was favorably impacted by lower
interest payments partially offset by lower earnings and higher working capital.
Cash provided by operating activities in fiscal year 2008 was negatively
impacted by the losses incurred and higher working capital requirements of the
discontinued achievement publications segment.




Investing
Activities.Capital
expenditures for the six months ended February 28, 2009 were $3.1 million
compared to capital expenditures of $5.4 million for the six months ended
February 23, 2008. Our projected capital expenditures for the entire fiscal year
2009 are expected to be between $6.0 million and $7.0
million.




Financing
Activities.   During the six months ended February 28, 2009,
cash was used to pay down $28.5 million of the term loan, of
which $2.5 million were mandatory payments.  During the six
months ended February 23, 2008, cash was used to pay down $6.2 million of
the term loan, of which approximately $0.7 million were mandatory payments and
there were net payments under the revolving credit facility of $7.8
million.




Capital
Resources.  We have a significant amount of indebtedness. On
February 28, 2009, Intermediate Holdings had total indebtedness of $328.5
million, of which $131.5 million was 10.25% senior discount notes, $150.0
million was 8.25% senior subordinated notes and $47.0 million was indebtedness
under the existing senior secured credit facility. We also have
$38.3 million in available revolving loan borrowings under our senior
secured credit facility as of February 28, 2009.  We are currently in
compliance with financial covenants in all of the agreements governing our
outstanding indebtedness.




Interest
accrued on the 10.25% senior discount notes in the form of an increase in the
accreted value of the notes through October 1, 2008. Thereafter, cash
interest on the 10.25% senior discount notes will accrue and be payable
semiannually in arrears on April 1 and October 1 of each year, commencing
April 1, 2009 at a rate of 10.25% per annum.






25




At
February 28, 2009, Parent Holdings had indebtedness in addition to the
indebtedness at Intermediate Holdings and AAC of $116.2 million, of which $108.7
million consisted of the Parent Holdings Notes and $7.5 million consisted of
mandatory redeemable series A preferred stock of Parent Holdings.




Interest
accrues on the Parent Holdings Notes at 16.75% per annum.  Through
April 2011, interest on such notes is payable in the form of additional notes
semi-annually in arrears on April 1 and October 1 of each year.  On
October 1, 2011 and thereafter, interest will be payable in cash semi-annually
in arrears on April 1 and October 1 of each year.  The Parent Holdings
Notes mature on October 1, 2012.  At maturity, Parent Holdings is
required to repay the notes at a repayment price of 103.188% of the aggregate
principal amount thereof, plus accrued and unpaid interest through the maturity
date.




The
holders of the mandatory redeemable preferred stock of Parent Holdings are
entitled to receive cumulative dividends at a rate of 14% per annum, when, as
and if declared by the board of directors of Parent Holdings.  The
redemption obligation for the mandatory redeemable preferred stock of Parent
Holdings matures in January 2013.




We expect
that cash generated from operating activities and availability under the senior
secured credit facility will be our principal sources of liquidity. Due to the
current unfavorable economic environment, we expect continued softness in sales
for the rest of this year and into next year.  We expect our
productivity initiatives and cost containment measures to partially offset the
impact of lower sales on our operating income. We expect most of our net
operating loss carryforward will be utilized by the end of fiscal year 2009,
which will impact our future cash outflows for income taxes.  Based on
our current and planned level of operations, we believe our cash flow from
operations, available cash on hand and available borrowings under the senior
secured credit facility will be adequate to meet our liquidity needs for at
least the next twelve months.




Off
Balance-Sheet Obligations




Gold
Consignment Agreement.On March 25, 2004, we signed the
First Amended and Restated Letter Agreement for Fee Consignment and Purchase of
Gold with The Bank of Nova Scotia. Under this agreement, we have an ability to
have on consignment gold with aggregate value less than or equal to the lowest
of: (i) the dollar value of 27,000 troy ounces of gold, (ii)
$14.2 million or (iii) a borrowing base, calculated based on a percentage
of the gold held at our facilities and other approved locations, as specified by
the agreement. Under the terms of this arrangement, we do not own the consigned
gold nor do we have risk of loss related to price variance on such inventory
until we pay The Bank of Nova Scotia for quantities purchased. Accordingly, we
do not reflect the value of consigned gold in our inventory, nor do we reflect
the corresponding liability for financial statement purposes. As of February 28,
2009, we held consigned gold valued at $3.2 million, while as of August 30, 2008
we held no consigned gold.




On March
4, 2009, we received notice from The Bank of Nova Scotia electing to terminate
the consignment agreement.  The termination is pursuant to a provision
in the agreement allowing either party to terminate the agreement upon 60 days
written notice without cause.  The termination will be effective May
5, 2009.  We do not anticipate replacing the consignment agreement at
this time and instead may use availability under our revolving credit facility
to finance purchases of gold going forward.




Letters
of Credit.  As of February 28, 2009, and August 30, 2008, we
had commitments for $1.7 million and $2.1 million on letters of credit
outstanding, respectively.




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 and
early spring, with many orders made for delivery to students before the winter
holiday season. Graduation product sales are predominantly made during February
through April prior to the April through June graduation season. Yearbook sales
are highest during the months of April through June, as yearbooks are typically
shipped prior to each school’s summer break. Our recognition and affinity
product line sales are also seasonal, with highest sales 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 first and fourth fiscal quarters, which includes the beginning of the
school year and 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 May through September.






26




Recent
Accounting Pronouncements




In
September 2006, the FASB issued SFAS No. 157, “Fair Value
Measurements” (“SFAS 157”), which defines fair value, establishes a framework
for measuring fair value and expands disclosures about fair value measurements.
SFAS 157 applies under other accounting pronouncements that require or permit
fair value measurements and does not require any new fair value measurements.
The provisions of SFAS 157 are effective for us beginning with our fiscal year
2009. The adoption of the standard did not have a material impact on our
financial position and results of operations.




In
September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting
for Defined Benefit Pension and Other Postretirement Plans — An Amendment of
FASB Statements No. 87, 88, 106 and 132 (R)” (“SFAS 158”). SFAS 158
requires an employer to recognize the funded status of defined benefit
postretirement plan as an asset or liability in the balance sheet and to
recognize changes in that funded status in the year in which changes occur
through comprehensive income. Additionally, SFAS 158 requires an employer to
measure the funded status of each of its plans as of the date of its year-end
statement of financial position.   We adopted the recognition and
disclosure provisions of SFAS 158 in fiscal 2007. The measurement date
provisions of SFAS 158 will be effective for us beginning with our fiscal year
2009 and we will use a measurement date as of the end of our fiscal year for our
defined benefit postretirement plans in fiscal 2009.




In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities” (“SFAS 159”).  SFAS 159 permits
entities to measure many financial assets and financial liabilities at fair
value.  Unrealized gains and losses on items for which the fair value
option has been elected are reported in earnings.  SFAS 159 is effective
for us beginning with our fiscal year 2009.  The standard did not have a
material impact on our financial position and results of
operations.




ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK




Interest
Rate Risk.We have exposure to market risk 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
existing gold consignment agreement are variable rate arrangements. Each quarter
point change in interest rates on our senior secured credit facility, which
bears interest at variable rates, would result in a $0.2 million change in
annual interest expense, assuming the entire revolving loan was
drawn.




CurrencyExchange
Rate Risk.We purchase the majority of our precious, semi-precious
and synthetic stones from a single supplier in Germany. We believe that all of
our major competitors purchase their semi-precious stones from this same
supplier. Each ten percent change in the Euro exchange rate would result in a
$0.5 million annual change in cost of goods sold, assuming stone purchase
levels approximate the levels of fiscal 2008.




Gold.
Each ten percent change in the price of gold would result in a $3.6 million
annual change in cost of goods sold, assuming gold purchase levels approximate
the levels in fiscal 2008.




ITEM
4. CONTROLS AND PROCEDURES




Evaluation
of disclosure controls and procedures.Our management evaluated,
under the supervision and with the participation of our Chief Executive Officer
and Chief Financial Officer, 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 on Form 10-Q.  Based on this
evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that these disclosure controls and procedures are effective as of the
end of the period covered by this report in enabling us to record, process,
summarize and report information required to be included in the Company’s
periodic SEC filings within the required time period, and that such information
is accumulated and communicated to the Company’s management, including the Chief
Executive Officer and Chief Financial Officer, to allow timely decisions
regarding required disclosure.




Changes
in internal control over financial reporting.Additionally,
our Chief Executive Officer and Chief Financial Officer determined that during
our most recent fiscal quarter, there was no change in our internal control over
financial reporting that has materially affected, or is likely to materially
affect, our internal control over financial
reporting.






27




DISCLOSURE
REGARDING FORWARD LOOKING STATEMENTS




This
report contains “forward looking statements.” All statements other than
statements of historical facts included in this report that address activities,
events or developments that we expect, believe or anticipate will or may occur
in the future are forward looking statements. Forward looking statements give
our current expectations and projections relating to the financial condition,
results of operations, plans, objectives, future performance and business of our
company. You can identify these statements by the fact that they do not relate
strictly to historical or current facts. These statements may include words such
as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe”
and other words and terms of similar meaning in connection with any discussion
of the timing or nature of future operating or financial performance or other
events.




These
forward looking statements are based on our expectations and beliefs concerning
future events affecting us. They are subject to uncertainties and factors
relating to our operations and business environment, all of which are difficult
to predict and many of which are beyond our control. Although we believe that
the expectations reflected in our forward looking statements are reasonable, we
do not know whether our expectations will prove correct. They can be affected by
inaccurate assumptions we might make or by known or unknown risks and
uncertainties.




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 the Company’s Form 10-K filed with the
Securities and Exchange Commission on November 25, 2008 as you review this
quarterly report.






PART
II. OTHER INFORMATION




ITEM
1. LEGAL PROCEEDINGS




In the
normal course of business, we may be a party to lawsuits and administrative
proceedings before various courts and government agencies. These lawsuits and
proceedings may involve personal injury, contractual issues and other matters.
We cannot predict the ultimate outcome of any pending or threatened litigation
or of actual claims or possible claims.




We
currently are not a party to any pending legal proceedings other than ordinary
routine litigation incidental to our business. In management’s opinion, adverse
decisions on these ordinary legal proceedings, individually or in the aggregate,
would not have a materially adverse impact on our results of operations,
financial condition or cash flows.






28




ITEM
6. EXHIBITS




(a)
            Exhibits




EXHIBITNUMBER
              
              DESIGNATION3.1
              
              Amended
      and Restated Certificate of Incorporation of AAC Group Holding Corp.
      (incorporated by reference to Exhibit 3.1 to AAC Group Holding Corp.’s
      Form 8-K as filed on January 24, 2006).3.2
              
              Certificate
      of Amendment of Certificate of Incorporation of AAC Group Holding Corp.,
      filed with the Delaware Secretary of State on December 28,
      2007.3.3
              
              Certificate
      of Incorporation of American Achievement Corporation (incorporated by
      reference to Exhibit 3.1 to American Achievement Corporation’s Form S-4/A
      as filed on March 14, 2002).3.2
              
              Certificate
      of Amendment of Certificate of Incorporation of American Achievement
      Corporation, filed with the Delaware Secretary of State on December 28,
      2007.31.1
              
              CEO
      Certification Accompanying Period Report Pursuant to Section 302 of
      the Sarbanes-Oxley Act of 200231.2
              
              CFO
      Certification Accompanying Period Report Pursuant to Section 302 of
      the Sarbanes-Oxley Act of 200232.1
              
              CEO
      Certification Accompanying Period Report Pursuant to Section 906 of
      the Sarbanes-Oxley Act of 200232.2
              
              CFO
      Certification Accompanying Period Report Pursuant to Section 906 of
      the Sarbanes-Oxley Act of
2002






29






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:
April 14, 2009




AAC
      GROUP HOLDING CORP.AMERICAN
      ACHIEVEMENT CORPORATIONBy:
            
            /s/
      DONALD J. PERCENTIDonald
      J. PercentiCHIEF
      EXECUTIVE OFFICER(principal
      executive officer)By:
            
            /s/
      KRIS G. RADHAKRISHNANKris
      G. RadhakrishnanCHIEF
      FINANCIAL OFFICER(principal
      financial officer)










30


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