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 May 30, 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.  Although
the registrants are not subject to the filing requirements of Section 13 or
15(d) of the Exchange Act, the registrants have filed all reports for the
preceding 12 months.





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).  Yes ⁭ No
⁭





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 June 30, 2009: 100 shares of
common stock.


Number of
shares of American Achievement Corporation outstanding as of June 30, 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” refertoAAC Group Holding Corp. together with
American Achievement Corporation.








FOR THE QUARTERLY PERIOD ENDED MAY 30, 2009


INDEX











PAGEPART I. FINANCIAL INFORMATIONItem 1. Condensed Consolidated Financial Statements and
      NotesCondensed Consolidated Balance Sheets (unaudited) — As of May
      30, 2009 and August 30, 2008
                          3Condensed Consolidated Statements of Operations (unaudited) —
      For the Three and Nine Months Ended May 30, 2009 and the Three and Nine
      Months Ended May 31, 2008
                          5Condensed Consolidated Statements of Cash Flows (unaudited) —
      For the Nine Months Ended May 30, 2009 and the Nine Months Ended May 31,
      2008
                          7Notes to Condensed Consolidated Financial Statements
      (unaudited)
                          9Item 2. Management’s Discussion and Analysis of
      Financial Condition and Results of Operations
                          19Item 3. Quantitative and Qualitative Disclosures About
      Market Risk
                          31Item 4. Controls and Procedures
                          32PART II. OTHER INFORMATIONItem 1. Legal Proceedings
                          32Item 6. Exhibits
                          33SIGNATURES
                          34Certificate of Amendment of Certificate of
      Incorporation of AAC Group Holding Corp.Certificate of Amendment of Certificate of
      Incorporation of American Achievement CorporationCertification 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
 Table of Contents


AAC
GROUP HOLDING CORP.


Condensed Consolidated Balance Sheets


(unaudited)





Intermediate
      HoldingsMay
      30, 2009
                          
                          
                          August
      30, 2008(Dollars
      in thousands)ASSETSCash
      and cash equivalents
                          
                          $
                          15,332
                          
                          
                          $
                          9,746Accounts
      receivable, net of allowances
                          
                          
                          75,648
                          
                          
                          
                          36,920Inventories
                          
                          
                          18,295
                          
                          
                          
                          27,411Deferred
      tax assets
                          
                          
                          4,222
                          
                          
                          
                          12,196Prepaid
      expenses and other current assets, net
                          
                          
                          13,221
                          
                          
                          
                          19,395Total
      current assets
                          
                          
                          126,718
                          
                          
                          
                          105,668Property,
      plant and equipment, net
                          
                          
                          61,862
                          
                          
                          
                          68,477Goodwill
                          
                          
                          171,323
                          
                          
                          
                          171,073Other
      intangible assets, net
                          
                          
                          89,464
                          
                          
                          
                          97,000Other
      assets, net
                          
                          
                          13,421
                          
                          
                          
                          12,555Total
      assets
                          
                          $
                          462,788
                          
                          
                          $
                          454,773LIABILITIES
      AND STOCKHOLDER'S EQUITYBook
      overdraft
                          
                          $
                          110
                          
                          
                          $
                          61Accounts
      payable
                          
                          
                          10,438
                          
                          
                          
                          10,900Customer
      deposits
                          
                          
                          25,885
                          
                          
                          
                          8,102Accrued
      expenses
                          
                          
                          27,705
                          
                          
                          
                          16,863Deferred
      revenue
                          
                          
                          720
                          
                          
                          
                          2,750Accrued
      interest
                          
                          
                          4,369
                          
                          
                          
                          5,722Current
      portion of long-term debt
                          
                          
                          3,123
                          
                          
                          
                          2,908Total
      current liabilities
                          
                          
                          72,350
                          
                          
                          
                          47,306Long-term
      debt, net of current portion
                          
                          
                          325,254
                          
                          
                          
                          352,998Deferred
      tax liabilities
                          
                          
                          48,533
                          
                          
                          
                          21,595Other
      long-term liabilities
                          
                          
                          2,692
                          
                          
                          
                          2,703Total
      liabilities
                          
                          
                          448,829
                          
                          
                          
                          424,602Commitments
      and contingencies (Note 7)Stockholder's
      equity:Common
      stock
                          
                          
                          -
                          
                          
                          
                          -Additional
      (distributions in excess of) paid-in capital
                          
                          
                          (2,847
                          )
                          
                          
                          24,309Accumulated
      earnings
                          
                          
                          14,317
                          
                          
                          
                          3,153Accumulated
      other comprehensive income
                          
                          
                          2,489
                          
                          
                          
                          2,709Total
      stockholder's equity
                          
                          
                          13,959
                          
                          
                          
                          30,171Total
      liabilities and stockholder's equity
                          
                          $
                          462,788
                          
                          
                          $
                          454,773





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





3
 Table of Contents


AMERICAN
ACHIEVEMENT CORPORATION


Condensed
Consolidated Balance Sheets


(unaudited)





AACMay
      30, 2009
                          
                          
                          August
      30, 2008(Dollars
      in thousands)ASSETSCash
      and cash equivalents
                          
                          $
                          14,765
                          
                          
                          $
                          9,735Accounts
      receivable, net of allowances
                          
                          
                          75,648
                          
                          
                          
                          36,920Inventories
                          
                          
                          18,295
                          
                          
                          
                          27,411Deferred
      tax assets
                          
                          
                          4,555
                          
                          
                          
                          14,920Prepaid
      expenses and other current assets, net
                          
                          
                          13,221
                          
                          
                          
                          18,839Total
      current assets
                          
                          
                          126,484
                          
                          
                          
                          107,825Property,
      plant and equipment, net
                          
                          
                          61,862
                          
                          
                          
                          68,477Goodwill
                          
                          
                          171,323
                          
                          
                          
                          171,073Other
      intangible assets, net
                          
                          
                          89,464
                          
                          
                          
                          97,000Other
      assets, net
                          
                          
                          11,939
                          
                          
                          
                          10,739Total
      assets
                          
                          $
                          461,072
                          
                          
                          $
                          455,114LIABILITIES
      AND STOCKHOLDER'S EQUITYBook
      overdraft
                          
                          $
                          110
                          
                          
                          $
                          61Accounts
      payable
                          
                          
                          10,438
                          
                          
                          
                          10,900Customer
      deposits
                          
                          
                          25,885
                          
                          
                          
                          8,102Accrued
      expenses
                          
                          
                          27,836
                          
                          
                          
                          16,852Deferred
      revenue
                          
                          
                          720
                          
                          
                          
                          2,750Accrued
      interest
                          
                          
                          2,122
                          
                          
                          
                          5,722Current
      portion of long-term debt
                          
                          
                          3,123
                          
                          
                          
                          2,908Total
      current liabilities
                          
                          
                          70,234
                          
                          
                          
                          47,295Long-term
      debt, net of current portion
                          
                          
                          193,754
                          
                          
                          
                          222,577Deferred
      tax liabilities
                          
                          
                          66,909
                          
                          
                          
                          39,580Other
      long-term liabilities
                          
                          
                          2,659
                          
                          
                          
                          2,675Total
      liabilities
                          
                          
                          333,556
                          
                          
                          
                          312,127Commitments
      and contingencies (Note 7)Stockholder's
      equity:Common
      stock
                          
                          
                          -
                          
                          
                          
                          -Additional
      paid-in capital
                          
                          
                          75,316
                          
                          
                          
                          109,211Accumulated
      earnings
                          
                          
                          49,711
                          
                          
                          
                          31,067Accumulated
      other comprehensive income
                          
                          
                          2,489
                          
                          
                          
                          2,709Total
      stockholder's equity
                          
                          
                          127,516
                          
                          
                          
                          142,987Total
      liabilities and stockholder's equity
                          
                          $
                          461,072
                          
                          
                          $
                          455,114








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





4
 Table of Contents


AAC
GROUP HOLDING CORP.


Condensed Consolidated Statements of Operations


(unaudited)











Intermediate
      HoldingsFor
      the three months ended
                      
                      
                      For
      the nine months endedMay
      30, 2009
                      
                      
                      May
      31, 2008
                      
                      
                      May
      30, 2009
                      
                      
                      May
      31, 2008(Dollars
      in thousands)Net
      sales
                      
                      $
                      144,842
                      
                      
                      $
                      157,142
                      
                      
                      $
                      250,169
                      
                      
                      $
                      269,710Cost
      of sales
                      
                      
                      55,353
                      
                      
                      
                      62,432
                      
                      
                      
                      105,511
                      
                      
                      
                      114,614Gross
      profit
                      
                      
                      89,489
                      
                      
                      
                      94,710
                      
                      
                      
                      144,658
                      
                      
                      
                      155,096Selling,
      general and administrative expenses
                      
                      
                      44,256
                      
                      
                      
                      50,094
                      
                      
                      
                      101,775
                      
                      
                      
                      111,184Operating
      income
                      
                      
                      45,233
                      
                      
                      
                      44,616
                      
                      
                      
                      42,883
                      
                      
                      
                      43,912Interest
      expense, net
                      
                      
                      7,497
                      
                      
                      
                      8,469
                      
                      
                      
                      22,783
                      
                      
                      
                      24,990Income
      from continuing operations before income taxes
                      
                      
                      37,736
                      
                      
                      
                      36,147
                      
                      
                      
                      20,100
                      
                      
                      
                      18,922Provision
      for income taxes
                      
                      
                      16,574
                      
                      
                      
                      16,846
                      
                      
                      
                      8,936
                      
                      
                      
                      9,306Income
      from continuing operations
                      
                      
                      21,162
                      
                      
                      
                      19,301
                      
                      
                      
                      11,164
                      
                      
                      
                      9,616Discontinued
      operations:Loss
      from discontinued operations before income taxes
                      
                      
                      -
                      
                      
                      
                      (72
                      )
                      
                      
                      -
                      
                      
                      
                      (7,200
                      )Benefit
      for income taxes
                      
                      
                      -
                      
                      
                      
                      (28
                      )
                      
                      
                      -
                      
                      
                      
                      (2,815
                      )Loss
      from discontinued operations
                      
                      
                      -
                      
                      
                      
                      (44
                      )
                      
                      
                      -
                      
                      
                      
                      (4,385
                      )Net
      income
                      
                      $
                      21,162
                      
                      
                      $
                      19,257
                      
                      
                      $
                      11,164
                      
                      
                      $
                      5,231








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





5
 Table of Contents


AMERICAN
ACHIEVEMENT CORPORATION


Condensed
Consolidated Statements of Operations


(unaudited)










AACFor
      the three months ended
                        
                        
                        For
      the nine months endedMay
      30, 2009
                        
                        
                        May
      31, 2008
                        
                        
                        May
      30, 2009
                        
                        
                        May
      31, 2008(Dollars
      in thousands)Net
      sales
                        
                        $
                        144,842
                        
                        
                        $
                        157,142
                        
                        
                        $
                        250,169
                        
                        
                        $
                        269,710Cost
      of sales
                        
                        
                        55,353
                        
                        
                        
                        62,432
                        
                        
                        
                        105,511
                        
                        
                        
                        114,614Gross
      profit
                        
                        
                        89,489
                        
                        
                        
                        94,710
                        
                        
                        
                        144,658
                        
                        
                        
                        155,096Selling,
      general and administrative expenses
                        
                        
                        44,256
                        
                        
                        
                        50,094
                        
                        
                        
                        101,775
                        
                        
                        
                        111,184Operating
      income
                        
                        
                        45,233
                        
                        
                        
                        44,616
                        
                        
                        
                        42,883
                        
                        
                        
                        43,912Interest
      expense, net
                        
                        
                        4,022
                        
                        
                        
                        5,022
                        
                        
                        
                        12,390
                        
                        
                        
                        15,303Income
      from continuing operations before income taxes
                        
                        
                        41,211
                        
                        
                        
                        39,594
                        
                        
                        
                        30,493
                        
                        
                        
                        28,609Provision
      for income taxes
                        
                        
                        15,969
                        
                        
                        
                        16,012
                        
                        
                        
                        11,849
                        
                        
                        
                        11,664Income
      from continuing operations
                        
                        
                        25,242
                        
                        
                        
                        23,582
                        
                        
                        
                        18,644
                        
                        
                        
                        16,945Discontinued
      operations:Loss
      from discontinued operations before income taxes
                        
                        
                        -
                        
                        
                        
                        (72
                        )
                        
                        
                        -
                        
                        
                        
                        (7,200
                        )Benefit
      for income taxes
                        
                        
                        -
                        
                        
                        
                        (28
                        )
                        
                        
                        -
                        
                        
                        
                        (2,815
                        )Loss
      from discontinued operations
                        
                        
                        -
                        
                        
                        
                        (44
                        )
                        
                        
                        -
                        
                        
                        
                        (4,385
                        )Net
      income
                        
                        $
                        25,242
                        
                        
                        $
                        23,538
                        
                        
                        $
                        18,644
                        
                        
                        $
                        12,560








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








6
 Table of Contents


AAC
GROUP HOLDING CORP.


Condensed Consolidated Statements of Cash Flows


(unaudited)





Intermediate
      HoldingsFor
      the nine months endedMay
      30, 2009
                        
                        
                        May
      31, 2008(Dollars
      in thousands)Cash
      flows from operating activities:Net
      income
                        
                        $
                        11,164
                        
                        
                        $
                        5,231Adjustments
      to reconcile net income to net cash provided by operating
      activities:Other
      charges
                        
                        
                        -
                        
                        
                        
                        5,542Depreciation
      and amortization
                        
                        
                        19,189
                        
                        
                        
                        18,393Deferred
      income taxes
                        
                        
                        7,493
                        
                        
                        
                        5,033Amortization
      of deferred financing fees
                        
                        
                        1,502
                        
                        
                        
                        1,481Accretion
      of interest on 10.25% senior discount notes
                        
                        
                        1,079
                        
                        
                        
                        9,369Loss
      (gain) on disposal of property, plant and equipment
                        
                        
                        8
                        
                        
                        
                        (12
                        )Allowance for
      doubtful accounts
                        
                        
                        234
                        
                        
                        
                        736Changes
      in assets and liabilities:Accounts
      receivable
                        
                        
                        (38,962
                        )
                        
                        
                        (33,003
                        )Inventories
                        
                        
                        9,154
                        
                        
                        
                        10,539Prepaid
      expenses and other current assets, net
                        
                        
                        6,174
                        
                        
                        
                        2,750Other
      assets, net
                        
                        
                        (1,591
                        )
                        
                        
                        2,198Customer
      deposits
                        
                        
                        17,783
                        
                        
                        
                        13,639Deferred
      revenue
                        
                        
                        (2,030
                        )
                        
                        
                        (3,964
                        )Accounts
      payable, accrued expenses, accrued interest and other long-term
      liabilities
                        
                        
                        8,338
                        
                        
                        
                        8,091Net
      cash provided by operating activities
                        
                        
                        39,535
                        
                        
                        
                        46,023Cash
      flows from investing activities:Purchases
      of property, plant and equipment
                        
                        
                        (4,311
                        )
                        
                        
                        (11,037
                        )Proceeds
      from sales of property, plant and equipment
                        
                        
                        -
                        
                        
                        
                        61Business
      acquisition, purchase price adjustment
                        
                        
                        (83
                        )
                        
                        
                        -Net
      cash used in investing activities
                        
                        
                        (4,394
                        )
                        
                        
                        (10,976
                        )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
                        
                        
                        (28,608
                        )
                        
                        
                        (11,395
                        )Deferred
      financing fees
                        
                        
                        (1,396
                        )
                        
                        
                        -Contribution
      of capital
                        
                        
                        400
                        
                        
                        
                        -Change
      in book overdraft
                        
                        
                        49
                        
                        
                        
                        (3,419
                        )Net
      cash used in financing activities
                        
                        
                        (29,555
                        )
                        
                        
                        (22,619
                        )Net
      increase in cash and cash equivalents
                        
                        
                        5,586
                        
                        
                        
                        12,428Cash
      and cash equivalents, beginning of period
                        
                        
                        9,746
                        
                        
                        
                        1,168Cash
      and cash equivalents, end of period
                        
                        $
                        15,332
                        
                        
                        $
                        13,596Supplemental
      disclosures of cash flow information:Cash
      paid during the period for:Interest
                        
                        $
                        21,575
                        
                        
                        $
                        17,475Income
      taxes
                        
                        $
                        945
                        
                        
                        $
                        914Supplemental
      non-cash investing and financing activities disclosure:Additions
      to property, plant and equipment included in accounts
    payable
                        
                        $
                        286
                        
                        
                        $
                        74Increase
      in goodwill for purchase price adjustment included in accounts payable and
      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
 Table of Contents


AMERICAN
ACHIEVEMENT CORPORATION


Condensed
Consolidated Statements of Cash Flows


(unaudited)





AACFor
      the nine months endedMay
      30, 2009
                          
                          
                          May
      31, 2008(Dollars
      in thousands)Cash
      flows from operating activities:Net
      income
                          
                          $
                          18,644
                          
                          
                          $
                          12,560Adjustments
      to reconcile net income to net cash provided by operating
      activities:Other
      charges
                          
                          
                          -
                          
                          
                          
                          5,542Depreciation
      and amortization
                          
                          
                          19,189
                          
                          
                          
                          18,393Deferred
      income taxes
                          
                          
                          10,275
                          
                          
                          
                          7,391Amortization
      of deferred financing fees
                          
                          
                          1,168
                          
                          
                          
                          1,147Loss
      (gain) on disposal of property, plant and equipment
                          
                          
                          8
                          
                          
                          
                          (12
                          )Allowance for
      doubtful accounts
                          
                          
                          234
                          
                          
                          
                          736Changes
      in assets and liabilities:Accounts
      receivable
                          
                          
                          (38,962
                          )
                          
                          
                          (33,003
                          )Inventories
                          
                          
                          9,154
                          
                          
                          
                          10,539Prepaid
      expenses and other current assets, net
                          
                          
                          5,618
                          
                          
                          
                          2,750Other
      assets, net
                          
                          
                          (1,591
                          )
                          
                          
                          2,198Customer
      deposits
                          
                          
                          17,783
                          
                          
                          
                          13,639Deferred
      revenue
                          
                          
                          (2,030
                          )
                          
                          
                          (3,964
                          )Accounts
      payable, accrued expenses, accrued interest and other long-term
      liabilities
                          
                          
                          6,228
                          
                          
                          
                          8,091Net
      cash provided by operating activities
                          
                          
                          45,718
                          
                          
                          
                          46,007Cash
      flows from investing activities:Purchases
      of property, plant and equipment
                          
                          
                          (4,311
                          )
                          
                          
                          (11,037
                          )Proceeds
      from sales of property, plant and equipment
                          
                          
                          -
                          
                          
                          
                          61Business
      acquisition, purchase price adjustment
                          
                          
                          (83
                          )
                          
                          
                          -Net
      cash used in investing activities
                          
                          
                          (4,394
                          )
                          
                          
                          (10,976
                          )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
                          
                          
                          (28,608
                          )
                          
                          
                          (11,395
                          )Deferred
      financing fees
                          
                          
                          (1,396
                          )
                          
                          
                          -Distribution
      to Intermediate Holdings
                          
                          
                          (6,739
                          )
                          
                          
                          -Contribution
      of capital
                          
                          
                          400
                          
                          
                          
                          -Change
      in book overdraft
                          
                          
                          49
                          
                          
                          
                          (3,419
                          )Net
      cash used in financing activities
                          
                          
                          (36,294
                          )
                          
                          
                          (22,619
                          )Net
      increase in cash and cash equivalents
                          
                          
                          5,030
                          
                          
                          
                          12,412Cash
      and cash equivalents, beginning of period
                          
                          
                          9,735
                          
                          
                          
                          620Cash
      and cash equivalents, end of period
                          
                          $
                          14,765
                          
                          
                          $
                          13,032Supplemental
      disclosures of cash flow information:Cash
      paid during the period for:Interest
                          
                          $
                          14,836
                          
                          
                          $
                          17,475Income
      taxes
                          
                          $
                          945
                          
                          
                          $
                          914Supplemental
      non-cash investing and financing activities disclosure:Additions
      to property, plant and equipment included in accounts
    payable
                          
                          $
                          286
                          
                          
                          $
                          74Increase
      in goodwill for purchase price adjustment included in accounts payable and
      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
 Table of Contents
 AAC
GROUP HOLDING CORP.
 AMERICAN
ACHIEVEMENT CORPORATION
 Notes to
Condensed Consolidated Financial Statements
 (Dollars
in thousands, unless otherwise stated)
 (unaudited)


1. Summary of 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”). On June 2, 2009, Intermediate Holdings became a wholly-owned
subsidiary of American Achievement Intermediate Holding Corp, a newly formed
wholly-owned subsidiary of 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 significant 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 nine months ended May 30, 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, 333-121479 and
333-137067) filed on November 25, 2008.





9
 Table of Contents
 AAC
GROUP HOLDING CORP.
 AMERICAN
ACHIEVEMENT CORPORATION
 Notes to
Condensed Consolidated Financial Statements
 (Dollars
in thousands, unless otherwise stated)
 (unaudited)


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.





Recent
Accounting Pronouncements




In May
2009, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standard (“SFAS”) No. 165, “Subsequent Events” (“SFAS
165”). SFAS 165 establishes general standards of accounting for and disclosures
of events that occur after the balance sheet date but before financial
statements are issued or are available to be issued.  It requires the
disclosure of the date through which an entity has evaluated subsequent events
and the basis for that date. The provisions of SFAS 165 are effective for the
Company beginning with the fourth quarter of its fiscal year 2009. The Company
does not expect the adoption of the standard to have a material impact on its
financial position and results of operations.





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 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 are 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.





10
 Table of Contents
 AAC
GROUP HOLDING CORP.
 AMERICAN
ACHIEVEMENT CORPORATION
 Notes to
Condensed Consolidated Financial Statements
 (Dollars
in thousands, unless otherwise stated)
 (unaudited)


2.
Comprehensive Income





The
following amounts were included in determining comprehensive income for the
three and nine months ended May 30, 2009 and May 31, 2008.





For
      the three months ended
                                                                  
                                                                  For
      the nine months endedMay
      30, 2009
                                                                  
                                                                  May
      31, 2008
                                                                  
                                                                  May
      30, 2009
                                                                  
                                                                  May
      31, 2008Intermediate
      HoldingsNet
      income
                                                                  
                                                                  $
                                                                  21,162
                                                                  
                                                                  
                                                                  $
                                                                  19,257
                                                                  
                                                                  
                                                                  $
                                                                  11,164
                                                                  
                                                                  
                                                                  $
                                                                  5,231Amortization
      of net actuarial gain and prior service costs - pension and postretirement
      plans, net of tax
                                                                  
                                                                  
                                                                  (72
                                                                  )
                                                                  
                                                                  
                                                                  (73
                                                                  )
                                                                  
                                                                  
                                                                  (220
                                                                  )
                                                                  
                                                                  
                                                                  (223
                                                                  )Total
      comprehensive income
                                                                  
                                                                  $
                                                                  21,090
                                                                  
                                                                  
                                                                  $
                                                                  19,184
                                                                  
                                                                  
                                                                  $
                                                                  10,944
                                                                  
                                                                  
                                                                  $
                                                                  5,008For
      the three months ended
                                                                  
                                                                  For
      the nine months endedMay
      30, 2009
                                                                  
                                                                  May
      31, 2008
                                                                  
                                                                  May
      30, 2009
                                                                  
                                                                  May
      31, 2008AACNet
      income
                                                                  
                                                                  $
                                                                  25,242
                                                                  
                                                                  
                                                                  $
                                                                  23,538
                                                                  
                                                                  
                                                                  $
                                                                  18,644
                                                                  
                                                                  
                                                                  $
                                                                  12,560Amortization
      of net actuarial gain and prior service costs - pension and postretirement
      plans, net of tax
                                                                  
                                                                  
                                                                  (72
                                                                  )
                                                                  
                                                                  
                                                                  (73
                                                                  )
                                                                  
                                                                  
                                                                  (220
                                                                  )
                                                                  
                                                                  
                                                                  (223
                                                                  )Total
      comprehensive income
                                                                  
                                                                  $
                                                                  25,170
                                                                  
                                                                  
                                                                  $
                                                                  23,465
                                                                  
                                                                  
                                                                  $
                                                                  18,424
                                                                  
                                                                  
                                                                  $
                                                                  12,337





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 statements of operations
for the three and nine months ended May 31, 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 nine months ended May 31, 2008 are as
follows:




For
      the three months ended
                          
                          
                          For
      the nine months endedMay
      31, 2008
                          
                          
                          May
      31, 2008Discontinued
      operations:Net
      sales
                          
                          $
                          -
                          
                          
                          $
                          1,758Operating
      loss
                          
                          $
                          (72
                          )
                          
                          $
                          (7,200
                          )Benefit
      for income taxes
                          
                          
                          (28
                          )
                          
                          
                          (2,815
                          )Loss
      from discontinued operations
                          
                          $
                          (44
                          )
                          
                          $
                          (4,385
                          )





The
Company recognized charges of $5.5 million during the nine months ended May 31,
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 nine months ended May 31,
2008, are $0.7 million of costs incurred for contract termination and employee
termination costs related to the shutdown.  All such costs have been
paid.





11
 Table of Contents
 AAC
GROUP HOLDING CORP.
 AMERICAN
ACHIEVEMENT CORPORATION
 Notes to
Condensed Consolidated Financial Statements
 (Dollars
in thousands, unless otherwise stated)
 (unaudited)


4.
Inventories





May
      30, 2009
                    
                    
                    August
      30, 2008Raw
      materials
                    
                    $
                    8,658
                    
                    
                    $
                    15,840Work
      in process
                    
                    
                    5,057
                    
                    
                    
                    5,431Finished
      goods
                    
                    
                    5,422
                    
                    
                    
                    6,540Less—Reserves
                    
                    
                    (842
                    )
                    
                    
                    (400
                    )$
                    18,295
                    
                    
                    $
                    27,411





The
Company’s cost of sales includes depreciation of $4.6 million and $4.0 million
for the three months ended May 30, 2009 and May 31, 2008,
respectively, and $8.7 million and $7.7 million for the nine months then
ended, respectively.





5.
Goodwill and Other Intangible Assets





Goodwill





Segment:
                      
                      May
      30, 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 $0.3 million 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 $0.3 million of additional purchase price is to be paid over
three years beginning January 2009, of which $0.1 million was paid during
the nine months ended May 30, 2009.





12
 Table of Contents
 AAC
GROUP HOLDING CORP.
 AMERICAN
ACHIEVEMENT CORPORATION
 Notes to
Condensed Consolidated Financial Statements
 (Dollars
in thousands, unless otherwise stated)
 (unaudited)


Other
Intangible Assets





May
      30, 2009Estimated
                                          
                                          Gross
                                          
                                          Accumulated
                                          
                                          NetUseful
      Life
                                          
                                          Asset
                                          
                                          Amortization
                                          
                                          AssetTrademarks
                                          
                                          Indefinite
                                          
                                          $
                                          36,826
                                          
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          36,826Patents
                                          
                                          14 to 17 years
                                          
                                          
                                          7,317
                                          
                                          
                                          
                                          (2,290
                                          )
                                          
                                          
                                          5,027Customer
      lists and distribution contracts
                                          
                                          3
      to 12 years
                                          
                                          
                                          98,340
                                          
                                          
                                          
                                          (50,729
                                          )
                                          
                                          
                                          47,611Total
                                          
                                          
                                          
                                          $
                                          142,483
                                          
                                          
                                          $
                                          (53,019
                                          )
                                          
                                          $
                                          89,464August
      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.





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 and trademarks in the
future.  There have been no material changes or triggering events
since the date of this interim impairment analysis.





Total
amortization on other intangible assets was $2.7 million and $3.2 million for
the three months ended May 30, 2009 and May 31, 2008, respectively, and was $8.1
million and $8.4 million for the nine months ended May 30, 2009 and May 31,
2008, respectively, and 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





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


6.
Long-term Debt





May
      30, 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 2011
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -Term
      loan due 2011
                                                    
                                                    
                                                    
                                                    46,877
                                                    
                                                    
                                                    
                                                    75,485Total
                                                    
                                                    
                                                    
                                                    328,377
                                                    
                                                    
                                                    
                                                    355,906Less
      current portion of long-term debt
                                                    
                                                    
                                                    
                                                    (3,123
                                                    )
                                                    
                                                    
                                                    (2,908
                                                    )Total
      long-term debt
                                                    
                                                    
                                                    $
                                                    325,254
                                                    
                                                    
                                                    $
                                                    352,998May
      30, 2009
                                                    
                                                    August
      30, 2008AAC8.25%
      Senior subordinated notes due April 1, 2012
                                                    
                                                    
                                                    $
                                                    150,000
                                                    
                                                    
                                                    $
                                                    150,000Senior
      secured credit facility:Revolving
      credit facility due 2011
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -Term
      loan due 2011
                                                    
                                                    
                                                    
                                                    46,877
                                                    
                                                    
                                                    
                                                    75,485Total
                                                    
                                                    
                                                    
                                                    196,877
                                                    
                                                    
                                                    
                                                    225,485Less
      current portion of long-term debt
                                                    
                                                    
                                                    
                                                    (3,123
                                                    )
                                                    
                                                    
                                                    (2,908
                                                    )Total
      long-term debt
                                                    
                                                    
                                                    $
                                                    193,754
                                                    
                                                    
                                                    $
                                                    222,577





Senior
Secured Credit Facility





On May
20, 2009, the Company executed an amendment (the “Second Amendment”) to the
senior secured credit facility (as amended, the “Amended Senior Credit
Facility”). Among other things, the Second Amendment: (i) modified the existing
$40 million revolving facility to a $25 million revolving facility available
through March 25, 2011 and eliminated incremental facilities of up to $75
million available under the original agreement, (ii) increased interest rates,
term loan quarterly amortization, and revolving commitment fees paid to lenders,
(iii) modified the limitations on restricted payments, dividends or
distributions, and permitted acquisitions, and (iv) modified those covenants
relating to the maintenance of a maximum leverage ratio and minimum interest
coverage ratio to be less restrictive for fiscal quarters beginning August 30,
2009.





In
connection with the Second Amendment, the Company incurred costs totaling $2.5
million, of which $1.1 million was recorded as selling, general and
administrative expense during the three months ended May 30, 2009, and $1.4
million are included in other assets and will be amortized over the remaining
term of the Amended Senior Credit Facility.





The term
loan of the Amended Senior Credit Facility is due in March 2011. Quarterly
payments of $1.0 million are required beginning August 30, 2009 through February
28, 2011. The term loan of the Amended Senior Credit Facility has an interest
rate based on the higher of the prime rate or 2.0%, plus points based on a
calculated leverage ratio as defined in the agreement. The interest rate on the
term loan of the Amended Senior Credit Facility was 6.25% at May 30,
2009. During the nine months ended May 30, 2009 and May 31, 2008, the
Company paid down $28.6 million and $11.4 million of the term loan of the
Amended Senior Credit Facility, of which $2.6 million and $0.9 million,
respectively, were mandatory payments.





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


The
revolving credit facility matures in March 2011. Availability under the
revolving credit facility is restricted to a total revolving commitment of
$25.0 million as defined in the credit agreement governing the Amended
Senior Credit Facility. Availability under the revolving credit facility as of
May 30, 2009 was approximately $23.3 million with $1.7 million in letters of
credit outstanding.





Advances
under the revolving credit facility may be made as base rate loans or LIBOR
loans at AAC’s election. Interest rates payable upon advances are based upon the
higher of 3.0% or the base rate, which is derived from the Prime Rate or Federal
Funds Effective Rate as defined in the credit agreement, or the higher of 2.0%
or LIBOR depending on the type of loan AAC chooses, plus an applicable margin
based on a calculated leverage ratio as defined in the agreement.





The
Amended Senior Credit Facility contains restrictions on the ability of AAC to
pay dividends and make certain other payments to Parent Holdings and its
subsidiaries. Pursuant to each arrangement, AAC may, subject to certain
limitations, pay dividends or make such payments in connection with (i)
repurchases of certain capital stock of Parent Holdings and (ii) the payment by
Parent Holdings of taxes, costs and other expenses required to maintain its
legal existence and legal, accounting and other overhead costs in the ordinary
course of business, (iii) the payment by Intermediate Holdings of interest on
the 10.25% senior discount notes, and (iv) repayment, redemption or repurchase
of indebtedness of Parent Holdings and Intermediate Holdings in an amount not to
exceed $15.0 million.





AAC was
in compliance with the Amended Senior Credit Facility’s covenants as of May 30,
2009.





10.25%
Senior Discount Notes





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 accrues and is payable semiannually
in arrears on April 1 and October 1 of each year, at a rate of 10.25% per
annum.  The initial interest payment of $6.7 million was funded by AAC
on April 1, 2009, and was accounted for as a capital distribution from AAC and
reflected as a reduction of AAC’s additional paid-in capital.





The
following table represents the amount of interest income included in interest
expense, net, for the three and nine months ended May 30, 2009 and May 31,
2008:





For
      the three months ended
                
                
                For
      the nine months endedMay
      30, 2009
                
                
                May
      31, 2008
                
                
                May
      30, 2009
                
                
                May
      31, 2008Intermediate
      Holdings
                
                $
                48
                
                
                $
                143
                
                
                $
                271
                
                
                $
                491AAC
                
                
                48
                
                
                
                140
                
                
                
                271
                
                
                
                475








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.





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


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,
$27.6 million of this deferred tax benefit was transferred from AAC to
Intermediate Holdings 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 was reflected as a reduction to additional
paid-in capital and a reduction of deferred tax assets.





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 endedMay
      30, 2009
                                                            
                                                            May
      31, 2008CBI
      post-
                                                            
                                                            
                                                            
                                                            
                                                            CBI
      post-Taylor
      pension
                                                            
                                                            retirement
                                                            
                                                            Taylor
      pension
                                                            
                                                            retirementService
      costs, benefits attributed to service during the period
                                                            
                                                            
                                                            $
                                                            18
                                                            
                                                            
                                                            $
                                                            -
                                                            
                                                            
                                                            $
                                                            21
                                                            
                                                            
                                                            $
                                                            -Interest
      cost
                                                            
                                                            
                                                            
                                                            220
                                                            
                                                            
                                                            
                                                            23
                                                            
                                                            
                                                            
                                                            229
                                                            
                                                            
                                                            
                                                            27Expected
      return on assets
                                                            
                                                            
                                                            
                                                            (264
                                                            )
                                                            
                                                            
                                                            -
                                                            
                                                            
                                                            
                                                            (292
                                                            )
                                                            
                                                            
                                                            -Amortization
      of unrecognized net gain
                                                            
                                                            
                                                            
                                                            (7
                                                            )
                                                            
                                                            
                                                            (76
                                                            )
                                                            
                                                            
                                                            (9
                                                            )
                                                            
                                                            
                                                            (77
                                                            )Amortization
      of unrecognized net prior service costs
                                                            
                                                            
                                                            
                                                            -
                                                            
                                                            
                                                            
                                                            (38
                                                            )
                                                            
                                                            
                                                            -
                                                            
                                                            
                                                            
                                                            (38
                                                            )Net
      periodic postretirement benefit income
                                                            
                                                            
                                                            $
                                                            (33
                                                            )
                                                            
                                                            $
                                                            (91
                                                            )
                                                            
                                                            $
                                                            (51
                                                            )
                                                            
                                                            $
                                                            (88
                                                            )For
      the nine months endedMay
      30, 2009
                                                            
                                                            May
      31, 2008CBI
      post-
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            CBI
      post-Taylor
      pension
                                                            
                                                            retirement
                                                            
                                                            Taylor
      pension
                                                            
                                                            retirementService
      costs, benefits attributed to service during the period
                                                            
                                                            
                                                            $
                                                            54
                                                            
                                                            
                                                            $
                                                            -
                                                            
                                                            
                                                            $
                                                            65
                                                            
                                                            
                                                            $
                                                            -Interest
      cost
                                                            
                                                            
                                                            
                                                            659
                                                            
                                                            
                                                            
                                                            68
                                                            
                                                            
                                                            
                                                            686
                                                            
                                                            
                                                            
                                                            81Expected
      return on assets
                                                            
                                                            
                                                            
                                                            (793
                                                            )
                                                            
                                                            
                                                            -
                                                            
                                                            
                                                            
                                                            (876
                                                            )
                                                            
                                                            
                                                            -Amortization
      of unrecognized net gain
                                                            
                                                            
                                                            
                                                            (19
                                                            )
                                                            
                                                            
                                                            (227
                                                            )
                                                            
                                                            
                                                            (27
                                                            )
                                                            
                                                            
                                                            (232
                                                            )Amortization
      of unrecognized net prior service costs
                                                            
                                                            
                                                            
                                                            -
                                                            
                                                            
                                                            
                                                            (112
                                                            )
                                                            
                                                            
                                                            -
                                                            
                                                            
                                                            
                                                            (112
                                                            )Net
      periodic postretirement benefit income
                                                            
                                                            
                                                            $
                                                            (99
                                                            )
                                                            
                                                            $
                                                            (271
                                                            )
                                                            
                                                            $
                                                            (152
                                                            )
                                                            
                                                            $
                                                            (263
                                                            )





16
 Table of Contents
 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:





May
      30, 2009
                
                
                August
      30, 2008Taylor
      pension
                
                
                CBI
      post-retirement
                
                
                Taylor
      pension
                
                
                CBI
      post-retirementNet
      actuarial gain
                
                $
                (1,708
                )
                
                $
                (1,729
                )
                
                $
                (1,727
                )
                
                $
                (1,956
                )Prior
      service cost
                
                
                -
                
                
                
                (595
                )
                
                
                -
                
                
                
                (707
                )$
                (1,708
                )
                
                $
                (2,324
                )
                
                $
                (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 thousand.  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 $0.3 million and $0.1 million, 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 $0.9 million for the
three months ended May 30, 2009 and May 31, 2008 and $2.5 million for the nine
months ended May 30, 2009 and May 31, 2008.





As of May
30, 2009 and August 30, 2008, the Company had prepaid management fees of
approximately $0.2 million.





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.





17
 Table of Contents
 AAC
GROUP HOLDING CORP.
 AMERICAN
ACHIEVEMENT CORPORATION
 Notes to
Condensed Consolidated Financial Statements
 (Dollars
in thousands, unless otherwise stated)
 (unaudited)


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.





Class
                    
                    
                    
                    
                    
                    GraduationRings
                    
                    
                    Yearbooks
                    
                    
                    Products
                    
                    
                    Other
                    
                    
                    TotalThree
      Months Ended May 30, 2009Net
      sales
                    
                    $
                    35,605
                    
                    
                    $
                    79,298
                    
                    
                    $
                    21,653
                    
                    
                    $
                    8,286
                    
                    
                    $
                    144,842Segment
      operating income
                    
                    
                    6,212
                    
                    
                    
                    34,106
                    
                    
                    
                    4,649
                    
                    
                    
                    266
                    
                    
                    
                    45,233Three
      Months Ended May 31, 2008Net
      sales
                    
                    $
                    40,339
                    
                    
                    $
                    80,675
                    
                    
                    $
                    25,645
                    
                    
                    $
                    10,483
                    
                    
                    $
                    157,142Segment
      operating income (loss)
                    
                    
                    4,812
                    
                    
                    
                    33,874
                    
                    
                    
                    5,961
                    
                    
                    
                    (31
                    )
                    
                    
                    44,616Nine
      Months Ended May 30, 2009Net
      sales
                    
                    $
                    95,411
                    
                    
                    $
                    89,372
                    
                    
                    $
                    40,728
                    
                    
                    $
                    24,658
                    
                    
                    $
                    250,169Segment
      operating income (loss)
                    
                    
                    11,144
                    
                    
                    
                    25,500
                    
                    
                    
                    6,632
                    
                    
                    
                    (393
                    )
                    
                    
                    42,883Nine
      Months Ended May 31, 2008Net
      sales
                    
                    $
                    105,855
                    
                    
                    $
                    92,630
                    
                    
                    $
                    44,587
                    
                    
                    $
                    26,638
                    
                    
                    $
                    269,710Segment
      operating income (loss)
                    
                    
                    11,351
                    
                    
                    
                    25,081
                    
                    
                    
                    8,014
                    
                    
                    
                    (534
                    )
                    
                    
                    43,912







Intermediate
      HoldingsClass
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                Graduation
                                                                                
                                                                                
                                                                                
                                                                                Assets
      notRings
                                                                                
                                                                                Yearbooks
                                                                                
                                                                                Products
                                                                                
                                                                                Other
                                                                                
                                                                                Allocated
                                                                                
                                                                                TotalSegment
      assetsMay
      30, 2009
                                                                                
                                                                                $
                                                                                173,670
                                                                                
                                                                                
                                                                                $
                                                                                185,391
                                                                                
                                                                                
                                                                                $
                                                                                59,930
                                                                                
                                                                                
                                                                                $
                                                                                43,797
                                                                                
                                                                                
                                                                                $
                                                                                -
                                                                                
                                                                                
                                                                                $
                                                                                462,788August
      30, 2008
                                                                                
                                                                                
                                                                                189,633
                                                                                
                                                                                
                                                                                
                                                                                162,727
                                                                                
                                                                                
                                                                                
                                                                                55,377
                                                                                
                                                                                
                                                                                
                                                                                44,703
                                                                                
                                                                                
                                                                                
                                                                                2,333
                                                                                
                                                                                
                                                                                
                                                                                454,773AACClass
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                Graduation
                                                                                
                                                                                
                                                                                
                                                                                Assets
      notRings
                                                                                
                                                                                Yearbooks
                                                                                
                                                                                Products
                                                                                
                                                                                Other
                                                                                
                                                                                Allocated
                                                                                
                                                                                TotalSegment
      assetsMay
      30, 2009
                                                                                
                                                                                $
                                                                                172,938
                                                                                
                                                                                
                                                                                $
                                                                                184,863
                                                                                
                                                                                
                                                                                $
                                                                                59,778
                                                                                
                                                                                
                                                                                $
                                                                                43,493
                                                                                
                                                                                
                                                                                $
                                                                                -
                                                                                
                                                                                
                                                                                $
                                                                                461,072August
      30, 2008
                                                                                
                                                                                
                                                                                189,939
                                                                                
                                                                                
                                                                                
                                                                                163,139
                                                                                
                                                                                
                                                                                
                                                                                55,541
                                                                                
                                                                                
                                                                                
                                                                                44,718
                                                                                
                                                                                
                                                                                
                                                                                1,777
                                                                                
                                                                                
                                                                                
                                                                                455,114




18
 Table of Contents


ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS





The
following discussion of our condensed consolidated financial condition and
results of operations should be read in conjunction with the information
contained in our condensed consolidated financial statements and 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.”





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, we 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;


·
            our
      access to students and consumers in
schools;


·
            the
      seasonality of our business;


·
            regulatory
      and accounting rules;


·
            our
      relationship with its independent sales
  representatives;


·
            fashion and
      demographic trends;


·
            general
      economic, business, and market trends and events, especially during peak
      buying seasons for our products;


·
            our
      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;


·
            our
      cash flows; and


·
            our
      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 our operations and businesses. Forward-looking statements
herein are expressly qualified by the foregoing or such other factors as may be
applicable.





You
should consider the risks described in our Form 10-K filed with the Securities
and Exchange Commission on November 25, 2008 as you review this quarterly
report.





19
 Table of Contents


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 the college, 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.




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.




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)
is a variable rate arrangement.




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.




20
 Table of Contents


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, we 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.





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.





We use a
52/53-week fiscal year ending on the last Saturday of August.





Critical
Accounting Policies
 
 As of May
30, 2009, there have been no significant changes with regard to the critical
accounting policies disclosed in our Annual Reports on Form 10-K for the year
ended August 30, 2008.  The policies disclosed included allowance for
product returns, allowance for doubtful accounts and reserve on independent
sales representative advances, goodwill and other intangible assets, long-lived
tangible and intangible assets with definite lives, revenue recognition and
income taxes.




Significant
Developments




Amendment of
Senior Secured Credit Facilities.As described in Note 6 in the Notes to
Condensed Consolidated Financial Statements, on May 20, 2009, we executed
an amendment (the “Second Amendment”), to our senior secured credit facility (as
amended, the “Amended Senior Credit Facility”). Among other things, the Second
Amendment: (i) modified the existing $40 million revolving facility to a $25
million revolving facility available through March 25, 2011 and eliminated
incremental facilities of up to $75 million available under the agreement, (ii)
increased interest rates, term loan quarterly amortization, and revolving
commitment fees paid to lenders, (iii) modified the limitations on restricted
payments, dividends or distributions, and permitted acquisitions, and (iv)
modified those covenants relating to the maintenance of a maximum leverage ratio
and minimum interest coverage ratio to be less restrictive for fiscal quarters
beginning August 30, 2009.





In
connection with the Second Amendment, we incurred costs totaling $2.5 million,
of which $1.1 million was recorded as selling, general and administrative
expense during the three months ended May 30, 2009, and $1.4 million is
included in other assets and will be amortized over the remaining term of the
Amended Senior Credit Facility.




Termination of Gold Consignment
Agreement.




21
 Table of Contents


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 nine months ended May
31, 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.  The
following are transactions of American Achievement Group Holdings Corp. (“Parent
Holdings”), the parent company of Intermediate Holdings .  These
transactions are not reflected in the accompanying condensed consolidated
financial statements and had no impact on our financial position and results of
operations, except as specifically referenced below.




·
            On
      December 5, 2008, 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 repurchased $104.3 million aggregate
      principal amount of its outstanding 12.75% Senior PIK Notes due October 1,
      2012 (the “Parent Holdings Notes”) for an aggregate purchase price of
      $24.0 million.  This repurchase was funded from the net proceeds
      received by Parent Holdings in connection with the aforementioned
      settlement.  For no additional consideration, the sellers of the
      Parent Holdings Notes, representing a majority in principal amount of the
      Parent Holdings Notes, consented to a second supplemental indenture (“the
      Second Supplemental Indenture”), which was entered into on February 25,
      2009, by Parent Holdings and the trustee under the
      indenture.  The Second Supplemental Indenture removed
      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 May 30, 2009 there was approximately $113.1 million aggregate principal
      amount of Parent Holdings Notes outstanding.
              
              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 Parent Holdings in the second
      quarter of 2009.  This transfer was accounted for as a distribution
      by AAC to Intermediate Holdings 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.




·
            On
      June 4, 2009, Parent Holdings commenced a tender offer to purchase any and
      all of the outstanding Parent Holdings Notes.  The tender offer
      will expire at 11:59 p.m., New York City time, on July 17, 2009, unless
      further extended or earlier terminated.  Parent Holdings intends
      to fund payment for the notes that are purchased in the tender offer with
      a combination of one or more of (i) cash borrowed by AAC under the Amended
      Senior Credit Facility and distributed to Parent Holdings, (ii) proceeds
      of the sale of new preferred stock by a newly formed subsidiary American
      Achievement Intermediate Holding Corp. and (iii) cash on
      hand.  American Achievement Intermediate Holding Corp. is a
      subsidiary of Parent Holdings and the new parent company of Intermediate
      Holdings. Any preferred stock issued by American Achievement Intermediate
      Holding Corp. will be structurally senior to any remaining Parent Holdings
      Notes.





·
            On
      June 4, 2009, Parent Holdings and American Achievement Intermediate
      Holding Corp. entered into a Securities Purchase Agreement with the
      Purchasers party thereto with respect to the issuance of shares of new
      preferred stock and warrants to purchase Parent Holdings’ common
      stock.  Certain investors have already deposited proceeds for
      the issuance of preferred stock into escrow and may deposit additional
      proceeds in the future.  The Purchase Agreement pursuant to
      which the new preferred stock will be issued contains restrictions on the
      ability of American Achievement Intermediate Holding Corp and its
      subsidiaries, including the Company, to incur additional debt or issue
      preferred stock; pay dividends or distributions on its capital stock, or
      redeem or repurchase its capital stock or subordinated debt; make certain
      investments; enter into sale and leaseback transactions; engage in
      transactions with affiliates; create liens on assets to secure debt;
      transfer or sell assets; guarantee debt; restrict dividend or other
      payments to the issuer; in the case of the issuer, consolidate, merge or
      transfer all or substantially all of its assets and the assets of its
      subsidiaries; and engage in unrelated
  businesses.




22
 Table of Contents


Results
of Operations





Three
Months Ended May 30, 2009 Compared to Three Months Ended May 31,
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
                                          
                                          
                                          NetMay
      30, 2009
                                          
                                          
                                          Sales
                                          
                                          
                                          May
      31, 2008
                                          
                                          
                                          Sales
                                          
                                          
                                          ChangeNet
      sales
                                          
                                          $
                                          144,842
                                          
                                          
                                          
                                          100.0
                                          
                                          %
                                          
                                          $
                                          157,142
                                          
                                          
                                          
                                          100.0
                                          
                                          %
                                          
                                          $
                                          (12,300
                                          )Cost
      of sales
                                          
                                          
                                          55,353
                                          
                                          
                                          
                                          38.2
                                          
                                          %
                                          
                                          
                                          62,432
                                          
                                          
                                          
                                          39.7
                                          
                                          %
                                          
                                          
                                          (7,079
                                          )Gross
      profit
                                          
                                          
                                          89,489
                                          
                                          
                                          
                                          61.8
                                          
                                          %
                                          
                                          
                                          94,710
                                          
                                          
                                          
                                          60.3
                                          
                                          %
                                          
                                          
                                          (5,221
                                          )Selling,
      general & administrative expenses
                                          
                                          
                                          44,256
                                          
                                          
                                          
                                          30.6
                                          
                                          %
                                          
                                          
                                          50,094
                                          
                                          
                                          
                                          31.9
                                          
                                          %
                                          
                                          
                                          (5,838
                                          )Operating
      income
                                          
                                          
                                          45,233
                                          
                                          
                                          
                                          31.2
                                          
                                          %
                                          
                                          
                                          44,616
                                          
                                          
                                          
                                          28.4
                                          
                                          %
                                          
                                          
                                          617Interest
      expense, net
                                          
                                          
                                          7,497
                                          
                                          
                                          
                                          5.2
                                          
                                          %
                                          
                                          
                                          8,469
                                          
                                          
                                          
                                          5.4
                                          
                                          %
                                          
                                          
                                          (972
                                          )Income
      from continuing operations before income taxes
                                          
                                          
                                          37,736
                                          
                                          
                                          
                                          26.0
                                          
                                          %
                                          
                                          
                                          36,147
                                          
                                          
                                          
                                          23.0
                                          
                                          %
                                          
                                          
                                          1,589Provision
      for income taxes
                                          
                                          
                                          16,574
                                          
                                          
                                          
                                          11.4
                                          
                                          %
                                          
                                          
                                          16,846
                                          
                                          
                                          
                                          10.7
                                          
                                          %
                                          
                                          
                                          (272
                                          )Income
      from continuing operations
                                          
                                          
                                          21,162
                                          
                                          
                                          
                                          14.6
                                          
                                          %
                                          
                                          
                                          19,301
                                          
                                          
                                          
                                          12.3
                                          
                                          %
                                          
                                          
                                          1,861Discontinued
      operations:Loss
      from discontinued operations before income taxes
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          %
                                          
                                          
                                          (72
                                          )
                                          
                                          
                                          (0.0
                                          )
                                          %
                                          
                                          
                                          72Benefit
      for income taxes
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          %
                                          
                                          
                                          (28
                                          )
                                          
                                          
                                          (0.0
                                          )
                                          %
                                          
                                          
                                          28Loss
      from discontinued operations
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          %
                                          
                                          
                                          (44
                                          )
                                          
                                          
                                          (0.0
                                          )
                                          %
                                          
                                          
                                          44Net
      income
                                          
                                          $
                                          21,162
                                          
                                          
                                          
                                          14.6
                                          
                                          %
                                          
                                          $
                                          19,257
                                          
                                          
                                          
                                          12.3
                                          
                                          %
                                          
                                          $
                                          1,905





AACFor
      the Three
                                        
                                        
                                        %
      of
                                        
                                        
                                        For
      the Three
                                        
                                        
                                        %
      of(in
      thousands)
                                        
                                        Months
      Ended
                                        
                                        
                                        Net
                                        
                                        
                                        Months
      Ended
                                        
                                        
                                        NetMay
      30, 2009
                                        
                                        
                                        Sales
                                        
                                        
                                        May
      31, 2008
                                        
                                        
                                        Sales
                                        
                                        
                                        ChangeNet
      sales
                                        
                                        $
                                        144,842
                                        
                                        
                                        
                                        100.0
                                        
                                        %
                                        
                                        $
                                        157,142
                                        
                                        
                                        
                                        100.0
                                        
                                        %
                                        
                                        $
                                        (12,300
                                        )Cost
      of sales
                                        
                                        
                                        55,353
                                        
                                        
                                        
                                        38.2
                                        
                                        %
                                        
                                        
                                        62,432
                                        
                                        
                                        
                                        39.7
                                        
                                        %
                                        
                                        
                                        (7,079
                                        )Gross
      profit
                                        
                                        
                                        89,489
                                        
                                        
                                        
                                        61.8
                                        
                                        %
                                        
                                        
                                        94,710
                                        
                                        
                                        
                                        60.3
                                        
                                        %
                                        
                                        
                                        (5,221
                                        )Selling,
      general & administrative expenses
                                        
                                        
                                        44,256
                                        
                                        
                                        
                                        30.6
                                        
                                        %
                                        
                                        
                                        50,094
                                        
                                        
                                        
                                        31.9
                                        
                                        %
                                        
                                        
                                        (5,838
                                        )Operating
      income
                                        
                                        
                                        45,233
                                        
                                        
                                        
                                        31.2
                                        
                                        %
                                        
                                        
                                        44,616
                                        
                                        
                                        
                                        28.4
                                        
                                        %
                                        
                                        
                                        617Interest
      expense, net
                                        
                                        
                                        4,022
                                        
                                        
                                        
                                        2.8
                                        
                                        %
                                        
                                        
                                        5,022
                                        
                                        
                                        
                                        3.2
                                        
                                        %
                                        
                                        
                                        (1,000
                                        )Income
      from continuing operations before income taxes
                                        
                                        
                                        41,211
                                        
                                        
                                        
                                        28.4
                                        
                                        %
                                        
                                        
                                        39,594
                                        
                                        
                                        
                                        25.2
                                        
                                        %
                                        
                                        
                                        1,617Provision
      for income taxes
                                        
                                        
                                        15,969
                                        
                                        
                                        
                                        (11.0
                                        )
                                        %
                                        
                                        
                                        16,012
                                        
                                        
                                        
                                        10.2
                                        
                                        %
                                        
                                        
                                        (43
                                        )Income
      from continuing operations
                                        
                                        
                                        25,242
                                        
                                        
                                        
                                        17.4
                                        
                                        %
                                        
                                        
                                        23,582
                                        
                                        
                                        
                                        15.0
                                        
                                        %
                                        
                                        
                                        1,660Discontinued
      operations:Loss
      from discontinued operations before income taxes
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        %
                                        
                                        
                                        (72
                                        )
                                        
                                        
                                        (0.0
                                        )
                                        %
                                        
                                        
                                        72Benefit
      for income taxes
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        %
                                        
                                        
                                        (28
                                        )
                                        
                                        
                                        (0.0
                                        )
                                        %
                                        
                                        
                                        28Loss
      from discontinued operations
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        %
                                        
                                        
                                        (44
                                        )
                                        
                                        
                                        (0.0
                                        )
                                        %
                                        
                                        
                                        44Net
      income
                                        
                                        $
                                        25,242
                                        
                                        
                                        
                                        17.4
                                        
                                        %
                                        
                                        $
                                        23,538
                                        
                                        
                                        
                                        15.0
                                        
                                        %
                                        
                                        $
                                        1,704





23
 Table of Contents


We use a
52/53 week fiscal year.  Fiscal year 2009 will consist of 52 weeks,
whereas fiscal year 2008 consisted of 53 weeks.  The additional week
in fiscal year 2008 was included in the third quarter; therefore the three month
period ended May 31, 2008 consisted of fourteen weeks as compared to the three
month period ended May 30, 2009, which consisted of thirteen
weeks.  As a result, the current reporting period reflects one week
less of net sales, expenses and operating income as compared to the same period
of the prior fiscal year.





Net
Sales.Net sales
consist of product sales and are net of product returns and promotional
discounts. Net sales decreased $12.3 million, or 7.8%, to $144.8 million
for the three months ended May 30, 2009 from $157.1 million for the three
months ended May 31, 2008. The following details the changes in net sales during
such periods by business segment.





Class Rings.Net sales
decreased $4.7 million to $35.6 million for the three months ended May
30, 2009 from $40.3 million for the three months ended May 31, 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 with lower selling
prices due to softness in the economy.





Yearbooks.Net sales
decreased $1.4 million to $79.3 million for the three months ended May
30, 2009 from $80.7 million for the three months ended May 31, 2008. The
decrease in net sales was primarily the result of lower contract volume and a
decrease in the average contract value from the third quarter of fiscal 2008 due
to softness in the economy.





Graduation Products.Net
sales decreased $4.0 million to $21.6 million for the three months ended
May 30, 2009 from $25.6 million for the three months ended May 31, 2008. The
decrease in net sales was primarily a result of lower sales volume due to
softness in the economy and a result of timing of shipments between the second
and third quarters of fiscal 2009 compared to the comparable quarters of fiscal
2008.





Other.Net sales decreased
$2.2 million to $8.3 million for the three months ended May 30, 2009
from $10.5 million for the three months ended May 31, 2008. The decrease in
net sales was primarily related to a decline in sales of personalized family
jewelry and a change in product mix from gold to other metals due to softness in
the economy.





Gross
Profit.Gross
margin represents gross profit as a percentage of net sales. Gross margin was
61.8% for the three months ended May 30, 2009, a 1.5 percentage point increase
from 60.3% for the three months ended May 31, 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 our manufacturing processes and other cost reduction measures.





Selling, General
and Administrative Expenses.Selling, general and
administrative expenses decreased $5.8 million, or 11.6%, to
$44.3 million for the three months ended May 30, 2009 from
$50.1 million for the three months ended May 31, 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 $4.0 million to $34.0 million or 23.5% of
net sales, for the three months ended May 30, 2009 from $38.0 million or
24.2% of net sales, for the three months ended May 31, 2008 due to a decrease in
commissions as a result of lower sales and due to decreased marketing
expenditures.





General
and administrative expenses for the three months ended May 30, 2009 were
$10.3 million, or 7.1% of net sales, as compared to $12.1 million, or 7.7% of
net sales, for the three months ended May 31, 2008. The decrease in general and
administrative expenses is a result of reductions in spending including
consulting and professional fees, partially offset by expenses incurred to amend
our credit facility.





24
 Table of Contents


OperatingIncome.As a result of the
foregoing, operating income was $45.2 million, or 31.2% of net sales, for the
three months ended May 30, 2009 as compared with operating income of
$44.6 million, or 28.4% of net sales, for the three months ended May 31,
2008.





The class
rings segment reported operating income of $6.2 million for the three
months ended May 30, 2009 as compared with operating income of $4.8 million
for the three months ended May 31, 2008. The yearbooks segment reported
operating income of $34.1 million for the three months ended May 30, 2009
as compared with operating income of $33.9 million for the three months ended
May 31, 2008. The graduation products segment reported operating income of
$4.6 million for the three months ended May 30, 2009 as compared with
operating income of $6.0 million for the three months ended May 31, 2008.
The other segment reported operating income of $0.3 million for the three months
ended May 30, 2009 as compared with an operating loss of $0.1 million for the
three months ended May 31, 2008.





Interest Expense,
Net.For
Intermediate Holdings, net interest expense was $7.5 million for the three
months ended May 30, 2009 and $8.5 million for the three months ended May
31, 2008. The average debt outstanding of Intermediate Holdings for the three
months ended May 30, 2009 and the three months ended May 31, 2008 was
$328 million and $349 million, respectively. The weighted average
interest rate on debt outstanding of Intermediate Holdings for the three months
ended May 30, 2009 and the three months ended May 31, 2008 was
8.4%.





For AAC,
net interest expense was $4.0 million for the three months ended May 30,
2009 and $5.0 million for the three months ended May 31, 2008. The average
debt outstanding of AAC for the three months ended May 30, 2009 and the three
months ended May 31, 2008 was $197 million and $227 million, respectively.
The weighted average interest rate on debt outstanding of AAC for the three
months ended May 30, 2009 and the three months ended May 31, 2008 was 7.1% and
7.5%, respectively.





Provisionfor Income
Taxes.For the
three months ended May 30, 2009 and May 31, 2008, Intermediate Holdings recorded
an income tax provision of $16.6 million and $16.8 million, respectively,
which represents an effective tax rate of 44% 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 May 30, 2009 and May 31, 2008 represent an estimate of the annual federal
and state income tax rate.





For the
three months ended May 30, 2009 and May 31, 2008, AAC recorded an income tax
provision of $16.0 million and $16.0 million, respectively, which represents an
effective tax rate of 39% 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 May 30, 2009
and May 31, 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 May
31, 2008 was $0.1 million.





25
 Table of Contents


Nine
Months Ended May 30, 2009 Compared to Nine Months Ended May 31,
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 Nine
                                          
                                          
                                          %
      of
                                          
                                          
                                          For
      the Nine
                                          
                                          
                                          %
      of(in
      thousands)
                                          
                                          Months
      Ended
                                          
                                          
                                          Net
                                          
                                          
                                          Months
      Ended
                                          
                                          
                                          NetMay
      30, 2009
                                          
                                          
                                          Sales
                                          
                                          
                                          May
      31, 2008
                                          
                                          
                                          Sales
                                          
                                          
                                          ChangeNet
      sales
                                          
                                          $
                                          250,169
                                          
                                          
                                          
                                          100.0
                                          
                                          %
                                          
                                          $
                                          269,710
                                          
                                          
                                          
                                          100.0
                                          
                                          %
                                          
                                          $
                                          (19,541
                                          )Cost
      of sales
                                          
                                          
                                          105,511
                                          
                                          
                                          
                                          42.2
                                          
                                          %
                                          
                                          
                                          114,614
                                          
                                          
                                          
                                          42.5
                                          
                                          %
                                          
                                          
                                          (9,103
                                          )Gross
      profit
                                          
                                          
                                          144,658
                                          
                                          
                                          
                                          57.8
                                          
                                          %
                                          
                                          
                                          155,096
                                          
                                          
                                          
                                          57.5
                                          
                                          %
                                          
                                          
                                          (10,438
                                          )Selling,
      general & administrative expenses
                                          
                                          
                                          101,775
                                          
                                          
                                          
                                          40.7
                                          
                                          %
                                          
                                          
                                          111,184
                                          
                                          
                                          
                                          41.2
                                          
                                          %
                                          
                                          
                                          (9,409
                                          )Operating
      income
                                          
                                          
                                          42,883
                                          
                                          
                                          
                                          17.1
                                          
                                          %
                                          
                                          
                                          43,912
                                          
                                          
                                          
                                          16.3
                                          
                                          %
                                          
                                          
                                          (1,029
                                          )Interest
      expense, net
                                          
                                          
                                          22,783
                                          
                                          
                                          
                                          9.1
                                          
                                          %
                                          
                                          
                                          24,990
                                          
                                          
                                          
                                          9.3
                                          
                                          %
                                          
                                          
                                          (2,207
                                          )Income
      from continuing operations before income taxes
                                          
                                          
                                          20,100
                                          
                                          
                                          
                                          8.0
                                          
                                          %
                                          
                                          
                                          18,922
                                          
                                          
                                          
                                          7.0
                                          
                                          %
                                          
                                          
                                          1,178Provision
      for income taxes
                                          
                                          
                                          8,936
                                          
                                          
                                          
                                          3.5
                                          
                                          %
                                          
                                          
                                          9,306
                                          
                                          
                                          
                                          3.4
                                          
                                          %
                                          
                                          
                                          (370
                                          )Income
      from continuing operations
                                          
                                          
                                          11,164
                                          
                                          
                                          
                                          4.5
                                          
                                          %
                                          
                                          
                                          9,616
                                          
                                          
                                          
                                          3.6
                                          
                                          %
                                          
                                          
                                          1,548Discontinued
      operations:Loss
      from discontinued operations before income taxes
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          %
                                          
                                          
                                          (7,200
                                          )
                                          
                                          
                                          (2.7
                                          )
                                          %
                                          
                                          
                                          7,200Benefit
      for income taxes
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          %
                                          
                                          
                                          (2,815
                                          )
                                          
                                          
                                          (1.0
                                          )
                                          %
                                          
                                          
                                          2,815Loss
      from discontinued operations
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          %
                                          
                                          
                                          (4,385
                                          )
                                          
                                          
                                          (1.7
                                          )
                                          %
                                          
                                          
                                          4,385Net
      income
                                          
                                          $
                                          11,164
                                          
                                          
                                          
                                          4.5
                                          
                                          %
                                          
                                          $
                                          5,231
                                          
                                          
                                          
                                          1.9
                                          
                                          %
                                          
                                          $
                                          5,933





AACFor
      the Nine
                                        
                                        
                                        %
      of
                                        
                                        
                                        For
      the Nine
                                        
                                        
                                        %
      of(in
      thousands)
                                        
                                        Months
      Ended
                                        
                                        
                                        Net
                                        
                                        
                                        Months
      Ended
                                        
                                        
                                        NetMay
      30, 2009
                                        
                                        
                                        Sales
                                        
                                        
                                        May
      31, 2008
                                        
                                        
                                        Sales
                                        
                                        
                                        ChangeNet
      sales
                                        
                                        $
                                        250,169
                                        
                                        
                                        
                                        100.0
                                        
                                        %
                                        
                                        $
                                        269,710
                                        
                                        
                                        
                                        100.0
                                        
                                        %
                                        
                                        $
                                        (19,541
                                        )Cost
      of sales
                                        
                                        
                                        105,511
                                        
                                        
                                        
                                        42.2
                                        
                                        %
                                        
                                        
                                        114,614
                                        
                                        
                                        
                                        42.5
                                        
                                        %
                                        
                                        
                                        (9,103
                                        )Gross
      profit
                                        
                                        
                                        144,658
                                        
                                        
                                        
                                        57.8
                                        
                                        %
                                        
                                        
                                        155,096
                                        
                                        
                                        
                                        57.5
                                        
                                        %
                                        
                                        
                                        (10,438
                                        )Selling,
      general & administrative expenses
                                        
                                        
                                        101,775
                                        
                                        
                                        
                                        40.7
                                        
                                        %
                                        
                                        
                                        111,184
                                        
                                        
                                        
                                        41.2
                                        
                                        %
                                        
                                        
                                        (9,409
                                        )Operating
      income
                                        
                                        
                                        42,883
                                        
                                        
                                        
                                        17.1
                                        
                                        %
                                        
                                        
                                        43,912
                                        
                                        
                                        
                                        16.3
                                        
                                        %
                                        
                                        
                                        (1,029
                                        )Interest
      expense, net
                                        
                                        
                                        12,390
                                        
                                        
                                        
                                        4.9
                                        
                                        %
                                        
                                        
                                        15,303
                                        
                                        
                                        
                                        5.7
                                        
                                        %
                                        
                                        
                                        (2,913
                                        )Income
      from continuing operations before income taxes
                                        
                                        
                                        30,493
                                        
                                        
                                        
                                        12.2
                                        
                                        %
                                        
                                        
                                        28,609
                                        
                                        
                                        
                                        10.6
                                        
                                        %
                                        
                                        
                                        1,884Provision
      for income taxes
                                        
                                        
                                        11,849
                                        
                                        
                                        
                                        4.7
                                        
                                        %
                                        
                                        
                                        11,664
                                        
                                        
                                        
                                        4.3
                                        
                                        %
                                        
                                        
                                        185Income
      from continuing operations
                                        
                                        
                                        18,644
                                        
                                        
                                        
                                        7.5
                                        
                                        %
                                        
                                        
                                        16,945
                                        
                                        
                                        
                                        6.3
                                        
                                        %
                                        
                                        
                                        1,699Discontinued
      operations:Loss
      from discontinued operations before income taxes
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        %
                                        
                                        
                                        (7,200
                                        )
                                        
                                        
                                        (2.7
                                        )
                                        %
                                        
                                        
                                        7,200Benefit
      for income taxes
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        %
                                        
                                        
                                        (2,815
                                        )
                                        
                                        
                                        (1.0
                                        )
                                        %
                                        
                                        
                                        2,815Loss
      from discontinued operations
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        %
                                        
                                        
                                        (4,385
                                        )
                                        
                                        
                                        (1.7
                                        )
                                        %
                                        
                                        
                                        4,385Net
      income
                                        
                                        $
                                        18,644
                                        
                                        
                                        
                                        7.5
                                        
                                        %
                                        
                                        $
                                        12,560
                                        
                                        
                                        
                                        4.7
                                        
                                        %
                                        
                                        $
                                        6,084





26
 Table of Contents


We use a
52/53 week fiscal year.  Fiscal year 2009 will consist of 52 weeks,
whereas fiscal year 2008 consisted of 53 weeks.  The additional week
in fiscal year 2008 was included in the third quarter; therefore the nine month
period ended May 31, 2008 consisted of forty weeks as compared to the nine month
period ended May 30, 2009, which consisted of thirty-nine weeks.  As a
result, the current reporting period reflects one week less of net sales,
expenses and operating income as compared to the same period of the prior fiscal
year.





Net
Sales.Net sales
consist of product sales and are net of product returns and promotional
discounts. Net sales decreased $19.5 million, or 7.2%, to $250.2 million
for the nine months ended May 30, 2009 from $269.7 million for the nine
months ended May 31, 2008. The following details the changes in net sales during
such periods by business segment.





Class Rings.Net sales
decreased $10.5 million to $95.4 million for the nine months ended May
30, 2009 from $105.9 million for the nine months ended May 31, 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 with lower selling
prices due to softness in the economy, partially offset by an increase in
average selling price of college class rings due to an increase in gold
prices.





Yearbooks.Net sales
decreased $3.2 million to $89.4 million for the nine months ended May
30, 2009 from $92.6 million for the nine months ended May 31, 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.





Graduation Products.Net
sales decreased $3.9 million to $40.7 million for the nine months ended May
30, 2009 from $44.6 million for the nine months ended May 31, 2008. The decrease
in net sales was primarily the result of lower sales volume and product
mix.





Other.Net sales decreased
$1.9 million to $24.7 million for the nine months ended May 30, 2009
from $26.6 million for the nine months ended May 31, 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
57.8% for the nine months ended May 30, 2009, a 0.3 percentage point
increase from 57.5% for the nine months ended May 31, 2008. Overall, gross
profit decreased $10.4 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 our manufacturing processes and cost reduction
measures.





Selling, General
and Administrative Expenses.Selling, general and
administrative expenses decreased $9.4 million, or 8.5%, to
$101.8 million for the nine months ended May 30, 2009 from
$111.2 million for the nine months ended May 31, 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 $7.0 million to $71.6 million or 28.6% of
net sales, for the nine months ended May 30, 2009 from $78.6 million or
29.1% of net sales, for the nine months ended May 31, 2008 due to decreased
marketing expenditures and lower commissions, as a result of sales
decreases.





General
and administrative expenses for the nine months ended May 30, 2009 were
$30.2 million, or 12.1% of net sales, as compared to $32.6 million, or 12.1% of
net sales, for the nine months ended May 31, 2008. The decrease in general and
administrative expenses was primarily the result of decreases in professional
fees and consulting fees, partially offset by fees incurred to amend our credit
facility.





27
 Table of Contents


OperatingIncome.As a result of the
foregoing, operating income was $42.9 million, or 17.1% of net sales, for the
nine months ended May 30, 2009 as compared with operating income of
$43.9 million, or 16.3% of net sales, for the nine months ended May 31,
2008.





The class
rings segment reported operating income of $11.2 million for the nine
months ended May 30, 2009 as compared with operating income of
$11.4 million for the nine months ended May 31, 2008. The yearbooks segment
reported operating income of $25.5 million for the nine months ended May
30, 2009 as compared with operating income of $25.0 million for the nine months
ended May 31, 2008. The graduation products segment reported operating income of
$6.6 million for the nine months ended May 30, 2009 as compared with
operating income of $8.0 million for the nine months ended May 31, 2008.
The other segment reported an operating loss of $0.4 million for the nine months
ended May 30, 2009 as compared with operating loss of $0.5 million for the nine
months ended May 31, 2008.





Interest Expense,
Net.For
Intermediate Holdings, net interest expense was $22.8 million for the nine
months ended May 30, 2009 and $25.0 million for the nine months ended May
31, 2008. The average debt outstanding of Intermediate Holdings for the nine
months ended May 30, 2009 and the nine months ended May 31, 2008 was
$342 million and $361 million, respectively. The weighted average
interest rate on debt outstanding of Intermediate Holdings for the nine months
ended May 30, 2009 and the nine months ended May 31, 2008 was 8.3% and 8.5%,
respectively.





For AAC,
net interest expense was $12.4 million for the nine months ended May 30,
2009 and $15.3 million for the nine months ended May 31, 2008. The average
debt outstanding of AAC for the nine months ended May 30, 2009 and the nine
months ended May 31, 2008 was $211 million and $239 million, respectively.
The weighted average interest rate on debt outstanding of AAC for the nine
months ended May 30, 2009 and the nine months ended May 31, 2008 was 7.1% and
7.6%, respectively.





Provisionfor Income
Taxes.For the
nine months ended May 30, 2009 and May 31, 2008, Intermediate Holdings recorded
an income tax provision of $8.9 million and $9.3 million,
respectively, which represents an effective tax rate of 44% and 49%,
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
nine months ended May 30, 2009 and May 31, 2008 represent an estimate of the
annual federal and state income tax rate.





For the
nine months ended May 30, 2009 and May 31, 2008, AAC recorded an income tax
provision of $11.8 million and $11.7 million, respectively, which represents an
effective tax rate of 39% and 41%, 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 nine months ended May 30, 2009
and May 31, 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 nine months ended May 31,
2008 was $7.2 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 $39.5 million of cash for the nine
months ended May 30, 2009 compared to cash provided of $46.0 million for
the nine months ended May 31, 2008. Operating activities for
AAC provided $45.7 million of cash for the nine months ended May 30, 2009
compared to cash provided of $46.0 million for the nine months ended May
31, 2008. The decrease in cash provided by operating activities during fiscal
year 2009 compared to fiscal year 2008 was a result of increased working
capital, partially offset by lower interest payments. 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.  Cash provided by operating activities in fiscal
2009 for Intermediate Holdings was further reduced by required cash interest
payments related to the 10.25% Notes.





28
 Table of Contents


Investing
Activities.Capital
expenditures for the nine months ended May 30, 2009 were $4.3 million
compared to capital expenditures of $11.0 million for the nine months ended
May 31, 2008. Capital expenditures during the nine months ended May 30, 2009 are
lower than the nine months ended May 31, 2008 mainly due to the purchase of
printing presses during fiscal year 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 nine months ended May 30, 2009, cash was used
to pay down $28.6 million of the term loan, of which $2.6 million were
mandatory payments.  During the nine months ended May 31, 2008, cash
was used to pay down $11.4 million of the term loan, of which approximately
$0.9 million were mandatory payments and there were net payments under the
revolving credit facility of $7.8 million.  During the nine months
ended May 30, 2009, AAC paid $6.7 million related to an interest payment on the
10.25% senior discount notes of Intermediate Holdings which is reflected as a
cash distribution to Intermediate Holdings.





Capital
Resources.We
have a significant amount of indebtedness. On May 30, 2009, Intermediate
Holdings had total indebtedness of $328.4 million, of which $131.5 million was
10.25% senior discount notes, $150.0 million was 8.25% senior subordinated notes
and $46.9 million was indebtedness under the existing senior secured credit
facility. The Second Amendment to the Amended Senior Credit
Facility modified the availability under the existing revolving facility
from $40 million to $25 million and extended the term through March
25, 2011.  We have $23.3 million in available revolving loan
borrowings under the Amended Senior Credit Facility as of May 30,
2009.  We are currently in compliance with financial covenants in all
of the agreements governing our outstanding indebtedness.





The
Second Amendment to the Amended Senior Credit Facility increased the base
interest rate and applicable margin on our outstanding term loan effective May
20, 2009.  The interest rate on the term loan was 6.25% at May 30,
2009.





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 accrues and is payable semiannually
in arrears on April 1 and October 1 of each year, at a rate of 10.25% per
annum.  The initial interest payment of $6.7 million was made on April
1, 2009.  This payment was funded by AAC, and was accounted for as a
capital distribution from AAC and reflected as a reduction of AAC’s additional
paid-in capital.





At May
30, 2009, Parent Holdings had indebtedness in addition to the indebtedness at
Intermediate Holdings and AAC of $120.6 million, of which $113.1 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 series A 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 series A preferred stock of
Parent Holdings matures in January 2013. Accumulated undeclared dividends at May
30, 2009 totaled $4.4 million.
 29
 Table of Contents


As
described in “Significant Developments” above, on June 4, 2009, Parent Holdings
commenced a tender offer to purchase additional outstanding Parent Holdings
Notes. Payment for the notes that are purchased in the tender offer may be
partially funded with cash borrowed by AAC under the Amended Senior Credit
Facility and distributed to Parent Holdings.  The Second Amendment to
the Amended Senior Credit Facility allows AAC to make restricted payments to
Parent Holdings in an amount not to exceed $15.0 million for the purpose of
repayment, redemption or repurchase of indebtedness of Parent Holdings and
Intermediate Holdings.  As described in “Significant Developments”
above, payment for the notes that are purchased in the tender offer will be
partially funded with proceeds of the sale of Series A Preferred Stock of
American Achievement Intermediate Holding Corp., a newly formed subsidiary of
Parent Holdings.




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 had 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 did not own the consigned gold nor did
we have risk of loss related to price variance on such inventory until we paid
The Bank of Nova Scotia for quantities purchased. Accordingly, we did not
reflect the value of consigned gold in our inventory, nor did we reflect the
corresponding liability for financial statement purposes.





On March
4, 2009, we received notice from The Bank of Nova Scotia electing to terminate
the consignment agreement.  The termination was pursuant to a
provision in the agreement allowing either party to terminate the agreement upon
60 days written notice without cause.  The termination was 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 May 30, 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.





30
 Table of Contents


Recent
Accounting Pronouncements




In May
2009, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standard (“SFAS”) No. 165, “Subsequent Events” (“SFAS
165”). SFAS 165 establishes general standards of accounting for and disclosures
of events that occur after the balance sheet date but before financial
statements are issued or are available to be issued.  It requires the
disclosure of the date through which an entity has evaluated subsequent events
and the basis for that date. The provisions of SFAS 165 are effective for us
beginning with the fourth quarter of our fiscal year 2009. We do not expect the
adoption of the standard to have a material impact on our financial position and
results of operations.





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 are 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.  The
Amended Senior Credit Facility (revolver and term loan) is a variable rate
arrangement. The Second Amendment to the Amended Senior Credit Facility provides
that the Eurodollar rate used in determining our interest rate shall not be less
than 2.0%.  Because current market rates are significantly below this
threshold, our exposure to market rate risk is limited at this
time.  However, should market rates increase, each quarter point above
the 2% threshold 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.





31
 Table of Contents


ITEM 4. CONTROLS AND PROCEDURES





Evaluation of
disclosure controls and procedures.Our management evaluated,
under the supervision and with the participation of the 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.





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.


32
 Table of Contents


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).3.4
              
              Certificate
      of Amendment of Certificate of Incorporation of American Achievement
      Corporation, filed with the Delaware Secretary of State on December 28,
      2007.10.1
              
              Second
      Amendment to Credit and Guaranty Agreement dated as of May 20, 2009, by
      and among American Achievement Corporation, the Guarantors, Goldman
      Sachs Credit Partners L.P. and the other lenders party
      thereto (incorporated by reference to Exhibit 10.1 to AAC Group
      Holding Corp.'s Form 8-K as filed on May 21, 2009).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





33
 Table of Contents





AAC
GROUP HOLDING CORP.


AMERICAN
ACHIEVEMENT CORPORATION





SIGNATURES





Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrants have
duly caused this report to be signed on their behalf by the undersigned
thereunto duly authorized.








Date:
July 10, 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)











34