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 November 29, 2008





OR





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





COMMISSION
FILE NUMBERS 333-137067, 333-121479, 333-84294





AMERICAN
ACHIEVEMENT GROUP HOLDING CORP.


AAC
GROUP HOLDING CORP.


AMERICAN
ACHIEVEMENT CORPORATION


(Exact
name of registrant as specified in its charter)


DELAWARE
            
            20-4833998DELAWARE
            
            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 oNo þ.





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):




Large
accelerated filer o                                                                                                            Accelerated
filer o


Non-accelerated
filer þ(do not
check if smaller reporting
company)                                  Smaller
reporting company o


Indicate
by check mark whether the registrants are shell companies (as defined in
Rule 12b-2 of the Exchange Act). Yes oNo þ.





Number of
shares outstanding of American Achievement Group Holding Corp. as of December
31, 2008: 505,460 shares of common stock.


Number of
shares outstanding of AAC Group Holding Corp. as of December 31, 2008: 100
shares of common stock.


Number of
shares of American Achievement Corporation outstanding as of December 31, 2008:
100 shares of common stock.





This Form 10-Q is a combined quarterly
report being filed separately by three registrants: American Achievement Group
Holding Corp., AAC Group Holding Corp., and American Achievement Corporation.
Unless the context indicates otherwise, any reference in this report to “Parent
Holdings” refers to American Achievement Group Holding Corp., “Intermediate
Holdings” refers to AAC Group Holding Corp., and “AAC” refers to American
Achievement Corporation, the indirect wholly-owned operating subsidiary
ofIntermediate Holdings. The “Company”,
“we”, “us”, and “our” refer to American Achievement Group Holding Corp., and AAC
Group Holding Corp. together with American Achievement
Corporation.








FOR
THE QUARTERLY PERIOD ENDED NOVEMBER 29, 2008


INDEX











PAGEPART
      I. FINANCIAL INFORMATIONItem 1.
      Condensed Consolidated Financial Statements and NotesCondensed
      Consolidated Balance Sheets (unaudited) — As of November 29, 2008 and
      August 30, 2008
            3Condensed
      Consolidated Statements of Operations (unaudited) — For the Three Months
      Ended November 29, 2008 and the Three Months Ended November 24,
      2007
            6Condensed
      Consolidated Statements of Cash Flows (unaudited) — For the Three Months
      Ended November 29, 2008 and the Three Months Ended November 24,
      2007
            9Notes
      to Condensed Consolidated Financial Statements (unaudited)
            12Item 2.
      Management’s Discussion and Analysis of Financial Condition and Results of
      Operations
            22Item 3.
      Quantitative and Qualitative Disclosures About Market Risk
            28Item 4.
      Controls and Procedures
            28PART
      II. OTHER INFORMATIONItem 1.
      Legal Proceedings
            29Item 6.
      Exhibits
            30SIGNATURES
            31Certification
      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 American Achievement Group Holding
Corp., 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 “Parent
Holdings” refers to American Achievement Group Holding Corp., “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 American
Achievement Group Holding Corp., and AAC Group Holding Corp. together with
American Achievement Corporation.








2


AMERICAN
ACHIEVEMENT GROUP HOLDING CORP.


Condensed
Consolidated Balance Sheets


(unaudited)




Parent
      HoldingsNovember
      29, 2008
            
            
            August
      30, 2008(Dollars
      in thousands)ASSETSCash
      and cash equivalents
            
            $
            14,970
            
            
            $
            9,757Accounts
      receivable, net of allowances
            
            
            35,156
            
            
            
            36,920Inventories
            
            
            29,956
            
            
            
            27,411Deferred
      tax assets
            
            
            24,504
            
            
            
            11,752Prepaid
      expenses and other current assets, net
            
            
            21,593
            
            
            
            17,062Total
      current assets
            
            
            126,179
            
            
            
            102,902Property,
      plant and equipment, net
            
            
            66,825
            
            
            
            68,477Goodwill
            
            
            171,073
            
            
            
            171,073Other
      intangible assets, net
            
            
            94,888
            
            
            
            97,000Deferred
      tax assets
            
            
            -
            
            
            
            973Other
      assets, net
            
            
            18,223
            
            
            
            18,692Total
      assets
            
            $
            477,188
            
            
            $
            459,117LIABILITIES
      AND STOCKHOLDERS’ DEFICITBook
      overdraft
            
            $
            119
            
            
            $
            61Accounts
      payable
            
            
            8,734
            
            
            
            10,900Customer
      deposits
            
            
            28,748
            
            
            
            8,102Accrued
      expenses
            
            
            24,364
            
            
            
            22,018Deferred
      revenue
            
            
            6,909
            
            
            
            2,750Accrued
      interest
            
            
            5,077
            
            
            
            5,722Current
      portion of long-term debt
            
            
            469
            
            
            
            2,908Total
      current liabilities
            
            
            74,420
            
            
            
            52,461Long-term
      debt, net of current portion
            
            
            562,068
            
            
            
            556,135Deferred
      tax liabilities
            
            
            5,945
            
            
            
            -Mandatory
      redeemable preferred stock
            
            
            7,500
            
            
            
            7,500Other
      long-term liabilities
            
            
            9,840
            
            
            
            9,201Total
      liabilities
            
            
            659,773
            
            
            
            625,297Commitments
      and contingencies (Note 8)Stockholders’
      deficit:Common
      stock
            
            
            5
            
            
            
            5Distributions
      in excess of paid-in capital
            
            
            (123,880
            )
            
            
            (123,880
            )Accumulated
      deficit
            
            
            (61,345
            )
            
            
            (45,014
            )Accumulated
      other comprehensive income
            
            
            2,635
            
            
            
            2,709Total
      stockholders’ deficit
            
            
            (182,585
            )
            
            
            (166,180
            )Total
      liabilities and stockholders’ deficit
            
            $
            477,188
            
            
            $
            459,117








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


3


AAC
GROUP HOLDING CORP.


Condensed
Consolidated Balance Sheets


(unaudited)










Intermediate
      HoldingsNovember
      29, 2008
            
            
            August
      30, 2008(Dollars
      in thousands)ASSETSCash
      and cash equivalents
            
            $
            14,959
            
            
            $
            9,746Accounts
      receivable, net of allowances
            
            
            35,156
            
            
            
            36,920Inventories
            
            
            29,956
            
            
            
            27,411Deferred
      tax assets
            
            
            16,130
            
            
            
            12,196Prepaid
      expenses and other current assets, net
            
            
            24,812
            
            
            
            19,395Total
      current assets
            
            
            121,013
            
            
            
            105,668Property,
      plant and equipment, net
            
            
            66,825
            
            
            
            68,477Goodwill
            
            
            171,073
            
            
            
            171,073Other
      intangible assets, net
            
            
            94,888
            
            
            
            97,000Other
      assets, net
            
            
            12,465
            
            
            
            12,555Total
      assets
            
            $
            466,264
            
            
            $
            454,773LIABILITIES
      AND STOCKHOLDER'S EQUITYBook
      overdraft
            
            $
            119
            
            
            $
            61Accounts
      payable
            
            
            8,734
            
            
            
            10,900Customer
      deposits
            
            
            28,748
            
            
            
            8,102Accrued
      expenses
            
            
            17,732
            
            
            
            16,863Deferred
      revenue
            
            
            6,909
            
            
            
            2,750Accrued
      interest
            
            
            5,077
            
            
            
            5,722Current
      portion of long-term debt
            
            
            469
            
            
            
            2,908Total
      current liabilities
            
            
            67,788
            
            
            
            47,306Long-term
      debt, net of current portion
            
            
            350,531
            
            
            
            352,998Deferred
      tax liabilities
            
            
            21,166
            
            
            
            21,595Other
      long-term liabilities
            
            
            2,564
            
            
            
            2,703Total
      liabilities
            
            
            442,049
            
            
            
            424,602Commitments
      and contingencies (Note 8)Stockholder's
      equity:Common
      stock
            
            
            -
            
            
            
            -Additional
      paid-in capital
            
            
            24,309
            
            
            
            24,309Accumulated
      earnings (deficit)
            
            
            (2,729
            )
            
            
            3,153Accumulated
      other comprehensive income
            
            
            2,635
            
            
            
            2,709Total
      stockholder's equity
            
            
            24,215
            
            
            
            30,171Total
      liabilities and stockholder's equity
            
            $
            466,264
            
            
            $
            454,773








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





4


AMERICAN
ACHIEVEMENT CORPORATION


Condensed
Consolidated Balance Sheets


(unaudited)











AACNovember
      29, 2008
            
            
            August
      30, 2008(Dollars
      in thousands)ASSETSCash
      and cash equivalents
            
            $
            14,948
            
            
            $
            9,735Accounts
      receivable, net of allowances
            
            
            35,156
            
            
            
            36,920Inventories
            
            
            29,956
            
            
            
            27,411Deferred
      tax assets
            
            
            17,539
            
            
            
            14,920Prepaid
      expenses and other current assets, net
            
            
            24,256
            
            
            
            18,839Total
      current assets
            
            
            121,855
            
            
            
            107,825Property,
      plant and equipment, net
            
            
            66,825
            
            
            
            68,477Goodwill
            
            
            171,073
            
            
            
            171,073Other
      intangible assets, net
            
            
            94,888
            
            
            
            97,000Other
      assets, net
            
            
            10,760
            
            
            
            10,739Total
      assets
            
            $
            465,401
            
            
            $
            455,114LIABILITIES
      AND STOCKHOLDER'S EQUITYBook
      overdraft
            
            $
            119
            
            
            $
            61Accounts
      payable
            
            
            8,734
            
            
            
            10,900Customer
      deposits
            
            
            28,748
            
            
            
            8,102Accrued
      expenses
            
            
            17,721
            
            
            
            16,852Deferred
      revenue
            
            
            6,909
            
            
            
            2,750Accrued
      interest
            
            
            2,831
            
            
            
            5,722Current
      portion of long-term debt
            
            
            469
            
            
            
            2,908Total
      current liabilities
            
            
            65,531
            
            
            
            47,295Long-term
      debt, net of current portion
            
            
            219,031
            
            
            
            222,577Deferred
      tax liabilities
            
            
            39,535
            
            
            
            39,580Other
      long-term liabilities
            
            
            2,536
            
            
            
            2,675Total
      liabilities
            
            
            326,633
            
            
            
            312,127Commitments
      and contingencies (Note 8)Stockholder's
      equity:Common
      stock
            
            
            -
            
            
            
            -Additional
      paid-in capital
            
            
            109,211
            
            
            
            109,211Accumulated
      earnings
            
            
            26,922
            
            
            
            31,067Accumulated
      other comprehensive income
            
            
            2,635
            
            
            
            2,709Total
      stockholder's equity
            
            
            138,768
            
            
            
            142,987Total
      liabilities and stockholder's equity
            
            $
            465,401
            
            
            $
            455,114










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





5


AMERICAN
ACHIEVEMENT GROUP HOLDING CORP.


Condensed
Consolidated Statements of Operations


(unaudited)











Parent
      HoldingsFor
      the three months endedNovember
      29, 2008
            
            
            November
      24, 2007(Dollars
      in thousands)Net
      sales
            
            $
            49,213
            
            
            $
            51,940Cost
      of sales
            
            
            25,051
            
            
            
            25,317Gross
      profit
            
            
            24,162
            
            
            
            26,623Selling,
      general and administrative expenses
            
            
            28,852
            
            
            
            29,346Operating
      loss
            
            
            (4,690
            )
            
            
            (2,723
            )Interest
      expense, net
            
            
            17,430
            
            
            
            15,631Loss
      from continuing operations before income taxes
            
            
            (22,120
            )
            
            
            (18,354
            )Benefit
      for income taxes
            
            
            (5,789
            )
            
            
            (4,555
            )Loss
      from continuing operations
            
            
            (16,331
            )
            
            
            (13,799
            )Discontinued
      operations:Loss
      from discontinued operations before income taxes
            
            
            -
            
            
            
            (7,090
            )Benefit
      for income taxes
            
            
            -
            
            
            
            (2,772
            )Loss
      from discontinued operations
            
            
            -
            
            
            
            (4,318
            )Net
      loss
            
            $
            (16,331
            )
            
            $
            (18,117
            )








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




6


AAC
GROUP HOLDING CORP.


Condensed
Consolidated Statements of Operations


(unaudited)











Intermediate
      HoldingsFor
      the three months endedNovember
      29, 2008
            
            
            November
      24, 2007(Dollars
      in thousands)Net
      sales
            
            $
            49,213
            
            
            $
            51,940Cost
      of sales
            
            
            25,051
            
            
            
            25,317Gross
      profit
            
            
            24,162
            
            
            
            26,623Selling,
      general and administrative expenses
            
            
            26,489
            
            
            
            29,346Operating
      loss
            
            
            (2,327
            )
            
            
            (2,723
            )Interest
      expense, net
            
            
            7,873
            
            
            
            8,171Loss
      from continuing operations before income taxes
            
            
            (10,200
            )
            
            
            (10,894
            )Benefit
      for income taxes
            
            
            (4,318
            )
            
            
            (4,592
            )Loss
      from continuing operations
            
            
            (5,882
            )
            
            
            (6,302
            )Discontinued
      operations:Loss
      from discontinued operations before income taxes
            
            
            -
            
            
            
            (7,090
            )Benefit
      for income taxes
            
            
            -
            
            
            
            (2,772
            )Loss
      from discontinued operations
            
            
            -
            
            
            
            (4,318
            )Net
      loss
            
            $
            (5,882
            )
            
            $
            (10,620
            )








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





7


AMERICAN
ACHIEVEMENT CORPORATION


Condensed
Consolidated Statements of Operations


(unaudited)










AACFor
      the three months endedNovember
      29, 2008
            
            
            November
      24, 2007(Dollars
      in thousands)Net
      sales
            
            $
            49,213
            
            
            $
            51,940Cost
      of sales
            
            
            25,051
            
            
            
            25,317Gross
      profit
            
            
            24,162
            
            
            
            26,623Selling,
      general and administrative expenses
            
            
            26,489
            
            
            
            29,346Operating
      loss
            
            
            (2,327
            )
            
            
            (2,723
            )Interest
      expense, net
            
            
            4,437
            
            
            
            5,105Loss
      from continuing operations before income taxes
            
            
            (6,764
            )
            
            
            (7,828
            )Benefit
      for income taxes
            
            
            (2,619
            )
            
            
            (3,090
            )Loss
      from continuing operations
            
            
            (4,145
            )
            
            
            (4,738
            )Discontinued
      operations:Loss
      from discontinued operations before income taxes
            
            
            -
            
            
            
            (7,090
            )Benefit
      for income taxes
            
            
            -
            
            
            
            (2,772
            )Loss
      from discontinued operations
            
            
            -
            
            
            
            (4,318
            )Net
      loss
            
            $
            (4,145
            )
            
            $
            (9,056
            )








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








8


AMERICAN
ACHIEVEMENT GROUP HOLDING CORP.


Condensed
Consolidated Statements of Cash Flows


(unaudited)








Parent
      HoldingsFor
      the three months endedNovember
      29, 2008
            
            
            November
      24, 2007(Dollars
      in thousands)Cash
      flows from operating activities:Net
      loss
            
            $
            (16,331
            )
            
            $
            (18,117
            )Adjustments
      to reconcile net loss to net cash provided by operating
      activities:Other
      charges
            
            
            -
            
            
            
            5,542Depreciation
      and amortization
            
            
            5,966
            
            
            
            5,276Deferred
      income taxes
            
            
            (5,789
            )
            
            
            (7,328
            )Amortization
      of deferred financing fees
            
            
            872
            
            
            
            873Accretion
      of interest on 10.25% senior discount notes
            
            
            1,079
            
            
            
            2,962Accretion
      of Senior PIK Notes
            
            
            8,400
            
            
            
            6,388Gain
      on sale of property, plant and equipment
            
            
            -
            
            
            
            (21
            )Allowance for
      doubtful accounts
            
            
            (90
            )
            
            
            326Changes
      in assets and liabilities:Accounts
      receivable
            
            
            1,854
            
            
            
            1,729Inventories
            
            
            (1,940
            )
            
            
            3,150Prepaid
      expenses and other current assets, net
            
            
            (4,531
            )
            
            
            (2,652
            )Other
      assets, net
            
            
            (1,009
            )
            
            
            1,666Customer
      deposits
            
            
            20,646
            
            
            
            13,276Deferred
      revenue
            
            
            4,159
            
            
            
            5,017Accounts
      payable, accrued expenses, accrued interest and other long-term
      liabilities
            
            
            (602
            )
            
            
            (2,647
            )Net
      cash provided by operating activities
            
            
            12,684
            
            
            
            15,440Cash
      flows from investing activities:Purchases
      of property, plant and equipment
            
            
            (1,544
            )
            
            
            (3,116
            )Proceeds
      from sales of property, plant and equipment
            
            
            -
            
            
            
            52Net
      cash used in investing activities
            
            
            (1,544
            )
            
            
            (3,064
            )Cash
      flows from financing activities:Payments
      on revolving credit facility
            
            
            (6,000
            )
            
            
            (12,950
            )Proceeds
      from credit facility revolver
            
            
            6,000
            
            
            
            14,100Payments
      on term loan
            
            
            (5,985
            )
            
            
            (225
            )Change
      in book overdraft
            
            
            58
            
            
            
            (4,524
            )Net
      cash used in financing activities
            
            
            (5,927
            )
            
            
            (3,599
            )Net
      increase in cash and cash equivalents
            
            
            5,213
            
            
            
            8,777Cash
      and cash equivalents, beginning of period
            
            
            9,757
            
            
            
            1,454Cash
      and cash equivalents, end of period
            
            $
            14,970
            
            
            $
            10,231Supplemental
      disclosures of cash flow information:Cash
      paid during the period for:Interest
            
            $
            6,968
            
            
            $
            8,099Income
      taxes
            
            $
            192
            
            
            $
            465Supplemental
      non-cash investing and financing activities disclosure:Additions
      to property, plant and equipment included in accounts
    payable
            
            $
            752
            
            
            $
            84








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


9


AAC
GROUP HOLDING CORP.


Condensed
Consolidated Statements of Cash Flows


(unaudited)








Intermediate
      HoldingsFor
      the three months endedNovember
      29, 2008
            
            
            November
      24, 2007(Dollars
      in thousands)Cash
      flows from operating activities:Net
      loss
            
            $
            (5,882
            )
            
            $
            (10,620
            )Adjustments
      to reconcile net loss to net cash provided by operating
      activities:Other
      charges
            
            
            -
            
            
            
            5,542Depreciation
      and amortization
            
            
            5,966
            
            
            
            5,276Deferred
      income taxes
            
            
            (4,318
            )
            
            
            (7,365
            )Amortization
      of deferred financing fees
            
            
            493
            
            
            
            494Accretion
      of interest on 10.25% senior discount notes
            
            
            1,079
            
            
            
            2,962Gain
      on sale of property, plant and equipment
            
            
            -
            
            
            
            (21
            )Allowance for
      doubtful accounts
            
            
            (90
            )
            
            
            326Changes
      in assets and liabilities:Accounts
      receivable
            
            
            1,854
            
            
            
            1,729Inventories
            
            
            (1,940
            )
            
            
            3,150Prepaid
      expenses and other current assets, net
            
            
            (5,417
            )
            
            
            (2,652
            )Other
      assets, net
            
            
            (1,009
            )
            
            
            1,666Customer
      deposits
            
            
            20,646
            
            
            
            13,276Deferred
      revenue
            
            
            4,159
            
            
            
            5,017Accounts
      payable, accrued expenses, accrued interest and other long-term
      liabilities
            
            
            (2,857
            )
            
            
            (3,344
            )Net
      cash provided by operating activities
            
            
            12,684
            
            
            
            15,436Cash
      flows from investing activities:Purchases
      of property, plant and equipment
            
            
            (1,544
            )
            
            
            (3,116
            )Proceeds
      from sales of property, plant and equipment
            
            
            -
            
            
            
            52Net
      cash used in investing activities
            
            
            (1,544
            )
            
            
            (3,064
            )Cash
      flows from financing activities:Payments
      on revolving credit facility
            
            
            (6,000
            )
            
            
            (12,950
            )Proceeds
      from credit facility revolver
            
            
            6,000
            
            
            
            14,100Payments
      on term loan
            
            
            (5,985
            )
            
            
            (225
            )Change
      in book overdraft
            
            
            58
            
            
            
            (4,524
            )Net
      cash used in financing activities
            
            
            (5,927
            )
            
            
            (3,599
            )Net
      increase in cash and cash equivalents
            
            
            5,213
            
            
            
            8,773Cash
      and cash equivalents, beginning of period
            
            
            9,746
            
            
            
            1,168Cash
      and cash equivalents, end of period
            
            $
            14,959
            
            
            $
            9,941Supplemental
      disclosures of cash flow information:Cash
      paid during the period for:Interest
            
            $
            6,968
            
            
            $
            8,099Income
      taxes
            
            $
            192
            
            
            $
            465Supplemental
      non-cash investing and financing activities disclosure:Additions
      to property, plant and equipment included in accounts
    payable
            
            $
            752
            
            
            $
            84








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





10


AMERICAN
ACHIEVEMENT CORPORATION


Condensed
Consolidated Statements of Cash Flows


(unaudited)








AACFor
      the three months endedNovember
      29, 2008
            
            
            November
      24, 2007(Dollars
      in thousands)Cash
      flows from operating activities:Net
      loss
            
            $
            (4,145
            )
            
            $
            (9,056
            )Adjustments
      to reconcile net loss to net cash provided by operating
      activities:Other
      charges
            
            
            -
            
            
            
            5,542Depreciation
      and amortization
            
            
            5,966
            
            
            
            5,276Deferred
      income taxes
            
            
            (2,619
            )
            
            
            (5,863
            )Amortization
      of deferred financing fees
            
            
            382
            
            
            
            383Gain
      on sale of property, plant and equipment
            
            
            -
            
            
            
            (21
            )Allowance for
      doubtful accounts
            
            
            (90
            )
            
            
            326Changes
      in assets and liabilities:Accounts
      receivable
            
            
            1,854
            
            
            
            1,729Inventories
            
            
            (1,940
            )
            
            
            3,150Prepaid
      expenses and other current assets, net
            
            
            (5,417
            )
            
            
            (2,652
            )Other
      assets, net
            
            
            (1,009
            )
            
            
            1,666Customer
      deposits
            
            
            20,646
            
            
            
            13,276Deferred
      revenue
            
            
            4,159
            
            
            
            5,017Accounts
      payable, accrued expenses, accrued interest and other long-term
      liabilities
            
            
            (5,103
            )
            
            
            (3,344
            )Net
      cash provided by operating activities
            
            
            12,684
            
            
            
            15,429Cash
      flows from investing activities:Purchases
      of property, plant and equipment
            
            
            (1,544
            )
            
            
            (3,116
            )Proceeds
      from sales of property, plant and equipment
            
            
            -
            
            
            
            52Net
      cash used in investing activities
            
            
            (1,544
            )
            
            
            (3,064
            )Cash
      flows from financing activities:Payments
      on revolving credit facility
            
            
            (6,000
            )
            
            
            (12,950
            )Proceeds
      from credit facility revolver
            
            
            6,000
            
            
            
            14,100Payments
      on term loan
            
            
            (5,985
            )
            
            
            (225
            )Change
      in book overdraft
            
            
            58
            
            
            
            (4,524
            )Net
      cash used in financing activities
            
            
            (5,927
            )
            
            
            (3,599
            )Net
      increase in cash and cash equivalents
            
            
            5,213
            
            
            
            8,766Cash
      and cash equivalents, beginning of period
            
            
            9,735
            
            
            
            620Cash
      and cash equivalents, end of period
            
            $
            14,948
            
            
            $
            9,386Supplemental
      disclosures of cash flow information:Cash
      paid during the period for:Interest
            
            $
            6,968
            
            
            $
            8,099Income
      taxes
            
            $
            192
            
            
            $
            465Supplemental
      non-cash investing and financing activities disclosure:Additions
      to property, plant and equipment included in accounts
    payable
            
            $
            752
            
            
            $
            84








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


11
 AMERICAN
ACHIEVEMENT GROUP HOLDING CORP.
 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





Registrants





The consolidated financial statements of American Achievement Group Holding
Corp. (“Parent Holdings”) include the accounts of its wholly-owned subsidiary,
AAC Group Holding Corp. (“Intermediate Holdings”) and its indirect wholly-owned
subsidiary, American Achievement Corporation (“AAC”), all of which are separate
public reporting companies. The consolidated financial statements of
Intermediate Holdings include the accounts of its indirect wholly-owned
subsidiary, AAC. Parent Holdings, Intermediate Holdings, and AAC are treated as
entities under common control. Parent Holdings, Intermediate Holdings and AAC
together with their consolidated subsidiaries are referred to as the “Company.”
Unless separately stated, the notes herein relate to Parent Holdings,
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 and college 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 4, during the first quarter of fiscal year 2008, the Company
decided to shut down its achievement publications segment.  This
segment sold achievement publications in the specialty directory publishing
industry nationwide.





Consolidation





The
consolidated financial statements include the accounts of the Company and its
majority owned subsidiaries.  All intercompany accounts and
transactions have been eliminated in consolidation.




Parent
Holdings conducts all of its business through Intermediate Holdings and AAC and
its subsidiaries. The consolidated financial statements of Parent Holdings
include the accounts of its direct wholly-owned subsidiary, Intermediate
Holdings and its indirect wholly-owned subsidiary, AAC. Parent Holdings’
consolidated financial statements are substantially identical to Intermediate
Holdings’ consolidated financial statements, with the exception of the series A
preferred stock, senior PIK notes, costs related to the Transaction (see Note
2), additional interest expense related to its series A preferred stock and
senior PIK notes, amortization of deferred financing costs, interest income on
its cash balances and the related income taxes.





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 months ended November 29, 2008 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.


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


Unless
separately stated, the notes herein relate to Parent Holdings, Intermediate
Holdings and AAC.





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
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 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.   The Company adopted the recognition and
disclosure provisions of SFAS 158 in fiscal 2007. The measurement date
provisions of SFAS 158 will be effective for the Company beginning with its
fiscal year 2009 and the Company will use a measurement date as of the end of
its fiscal year for its defined benefit postretirement plans in fiscal
2009.




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





2.
Stock Purchase Agreement




Pursuant
to a Stock Purchase Agreement dated May 15, 2008 among Herff Jones Inc. (the
“Buyer”), Parent Holdings and the holders of all of Parent Holdings’ equity
securities (the “Equity Holders”), the Equity Holders agreed to sell all of the
equity in Parent Holdings to the Buyer (the “Transaction”).  On
December 5, 2008, Parent Holdings and the Buyer, together with the Equity
Holders, announced that such parties have entered into a Settlement Agreement
pursuant to which they have mutually agreed to terminate the Stock Purchase
Agreement (see Note 13).




During
the first quarter of 2009, Parent Holdings recorded costs related to the
Transaction of $2.4 million in selling, general and administrative
expenses.  As of November 29, 2008, Parent Holdings had accrued
expenses related to the Transaction of $6.6 million.




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


3.
Comprehensive Loss





The
following amounts were included in determining comprehensive loss for the
three months ended November 29, 2008 and November 24, 2007.




For
      the three months endedNovember
      29, 2008
            
            November
      24, 2007Parent
      HoldingsNet
      loss
            
            $
            (16,331
            )
            
            $
            (18,117
            )Amortization
      of net actuarial gain and prior service costs - pension and postretirement
      plans, net of tax
            
            
            (74
            )
            
            
            (73
            )Total
      comprehensive loss
            
            $
            (16,405
            )
            
            $
            (18,190
            )For
      the three months endedNovember
      29, 2008
            
            November
      24, 2007Intermediate
      HoldingsNet
      loss
            
            $
            (5,882
            )
            
            $
            (10,620
            )Amortization
      of net actuarial gain and prior service costs - pension and postretirement
      plans, net of tax
            
            
            (74
            )
            
            
            (73
            )Total
      comprehensive loss
            
            $
            (5,956
            )
            
            $
            (10,693
            )For
      the three months endedNovember
      29, 2008
            
            November
      24, 2007AACNet
      loss
            
            $
            (4,145
            )
            
            $
            (9,056
            )Amortization
      of net actuarial gain and prior service costs - pension and postretirement
      plans, net of tax
            
            
            (74
            )
            
            
            (73
            )Total
      comprehensive loss
            
            $
            (4,219
            )
            
            $
            (9,129
            )




4.
Discontinued Operations





On
October 26, 2007, the Company announced a planned shutdown of the achievement
publications segment. Operations of this segment have ceased and have been
eliminated from the ongoing operations of the Company as a result of the
shutdown. All activities in connection with the shutdown were completed
prior to May 31, 2008, and the Company has not had any significant continuing
involvement in this segment since then.





The
results of operations of the achievement publications business are reported as
discontinued operations in the condensed consolidated income statements for the
period ended November 24, 2007.  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 months ended November 24, 2007 are as
follows:




For
      the three months endedNovember
      24, 2007Discontinued
      operations:Net
      sales
            
            $
            1,758Operating
      loss
            
            $
            (7,090
            )Benefit
      for income taxes
            
            
            (2,772
            )Loss
      from discontinued operations
            
            $
            (4,318
            )


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


The
Company recognized charges of $5.5 million during the three months ended
November 24, 2007 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 period
ended November 24, 2007, are $0.7 million of costs incurred for contract
termination and employee termination costs related to the
shutdown.  All such costs have been paid as of November 29,
2008.





5.
Inventories




November
      29, 2008
            
            
            August
      30, 2008Raw
      materials
            
            $
            14,016
            
            
            $
            15,840Work
      in process
            
            
            8,090
            
            
            
            5,431Finished
      goods
            
            
            8,319
            
            
            
            6,540Less—Reserves
            
            
            (469
            )
            
            
            (400
            )$
            29,956
            
            
            $
            27,411




The
Company’s cost of sales includes depreciation of $2,268 and $2,042 for the three
months ended November 29, 2008 and November 24, 2007, respectively.





6.
Goodwill and Other Intangible Assets





Goodwill




November
      29, 2008
            
            
            August
      30, 2008Class Rings
            
            $
            67,092
            
            
            $
            67,092Yearbooks
            
            
            65,241
            
            
            
            65,241Graduation
      Products
            
            
            23,781
            
            
            
            23,781Other
            
            
            14,959
            
            
            
            14,959Total
            
            $
            171,073
            
            
            $
            171,073




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


Other
Intangible Assets




November
      29, 2008Estimated
            Gross
            
            Accumulated
            
            NetUseful
      Life
            Asset
            
            Amortization
            
            AssetTrademarks
            Indefinite
            
            $
            36,826
            
            
            $
            -
            
            
            $
            36,826Patents
            14 to 17 years
            
            
            7,317
            
            
            
            (2,070
            )
            
            
            5,247Customer
      lists and distribution contracts
            3
      to 12 years
            
            
            98,340
            
            
            
            (45,525
            )
            
            
            52,815Total
            
            
            $
            142,483
            
            
            $
            (47,595
            )
            
            $
            94,888August
      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




Total
amortization on other intangible assets was $2,712 and $2,562 for the three
months ended November 29, 2008 and November 24, 2007, respectively, which is
recorded as selling, general and administrative expenses.  Estimated
annual amortization expense is as follows:




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







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


7.
Long-term Debt




November
      29, 2008
            August
      30, 2008Parent
      HoldingsSenior
      PIK Notes due October 1, 2012 (including $61,537 and $53,137 PIK interest,
      respectively)
            
            $
            211,537
            
            
            $
            203,13710.25%
      Senior discount notes due October 1, 2012 (net of unamortized discount of
      $0 and $1,079, respectively)
            
            
            131,500
            
            
            
            130,4218.25%
      Senior subordinated notes due April 1, 2012
            
            
            150,000
            
            
            
            150,000Senior
      secured credit facility:Revolving
      credit facility due 2010
            
            
            -
            
            
            
            -Term
      loan due 2011
            
            
            69,500
            
            
            
            75,485Total
            
            
            562,537
            
            
            
            559,043Less
      current portion of long-term debt
            
            
            (469
            )
            
            
            (2,908
            )Total
      long-term debt
            
            $
            562,068
            
            
            $
            556,135November
      29, 2008
            August
      30, 2008Intermediate
      Holdings10.25%
      Senior discount notes due October 1, 2012 (net of unamortized discount of
      $0 and $1,079, respectively)
            
            $
            131,500
            
            
            $
            130,4218.25%
      Senior subordinated notes due April 1, 2012
            
            
            150,000
            
            
            
            150,000Senior
      secured credit facility:Revolving
      credit facility due 2010
            
            
            -
            
            
            
            -Term
      loan due 2011
            
            
            69,500
            
            
            
            75,485Total
            
            
            351,000
            
            
            
            355,906Less
      current portion of long-term debt
            
            
            (469
            )
            
            
            (2,908
            )Total
      long-term debt
            
            $
            350,531
            
            
            $
            352,998November
      29, 2008
            August
      30, 2008AAC8.25%
      Senior subordinated notes due April 1, 2012
            
            $
            150,000
            
            
            $
            150,000Senior
      secured credit facility:Revolving
      credit facility due 2010
            
            
            -
            
            
            
            -Term
      loan due 2011
            
            
            69,500
            
            
            
            75,485Total
            
            
            219,500
            
            
            
            225,485Less
      current portion of long-term debt
            
            
            (469
            )
            
            
            (2,908
            )Total
      long-term debt
            
            $
            219,031
            
            
            $
            222,577





The
amendments to the indentures governing the senior PIK notes, the 10.25% senior
discount notes, and the 8.25% senior subordinated notes that were included in
the various supplemental indentures entered into in connection with the
Transaction have become substantially ineffective as a result of the termination
of the Transaction. However, with respect to notes held by holders of senior PIK
notes that did not consent to such amendments, substantially all of the
restrictive and reporting covenants under the indenture governing the senior PIK
notes have been removed by the supplemental indenture entered into in connection
with the Transaction. Such notes represent a de minimus portion of the total
outstanding balance of the senior PIK notes. All such covenants remain in full
force and effect for all other senior PIK notes.


Because
the Compay's consolidated group leverage ratio, as defined in the corresponding
agreement,  was greater than 5.0 to 1.0 on August 30, 2008, the rate at
which interest accrues on the senior PIK notes was increased an additional 2.00%
per annum, to a rate of 16.75%, commencing on, and including August 30,
2008.




During
the three months ended November 29, 2008 and November 24, 2007, the Company paid
down $6.0 million and $0.2 million of the term loan of the Amended Senior Credit
Facility, of which $2.5 million and $0.2 million were mandatory
payments.


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


Availability
under the revolving credit facility is restricted to a total revolving
commitment of $40.0 million as defined in the credit agreement governing
the Amended Senior Credit Facility. Availability under the revolving credit
facility as of November 29, 2008 was approximately $38.3 million with $1.7
million in letters of credit outstanding.




Interest income, included in the interest expense, net, for the three months
ended November 29, 2008 was $115 for Parent Holdings, Intermediate Holdings and
AAC. Interest income, included in the interest expense, net, for the three
months ended November 24, 2007 was $123, $119 and $112 for Parent Holdings,
Intermediate Holdings and AAC, respectively.





8.
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.





9.
Income Taxes





As
part of the process of preparing consolidated financial statements, the
Company assesses the likelihood that its deferred income tax assets will be
recovered through future taxable income.  To the extent that recovery is
not likely, a valuation allowance is established.  Based on this
assessment, the Company has not recorded a valuation allowance as of November
29, 2008 or August 30, 2008.  In the event that actual results differ from
these estimates or adjustments are made to these estimates in future periods, a
valuation allowance may need to be established.




10.
Postretirement Pension and Medical Benefits





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





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





The
net periodic postretirement benefit income includes the following
components:




For
      the three months ended
            
            For
      the three months endedNovember
      29, 2008
            
            November
      24, 2007CBI
      post-
            
            
            
            
            CBI
      post-Taylor
      pension
            
            retirement
            
            Taylor
      pension
            
            retirementService
      costs, benefits attributed to service during the period
            
            $
            18
            
            
            $
            -
            
            
            $
            22
            
            
            $
            -Interest
      cost
            
            
            219
            
            
            
            23
            
            
            
            229
            
            
            
            27Expected
      return on assets
            
            
            (264
            )
            
            
            -
            
            
            
            (292
            )
            
            
            -Amortization
      of unrecognized net gain
            
            
            (6
            )
            
            
            (76
            )
            
            
            (9
            )
            
            
            (77
            )Amortization
      of unrecognized net prior service costs
            
            
            -
            
            
            
            (37
            )
            
            
            -
            
            
            
            (37
            )Net
      periodic postretirement benefit income
            
            $
            (33
            )
            
            $
            (90
            )
            
            $
            (50
            )
            
            $
            (87
            )







18
 AMERICAN
ACHIEVEMENT GROUP HOLDING CORP.
 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:




November
      29, 2008
            
            
            November
      24, 2007Taylor
      pension
            
            
            CBI
      post-retirement
            
            
            Taylor
      pension
            
            
            CBI
      post-retirementNet
      actuarial gain
            
            $
            (1,721
            )
            
            $
            (1,881
            )
            
            $
            (2,020
            )
            
            $
            (2,182
            )Prior
      service cost
            
            
            -
            
            
            
            (669
            )
            
            
            -
            
            
            
            (818
            )$
            (1,721
            )
            
            $
            (2,550
            )
            
            $
            (2,020
            )
            
            $
            (3,000
            )








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





11.
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 paid by the
Company under the management agreement totaled $750 for the three months ended
November 29, 2008 and for the three months ended November 24, 2007.





As
of November 29, 2008 and August 30, 2008, the Company had prepaid management
fees of approximately $148 and $244, respectively.





12.
Business Segments





The
Company is a manufacturer and supplier of class rings, yearbooks and other
graduation-related scholastic products for the high school and college 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 4, 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.





During
the first quarter of fiscal year 2009, Parent Holdings incurred certain costs
related to the Transaction, which are not allocated to the operating
segments.  Total unallocated costs included in Parent Holdings
operating income but not included in total segment operating income were $2,363
for the three months ended November 29, 2008. Assets not allocated to the
operating segments represent affiliate receivables from Parent Holdings related
to payments funded by Intermediate Holdings and AAC for costs related to the
Transaction and are presented in the tables below.




19


Class
            
            
            
            
            
            GraduationRings
            
            
            Yearbooks
            
            
            Products
            
            
            Other
            
            
            TotalThree
      Months Ended November 29, 2008Net
      sales
            
            $
            30,624
            
            
            $
            8,376
            
            
            $
            3,310
            
            
            $
            6,903
            
            
            $
            49,213Segment
      operating income (loss)
            
            
            3,201
            
            
            
            (3,720
            )
            
            
            (1,120
            )
            
            
            (688
            )
            
            
            (2,327
            )Three
      Months Ended November 24, 2007Net
      sales
            
            $
            32,661
            
            
            $
            9,620
            
            
            $
            3,464
            
            
            $
            6,195
            
            
            $
            51,940Segment
      operating income (loss)
            
            
            2,760
            
            
            
            (3,307
            )
            
            
            (1,740
            )
            
            
            (436
            )
            
            
            (2,723
            )








Parent
      HoldingsClass
            
            
            
            
            
            Graduation
            
            
            
            
            
            Assets
      notRings
            
            
            Yearbooks
            
            
            Products
            
            
            Other
            
            
            Allocated
            
            
            TotalAs
      of November 29, 2008Goodwill
            
            $
            67,092
            
            
            $
            65,241
            
            
            $
            23,781
            
            
            $
            14,959
            
            
            $
            -
            
            
            $
            171,073Segment
      assets
            
            
            207,202
            
            
            
            160,771
            
            
            
            59,925
            
            
            
            49,290
            
            
            
            -
            
            
            
            477,188As
      of August 30, 2008Goodwill
            
            $
            67,092
            
            
            $
            65,241
            
            
            $
            23,781
            
            
            $
            14,959
            
            
            $
            -
            
            
            $
            171,073Segment
      assets
            
            
            192,538
            
            
            
            165,123
            
            
            
            56,199
            
            
            
            45,257
            
            
            
            -
            
            
            
            459,117








Intermediate
      HoldingsClass
            
            
            
            
            
            Graduation
            
            
            
            
            
            Assets
      notRings
            
            
            Yearbooks
            
            
            Products
            
            
            Other
            
            
            Allocated
            
            
            TotalAs
      of November 29, 2008Goodwill
            
            $
            67,092
            
            
            $
            65,241
            
            
            $
            23,781
            
            
            $
            14,959
            
            
            $
            -
            
            
            $
            171,073Segment
      assets
            
            
            201,277
            
            
            
            155,681
            
            
            
            58,192
            
            
            
            47,895
            
            
            
            3,219
            
            
            
            466,264As
      of August 30, 2008Goodwill
            
            $
            67,092
            
            
            $
            65,241
            
            
            $
            23,781
            
            
            $
            14,959
            
            
            $
            -
            
            
            $
            171,073Segment
      assets
            
            
            189,633
            
            
            
            162,727
            
            
            
            55,377
            
            
            
            44,703
            
            
            
            2,333
            
            
            
            454,773








AACClass
            
            
            
            
            
            Graduation
            
            
            
            
            
            Assets
      notRings
            
            
            Yearbooks
            
            
            Products
            
            
            Other
            
            
            Allocated
            
            
            TotalAs
      of November 29, 2008Goodwill
            
            $
            67,092
            
            
            $
            65,241
            
            
            $
            23,781
            
            
            $
            14,959
            
            
            $
            -
            
            
            $
            171,073Segment
      assets
            
            
            201,130
            
            
            
            155,650
            
            
            
            58,205
            
            
            
            47,753
            
            
            
            2,663
            
            
            
            465,401As
      of August 30, 2008Goodwill
            
            $
            67,092
            
            
            $
            65,241
            
            
            $
            23,781
            
            
            $
            14,959
            
            
            $
            -
            
            
            $
            171,073Segment
      assets
            
            
            189,939
            
            
            
            163,139
            
            
            
            55,541
            
            
            
            44,718
            
            
            
            1,777
            
            
            
            455,114




20
 AMERICAN
ACHIEVEMENT GROUP HOLDING CORP.
 AAC
GROUP HOLDING CORP.
 AMERICAN
ACHIEVEMENT CORPORATION
 Notes to
Condensed Consolidated Financial Statements
 (Dollars
in thousands, unless otherwise stated)
 (unaudited)


13.
Subsequent Events





On
December 5, 2008, Parent Holdings and the Buyer, together with the Equity
Holders, announced that such parties have entered into a Settlement Agreement
pursuant to which they have mutually agreed to terminate the
Transaction because they had not received the required regulatory approvals
necessary to complete the Transaction.





Parent
Holdings received proceeds in connection with the termination of the Transaction
that, after considering transaction related costs incurred by the Company,
amounted to net proceeds of approximately $25.0 million. A portion of the costs
incurred by the Company related to the Transaction were incurred during fiscal
2008 and during the first quarter of fiscal 2009, and these costs were included
in the operating results of the respective periods.





On
January 6, 2009, CBI entered into an amendment to the Stock Purchase Agreement
(“SPA”) related to the acquisition of Powers Embroidery Inc. in fiscal
2007.  The amended agreement provides for $250 of additional purchase
price instead of the provision in the SPA that provided for up to $1.5
million additional purchase price payment that was contingent upon the acquired
business achieving certain financial goals through August 2010.  The $250
of additional purchase price is to be paid over three years beginning January
2009.


21




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





The
following discussion of our condensed consolidated financial condition and
results of operations should be read in conjunction with the information
contained in our condensed consolidated financial statements and accompanying
notes included elsewhere in this report. The condensed consolidated financial
statements and the notes thereto have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations (see Note 1 in our condensed
consolidated financial statements). The following discussion includes forward
looking statements that involve certain risks and uncertainties. See “Disclosure
Regarding Forward Looking Statements.”





General





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




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





Our
ability to meet our debt service and other obligations depends in significant
part on how successful we are in maintaining our core businesses and further
implementing our business strategy. Our business plan envisions several
long-term growth initiatives, including the development of new products. The
components of our strategy are subject to significant business, economic and
competitive uncertainties and contingencies.





Numerous
raw materials are used in the manufacture of our products. Gold and other
metals, precious, semi-precious and synthetic stones, paper products and ink
comprise the bulk of the raw materials we utilize in the largest segments of our
business. Prices of these materials, especially gold, continually fluctuate. We
purchase a majority of our gold from a single supplier. We may consign a portion
of our gold and pay for gold as our products are shipped to customers. 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)
and existing gold consignment agreement are variable rate
arrangements.


22


Historically,
the class rings, yearbooks and graduation products markets have been impacted by
demographic changes. 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 and is located
in Waco, Texas.





Basis
of Presentation





We
present financial information relating to Parent Holdings, Intermediate Holdings
and AAC and its subsidiaries in this discussion and analysis.  Parent
Holdings owns 100% of the shares of common stock of Intermediate
Holdings.  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 the series A preferred stock, debt obligations, cash, costs related to the
Transaction, additional interest expense related to the series A preferred stock
and 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
Parent Holdings and 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, Intermediate Holdings and Parent Holdings are treated as entities under
common control.





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





Significant
Developments




Stock Purchase
Agreement.Pursuant to a Stock Purchase Agreement dated May
15, 2008 among Herff Jones Inc. (the “Buyer”), Parent Holdings and the holders
of all of Parent Holding’s equity securities (the “Equity Holders”), the Equity
Holders agreed to sell all of the equity in Parent Holdings to the Buyer (the
“Transaction”).  On December 5, 2008, Parent Holdings and the
Buyer, together with the Equity Holders, announced that such parties have
entered into a Settlement Agreement pursuant to which they have mutually agreed
to terminate the Transaction because they had not received the required
regulatory approvals necessary to complete the Transaction.





Parent
Holdings received proceeds in connection with the termination of the Transaction
that, after considering transaction related costs incurred by the Company,
amounted to net proceeds of approximately $25.0 million. A portion of the costs
incurred by the Company related to the Transaction were incurred during fiscal
2008 and during the first quarter of fiscal 2009, and these costs were included
in the operating results of the respective periods.





During
the three months ended November 29, 2008, Parent Holdings incurred $2.4 million
in costs related to the Transaction. These costs are included in selling,
general and administrative expenses in Parent Holdings’ consolidated statement
of operations.





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 three months ended
November 24, 2007 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 income statements for all
periods presented.


23


Results
of Operations





Three
Months Ended November 29, 2008 Compared to Three Months Ended November 24,
2007





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





Parent
      HoldingsFor
      the Three
            
            
            %
      of
            
            For
      the Three
            
            
            %
      of(in
      thousands)
            
            Months
      Ended
            
            
            Net
            
            Months
      Ended
            
            
            NetNovember
      29, 2008
            
            
            Sales
            
            November
      24, 2007
            
            
            SalesNet
      sales
            
            $
            49,213
            
            
            
            100.0
            
            %
            
            $
            51,940
            
            
            
            100.0
            
            %Cost
      of sales
            
            
            25,051
            
            
            
            50.9
            
            %
            
            
            25,317
            
            
            
            48.7
            
            %Gross
      profit
            
            
            24,162
            
            
            
            49.1
            
            %
            
            
            26,623
            
            
            
            51.3
            
            %Selling,
      general & administrative expenses
            
            
            28,852
            
            
            
            58.6
            
            %
            
            
            29,346
            
            
            
            56.5
            
            %Operating
      loss
            
            
            (4,690
            )
            
            
            (9.5
            )
            %
            
            
            (2,723
            )
            
            
            (5.2
            )
            %Interest
      expense, net
            
            
            17,430
            
            
            
            35.4
            
            %
            
            
            15,631
            
            
            
            30.1
            
            %Loss
      from continuing operations before income taxes
            
            
            (22,120
            )
            
            
            (44.9
            )
            %
            
            
            (18,354
            )
            
            
            (35.3
            )
            %Benefit
      for income taxes
            
            
            (5,789
            )
            
            
            (11.8
            )
            %
            
            
            (4,555
            )
            
            
            (8.7
            )
            %Loss
      from continuing operations
            
            
            (16,331
            )
            
            
            (33.2
            )
            %
            
            
            (13,799
            )
            
            
            (26.6
            )
            %Discontinued
      operations:Loss
      from discontinued operations before income taxes
            
            
            -
            
            
            
            -
            
            %
            
            
            (7,090
            )
            
            
            (13.7
            )
            %Benefit
      for income taxes
            
            
            -
            
            
            
            -
            
            %
            
            
            (2,772
            )
            
            
            (5.4
            )
            %Loss
      from discontinued operations
            
            
            -
            
            
            
            -
            
            %
            
            
            (4,318
            )
            
            
            (8.3
            )
            %Net
      loss
            
            $
            (16,331
            )
            
            
            (33.2
            )
            %
            
            $
            (18,117
            )
            
            
            (34.9
            )
            %





Intermediate
      HoldingsFor
      the Three
            
            
            %
      of
            
            
            For
      the Three
            
            
            %
      of(in
      thousands)
            
            Months
      Ended
            
            
            Net
            
            
            Months
      Ended
            
            
            NetNovember
      29, 2008
            
            
            Sales
            
            
            November
      24, 2007
            
            
            SalesNet
      sales
            
            $
            49,213
            
            
            
            100.0
            
            %
            
            $
            51,940
            
            
            
            100.0
            
            %Cost
      of sales
            
            
            25,051
            
            
            
            50.9
            
            %
            
            
            25,317
            
            
            
            48.7
            
            %Gross
      profit
            
            
            24,162
            
            
            
            49.1
            
            %
            
            
            26,623
            
            
            
            51.3
            
            %Selling,
      general & administrative expenses
            
            
            26,489
            
            
            
            53.8
            
            %
            
            
            29,346
            
            
            
            56.5
            
            %Operating
      loss
            
            
            (2,327
            )
            
            
            (4.7
            )
            %
            
            
            (2,723
            )
            
            
            (5.2
            )
            %Interest
      expense, net
            
            
            7,873
            
            
            
            16.0
            
            %
            
            
            8,171
            
            
            
            15.7
            
            %Loss
      from continuing operations before income taxes
            
            
            (10,200
            )
            
            
            (20.7
            )
            %
            
            
            (10,894
            )
            
            
            (21.0
            )
            %Benefit for
      income taxes
            
            
            (4,318
            )
            
            
            (8.8
            )
            %
            
            
            (4,592
            )
            
            
            (8.8
            )
            %Loss
      from continuing operations
            
            
            (5,882
            )
            
            
            (12.0
            )
            %
            
            
            (6,302
            )
            
            
            (12.2
            )
            %Discontinued
      operations:Loss
      from discontinued operations before income taxes
            
            
            -
            
            
            
            -
            
            %
            
            
            (7,090
            )
            
            
            (13.7
            )
            %Benefit
      for income taxes
            
            
            -
            
            
            
            -
            
            %
            
            
            (2,772
            )
            
            
            (5.4
            )
            %Loss
      from discontinued operations
            
            
            -
            
            
            
            -
            
            %
            
            
            (4,318
            )
            
            
            (8.3
            )
            %Net
      loss
            
            $
            (5,882
            )
            
            
            (12.0
            )
            %
            
            $
            (10,620
            )
            
            
            (20.5
            )
            %




24





AACFor
      the Three
            
            
            %
      of
            
            
            For
      the Three
            
            
            %
      of(in
      thousands)
            
            Months
      Ended
            
            
            Net
            
            
            Months
      Ended
            
            
            NetNovember
      29, 2008
            
            
            Sales
            
            
            November
      24, 2007
            
            
            SalesNet
      sales
            
            $
            49,213
            
            
            
            100.0
            
            %
            
            $
            51,940
            
            
            
            100.0
            
            %Cost
      of sales
            
            
            25,051
            
            
            
            50.9
            
            %
            
            
            25,317
            
            
            
            48.7
            
            %Gross
      profit
            
            
            24,162
            
            
            
            49.1
            
            %
            
            
            26,623
            
            
            
            51.3
            
            %Selling,
      general & administrative expenses
            
            
            26,489
            
            
            
            53.8
            
            %
            
            
            29,346
            
            
            
            56.5
            
            %Operating
      loss
            
            
            (2,327
            )
            
            
            (4.7
            )
            %
            
            
            (2,723
            )
            
            
            (5.2
            )
            %Interest
      expense, net
            
            
            4,437
            
            
            
            9.0
            
            %
            
            
            5,105
            
            
            
            9.8
            
            %Loss
      from continuing operations before income taxes
            
            
            (6,764
            )
            
            
            (13.7
            )
            %
            
            
            (7,828
            )
            
            
            (15.1
            )
            %Benefit
      for income taxes
            
            
            (2,619
            )
            
            
            (5.3
            )
            %
            
            
            (3,090
            )
            
            
            6.0
            
            %Loss
      from continuing operations
            
            
            (4,145
            )
            
            
            (8.4
            )
            %
            
            
            (4,738
            )
            
            
            (9.1
            )
            %Discontinued
      operations:
            
            
            
            
            
            
            -
            
            
            
            
            
            
            
            
            -Loss
      from discontinued operations before income taxes
            
            
            -
            
            
            
            -
            
            %
            
            
            (7,090
            )
            
            
            (13.7
            )
            %Benefit
      for income taxes
            
            
            -
            
            
            
            -
            
            %
            
            
            (2,772
            )
            
            
            5.4
            
            %Loss
      from discontinued operations
            
            
            -
            
            
            
            -
            
            %
            
            
            (4,318
            )
            
            
            (8.3
            )
            %Net
      loss
            
            $
            (4,145
            )
            
            
            (8.4
            )
            %
            
            $
            (9,056
            )
            
            
            (17.4
            )
            %





Net
Sales.Net sales
consist of product sales and are net of product returns and promotional
discounts. Net sales decreased $2.7 million, or 5%, to $49.2 million for
the three months ended November 29, 2008 from $51.9 million for the three
months ended November 24, 2007. The following details the changes in net sales
during such periods by business segment.





Class Rings.Net sales decreased $2.1 million to $30.6 million for the three
months ended November 29, 2008 from $32.7 million for the three months ended
November 24, 2007. The decrease in net sales in class ring sales was primarily a
result of lower sales volumes due to softness in the economy and a change in
product mix caused by increases in gold prices, partially offset by an increase
in average selling price of college class rings.





Yearbooks.Net sales decreased $1.2 million to $8.4 million for the three
months ended November 29, 2008 from $9.6 million for the three months ended
November 24, 2007. The decrease in net sales was primarily the result timing of
shipments between the fourth quarter of 2008 and the first quarter of 2009 and a
result of softness in the economy. This decrease was partially offset by an
increase in the average contract value from the first quarter of fiscal
2008.





Graduation
Products.Net sales decreased $0.2 million to $3.3 million for the
three months ended November 29, 2008 from $3.5 million for the three months
ended November 24, 2007. The decrease in net sales was the result of lower sales
volume.





Other.Net sales increased $0.7 million to $6.9 million for the three
months ended November 29, 2008 from $6.2 million for the three months ended
November 24, 2007. The increase in net sales was primarily related to an
increase in professional championship rings, partially offset by a decline
in sales of personalized family jewelry due to softness in the
economy.





Gross
Profit.Gross
margin represents gross profit as a percentage of net sales. Gross margin was
49.1% for the three months ended November 29, 2008, a 2.2 percentage point
decrease from 51.3% for the three months ended November 24, 2007. Overall, gross
profit decreased $2.5 million. The decrease in gross profit was primarily a
result of the sales declines.





Selling, General
and Administrative Expenses.Selling, general and
administrative expenses for Intermediate Holdings and AAC decreased
$2.8 million, or 10%, to $26.5 million for the three months ended
November 29, 2008 from $29.3 million for the three months ended November
24, 2007. Included in selling, general and administrative expenses are two
sub-categories: selling and marketing expenses and general and administrative
expenses.





Selling
and marketing expenses for Intermediate Holdings and AAC decreased
$2.3 million to $16.7 million or 34% of net sales, for the three
months ended November 29, 2008 from $19.0 million or 37% of net sales, for
the three months ended November 24, 2007 due to decreased marketing expenditures
and lower commissions.




25


General
and administrative expenses for Intermediate Holdings and AAC for the three
months ended November 29, 2008 were $9.8 million, or 20% of net sales, as
compared to $10.3 million, or 20% of net sales, for the three months ended
November 24, 2007. The decrease in general and administrative expenses was
primarily the result of decreases in professional fees and consulting
fees.





Selling,
general and administrative expenses at Parent Holdings decreased $0.4 million to
$28.9 million the three months ended November 29, 2008 due to the reasons
discussed above, partially offset by $2.4 million of costs incurred related to
the Transaction.





Operating
Loss.As a
result of the foregoing, operating loss for Intermediate Holdings and AAC
was $2.3 million, or 5% of net sales, for the three months ended November 29,
2008 as compared with operating loss of $2.7 million, or 5% of net sales,
for the three months ended November 24, 2007. Operating loss for Parent Holdings
was $4.7 million, or 10% of net sales, for the three months ended November 29,
2008 as compared with operating loss of $2.7 million, or 5% of net sales,
for the three months ended November 24, 2007.





The class
rings segment reported operating income of $3.2 million for the three
months ended November 29, 2008 as compared with operating income of
$2.8 million for the three months ended November 24, 2007. The yearbooks
segment reported operating loss of $3.7 million for the three months ended
November 29, 2008 as compared with operating loss of $3.3 million for the three
months ended November 24, 2007. The graduation products segment reported
operating loss of $1.1 million for the three months ended November 29, 2008
as compared with operating loss of $1.7 million for the three months ended
November 24, 2007. The other segment reported an operating loss of $0.7 million
for the three months ended November 29, 2008 as compared with operating loss of
$0.4 million for the three months ended November 24, 2007.





Interest Expense,
Net.For
Parent Holdings, net interest expense was $17.4 million for the three
months ended November 29, 2008 and $15.6 million for the three months ended
November 24, 2007. The average debt outstanding of Parent Holdings for the three
months ended November 29, 2008 and the three months ended November 24, 2007 was
$573 million and $556 million, respectively. The weighted average
interest rate on debt outstanding of Parent Holdings for the three months ended
November 29, 2008 and the three months ended November 24, 2007 was 12.2% and
10.7%, respectively. The increase in
interest expense isa result ofa 2.00% per annum increase in the
interest rate for our senior PIK notes effective beginning August 30,
2008.





For
Intermediate Holdings, net interest expense was $7.9 million for the three
months ended November 29, 2008 and $8.2 million for the three months ended
November 24, 2007. The average debt outstanding of Intermediate Holdings for the
three months ended November 29, 2008 and the three months ended November 24,
2007 was $359 million and $369 million, respectively. The weighted
average interest rate on debt outstanding of Intermediate Holdings for the three
months ended November 29, 2008 and the three months ended November 24, 2007 was
8.9% and 8.7%, respectively.





For
AAC, net interest expense was $4.4 million for the three months ended
November 29, 2008 and $5.1 million for the three months ended November 24,
2007. The average debt outstanding of AAC for the three months ended November
29, 2008 and the three months ended November 24, 2007 was $228 million and
$250 million, respectively. The weighted average interest rate on debt
outstanding of AAC for the three months ended November 29, 2008 and the three
months ended November 24, 2007 was 8.0%.





Benefit for
Income Taxes.For the three months ended November 29, 2008, and November 24, 2007,
Parent Holdings recorded an income tax benefit of $5.8 million and $4.6
million, respectively, which represents an effective tax rate of 26% and 25%,
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.  Parent Holdings’ effective rates
for the three months ended November 29, 2008 and November 24, 2007 represent an
estimate of the annual federal and state income tax rate.





For
the three months ended November 29, 2008 and November 24, 2007, Intermediate
Holdings recorded an income tax benefit of $4.3 million
and $4.6 million, respectively, which represents an effective tax rate of
42% for both periods. 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 November 29, 2008 and
November 24, 2007 represent an estimate of the annual federal and state income
tax rate.





For
the three months ended November 29, 2008 and November 24, 2007, AAC recorded an
income tax benefit of $2.6 million and $3.1 million, respectively, which
represents an effective tax rate of 39% for both periods.  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 November 29, 2008 and
November 24, 2007 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
November 24, 2007 includes 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.


26


Liquidity
and Capital Resources





Operating
Activities. Operating activities provided $12.7 million of cash for
the three months ended November 29, 2008 compared to cash provided of
$15.4 million for the three months ended November 24, 2007. The
$2.7 million decrease in cash provided by operating activities was
mainly attributable to higher working capital in first quarter
2009.





Investing
Activities.Capital expenditures for
the three months ended November 29, 2008 were $1.5 million compared to
capital expenditures of $3.1 million for the three months ended November
24, 2007. Our projected capital expenditures for the entire fiscal year 2009 are
expected to be approximately $7.3 million.





Financing
Activities.   During the three months ended November 29, 2008,
cash was used to pay down $6.0 million of the term loan, of which $2.5
million were mandatory payments.





During
the three months ended November 24, 2007, cash was used to pay down
$0.2 million of the term loan, which were mandatory payments.  In
addition, net revolver borrowings were $1.2 million.





Capital
Resources.     We have a significant amount of
indebtedness. On November 29, 2008, Parent Holdings had total indebtedness of
$570.0 million, of which $211.5 million was senior PIK notes, $131.5 million was
10.25% senior discount notes, $150.0 million was 8.25% senior subordinated
notes, $69.5 million was indebtedness under the existing senior secured credit
facility and $7.5 million was our mandatory redeemable series A preferred stock.
We also have up to $40.0 million in available revolving loan borrowings
under our senior secured credit facility. We are currently in compliance with
financial covenants in all of the agreements governing our outstanding
indebtedness.





Because
our consolidated group leverage ratio, as defined in the corresponding
agreement,  was greater than 5.0 to 1.0 on August 30, 2008, the rate at
which interest accrues on the senior PIK notes was increased an additional 2.00%
per annum, to a rate of 16.75%, commencing on, and including August 30,
2008.


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




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. Based on our current and planned
level of operations, we believe our cash flow from operations, available cash on
hand and available borrowings under the senior secured credit facility will be
adequate to meet our liquidity needs for at least the next twelve
months.





Off
Balance-Sheet Obligations





Gold Consignment
Agreement.On March 25, 2004, we signed the First Amended and
Restated Letter Agreement for Fee Consignment and Purchase of Gold with The Bank
of Nova Scotia. Under this agreement, we have an ability to have on consignment
gold with aggregate value less than or equal to the lowest of: (i) the
dollar value of 27,000 troy ounces of gold, (ii) $14.2 million or (iii) a
borrowing base, calculated based on a percentage of the gold held at our
facilities and other approved locations, as specified by the
agreement. Under the terms of this arrangement, we do not own the consigned gold
nor do we have risk of loss related to price variance on such inventory until we
pay The Bank of Nova Scotia for quantities purchased. Accordingly, we do not
reflect the value of consigned gold in our inventory, nor do we reflect the
corresponding liability for financial statement purposes. As of November 29,
2008 and August 30, 2008, we held no consigned gold.





The
agreement can be terminated by either us or The Bank of Nova Scotia with
60 days prior written notice to the other party.





Letters of
Credit.  As of November 29, 2008 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.


27





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.





Recent
Accounting Pronouncements




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





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





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




ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





Interest Rate
Risk.We have exposure to market risk relating to changes in interest
rates on our variable rate debt. Our policy is to manage interest rate exposure
through the use of a combination of fixed and floating rate debt instruments.
Our senior secured credit facility (revolver and term loan) and existing gold
consignment agreement are variable rate arrangements. Each quarter point change
in interest rates on our senior secured credit facility, which bears interest at
variable rates, would result in a $0.3 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.We
purchase a majority of our gold from a single supplier. We may consign a portion
of our gold and pay for consigned gold as our related products are shipped to
customers. 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.




28


ITEM
4. CONTROLS AND PROCEDURES




Evaluation of
disclosure controls and procedures. Our management evaluated, with the
participation of our Chief Executive Officer and our 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. The evaluation was conducted based on the
framework established by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) in Internal Control — Integrated
Framework.Based on this evaluation, our Chief Executive
Officer and our Chief Financial Officer have concluded that our disclosure
controls and procedures are effective to ensure that information we are required
to disclose in reports that we file or submit under the Securities Exchange Act
of 1934 is recorded, processed, summarized and reported within the time periods
specified in Securities and Exchange Commission rules and forms 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.  There was no change
in our internal control over financial reporting that occurred during the period
covered by this Quarterly Report on Form 10-Q that has materially affected, or
is reasonably likely to materially affect, our internal control over financial
reporting.




DISCLOSURE
REGARDING FORWARD LOOKING STATEMENTS





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




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





Although
management believes that the expectations reflected in such forward looking
statements are based upon reasonable assumptions, the Company can give no
assurance that these expectations will be achieved. Any change in or adverse
development, including the following factors, may impact the achievement of
results in or accuracy of forward-looking statements: the price of
gold


and
precious, semiprecious and synthetic stones; the Company’s access to students
and consumers in schools; the seasonality of the Company’s business; regulatory
and accounting rules; the Company’s relationship with its independent sales
representatives; fashion


and
demographic trends; general economic, business, and market trends and events,
especially during peak buying seasons for the Company’s products; the Company’s
ability to respond to customer change orders and delivery schedules; development
and operating


costs;
competitive pricing changes; successful completion of management initiatives
designed to achieve operating efficiencies; the


Company’s
cash flows; and the Company’s ability to draw down funds under its current bank
financings and to enter into new bank financings. The foregoing factors are not
exhaustive. New factors may emerge or changes may occur that impact the
Company’s operations and businesses. Forward-looking statements herein are
expressly qualified on the foregoing or such other factors as may be
applicable.





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




29


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.





ITEM 6. EXHIBITS





(a) Exhibits





EXHIBITNUMBER
            
            DESIGNATION31.1
            
            CEO
      Certification Accompanying Period Report Pursuant to Section 302 of
      the Sarbanes-Oxley Act of 200231.2
            
            CFO
      Certification Accompanying Period Report Pursuant to Section 302 of
      the Sarbanes-Oxley Act of 200232.1
            
            CEO
      Certification Accompanying Period Report Pursuant to Section 906 of
      the Sarbanes-Oxley Act of 200232.2
            
            CFO
      Certification Accompanying Period Report Pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002





30





AMERICAN
ACHIEVEMENT GROUP HOLDING CORP.


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:
January 13, 2009





AMERICAN
      ACHIEVEMENT GROUP HOLDING CORP.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)





31