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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 
 FORM 10-Q/A (Amendment No.
1)
 
 
 o
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
 
 FOR THE QUARTERLY PERIOD ENDED FEBRUARY 26, 2005 OR o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
 COMMISSION FILE NUMBER 333-121479
COMMISSION FILE NUMBER 333-84294 AAC GROUP HOLDING CORP.
AMERICAN ACHIEVEMENT CORPORATION (Exact name of registrant as specified in its charter) DELAWARE
    
    20-1854833DELAWARE
    
    13-4126506(State or other jurisdiction of
    
    (I.R.S. Employer Identification Number)incorporation or organization)
 7211 CIRCLE S ROAD
AUSTIN, TEXAS 78745
(Address of principal executive offices) (Zip Code) REGISTRANTS TELEPHONE NUMBER, INCLUDING AREA CODE (512) 444-0571 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes o No þ. Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act
Rule 12b-2). Yes o No þ. The number of shares outstanding of AAC Group Holding Corp. as of April 10, 2005 was 505,460 shares
of common stock, par value $.01 The number of shares outstanding of American Achievement
Corporation as of April 10, 2005 was 100 shares of common stock, par value $.01.   1




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FOR THE QUARTERLY PERIOD ENDED FEBRUARY 26, 2005
INDEX 
 PAGEPART I.
    
    FINANCIAL INFORMATIONItem 1.
    
    Condensed Consolidated Financial Statements and NotesCondensed
Consolidated Balance Sheets (unaudited)  As of February 26, 2005
(Successor)  and August 28, 2004 (Successor)
    
    3Condensed
Consolidated Statements of Operations (unaudited)  For the Three
Months Ended February 26, 2005 (Successor)  and the
Three Months Ended February 28, 2004 (Predecessor)
    
    4Condensed
Consolidated Statements of Operations (unaudited)  For the Six
Months Ended February 26, 2005 (Successor)  and the
Six Months Ended February 28, 2004 (Predecessor)
    
    5Condensed
Consolidated Statements of Cash Flows (unaudited)  For the Six
Months Ended February 26, 2005 (Successor)  and the
Six Months Ended February 28, 2004 (Predecessor)
    
    6Condensed
Consolidated Statements of Stockholders Equity (unaudited)  For
the Six Months Ended February 26, 2005 (Successor)
    
    7Notes to Condensed Consolidated Financial Statements (unaudited)
    
    8-22Item 2.
    
    Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    23-33Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    34Item 4.
    
    Controls and Procedures
    
    35PART II.
    
    OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    36Item 6.
    
    Exhibits
    
    37SIGNATURES
    
    38CEO Certification Pursuant to Section 302CFO Certification Pursuant to Section 302CEO Certification Pursuant to Section 906CFO Certification Pursuant to Section 906
 
  Explanatory Note 
 This Form 10-Q/A is a combined quarterly report being filed separately by two registrants: AAC Group
Holding Corp. and American Achievement Corporation. Unless the context indicates otherwise, any
reference in this report to Group Holdings refers to AAC Group Holding Corp. and any reference to
AAC refers to American Achievement Corporation, the wholly-owned operating subsidiary of Group
Holdings. The Company, we, us, and our refer to AAC Group Holding Corp., together with
American Achievement Corporation and its consolidated subsidiaries. Each Registrant hereto is
filing on its own behalf all of the information contained in this quarterly report that relates to
such Registrant. Each Registrant hereto is not filing any information that does not relate to such
Registrant, and therefore makes no representation as to any such information. 
 
 This Amendment No. 1 to
this Quarterly Report on Form 10-Q/A (Amendment 1) is
being filed in order to restate the previously issued segment
information as disclosed in the historical condensed consolidated
financial statements for the period ended February 26, 2005 initially
filed with the Securities and Exchange Commission (the
SEC) on April 12, 2005 (Original Filing). 
 
 Subsequent to the Original
Filing, we restated the segment disclosure from two to five reporting
segments. See Note 13: Business Segments under
Condensed Consolidated Financial Statements and Notes included in
Item 1, Notes to Condensed Consolidated Financial Statements
(unaudited). Item 2 has been updated for the effects of the
restatement.
 The restatement had no impact on previously reported total current
assets, total assets, working capital position, results of operations
or cash flows. We have updated our disclosure to reflect the
aforementioned changes and have otherwise updated information where
necessary. 
 2




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AAC GROUP HOLDING CORP.
AMERICAN ACHIEVEMENT CORPORATION 
 Condensed Consolidated Balance Sheets
(In thousands)
(unaudited) 
 AAC GroupHoldingCorp.
    
    
    American Achievement Corporation(Successor)
    
    
    (Successor)February 26,
    
    
    February 26,
    
    
    August 28,2005
    
    
    2005
    
    
    2004ASSETSCurrent assets:Cash and cash equivalents
    
    $
    10,607
    
    
    $
    10,377
    
    
    $
    3,038Accounts receivable, net
    
    
    36,714
    
    
    
    36,714
    
    
    
    43,321Inventories, net
    
    
    36,359
    
    
    
    36,359
    
    
    
    23,023Prepaid expenses and other current assets, net
    
    
    33,866
    
    
    
    33,866
    
    
    
    36,395Total current assets
    
    
    117,546
    
    
    
    117,316
    
    
    
    105,777Property, plant and equipment, net
    
    
    76,379
    
    
    
    76,379
    
    
    
    76,565Goodwill and other intangible assets, net
    
    
    342,557
    
    
    
    339,182
    
    
    
    345,553Other assets
    
    
    3,757
    
    
    
    3,757
    
    
    
    3,091Total assets
    
    $
    540,239
    
    
    $
    536,634
    
    
    $
    530,986LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Bank overdraft
    
    $
    4,584
    
    
    $
    4,584
    
    
    $
    5,733Accounts payable
    
    
    9,528
    
    
    
    9,528
    
    
    
    9,842Customer deposits
    
    
    55,014
    
    
    
    55,014
    
    
    
    17,807Accrued expenses
    
    
    27,565
    
    
    
    27,546
    
    
    
    30,314Deferred revenue
    
    
    941
    
    
    
    941
    
    
    
    5,503Accrued interest
    
    
    6,188
    
    
    
    6,188
    
    
    
    7,334Current portion of long-term debt
    
    
    1,550
    
    
    
    1,550
    
    
    
    1,550Total current liabilities
    
    
    105,370
    
    
    
    105,351
    
    
    
    78,083Long-term debt, net of current portion
    
    
    390,911
    
    
    
    298,973
    
    
    
    309,108Deferred income taxes
    
    
    19,904
    
    
    
    21,669
    
    
    
    25,844Other long-term liabilities
    
    
    8,806
    
    
    
    8,806
    
    
    
    9,439Total liabilities
    
    
    524,991
    
    
    
    434,799
    
    
    
    422,474Commitments and contingenciesStockholders equity:Common stock
    
    
    5
    
    
    
    
    
    
    
    Additional paid-in capital
    
    
    16,491
    
    
    
    102,046
    
    
    
    102,046Accumulated earnings (loss)
    
    
    (1,248
    )
    
    
    (211
    )
    
    
    6,466Total stockholders equity
    
    
    15,248
    
    
    
    101,835
    
    
    
    108,512Total liabilities and stockholders equity
    
    $
    540,239
    
    
    $
    536,634
    
    
    $
    530,986
 
 The accompanying notes are an integral part of these condensed consolidated financial
statements. 3




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AAC GROUP HOLDING CORP.
AMERICAN ACHIEVEMENT CORPORATION 
 Condensed Consolidated Statements of Operations
(In thousands)
(unaudited) AAC GroupHoldingCorp.
    
    
    American Achievement Corporation(Successor)
    
    
    
    (Predecessor)For the threemonths ended
    
    
    For the three months endedFebruary 26,
    
    
    February 26,
    
    
    
    February 28,2005
    
    
    2005
    
    
    
    2004Net sales
    
    $
    58,823
    
    
    $
    58,823
    
    
    
    $
    58,518Cost of sales
    
    
    23,150
    
    
    
    23,150
    
    
    
    
    21,538Gross profit
    
    
    35,673
    
    
    
    35,673
    
    
    
    
    36,980Selling, general and administrative expenses
    
    
    35,677
    
    
    
    35,677
    
    
    
    
    31,910Operating income (loss)
    
    
    (4
    )
    
    
    (4
    )
    
    
    
    5,070Interest expense
    
    
    8,172
    
    
    
    5,772
    
    
    
    
    6,917Loss before income taxes
    
    
    (8,176
    )
    
    
    (5,776
    )
    
    
    
    (1,847
    )Benefit for income taxes
    
    
    (3,718
    )
    
    
    (2,311
    )
    
    
    
    Net loss
    
    
    (4,458
    )
    
    
    (3,465
    )
    
    
    
    (1,847
    )Preferred dividends
    
    
    
    
    
    
    
    
    
    
    
    (300
    )Net loss applicable to common stockholders
    
    $
    (4,458
    )
    
    $
    (3,465
    )
    
    
    $
    (2,147
    )
 The accompanying notes are an integral part of these condensed consolidated financial
statements. 4




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AAC GROUP HOLDING CORP.
AMERICAN ACHIEVEMENT CORPORATION 
 Condensed Consolidated Statements of Operations
(In thousands)
(unaudited) AAC GroupHolding Corp.
    
    
    American Achievement Corporation(Successor)
    
    
    
    (Predecessor)For the sixmonths ended
    
    
    For the six months endedFebruary 26,
    
    
    February 26,
    
    
    
    February 28,2005
    
    
    2005
    
    
    
    2004Net sales
    
    $
    122,105
    
    
    $
    122,105
    
    
    
    $
    126,446Cost of sales
    
    
    50,466
    
    
    
    50,466
    
    
    
    
    51,582Gross profit
    
    
    71,639
    
    
    
    71,639
    
    
    
    
    74,864Selling, general and administrative expenses
    
    
    71,280
    
    
    
    71,280
    
    
    
    
    64,370Operating income
    
    
    359
    
    
    
    359
    
    
    
    
    10,494Interest expense
    
    
    14,290
    
    
    
    11,488
    
    
    
    
    13,898Loss before income taxes
    
    
    (13,931
    )
    
    
    (11,129
    )
    
    
    
    (3,404
    )Benefit for income taxes
    
    
    (6,217
    )
    
    
    (4,452
    )
    
    
    
    Net loss
    
    
    (7,714
    )
    
    
    (6,677
    )
    
    
    
    (3,404
    )Preferred dividends
    
    
    
    
    
    
    
    
    
    
    
    (600
    )Net loss applicable to common stockholders
    
    $
    (7,714
    )
    
    $
    (6,677
    )
    
    
    $
    (4,004
    )
 The accompanying notes are an integral part of these condensed consolidated financial
statements. 5




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AAC GROUP HOLDING CORP.
AMERICAN ACHIEVEMENT CORPORATION 
 Condensed Consolidated Statements of Cash Flows
(In thousands)
(unaudited) AAC GroupHolding Corp.
    
    
    American Achievement Corporation(Successor)
    
    
    
    (Predecessor)For the sixmonths ended
    
    
    For the six months endedFebruary 26,
    
    
    February 26,
    
    
    
    February 28,2005
    
    
    2005
    
    
    
    2004Cash flows from operating activities:Net loss
    
    $
    (7,714
    )
    
    $
    (6,677
    )
    
    
    $
    (3,404
    )Adjustments to reconcile net loss to net cash
provided by operating activities:Depreciation and amortization
    
    
    12,692
    
    
    
    12,692
    
    
    
    
    7,380Amortization of debt discount and deferred
financing fees
    
    
    3,555
    
    
    
    753
    
    
    
    
    1,025Provision (recovery) for doubtful accounts
    
    
    (289
    )
    
    
    (289
    )
    
    
    
    139Changes in assets and liabilities:Accounts receivable
    
    
    6,896
    
    
    
    6,896
    
    
    
    
    5,266Inventories, net
    
    
    (13,336
    )
    
    
    (13,336
    )
    
    
    
    (13,729
    )Prepaid expenses and other current assets, net
    
    
    2,529
    
    
    
    2,529
    
    
    
    
    1,862Other assets
    
    
    (4,484
    )
    
    
    (976
    )
    
    
    
    (1,238
    )Customer deposits
    
    
    37,207
    
    
    
    37,207
    
    
    
    
    36,683Deferred revenue
    
    
    (4,562
    )
    
    
    (4,562
    )
    
    
    
    (2,470
    )Accounts payable, accrued expenses, and other
long-term liabilities
    
    
    (10,782
    )
    
    
    (9,036
    )
    
    
    
    2,575Net cash provided by operating activities
    
    
    21,712
    
    
    
    25,201
    
    
    
    
    34,089Cash flows from investing activities:Purchases of property, plant and equipment
    
    
    (6,573
    )
    
    
    (6,573
    )
    
    
    
    (11,234
    )Acquisition, net of cash acquired
    
    
    
    
    
    
    
    
    
    
    
    (5,000
    )Net cash used in investing activities
    
    
    (6,573
    )
    
    
    (6,573
    )
    
    
    
    (16,234
    )Cash flows from financing activities:Payments on revolver, net
    
    
    (22,400
    )
    
    
    (22,400
    )
    
    
    
    (9,500
    )Proceeds from credit facility revolver
    
    
    22,400
    
    
    
    22,400
    
    
    
    
    Payments on term loan
    
    
    (10,140
    )
    
    
    (10,140
    )
    
    
    
    Proceeds from 10 1/4% notes
    
    
    89,269
    
    
    
    
    
    
    
    
    Distribution to stockholders
    
    
    (85,550
    )
    
    
    
    
    
    
    
    Change in bank overdraft
    
    
    (1,149
    )
    
    
    (1,149
    )
    
    
    
    (898
    )Net cash used in financing activities
    
    
    (7,570
    )
    
    
    (11,289
    )
    
    
    
    (10,398
    )Net increase in cash and cash equivalents
    
    
    7,569
    
    
    
    7,339
    
    
    
    
    7,457Cash and cash equivalents, beginning of period
    
    
    3,038
    
    
    
    3,038
    
    
    
    
    1,735Cash and cash equivalents, end of period
    
    $
    10,607
    
    
    $
    10,377
    
    
    
    $
    9,192Supplemental disclosureCash paid during the period for:Interest
    
    $
    11,877
    
    
    $
    11,877
    
    
    
    $
    13,504Income taxes
    
    $
    124
    
    
    $
    124
    
    
    
    $
    178Supplemental Disclosure of noncash
financing activitiesAccrued preferred stock dividends
    
    $
    
    
    
    $
    
    
    
    
    $
    600
 The accompanying notes are an integral part of these condensed consolidated financial
statements. 6




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AAC GROUP HOLDING CORP.
AMERICAN ACHIEVEMENT CORPORATION 
 Consolidated Statements of Stockholders Equity
(In thousands, except share data)
(unaudited) 
 AdditionalAAC Group Holding
    
    Common Stock
    
    
    Paid-in
    
    
    AccumulatedCorp.
    
    Shares
    
    
    Amount
    
    
    Capital
    
    
    earnings
    
    
    TotalBalance, August 28, 2004
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Issuance of common stock
$.01 par value, 1,250,000
shares authorized
    
    
    1,015,426
    
    
    
    10
    
    
    
    102,036
    
    
    
    6,466
    
    
    
    108,512Distribution to stockholders
    
    
    (509,966
    )
    
    
    (5
    )
    
    
    (85,545
    )
    
    
    
    
    
    
    (85,550
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,714
    )
    
    
    (7,714
    )Balance, February 26, 2005
    
    
    505,460
    
    
    $
    5
    
    
    $
    16,491
    
    
    $
    (1,248
    )
    
    $
    15,248
 
 
 American
    
    
    
    
    
    
    
    
    
    AdditionalAchievement
    
    Common Stock
    
    
    Paid-in
    
    
    AccumulatedCorporation
    
    Shares
    
    
    Amount
    
    
    Capital
    
    
    earnings
    
    
    TotalBalance, August 28, 2004 (Successor) $.01 par value,
1,000 shares authorized
    
    
    100
    
    
    $
    
    
    
    $
    102,046
    
    
    $
    6,466
    
    
    $
    108,512Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,677
    )
    
    
    (6,677
    )Balance, February 26, 2005 (Successor)
    
    
    100
    
    
    $
    
    
    
    $
    102,046
    
    
    $
    (211
    )
    
    $
    101,835
 
 The accompanying notes are an integral part of these condensed consolidated financial
statements. 7




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AAC GROUP HOLDING CORP.
AMERICAN ACHIEVEMENT CORPORATION 
 Notes to Condensed Consolidated Financial Statements
(Dollars in thousands, unless otherwise stated)
(unaudited) 1. Summary of Significant Accounting Policies Consolidation 
 The unaudited condensed consolidated financial statements of AAC Group Holding Corp. (Group
Holdings) include the accounts of its wholly-owned subsidiary, American Achievement Corporation
(AAC, a separate public reporting company, together with
Group Holdings, the Company). Group Holdings was formed
on November 8, 2004. On
November 16, 2004, the stockholders of AAC Holding Corp. participated in an exchange, pursuant to
which they exchanged their shares of common stock in AAC Holding Corp. for a like amount of shares
in Group Holdings. Following the exchange, AAC Holding Corp. became a wholly-owned subsidiary of
Group Holdings. 
 
 On November 16, 2004, Group Holdings issued $131.5 million aggregate principal amount at
maturity of 10 1/4% senior discount notes due 2012 (the 10 1/4% Notes) , generating net proceeds
of $89.3 million. Group Holdings is the sole obligor of these notes. The net proceeds of this
offering were used as distributions to stockholders through the
repurchase of shares of Group Holdings common stock from its stockholders.
Other than this debt obligation, related deferred issuance costs and associated accrued
liabilities, and related interest expense, net of taxes, all other assets, liabilities, income,
expenses and cash flows presented for all periods represent those of Group Holdings wholly-owned
indirect subsidiary AAC and the direct and indirect subsidiaries of AAC. Group Holdings only
direct subsidiary is AAC Holding Corp., whose sole asset is AAC. All significant intercompany
accounts and transactions have been eliminated in consolidation. AAC
and Group Holdings are treated as entities under common control and
therefore, the statements of operations and cash flows presented for
Group Holdings combine the results of AAC to the beginning of the
period presented. 
 
 The accompanying unaudited condensed consolidated financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or omitted pursuant to
such rules and regulations, although the Company believes the disclosures are adequate to make the
information presented not misleading. In the opinion of management, all adjustments (consisting
only of normal recurring adjustments) necessary for a fair presentation of the financial position
and results of operations for the periods presented have been included. Operating results for the
three months and six months ended February 26, 2005 are not necessarily indicative of the results
that may be expected for the fiscal year ending August 27, 2005. Accordingly, the interim
condensed consolidated financial statements and accompanying notes included herein should be read in
conjunction with the consolidated financial statements for the year ended August 28, 2004 included
in AACs Report on Form 10-K/A (File No. 333-84294) filed
on August 5, 2005. 
 Unless separately stated, the notes herein relate to both Group Holdings and AAC. 
 Effective January 30, 2004, AAC acquired the assets of C-B Graduation Announcements, LLC, a
producer of personalized graduation announcements and related accessories (the C-B Announcements
Acquisition). The maximum purchase price payable in connection with this acquisition is
approximately $5.9 million in cash, of which approximately $5.0 million was paid at closing
(including $1.0 million placed in escrow), with the escrowed amount and balance of the purchase
price to be paid upon achieving certain financial targets. The C-B Announcements
Acquisition was accounted for using the purchase method of accounting.
The results of the C-B Announcements Acquisition have been included
in the Companys
consolidated results of operations since the date of acquisition. 
 
 Use of Estimates 
 
 The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the financial statements, as
well as the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from these estimates. 
 8




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AAC GROUP HOLDING CORP.
AMERICAN ACHIEVEMENT CORPORATION Notes to Condensed
Consolidated Financial Statements(Continued)
(Dollars in thousands, unless otherwise stated)
(unaudited) Stock-Based Compensation The Company accounts for equity instruments issued to non-employees in accordance with the
provisions of SFAS No. 123 (SFAS 123), Accounting for Stock-Based Compensation, as amended by
SFAS No. 148 (SFAS 148), Accounting for Stock-Based CompensationTransition and Disclosure an
amendment of FASB Statement No. 123. The Company accounts for stock-based employee compensation
arrangements in accordance with the provisions of Accounting Principles Board Opinion No. 25 (APB
No. 25), Accounting for Stock Issued to Employees and complies with the disclosure provisions of
SFAS 123, as amended by SFAS 148. Had compensation expense for the employee stock plans been determined based on the fair value
at the grant date for options granted consistent with the provisions of SFAS 123, as amended by
SFAS 148, the Companys pro forma net loss would not have been materially impacted. No options were
granted during the three months and six months ended February 26, 2005 or the three months and six
months ended February 28, 2004. 2. Merger On March 25, 2004, AAC Acquisition Corp., a wholly-owned subsidiary of AAC Holding Corp.,
merged with and into AAC, with AAC continuing as the surviving corporation and a wholly-owned
subsidiary of AAC Holding Corp (the Merger). 
 The Merger was financed by a cash equity investment in AAC Holding Corp. by an
investor group led by Fenway Partners of $102.0 million, the borrowing by AAC of
$155.0 million under a seven-year term loan and $2.0 million under a nine-year revolving
loan, each under AACs senior secured credit facility and the issuance by AAC of
$150.0 million aggregate principal amount of 8 1/4 % senior subordinated notes due 2012
(the 8 1/4% Notes) . Proceeds of these financing arrangements were used to redeem the
outstanding Series A Preferred Stock of AAC, refinance AACs existing indebtedness,
including the redemption of $41.4 million of AACs then outstanding 11% senior notes
due 2007 (the 11% Notes) and completion of a debt tender offer to acquire all of
AACs existing 11 5/8% senior unsecured notes due 2007 (the
11 5/8% Notes), and
pay transaction costs and expenses. Pursuant to the debt tender offer, AAC retired
$170.9 million of the 11 5/8% Notes for an aggregate of $193.8 million and eliminated
substantially all of the restrictive covenants associated with such notes. The tender for the
$177.0 million 11 5/8% Notes and the $41.4 million 11% Notes was the direct result of
the Merger. The consummation of the Merger was subject to the consent and a debt
tender offer to acquire these notes. The subsequent tender offer costs and early
redemption expenses of the debt directly related to the cost of the transaction and was
included as part of the purchase price. In addition, as part of the Merger, AAC terminated
its former senior secured credit facility and terminated its management contract with its
previous owners. AAC also entered into an amendment of its existing gold consignment
agreement and entered into a new management agreement with an affiliate of Fenway
Partners. 
 Beginning on March 26, 2004, AAC accounted for the Merger as a purchase in accordance with the
provisions of Statement of Financial Accounting Standards (SFAS) 141, Business Combinations,
which results in a new valuation for the assets and liabilities of AAC based upon the fair values
as of the date of the Merger. As required under SEC Staff Accounting Bulletin No. 54, Push Down
Basis of Accounting Required in Certain Limited Circumstances,AAC has reflected all applicable
purchase accounting adjustments in the consolidated financial statements covering periods
subsequent to the Merger. As required, AAC has established a new basis for assets and liabilities
based on the amount paid for ownership at March 25, 2004. Accordingly, the purchase price of $419.2
million was allocated to the assets and liabilities based on their relative fair values. 9




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AAC GROUP HOLDING CORP.
AMERICAN ACHIEVEMENT CORPORATION Notes to Condensed
Consolidated Financial Statements(Continued)
(Dollars in thousands, unless otherwise stated)
(unaudited) The purchase price was as follows: 
 Purchase price
    
    
    
    
    
    $
    419,200Assets acquired
    
    
    197,714Liabilities assumed
    
    
    (125,731
    )Net assets acquired
    
    
    
    
    
    
    71,983Excess purchase price over net assets acquired
    
    
    
    
    
    $
    347,217
 
 
 Subsequent
to the issuance of the Companys 2004 consolidated financial statements, management determined
that assets acquired required restatement in the above table to remove goodwill and intangible
assets reflected in the pre-Merger consolidated financial statements. Previously reported assets
acquired was $422,456. This correction had no impact on the purchase price or the purchase price allocation in the table below. 
 AAC has preliminarily allocated the purchase price in the Merger as follows: 
 Current assets
    
    $
    123,407Property, plant and equipment
    
    
    78,301Goodwill
    
    
    181,361Intangible assets
    
    
    157,928Other assets
    
    
    15,390Current liabilities
    
    
    (116,102
    )Deferred income taxes
    
    
    (12,043
    )Other long-term liabilities
    
    
    (9,042
    )Total purchase price
    
    $
    419,200
 
 As a result of the Merger, AAC has reflected pre-Merger periods from November 30,
2003 to February 28, 2004 and August 31, 2003 to February 28, 2004 (Predecessor) and post-Merger
periods from November 28, 2004 to February 26, 2005 and August 29, 2004 to February 26, 2005
(Successor) in its condensed consolidated financial statements. 
 During the three months ended February 26, 2005, AAC recognized in its
consolidated statements of operations approximately $3.0 million of amortization
expense of intangible assets as selling, general and administrative expenses, as compared
to approximately $0.4 million for the three months ended February 28, 2004. During the
six months ended February 26, 2005, amortization expense was approximately $6.0
million as compared to approximately $1.0 million for the six months ended February 28, 2004. 
 3. Goodwill and Other Intangible Assets Goodwill 
 For Group Holdings, the carrying amount of goodwill was $182,390 as of February 26, 2005.
Since the date of the Merger, goodwill has increased due to
finalization of previously estimated transaction costs associated with professional services. 
 
 For AAC, the carrying amount of goodwill was $182,390 and $182,080 as of February 26, 2005
and August 28, 2004, respectively. Since the date of the Merger, goodwill has increased due to
finalization of previously estimated transaction costs associated with professional services. 
 10




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AAC GROUP HOLDING CORP.
AMERICAN ACHIEVEMENT CORPORATION Notes to Condensed Consolidated Financial Statements  (Continued)
(Dollars in thousands, unless otherwise stated)
(unaudited) Other Intangible Assets For Group Holdings, other intangible assets consisted of the following: Estimated
    
    
    Gross
    
    
    Accumulated
    
    
    NetUseful Life
    
    
    Asset
    
    
    Amortization
    
    
    AssetAt February 26, 2005Trademarks
    
    Indefinite
    
    $
    50,095
    
    
    $
    
    
    
    $
    50,095Deferred financing costs and other
    
    
    7 to 8 years
    
    
    
    14,620
    
    
    
    (1,505
    )
    
    
    13,115Patents
    
    
    14 to 17 years
    
    
    
    7,317
    
    
    
    (407
    )
    
    
    6,910Customer lists and distribution contracts
    
    
    3 to 12 years
    
    
    
    100,516
    
    
    
    (10,469
    )
    
    
    90,047$
    172,548
    
    
    $
    (12,381
    )
    
    $
    160,167
 For Group Holdings, total amortization on other intangible assets was $3,452 and
$6,814 for the three and six months ended February 26, 2005, respectively, of which amortization on
deferred financing costs is recorded as interest expense and amortization on patents and customer
lists and distribution contracts is recorded as amortization expense. Estimated annual amortization
expense for fiscal years ended 2005 through 2009 is approximately $13.8 million each year. For AAC, other intangible assets consisted of the following: Estimated
    
    
    Gross
    
    
    Accumulated
    
    
    NetUseful Life
    
    
    Asset
    
    
    Amortization
    
    
    AssetAt February 26, 2005 (Successor)Trademarks
    
    Indefinite
    
    $
    50,095
    
    
    $
    
    
    
    $
    50,095Deferred financing costs and other
    
    
    7 to 8 years
    
    
    
    11,112
    
    
    
    (1,372
    )
    
    
    9,740Patents
    
    
    14 to 17 years
    
    
    
    7,317
    
    
    
    (407
    )
    
    
    6,910Customer lists and distribution contracts
    
    
    3 to 12 years
    
    
    
    100,516
    
    
    
    (10,469
    )
    
    
    90,047$
    169,040
    
    
    $
    (12,248
    )
    
    $
    156,792At August 28, 2004 (Successor)Trademarks
    
    Indefinite
    
    $
    50,095
    
    
    $
    
    
    
    $
    50,095Deferred financing costs and other
    
    
    7 to 8 years
    
    
    
    11,112
    
    
    
    (624
    )
    
    
    10,488Patents
    
    
    14 to 17 years
    
    
    
    7,317
    
    
    
    (185
    )
    
    
    7,132Customer lists and distribution contracts
    
    
    3 to 12 years
    
    
    
    100,516
    
    
    
    (4,758
    )
    
    
    95,758$
    169,040
    
    
    $
    (5,567
    )
    
    $
    163,473
 For AAC, total amortization on other intangible assets was $3,340 and $851 for the
three months ended February 26, 2005 and February 28, 2004, respectively, and $6,681 and $1,871 for
the six months ended February 26, 2005 and February 28, 2004, respectively, of which amortization
on deferred financing costs is recorded as interest expense and amortization on patents and
customer lists and distribution contracts is
recorded as amortization expense. Estimated annual amortization expense for fiscal years ended 2005
through 2009 is approximately $13.4 million each year. 11




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AAC GROUP HOLDING CORP.
AMERICAN ACHIEVEMENT CORPORATION Notes to Condensed Consolidated Financial Statements  (Continued)
(Dollars in thousands, unless otherwise stated)
(unaudited) 4. Comprehensive Loss Unrecognized losses on accrued minimum pension liabilities are included in other comprehensive
loss. The following amounts were included in determining comprehensive loss: AAC GroupHolding Corp.
    
    
    American Achievement CorporationFor the three
    
    
    (Successor)
    
    
    
    (Predecessor)months ended
    
    
    For the three months endedFebruary 26, 2005
    
    
    February 26, 2005
    
    
    
    February 28, 2004Net loss
    
    $
    (4,458
    )
    
    $
    (3,465
    )
    
    
    $
    (1,847
    )Adjustment in minimum pension liability
    
    
    
    
    
    
    
    
    
    
    
    17Total comprehensive loss
    
    $
    (4,458
    )
    
    $
    (3,465
    )
    
    
    $
    (1,830
    )
 AAC GroupHolding Corp.
    
    
    American Achievement CorporationFor the six
    
    
    (Successor)
    
    
    
    (Predecessor)months ended
    
    
    For the six months endedFebruary 26, 2005
    
    
    February 26, 2005
    
    
    
    February 28, 2004Net loss
    
    $
    (7,714
    )
    
    $
    (6,677
    )
    
    
    $
    (3,404
    )Adjustment in minimum pension liability
    
    
    
    
    
    
    
    
    
    
    
    34Total comprehensive loss
    
    $
    (7,714
    )
    
    $
    (6,677
    )
    
    
    $
    (3,370
    )
 5. Inventories, Net A summary of inventories, net is as follows: AAC GroupHolding Corp.
    
    
    American Achievement Corporation(Successor)
    
    
    (Successor)February 26, 2005
    
    
    February 26, 2005
    
    
    August 28, 2004Raw materials
    
    $
    9,769
    
    
    $
    9,769
    
    
    $
    8,853Work in process
    
    
    19,098
    
    
    
    19,098
    
    
    
    7,380Finished goods
    
    
    7,807
    
    
    
    7,807
    
    
    
    6,978LessReserves
    
    
    (315
    )
    
    
    (315
    )
    
    
    (188
    )$
    36,359
    
    
    $
    36,359
    
    
    $
    23,023
 For Group Holdings, cost of sales includes depreciation and amortization of $2,399
and $4,783 for the three months and six months ended February 26, 2005, respectively. For AAC, cost of sales includes depreciation and amortization of $2,399 and $2,178 for the
three months ended February 26, 2005 and February 28, 2004, respectively. For AAC, cost of sales
includes depreciation and amortization of $4,783 and $4,341 for the six months ended February 26,
2005 and February 28, 2004, respectively. 12




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AAC GROUP HOLDING CORP.
AMERICAN ACHIEVEMENT CORPORATION Notes to Condensed Consolidated Financial Statements  (Continued)
(Dollars in thousands, unless otherwise stated)
(unaudited) 6. Prepaid Expenses and Other Current Assets, Net For Group Holdings, prepaid expenses and other current assets, net on the balance sheet,
include reserves on sales representative advances of $2,412 at February 26, 2005. For AAC, prepaid expenses and other current assets, net on the balance sheet, include reserves
on sales representative advances of $2,412 and $2,383 at February 26, 2005 and August 28, 2004,
respectively. 7. Long-term Debt Long-term debt consists of the following: AAC Group Holding Corp.
    
    
    American Achievement Corporation(Successor)
    
    
    (Successor)August 28,February 26, 2005
    
    
    February 26, 2005
    
    
    200410 1/4% Senior discount notes due
2012 (net of unamortized discount of
$39,562)
    
    $
    91,938
    
    
    $
    
    
    
    $
    8 1/4% Senior subordinated notes due 2012
    
    
    150,000
    
    
    
    150,000
    
    
    
    150,00011 5/8% Senior unsecured notes due 2007
(net of unamortized discount of $33 and
$1,145)
    
    
    6,050
    
    
    
    6,050
    
    
    
    6,045Senior secured credit facilityRevolving credit facility due 2010
    
    
    
    
    
    
    
    
    
    
    Term loan due 2011
    
    
    144,473
    
    
    
    144,473
    
    
    
    154,613Total
    
    
    392,461
    
    
    
    300,523
    
    
    
    310,658Less current portion of long-term debt
    
    
    (1,550
    )
    
    
    (1,550
    )
    
    
    (1,550
    )Total long-term debt
    
    $
    390,911
    
    
    $
    298,973
    
    
    $
    309,108
 10 1/4% Senior Discount Notes On November 16, 2004 Group Holdings issued the 10 1/4% Notes. The net proceeds of this
offering were used to repurchase shares of Group Holdings common stock from its stockholders.
Group Holdings was formed on November 8, 2004 and has no operations separate from its ownership in
AAC. Interest accrues on the 10 1/4% Notes in the form of an increase in the accreted value of the
notes prior to October 1, 2008. Thereafter, cash interest on the 10 1/4% Notes will accrue and be
payable semiannually in arrears on April 1 and October 1 of each year, commencing April 1, 2009 at
a rate of 10 1/4% per annum. Group Holdings has no independent operating assets or liabilities
other than its investment in AAC. At any time on or after October 1, 2008, Group Holdings may redeem the 10 1/4% Notes, in whole
or in part, at a redemption price equal to 100% of the principal amount plus a premium, declining
ratably to par, plus accrued and unpaid interest. At any time on or prior to October 1, 2007, Group
Holdings may redeem
up to 35% of the aggregate accreted value of the 10 1/4% Notes with the proceeds of qualified
equity offerings at a redemption price equal to 110.25% of the accreted value. 
 If a change in control as defined in the indenture relating to the 10 1/4% Notes occurs
prior to October 1, 2008, Group Holdings must give the holders of the 10 1/4% Notes the
opportunity to sell their 10 1/4% Notes to Group Holdings at 101% of the accreted value
of the 10 1/4% Notes, plus accrued interest.  If a change in control as defined in the
indenture relating to the 10 1/4% Notes occurs following October 1, 2008, Group
Holdings must give the holders of the 10 1/4% Notes the opportunity to sell their 10 1/4%
Notes to Group Holdings at 101% of the aggregate principal amount at maturity of the 10
1/4% Notes, plus accrued interest. 
 13




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AAC GROUP HOLDING CORP.
AMERICAN ACHIEVEMENT CORPORATION Notes to Condensed Consolidated Financial Statements  (Continued)
(Dollars in thousands, unless otherwise stated)
(unaudited) 
 Additionally,
the terms of the 10 1/4% Notes limit Group Holdings ability to, among
other things, incur additional indebtedness, dispose of assets, make acquisitions, make
other investments, pay dividends and make various other payments. The terms also
include cross-default provisions to the indenture governing the 8 1/4% Notes and the
Senior Secured Credit Facility. 
 
 As
of February 26, 2005, Group Holdings was in compliance with all
such provisions. 
 8 1/4% Senior Subordinated Notes On March 25, 2004, AAC issued the 8 1/4% Notes. The 8 1/4% Notes bear interest at a stated
rate of 8 1/4%. The 8 1/4% Notes are unsecured senior subordinated obligations and are subordinated
in right of payment to all of AACs existing and future senior indebtedness, including obligations
under AACs senior secured credit facility, pari passu in right of payment with any of AACs future
senior subordinated indebtedness and senior in right of payment to any of AACs future subordinated
indebtedness. The 8 1/4% Notes are guaranteed by certain of AACs existing domestic subsidiaries,
and will be guaranteed by certain of AACs future domestic subsidiaries. The guarantees are
subordinated in right of payment to all existing and future senior indebtedness of the applicable
guarantor, pari passu in right of payment with any future senior subordinated debt of such
guarantor and senior in right of payment to any future subordinated indebtedness of such guarantor. AAC may not redeem the 8 1/4% Notes until on or after April 1, 2008, except that AAC, in
connection with certain equity offerings, may redeem up to 35 percent of the 8 1/4% Notes before
the third anniversary of the issue date of the 8 1/4% Notes as long as (a) AAC pays a specified
percentage of the principal amount of the 8 1/4% Notes, plus interest, (b) AAC redeems the 8 1/4%
Notes within 90 days of completing a public equity offering and (c) at least 65 percent of the
aggregate principal amount of the 8 1/4% Notes originally issued remains outstanding
afterward. If a change in control as defined in the indenture relating to the 8 1/4% Notes occurs, AAC
must give the holders of the 8 1/4% Notes the opportunity to sell their 8 1/4% Notes to AAC at 101
percent of the principal amount of the 8 1/4% Notes, plus accrued interest. The 8 1/4% Notes contain customary negative covenants and restrictions on actions by AAC and
its subsidiaries including, without limitation, restrictions on additional indebtedness,
investments, asset dispositions outside the ordinary course of business, liens, and transactions
with affiliates, among other restrictions included in the indenture governing the 8 1/4% Notes . In
addition, the 8 1/4% Notes contain covenants, which restrict the declaration or payment of
dividends by AAC and/or its subsidiaries (as
defined in the indenture governing the 8 1/4% Notes). AAC was in compliance with the 8 1/4% Notes
covenants as of February 26, 2005. 11 5/8% Senior Unsecured Notes On February 20, 2002, AAC issued the 11 5/8% Notes. The 11 5/8% Notes bear interest at a
stated rate of 11 5/8%. The 11 5/8% Notes were issued at a discount of 0.872% resulting in net
proceeds of approximately $175.5 million before considering financing costs. The effective rate of
the 11 5/8% Notes after discount is approximately 13.0%. The 11 5/8% Notes rank pari passu with
AACs existing and future senior indebtedness, including obligations under AACs senior secured
credit facility. The 11 5/8% Notes are guaranteed by AACs domestic subsidiaries, and the
guarantees rank pari passu with the existing 8 1/4% Notes and future senior debt of AAC and its
subsidiaries. The 11 5/8% Notes and the guarantees on the 11 5/8% Notes are effectively
subordinated to any of AACs secured debt. 14




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AAC GROUP HOLDING CORP.
AMERICAN ACHIEVEMENT CORPORATION Notes to Condensed Consolidated Financial Statements  (Continued)
(Dollars in thousands, unless otherwise stated)
(unaudited) On March 25, 2004, pursuant to the debt tender offer for the 11 5/8% Notes described in Note
2, AAC retired $170.9 million of outstanding 11 5/8% Notes for an aggregate $193.8 million and
eliminated substantially all of the restrictive covenants associated with such notes. The remaining
$6.1 million of 11 5/8% Notes outstanding are redeemable by AAC on or after January 1, 2005 at its
option at 105.813% of the principal amount thereof (plus accrued and unpaid interest). AAC was in
compliance with the remaining covenants of the 11 5/8% Notes as of February 26, 2005. On March 31, 2005, the Company called for redemption of the remaining outstanding 11 5/8%
Notes. The redemption will occur on May 15, 2005 and in accordance with the indenture governing
the 11 5/8% Notes, the redemption price is 105.813% of the principal amount of notes to be
redeemed, plus accrued and unpaid interest. 11% Senior Subordinated Notes Commemorative Brands, Inc.s (CBI) 11% Notes mature on January 15, 2007. The 11% Notes are
redeemable at the option of CBI in whole or in part, at any time on or after January 15, 2002, at
specified redemption prices ranging from 105.5 percent of the principal amount thereof if redeemed
during 2002 and declining to 100 percent of the principal amount thereof if redeemed during the
year 2005 or thereafter, plus accrued and unpaid interest and Liquidated Damages as defined in the
indenture relating to the 11% Notes, as amended, if any, thereon to the date of redemption. On March 25, 2004, as discussed in Note 2, AAC redeemed all of the outstanding 11% Notes for
an aggregate of $42.1 million. The tender for the $177.0 million 11 5/8% Notes and the $41.4 million 11% Notes was the direct
result of the Merger. The consummation of the Merger was subject to the consent and a debt tender
offer to acquire these notes. The subsequent tender offer costs and early redemption expenses of
the debt directly related to the cost of the transaction and was included as part of the purchase
price. Senior Secured Credit Facility In conjunction with the consummation of the Merger, on March 25, 2004, AAC entered into a
$195.0 million senior credit facility (the Senior Credit Facility) which includes a $155.0
million term loan and up to $40.0 million available under a revolving credit facility. The Senior
Credit Facility is secured by a first priority security interest in all existing and after-acquired
assets of AAC, and certain of AACs direct and indirect domestic subsidiaries existing and
after-acquired assets, including, without limitation, real property and all of the capital stock
owned by AAC Holding Corp. and certain of AACs direct and indirect domestic subsidiaries
(including certain capital stock of their direct foreign subsidiaries only to the extent permitted
by applicable law). As of February 26, 2005, assets of AAC subject to lien under the Senior Credit
Facility were approximately $350.9 million. All of AACs obligations under the Senior Credit
Facility are fully and unconditionally guaranteed by AAC Holding Corp. and certain of AACs direct
and indirect domestic subsidiaries. The term loan of the Senior Credit Facility is due in March 2011. Quarterly payments of $388
are made through 2011. The term loan has an interest rate based on the prime rate, plus points
based on a calculated leverage ratio. During the six months ended February 26, 2005, the Company paid down $10.1 million of the term
loan of the Senior Credit Facility, of which $1.1 million were quarterly payments, and during March
2005, the Company paid down an additional $5.0 million of the term loan. 15




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AAC GROUP HOLDING CORP.
AMERICAN ACHIEVEMENT CORPORATION Notes to Condensed Consolidated Financial Statements  (Continued)
(Dollars in thousands, unless otherwise stated)
(unaudited) The revolving credit facility matures in March 2010. Availability under the revolving credit
facility is restricted to a total revolving commitment of $40 million as defined in the credit
agreement governing the Senior Credit Facility. Availability under the revolving credit facility as
of February 26, 2005 was approximately $37.6 million with $0 borrowings and $2.4 million in letters
of credit outstanding. Advances under the revolving credit facility may be made as base rate loans or LIBOR loans at
AACs election (except for the initial loans which were base rate loans). Interest rates payable
upon advances are based upon the base rate or LIBOR depending on the type of loan AAC chooses, plus
an applicable margin based upon a consolidated leverage ratio of certain outstanding indebtedness
to EBITDA (net income (loss) before interest expense, income taxes, depreciation and amortization)
to be calculated in accordance with the terms specified in the credit agreement governing the
Senior Credit Facility. The Senior Credit Facility and the indenture governing the 8 1/4% Notes each contain
restrictions on the ability of AAC to pay dividends and make certain other payments to AAC Holding
Corp. Pursuant to each arrangement, AAC may, subject to certain limitations, pay dividends or make
such payments in connection with (i) repurchases of certain capital stock of AAC Holding Corp. and
(ii) the payment by AAC Holding Corp. of taxes, costs and other expenses required to maintain its
legal existence and legal, accounting and other overhead costs in the ordinary course of business. AAC was in compliance with the Senior Credit Facilitys covenants as of February 26, 2005. 
 
 Group Holdings weighted average interest rate on debt outstanding as of February 26, 2005 was
7.6%. AACs weighted average interest rate on debt outstanding as of February 26, 2005 and August
28, 2004 was 6.8% and 6.1%, respectively. AACs management believes the carrying amount of long-term debt approximates fair value as of
February 26, 2005 and August 28, 2004, based upon current rates offered for debt with the same or
similar debt terms. 16




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AAC GROUP HOLDING CORP.
AMERICAN ACHIEVEMENT CORPORATION Notes to Condensed Consolidated Financial Statements  (Continued)
(Dollars in thousands, unless otherwise stated)
(unaudited) 8. Commitments and Contingencies Pending Litigation 
 On February 11, 2004, Frederick Goldman, Inc. (the Licensee) filed an arbitration claim
against AACs subsidiary, CBI, for an unspecified monetary amount alleging, among other things,
that CBI had improperly attempted to convert an exclusive license CBI granted to the Licensee to a
non-exclusive license. The arbitration proceedings have concluded
with the arbitrator ruling that the Licensee has an exclusive license. In addition, on February 10, 2004, the Licensee commenced a lawsuit in
federal district court in New York against CBI alleging that CBI breached the license agreement by
granting third parties rights in violation of the Licensees exclusive rights under the license
agreement. The district court claim seeks injunctive and monetary
relief. The Licensee has not specified the exact amount of monetary
relief it seeks, but has asked for an amount not less than
$10.0 million. CBI intends to defend itself
vigorously, and pursue its own claims aggressively, in these proceedings. 
 
 On
August 2, 2004, AACs subsidiary Taylor Publishing Company
(Taylor) filed a motion in United States
Bankruptcy Court, Eastern District of Virginia, Norfolk Division, Case No. 03-75562-SCS to recover
certain data and documents pursuant to a teleservices contract between Taylor and Abacus
Communications, LC (Abacus), the chapter 11 debtor. Subsequent to court approval of Abacus
turning over the documents and data requested, Abacus filed a counterclaim against Taylor
for approximately $840,000 plus interest for unpaid billings that it claims are owed
under the teleservices contract with Taylor. In
February 2005, the Company reached a settlement
with Abacus which did not have a material impact on the Company's financial position. 
 The Company is not a party to any other pending legal proceedings other than ordinary routine
litigation incidental to its business. In managements opinion, adverse decisions on legal
proceedings, in the aggregate, would not have a materially adverse impact on the Companys results
of operations or financial position. Gold Consignment Agreement Under AACs gold consignment financing arrangement, AAC has the ability to have on consignment
the lowest of the dollar value of 27,000 troy ounces of gold, $14.2 million or a borrowing base,
determined based upon a percentage of gold located at AACs facilities and other approved
locations, as specified by the agreement. AAC expensed consignment fees of $87 for the three months
ended February 26, 2005 and $87 for the three months ended February 28, 2004. AAC expensed
consignment fees of $174 for the six months ended February 26, 2005 and $154 for the six months
ended February 28, 2004. Under the terms of the consignment arrangement, AAC does not own the
consigned gold nor does it have risk of loss related to such inventory until the money is received
by the bank from AAC in payment for the gold purchased. Accordingly, AAC does not include the value
of consigned gold in its inventory or the corresponding liability for financial statement purposes.
As of February 26, 2005 and August 28, 2004, AAC held approximately 20,500 ounces and 19,460
ounces, respectively, of gold valued at $8.9 million and $7.9 million, respectively, on
consignment. The gold consignment agreement does not have a stated period and it can be terminated
by either party upon 60 days written notice. 17




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AAC GROUP HOLDING CORP.
AMERICAN ACHIEVEMENT CORPORATION Notes to Condensed Consolidated Financial Statements  (Continued)
(Dollars in thousands, unless otherwise stated)
(unaudited) 9. Income Taxes The Company has recognized a net deferred tax liability. AAC has an effective rate of 40% for
the three and six months ended February 26, 2005 to represent an estimated federal and state income
tax benefit. Group Holdings has an effective rate of 45% for the three and six months ended
February 26, 2005 to represent an estimated federal and state income tax benefit and the
non-deductibility of a portion of its interest on high-yield debt. 10. Stockholders Equity Pursuant to an employment agreement entered into between AAC and its chief executive officer
in July 1999, as amended on February 1, 2002, the executive is entitled to receive discretionary
bonuses as directed by the Board of Directors up to $300 annually, of which $150 was accrued as of
February 26, 2005. On March 25, 2004, as part of the Merger discussed in Note 2, AACs parent company issued
substantially all of its outstanding equity interests to an investor group led by Fenway Partners
for $102.0 million. All previously issued shares of preferred stock or common stock of AAC, and all
warrants, options and other rights to acquire preferred stock or common stock of AAC (including the
right and option in the employment agreement described above) were redeemed, cancelled or exchanged
as part of the Merger discussed in Note 2. 11. Postretirement Pension and Medical Benefits CBI provides certain healthcare and life insurance benefits for former employees of the L.G.
Balfour Company who retired prior to December 31, 1990. Certain hourly employees of Taylor are
covered by a defined benefit pension plan (TPC Plan) established by Taylor. The benefits under
the CBI and TPC Plans are based primarily on the employees years of service and compensation near
retirement. The funding policies for these plans are consistent with the funding requirements of
federal laws and regulations. The net periodic postretirement benefit cost (income), include the following components: 
 (Successor)
    
    
    
    (Predecessor)For the three months
    
    
    
    For the three months endedended February 26, 2005
    
    
    
    February 28, 2004CBI
    
    
    
    
    

    
    
    CBITaylor
    
    
    post-
    
    
    
    Taylor
    
    
    post-pension
    
    
    retirement
    
    
    
    pension
    
    
    retirementService costs, benefits attributed to Service
during the period
    
    $
    19
    
    
    $
    
    
    
    
    $
    15
    
    
    $
    Interest cost
    
    
    209
    
    
    
    37
    
    
    
    
    149
    
    
    
    74Expected return on assets
    
    
    (208
    )
    
    
    
    
    
    
    
    (150
    )
    
    
    Amortization of unrecognized net loss (gain)
    
    
    
    
    
    
    (74
    )
    
    
    
    39
    
    
    
    40Amortization of unrecognized net prior service costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    73Net periodic postretirement benefit cost (income)
    
    $
    20
    
    
    $
    (37
    )
    
    
    $
    53
    
    
    $
    187
 
 18




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##### Table of Contents



AAC GROUP HOLDING CORP.
AMERICAN ACHIEVEMENT CORPORATION Notes to Condensed Consolidated Financial Statements  (Continued)
(Dollars in thousands, unless otherwise stated)
(unaudited) 
 (Successor)
    
    
    
    (Predecessor)For the six months
    
    
    
    For the six months endedended February 26, 2005
    
    
    
    February 28, 2004CBI
    
    
    
    
    
    
    
    CBITaylor
    
    
    post-
    
    
    
    Taylor
    
    
    post-pension
    
    
    retirement
    
    
    
    pension
    
    
    retirementService costs, benefits attributed to Service
during the period
    
    $
    38
    
    
    $
    
    
    
    
    $
    43
    
    
    $
    Interest cost
    
    
    418
    
    
    
    74
    
    
    
    
    418
    
    
    
    148Expected return on assets
    
    
    (416
    )
    
    
    
    
    
    
    
    (420
    )
    
    
    Amortization of unrecognized net loss (gain)
    
    
    
    
    
    
    (148
    )
    
    
    
    108
    
    
    
    79Amortization of unrecognized net prior service costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    146Net periodic postretirement benefit cost (income)
    
    $
    40
    
    
    $
    (74
    )
    
    
    $
    149
    
    
    $
    373
 
 
 In
May 2004, the Financial Accounting Standards Board
(FASB) issued FASB Staff Position (FSP) 106-2 as a result of the
Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Medicare Subsidy Act).
The Medicare Subsidy Act entitles employers who provide certain prescription drug benefits for
retirees to receive a federal subsidy beginning in calendar 2006, thereby creating the potential
for significant benefit cost savings. FSP 106-2 requires companies to record the amount expected to
be received under the Medicare Subsidy Act as an actuarial gain, to the extent the related
post-retirement medical plans total unrecognized actuarial gains or losses exceed certain
thresholds, to be amortized into income over time. During the first quarter of fiscal 2005, the
Company adopted the provisions of this pronouncement and noted a reduction of service costs for
fiscal 2005 of $93 as a component of net postretirement health care costs attributable to current
services. 
 12. Related-Party Transactions On March 25, 2004, upon consummation of the Merger, AAC entered into a new management
agreement with an affiliate of Fenway Partners pursuant to which AAC, among other things, agreed to
pay such affiliate an annual fee equal to the greater of $3.0 million or 5% of the previous fiscal
years EBITDA (as defined in the agreement). Amounts paid under the new management agreement
totaled $735 and $1,500 for the three months and six months ended February 26, 2005, respectively.
As of February 26, 2005 and August 28, 2004, AAC had accrued management fees of approximately $530
and $500, respectively. In 2001, AAC entered into a management agreement with a prior stockholder. This agreement was
terminated on March 25, 2004. Amounts paid under this management agreement totaled $750 and $1,500
for the three months and six months ended February 28, 2004, respectively. 
 13. Business Segments (Restated) 
 
 Previously the Company had aggregated and presented two reportable
segments - Scholastic Products and Recognition and Affinity Products. Subsequent to the issuance
of the Companys financial statements for the period ended February 26, 2005 , management of the Company
determined that it should have disaggregated its segments into five separate
segments; namely, Yearbooks, Class Rings, Graduation Products, Achievement Publications and Other. Accordingly, the following information
pertaining to the Companys operating segments has been restated to present such segment disclosures. 
 
 The Company manufactures, markets
and sells class rings, yearbooks and graduation products, which includes fine paper products and
graduation accessories, to high school, college and, to a lesser extent, elementary and junior
high school markets in the United States. The achievement publications segment produces, markets, and
sells publications that recognize the achievements of top students at the high school and
college levels, as well as the nations most inspiring teachers. The other segment consists
primarily of jewelry commemorating family events such as the birth of a child, fan affinity jewelry
and related products and professional sports championship rings such as World Series rings. 
 19




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##### Table of Contents



AAC GROUP HOLDING CORP.
AMERICAN ACHIEVEMENT CORPORATION Notes to Condensed Consolidated Financial Statements  (Continued)
(Dollars in thousands, unless otherwise stated)
(unaudited) AAC Group Holding Corp.
 
 SegmentThree Months Ended
    
    
    
    
    
    Operating
    
    
    SegmentFebruary 26, 2005
    
    Net Sales
    
    
    Income (Loss)
    
    
    AssetsClass Rings
    
    $
    32,651
    
    
    $
    3,140
    
    
    $
    219,413Yearbooks
    
    
    2,978
    
    
    
    (5,292
    )
    
    
    177,731Graduation Products
    
    
    16,361
    
    
    
    2,866
    
    
    
    71,032Achievement Publications
    
    
    495
    
    
    
    (1,229
    )
    
    
    35,816Other
    
    
    6,338
    
    
    
    511
    
    
    
    36,247Total
    
    $
    58,823
    
    
    $
    (4
    )
    
    $
    540,239
 
 American Achievement Corporation
(Successor)
 
 SegmentThree Months Ended
    
    
    
    
    
    Operating
    
    
    SegmentFebruary 26, 2005
    
    Net Sales
    
    
    Income (Loss)
    
    
    AssetsClass Rings
    
    $
    32,651
    
    
    $
    3,140
    
    
    $
    218,007Yearbooks
    
    
    2,978
    
    
    
    (5,292
    )
    
    
    176,453Graduation Products
    
    
    16,361
    
    
    
    2,866
    
    
    
    70,577Achievement Publications
    
    
    495
    
    
    
    (1,229
    )
    
    
    35,587Other
    
    
    6,338
    
    
    
    511
    
    
    
    36,010Total
    
    $
    58,823
    
    
    $
    (4
    )
    
    $
    536,634
 
 
 American
Achievement Corporation(Predecessor)
 
 SegmentThree Months Ended
    
    
    
    
    
    OperatingFebruary 28, 2004
    
    Net Sales
    
    
    Income (Loss)Class Rings
    
    $
    33,067
    
    
    $
    5,551Yearbooks
    
    
    2,521
    
    
    
    (3,216
    )Graduation Products
    
    
    16,568
    
    
    
    2,629Achievement Publications
    
    
    448
    
    
    
    (797
    )Other
    
    
    5,914
    
    
    
    903Total
    
    $
    58,518
    
    
    $
    5,070
 
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##### Table of Contents



AAC GROUP HOLDING CORP.
AMERICAN ACHIEVEMENT CORPORATION Notes to Condensed
Consolidated Financial Statements  (Continued)
(Dollars in thousands, unless otherwise stated)
(unaudited) AAC Group Holding Corp.
 
 SegmentSix Months Ended
    
    
    
    
    
    Operating
    
    
    SegmentFebruary 26, 2005
    
    Net Sales
    
    
    Income (Loss)
    
    
    AssetsClass Rings
    
    $
    67,502
    
    
    $
    8,786
    
    
    $
    219,413Yearbooks
    
    
    15,929
    
    
    
    (10,788
    )
    
    
    177,731Graduation Products
    
    
    19,319
    
    
    
    1,116
    
    
    
    71,032Achievement Publications
    
    
    9,294
    
    
    
    1,503
    
    
    
    35,816Other
    
    
    10,061
    
    
    
    (258
    )
    
    
    36,247Total
    
    $
    122,105
    
    
    $
    359
    
    
    $
    540,239
 
 American Achievement Corporation
(Successor)
 
 SegmentSix Months Ended
    
    
    
    
    
    Operating
    
    
    SegmentFebruary 26, 2005
    
    Net Sales
    
    
    Income (Loss)
    
    
    AssetsClass Rings
    
    $
    67,502
    
    
    $
    8,786
    
    
    $
    218,007Yearbooks
    
    
    15,929
    
    
    
    (10,788
    )
    
    
    176,453Graduation Products
    
    
    19,319
    
    
    
    1,116
    
    
    
    70,577Achievement Publications
    
    
    9,294
    
    
    
    1,503
    
    
    
    35,587Other
    
    
    10,061
    
    
    
    (258
    )
    
    
    36,010Total
    
    $
    122,105
    
    
    $
    359
    
    
    $
    536,634
 
 
 American
Achievement Corporation(Predecessor)
 
 SegmentSix Months Ended
    
    
    
    
    
    OperatingFebruary 28, 2004
    
    Net Sales
    
    
    Income (Loss)Class Rings
    
    $
    69,777
    
    
    $
    11,693Yearbooks
    
    
    16,165
    
    
    
    (7,163
    )Graduation Products
    
    
    19,220
    
    
    
    747Achievement Publications
    
    
    11,634
    
    
    
    4,595Other
    
    
    9,650
    
    
    
    622Total
    
    $
    126,446
    
    
    $
    10,494
 
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##### Table of Contents



AAC GROUP HOLDING CORP.
AMERICAN ACHIEVEMENT CORPORATION Notes to Condensed
Consolidated Financial Statements  (Continued)
(Dollars in thousands, unless otherwise stated)
(unaudited) 14. Recent Accounting Pronouncements In May 2004, FASB issued FASB Staff Position (FSP) 106-2 as a result of the Medicare
Prescription Drug, Improvement and Modernization Act of 2003 (the Medicare Subsidy Act). The
Medicare Subsidy Act entitles employers who provide certain prescription drug benefits for retirees
to receive a federal subsidy beginning in calendar 2006, thereby creating the potential for
significant benefit cost savings. FSP 106-2 requires companies to record the amount expected to be
received under the Medicare Subsidy Act as an actuarial gain, to the extent the related
post-retirement medical plans total unrecognized actuarial gains or losses exceed certain
thresholds, to be amortized into income over time. During the first quarter of fiscal 2005, the
Company adopted the provisions of this pronouncement and noted a reduction of service costs for
fiscal 2005 of $93 as a component of net postretirement health care costs attributable to current
services. In November 2004, FASB issued SFAS No. 151 Inventory Costs, an Amendment of ARB No. 43
Chapter 4 (FAS 151). FAS 151 requires that items such as idle facility expense, excessive
spoilage, double freight, and rehandling be recognized as current-period charges rather than being
included in inventory regardless of whether the costs meet the criterion of abnormal as defined in
ARB 43. FAS 151 is applicable for inventory costs incurred during fiscal years beginning after June
15, 2005. The Company will adopt this standard beginning the first quarter of fiscal year 2006 and
does not believe the adoption will have a material impact on its financial statements as such costs
have historically been expensed as incurred. 
 In December 2004, FASB issued SFAS No. 153,
Exchanges of Nonmonetary Assets  an amendment of APB Opinion No. 29 which addresses the
measurement of exchanges of nonmonetary assets and eliminates the exception from fair value
accounting for nonmonetary exchanges of similar productive assets and replaces it with an exception
for exchanges that do not have commercial substance. SFAS No. 153 specifies that a nonmonetary
exchange has commercial substance if the future cash flows of an entity are expected to change
significantly as a result of the exchange. This statement is effective for the Company beginning
the first quarter of fiscal year 2006 and is not expected to have a significant impact on the
Companys financial statements. 
 
 In December 2004, FASB issued SFAS No. 123 (Revised 2004) Share-Based Payment: an Amendment
of FASB Statements No. 123 and 95 (FAS 123R). FAS 123R sets accounting requirements for
share-based compensation to employees, requires companies to recognize in the income statement
the grant-date fair value of stock options and other equity-based compensation issued to employees
and disallows the use of the intrinsic value method of accounting for stock compensation. FAS 123R
is applicable for all interim and annual periods for fiscal years beginning after June 15, 2005. This statement is
effective for the Company beginning the first quarter of fiscal year 2006 and is not expected to
have a significant impact on its financial statements. 
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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 
 The
following discussion of our condensed consolidated financial condition and results of operations
should be read in conjunction with the information contained in our
condensed consolidated financial
statements and the notes thereto. The consolidated financial statements, and the notes thereto, have been prepared in accordance
 with U.S. GAAP. The comparative financial information contains the pre-Merger periods for the three months and six months ended
 February 28, 2004 (Predecessor) and the post-Merger periods for the three months and six months ended
 February 26, 2005 (Successor). In reviewing this comparative financial information, readers should remember that the
 Predecessor period results of operations do not reflect the effects
of the acquisition and the application of purchase accounting. The following discussion includes forward-looking statements that
involve certain risks and uncertainties. See Disclosure Regarding Forward-Looking Statements. 
 
 The
following managements discussion and analysis gives effect of the restatement as discussed in Note 13. 
 Basis of Presentation We present financial information relating to American Achievement Corporation
(AAC) and its subsidiaries in this report, including in this discussion and analysis. AACs
consolidated financial statements are substantially identical to what AAC Group Holding Corp.s
(Group Holdings, a separate public company, together with AAC, the Company) consolidated
financial statements would look like had Group Holdings prepared separate financial statements for
this report. Group Holdings was formed in November 2004. Its only assets are 100% of the shares of
common stock of AAC Holding Corp., which is the holder of 100% of the shares of common stock of
AAC. Group Holdings conducts all of its business through AAC and its subsidiaries. 
 Recent Developments 
 
 On
April 25, 2005, David G. Fiore, our President and Chief
Executive Officer, informed us of his plans to retire. On
July 20, 2005, we announced that Donald J. Percenti was appointed
to replace Mr. Fiore as our Chief Executive Officer effective
September 1, 2005. Mr. Percenti has most recently served as
our Senior Vice President On Campus and General Manager for Printing. 
 General 
 We are one of
the leading manufacturers and
suppliers of class rings, yearbooks, graduation products, achievement publications and
recognition and affinity jewelry in the United States. We serve the high school, college
and, to a lesser extent, elementary and junior high school markets. We market and sell yearbooks in all of the markets we serve.
We primarily sell our class rings and graduation products, which include fine paper products and
graduation accessories, in the high school, college and junior high school markets. Our achievement publications segment
produces, markets, and sells publications that recognize the
achievements of top students at the high school and college levels,
as well as the nations most inspiring teachers. Our other segment consists
primarily of jewelry commemorating family events such as the birth of a child, fan affinity jewelry and related products and
professional sports championship rings such as World Series rings. 
 Our ability to meet our debt service and other obligations depends in significant part on how
successful we are in maintaining our business and further implementing our business strategy. Our
business plan envisions several long-term growth initiatives, including the development of new
products. The components of our strategy are subject to significant business, economic and
competitive uncertainties and contingencies. Numerous raw materials are used in the manufacture of our products. Gold, precious,
semiprecious and synthetic stones, paper products and ink comprise the bulk of the raw materials we
utilize in the largest segments of our business. Prices of these materials, especially gold,
continually fluctuate. We purchase all of our gold from a single supplier, The Bank of Nova Scotia,
through our existing gold consignment agreement. We consign the majority of our gold and pay for
gold as our products are shipped to customers. We also purchase the majority of our semi-precious
stones from a single supplier in Germany. The prices for these products are denominated in Euros.
We generally are able to pass on price increases in gold and stones to our customers as such
increases are realized by us, however, this may not always be the case. Gold prices have increased
and the U.S. dollar has continued to lose valuation when compared to the Euro during the first two
quarters of our fiscal year 2005. We expect these trends to continue at least through the end of
our fiscal year 2005, and perhaps thereafter. 
 We face strong competition for most of our principal products. The class ring and
yearbook markets are highly concentrated and consist primarily of a few national manufacturers (of
which we are one) and, to a significantly lesser extent, small regional competitors. Our
achievement publications compete with one national manufacturer and, to a lesser extent,
with various other companies. We believe that it would 
 23




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##### Table of Contents



be costly and time-consuming for new competitors to replicate the production and distribution
capabilities necessary to compete effectively in this market, and as a result, there have been no
major new competitors in the last 60 years. We experience seasonal fluctuations in our net sales tied primarily to the school
year. We recorded 22% and 43% of our fiscal year 2004 net sales in our first and third quarters,
respectively. Class ring sales are highest during October through December, with most orders made
for delivery to students before the winter holiday season. Graduation product sales are
predominantly made during February through April prior to the April through June graduation season.
Yearbook sales are highest during the months of April through June, as yearbooks are typically
shipped prior to each schools summer break. We have historically experienced operating losses
during our fourth fiscal quarter, which includes the summer months when school is not in session,
thus reducing related shipment of products. In addition, our working capital requirements tend to
exceed our operating cash flows from April through August. We also have exposure to market risk relating to changes in interest rates on our
variable rate debt. Our senior secured credit facility (revolver and term loan) and existing gold
consignment agreement are variable rate arrangements. The interest rates are based on a floating
benchmark rate (such as LIBOR or the Federal Funds rate) plus a fixed spread. 
 Historically,
growth in the class rings, yearbooks and graduation products market has been driven primarily by
demographics. The U.S. Department of Education projects that the number of high school and college
graduates will grow by an average of 2.1% and 1.7% per year, respectively, from 2004 to 2008.
Additionally, the U.S. Census Bureau projects that the total U.S. population will increase by 9.5%
between 2000 and 2010. Both the increased population, and the increased number of high school and
college graduates should expand the market for our products. 
 Company Background In November of 2004, the stockholders of AAC Holding Corp. participated in an exchange,
pursuant to which they exchanged their shares of common stock in AAC Holding Corp for a like amount
of shares in Group Holdings. In November 2004, Group Holdings issued $131.5 million of 10 1/4%
senior discount notes generating net proceeds of $89.3 million (the 10 1/4% Notes) . Group
Holdings is the sole obligor of these notes. The net proceeds of this offering were used to
repurchase shares of Group Holdings common stock from its stockholders. On December 24, 2003, AAC entered into a merger agreement with AAC Acquisition Corp.
(Acquisition) and Holdings, each Delaware corporations formed by Fenway Partners Capital Fund II,
L.P. (Fenway Partners) for the sole purpose of effecting a merger. On March 25, 2004, as
contemplated by the merger agreement, Acquisition was merged with and into AAC, with AAC continuing
as the surviving corporation and a wholly-owned subsidiary of Holdings (the Merger). Upon
consummation of the Merger, substantially all of the equity interests in Holdings were indirectly
held by an investor group led by Fenway Partners. The Merger was financed by a cash equity investment in AAC Holding Corp. by an investor group
led by Fenway Partners of $102.0 million, the borrowing by AAC of $155.0 million under a seven-year
term loan and $2.0 million under a six-year revolving loan, each under AACs senior secured credit
facility and the issuance by AAC of $150.0 million aggregate principal amount of 8 1/4% senior
subordinated notes due 2012 (the 8 1/4% Notes). Proceeds of these financing arrangements were
used to redeem the outstanding Series A Preferred Stock of AAC, refinance AACs existing
indebtedness, including the redemption of $41.4 million of AACs 11% subordinated notes due 2007
and completion of a debt tender offer to acquire all of AACs existing 11 5/8% senior unsecured
notes due 2007 (the 11 5/8% Notes), and pay transaction costs and expenses. Pursuant to the debt
tender offer, AAC retired $170.9 million of the 11 5/8% Notes for an aggregate price of $193.8
million and eliminated substantially all of the restrictive covenants associated with such notes.
In addition, as part of the Merger, AAC terminated its then existing senior secured credit facility
and terminated its management contract with its previous owners. AAC also entered into an amendment
of its existing gold consignment agreement and entered into a new management agreement with an
affiliate of Fenway Partners. 24




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##### Table of Contents



As a result of the Merger, AAC has reflected pre-Merger periods from November 30, 2003 to
February 28, 2004 and August 31, 2003 to February 28, 2004 (Predecessor) and post-Merger periods
from November 28, 2004 to February 26, 2005 and August 29, 2004 to February 26, 2005 (Successor)
in its condensed consolidated financial statements. During the three months and six months ended
February 26, 2005, AAC recognized in its consolidated statements of operations approximately $2.5
million and $4.9 million, respectively of additional amortization expense of intangible assets as
selling, general and administrative expenses, all as compared to its historical basis of accounting
prior to the Merger. Our predecessor was founded when the operations of ArtCarved, which were previously owned by
CJC Holdings, Inc., and the operations of Balfour, which were previously owned by L. G. Balfour
Company, Inc., were combined in December 1996. AAC was formed in June 2000 to serve as a holding
company for these operations as well as any future acquisitions. In June 2000, we acquired the
Taylor Senior Holding Company, the parent company of Taylor Publishing, whose primary business was
designing and printing student yearbooks. In March 2001, AAC acquired all of the capital stock of
ECI, which publishes achievement publications. In July 2002, AAC acquired all the outstanding stock
and warrants of Milestone Marketing, a marketer of class rings and other graduation products to the
college market. In January 2004, AAC acquired C-B Graduation Announcements, a marketer of
graduation products to the college market. Beginning on March 25, 2004, we accounted for the Merger as a purchase in accordance
with the provisions of Statement of Financial Accounting Standards (SFAS) 141, Business
Combinations, which results in a new valuation of our assets and liabilities based upon the fair
values as of the date of the Merger. As required under SEC Staff Accounting Bulletin No. 54, Push
Down Basis of Accounting Required in Certain Limited Circumstances, we have reflected all
applicable purchase accounting adjustments in the consolidated financial statements covering
periods subsequent to the Merger. As required, we have established a new basis for assets and
liabilities based on the amount paid for ownership at March 25, 2004. Accordingly, the purchase
price of $419.2 million was allocated to the assets and liabilities based on their relative fair
values. Critical Accounting Policies We prepare our consolidated financial statements in conformity with accounting principles
generally accepted in the United States of America. As such, we are required to make certain
estimates, judgments and assumptions that we believe are reasonable based upon the information
available. These estimates and assumptions affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues and expenses during the
periods presented. The significant accounting policies which we believe are the most critical to
aid in fully understanding and evaluating our reported financial results include the following: 
 Sales Returns and Allowances.We make estimates of potential future product returns related
to current period product revenue. We analyze the previous five years average historical returns,
current economic trends and changes in customer demand and acceptance of our products when
evaluating the adequacy of the sales returns and allowances. Significant management judgments and
estimates must be made and used in connection with establishing the sales returns and allowances in
any accounting period. Product returns as a percentage of net sales have been 1.8%, 1.9% and 2.2%
for the fiscal years ended 2004, 2003 and 2002, respectively. Product warranty costs as a
percentage of net sales have been 0.3%, 0.2% and 0.4% for the fiscal years ended 2004, 2003 and
2002, respectively. A ten percent increase in product returns and product warranty costs would
result in a reduction of annual net sales of approximately $0.6 million and $0.1 million, respectively,
based on fiscal year end 2004 rates. Material differences could result in the amount and timing
of our revenue for any period if we made different judgments or utilized different estimates. 
 Allowance for Doubtful Accounts and Reserve on Sales Representative Advances.We
make estimates of potentially uncollectible customer accounts receivable and receivables arising
from sales representative draws paid in excess of earned commissions. Our reserves are based on an
analysis of individual customer and salesperson accounts and historical write-off experience. Our
analysis includes the age of the receivable, customer or salesperson creditworthiness and general
economic conditions. Write-offs of doubtful accounts as a percentage of net sales have been 0.6%,
0.5% and 0.5% for the fiscal years ended 25




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##### Table of Contents



2004, 2003 and 2002, respectively. Write-offs of sales representative advances as a percentage of
net sales have been 0.7%, 0.9% and 0.9% for the fiscal years ended 2004, 2003 and 2002,
respectively. A ten percent increase in write-offs of doubtful accounts and sales representative
advances would result in a reduction of annual net sales of approximately $0.2 million and $0.2 million,
respectively, based on fiscal year ended 2004 rates. We believe that our results could be
materially different if historical trends do not reflect actual results or if economic conditions
worsened. 
 Goodwill and Other Intangible Assets. We account for our long-lived assets with
indefinite lives under Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets or SFAS No. 142. Under SFAS No. 142 we are required to test goodwill and
intangible assets with indefinite lives for impairment annually, or more frequently if impairment
indicators occur. The impairment test requires management to make judgments in connection with
identifying reporting units, assigning assets and liabilities to reporting units and determining
fair value of each reporting unit. Significant judgments required to estimate the fair value of
reporting units include projecting future cash flows, determining appropriate discount rates and
other assumptions. The projections are based on historical performance and future estimated
results. As of the Merger, a third party valuation, among other factors, was used by management in
formulating other intangible assets values and the residual goodwill. We believe that we had no unrecorded impairment as of August 28, 2004 and August 30,
2003; however, unforeseen future events could adversely affect the reported value of goodwill and
indefinite-lived intangible assets. As of August 28, 2004, goodwill and indefinite-lived intangible
assets totaled $232.2 million and represented 44% of total assets and 214% of equity. Long-lived Tangible and Intangible Assets with Definite Lives.We test our
long-lived tangible and intangible assets with definite lives for impairment under Statement of
Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets, which requires us to review long-lived tangible and intangible assets with definite lives
whenever events or changes in circumstances indicate the carrying amount of an asset may not be
recoverable. Recoverability of these assets is measured by comparison of its carrying amount to the
future undiscounted cash flows the assets are expected to generate. If long-lived assets are
considered to be impaired, the impairment to be recognized equals the amount by which the carrying
value of the assets exceeds its fair market value and is recorded in the period the determination
is made. In applying this standard, assets are grouped and evaluated at the lowest level for which
there are identifiable cash flows that are largely independent of the cash flows of other groups of
assets. We consider historical performance and future estimated results in evaluation of
impairment. If the carrying amount of the asset exceeds expected undiscounted future cash flows, we
measure the amount of impairment by comparing the carrying amount of the asset to its fair value,
generally measured by discounting expected future cash flows at the rate we utilize to evaluate
potential investments. As of the Merger, a third party valuation was used in formulating our
long-lived tangible and intangible assets with definite lives. Results of Operations Three Months Ended February 26, 2005 (Successor) Compared to Three Months Ended February 28, 2004
(Predecessor) Group Holdings was not formed until November of 2004. We are therefore comparing our results
of operations for the three months ended February 26, 2005, which include results of operations for
both Group Holdings and AAC, with the results of operations of AAC by itself for the three months
ended February 28, 2004. The inclusion of the results of Group Holdings for the three months ended
February 26, 2005 only adds additional interest expense or $2.4 million from the issuance of the 10
1/4% Notes and increases the tax benefit by $1.4 million. 26




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##### Table of Contents



The following table sets forth selected information for Group Holdings and AAC from
our condensed consolidated statements of operations expressed on an actual basis and as a
percentage of net sales: AAC Group Holding Corp.
    
    
    
    
    
    
    American Achievement Corporation(Successor)
    
    
    
    
    
    
    
    (Predecessor)For the three
    
    
    
    
    
    
    For the three
    
    
    
    
    
    
    
    For the threemonths ended
    
    
    
    
    
    
    months ended
    
    
    
    
    
    
    
    months endedFebruary 26,
    
    
    
    
    
    
    February 26,
    
    
    % of Net
    
    
    
    February 28,
    
    
    % of Net2005
    
    
    % of Net Sales
    
    
    2005
    
    
    Sales
    
    
    
    2004
    
    
    SalesNet sales
    
    $
    58,823
    
    
    
    100.0
    %
    
    $
    58,823
    
    
    
    100.0
    %
    
    
    $
    58,518
    
    
    
    100.0
    %Cost of sales
    
    
    23,150
    
    
    
    39.4
    %
    
    
    23,150
    
    
    
    39.4
    %
    
    
    
    21,538
    
    
    
    36.8
    %Gross profit
    
    
    35,673
    
    
    
    60.6
    %
    
    
    35,673
    
    
    
    60.6
    %
    
    
    
    36,980
    
    
    
    63.2
    %Selling, general
and administrative
expenses
    
    
    35,677
    
    
    
    60.6
    %
    
    
    35,677
    
    
    
    60.6
    %
    
    
    
    31,910
    
    
    
    54.5
    %Operating
income (loss)
    
    
    (4
    )
    
    
    0.0
    %
    
    
    (4
    )
    
    
    0.0
    %
    
    
    
    5,070
    
    
    
    8.7
    %Interest expense,
net
    
    
    8,172
    
    
    
    13.9
    %
    
    
    5,772
    
    
    
    9.8
    %
    
    
    
    6,917
    
    
    
    11.8
    %Loss before
income taxes
    
    
    (8,176
    )
    
    
    (13.9
    )%
    
    
    (5,776
    )
    
    
    (9.8
    )%
    
    
    
    (1,847
    )
    
    
    (3.1
    )%Benefit for income
taxes
    
    
    (3,718
    )
    
    
    (6.3
    )%
    
    
    (2,311
    )
    
    
    (3.9
    )%
    
    
    
    
    
    
    
    0.0
    %Net loss
    
    $
    (4,458
    )
    
    
    (7.6
    )%
    
    $
    (3,465
    )
    
    
    (5.9
    )%
    
    
    $
    (1,847
    )
    
    
    (3.1
    )%
 
 Net Sales.Net sales consist of product sales and are net of product returns and promotional
discounts. Net sales increased $0.3 million, or 0.5%, to $58.8 million for the three months ended
February 26, 2005 from $58.5 million for the three months ended February 28, 2004. 
 The following details the changes in net sales during such periods by business segment. 
 Class
Rings. Net sales decreased $0.4 million to $32.7 million for the three months ended February 26, 2005 from $33.1 million for the three months ended February 29, 2004. The decrease in net sales was the result of timing differences from on-campus high school ring shipments. 
 
 Yearbooks. Net sales increased $0.5 million to $3.0 million for the three months ended February 26, 2005 from $2.5 million for the three months ended February 29, 2004. The increase in net sales was the result of an increase in average yearbook contract prices. 
 
 Graduation
Products. Net sales decreased $0.2 million to $16.4 million for the three months ended February 26, 2005 from $16.6 million for the three months ended February 29, 2004. The decrease in net sales was the result of a decrease in timing of shipments of graduation products. 
 
 Achievement
Publications. Net sales increased $0.1 million to $0.5 million for the three months ended February 26, 2005 from $0.4 million for the three months ended February 29, 2004. The increase in net sales was the result increased collateral sales. 
 
 Other. Net sales increased $0.4 million to $6.3 million for the three months ended February 26, 2005 from $5.9 million for the three months ended February 29, 2004. The increase in net sales was directly related to shipments of family jewelry for the Christmas holidays. 
 Gross Profit.Gross margin represents gross profit as a percentage of net sales. Gross margin was
60.6% for the three months ended February 26, 2005, a 2.6 percentage point decrease from 63.2% for
the three months ended February 28, 2004. The decrease was a result of the product mix in the ring shipments, increased material costs, and the timing of yearbook product shipments. These
declines were partially offset by continued efficiencies in our graduation product manufacturing
facility. Overall, gross profit decreased $1.3 million. Selling, General and Administrative Expenses.Selling, general and administrative expenses
increased $3.8 million, or 11.8%, to $35.7 million for the three months ended February 26, 2005
from $31.9 million
for the three months ended February 28, 2004. Included in selling, general and administrative
expenses are two sub-categories: selling and marketing expenses and general and administrative
expenses. Selling and marketing expenses decreased $0.6 million to $23.0 million or 39.1% of net
sales, for the three months ended February 26, 2005 from $23.6 million or 40.3% of net sales, for
the three months ended February 28, 27




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##### Table of Contents



2004. The decrease in selling and marketing expenses was
primarily the result of decreased marketing expenses and commissions as a result of lower sales of
class rings. General and administrative expenses for the three months ended February 26, 2005 were $12.7
million, or 21.6% of net sales, as compared to $8.3 million, or 14.2% of net sales, for the three
months ended February 28, 2004. The increase in general and administrative expenses was primarily
the result of the impact of purchase accounting increasing amortization expense by $2.5 million and
a one-time management bonus. 
 Operating Income.As a result of the foregoing, operating income was $0.0 million for the three
months ended February 26, 2005 as compared with operating income of $5.1 million, or 8.7% of net
sales, for the three months ended February 28, 2004. The majority of the decrease was attributable
to the increase in amortization and the one-time management bonus.
The class rings segment reported operating income of
$3.1 million for the three months ended February 26, 2005 as compared with operating income of
$5.6 million for the three months ended February 29, 2004. The yearbooks segment reported an
operating loss of $5.3 million for the three months February 26, 2005 as compared with an
operating loss of $3.2 million for the three months ended February 29, 2004. The graduation
products segment reported operating income of $2.9 million for the three months ended February
26, 2005 as compared with operating income of $2.6 million for the three months ended February
29, 2004. The achievement publications segment reported an operating loss of $1.2 million for
the three months ended February 26, 2005 as compared with an operating loss of $0.8 million
for the three months ended February 29, 2004. The other segment reported operating income of
$0.5 million for the three months ended February 26, 2005 as compared with operating income of
$0.9 million for the three months ended February 29, 2004. 
 Interest Expense, Net.For AAC, net interest expense was $5.8 million for the three months ended
February 26, 2005 and $6.9 million for the three months ended February 28, 2004. The average debt
outstanding of AAC for the three months ended February 26, 2005 and the three months ended February
28, 2004 was $319 million and $226 million, respectively. The weighted average interest rate on
debt outstanding of AAC for the three months ended February 26, 2005 and the three months ended
February 28, 2004 was 6.7% and 12.1%, respectively. For Group Holdings, net interest expense was $8.2 million for the three months ended February
26, 2005. The average debt outstanding of Group Holdings for the three months ended February 26,
2005 was $410 million. The weighted average interest rate on debt outstanding of Group Holdings for
the three months ended February 26, 2005 was 7.5%. Benefit for Income Taxes.For the three months ended February 26, 2005 and February 28,
2004, AAC recorded an income tax benefit of $2.3 million and a provision of $0, respectively, which
represents an effective tax rate of 40% and 0%, respectively. Due to the impact of purchase
accounting on deferred taxes as a result of the Merger, AAC has recognized a net deferred tax
liability. AAC has an effective rate of 40% for the three months ended February 26, 2005 to
represent an estimated federal and state income tax benefit. For the three months ended February
28, 2004, no net federal income tax benefit was reflected in the statement of operations for net
operating losses to be carried forward since realization of the potential benefit of net operating
loss carry-forwards was not considered to be more likely than not. Although state taxes were
expected for the year ended 2004, no benefit was recorded for the three months ended February 28,
2004 due to the valuation allowance. For the three months ended February 26, 2005, Group Holdings recorded an income tax benefit of
$3.7 million, which represents an effective tax rate of 45%. Due to the impact of purchase
accounting on deferred taxes as a result of the Merger, Group Holdings has recognized a net
deferred tax liability. Group Holdings has an effective rate of 45% for the three months ended
February 26, 2005 to represent an estimated federal and state income tax benefit and the
non-deductibility of a portion of its interest on high-yield debt. Net Loss.As a result of the foregoing, AAC reported a net loss of $3.5 million for the
three months ended February 26, 2005 as compared to a net loss of $1.8 million for the three months
ended February 28, 2004. As a result of the foregoing, Group Holdings reported a net loss of $4.5 million for the three
months ended February 26, 2005. 28




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##### Table of Contents



Six Months Ended February 26, 2005 (Successor) Compared to Six Months Ended February 28, 2004
(Predecessor) Group Holdings was not formed until November of 2004. We are therefore comparing our results
of operations for the six months ended February 26, 2005, which include results of operations for
both Group Holdings and AAC, with the results of operations of AAC by itself for the six months
ended February 28, 2004. The inclusion of the results of Group Holdings for the six months ended
February 26, 2005 only adds additional interest expense of $2.8 million from the issuance of the 10
1/4% Notes and increases the tax benefit by $1.8 million. The following table sets forth selected information for Group Holdings and AAC from
our condensed consolidated statements of operations expressed on an actual basis and as a
percentage of net sales: AAC Group Holding Corp.
    
    
    
    
    
    
    American Achievement Corporation(Successor)
    
    
    
    
    
    
    
    (Predecessor)For the six
    
    
    
    
    
    
    For the six
    
    
    
    
    
    
    
    For the sixmonths ended
    
    
    
    
    
    
    months ended
    
    
    
    
    
    
    
    months endedFebruary 26,
    
    
    
    
    
    
    February 26,
    
    
    % of Net
    
    
    
    February 28,
    
    
    % of Net2005
    
    
    % of Net Sales
    
    
    2005
    
    
    Sales
    
    
    
    2004
    
    
    SalesNet sales
    
    $
    122,105
    
    
    
    100.0
    %
    
    $
    122,105
    
    
    
    100.0
    %
    
    
    $
    126,446
    
    
    
    100.0
    %Cost of sales
    
    
    50,466
    
    
    
    41.3
    %
    
    
    50,466
    
    
    
    41.3
    %
    
    
    
    51,582
    
    
    
    40.8
    %Gross profit
    
    
    71,639
    
    
    
    58.7
    %
    
    
    71,639
    
    
    
    58.7
    %
    
    
    
    74,864
    
    
    
    59.2
    %Selling, general and
administrative
expenses
    
    
    71,280
    
    
    
    58.4
    %
    
    
    71,280
    
    
    
    58.4
    %
    
    
    
    64,370
    
    
    
    50.9
    %Operating income
    
    
    359
    
    
    
    0.3
    %
    
    
    359
    
    
    
    0.3
    %
    
    
    
    10,494
    
    
    
    8.3
    %Interest expense, net
    
    
    14,290
    
    
    
    11.7
    %
    
    
    11,488
    
    
    
    9.4
    %
    
    
    
    13,898
    
    
    
    11.0
    %Loss before
income taxes
    
    
    (13,931
    )
    
    
    (11.4
    )%
    
    
    (11,129
    )
    
    
    (9.1
    )%
    
    
    
    (3,404
    )
    
    
    (2.7
    )%Benefit for income
taxes
    
    
    (6,217
    )
    
    
    (5.1
    )%
    
    
    (4,452
    )
    
    
    (3.6
    )%
    
    
    
    
    
    
    
    0.0
    %Net loss
    
    $
    (7,714
    )
    
    
    (6.3
    )%
    
    $
    (6,677
    )
    
    
    (5.5
    )%
    
    
    $
    (3,404
    )
    
    
    (2.7
    )%
 
 Net Sales.Net sales consist of product sales and are net of product returns and promotional
discounts. Net sales decreased $4.3 million, or 3.4%, to $122.1 million for the six months ended
February 26, 2005 from $126.4 million for the six months ended February 28, 2004. This decrease in
net sales was due primarily to a decline in class rings and timing of shipments in achievement
publications. 
 The following details the changes in net sales during such periods by business segment. 
 Class Rings. Net sales decreased $2.2 million to $67.6 million
for the six months ended February 26, 2005 from $69.8 million for the six
months ended February 29, 2004. The decrease in net sales was the result
of a decline in college ring sales of $0.9 million and high school ring
sales of $1.3 million. 
 
 Yearbooks. Net sales decreased $0.1 million to $16.0 million for
the six months ended February 26, 2005 from $16.1 million for the six months ended February 29, 2004. The decrease in net sales was the result of a decrease in yearbook shipments. 
 
 Graduation Products. Net sales increased $0.1 million to $19.4
million for the six months ended February 26, 2005 from $19.3 million for the six months ended February 29, 2004. The increase in net sales was the result of an increase in shipments of graduation products. 
 
 Achievement Publications. Net sales decreased $2.3 million to $9.3 million for the six months ended
February 26, 2005 from $11.6 million for the six months ended February 29, 2004. The decrease in
net sales was the result of not publishing The National Deans
List (the Deans List Book), our
publication honoring exceptional college students, in November 2004. In fiscal year 2004, this book
was published in both November 2003 and August 2004, while in fiscal year 2005, it will only
be published in August 2005. 
 
 Other. Net sales increased $0.4 million to $10.0 million for the
six months ended February 26, 2005 from $9.6 million for the six months ended February 29, 2004. The increase in net sales was directly related to shipments of family jewelry for the Christmas holidays. 
 29




---



##### Table of Contents



Gross Profit.Gross margin represents gross profit as a percentage of net sales. Gross margin was
58.7% for the six months ended February 26, 2005, a 0.5 percentage point decrease from 59.2% for
the six months ended February 28, 2004. The decrease was a result of lower per unit sales prices of
rings as a result of product mix and increased material costs. The decline was partially offset by
continued gross margin improvements in both our yearbook and graduation products manufacturing
facilities. Overall, gross profit decreased $3.2 million. Selling, General and Administrative Expenses.Selling, general and administrative expenses
increased $6.9 million, or 10.9%, to $71.3 million for the six months ended February 26, 2005 from
$64.4 million for the six months ended February 28, 2004. Included in selling, general and
administrative expenses are two sub-categories: selling and marketing expenses and general and
administrative expenses. Selling and marketing expenses increased $0.9 million to $48.1 million or
39.4% of net sales, for the six months ended February 26, 2005 from $47.2 million or 37.4% of net
sales, for the six months ended February 28, 2004. The increase in selling and marketing expenses
was primarily the result of increased marketing expenses related to
yearbooks offset by decreased marketing expenses and commissions as a
result of lower sales of class rings. General and administrative expenses for the six months ended February 26, 2005 were $23.2 million,
or 19.0% of net sales, as compared to $17.1 million, or 13.5% of net sales, for the six months
ended February 28, 2004. The increase in general and administrative expenses was primarily the
result of the impact of purchase accounting increasing amortization expense by $4.9 million and a
one-time management bonus. 
 Operating Income.As a result of the foregoing, operating income was $0.4 million, or 0.3% of net
sales, for the six months ended February 26, 2005 as compared with operating income of $10.5
million, or 8.3% of net sales, for the six months ended
February 28, 2004. The class rings segment reported operating income of $8.7 million for the six months ended
February 26, 2005 as compared with operating income of $11.7 million for the six months ended
February 29, 2004. The yearbooks segment reported an operating loss of $10.8 million for the six
months February 26, 2005 as compared with an operating loss of $7.1 million for the six months
ended February 29, 2004. The graduation products segment reported operating income of $1.1 million for the six
months ended February 26, 2005 as compared with operating income of $0.7 million for the six months
ended February 29, 2004. The achievement publications segment reported operating income of $1.5 million for
the six months ended February 26, 2005 as compared with operating income of $4.6 million for the six months
ended February 29, 2004. The other segment reported an operating loss
of $0.3 million for the six months ended February
26, 2005 as compared with operating income of $0.6 million for the six months ended
February 29, 2004. 
 Interest Expense, Net.For AAC, net interest expense was $11.5 million for the six months ended
February 26, 2005 and $13.9 million for the six months ended February 28, 2004. The average debt
outstanding of AAC for the six months ended February 26, 2005 and the six months ended February 28,
2004 was $324 million and $230 million, respectively. The weighted average interest rate on debt
outstanding of AAC for the six months ended February 26, 2005 and the six months ended February 28,
2004 was 6.6% and 11.9%, respectively. For Group Holdings, net interest expense was $14.3 million for the six months ended February
26, 2005. The average debt outstanding of Group Holdings for the six months ended February 26, 2005
was $377 million. The weighted average interest rate on debt outstanding of Group Holdings for the
six months ended February 26, 2005 was 7.1%. Benefit for Income Taxes.For the six months ended February 26, 2005 and February 28, 2004,
AAC recorded an income tax benefit of $4.5 million and a provision of $0, respectively, which
represents an effective tax rate of 40% and 0%, respectively. Due to the impact of purchase
accounting on deferred taxes as a result of the Merger, AAC has recognized a net deferred tax
liability. AAC has an effective rate of 40% for the six months ended February 26, 2005 to represent an estimated federal and state income
tax benefit. For the six months ended February 28, 2004, no net federal income tax benefit was
reflected in the statement of operations for net operating losses to be carried forward since
realization of the potential benefit of net operating loss carry-forwards was not considered to be
more likely than not. Although state taxes were expected for the year ended 2004, no benefit was
recorded for the six months ended February 28, 2004 due to the valuation allowance. For the six months ended February 26, 2005, Group Holdings recorded an income tax benefit of
$6.2 million, which represents an effective tax rate of 45%. Due to the impact of purchase
accounting on 30




---



##### Table of Contents



deferred taxes as a result of the Merger, Group Holdings has recognized a net
deferred tax liability. Group Holdings has an effective rate of 45% for the six months ended
February 26, 2005 to represent an estimated federal and state income tax benefit and the
non-deductibility of a portion of its interest on high-yield debt. Net Loss.As a result of the foregoing, AAC reported a net loss of $6.7 million for the six
months ended February 26, 2005 as compared to a net loss of $3.4 million for the six months ended
February 28, 2004. As a result of the foregoing, Group Holdings reported a net loss of $7.7 million for the six months
ended February 26, 2005. Liquidity and Capital Resources Operating Activities.For AAC, operating activities provided cash of $25.2 million for the six
months ended February 26, 2005 compared to cash provided of $34.1 million for the six months ended
February 28, 2004. The $8.9 million decrease in cash used in operating activities was primarily
attributable to a decrease in accounts payable, accrued expenses, and other long-term liabilities
of $11.6 million and a decrease in deferred revenue of $2.1 million, partially offset by an
increase in accounts receivable of $1.6 million, net income (net of non-cash items) of $1.3
million, an increase in prepaid expenses and other assets of $0.9 million, an increase in customer
deposits of $0.5 million, and an increase in inventory of $0.4 million. For Group Holdings, operating activities provided cash of $21.7 million for the six months ended
February 26, 2005. Investing Activities.Capital expenditures for the six months ended February 26, 2005 were $6.6
million compared to capital expenditures of $11.2 million for the six months ended February 28,
2004. The acquisition of CB Announcements was $5.0 million during the six months ended February 28,
2004. Our projected capital expenditures for the entire fiscal year 2005 are expected to be
approximately $14.5 million. Financing Activities.For AAC, financing activities used cash of $11.3 million for the six months
ended February 26, 2005 compared to cash used of $10.4 million for the six months ended February
28, 2004. For Group Holdings, financing activities used cash of $7.6 million for the six months ended
February 26, 2005. Capital Resources.In February 2002, AAC issued $177.0 million of unsecured senior notes due
2007 and entered into a $40.0 million senior secured revolving credit facility. At that time, AAC
repaid in full all outstanding term loans and revolving loans under the former credit agreement, as
well as the outstanding bridge note, and settled all but $25.0 million (notional amount) of our
interest rate swap agreements. As of the date of the Merger, all amounts outstanding under this
senior secured revolving credit facility and $170.0 of the unsecured senior notes due 2007 were
repaid. In connection with the Merger, AAC entered into its existing $195.0 million senior secured
credit facility and issued $150.0 million of the 8.25% senior subordinated notes. The senior secured credit facility provides a $155.0 million term loan, maturing in 2011, and
up to $40.0 million in available revolving loan borrowings, maturing in 2010. As of February 26,
2005, the revolver was undrawn. The senior secured credit facility imposes certain restrictions on
AAC, including restrictions on its ability to incur indebtedness, pay dividends, make investments, grant liens, sell assets and
engage in certain other activities. In addition, the senior secured credit facility contains
financial covenants and maintenance tests, including a minimum interest coverage test and a maximum
total leverage test, and restrictive covenants, including restrictions on its ability to make
capital expenditures. The senior secured credit facility is secured by substantially all of the
assets of AAC, is guaranteed by and secured by the assets of some of its existing and future
domestic subsidiaries, if any, and by a pledge of all of the capital stock of some of its existing
and future domestic subsidiaries, if any. The senior secured credit facility is also guaranteed by
Holdings. 31




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##### Table of Contents



AAC is required to pay cash interest on the 8.25% Notes semi-annually in arrears on April 1
and October 1 of each year. The 8.25% Notes have no scheduled amortization and mature on April 1,
2012. The indenture governing the 8.25% Notes contains certain restrictions on AAC, including
restrictions on its ability to incur indebtedness, pay dividends, make investments, grant liens,
sell its assets and engage in certain other activities. The 8.25% Notes are guaranteed by certain
of AACs existing and future domestic subsidiaries. In November 2004, Group Holdings issued $89.3 million (gross proceeds) of the 10 1/4% Notes.
The 10 1/4% Notes accrete to $131.5 million aggregate principal amount at maturity. Interest
accrues on the 10 1/4% Notes in the form of an increase in the accreted value of such notes prior
to October 1, 2008. Thereafter, cash interest on the 10 1/4% Notes will accrue and be payable
semiannually in arrears on April 1 and October 1 of each year, commencing April 1, 2009, at a rate
of 10.25% per annum. The 10 1/4% Notes are Group Holdings unsecured obligation and rank equally
with all of its future senior obligations and senior to its future subordinated indebtedness. The
10 1/4% Notes are effectively subordinated to Group Holdings future secured indebtedness to the
extent of the assets securing that indebtedness and are structurally subordinated to all
indebtedness and other obligations of Group Holdings subsidiaries, including AAC. We are currently
in compliance with financial covenants in all of the agreements governing our outstanding
indebtedness. We expect that cash generated from operating activities and availability under the senior
secured credit facility will be our principal sources of liquidity. Based on our current level of
operations and anticipated cost savings and operational improvements, we believe our cash flow from
operations, available cash and available borrowings under the senior secured credit facility will
be adequate to meet our liquidity needs for at least the next twelve months. We cannot assure you,
however, that our business will generate sufficient cash flow from operations, that currently
anticipated cost savings and operating improvements will be realized on schedule or that future
borrowings will be available to us under the senior secured credit facility in amounts sufficient
to enable us to repay our indebtedness, including the notes, or to fund our other liquidity needs.
To service our indebtedness, we will require a significant amount of cash. Our ability to generate
cash depends on many factors beyond our control. Off Balance-Sheet Obligations Gold Consignment Agreement.Under AACs gold consignment financing arrangement, AAC has the ability
to have on consignment the lowest of the dollar value of 27,000 troy ounces of gold, $14.2 million
or a borrowing base, determined based upon a percentage of gold located at AACs facilities and
other approved locations, as specified by the agreement. AAC expensed consignment fees of $87 for
the three months ended February 26, 2005 and $87 for the three months ended February 28, 2004. AAC
expensed consignment fees of $174 for the six months ended February 26, 2005 and $154 for the six
months ended February 28, 2004. Under the terms of the consignment arrangement, AAC does not own
the consigned gold nor does it have risk of loss related to such inventory until the money is
received by the bank from AAC in payment for the gold purchased. Accordingly, AAC does not include
the value of consigned gold in its inventory or the corresponding liability for financial statement
purposes. As of February 26, 2005 and August 28, 2004, AAC held approximately 20,500 ounces and
19,460 ounces, respectively, of gold valued at $8.9 million and $7.9 million, respectively, on
consignment. The gold consignment agreement does not have a stated period and it can be terminated
by either party upon 60 day written notice. Seasonality The seasonal nature of our various businesses tends to be tempered by our broad
product mix. Class ring sales are highest during October through December, with most orders made
for delivery to students before the winter holiday season. Graduation product sales are predominantly made during February through
April prior to the April through June graduation season. Yearbook sales are highest during the
months of April through June, as yearbooks are typically shipped prior to each schools summer
break. Our recognition and affinity product line sales are also seasonal. The majority of our
achievement publications are shipped in November and August of each year. The remaining recognition
and affinity product line sales are highest during the winter holiday season and in the period
leading up to Mothers Day. 32




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As a result of the foregoing, we have historically experienced operating losses
during our fourth fiscal quarter, which includes the summer months when school is not in session,
thus reducing related shipment of products. In addition, our working capital requirements tend to
exceed our operating cash flows from April through August. Recent Accounting Pronouncements In May 2004, FASB issued FASB Staff Position (FSP) 106-2 as a result of the Medicare
Prescription Drug, Improvement and Modernization Act of 2003 (the Medicare Subsidy Act). The
Medicare Subsidy Act entitles employers who provide certain prescription drug benefits for retirees
to receive a federal subsidy beginning in calendar 2006, thereby creating the potential for
significant benefit cost savings. FSP 106-2 requires companies to record the amount expected to be
received under the Medicare Subsidy Act as an actuarial gain, to the extent the related
post-retirement medical plans total unrecognized actuarial gains or losses exceed certain
thresholds, to be amortized into income over time. During the first quarter of fiscal 2005, we
adopted the provisions of this pronouncement and noted a reduction of service costs for fiscal 2005
of $93 as a component of net postretirement health care costs attributable to current services. In November 2004, FASB issued SFAS No. 151 Inventory Costs, an Amendment of ARB No. 43
Chapter 4 (FAS 151). FAS 151 requires that items such as idle facility expense, excessive
spoilage, double freight, and rehandling be recognized as current-period charges rather than being
included in inventory regardless of whether the costs meet the criterion of abnormal as defined in
ARB 43. FAS 151 is applicable for inventory costs incurred during fiscal years beginning after June
15, 2005. We will adopt this standard beginning the first quarter of fiscal year 2006 and do not
believe the adoption will have a material impact on our financial statements as such costs have
historically been expensed as incurred. 
 In
December 2004, FASB issued SFAS No. 153,
Exchanges of Nonmonetary Assets  an amendment of APB Opinion No. 29 which addresses the
measurement of exchanges of nonmonetary assets and eliminates the exception from fair value
accounting for nonmonetary exchanges of similar productive assets and replaces it with an exception
for exchanges that do not have commercial substance. SFAS No. 153 specifies that a nonmonetary
exchange has commercial substance if the future cash flows of an entity are expected to change
significantly as a result of the exchange. This statement is effective for us beginning the first
quarter of fiscal year 2006 and is not expected to have a significant impact on our financial
statements. 
 
 In December 2004, FASB issued SFAS No. 123 (Revised 2004) Share-Based Payment: an Amendment
of FASB Statements No. 123 and 95 (FAS 123R). FAS 123R sets accounting requirements for
share-based compensation to employees, requires companies to recognize in the income statement
the grant-date fair value of stock options and other equity-based compensation issued to employees
and disallows the use of the intrinsic value method of accounting for stock compensation. FAS 123R
is applicable for all interim and annual periods for fiscal years beginning after June 15, 2005. This statement is
effective for us beginning the first quarter of fiscal year 2006 and is not expected to have a
significant impact on our financial statements. 
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Interest Rate Risk.We have market risk exposure relating to changes in interest rates on our
variable rate debt. Our policy is to manage interest rate exposure through the use of a combination
of fixed and floating rate debt instruments. Our senior secured credit facility (revolver and term
loan) and gold consignment agreement are variable rate arrangements. The interest rates are based
on a floating benchmark rate (such as LIBOR or the Federal Funds rate) plus a fixed spread. Other
financial instruments subject to interest rate risk consist of long-term debt. As of February 26,
2005, these financial instruments represented a net liability of $169.8 million. Each quarter point
change in interest rates would result in a $0.5 million change in annual interest expense on the
senior secured credit facility, assuming the entire revolving loan were drawn. Semi-Precious Stones.We purchase the majority of our semi-precious stones from a single source
supplier in Germany. We believe that all of our major competitors purchase their semi-precious
stones from this same supplier. The prices for these products are denominated in Euros. Each ten
percent change in the Euro exchange rate would result in a $0.8 million change in cost of goods
sold, assuming stone purchase levels approximate the levels in fiscal 2004. In order to hedge
market risk, we have from time-to-time purchased forward currency contracts. During the three
months ended February 26, 2005, we did not purchase any Euro forward contracts and did not have any
such contracts outstanding. Gold. We purchase all of our gold from The Bank of Nova Scotia through our existing gold
consignment agreement described above. We consign the majority of our gold and pay for gold as our
products are shipped to customers and as required by the terms of our gold consignment agreement.
Each ten percent change in the price of gold would result in a $2.3 million change in cost of goods
sold, assuming gold purchase levels approximate the levels in fiscal 2004. As of February 26, 2005,
we had hedged a majority of our gold requirements for fiscal 2005 through the purchase of gold
options. 34




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ITEM 4. CONTROLS AND PROCEDURES 
 We carried out an evaluation, under the supervision and with the participation of our management,
including our President and Chief Executive Officer and our Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule
13a-15 under the Securities Exchange Act of 1934, as amended (the Exchange Act), as of the end of
the period covered by this quarterly report. Based upon this evaluation, our President and Chief
Executive Officer and our Chief Financial Officer concluded that our disclosure controls and
procedures were effective to ensure that information required to be disclosed by us in the reports
filed or submitted by us under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the SECs rules and forms. In addition, our President and
Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and
procedures were also effective to ensure that information required to be disclosed in the reports
that we file or submit under the Exchange Act is accumulated and communicated to our management,
including our President and Chief Executive Officer and our Chief Financial Officer, to allow
timely decisions regarding required disclosure. 
 
 Additionally, our President and Chief Executive Officer and Chief Financial Officer determined that
there were no changes in our internal controls or in
other factors that have materially affected, or are reasonably likely
to materially affect our internal controls during the period covered by this quarterly report. 
 DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS This report includes forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended. Although management believes that the expectations reflected in
such forward looking statements are based upon reasonable assumptions, the Company can give no
assurance that these expectations will be achieved. Any change in or adverse development, including
the following factors may impact the achievement of results in or accuracy of forward-looking
statements: the price of gold and precious, semiprecious and synthetic stones; the Companys access
to students and consumers in schools; the seasonality of the Companys business; regulatory and
accounting rules; the Companys relationship with its independent sales representatives; fashion
and demographic trends; general economic, business, and market trends and events, especially during
peak buying seasons for the Companys products; the Companys ability to respond to customer change
orders and delivery schedules; development and operating costs; competitive pricing changes;
successful completion of management initiatives designed to achieve operating efficiencies; the
Companys cash flows; and the Companys ability to draw down funds under its current bank
financings and to enter into new bank financings. The foregoing factors are not exhaustive. New
factors may emerge or changes may occur that impact the Companys operations and businesses.
Forward-looking statements herein are expressly qualified on the foregoing or such other factors as
may be applicable. You should consider the risks described in Group Holdings Registration Statement on Form S-4
Amendment No. 1 (File No. 333-121479) filed on February 10, 2005 as you review this quarterly
report. 35




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PART II. OTHER INFORMATION 
 ITEM 1. LEGAL PROCEEDINGS 
 On February 11, 2004, Frederick Goldman, Inc. (the Licensee) filed an arbitration claim
against the Companys subsidiary, CBI, for an unspecified monetary amount alleging, among other
things, that CBI had improperly attempted to convert an exclusive license CBI granted to the
Licensee to a non-exclusive license. The arbitration proceedings have
concluded with the arbitrator ruling that the Licensee has an
exclusive license. In addition, on February 10, 2004, the Licensee commenced a
lawsuit in federal district court in New York against CBI alleging that CBI breached the license
agreement by granting third parties rights in violation of the Licensees exclusive rights under
the license agreement. The district court claim seeks injunctive and
monetary relief. The Licensee has not specified the exact amount of
monetary relief that it seeks, but has asked for an amount not less
than $10.0 million. The parties have agreed to submit to non-binding
mediation in an attempt to resolve this action in its early stages of
litigation. The mediation is scheduled for August 16, 2005. The
district court has agreed to effectively stay the proceedings until
the conclusion of the mediation. 
 
 On
August 2, 2004, the Companys subsidiary Taylor Publishing
Company (Taylor) filed a motion in United States
Bankruptcy Court, Eastern District of Virginia, Norfolk Division, Case No. 03-75562-SCS to recover
certain data and documents pursuant to a teleservices contract between Taylor and Abacus
Communications, LC (Abacus), the chapter 11 debtor. Subsequent to court approval of Abacus
turning over the documents and data requested, Abacus filed a counterclaim against Taylor
 for approximately $840,000 plus interest for unpaid billings that it claims are owed
under the teleservices contract with Taylor. In
February 2005, the Company reached a settlement
with Abacus which did not have a material impact on the Company's financial position. 
 There are no other material pending legal proceedings to which the Company is a party or to
which any of its property is subject. The Company monitors all claims, and the Company accrues for
those, if any, which management believes may be adversely decided against the Company and result in
money damages to a third party. 36




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ITEM 6. EXHIBITS (a) Exhibits EXHIBITNUMBER
    
    DESIGNATION31.1
    
    CEO Certification Accompanying Period Report Pursuant to
Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    CFO Certification Accompanying Period Report Pursuant to
Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    CEO Certification Accompanying Period Report Pursuant to
Section 906 of the Sarbanes-Oxley Act of 200232.2
    
    CFO Certification Accompanying Period Report Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
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AAC GROUP HOLDING CORP.
AMERICAN ACHIEVEMENT CORPORATION 
 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrants have duly
caused this report to be signed on their behalf by the undersigned thereunto duly authorized. 
 Date: August 5, 2005 
 AAC GROUP HOLDING CORP.
AMERICAN ACHIEVEMENT 
CORPORATIONBy:
    /s/ DAVID G. FIOREDavid G. FioreCHIEF EXECUTIVE OFFICER
(principal executive officer) By:
    /s/ SHERICE P. BENCHSherice P. BenchCHIEF FINANCIAL OFFICER
(principal financial officer) 38