body_10q-2q2008.htm

/s/ DONALD J. PERCENTI

Donald J. Percenti

President and Chief Executive Officer

(principal executive officer)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q


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

FOR THE QUARTERLY PERIOD ENDED February 23, 2008

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

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

AMERICAN ACHIEVEMENT GROUP HOLDING CORP.

AAC GROUP HOLDING CORP.

AMERICAN ACHIEVEMENT CORPORATION

(Exact name of registrant as specified in its charter)


DELAWARE		20-4833998
DELAWARE		20-1854833
DELAWARE		13-4126506
(State or other jurisdiction of incorporation or		(I.R.S. Employer Identification Number)
organization)

7211 CIRCLE S ROAD

AUSTIN, TEXAS 78745

(Address of principal executive offices) (Zip Code)

Registrants’ Telephone Number, Including Area Code (512) 444-0571

Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. Yes o No þ.

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

Large accelerated filer o Accelerated filer o Non-accelerated filer þ

Indicate by check mark whether the registrants are shell companies (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

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

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

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

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

FOR THE QUARTERLY PERIOD ENDED FEBRUARY 23, 2008

INDEX

	PAGE
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements and Notes
Unaudited Condensed Consolidated Balance Sheets — As of February 23, 2008 and August 25, 2007		3
Unaudited Condensed Consolidated Statements of Operations — For the Three and Six Months Ended February 23, 2008 and February 24, 2007		6
Unaudited Condensed Consolidated Statement of Cash Flows — For the Six Months Ended February 23, 2008 and February 24, 2007		9
Notes to Condensed Consolidated Financial Statements (unaudited)		12
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		21
Item 3. Quantitative and Qualitative Disclosures About Market Risk		30
Item 4. Controls and Procedures		30

PART II. OTHER INFORMATION
Item 1. Legal Proceedings		31
Item 6. Exhibits		31
SIGNATURES		32
Certification of CEO Pursuant to Section 302
Certification of CFO Pursuant to Section 302
Certification of CEO Pursuant to Section 906
Certification of CFO Pursuant to Section 906

Explanatory Note

This combined Form 10-Q is separately filed by American Achievement Group Holding Corp., AAC Group Holding Corp., and American Achievement Corporation. Each Registrant hereto is filing on its own behalf all of the information contained in this quarterly report that relates to such Registrant. Each Registrant hereto is not filing any information that does not relate to such Registrant, and therefore makes no representation as to any such information.

Unless the context indicates otherwise, any reference in this report to “Parent Holdings” refers to American Achievement Group Holding Corp., “Intermediate Holdings” refers to AAC Group Holding Corp., and “AAC” refers to American Achievement Corporation, the indirect wholly-owned operating subsidiary of Intermediate Holdings. The “Company”, “we”, “us”, and “our” refer to American Achievement Group Holding Corp., and AAC Group Holding Corp. together with American Achievement Corporation.

AMERICAN ACHIEVEMENT GROUP HOLDING CORP.

Condensed Consolidated Balance Sheets

(unaudited)

	Parent Holdings
	February 23, 2008			August 25, 2007
	(in thousands)
ASSETS
Cash and cash equivalents	$	17,330		$	1,454
Accounts receivable, net of allowance for doubtful accounts of $2,461 and $1,875, respectively		36,130			43,039
Inventories		39,428			31,158
Deferred tax assets		10,867			3,731
Prepaid expenses and other current assets, net		19,574			18,317
Total current assets		123,329			97,699

Property, plant and equipment, net		72,988			70,653
Goodwill		171,073			173,277
Other intangible assets, net		102,739			107,855
Other assets, net		20,772			26,582
Total assets	$	490,901		$	476,066
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Book overdraft	$	1,356		$	5,082
Accounts payable		13,819			10,590
Customer deposits		55,346			11,771
Accrued expenses		19,156			20,361
Deferred revenue		3,389			4,460
Accrued interest		5,322			5,550
Current portion of long-term debt		841			900
Total current liabilities		99,229			58,714

Long-term debt, net of current portion		542,726			537,680
Mandatory redeemable preferred stock		7,500			7,500
Deferred tax liabilities		5,933			9,736
Other long-term liabilities		8,141			6,619
Total liabilities		663,529			620,249

Commitments and contingencies

Stockholders’ deficit:
Common stock		5			5
Additional paid-in capital		(123,880	)		(124,045	)
Accumulated deficit		(51,756	)		(23,297	)
Accumulated other comprehensive income		3,003			3,154
Total stockholders’ deficit		(172,628	)		(144,183	)

Total liabilities and stockholders’ deficit	$	490,901		$	476,066

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

AAC GROUP HOLDING CORP.

Condensed Consolidated Balance Sheets

(unaudited)

	Intermediate Holdings
	February 23, 2008			August 25, 2007
	(in thousands)
ASSETS
Cash and cash equivalents	$	17,037		$	1,168
Accounts receivable, net of allowance for doubtful accounts of $2,461 and $1,875, respectively		36,130			43,039
Inventories		39,428			31,158
Deferred tax assets		10,867			3,731
Prepaid expenses and other current assets, net		19,574			18,317
Total current assets		123,036			97,413

Property, plant and equipment, net		72,988			70,653
Goodwill		171,073			173,277
Other intangible assets, net		102,739			107,855
Other assets, net		13,878			18,931
Total assets	$	483,714		$	468,129
LIABILITIES AND STOCKHOLDERS’ EQUITY
Book overdraft	$	1,356		$	5,082
Accounts payable		13,819			10,590
Customer deposits		55,346			11,771
Accrued expenses		19,211			20,299
Deferred revenue		3,389			4,460
Accrued interest		5,322			5,550
Current portion of long-term debt		841			900
Total current liabilities		99,284			58,652

Long-term debt, net of current portion		353,935			361,836
Deferred tax liabilities		16,483			19,731
Other long-term liabilities		3,148			3,034
Total liabilities		472,850			443,253

Commitments and contingencies

Stockholders’ equity:
Common stock		-			-
Additional paid-in capital		24,309			24,144
Accumulated deficit		(16,448	)		(2,422	)
Accumulated other comprehensive income		3,003			3,154
Total stockholders’ equity		10,864			24,876

Total liabilities and stockholders’ equity	$	483,714		$	468,129

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

AMERICAN ACHIEVEMENT CORPORATION

Condensed Consolidated Balance Sheets

(unaudited)

	AAC
	February 23, 2008		August 25, 2007
	(in thousands)
ASSETS
Cash and cash equivalents	$	16,477	$	620
Accounts receivable, net of allowance for doubtful accounts of $2,461 and $1,875, respectively		36,130		43,039
Inventories		39,428		31,158
Deferred tax assets		10,867		3,731
Prepaid expenses and other current assets, net		19,574		18,317
Total current assets		122,476		96,865

Property, plant and equipment, net		72,988		70,653
Goodwill		171,073		173,277
Other intangible assets, net		102,739		107,855
Other assets, net		11,838		16,669
Total assets	$	481,114	$	465,319
LIABILITIES AND STOCKHOLDERS’ EQUITY
Book overdraft	$	1,356	$	5,082
Accounts payable		13,819		10,590
Customer deposits		55,346		11,771
Accrued expenses		19,230		20,284
Deferred revenue		3,389		4,460
Accrued interest		5,322		5,550
Current portion of long-term debt		841		900
Total current liabilities		99,303		58,637

Long-term debt, net of current portion		230,051		243,982
Deferred tax liabilities		30,549		30,639
Other long-term liabilities		3,120		3,006
Total liabilities		363,023		336,264

Commitments and contingencies

Stockholders’ equity:
Common stock		-		-
Additional paid-in capital		109,211		109,046
Accumulated earnings		5,877		16,855
Accumulated other comprehensive income		3,003		3,154
Total stockholders’ equity		118,091		129,055

Total liabilities and stockholders’ equity	$	481,114	$	465,319

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

AMERICAN ACHIEVEMENT GROUP HOLDING CORP.

Condensed Consolidated Statements of Operations

(unaudited)

	Parent Holdings
		For the three months ended						For the six months ended
		February 23, 2008			February 24, 2007			February 23, 2008			February 24, 2007
	(in thousands)
Net sales	$	60,628		$	57,097		$	112,568		$	109,145
Cost of sales		26,865			21,258			52,182			48,651
Gross profit		33,763			35,839			60,386			60,494
Selling, general and administrative expenses		31,744			30,574			61,090			58,214
Operating income (loss)		2,019			5,265			(704	)		2,280
Interest expense, net		15,995			14,350			31,626			28,974
Loss before income taxes		(13,976	)		(9,085	)		(32,330	)		(26,694	)
Benefit for income taxes		(3,657	)		(3,068	)		(8,212	)		(9,448	)
Loss from continuing operations		(10,319	)		(6,017	)		(24,118	)		(17,246	)
Discontinued operations:
Loss from discontinued segment		(38	)		(986	)		(7,128	)		(1,694	)
Benefit for income taxes		(15	)		(383	)		(2,787	)		(662	)
Loss from discontinued operations		(23	)		(603	)		(4,341	)		(1,032	)
Net loss	$	(10,342	)	$	(6,620	)	$	(28,459	)	$	(18,278	)

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

AAC GROUP HOLDING CORP.

Condensed Consolidated Statements of Operations

(unaudited)

	Intermediate Holdings
		For the three months ended						For the six months ended
		February 23, 2008			February 24, 2007			February 23, 2008			February 24, 2007
	(in thousands)
Net sales	$	60,628		$	57,097		$	112,568		$	109,145
Cost of sales		26,865			21,258			52,182			48,651
Gross profit		33,763			35,839			60,386			60,494
Selling, general and administrative expenses		31,744			30,574			61,090			58,214
Operating income (loss)		2,019			5,265			(704	)		2,280
Interest expense, net		8,350			8,298			16,521			17,015
Loss before income taxes		(6,331	)		(3,033	)		(17,225	)		(14,735	)
Benefit for income taxes		(2,948	)		(1,293	)		(7,540	)		(6,112	)
Loss from continuing operations		(3,383	)		(1,740	)		(9,685	)		(8,623	)
Discontinued operations:
Loss from discontinued segment		(38	)		(986	)		(7,128	)		(1,694	)
Benefit for income taxes		(15	)		(383	)		(2,787	)		(662	)
Loss from discontinued operations		(23	)		(603	)		(4,341	)		(1,032	)
Net loss	$	(3,406	)	$	(2,343	)	$	(14,026	)	$	(9,655	)

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

AMERICAN ACHIEVEMENT CORPORATION

Condensed Consolidated Statements of Operations

(unaudited)

	AAC
		For the three months ended						For the six months ended
		February 23, 2008			February 24, 2007			February 23, 2008			February 24, 2007
	(in thousands)
Net sales	$	60,628		$	57,097		$	112,568		$	109,145
Cost of sales		26,865			21,258			52,182			48,651
Gross profit		33,763			35,839			60,386			60,494
Selling, general and administrative expenses		31,744			30,574			61,090			58,214
Operating income (loss)		2,019			5,265			(704	)		2,280
Interest expense, net		5,176			5,409			10,281			11,330
Loss before income taxes		(3,157	)		(144	)		(10,985	)		(9,050	)
Benefit for income taxes		(1,258	)		(64	)		(4,348	)		(3,573	)
Loss from continuing operations		(1,899	)		(80	)		(6,637	)		(5,477	)
Discontinued operations:
Loss from discontinued segment		(38	)		(986	)		(7,128	)		(1,694	)
Benefit for income taxes		(15	)		(383	)		(2,787	)		(662	)
Loss from discontinued operations		(23	)		(603	)		(4,341	)		(1,032	)
Net loss	$	(1,922	)	$	(683	)	$	(10,978	)	$	(6,509	)

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

AMERICAN ACHIEVEMENT GROUP HOLDING CORP.

Condensed Consolidated Statements of Cash Flows

(unaudited)

	Parent Holdings
	For the six months ended
		February 23, 2008			February 24, 2007
	(in thousands)
Cash flows from operating activities:
Net loss	$	(28,459	)	$	(18,278	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Write-offs related to discontinued segment		5,542			-
Gain on sales of property, plant and equipment		(12	)		-
Depreciation and amortization		10,255			12,877
Deferred income taxes		(10,849	)		(10,549	)
Amortization of deferred financing fees		1,744			1,746
Accretion of interest on 10.25% senior discount notes		6,030			5,474
Accretion of Senior PIK notes		12,947			9,930
Allowance for doubtful accounts		586			(106	)
Changes in assets and liabilities:
Accounts receivable		6,323			5,663
Inventories		(6,607	)		(8,088	)
Prepaid expenses and other current assets, net		(2,381	)		(7,527	)
Other assets, net		2,583			1,278
Customer deposits		43,575			46,130
Deferred revenue		(1,071	)		521
Accounts payable, accrued expenses, and other long-term liabilities		(1,232	)		(3,205	)
Net cash provided by operating activities		38,974			35,866

Cash flows from investing activities:
Purchases of property, plant and equipment		(5,443	)		(5,703	)
Proceeds from sales of property, plant and equipment		61		-
Net cash used in investing activities		(5,382	)		(5,703	)

Cash flows from financing activities:
Payments on revolving credit facility		(21,905	)		(24,150	)
Proceeds from revolving credit facility		14,100			14,850
Payments on term loan		(6,185	)		(11,947	)
Deferred financing fees		-			(179	)
Change in book overdraft		(3,726	)		(911	)
Net cash used in financing activities		(17,716	)		(22,337	)

Net increase in cash and cash equivalents		15,876			7,826
Cash and cash equivalents, beginning of period		1,454			3,404

Cash and cash equivalents, end of period	$	17,330		$	11,230

Supplemental disclosures of cash flow information:
Cash paid for interest	$	10,030		$	10,794
Cash paid for income taxes		887			178
Supplemental disclosure of non-cash investing activities:
Additions to property, plant and equipment included in accounts payable	$	4,479		$	248

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

AAC GROUP HOLDING CORP.

Condensed Consolidated Statements of Cash Flows

(unaudited)

	Intermediate Holdings
	For the six months ended
	February 23, 2008			February 24, 2007
	(in thousands)
Cash flows from operating activities:
Net loss	$	(14,026	)	$	(9,655	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Write-offs related to discontinued segment		5,542			-
Gain on sales of property, plant and equipment		(12	)		-
Depreciation and amortization		10,255			12,877
Deferred income taxes		(10,294	)		(7,213	)
Amortization of deferred financing fees		987			988
Accretion of interest on 10.25% senior discount notes		6,030			5,474
Allowance for doubtful accounts		586			(106	)
Changes in assets and liabilities:
Accounts receivable		6,323			5,663
Inventories		(6,607	)		(8,088	)
Prepaid expenses and other current assets, net		(2,381	)		(7,527	)
Other assets, net		2,583			1,278
Customer deposits		43,575			46,130
Deferred revenue		(1,071	)		521
Accounts payable, accrued expenses, and other long-term liabilities		(2,523	)		(4,419	)
Net cash provided by operating activities		38,967			35,923

Cash flows from investing activities:
Purchases of property, plant and equipment		(5,443	)		(5,703	)
Proceeds from sales of property, plant and equipment		61			-
Net cash used in investing activities		(5,382	)		(5,703	)

Cash flows from financing activities:
Payments on revolving credit facility		(21,905	)		(24,150	)
Proceeds from revolving credit facility		14,100			14,850
Payments on term loan		(6,185	)		(11,947	)
Deferred financing fees		-			(16	)
Change in book overdraft		(3,726	)		(911	)
Net cash used in financing activities		(17,716	)		(22,174	)

Net increase in cash and cash equivalents		15,869			8,046
Cash and cash equivalents, beginning of period		1,168			2,904

Cash and cash equivalents, end of period	$	17,037		$	10,950

Supplemental disclosures of cash flow information:
Cash paid for interest	$	10,030		$	10,794
Cash paid for income taxes		887			178
Supplemental disclosure of non-cash investing activities:
Additions to property, plant and equipment included in accounts payable	$	4,479		$	248

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

AMERICAN ACHIEVEMENT CORPORATION

Condensed Consolidated Statements of Cash Flows

(unaudited)

	AAC
	For the six months ended
	February 23, 2008			February 24, 2007
	(in thousands)
Cash flows from operating activities:
Net loss	$	(10,978	)	$	(6,509	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Write-offs related to discontinued segment		5,542			-
Gain on sales of property, plant and equipment		(12	)		-
Depreciation and amortization		10,255			12,877
Deferred income taxes		(7,136	)		(4,674	)
Amortization of deferred financing fees		765			765
Allowance for doubtful accounts		586			(106	)
Changes in assets and liabilities:
Accounts receivable		6,323			5,663
Inventories		(6,607	)		(8,088	)
Prepaid expenses and other current assets, net		(2,381	)		(7,527	)
Other assets, net		2,583			1,278
Customer deposits		43,575			46,130
Deferred revenue		(1,071	)		521
Accounts payable, accrued expenses, and other long-term liabilities		(2,489	)		(4,419	)
Net cash provided by operating activities		38,955			35,911

Cash flows from investing activities:
Purchases of property, plant and equipment		(5,443	)		(5,703	)
Proceeds from sales of property, plant and equipment		61			-
Net cash used in investing activities		(5,382	)		(5,703	)

Cash flows from financing activities:
Payments on revolving credit facility		(21,905	)		(24,150	)
Proceeds from revolving credit facility		14,100			14,850
Payments on term loan		(6,185	)		(11,947	)
Deferred financing fees		-			(16	)
Change in book overdraft		(3,726	)		(911	)
Net cash used in financing activities		(17,716	)		(22,174	)

Net increase in cash and cash equivalents		15,857			8,034
Cash and cash equivalents, beginning of period		620			2,381

Cash and cash equivalents, end of period	$	16,477		$	10,415

Supplemental disclosures of cash flow information:
Cash paid for interest	$	10,030		$	10,794
Cash paid for income taxes		887			178
Supplemental disclosure of non-cash investing activities:
Additions to property, plant and equipment included in accounts payable	$	4,479		$	248

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

AMERICAN ACHIEVEMENT GROUP HOLDING CORP.

AAC GROUP HOLDING CORP.

AMERICAN ACHIEVEMENT CORPORATION

Notes to Condensed Consolidated Financial Statements

(Dollars in thousands, unless otherwise stated)

(unaudited)

1. Summary of Organization and Significant Accounting Policies

Registrants

The consolidated financial statements of American Achievement Group Holding Corp. (“Parent Holdings”) include the accounts of its wholly-owned subsidiary, AAC Group Holding Corp. (“Intermediate Holdings”) and its indirect wholly-owned subsidiary, American Achievement Corporation (“AAC”), all of which are separate public reporting companies. The consolidated financial statements of Intermediate Holdings include the accounts of its indirect wholly-owned subsidiary, AAC. Parent Holdings, Intermediate Holdings, and AAC are treated as entities under common control. Parent Holdings, Intermediate Holdings and AAC together with their consolidated subsidiaries are referred to as the “Company.” Unless separately stated, the notes herein relate to Parent Holdings, Intermediate Holdings and AAC.

Description of Business

The Company is a manufacturer and supplier of class rings, yearbooks and other graduation-related scholastic products for the high school and college markets and of recognition products, such as letter jackets, and affinity jewelry designed to commemorate significant events, achievements and affiliations. The Company markets its products and services primarily in the United States and operates in four reporting segments; class rings, yearbooks, graduation products and other. The Company’s corporate office is located in Austin, Texas and its manufacturing facilities are located in Austin, Dallas, El Paso and Waco, Texas; Louisville, Kentucky; Manhattan, Kansas; and Juarez, Mexico.

As described in Note 3, on October 26, 2007 the Company decided to shut down its achievement publications segment. This segment sold achievement publications in the specialty directory publishing industry nationwide.

Consolidation

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

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

Intermediate Holdings conducts all of its business indirectly through AAC and its subsidiaries. The consolidated financial statements of Intermediate Holdings include the accounts of its indirect wholly-owned subsidiary, AAC. Intermediate Holdings’ consolidated financial statements are substantially identical to AAC’s consolidated financial statements, with the exception of the 10.25% senior discount notes, additional interest expense related to the 10.25% senior discount notes, amortization of deferred financing costs and the related income taxes.

The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes the disclosures are adequate to make the information presented not misleading. In the opinion of management, all adjustments necessary for a fair presentation of the financial position and results of operations for the periods presented have been included. Operating results for the three and six months ended February 23, 2008 are not necessarily indicative of the results that may be expected for the fiscal year ending August 30, 2008. 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 25, 2007 included in the Company’s Report on Form 10-K (File No. 333-84294, 333-121479 and 333-137067) filed on December 7, 2007.

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

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.

AMERICAN ACHIEVEMENT GROUP HOLDING CORP.

AAC GROUP HOLDING CORP.

AMERICAN ACHIEVEMENT CORPORATION

Notes to Condensed Consolidated Financial Statements

(Dollars in thousands, unless otherwise stated)

(unaudited)

Reclassifications

Certain prior period amounts in the accompanying consolidated financial statements have been reclassified to conform to the current year’s presentation. Deferred financing costs in the amount of $16,028, $8,377, and $6,115 have been reclassified from other intangible assets, net to other assets, net as of August 25, 2007 for Parent Holdings, Intermediate Holdings, and AAC, respectively.

Recent Accounting Pronouncements

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

In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — An Amendment of FASB Statements No. 87, 88, 106 and 132 (R)” (“SFAS 158”). SFAS 158 requires an employer to recognize the funded status of defined benefit postretirement plan as an asset or liability in the balance sheet and to recognize changes in that funded status in the year in which changes occur through comprehensive income. Additionally, SFAS 158 requires an employer to measure the funded status of each of its plans as of the date of its year-end statement of financial position. The Company adopted the recognition and disclosure provisions of SFAS 158 in fiscal year 2007. The measurement date provisions of SFAS 158 will be effective for the Company beginning with its fiscal year 2009. The Company has not yet evaluated the impact that the measurement date provisions of this standard will have on its financial position and results of operations.

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

2. Comprehensive Loss

The following amounts were included in determining comprehensive loss for the three and six months ended February 23, 2008 and February 24, 2007.

	For the three months ended						For the six months ended
		February 23, 2008			February 24, 2007			February 23, 2008			February 24, 2007
Parent Holdings
Net loss	$	(10,342	)	$	(6,620	)	$	(28,459	)	$	(18,278	)
Amortization of net gain and prior service cost - postretirement plans. (net of tax of $46 and $96 for the three and six months ended February 23,2008, respectively)		(78	)		-			(151	)		-
Total comprehensive loss	$	(10,420	)	$	(6,620	)	$	(28,610	)	$	(18,278	)

	For the three months ended						For the six months ended
		February 23, 2008			February 24, 2007			February 23, 2008			February 24, 2007
Intermediate Holdings
Net loss	$	(3,406	)	$	(2,343	)	$	(14,026	)	$	(9,655	)
Amortization of net gain and prior service cost - postretirement plans. (net of tax of $46 and $96 for the three and six months ended February 23, 2008, respectively)		(78	)		-			(151	)		-
Total comprehensive loss	$	(3,484	)	$	(2,343	)	$	(14,177	)	$	(9,655	)

AMERICAN ACHIEVEMENT GROUP HOLDING CORP.

AAC GROUP HOLDING CORP.

AMERICAN ACHIEVEMENT CORPORATION

Notes to Condensed Consolidated Financial Statements

(Dollars in thousands, unless otherwise stated)

(unaudited)

	For the three months ended						For the six months ended
		February 23, 2008			February 24, 2007			February 23, 2008			February 24, 2007
AAC
Net loss	$	(1,922	)	$	(683	)	$	(10,978	)	$	(6,509	)
Amortixation of net gain and prior service cost - postretirement plans. (net of tax of $46 and $96 for the three and six months ended February 23, 2008, respectively)		(78	)		-			(151	)		-
Total comprehensive loss	$	(2,000	)	$	(683	)	$	(11,129	)	$	(6,509	)

3. Discontinued Operations

On October 26, 2007, the Company announced a planned shutdown of the achievement publications segment. Operations of this segment have ceased and have been eliminated from the ongoing operations of the Company as a result of the shutdown. Substantially all activities in connection with the shutdown have been completed, and the Company will not have any significant continuing involvement in this segment going forward.

The results of operations of the achievement publications business are reported as discontinued operations in the condensed consolidated statements of operations for all periods presented. Prior to the shutdown, the achievement publications business was included as the Company’s achievement publications reporting segment. Certain shared costs that were previously allocated to the achievement publications segment were reallocated to the remaining continuing segments. Net sales and loss from discontinued operations for the three and six months ended February 23, 2008 and February 24, 2007 are as follows:

	For the three months ended						For the six months ended
		February 23, 2008			February 24, 2007			February 23, 2008			February 24, 2007
Discontinued operations:
Net sales	$	-		$	580		$	1,758		$	1,290

Operating loss	$	(38	)	$	(986	)	$	(7,128	)	$	(1,694	)
Benefit for income taxes		(15	)		(383	)		(2,787	)		(662	)
Loss from discontinued operations	$	(23	)	$	(603	)	$	(4,341	)	$	(1,032	)

The Company recognized charges of $5.5 million during the three months ended November 24, 2007 and the six months ended February 23, 2008, primarily related to the write-off of the remaining carrying value of tangible and intangible assets upon shutdown of the achievement publications segment. These charges are included in the loss from discontinued operations in the condensed consolidated statements of operations and in write-offs related to the discontinued segment in the condensed consolidated statements of cash flows.

Also included in loss from discontinued operations for the three months ended November 24, 2007 and the six months ended February 23, 2008 are $0.7 million, of costs incurred for contract termination and employee termination costs related to the shutdown. The accruals related to these costs are summarized in the following table:

		Contract Termination Costs			Employee Termination Costs			Total
Balance, August 25, 2007	$	-		$	-		$	-

Accrued costs		491			246			737
Payments made		(190	)		(98	)		(288	)
Balance, November 24, 2007		301			148			449

Payments made		(301	)		(45	)		(346	)
Balance, February 23, 2008	$	-		$	103		$	103

AMERICAN ACHIEVEMENT GROUP HOLDING CORP.

AAC GROUP HOLDING CORP.

AMERICAN ACHIEVEMENT CORPORATION

Notes to Condensed Consolidated Financial Statements

(Dollars in thousands, unless otherwise stated)

(unaudited)

4. Inventories

		February 23, 2008			August 25, 2007
Raw materials	$	13,287		$	19,357
Work in process		16,816			4,853
Finished goods		9,679			7,941
Less — reserves		(354	)		(993	)
	$	39,428		$	31,158

The Company’s cost of sales includes depreciation of $1,639 and $1,513 for the three months ended February 23, 2008 and February 24, 2007, respectively. Cost of sales includes depreciation of $3,681 and $4,477 for the six months ended February 23, 2008 and February 24, 2007, respectively.

5. Goodwill and Other Intangible Assets

Goodwill


		February 23, 2008		August 25, 2007
Class Rings	$	67,092	$	67,092
Yearbooks		65,241		65,241
Graduation Products		23,781		23,781
Achievement Publications		-		2,193
Other		14,959		14,970
Total	$	171,073	$	173,277

Other Intangible Assets

	Estimated	Gross		Accumulated		Net
	Useful Life	Asset		Amortization		Asset

At February 23, 2008
Trademarks	Indefinite	$	36,972	$	-	$	36,972
Patents	14 to 17 years		7,317		(1,738)		5,579
Customer lists and distribution contracts	3 to 12 years		97,740		(37,552)		60,188
Total		$	142,029	$	(39,290)	$	102,739


At August 25, 2007
Trademarks	Indefinite	$	37,433	$	-	$	37,433
Patents	14 to 17 years		7,317		(1,516)		5,801
Customer lists and distribution contracts	3 to 12 years		102,968		(38,347)		64,621
Total		$	147,718	$	(39,863)	$	107,855

Total amortization on other intangible assets was $2,692 and $5,254 for the three and six months ended February 23, 2008, respectively, and was $2,966 and $5,932 for the three and six months ended February 24, 2007, respectively, which is recorded as selling, general and administrative expenses. Estimated annual amortization expense is $10,849 for 2008, $10,249 for the years 2009 through 2011 and $9,816 for the year 2012.

AMERICAN ACHIEVEMENT GROUP HOLDING CORP.

AAC GROUP HOLDING CORP.

AMERICAN ACHIEVEMENT CORPORATION

Notes to Condensed Consolidated Financial Statements

(Dollars in thousands, unless otherwise stated)

(unaudited)

6. Long-term Debt

		February 23, 2008			August 25, 2007
Parent Holdings
Senior PIK Notes due October 1, 2012 (including $38,791 and $25,844 PIK interest, respectively)	$	188,791		$	175,844
10.25% Senior discount notes due October 1, 2012 (net of unamortized discount of $7,616 and $13,646, respectively)		123,884			117,854
8.25% Senior subordinated notes due April 1, 2012		150,000			150,000
Senior secured credit facility:
Revolving credit facility due 2010		-			7,805
Term loan due 2011		80,892			87,077
Total		543,567			538,580
Less current portion of long-term debt		(841	)		(900	)
Total long-term debt	$	542,726		$	537,680

		February 23, 2008			August 25, 2007
Intermediate Holdings
10.25% Senior discount notes due October 1, 2012 (net of unamortized discount of $7,616 and $13,646, respectively)	$	123,884		$	117,854
8.25% Senior subordinated notes due April 1, 2012		150,000			150,000
Senior secured credit facility
Revolving credit facility due 2010		-			7,805
Term loan due 2011		80,892			87,077
Total		354,776			362,736
Less current portion of long-term debt		(841	)		(900	)
Total long-term debt	$	353,935		$	361,836

	February 23, 2008				August 25, 2007
AAC
8.25% Senior subordinated notes due April 1, 2012	$	150,000		$	150,000
Senior secured credit facility
Revolving credit facility due 2010		-			7,805
Term loan due 2011		80,892			87,077
Total		230,892			244,882
Less current portion of long-term debt		(841	)		(900	)
Total long-term debt	$	230,051		$	243,982

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

Availability under the revolving credit facility is restricted to a total revolving commitment of $40 million as defined in the credit agreement governing the Amended Senior Credit Facility. Availability under the revolving credit facility as of February 23, 2008 was approximately $38.2 million with $1.8 million in letters of credit outstanding.

AMERICAN ACHIEVEMENT GROUP HOLDING CORP.

AAC GROUP HOLDING CORP.

AMERICAN ACHIEVEMENT CORPORATION

Notes to Condensed Consolidated Financial Statements

(Dollars in thousands, unless otherwise stated)

(unaudited)

The following table presents the amount of interest income included in interest expense, net, for the three and six months ended February 23, 2008 and February 24, 2007:

	For the three months ended		For the six months ended
	February 23, 2008	February 24, 2007	February 23, 2008	February 24, 2007
Parent Holdings	$ 232	$ 163	$ 354	$ 278
Intermediate Holdings	229	160	348	269
AAC	224	155	336	257

7. Commitments and Contingencies

Pending Litigation

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

Gold Consignment Agreement

Under the Company’s gold consignment financing arrangement, the Company has the ability to have on consignment the lowest of the dollar value of 27,000 troy ounces of gold, $14.2 million or a borrowing base, determined based upon a percentage of gold located at the Company’s facilities and other approved locations, as specified by the agreement. Under the terms of the consignment arrangement, the Company does not own the consigned gold nor does it have risk of loss related to price variation on such inventory until the Company pays the supplier for quantities purchased. Accordingly, the Company does not include the value of consigned gold in its inventory or the corresponding liability for financial statement purposes. As of February 23, 2008, the Company consigned gold valued at $1.8 million, while at August 25, 2007, the Company held no gold 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.

8. Income Taxes

As part of the process of preparing consolidated financial statements, we must assess the likelihood that our deferred income tax assets will be recovered through future taxable income. To the extent we believe that recovery is not likely, a valuation allowance must be established. Significant management judgment is required in determining any valuation allowance recorded against net deferred income tax assets. Based on our estimates of taxable income in each jurisdiction in which we operate and the period over which deferred income tax assets will be recoverable, we have not recorded a valuation allowance as of February 23, 2008 or August 25, 2007. In the event that actual results differ from these estimates or we make adjustments to these estimates in future periods, we may need to establish a valuation allowance. All tax years after 2003 are open to examination.

In July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109" (“FIN 48”), which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. In addition, FIN 48 provides guidance on derecognition, classification, accounting in interim periods and disclosure requirements for uncertain tax positions. The accounting provisions of FIN 48 are effective for the Company beginning with its fiscal year 2008. As a result of the adoption of FIN 48 on August 26, 2007 and as of February 23, 2008, no material adjustments to the Company’s financial position and results of operations were required.

9. Postretirement Pension and Medical Benefits

CBI provides certain healthcare and life insurance benefits for former employees of L.G. Balfour Company, Inc. (“CBI Plan”). Certain hourly employees of Taylor Publishing Company are covered under its defined benefit pension plan (“TPC Plan”). The benefits under the CBI Plan and TPC Plan 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.

In September 2006, the FASB issued SFAS 158, which requires an employer to recognize the funded status of defined benefit postretirement plan as an asset or liability in the balance sheet and to recognize changes in that funded status in the year in which changes occur through comprehensive income. Additionally, SFAS 158 requires an employer to measure the funded status of each of its plans as of the date of its year-end statement of financial position. The Company adopted the recognition and disclosure provisions of SFAS 158 in fiscal year 2007. The measurement date provisions of SFAS 158 will be effective for the Company beginning with its fiscal year 2009.

For fiscal 2007, the measurement date for the CBI Plan was August 25, 2007, and the measurement date for the TPC Plan was June 30, 2007. The Company will use a measurement date as of the end of its fiscal year for both plans on or before fiscal 2009.

AMERICAN ACHIEVEMENT GROUP HOLDING CORP.

AAC GROUP HOLDING CORP.

AMERICAN ACHIEVEMENT CORPORATION

Notes to Condensed Consolidated Financial Statements

(Dollars in thousands, unless otherwise stated)

(unaudited)

The net periodic postretirement benefit cost includes the following components:

	For the three months ended						For the three months ended
	February 23, 2008						February 24, 2007
	TPC Plan			CBI Plan			TPC Plan			CBI Plan
Service costs, benefits attributed to service during the period	$	22		$	-		$	20		$	-
Interest cost		228			27			225			27
Expected return on assets		(292	)		-			(247	)		-
Amortization of unrecognized net loss (gain)		(9	)		(78	)		-			(88	)
Amortization of unrecognized net prior service costs		-			(37	)		-			(37	)
Net periodic postretirement benefit cost (income)	$	(51	)	$	(88	)	$	(2	)	$	(98	)


	For the six months ended						For the six months ended
	February 23, 2008						February 24, 2007
	TPC Plan			CBI Plan			TPC Plan			CBI Plan
Service costs, benefits attributed to service during the period	$	44		$	-		$	40		$	-
Interest cost		457			54			450			54
Expected return on assets		(584	)		-			(494	)		-
Amortization of unrecognized net loss (gain)		(18	)		(155	)		-			(176	)
Amortization of unrecognized net prior service costs		-			(74	)		-			(74	)
Net periodic postretirement benefit cost (income)	$	(101	)	$	(175	)	$	(4	)	$	(196	)

Amounts recognized in other comprehensive income consist of:

	For the three months ended February 23, 2008						For the three months ended February 24, 2007
		TPC Plan			CBI Plan			TPC Plan	CBI Plan
Net gain	$	(9	)	$	(78	)		n/a	n/a
Prior service cost		-			(37	)		n/a	n/a
	$	(9	)	$	(115	)

	For the six months ended February 23, 2008						For the six months ended February 24, 2007
		TPC Plan			CBI Plan			TPC Plan	CBI Plan
Net gain	$	(18	)	$	(155	)		n/a	n/a
Prior service cost		-			(74	)		n/a	n/a
	$	(18	)	$	(229	)

The estimated net gain for the TPC Plan that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the next fiscal year is $36. The estimated net gain and estimated prior service credit for the CBI Plan that will be amortized from accumulated other income into net periodic postretirement benefit cost over the next fiscal year are $310 and $149, respectively.

10. Related-Party Transactions

On March 25, 2004, AAC entered into a management agreement with an affiliate of Fenway Partners pursuant to which AAC, among other things, agreed to pay such affiliate an annual fee equal to the greater of $3.0 million or 5% of the previous fiscal year’s EBITDA (as defined in the agreement). Amounts paid by the Company under the management agreement totaled $949 and $1,699 for the three and six months ended February 23, 2008, respectively and $896 and $1,832 for the three and six months ended February 24, 2007, respectively.

As of February 23, 2008 and August 25, 2007, the Company had prepaid management fees of approximately $219 and $250, respectively.

AMERICAN ACHIEVEMENT GROUP HOLDING CORP.

AAC GROUP HOLDING CORP.

AMERICAN ACHIEVEMENT CORPORATION

Notes to Condensed Consolidated Financial Statements

(Dollars in thousands, unless otherwise stated)

(unaudited)

11. Business Segments

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

As discussed in Note 3, the achievement publications business was shut down during the first quarter of fiscal year 2008. This business historically was included as an additional reporting segment. As all of the results of operations of the achievement publications business are included in discontinued operations, they are not presented in the tables below. Assets of the achievement publications segment were $271 and $7,610 as of February 23, 2008 and August 25, 2007, respectively. Certain shared assets and costs that were previously allocated to the achievement publications segment were reallocated to the remaining continuing segments.

	Class					Graduation
	Rings		Yearbooks			Products		Other			Total
Three Months Ended February 23, 2008
Net sales	$	32,855	$	2,335		$	15,478	$	9,960		$	60,628
Segment operating income (loss)		3,779		(5,486	)		3,793		(67	)	$	2,019

Three Months Ended February 24, 2007
Net sales	$	31,002	$	2,644		$	15,278	$	8,173		$	57,097
Segment operating income (loss)		4,719		(3,989	)		3,316		1,219		$	5,265

Six Months Ended February 23, 2008
Net sales	$	65,516	$	11,955		$	18,942	$	16,155		$	112,568
Segment operating income (loss)		6,539		(8,793	)		2,053		(503	)	$	(704	)

Six Months Ended February 24, 2007
Net sales	$	64,369	$	13,205		$	18,037	$	13,534		$	109,145
Segment operating income (loss)		8,493		(7,870	)		983		674		$	2,280

	Parent Holdings
	Class				Graduation
	Rings		Yearbooks		Products		Other		Total
As of February 23, 2008
Segment assets	$	210,044	$	171,955	$	66,948	$	41,683	$	490,630

As of August 25, 2007
Segment assets	$	203,637	$	168,292	$	57,796	$	38,731	$	468,456

AMERICAN ACHIEVEMENT GROUP HOLDING CORP.

AAC GROUP HOLDING CORP.

AMERICAN ACHIEVEMENT CORPORATION

Notes to Condensed Consolidated Financial Statements

(Dollars in thousands, unless otherwise stated)

(unaudited)

	Intermediate Holdings
	Class				Graduation
	Rings		Yearbooks		Products		Other		Total
As of February 23, 2008
Segment assets	$	206,916	$	169,377	$	66,064	$	41,086	$	483,443

As of August 25, 2007
Segment assets	$	200,330	$	165,287	$	56,726	$	38,176	$	460,519

	AAC
	Class				Graduation
	Rings		Yearbooks		Products		Other		Total
As of February 23, 2008
Segment assets	$	205,785	$	168,444	$	65,744	$	40,870	$	480,843

As of August 25, 2007
Segment assets	$	199,160	$	164,223	$	56,347	$	37,979	$	457,709

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

The following discussion of our condensed consolidated financial condition and results of operations should be read in conjunction with the information contained in our condensed consolidated financial statements and accompanying notes included elsewhere in this report. The condensed consolidated financial statements and the notes thereto have been prepared in accordance with U.S. Generally Accepted Accounting Principals. The following discussion includes forward looking statements that involve certain risks and uncertainties. See “Disclosure Regarding Forward Looking Statements.”

General

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

As fully described under the “Significant Developments” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations, on October 26, 2007, the Company decided to shut down the operations of its achievement publications segment, which produced, marketed and sold publications that recognize the achievements of top students at the high school and college levels, as well as the nation’s most inspiring teachers. Substantially all shutdown activities were complete as of February 23, 2008.

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

Numerous raw materials are used in the manufacture of our products. Gold and other metals, precious, 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 a majority of our gold from a single supplier, through our existing gold consignment agreement. We may consign a portion of our gold and pay for gold as our products are shipped to customers. We also purchase the majority of our semi-precious and synthetic stones from a single supplier in Germany. The prices for these stone purchases 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.

We face 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. We believe that it would be costly and time-consuming for new competitors to replicate the production and distribution capabilities necessary to compete effectively in this market, and as a result, there have been no major new competitors in the last 61 years.

We experience seasonal fluctuations in our net sales tied primarily to the school year. We recorded 46% of our fiscal year 2007 net sales in our third quarter. Class ring sales are highest during October through December and early spring, with many orders made for delivery to students before the winter holiday season. Graduation product sales are predominantly made during February through April prior to the April through June graduation season. Yearbook sales are highest during the months of April through June, as yearbooks are typically shipped prior to each school’s summer break. Our recognition and affinity product line sales are seasonal. The recognition and affinity product line sales are highest during the winter holiday season and in the period leading up to Mother’s Day. We have experienced operating losses during our first and fourth fiscal quarters, which includes the beginning of the school year and the summer months when school is not in session, thus reducing related shipment of products. In addition, our working capital requirements tend to exceed our operating cash flows from May through September.

We also have exposure to market risk relating to changes in interest rates on our variable rate debt. Our senior secured credit facility (revolver and term loan) and existing gold consignment agreement are variable rate arrangements.

Historically, growth in the class rings, yearbooks and graduation products market has been driven primarily by demographics. The U.S. Department of Education projects that the number of high school and college graduates will increase by an average of 6% and 22% nationally, respectively, over the time period from 2003 to 2016. Additionally, the U.S. Census Bureau projects that the total U.S. population will increase by 6% over the time period from 2007 to 2015. Both the increased population, and the increased number of high school and college graduates should expand the market for our products.

Company Background

Our business was founded when the operations of ArtCarved, which were previously owned by CJC Holdings, Inc., and the operations of Balfour, which were previously owned by L.G. Balfour Company, Inc., were combined through various asset purchase agreements in December 1996. AAC was formed in June 2000 to serve as a holding company for these operations as well as any future acquisitions. In June 2000, we acquired the Taylor Senior Holding Company, the parent company of Taylor Publishing Company (“Taylor”), whose primary business is designing and printing student yearbooks. In July 2002, AAC acquired all the outstanding stock and warrants of Milestone Marketing, a marketer of class rings and other graduation products to the college market. In January 2004, AAC acquired C-B Graduation Announcements, a marketer of graduation products to the college market. In April 2007, Commemorative Brands, Inc. (“CBI”), a wholly-owned subsidiary of AAC, acquired all of the outstanding stock of BFJ Holdings, Inc. and its wholly owned subsidiary, Powers Embroidery, Inc. (“Powers”), which companies were immediately merged into and became an operating division of CBI. Powers is a producer of quality letter jackets, chenille patches and other school spirit embroidery merchandise and is located in Waco, Texas.

Basis of Presentation

We present financial information relating to Parent Holdings, Intermediate Holdings and AAC and its subsidiaries in this discussion and analysis. Parent Holdings owns 100% of the shares of common stock of Intermediate Holdings. Intermediate Holdings owns 100% of the shares of common stock of AAC Holding Corp., which is the holder of 100% of the shares of common stock of AAC.

Other than the series A preferred stock, debt obligations, related deferred debt issuance costs, 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 Parent Holdings and Intermediate Holdings’ wholly-owned indirect subsidiary AAC and the direct and indirect subsidiaries of AAC. Intermediate Holdings’ only direct subsidiary is AAC Holding Corp., whose sole asset is the stock of AAC. AAC, Intermediate Holdings and Parent Holdings are treated as entities under common control.

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

Significant Developments

The financial performance of our achievement publications segment took a significant downturn in 2007, with sales declining from $21.0 million in 2006 to $5.1 million in 2007. Late in the fourth quarter of 2007, as the results of solicitation mailings made in May and June became known, it was clear that student and teacher responses were coming in well below what was anticipated and necessary to support profitable operations.

After carefully considering the risks of continuing to operate this business and the investment required to do so, management determined in August 2007 that the risks of continuing to operate this business outweighed the probable benefits. Additionally, management and the Board of Directors wanted to focus our efforts around the core businesses that offered the most opportunity for continued growth and earnings. Accordingly, on October 26, 2007, management proposed and the Board of Directors approved the shut down of our achievement publications business.

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

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

Results of Operations

Three Months Ended February 23, 2008 Compared to Three Months Ended February 24, 2007

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

	Parent Holdings
	For the Three			% of			For the Three			% of
(in thousands)	Months Ended			Net			Months Ended			Net
	February 23, 2008			Sales			February 24, 2007			Sales
Net sales	$	60,628			100.0	%	$	57,097			100.0	%
Cost of sales		26,865			44.3	%		21,258			37.2	%
Gross profit		33,763			55.7	%		35,839			62.8	%
Selling, general and administrative expenses		31,744			52.4	%		30,574			53.6	%
Operating income		2,019			3.3	%		5,265			9.2	%
Interest expense, net		15,995			26.3	%		14,350			25.1	%
Loss before income taxes		(13,976	)		(23.0)	%		(9,085	)		(15.9)	%
Benefit for income taxes		(3,657	)		(6.0)	%		(3,068	)		(5.4)	%
Loss from continuing operations		(10,319	)		(17.0)	%		(6,017	)		(10.5)	%
Discontinued operations:
Loss from discontinued segment		(38	)		(0.1)	%		(986	)		(1.7)	%
Benefit for income taxes		(15	)		(0.0)	%		(383	)		(0.6)	%
Loss from discontinued operations		(23	)		(0.1)	%		(603	)		(1.1)	%
Net loss	$	(10,342	)		(17.1)	%	$	(6,620	)		(11.6)	%

	Intermediate Holdings
	For the Three			% of			For the Three			% of
(in thousands)	Months Ended			Net			Months Ended			Net
	February 23, 2008			Sales			February 24, 2007			Sales
Net sales	$	60,628			100.0	%	$	57,097			100.0	%
Cost of sales		26,865			44.3	%		21,258			37.2	%
Gross profit		33,763			55.7	%		35,839			62.8	%
Selling, general and administrative expenses		31,744			52.4	%		30,574			53.6	%
Operating income		2,019			3.3	%		5,265			9.2	%
Interest expense, net		8,350			13.7	%		8,298			14.5	%
Loss before income taxes		(6,331	)		(10.4)	%		(3,033	)		(5.3)	%
Benefit for income taxes		(2,948	)		(4.9)	%		(1,293	)		(2.3)	%
Loss from continuing operations		(3,383	)		(5.5)	%		(1,740	)		(3.0)	%
Discontinued operations:
Loss from discontinued segment		(38	)		(0.1)	%		(986	)		(1.7)	%
Benefit for income taxes		(15	)		(0.0)	%		(383	)		(0.6)	%
Loss from discontinued operations		(23	)		(0.1)	%		(603	)		(1.1)	%
Net loss	$	(3,406	)		(5.6)	%	$	(2,343	)		(4.1)	%

	AAC
	For the Three			% of			For the Three			% of
(in thousands)	Months Ended			Net			Months Ended			Net
	February 23, 2008			Sales			February 24, 2007			Sales
Net sales	$	60,628			100.0	%	$	57,097			100.0	%
Cost of sales		26,865			44.3	%		21,258			37.2	%
Gross profit		33,763			55.7	%		35,839			62.8	%
Selling, general and administrative expenses		31,744			52.4	%		30,574			53.5	%
Operating income		2,019			3.3	%		5,265			9.2	%
Interest expense, net		5,176			8.5	%		5,409			9.5	%
Loss before income taxes		(3,157	)		(5.2)	%		(144	)		(0.3)	%
Benefit for income taxes		(1,258	)		(2.1)	%		(64	)		(0.2)	%
Loss from continuing operations		(1,899	)		(3.1)	%		(80	)		(0.1)	%
Discontinued operations:
Loss from discontinued segment		(38	)		(0.1)	%		(986	)		(1.7)	%
Benefit for income taxes		(15	)		(0.0)	%		(383	)		(0.6)	%
Loss from discontinued operations		(23	)		(0.1)	%		(603	)		(1.1)	%
Net loss	$	(1,922	)		(3.2)	%	$	(683	)		(1.2)	%

Net Sales. Net sales consist of product sales and are net of product returns and promotional discounts. Net sales increased $3.5 million, or 6.2%, to $60.6 million for the three months ended February 23, 2008 from $57.1 million for the three months ended February 24, 2007. The following details the changes in net sales during such periods by business segment.

Class Rings. Net sales increased $1.9 million to $32.9 million for the three months ended February 23, 2008 from $31.0 million for the three months ended February 24, 2007. The increase in net sales was primarily due to timing of deliveries related to on-campus class rings between the first and second quarters of 2008 and higher on-campus average sales price, partially offset by lower retail class ring sales due to softness in the retail market.

Yearbooks. Net sales decreased $0.3 million to $2.3 million for the three months ended February 23, 2008 from $2.6 million for the three months ended February 24, 2007. The decrease in net sales was primarily the result of a decline in contracts partially offset by a higher average contract value.

Graduation Products. Net sales increased $0.2 million to $15.5 million for the three months ended February 23, 2008 from $15.3 million for the three months ended February 24, 2007.

Other. Net sales increased $1.8 million to $10.0 million for the three months ended February 23, 2008 from $8.2 million for the three months ended February 24, 2007. The increase in net sales was primarily related to the acquisition of Powers in April 2007 and an increase in the sale of commercial and fine books, partially offset by a decrease in sales of recognition and affinity rings partially due to timing of licensing revenue between the first two quarters of 2007.

Gross Profit. Gross margin represents gross profit as a percentage of net sales. Gross margin was 55.7% for the three months ended February 23, 2008, a 7.1 percentage point decrease from 62.8% for the three months ended February 24, 2007. Overall, gross profit decreased $2.1 million. The decrease in gross profit was a result of the decline in retail class rings and recognition and affinity ring sales, a decline in yearbook gross profit due to timing between the first two quarters of 2008, unfavorable exchange impact on Euro denominated stone purchases and higher consulting expenses related to productivity projects, partially offset by the Powers acquisition and increased on-campus class ring sales.

Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $1.1 million, or 3.8%, to $31.7 million for the three months ended February 23, 2008 from $30.6 million for the three months ended February 24, 2007. Included in selling, general and administrative expenses are two sub-categories: selling and marketing expenses and general and administrative expenses.

Selling and marketing expenses increased $0.3 million to $21.5 million or 35.6% of net sales for the three months ended February 23, 2008 from $21.2 million or 37.1% of net sales for the three months ended February 24, 2007 due to higher market research and e-business expenses, partially offset by lower spending in other areas.

General and administrative expenses for the three months ended February 23, 2008 were $10.2 million, or 16.8% of net sales as compared to $9.4 million, or 16.4% of net sales for the three months ended February 24, 2007. The increase in general and administrative expenses was primarily the result of the acquisition of Powers in April 2007, increased employee headcount and increases in other administrative expenses.

Operating Income. As a result of the foregoing, operating income was $2.0 million, or 3.3% of net sales, for the three months ended February 23, 2008 as compared with operating income of $5.3 million, or 9.2% of net sales, for the three months ended February 24, 2007. The class rings segment reported operating income of $3.8 million for the three months ended February 23, 2008 as compared with operating income of $4.7 million for the three months ended February 24, 2007. The yearbooks segment reported operating loss of $5.5 million for the three months ended February 23, 2008 as compared with operating loss of $4.0 million for the three months ended February 24, 2007. The graduation products segment reported operating income of $3.8 million for the three months ended February 23, 2008 as compared with operating income of $3.3 million for the three months ended February 24, 2007. The other segment reported an operating loss of $0.1 million for the three months ended February 23, 2008 as compared with operating income of $1.2 million for the three months ended February 24, 2007.

Interest Expense, Net. For Parent Holdings, net interest expense was $16.0 million for the three months ended February 23, 2008 and $14.4 million for the three months ended February 24, 2007. The average debt outstanding of Parent Holdings for the three months ended February 23, 2008 and the three months ended February 24, 2007 was $555 million and $535 million, respectively. The weighted average interest rate on debt outstanding of Parent Holdings for the three months ended February 23, 2008 and the three months ended February 24, 2007 was 10.6% and 9.9%, respectively.

For Intermediate Holdings, net interest expense was $8.4 million for the three months ended February 23, 2008 and $8.3 million for the three months ended February 24, 2007. The average debt outstanding of Intermediate Holdings for the three months ended February 23, 2008 and the three months ended February 24, 2007 was $362 million and $366 million, respectively. The weighted average interest rate on debt outstanding of Intermediate Holdings for the three months ended February 23, 2008 and the three months ended February 24, 2007 was 8.4% and 8.5%, respectively.

For AAC, net interest expense was $5.2 million for the three months ended February 23, 2008 and $5.4 million for the three months ended February 24, 2007. The average debt outstanding of AAC for the three months ended February 23, 2008 and the three months ended February 24, 2007 was $239 million and $255 million, respectively. The weighted average interest rate on debt outstanding of AAC for the three months ended February 23, 2008 and the three months ended February 24, 2007 was 7.5% and 7.8%, respectively.

Benefit for Income Taxes. For the three months ended February 23, 2008 and the three months ended February 24, 2007, Parent Holdings recorded an income tax benefit of $3.7 million and $3.1 million, respectively, which represents an effective tax rate of 26% and 34%, respectively. The effective tax rates vary from the statutory federal rate due to the impact of state income taxes and the non-deductibility of a portion of interest on high-yield debt.

For the three months ended February 23, 2008 and the three months ended February 24, 2007, Intermediate Holdings recorded an income tax benefit of $2.9 million and $1.3 million, respectively, which represents an effective tax rate of 47% and 43%, respectively. The effective tax rates vary from the statutory federal rate due to the impact of state income taxes and the non-deductibility of a portion of interest on high-yield debt.

For the three months ended February 23, 2008 and the three months ended February 24, 2007, AAC recorded an income tax benefit of $1.3 million and $0.1 million, respectively, which represents an effective tax rate of 40% and 44%, respectively.

Six Months Ended February 23, 2008 Compared to Six Months Ended February 24, 2007

	Parent Holdings
		For the Six		% of			For the Six		% of
(in thousands)		Months Ended		Net			Months Ended		Net
		February 23, 2008		Sales			February 24, 2007		Sales
Net sales	$	112,568		100.0	%	$	109,145		100.0	%
Cost of sales		52,182		46.4	%		48,651		44.6	%
Gross profit		60,386		53.6	%		60,494		55.4	%
Selling, general and administrative expenses		61,090		54.2	%		58,214		53.3	%
Operating income (loss)		(704	)	(0.6)	%		2,280		2.1	%
Interest expense, net		31,626		28.1	%		28,974		(26.6)	%
Loss before income taxes		(32,330	)	(28.7)	%		(26,694	)	(24.5)	%
Benefit for income taxes		(8,212	)	(7.3)	%		(9,448	)	(8.7)	%
Loss from continuing operations		(24,118	)	(21.4)	%		(17,246	)	(15.8)	%
Discontinued operations:
Loss from discontinued segment		(7,128	)	(6.3)	%		(1,694	)	(1.6)	%
Benefit for income taxes		(2,787	)	(2.4)	%		(662	)	(0.6)	%
Loss from discontinued operations		(4,341	)	(3.9)	%		(1,032	)	(1.0)	%
Net loss	$	(28,459	)	(25.3)	%	$	(18,278	)	(16.8)	%

	Intermediate Holdings
		For the Six		% of			For the Six		% of
(in thousands)		Months Ended		Net			Months Ended		Net
		February 23, 2008		Sales			February 24, 2007		Sales
Net sales	$	112,568		100.0	%	$	109,145		100.0	%
Cost of sales		52,182		46.4	%		48,651		44.6	%
Gross profit		60,386		53.6	%		60,494		55.4	%
Selling, general and administrative expenses		61,090		54.2	%		58,214		53.3	%
Operating income (loss)		(704	)	(0.6)	%		2,280		2.1	%
Interest expense, net		16,521		14.7	%		17,015		15.6	%
Loss before income taxes		(17,225	)	(15.3)	%		(14,735	)	(13.5)	%
Benefit for income taxes		(7,540	)	(6.7)	%		(6,112	)	(5.6)	%
Loss from continuing operations		(9,685	)	(8.6)	%		(8,623	)	(7.9)	%
Discontinued operations:
Loss from discontinued segment		(7,128	)	(6.3)	%		(1,694	)	(1.6)	%
Benefit for income taxes		(2,787	)	(2.4)	%		(662	)	(0.6)	%
Loss from discontinued operations		(4,341	)	(3.9)	%		(1,032	)	(1.0)	%
Net loss	$	(14,026	)	(12.5)	%	$	(9,655	)	(8.9)	%

	AAC
		For the Six		% of			For the Six		% of
(in thousands)		Months Ended		Net			Months Ended		Net
		February 23, 2008		Sales			February 24, 2007		Sales
Net sales	$	112,568		100.0	%	$	109,145		100.0	%
Cost of sales		52,182		46.4	%		48,651		44.6	%
Gross profit		60,386		53.6	%		60,494		55.4	%
Selling, general and administrative expenses		61,090		54.2	%		58,214		53.3	%
Operating income (loss)		(704	)	(0.6)	%		2,280		2.1	%
Interest expense, net		10,281		9.2	%		11,330		10.4	%
Loss before income taxes		(10,985	)	(9.8)	%		(9,050	)	(8.3)	%
Benefit for income taxes		(4,348	)	(3.9)	%		(3,573	)	(3.3)	%
Loss from continuing operations		(6,637	)	(5.9)	%		(5,477	)	(5.0)	%
Discontinued operations:
Loss from discontinued segment		(7,128	)	(6.3)	%		(1,694	)	(1.6)	%
Benefit for income taxes		(2,787	)	(2.4)	%		(662	)	(0.6)	%
Loss from discontinued operations		(4,341	)	(3.9)	%		(1,032	)	(1.0)	%
Net loss	$	(10,978	)	(9.8)	%	$	(6,509	)	(6.0)	%

Net Sales. Net sales consist of product sales and are net of product returns and promotional discounts. Net sales increased $3.5 million, or 3.1%, to $112.6 million for the six months ended February 23, 2008 from $109.1 million for the six months ended February 24, 2007. The following details the changes in net sales during such periods by business segment.

Class Rings. Net sales increased $1.1 million to $65.5 million for the six months ended February 23, 2008 from $64.4 million for the six months ended February 24, 2007. The increase in net sales was primarily due to higher average sales price of on-campus class rings during the six months ended February 23, 2008 partially offset by lower retail unit sales as compared to the six months ended February 24, 2007 due to softness in the retail market.

Yearbooks. Net sales decreased $1.2 million to $12.0 million for the six months ended February 23, 2008 from $13.2 million for the six months ended February 24, 2007. The decrease in net sales was primarily the result of a decline in contracts and unfavorable contract mix.

Graduation Products. Net sales increased $0.9 million to $18.9 million for the six months ended February 23, 2008 from $18.0 million for the six months ended February 24, 2007. The increase in net sales was due to timing between the first and second half of 2007.

Other. Net sales increased $2.7 million to $16.2 million for the six months ended February 23, 2008 from $13.5 million for the six months ended February 24, 2007. The increase in net sales was primarily related to the acquisition of Powers in April 2007 and an increase in the sale of commercial books partially offset by a decline in professional championship rings.

Gross Profit. Gross margin represents gross profit as a percentage of net sales. Gross margin was 53.6% for the six months ended February 23, 2008, a 1.8 percentage point decrease from 55.4% for the six months ended February 24, 2007. Overall, gross profit decreased $0.1 million. The decrease in gross profit was a result of the decline in retail class rings and other recognition and affinity ring sales, a decline in yearbook gross margin due to lower sales, unfavorable exchange impact on Euro denominated stone purchases and higher consulting expenses related to productivity projects, partially offset by additional gross margin as a result of the Powers acquisition and increased sales of graduation products and on-campus class rings.

Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $2.9 million, or 4.9%, to $61.1 million for the six months ended February 23, 2008 from $58.2 million for the six months ended February 24, 2007. Included in selling, general and administrative expenses are two sub-categories: selling and marketing expenses and general and administrative expenses.

Selling and marketing expenses increased $1.0 million to $40.6 million or 36.1% of net sales for the six months ended February 23, 2008 from $39.6 million or 36.3% of net sales for the six months ended February 24, 2007 due to increased marketing research and development expenditures.

General and administrative expenses for the six months ended February 23, 2008 were $20.5 million, or 18.2% of net sales as compared to $18.6 million, or 17.0% of net sales for the six months ended February 24, 2007. The increase in general and administrative expenses was primarily the result of the acquisition of Powers in April 2007, increased employee headcount and increases in other administrative expenses.

Operating Income. As a result of the foregoing, operating loss was $0.7 million, or 0.6% of net sales, for the six months ended February 23, 2008 as compared with operating income of $2.3 million, or 2.1% of net sales, for the six months ended February 24, 2007. The class rings segment reported operating income of $6.5 million for the six months ended February 23, 2008 as compared with operating income of $8.5 million for the six months ended February 24, 2007. The yearbooks segment reported operating loss of $8.8 million for the six months ended February 23, 2008 as compared with operating loss of $7.9 million for the six months ended February 24, 2007. The graduation products segment reported operating income of $2.1 million for the six months ended February 23, 2008 as compared with operating income of $1.0 million for the six months ended February 24, 2007. The other segment reported an operating loss of $0.5 million for the six months ended February 23, 2008 as compared with operating income of $0.7 million for the six months ended February 24, 2007.

Interest Expense, Net. For Parent Holdings, net interest expense was $31.6 million for the six months ended February 23, 2008 and $29.0 million for the six months ended February 24, 2007. The average debt outstanding of Parent Holdings for the six months ended February 23, 2008 and the six months ended February 24, 2007 was $555 million and $540 million, respectively. The weighted average interest rate on debt outstanding of Parent Holdings for the six months ended February 23, 2008 and the six months ended February 24, 2007 was 10.7% and 9.9%, respectively.

For Intermediate Holdings, net interest expense was $16.5 million for the six months ended February 23, 2008 and $17.0 million for the six months ended February 24, 2007. The average debt outstanding of Intermediate Holdings for the six months ended February 23, 2008 and the six months ended February 24, 2007 was $365 million and $374 million, respectively. The weighted average interest rate on debt outstanding of Intermediate Holdings for the six months ended February 23, 2008 and the six months ended February 24, 2007 was 8.6%.

For AAC, net interest expense was $10.3 million for the six months ended February 23, 2008 and $11.3 million for the six months ended February 24, 2007. The average debt outstanding of AAC for the six months ended February 23, 2008 and the six months ended February 24, 2007 was $244 million and $264 million, respectively. The weighted average interest rate on debt outstanding of AAC for the six months ended February 23, 2008 and the six months ended February 24, 2007 was 7.7% and 7.9%, respectively.

Benefit for Income Taxes. For the six months ended February 23, 2008 and the six months ended February 24, 2007, Parent Holdings recorded an income tax benefit of $8.2 million and $9.4 million, respectively, which represents an effective tax rate of 25% and 35%, respectively. The effective tax rates vary from the statutory federal rate due to the impact of state income taxes and the non-deductibility of a portion of interest on high-yield debt.

For the six months ended February 23, 2008 and the six months ended February 24, 2007, Intermediate Holdings recorded an income tax benefit of $7.5 million and $6.1 million, respectively, which represents an effective tax rate of 44% and 41%, respectively. The effective tax rates vary from the statutory federal rate due to the impact of state income taxes and the non-deductibility of a portion of interest on high-yield debt.

For the six months ended February 23, 2008 and the six months ended February 24, 2007, AAC recorded an income tax benefit of $4.3 million and $3.6 million, respectively, which represents an effective tax rate of 40% and 39%, respectively.

The effective rates for the six months ended February 23, 2008 and the six months ended February 24, 2007 represent an estimate of the annual federal and state income tax rate.

Loss from Discontinued Operations. As described in “Significant Developments,” the results of operations of the achievement publications business are reported as discontinued operations. Loss from discontinued operations before income taxes during the six months ended February 23, 2008 was $7.1 million and includes charges of $5.5 million primarily related to the write-off of the remaining carrying value of tangible and intangible assets of the achievement publications segment and charges of approximately $0.7 million related to contract termination and employee severance costs. Loss from discontinued operations before income taxes during the six months ended February 24, 2007 was $1.7 million.

Liquidity and Capital Resources

Operating Activities. Operating activities provided $39.0 million of cash for the six months ended February 23, 2008 compared to cash provided of $35.9 million for the six months ended February 24, 2007. The $3.1 million increase in cash provided by operating activities was mainly attributable to lower working capital requirements and lower cash usage as a result of the achievement publications segment shutdown, partially offset by lower profitability.

Investing Activities. Capital expenditures for the six months ended February 23, 2008 were $5.4 million compared to capital expenditures of $5.7 million for the six months ended February 24, 2007. Our projected capital expenditures for the entire fiscal year 2008 are expected to be approximately $14.0 million.

Financing Activities. During the six months ended February 23, 2008, the Company paid down $6.2 million of the term loan of the Amended Senior Credit Facility, of which approximately $0.7 million were mandatory payments. In addition, net revolver payments were $7.8 million.

During the six months ended February 24, 2007, the Company paid down $11.9 million of the term loan of the Amended Senior Credit Facility, of which approximately $0.5 million were mandatory payments. In addition, net revolver payments were $9.3 million.

Capital Resources. We have a significant amount of indebtedness. On February 23, 2008, Parent Holdings had total indebtedness of $551.1 million, of which $188.8 million was senior PIK notes, $123.9 million was 10.25% senior discount notes, $150.0 million was 8.25% senior subordinated notes, $80.9 million was indebtedness under the existing senior secured credit facility and $7.5 million was our mandatory redeemable series A preferred stock. We also have up to $38.2 million in available revolving loan borrowings under our senior secured credit facility. We are currently in compliance with financial covenants in all of the agreements governing our outstanding indebtedness.

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.

Off Balance-Sheet Obligations

Gold Consignment Agreement. Under an agreement with a supplier, we have an ability to have on consignment gold with aggregate value less than or equal to the lowest of: (i) the dollar value of 27,000 troy ounces of gold, (ii) $14.2 million or (iii) a borrowing base, calculated based on a percentage of the gold held at our facilities and other approved locations, as specified by the agreement. Under the terms of this arrangement, we do not own the consigned gold nor do we have risk of loss related to price variance on such inventory until we pay for quantities purchased. Accordingly, we do not reflect the value of consigned gold in our inventory, nor do we reflect the corresponding liability for financial statement purposes. As of February 23, 2008, we held consigned gold valued at $1.8 million, while at August 25, 2007, we held no gold on consignment.

The agreement can be terminated by either party with 60 days prior written notice.

Letters of Credit. As of February 23, 2008 and August 25, 2007, we had commitments for $1.8 million and $2.3 million on letters of credit outstanding, respectively.

Seasonality

The seasonal nature of our various businesses tends to be tempered by our broad product mix. Class ring sales are highest during October through December and early spring, with many orders made for delivery to students before the winter holiday season. Graduation product sales are predominantly made during February through April prior to the April through June graduation season. Yearbook sales are highest during the months of April through June, as yearbooks are typically shipped prior to each school’s summer break. Our recognition and affinity product line sales are also seasonal. The recognition and affinity product line sales are highest during the winter holiday season and in the period leading up to Mother’s Day.

As a result of the foregoing, we have historically experienced operating losses during our first and fourth fiscal quarters, which includes the beginning of the school year and the summer months when school is not in session, thus reducing related shipment of products. In addition, our working capital requirements tend to exceed our operating cash flows from May through September.

Recent Accounting Pronouncements

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

In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — An Amendment of FASB Statements No. 87, 88, 106 and 132 (R)” (“SFAS 158”). SFAS 158 requires an employer to recognize the funded status of defined benefit postretirement plan as an asset or liability in the balance sheet and to recognize changes in that funded status in the year in which changes occur through comprehensive income. Additionally, SFAS 158 requires an employer to measure the funded status of each of its plans as of the date of its year-end statement of financial position. We adopted the recognition and disclosure provisions of SFAS 158 in our fiscal year 2007. The measurement date provisions of SFAS 158 will be effective for us beginning with our fiscal year 2009. We have not yet evaluated the impact that the measurement date provisions of this standard will have on our financial position and results of operations.

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk. We have exposure to market risk relating to changes in interest rates on our variable rate debt. Our policy is to manage interest rate exposure through the use of a combination of fixed and floating rate debt instruments. Our senior secured credit facility (revolver and term loan) and existing gold consignment agreement are variable rate arrangements. Each quarter point change in interest rates on our senior secured credit facility, which bears interest at variable rates, would result in a $0.3 million change in annual interest expense, assuming the entire revolving loan was drawn.

Exchange Rate Risk. We purchase the majority of our semi-precious and synthetic stones from a single supplier in Germany. We believe that all of our major competitors purchase their semi-precious stones from this same supplier. Each ten percent change in the Euro exchange rate would result in a $0.5 million annual change in cost of goods sold, assuming stone purchase levels approximate the levels of fiscal 2007.

Gold. We purchase a majority of our gold from a single supplier through our existing gold consignment agreement described above. We pay for consigned gold as our related products are shipped to customers. Each ten percent change in the price of gold would result in a $2.9 million annual change in cost of goods sold, assuming gold purchase levels approximate the levels in fiscal 2007.

ITEM 4. CONTROLS AND PROCEDURES

As of the end of the period covered by this report, 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 quarter. The evaluation was conducted based on the framework established by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control — Integrated Framework. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures are effective in enabling us to record, process, summarize and report information required to be included in the Company’s periodic SEC filings within the required time period, and that such information is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

Additionally, our Chief Executive Officer and Chief Financial Officer determined, as of the end of the period covered by this report, that during our most recent fiscal quarter, there was no change in our internal control over financial reporting that has materially affected, or is likely to materially affect, our internal control over financial reporting.

DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS

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

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

Although management believes that the expectations reflected in such forward looking statements are based upon reasonable assumptions, the Company can give no assurance that these expectations will be achieved. Any change in or adverse development, including the following factors, may impact the achievement of results in or accuracy of forward-looking statements: the price of gold and precious, semiprecious and synthetic stones; the Company’s access to students and consumers in schools; the seasonality of the Company’s business; regulatory and accounting rules; the Company’s relationship with its independent sales representatives; fashion and demographic trends; general economic, business, and market trends and events, especially during peak buying seasons for the Company’s products; the Company’s ability to respond to customer change orders and delivery schedules; development and operating costs; competitive pricing changes; successful completion of management initiatives designed to achieve operating efficiencies; the Company’s cash flows; and the Company’s ability to draw down funds under its current bank financings and to enter into new bank financings. The foregoing factors are not exhaustive. New factors may emerge or changes may occur that impact the Company’s operations and businesses. Forward-looking statements herein are expressly qualified on the foregoing or such other factors as may be applicable.

You should consider the risks described in the Company’s Form 10-K filed with the Securities and Exchange Commission on December 7, 2007 as you review this quarterly report.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

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

ITEM 6. EXHIBITS

(a) Exhibits


EXHIBIT
NUMBER		DESIGNATION
31.1		CEO Certification Accompanying Period Report Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		CFO Certification Accompanying Period Report Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1		CEO Certification Accompanying Period Report Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2		CFO Certification Accompanying Period Report Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

AMERICAN ACHIEVEMENT GROUP HOLDING CORP.

AAC GROUP HOLDING CORP.

AMERICAN ACHIEVEMENT CORPORATION

SIGNATURES

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

Date: April 8, 2008


		AMERICAN ACHIEVEMENT GROUP HOLDING CORP.
		AAC GROUP HOLDING CORP.
		AMERICAN ACHIEVEMENT CORPORATION

		By:		/s/ DONALD J. PERCENTI
				Donald J. Percenti
				CHIEF EXECUTIVE OFFICER
				(principal executive officer)


		By:		/s/ KRIS G. RADHAKRISHNAN
				Kris G. Radhakrishnan
				CHIEF FINANCIAL OFFICER
				(principal financial officer)