UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED FEBRUARY 28, 2004

OR

COMMISSION FILE NUMBER 333-84294

AMERICAN ACHIEVEMENT CORPORATION

(Exact name of registrant as specified in its charter)

7211 CIRCLE S ROAD
AUSTIN, TEXAS 78745
(Address of principal executive offices) (Zip Code)

REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE (512) 444-0571

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes [ ] No [X].

809,775 SHARES OF COMMON STOCK
(Number of shares outstanding as of February 28, 2004)

AMERICAN ACHIEVEMENT CORPORATION
FOR THE QUARTERLY PERIOD ENDED FEBRUARY 28, 2004
INDEX

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AMERICAN ACHIEVEMENT CORPORATION

Condensed Consolidated Balance Sheets

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

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AMERICAN ACHIEVEMENT CORPORATION

Condensed Consolidated Statements of Operations
(unaudited)

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

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AMERICAN ACHIEVEMENT CORPORATION

Condensed Consolidated Statements of Operations
(unaudited)

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

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AMERICAN ACHIEVEMENT CORPORATION

Condensed Consolidated Statements of Cash Flows
(unaudited)

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

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AMERICAN ACHIEVEMENT CORPORATION

Notes to Condensed Consolidated Financial Statements
(Dollars in thousands)
(unaudited)

1. Summary of Significant Accounting Policies

Consolidation

     The condensed consolidated financial statements include the accounts of American Achievement Corporation (the “Company”) and its direct and indirect subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

     The 11 5/8% Senior Unsecured Notes Due 2007 (the “Unsecured Notes”) are guaranteed by every direct and indirect domestic subsidiary of the Company. The guarantees by the guarantor subsidiaries are full, unconditional, and joint and several. All of the guarantor subsidiaries are wholly owned, with the exception of Commemorative Brands, Inc. (“CBI”), which is majority owned. American Achievement Corporation is a holding company with no independent assets or operations other than its investment in its subsidiaries.

     The accompanying condensed consolidated financial statements have been prepared without audit pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes the disclosures are adequate to make the information presented not misleading. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the financial position and results of operations for the periods presented have been included. Operating results for the six months ended February 28, 2004 are not necessarily indicative of the results that may be expected for the fiscal year ending August 28, 2004.

     Effective January 30, 2004, the Company acquired the assets of C-B Graduation Announcements, LLC, a producer of personalized graduation announcements and related accessories (the “C-B Announcements Acquisition”). The maximum purchase price payable in connection with this acquisition is approximately $5.9 million in cash, of which approximately $5.0 million was paid at closing (including $1.0 million placed in escrow), with the escrowed amount and balance of the purchase price to be paid pending a post-closing purchase price adjustment. The C-B Announcements Acquisition was accounted for using the purchase method of accounting.

Stock-Based Compensation

     The Company accounts for equity instruments issued to non-employees in accordance with the provisions of SFAS No. 123 (“SFAS 123”), “Accounting for Stock-Based Compensation,” as amended by SFAS No. 148 (“SFAS 148”), “Accounting for Stock-Based Compensation — Transition and Disclosure an amendment of FASB Statement No. 123”. The Company accounts for stock-based employee compensation arrangements in accordance with the provisions of Accounting Principles Board Opinion No. 25 (“APB No. 25”), “Accounting for Stock Issued to Employees” and complies with the disclosure provisions of SFAS 123, as amended by SFAS 148.

     Had compensation expense for the employee stock plans been determined based on the fair value at the grant date for options granted consistent with the provisions of SFAS 123, as amended by SFAS 148, the pro forma net income (loss) would have been reported as follows:

     The fair value of each option grant is estimated at the date of grant using the Black-Scholes pricing model with the following weighted average assumptions for grants in the fiscal year ended 2003:

     No options were granted during the six months ended February 28, 2004.

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AMERICAN ACHIEVEMENT CORPORATION

Notes to Condensed Consolidated Financial Statements – (Continued)
(Dollars in thousands)
(unaudited)

2. Trademarks, Goodwill and Other Intangible Assets

     The Company adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”), which revised the accounting for purchased goodwill and intangible assets with indefinite lives, effective September 1, 2002; and thus, goodwill and trademarks are no longer amortized.

     The Company includes other intangible assets subject to amortization in other assets on the balance sheet. The other intangible assets subject to amortization are as follows:

     Total amortization on the other intangible assets above was $1,871 and $1,640 for the six months ended February 28, 2004 and March 1, 2003, respectively, of which amortization on deferred financing costs is recorded as interest expense and amortization on customer lists and distribution contracts is recorded as amortization expense. Deferred financing costs have a useful life of 1-7 years and customer lists and distribution contracts have a useful life of 10-12 years. Estimated annual amortization expense for fiscal years ended 2004 through 2008 is approximately $3.7 million each year.

3. Comprehensive Income (Loss)

     Unrecognized losses on accrued minimum pension liabilities are included in other comprehensive income (loss). The following amounts were included in determining the Company’s comprehensive income (loss) for the three and six month periods ended February 28, 2004 and March 1, 2003.

4. Inventories, Net

     A summary of inventories, net is as follows:

     Cost of sales includes depreciation and amortization of $2,178 and $2,537 for the three months ended February 28, 2004 and March 1, 2003, respectively. Cost of sales includes depreciation and amortization of $4,341 and $4,791 for the six months ended February 28, 2004 and March 1, 2003, respectively.

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AMERICAN ACHIEVEMENT CORPORATION

Notes to Condensed Consolidated Financial Statements – (Continued)
(Dollars in thousands)
(unaudited)

5. Prepaid Expenses and Other Current Assets, Net

     Prepaid expenses and other current assets, net on the balance sheet, include reserves on sales representative advances of $2,097 and $2,516 at February 28, 2004 and August 30, 2003, respectively.

6. Long-term Debt

     Long-term debt consists of the following:

     11 5/8% Senior Unsecured Notes

     On February 20, 2002, the Company issued $177 million of senior unsecured notes (the “Unsecured Notes”) due in 2007. The Unsecured Notes bear interest at a stated rate of 11 5/8%. The Unsecured Notes were issued at a discount of 0.872% resulting in net proceeds of approximately $175.5 million before considering financing costs. The effective rate of the Unsecured Notes after discount is approximately 13.0%. The Unsecured Notes rank pari passu with the Company’s existing and future senior indebtedness, including obligations under the Company’s Senior Secured Credit Facility (as defined below). The Unsecured Notes are guaranteed by the Company’s domestic subsidiaries, and the guarantees rank pari passu with the existing Senior Subordinated Notes and future senior debt of the Company and its subsidiaries. The Unsecured Notes and the guarantees on the Unsecured Notes are effectively subordinated to any of the Company’s secured debt.

     The Company may not redeem the Unsecured Notes until 2005, except that the Company, in connection with a public equity offering, may redeem up to 35 percent of the Unsecured Notes before the third anniversary of the issue date of the Unsecured Notes as long as (a) the Company pays a certain percentage of the principal amount of the Unsecured Notes, plus interest, (b) the Company redeems the Unsecured Notes within 90 days of completing a public equity offering and (c) at least 65 percent of the aggregate principal amount of the Unsecured Notes issued remains outstanding afterward.

     If a change in control as defined in the indenture relating to the Unsecured Notes (the “AAC Indenture”) occurs, the Company must give the holders of the Unsecured Notes the opportunity to sell their Unsecured Notes to the Company at 101 percent of the principal amount of the Unsecured Notes, plus accrued interest.

     The Unsecured Notes contain customary negative covenants and restrictions on actions by the Company and its subsidiaries including, without limitation, restrictions on additional indebtedness, investments, asset dispositions outside the ordinary course of business, liens, and transactions with affiliates, among other restrictions (as defined in the AAC Indenture). In addition, the Unsecured Notes contain covenants, which restrict the declaration or payment of dividends by the Company and/or its subsidiaries (as defined in the AAC Indenture). The Unsecured Notes also require that the Company meet certain financial covenants including a minimum fixed charge coverage ratio (as defined in the AAC Indenture). The Company was in compliance with the Unsecured Notes covenants as of February 28, 2004.

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AMERICAN ACHIEVEMENT CORPORATION

Notes to Condensed Consolidated Financial Statements – (Continued)
(Dollars in thousands)
(unaudited)

11% Senior Subordinated Notes

     CBI’s 11% senior subordinated notes (the “Subordinated Notes”) mature on January 15, 2007. The Subordinated Notes are redeemable at the option of CBI in whole or in part, at any time on or after January 15, 2002, at specified redemption prices ranging from 105.5 percent of the principal amount thereof if redeemed during 2002 and declining to 100 percent of the principal amount thereof if redeemed during the year 2005 or thereafter, plus accrued and unpaid interest and Liquidated Damages as defined in the indenture relating to the Subordinated Notes, as amended (the “CBI Indenture”), if any, thereon to the date of redemption. The Company has not redeemed any of the Subordinated Notes as of February 28, 2004.

     In the event of a change of control (as defined in the CBI Indenture), each holder of the Subordinated Notes will have the right to require CBI to purchase all or any part of such holder’s Subordinated Notes at a purchase price in cash equal to 101 percent of the aggregate principal amount thereof, plus accrued and unpaid interest and Liquidated Damages, if any, thereon to the date of purchase.

     In the event of an asset sale (as defined in the CBI Indenture), CBI is required to apply any Net Proceeds (as defined in the CBI Indenture) to permanently reduce senior indebtedness, to acquire another business or long-term assets or to make capital expenditures. To the extent such amounts are not so applied within 365 days and the amount not applied exceeds $5.0 million, CBI is required to make an offer to all holders of the Subordinated Notes to purchase an aggregate principal amount of Subordinated Notes equal to such excess amount at a purchase price in cash equal to 100 percent of the principal amount thereof, plus accrued and unpaid interest and Liquidated Damages, if any, thereon to the date of purchase.

     The Subordinated Notes contain certain covenants that, among other things, limit the ability of CBI to engage in certain business transactions such as mergers, consolidations or sales of assets that would decrease the value of CBI or cause an event of default. The Company was in compliance with the Subordinated Notes covenants as of February 28, 2004.

Senior Secured Credit Facility

     In conjunction with the issuance of the Unsecured Notes, on February 20, 2002, the Company entered into a $40 million senior revolving credit facility (the “Senior Secured Credit Facility”) with various financial institutions, with all of the Company’s current domestic subsidiaries as guarantors. Loans made pursuant to the Senior Secured Credit Facility are secured by a first priority security interest in substantially all of the Company’s and the Company’s domestic subsidiaries’ assets and in all of the Company’s domestic subsidiaries’ capital stock.

     Availability under the Senior Secured Credit Facility is restricted to the lesser of (1) $40 million or (2) the Borrowing Base Amount as defined in the credit agreement under the Senior Secured Credit Facility (the “Credit Agreement”). Availability under the Senior Secured Credit Facility as of February 28, 2004 was approximately $38.1 million with $0 borrowings outstanding. The Senior Secured Credit Facility matures on February 20, 2006.

     Advances under the Senior Secured Credit Facility may be made as base rate loans or LIBOR loans at the Company’s election (except for the initial loans which were base rate loans). Interest rates payable upon advances are based upon the base rate or LIBOR depending on the type of loan the Company chooses, plus an applicable margin based upon a consolidated leverage ratio of certain outstanding indebtedness to EBITDA (to be calculated in accordance with the terms specified in the Credit Agreement). The effective rate on borrowings for the six months ended February 28, 2004 was 15.0%.

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AMERICAN ACHIEVEMENT CORPORATION

Notes to Condensed Consolidated Financial Statements – (Continued)
(Dollars in thousands)
(unaudited)

     The Credit Agreement contains customary negative covenants and restrictions on actions by the Company and its subsidiaries including, without limitation, restrictions on indebtedness, declaration or payment of dividends, liens, and changing the provisions of the gold consignment agreement, among other restrictions. In addition, the Credit Agreement requires that the Company meet certain financial covenants, ratios and tests, including capital expenditure limits, a maximum secured leverage ratio, a minimum interest coverage ratio, and a minimum fixed charge coverage ratio. The Company was in compliance with the Credit Agreement covenants as of February 28, 2004. The Company’s long-term debt outstanding as of February 28, 2004 matures as follows:

     The weighted average interest rate on debt outstanding as of February 28, 2004 and August 30, 2003 was 11.9% and 12.3%, respectively.

     The Company’s management believes the carrying amount of long-term debt approximates fair value as of February 28, 2004 and August 30, 2003, based upon current rates offered for debt with the same or similar debt terms.

     Subsequent to February 28, 2004, the Unsecured Notes, Subordinated Notes, and the Senior Secured Credit Facility were substantially paid off in connection with the merger agreement discussed in Note 13.

7. Commitments and Contingencies

Leases

     Certain Company facilities and equipment are leased under agreements expiring at various dates through 2018. Certain Company facilities and equipment are leased under agreements expiring at various dates through 2018. The Company’s commitments under the noncancellable portion of all operating and capital leases for each of the five years ending after August 30, 2003 and thereafter are approximately as follows:

     Some of the Company’s rental property leases contain options to renew the leased space for periods up to an additional ten years.

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AMERICAN ACHIEVEMENT CORPORATION

Notes to Condensed Consolidated Financial Statements – (Continued)
(Dollars in thousands)
(unaudited)

Employment Contracts

     The Company has employment agreements with its executive officers, the terms of which expire at various times through August 2005. Unless terminated, one executive officer’s employment agreement adds one day to the term for each day that passes, and accordingly, there are always two years remaining on the term. The remaining executive officers’ terms will be automatically extended for an additional one year term. Such agreements, which have been revised from time-to-time, provide for minimum salary levels, adjusted annually for cost-of-living changes, as well as for incentive bonuses for a certain executive that are payable if specific management goals are attained. The aggregate commitment for future salaries as of February 28, 2004, excluding bonuses, was approximately $2.6 million.

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 legal proceedings, in the aggregate, would not have a materially adverse impact on the Company’s results of operations or financial position.

     On February 11, 2004, Frederick Goldman, Inc. (the “Licensee”) filed an arbitration claim against CBI alleging, among other things, that CBI had improperly attempted to convert an exclusive license CBI granted to the Licensee to a non-exclusive license. In addition, on February 10, 2004, the Licensee commenced a lawsuit in federal district court in New York against CBI alleging that CBI breached the license agreement by granting third parties rights in violation of the Licensee’s exclusive rights under the license agreement. The district court claim seeks injunctive and monetary relief. No discovery has been conducted to date, therefore, at this time, it is not possible to predict with certainty the outcome of these unresolved legal matters or the range of possible loss or recovery. However, the Company intends to defend itself vigorously in these proceedings.

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, $10.1 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. For the three months ended February 28, 2004 and March 1, 2003, the Company expensed consignment fees of approximately $87 and $74, respectively. For the six months ended February 28, 2004 and March 1, 2003, the Company expensed consignment fees of approximately $154 and $142, respectively. Under the terms of the consignment arrangement, the Company does not own the consigned gold nor does it have risk of loss related to such inventory until the money is received by the bank from the Company in payment for the gold purchased. Accordingly, the Company does not include the value of consigned gold in its inventory or the corresponding liability for financial statement purposes. As of February 28, 2004 and August 30, 2003, the Company held approximately 17,170 ounces and 17,780 ounces, respectively, of gold valued at $6.9 million and $6.7 million, respectively, on consignment. The gold consignment agreement must be renewed annually, during February of each year. As of February 28, 2004, the Company had entered into an agreement to extend the gold consignment agreement through April 19, 2004. See Note 13, Subsequent Event.

8. Income Taxes

     Other than the three months ended March 1, 2003, whereby the Company recorded an $18 tax benefit, no tax provision or benefit has been recorded in the financial statements presented. No net federal income tax benefit is reflected in the statement of operations for net operating losses to be carried forward since realization of the potential benefit of net operating loss carry-forwards is not considered to be more likely than not. Although state taxes are expected for each year end, no benefit has been recorded due to the valuation allowance.

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AMERICAN ACHIEVEMENT CORPORATION

Notes to Condensed Consolidated Financial Statements – (Continued)
(Dollars in thousands)
(unaudited)

9. Stockholders’ Equity

     In the event of any liquidation, dissolution or winding up of the Company, the holders of the Series A Preferred Stock are entitled to receive payment of the liquidation value of $100 per share plus any accrued and unpaid dividends prior to the payment of any distributions to the holders of the Common Stock of the Company. The liquidation preference of the Series A Preferred Stock totaled approximately $100,737 at February 28, 2004 and August 30, 2003, respectively.

     Incentive stock options for 93,615 shares and nonqualified stock options for 3,289 shares of the Company’s Common Stock were outstanding as of February 28, 2004.

     During the six-month period ended November 30, 2002, the Company granted 28,500 options to employees. These options have an exercise price of $6.02 per share and, accordingly, the Company did not record any related compensation expense based upon the market price of the stock on the date of grant. A portion of the options, 10,000, vested on the grant date, with the remaining options vesting ratably over a four year period.

     Pursuant to an employment agreement entered into between the Company and its chief executive officer in July 1999, as amended on February 1, 2002, if the Company achieves certain EBITDA targets as defined by the agreement at any point from 2002 through 2004, the chief executive is entitled to receive up to a total of $1 million in face value of the Company’s Series A Preferred Stock. In addition, the plan provided for the immediate issuance of an option to purchase 12,500 shares of the Company’s common stock, and pursuant to this plan, an option to purchase 12,500 shares was granted in fiscal 2002. The executive is also entitled to receive discretionary bonuses as directed by the Board of Directors up to $300 annually, of which $150 is accrued as of February 28, 2004.

10. Related-Party Transactions

     The Company entered into a management agreement on March 30, 2001 with Castle Harlan, Inc., its majority shareholder, (the “Manager”), pursuant to which the Manager agreed to provide business and organization strategy, financial and investment management and merchant and investment banking services to the Company and its subsidiaries. The Company has agreed to indemnify the Manager against liabilities, costs, charges and expenses relating to the Manager’s performance of its duties, other than such of the foregoing resulting from the Manager’s gross negligence or willful misconduct. The agreement is for a term of 10 years, renewable automatically from year to year unless Castle Harlan Partners III, L.P. or Castle Harlan Partners II, L.P., affiliates of the Manager, shall own less than 5 percent of the then outstanding capital stock of the Company. As part of the agreement, the Company is charged a management fee equal to $3.0 million, unless otherwise prohibited by the Company’s Credit Agreement. Amounts paid under the management agreement totaled approximately $750 and $0 for the three months ended February 28, 2004 and March 1, 2003, respectively. Amounts paid under the management agreement totaled approximately $1,500 and $750 for the six months ended February 28, 2004 and March 1, 2003, respectively. As of February 28, 2004 and August 30, 2003, the Company had accrued management fees of approximately $750, respectively.

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AMERICAN ACHIEVEMENT CORPORATION

Notes to Condensed Consolidated Financial Statements – (Continued)
(Dollars in thousands)
(unaudited)

11. Business Segments

     The Company operates in two reportable business segments: scholastic products and recognition and affinity products. The principal products sold in the scholastic segment are class rings, yearbooks and graduation products, which include fine paper products and graduation accessories. The scholastic segment primarily serves the high school and college markets. The recognition and affinity segment includes publications that recognize the academic achievement of to