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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 FORM 10-K (Mark One) þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended March 31, 2005
 or o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from  toCommission file number 33-97090
 ACG HOLDINGS, INC.  Delaware
    
    62-1395968(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification No.)
 100 Winners Circle, Brentwood, Tennessee
    
    37027(Address of principal executive offices)
    
    (Zip Code)Registrants telephone number including area code
    
    (615) 377-0377
 AMERICAN COLOR GRAPHICS, INC.  New York
    
    16-1003976(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification No.)
 100 Winners Circle, Brentwood, Tennessee
    
    37027(Address of principal executive offices)
    
    (Zip Code)Registrants telephone number including area code
    
    (615) 377-0377
 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 þ No o Indicate by check mark if disclosure of delinquent filers pursuant to item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. þ Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Act). Yes o No þ Aggregate market value of the voting and non-voting common stock of ACG Holdings, Inc. held by
non-affiliates: Not applicable. ACG Holdings, Inc. has 160,067 shares outstanding of its common stock, $.01 Par Value, as of May
31, 2005 (all of which are privately owned and not traded on a public market). DOCUMENTS INCORPORATED BY REFERENCE




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INDEX PagePART IItem 1.
    
    Business
    
    
    2Item 2.
    
    Properties
    
    
    8Item 3.
    
    Legal Proceedings
    
    
    8Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    8PART IIItem 5.
    
    Market for
Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
    
    
    9Item 6.
    
    Selected Financial Data
    
    
    9Item 7.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    14Item 7A.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    30Item 8.
    
    Financial Statements and Supplementary Data
    
    
    31Item 9.
    
    Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
    
    
    69Item 9A.
    
    Controls and Procedures
    
    
    69Item 9B.
    
    Other Information
    
    
    69PART IIIItem 10.
    
    Directors and Executive Officers of the Registrant
    
    
    70Item 11.
    
    Executive Compensation
    
    
    72Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    76Item 13.
    
    Certain Relationships and Related Transactions
    
    
    77Item 14.
    
    Principal Accountant Fees and Services
    
    
    78PART IVItem 15.
    
    Exhibits and Financial Statement Schedules
    
    
    79Signatures
    
    
    90Ex-10.6  Severance Letter, dated November 19, 2000, between Graphics and Kathleen A. DeKamEx-10.12(c)  Third Amendment to Credit Agreement dated as of April 7, 2005Ex-12.1  Statement Re: Computation of Ratio of Earnings to Fixed ChargesEx-21.1  List of SubsidiariesEx-31.1  Section 302 Certifications of the CEOEx-31.2  Section 302 Certification of the CFOEx-32.1  Section 906 Certification of the CEO & CFO
  1




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PART I Special Note Regarding Forward Looking Statements This Annual Report on Form 10-K (this Report) contains forward-looking statements within the
meaning of the safe harbor provisions of Section 27A of the Securities Act of 1933 and Section
21E of the Securities Exchange Act of 1934. These forward-looking statements reflect our
managements views and assumptions as of the date of this Report regarding future events and
operating performance. Statements that are not of historical fact are forward-looking statements
and are contained throughout this Report including Items 1, 3, 7 and 7A hereof. Some of the
forward-looking statements in this Report can be identified by the use of forward-looking terms
such as believes, intends, expects, may, will, estimates, should, could,
anticipates, plans, or other comparable terms. Forward-looking statements are subject to known
and unknown risks and uncertainties, many of which may be beyond the control of ACG Holdings, Inc.
(Holdings), together with its wholly-owned subsidiary, American Color Graphics, Inc.
(Graphics), that could cause actual results to differ materially from any future results,
performance or achievements expressed or implied by the forward-looking statements. You should understand that the following important factors and assumptions could affect our future
results and could cause actual results to differ materially from those expressed in the
forward-looking statements:  
    
    a failure to achieve expected cost reductions or to execute other key strategies,
    
    fluctuations in the cost of paper, ink and other key raw materials used,
    
    changes in the advertising and print markets,
    
    actions by our competitors, particularly with respect to pricing,
    
    the financial condition of our customers,
    
    downgrades of our credit ratings,
    
    our financial condition and liquidity and our leverage and debt service obligations,
    
    the general condition of the United States economy,
    
    interest rate and foreign currency exchange rate fluctuations,
    
    the level of capital resources required for our operations,
    
    changes in the legal and regulatory environment,
    
    the demand for our products and services, and
    
    other risks and uncertainties, including the matters set forth in this Report
generally and those described from time to time in our filings with the Securities and
Exchange Commission. All forward-looking statements in this Report are qualified by these cautionary statements and are
made only as of the date of this Report. We do not undertake any obligation, other than as
required by law, to update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise. Consequently, such forward-looking statements should be regarded solely as our current plans,
estimates and beliefs. We do not undertake and specifically decline any obligation to publicly
release the results of any revisions to these forward-looking statements that may be made to
reflect any future events or circumstances after the date of such statements or to reflect the
occurrence of anticipated or unanticipated events. 
 ITEM 1.BUSINESS Overview We are one of the leading printers of advertising inserts and newspaper products in the United
States developed from a business that commenced operations in 1926. We believe our success is a
result of the strong and longstanding relationships that we have developed with our customers by
providing high quality, on-time and consistent solutions and our network of facilities, which
provides distribution efficiencies and short turnaround times. Customers for our print services
include approximately 200 national and regional retailers and approximately 160 newspapers. We are also one of the most technologically advanced providers of premedia services in the United
States. Our premedia services segment provides our customers with a complete solution for the
preparation and management of materials for printing, including the capture, manipulation, storage,
transmission and distribution of images. 2




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Advertising Inserts. Our principal focus is on the printing of retail advertising inserts. In the
fiscal year ended March 31, 2005 (Fiscal Year 2005) retail advertising inserts accounted for 83%
of our total print segment sales, in the fiscal year ended March 31, 2004 (Fiscal Year 2004),
accounted for 86% and in the fiscal year ended March 31, 2003 (Fiscal Year 2003), accounted for
87%. Customers in the advertising insert segment of the print industry, particularly large national
accounts, have increasingly demanded more sophisticated distribution capabilities, higher quality
and greater flexibility from print service providers. This demand has resulted in the continued
consolidation among printers within the industry. Heatset offset has become the dominant
technology for printing advertising inserts due to its reliability, high print quality and
flexibility. The industry is also experiencing the increasing interest of newspapers to outsource
their commercial printing, inserting and product mailings. As a result of these factors, we
believe that the key factors for success in the advertising insert segment of the printing industry
are price, quality, reliability, and proximity to customers target markets, as well as strong
customer service capabilities that foster lasting relationships. Premedia Services. Premedia services consist of a number of necessary steps in the production and
management of materials for printing, including the design creation and capture, manipulation,
storage, transmission and distribution of images, the majority of which leads to the production of
a four-color image in a format appropriate for use by printers. Unlike the advertising insert segment of the printing industry, the premedia services segment
remains highly fragmented, with a large number of service providers and many in-house departments
at larger retailers. We believe that premedia services are increasingly becoming a part of the
total mix of services that print customers demand, and most of our major competitors in the print
services segment offer premedia services. We believe that the key factors for success in the
premedia services segment are the ability to provide comprehensive services, including both print
services and managed premedia services, as well as technology leadership, which enhances customer
loyalty and helps establish new print customer relationships. Competitive Strengths We believe our continued success, strong customer relationships and leading market position are
primarily the result of the following competitive strengths: Leading Provider of Print Solutions to Our Customers. We believe our success in serving our
customers results primarily from the strong relationships that we have developed with them by
providing high quality print and premedia services solutions at competitive prices. We take a
proactive approach in adapting our offerings to the specific needs of our customers. We also
provide our print customers with comprehensive post-press services, such as mailing and freight
management. In our premedia services segment, we believe that we are one of a small number of
companies that can provide a full range of premedia services, and we use those capabilities to
primarily support our print sales. We also manage 14 facilities for customers at their offices,
which enable us to develop strong relationships with them. We believe that our commitment to
technology leadership and our ability and willingness to customize and improve our solutions for
our customers significantly enhance our ability to develop and maintain lasting relationships. Strong, Diverse Customer Base. The core of our customer base consists of growing, national
companies with whom we have strong, long-standing relationships. We also have a broad customer
base consisting of geographically diverse companies in a wide variety of industries. We provide
printing services to approximately 160 newspapers and approximately 200 national and regional
retailers, including hardware and home improvement retailers such as The Home Depot, electronics
and appliance retailers such as Best Buy, general merchandisers such as Wal-Mart, drug store
chains, such as Walgreens, grocery chains such as Jewel Foods, and clothing retailers such as
Federated Department Stores. None of these customers represent more than 10% of our sales. In
addition, many of our print customers also use our premedia services. Overall, the customers of
our premedia services segment are diverse and include large and medium-sized companies in the
retail, publishing, catalog and packaging industries. High Quality Assets and Investments in Technology. We believe that our 44 web heatset offset, nine
flexographic and two coldset offset printing presses are generally among the most advanced in the
industry. Through our comprehensive maintenance program, we are committed to extending the life
and enhancing the reliability of these valuable assets. We also strive to incorporate new
technology in our presses as it develops, and to acquire auxiliary equipment when needed, to
improve our process controls and print quality, as well as to satisfy customer requirements. For
example, our continued investment in pre-press, in-line and post-press technology has enabled us to
both strengthen existing and develop new partnerships with our customers. In the premedia services
segment, customers are continuously seeking ways to shorten their production cycles and reduce
their costs. We believe that our equipment and software are among the most advanced available and
position us well to address these requirements. We continuously strive to upgrade our equipment
and 3




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integrate or develop more advanced software. For example, we offer a variety of solutions which provide our
customers with better control of color, increased process control, shorter time to market and lower
production costs. National Scope with Regional Focus. In our print division, we believe our seven printing plants in
the United States and one plant in Canada form a broad and efficient production and distribution
network. These plants are located within convenient distribution distance of a large number of
major cities in the United States. Over the last few years, we have continued to restructure our
print operations through specific initiatives which have enhanced our production and distribution
networks flexibility, turnaround times and logistical capabilities, allowing us to better
distribute print products in a timely manner. These qualities have been and are instrumental to
our continued success in serving our customers, whose demands are increasingly complex. For
instance, a number of our national customers routinely use numerous versions of the same
advertising insert, which are adapted by region of the country. By coupling the flexibility of our
heatset offset presses and our comprehensive logistical capabilities, we have become one of the few
printers that can reliably meet the demands of large national and regional accounts. In our
premedia services division, we believe that our six stand-alone production facilities allow us to
provide strong customer service nationwide. They also provide us with access to highly skilled
technical personnel, provide redundancy and extra capacity during peak periods and allow for short
turnaround times. Competitive Cost Structure.We believe that we are one of the lowest cost producers of retail
advertising inserts, and we intend to continue to reduce our overall operating costs. In our print
business, we have reduced and are continuing to work to reduce the variable and fixed costs of
production at our print facilities and our selling, general and administrative expenses. This has
been accomplished through benefits related to strategic restructuring programs and disciplined cost
containment initiatives. We have also used our economies of scale to reduce the cost of raw
materials and enter into long-term agreements with our suppliers. In our premedia services
business, we have reduced and are continuing to reduce our operating expenses primarily through the
application of certain digital premedia production methodologies, facility consolidation and
continued cost containment. Strong Management Team.The seven members of our senior management team collectively have
approximately 105 years of service with us, and have worked together for us as a team for over
eleven years. Our management team maintains a sharp focus on our customers, growth, quality and
continued cost reduction, resulting in a strong competitive position and a well-defined strategy
for the future. Our Strategy We are committed to enhancing the strong and longstanding relationships that we have with our
existing customers and to building relationships with new customers by providing high quality,
on-time and consistent solutions. As we work to meet our customers needs we are also committed to
further reducing our operating costs. More specifically, our strategy consists of: Growing Print Volumes Profitably through the Strength of our Customer Relationships. A significant
number of our major customers are growing companies. We are committed to growing with our existing
customers and adding new accounts on a profitable basis. We will continue to focus on providing
excellent customer service, high quality print and premedia services solutions and reliable
delivery of materials, all of which strengthen our customer relationships. We are also actively
pursuing long-term printing and premedia opportunities similar to arrangements we have executed
with certain of our customers. Improving Customer and Service Mix.We expect to continue to adjust the mix of our customers and
services within our print segment. We consistently monitor our customer and service mix to
optimize profitability and asset utilization. As part of this process, we target customers who
have geographic and service needs that match our capabilities. This approach allows us to provide
better service to our customers, while generating higher margins. Also as part of this process, we
target accounts, such as grocery and drug store chains, that generate weekly, non-seasonal demand
for retail advertising insert printing services and enable us to maximize the use of our equipment
throughout the year. In our premedia services division, we continue to pursue large-scale managed
service opportunities, where we can work on-site with our customers to prepare materials for press,
foster strong long-term relationships and enhance sales of our print solutions. We will continue
to focus on high value-added, new business opportunities, particularly projects that utilize the
full breadth of the services and technologies we offer. Continuing to Reduce Costs.We have a disciplined approach to cost reduction that is implemented
on a plant-by-plant basis, and we are aggressively working to further reduce costs in our
manufacturing operations. Our cost reduction programs include savings resulting from various
restructuring initiatives that we put into place over the past several years as well as numerous
other specific cost reduction initiatives and efficiency improvements which have been implemented.
In our premedia services business, our use of advanced technology, facility consolidation and
continued cost containment 4




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initiatives will enable us to reduce our capital costs and improve our
digital premedia workflow, which we expect to further
enhance the productivity of our employees and reduce the overall cost structure in this segment.
In addition, we are continually working to further reduce our selling, general and administrative
expenses. Expanding our Printing Solutions through Disciplined Capital Expenditures.We are committed to
providing our customers with the solutions they need at competitive prices. We will continue to be
proactive in adapting our offerings to the specific needs of our customers, but we will do so only
through a disciplined program of capital expenditures. We will expand our production capacity
through the careful addition of equipment when opportunities support such an expansion. In our
premedia services segment, we believe that investments in new technology have allowed and will
continue to allow us to better market our service offerings to existing and new customers,
including customers in our print segment who increasingly use shared service offerings. Print Segment Our print business, which accounted for approximately 88%, 89% and 90% of our sales in Fiscal Years
2005, 2004 and 2003, respectively, produces advertising inserts, comics and other publications. Advertising Inserts.Retail advertising inserts accounted for 83% of print sales in Fiscal Year
2005, 86% of print sales in Fiscal Year 2004 and 87% of print sales in Fiscal Year 2003. We
believe that we are one of the largest printers of retail advertising inserts in the United States.
We print retail advertising inserts for approximately 200 retailers throughout the United States.
Advertising inserts are preprinted advertisements, generally in color, that display products sold
by a particular retailer or manufacturer, usually for a specific sale period. Advertising inserts
are used extensively by many different retailers, including discount, department, supermarket, home
center, drug and automotive stores. Inserts are an important and cost effective means of
advertising for these merchants. Advertising inserts are primarily distributed through insertion
in newspapers, but are also distributed by direct mail or in-store by retailers. As a result,
advertising inserts are both time sensitive and seasonal. Comics.Comics accounted for 10% of print sales in Fiscal Year 2005, 8% of print sales in Fiscal
Year 2004 and 7% of print sales in Fiscal Year 2003. We believe that we are one of the largest
printers of comics in the United States. Comics consist of Sunday newspaper comics, comic insert
advertising and comic books. We print Sunday comics for approximately 160 newspapers in the United
States and Canada and print a significant share of the annual comic book requirements of Marvel
Entertainment Group, Inc. Other Publications.Other publications, including local newspapers, TV guide listings and other
publications, accounted for 7% of print sales in Fiscal Year 2005 and 6% in Fiscal Years 2004 and
2003. Print Production.Our network of eight print plants in the United States and Canada is
strategically well positioned to service our customers, providing us with distribution efficiencies
and short turnaround times, two factors that we believe will allow our continuing success in
servicing large national and regional accounts. There are primarily three printing processes used
to produce advertising inserts and newspaper supplements: offset lithography (heatset and cold),
rotogravure and flexography. We principally use heatset offset and flexographic web printing
equipment in our print operations. Our printing equipment currently consists of 44 heatset offset
presses, two coldset offset presses and nine flexographic presses, 52 of which we own. Most of our
advertising inserts, publications and comic books are printed using the offset process, while
substantially all of our Sunday newspaper comics and comic advertising inserts are printed using
the flexographic process. In the heatset offset process, the desired printed images are distinguished chemically from the
non-image areas of a metal plate. This process allows the image area to attract solvent-based ink,
which is then transferred from the plate to a rubber blanket and then to the paper surface, which
we also refer to as the web. Once printed, the web goes through an oven that evaporates the
solvents from the ink, thereby setting the ink on the paper. In the cold offset process, inks are
set by the absorption of solvents into the paper. Due to the drying process, the heatset offset
process can be utilized on a wide variety of papers. Generally, heatset offset presses have the
ability to provide a more colorful and attractive product than cold offset presses. The flexographic process differs from offset printing in that it utilizes relief image plates and
water-based (as opposed to solvent-based) inks. The flexographic image area results from
application of ink to the raised image surface on the plate, which is transferred directly to the
paper. Once printed, the water-based inks are rapidly dried. Our flexographic printing generally
can provide vibrant color reproduction at a lower cost than heatset offset printing. The strengths
of flexography compared with the rotogravure and offset processes are faster press set-up times,
reduced paper waste, reduced energy use 5




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and maintenance costs, and environmental advantages due to the use of water-based inks and the use
of less paper. Faster press set-up times make the process particularly attractive to commercial
customers with shorter runs and extensive product versioning. In addition to press capacity, certain equipment parameters are critical to competing in the
advertising insert market, including cut-off length, folder capabilities and certain in-line and
off-line finishing capabilities. Cut-off length is one of the determinants of the size of the
printed page. Folder capabilities for advertising inserts must include a wide variety of page
sizes, page counts and page layouts. Finally, some advertising inserts require gluing or stitching
of the product, adding cards, trimming and numbering. These production activities generally are
done in-line with the press to meet the expedited delivery schedules required by many customers.
We believe that our mix and configuration of presses and press services allows for efficient
tailoring of printing services to customers product needs. In combination with our national account status with the United States Postal Service and our
experience in such areas as list services, addressing accuracy and postal service, we are able to
offer distribution and mailing services that help to maximize the advertising impact and financial
return for our customers. Premedia Services Segment Our premedia services business accounted for approximately 12%, 11% and 10% of our Fiscal Year
2005, 2004 and 2003 sales, respectively. We believe we are one of the largest full-service
providers of premedia services in the United States (based upon revenues) and a technological
leader in this industry. Our premedia services business commenced operations in 1975. We provide
these services within our print plants, our six stand-alone service locations and through our 14
managed services sites, which are premedia services facilities at a customer location. We assist customers in the capture, manipulation, storage, transmission and distribution of images.
The majority of this work leads to the production of a four-color image in a format appropriate for
use by printers as well as other forms of media. We make page changes, including type changes, and
combine digital page layout information with electronically captured and color-corrected four-color
images. From these digital files, proofs, final corrections, and finally, four-color films or
digital files are produced for each page. The final four-color films or digital files enable
printers to prepare plates for each color resulting in the appearance of full color on the printed
page generated. Our revenue from these traditional services is being supplemented by additional
revenue sources including digital asset management, managed services, computer-to-plate services,
creative services, conventional and digital photography, consulting and training services,
multimedia and Internet services, and software and data-base management. We have been a leader in
implementing these new technologies, which enables us to reduce unit costs and effectively service
the increasingly complex demands of our customers more quickly than many of our competitors. We
have also been one of the leaders in the integration of electronic page make-up, desktop
computer-based design and layout, and digital cameras into premedia production. Customers and Distribution Customers.We sell our print products and services to a large number of customers, primarily
retailers and newspapers. All of our products are produced in accordance with customer
specifications. We perform approximately 50% of our print work, including the printing of retail
advertising inserts, Sunday comics and comic books, under contracts ranging in term from one year
to ten years. Many of the contracts automatically extend for one year unless there has been notice
to the contrary from either of the contracting parties within a certain number of days before the
end of any term. For the balance of our print work, we obtain varying time commitments from our
customers ranging from job-to-job to annual allocations. Our premedia services customers consist of retailers, newspaper and magazine publishers, catalog
sales organizations, printers, consumer products companies, packaging manufacturers, advertising
agencies and direct mail advertisers. Our customers typically have a need for high levels of
technical expertise, short turnaround times and responsive customer service. In addition to our
historical regional customer base, our premedia services business is increasingly focused on
larger, national accounts that have a need for a broad range of fully integrated services and
communication capabilities requiring leading edge technology. The print and premedia services businesses have historically had certain common customers and our
ability to cross-market is an increasingly valuable tool as computer-to-plate, regional versioning,
electronic digital imaging, managed services and speed to market become more important to our
customers. We believe cross-marketing enables us to provide more comprehensive solutions for our
customers premedia and printing needs. 6




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No single customer accounted for sales in excess of 10% of our consolidated sales in Fiscal Year
2005. Our top ten customers accounted for approximately 43% of our consolidated sales in Fiscal
Year 2005. Distribution.We distribute our print products primarily by truck to customer-designated locations
(primarily newspapers and customer retail stores) and via mail. Distribution costs are generally
paid by the customer, and most shipping is by common carrier. Our premedia services business
generally distributes its products via electronic transmission, overnight express, or other methods
of personal delivery. Sales and Marketing Our print and premedia services divisions each have their own highly skilled sales forces that work
together to maximize our sales leverage by offering our customers multiple solutions utilizing the
products and services of both our print and premedia services divisions. Each sales force is
trained in the specific requirements of the market it serves to further allow us to maximize our
sales success and works closely with our customers to help them successfully market their products. Our print division employs 28 sales professionals who are divided into two regions, the south and
east region and the north and west region. These groups all specialize in the retail, newspaper
and comic book markets. The premedia services division employs 14 sales professionals who focus in
the retail and commercial, publications and catalog, and packaging markets. Competition Commercial printing in the United States is a large, highly fragmented, capital-intensive industry
and we compete with numerous national, regional and local printers. We believe that our largest
competitors are Vertis, Inc. and Quebecor World Inc., and to a lesser degree, R. R. Donnelley &
Sons Company. A trend of industry consolidation in recent years can be attributed to customer
preferences for larger printers with a greater range of services, capital requirements and
competitive pricing pressures. We believe that competition in the print business is based
primarily on quality and service at a competitive price. Our premedia services segment competes with numerous premedia services firms on both a national and
regional basis. The industry is highly fragmented, primarily consisting of smaller local and
regional companies, with only a few national full-service premedia services companies such as us,
none of which has a significant nationwide market share. Raw Materials The primary raw materials used in our print business are paper and ink. We purchase most of our
paper, ink and related products under long-term supply contracts. Raw materials used in our
premedia services processes include digital media, limited film usage and proofing substrate
materials. In both of our business segments, there is an adequate supply of the necessary materials
available from multiple vendors. We are not dependent on any single supplier and have had no
significant problems in the past obtaining necessary raw materials. Seasonality Some of our print and premedia services business is seasonal in nature, particularly those revenues
that are derived from advertising inserts. Generally, our sales from advertising inserts are
highest during the following advertising periods: the Spring advertising season from March to May,
the Back-to-School advertising season from July to August, and the Thanksgiving/Christmas
advertising season from October to December. Sales of Sunday newspaper comics are not subject to
significant seasonal fluctuations. Our strategy includes and will continue to include the
mitigation of the seasonality of our print business by increasing our sales to customers whose own
sales are less seasonal, such as food and drug companies, which utilize advertising inserts more
frequently. Backlog Because our print and premedia services products are required to be delivered soon after final
customer orders are received, we do not experience any backlog of unfilled customer orders. 7




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Our Employees As of May 31, 2005, we had a total of approximately 2,010 employees. Approximately 141 employees
are represented by a collective bargaining agreement. We consider our relations with our employees
to be excellent. Governmental and Environmental Regulations We are subject to regulation under various federal, state and local laws relating to employee
safety and health, and to the generation, storage, transportation, disposal and emission into the
environment of hazardous substances. We believe that we are in material compliance with such laws
and regulations. Although compliance with such laws and regulations in the future is likely to
entail additional capital expenditures, we do not anticipate that such expenditures will be
material. See Legal Proceedings  Environmental Matters appearing elsewhere in this Report. 
 ITEM 2.PROPERTIES We operate in 14 locations in 10 states and Canada. We own seven print plants in the United States
and one in Canada. Our premedia services business has six stand-alone production locations, all of
which are leased. The premedia services division also operates 14 premedia services facilities on
the premises of our customers. In addition, we maintain one small executive office in Connecticut
and our headquarters facility in Brentwood, Tennessee, both of which are leased. We believe that
our plants and facilities are adequately equipped and maintained for present and planned
operations. 
 ITEM 3.LEGAL PROCEEDINGS We have been named as a defendant in several legal actions arising from our normal business
activities. In the opinion of management, any liabilities that may arise from such actions will
not, individually or in the aggregate, have a material adverse effect on our financial condition or
results of operations. Environmental Matters Graphics, together with over 300 other persons, was designated by the U. S. Environmental
Protection Agency as a potentially responsible party, or a PRP, under the Comprehensive
Environmental Response Compensation and Liability Act, which we refer to as CERCLA or Superfund, at
a solvent recovery operation that closed in 1989. Although liability under CERCLA may be imposed
on a joint and several basis and our ultimate liability is not precisely determinable, the PRPs
have agreed in writing that Graphics share of removal costs is approximately 0.583%; therefore we
believe that our share of the anticipated remediation costs at such site will not be material to
our business or consolidated financial statements as a whole.

Graphics received written notice, dated May 10, 2004, of its potential liability in connection with
the Gibson Environmental Site at 2401 Gibson Street, Bakersfield, California. Gibson
Environmental, Inc. operated the (six acre) Site as a storage and treatment facility for used oil
and contaminated soil from June 1987 through October 1995. Graphics received the notice and a
Settlement Offer from LECG, a consultant representing approximately 60 companies comprising the
Gibson Group Trust. We have begun our investigation into this matter but we believe our potential
liability in connection with this Site will not be material to our business or financial statements
as a whole. Based upon an analysis of Graphics volumetric share of waste contributed to these sites, we
maintain a reserve of approximately $0.1 million in connection with these liabilities in our
consolidated balance sheet at March 31, 2005. We believe this amount is adequate to cover such
liabilities. 
 ITEM 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 8




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PART II 
 ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Market Information There is no established public market for the common stock of either Holdings or Graphics. Holders As of May 31, 2005, there were approximately 100 record holders of Holdings common stock.
Holdings is the sole shareholder of Graphics common stock. Dividends There have been no cash dividends declared on any class of common equity for the two most
recent fiscal years. See restrictions on Holdings ability to pay dividends and Graphics
ability to transfer funds to Holdings in note 1 to our consolidated financial statements
appearing elsewhere in this Report. Recent Sales of Unregistered Securities During the third quarter of Fiscal Year 2004, a former officer exercised options to purchase
1,125 shares of Holdings common stock for $.01/share. During the fourth quarter of Fiscal
Year 2003, a former officer exercised options to purchase 518 shares of Holdings common
stock for $.01/share. During the third quarter of Fiscal Year 2003, certain officers
exercised options to purchase an aggregate of 20,012 shares of Holdings common stock for
$.01/share. The securities that were sold were exempt from registration on the basis that
all such officers are accredited investors as defined by the rules of the Securities Act of
1933, as amended. 
 ITEM 6.SELECTED FINANCIAL DATA Set forth below is selected financial data for and as of the fiscal years ended March 31, 2005,
2004, 2003, 2002 and 2001. The balance sheet data as of March 31, 2005, 2004, 2003, 2002, 2001 and
the statements of operations data for the fiscal years ended March 31, 2005, 2004, 2003, 2002 and
2001 are derived from the audited consolidated financial statements for such periods and at such
dates. The selected financial data below, for the fiscal years ended March 31, 2004, 2003, 2002
and 2001, also reflects our digital visual effects business (Digiscope) as a discontinued
operation. This data should be read in conjunction with Managements Discussion and Analysis of Financial
Condition and Results of Operations and our consolidated financial statements appearing elsewhere
in this Report. 9




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ACG Holdings, Inc.
Selected Financial Data Fiscal Year Ended March 31,2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001(Dollars in thousands)Statements of Operations Data:Sales
    
    $
    449,513
    
    
    
    471,102
    
    
    
    517,139
    
    
    
    539,208
    
    
    
    600,021Cost of sales
    
    
    403,641
    
    
    
    409,321
    
    
    
    445,493
    
    
    
    460,283
    
    
    
    501,338Gross profit
    
    
    45,872
    
    
    
    61,781
    
    
    
    71,646
    
    
    
    78,925
    
    
    
    98,683Selling, general and administrative expenses
    
    
    28,824
    
    
    
    32,734
    
    
    
    37,614
    
    
    
    38,523
    
    
    
    44,471Restructuring costs and other charges (a)
    
    
    10,037
    
    
    
    8,140
    
    
    
    1,722
    
    
    
    12,920
    
    
    
    Operating income
    
    
    7,011
    
    
    
    20,907
    
    
    
    32,310
    
    
    
    27,482
    
    
    
    54,212Interest expense, net
    
    
    34,050
    
    
    
    34,166
    
    
    
    28,584
    
    
    
    29,806
    
    
    
    32,929Loss on early extinguishment of debt (b)
    
    
    
    
    
    
    3,196
    
    
    
    
    
    
    
    
    
    
    
    Other expense
    
    
    313
    
    
    
    489
    
    
    
    1,503
    
    
    
    624
    
    
    
    1,154Income tax expense (benefit) (c)
    
    
    (1,685
    )
    
    
    11,441
    
    
    
    1,559
    
    
    
    (5,073
    )
    
    
    (4,927
    )Income (loss) from continuing operations
    
    
    (25,667
    )
    
    
    (28,385
    )
    
    
    664
    
    
    
    2,125
    
    
    
    25,056Discontinued operations: (d)Loss from operations, net of $0 tax
    
    
    
    
    
    
    12
    
    
    
    979
    
    
    
    1,403
    
    
    
    633Loss on disposal, net of $0 tax
    
    
    

    
    
    
    444
    
    
    
    
    
    
    
    
    
    
    
    Net income (loss)
    
    $
    (25,667
    )
    
    
    (28,841
    )
    
    
    (315
    )
    
    
    722
    
    
    
    24,423Balance Sheet Data (at end of period):Working capital (deficit)
    
    $
    (11,571
    )
    
    
    (15,772
    )
    
    
    (29,820
    )
    
    
    (865
    )
    
    
    15,288Total assets
    
    $
    258,898
    
    
    
    267,913
    
    
    
    278,441
    
    
    
    280,513
    
    
    
    302,202Long-term debt and capitalized leases, including current installments
    
    $
    309,951
    
    
    
    298,298
    
    
    
    231,757
    
    
    
    252,792
    
    
    
    261,706Stockholders deficit
    
    $
    (212,740
    )
    
    
    (188,775
    )
    
    
    (107,699
    )
    
    
    (96,020
    )
    
    
    (85,867
    )Other Data:Net cash provided (used) by operating activities
    
    $
    (3,575
    )
    
    
    21,163
    
    
    
    45,647
    
    
    
    38,216
    
    
    
    40,913Net cash used by investing activities
    
    $
    (7,172
    )
    
    
    (13,118
    )
    
    
    (27,446
    )
    
    
    (16,493
    )
    
    
    (19,006
    )Net cash provided (used) by financing activities
    
    $
    10,822
    
    
    
    (7,924
    )
    
    
    (22,680
    )
    
    
    (17,189
    )
    
    
    (21,968
    )Capital expenditures (including lease obligations entered into)
    
    $
    6,907
    
    
    
    15,966
    
    
    
    28,652
    
    
    
    24,550
    
    
    
    25,271Ratio of earnings to fixed charges (e)
    
    
    
    
    
    
    
    
    
    
    1.07
    x
    
    
    
    
    
    
    1.58
    xEBITDA (f)
    
    $
    29,749
    
    
    
    41,054
    
    
    
    54,279
    
    
    
    56,654
    
    
    
    87,111
 10




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NOTES TO SELECTED
FINANCIAL DATA  (a)
    
    In March 2005, we approved a restructuring plan for our premedia services segment, which was
designed to improve operating efficiencies and overall profitability. We recorded $1.5
million of costs under this plan in Fiscal Year 2005.In March 2005, we approved a restructuring plan for our print segment, to reduce
manufacturing costs and improve profitability. We recorded $3.1 million of costs under this
plan in Fiscal Year 2005.In February 2005, we approved a restructuring plan for our print and premedia services
segments, to reduce overhead costs and improve operating efficiency and profitability. We
recorded $3.8 million of costs under this plan in Fiscal Year 2005.In January 2004, we approved a restructuring plan for our print and premedia services
segments, which was designed to improve operating efficiency and profitability. We recorded
$5.7 million of costs under this plan in Fiscal Year 2004. We recorded $(0.7) million of
costs for this plan in Fiscal Year 2005.In July 2003, we implemented a restructuring plan for our print and premedia services
segments to further reduce our selling, general and administrative expenses. We recorded
$1.8 million of costs under this plan in Fiscal Year 2004.In the fourth quarter of Fiscal Year 2003, we approved a restructuring plan for our print and
premedia services segments, which was designed to improve operating efficiency and
profitability. We recorded $1.2 million of costs under this plan in Fiscal Year 2003. We
recorded $(0.2) million of costs for this plan in Fiscal Year 2004.In January 2002, we approved a restructuring plan for our print and premedia services
segments, which was designed to improve asset utilization, operating efficiency and
profitability. We recorded $8.6 million of costs under this plan in Fiscal Year 2002. We
recorded an additional $0.7 million and $0.4 million of costs for this plan in Fiscal Year
2005 and Fiscal Year 2004, respectively.In addition, we recorded $1.6 million, $0.4 million, $0.5 million and $4.3 million of other
charges in our print and premedia services divisions in Fiscal Year 2005, Fiscal Year 2004,
Fiscal Year 2003 and Fiscal Year 2002, respectively. See note 15 to our consolidated
financial statements appearing elsewhere in this Report for further discussion of this
restructuring activity.(b)
    
    As part of a refinancing transaction entered into on July 3, 2003, we recorded a loss related
to early extinguishment of debt of $3.2 million, net of zero taxes. This loss related to the
write-off of deferred financing costs associated with the old bank credit agreement and the 12
 3/4% Senior Subordinated Notes Due 2005 (the 12 3/4% Notes).(c)
    
    In Fiscal Year 2005, income tax benefit relates primarily to tax benefit from losses in
foreign jurisdictions and to an adjustment recorded in the third quarter of $0.4 million to
reflect the tax benefit associated with a change in estimate with respect to our income tax
liability. The valuation allowance increased by $9.6 million in Fiscal year 2005 as a result
of changes in the deferred tax items. This increase included a $9.6 million increase related
to the tax effect of temporary differences generating deferred tax assets, net of a decrease
of $0.4 million related to the tax effect of the decrease in the minimum pension liability,
which is a component of other comprehensive income (loss).In the second quarter of Fiscal Year 2004, the valuation allowance for deferred tax assets
was increased by $12.8 million, resulting in a corresponding debit to deferred income tax
expense. This adjustment reflected a change in circumstances which resulted in a judgment
that, based on the provisions of Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes (SFAS 109) that restrict our ability to consider forecasts of
future income, a corresponding amount of deferred tax assets may not be realized. The change
in circumstances arose from our assessment of the economic climate, particularly the
continuance of competitive pricing pressures in our industry, and the expected increase in
annual interest costs arising from the issuance of our 10% Senior Second Secured Notes Due
2010 (the 10% Notes) in July 2003 (see note 7 to our consolidated financial statements
appearing elsewhere in the Report) that provided negative evidence about our ability to
realize certain deferred tax assets. We will reverse our valuation allowance into income
when and to the extent sufficient evidence arises to 11




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##### Table of Contents



support the realization of the related deferred tax assets. The valuation allowance
increased by $18.4 million in Fiscal Year 2004 as a result of changes in the deferred tax
items. This increase primarily included the $12.8 million increase discussed above and a
$5.6 million increase related to the tax effect of temporary differences generating deferred
tax assets, which is net of a decrease of $1.3 million related to the tax effect of the
decrease in the minimum pension liability, a component of other comprehensive income (loss).
In the third quarter of Fiscal Year 2004, we recorded an adjustment of $2.2 million to
reflect the tax benefit associated with a change in estimate with respect to our income tax
liability.The valuation allowance increased by $3.5 million in Fiscal Year 2003 as a result of changes
in the deferred tax items. This increase is primarily due to a $5.0 million increase related
to the tax effect of the minimum pension liability, which is a component of other
comprehensive income (loss), partially offset by a decrease in other temporary differences
generating deferred tax assets.In the fourth quarter of the fiscal year ended March 31, 2002 (Fiscal Year 2002), the
valuation allowance for deferred tax assets was reduced by $5.5 million, resulting in a
corresponding credit to deferred income tax expense. This adjustment reflected a change in
circumstances which resulted in a judgment that a corresponding amount of our deferred tax
assets would be realized in future years. The valuation allowance decreased by $0.1 million
during Fiscal Year 2002 as a result of changes in the deferred tax items. This decrease
primarily included the $5.5 million decrease discussed above and a $4.2 million increase
related to the tax effect of the minimum pension liability, which is a component of other
comprehensive income (loss).For the fiscal year ended March 31, 2001 (Fiscal Year 2001), income tax benefit relates
primarily to an adjustment recorded in the fourth quarter to reduce the valuation allowance
by $7.3 million. This adjustment reflected a change in circumstances which resulted in a
judgment that a corresponding amount of our deferred tax assets would be realized in future
years. The adjustment was partially offset by tax expense for income in foreign
jurisdictions. The valuation allowance decreased by $12.6 million (including the $7.3
million decrease discussed above) during Fiscal Year 2001 as a result of changes in the
deferred tax items.(d)
    
    In June 2003, we made a strategic decision to sell the operations of our digital visual
effects business, Digiscope, for a de minimis amount. This resulted in a net loss of
approximately $0.4 million in the quarter ended June 30, 2003, which is net of zero income tax
benefits. As a result of this sale, Digiscope has been accounted for as a discontinued
operation, and accordingly, Digiscopes operations are segregated in our consolidated
financial statements. Sales, cost of sales and selling, general and administrative expenses
attributable to Digiscope for Fiscal Years 2003, 2002 and 2001 have been reclassified and
presented within discontinued operations. Sales attributable to Digiscope for Fiscal Year
2004 were $0.8 million, for Fiscal Years 2003 and 2002 were $3.2 million in each year and for
Fiscal Year 2001 were $6.0 million.(e)
    
    The ratio of earnings to fixed charges is calculated by dividing earnings (representing
consolidated pretax income or loss from continuing operations) before fixed charges by fixed
charges. Fixed charges consist of interest expense, net amortization of debt issuance
expense, and that portion of operating lease rental expense which we deem to be representative
of interest. The deficiency in earnings to cover fixed charges is computed by subtracting
earnings before fixed charges, income taxes and discontinued operations from fixed charges.
The deficiency in earnings required to cover fixed charges for Fiscal Years 2005, 2004 and
2002 was $27.4 million, $16.9 million and $2.9 million, respectively. 12




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##### Table of Contents



(f)
    
    We have included EBITDA because we believe that investors regard EBITDA as a key measure of a
leveraged companys operating performance as it removes the non-operating components of
interest, taxes, depreciation and amortization from the managed operational results of our
business. EBITDA is defined as earnings before net interest expense, income tax expense
(benefit), depreciation and amortization. EBITDA is not a measure of financial performance
under U.S. generally accepted accounting principles and should not be considered an
alternative to net income (loss) (or any other measure of performance under U.S. generally
accepted accounting principles) as a measure of performance or to cash flows from operating,
investing or financing activities as an indicator of cash flows or as a measure of liquidity.
Our calculation of EBITDA may be different from the calculations used by other companies and
therefore comparability may be limited. Certain covenants in our debt instruments are based
on EBITDA, subject to certain adjustments. The following table provides a reconciliation of
EBITDA to net income (loss): Fiscal Year Ended March 31,2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001(In thousands)EBITDA
    
    $
    29,749
    
    
    
    41,054
    
    
    
    54,279
    
    
    
    56,654
    
    
    
    87,111Depreciation and amortization
    
    
    (23,051
    )
    
    
    (24,288
    )
    
    
    (24,451
    )
    
    
    (31,199
    )
    
    
    (34,686
    )Interest expense, net
    
    
    (34,050
    )
    
    
    (34,166
    )
    
    
    (28,584
    )
    
    
    (29,806
    )
    
    
    (32,929
    )Income tax (expense) benefit
    
    
    1,685
    
    
    
    (11,441
    )
    
    
    (1,559
    )
    
    
    5,073
    
    
    
    4,927Net income (loss)
    
    $
    (25,667
    )
    
    
    (28,841
    )
    
    
    (315
    )
    
    
    722
    
    
    
    24,423
 The following items are included in the determination of EBITDA and net income (loss) above: Fiscal Year Ended March 31,2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001(In thousands)Restructuring costs
    
    $
    8,369
    
    
    
    7,768
    
    
    
    1,191
    
    
    
    8,638
    
    
    
    Other charges
    
    
    1,668
    
    
    
    372
    
    
    
    531
    
    
    
    4,282
    
    
    
    Loss on early extinguishment of
debt
    
    
    
    
    
    
    3,196
    
    
    
    
    
    
    
    
    
    
    
    Loss from discontinued operations
    
    
    
    
    
    
    456
    
    
    
    979
    
    
    
    1,403
    
    
    
    633Total
    
    $
    10,037
    
    
    
    11,792
    
    
    
    2,701
    
    
    
    14,323
    
    
    
    633
 13




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##### Table of Contents



ITEM 7.MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS Overview The most important drivers of our results of operations are:  
    
    the relationships we have developed with key long-term customers and the capital we have
devoted to those relationships;
    
    the balance between capacity and demand in our industry sector; and
    
    our experienced management teams clear focus on servicing the retail advertising insert
and newspaper markets. We believe that our willingness to customize and improve customer solutions and our commitment to
technology leadership significantly enhances our ability to develop and maintain lasting
relationships. We provide our print customers with comprehensive services and solutions at our
print facilities and through our premedia services division. In the premedia services business, we
believe that we are one of a small number of companies that can provide a full range of premedia
services, and we use those capabilities to support our print sales. We also manage 14 facilities
for customers at their offices, which enables us to develop strong and long-term relationships with
them. We have experienced significant competitive pricing pressures over the past several years as a
result of a weak retail market, continuing excess industry capacity and the aggressive pricing
strategies of certain competitors. We continue to be committed, however, to providing
comprehensive solutions at competitive prices. We believe that we are one of the lowest cost
producers of retail advertising inserts, and we intend to continue to reduce our overall operating
costs. In our print business, we have reduced, and are continuing to work to reduce, the variable
and fixed costs of production and selling, general and administrative costs through our various
restructuring programs and ongoing disciplined and focused cost reduction initiatives at our print
facilities. In our premedia services business, we have reduced and are continuing to reduce
manufacturing costs and selling, general and administrative expenses primarily through our various
restructuring and cost containment initiatives and through the application of certain digital
premedia production methodologies and technological leadership. See -Recent Performance and
-Our Restructuring and Cost Reduction Initiatives below. We are one of the leading printers of retail advertising inserts in the United States. In Fiscal
Year 2005, retail advertising inserts accounted for 83% of our total print segment sales and in
Fiscal Years 2004 and 2003 accounted for 86% and 87% of our total print segment sales,
respectively. The focus and attention of our entire management team is dedicated to serving the
retail advertising insert market. We have made, and will continue to make, disciplined strategic
capital investments to enable us to maintain our position as a leader in the retail advertising
insert market. In addition to the drivers discussed above, the cost of raw materials used in our print business,
which are primarily paper and ink, affects our results of operations. The cost of paper is a
principal factor in our overall pricing to our customers. As a result, the level of paper costs
and the proportion of paper supplied by our customers have a significant impact on our reported
sales. During Fiscal Year 2003, paper prices were on average at lower levels than comparable
periods in the prior year. During Fiscal Year 2004, paper prices fluctuated and ended at levels
which were higher on average than the prior year. Paper prices generally increased throughout
Fiscal Year 2005. In accordance with industry practice, we generally pass through increases in the
cost of paper to customers in the cost of printed products, while decreases in paper costs
generally result in lower prices to customers. Variances in gross profit margin are impacted by product and customer mix and are also affected by
changes in sales resulting from changes in paper prices and changes in the level of customer
supplied paper. Our gross margin may not be comparable from period to period because of the impact
of changes in paper prices and the levels of customer supplied paper included within sales. 14




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##### Table of Contents



A portion of our print and premedia services business is seasonal in nature, particularly those
revenues that are derived from retail advertising inserts. Generally, our sales from retail
advertising inserts are highest during the following advertising periods: the Spring advertising
season from March to May, the Back-to-School advertising season from July to August, and the
Thanksgiving/Christmas advertising season from October to December. Sales of Sunday newspaper
comics are not subject to significant seasonal fluctuations. Our strategy includes, and will
continue to include, the mitigation of the seasonality of our print business by increasing our
sales to customers whose own sales are less seasonal, such as food and drug companies, which
utilize retail advertising inserts more frequently. Recent Performance During Fiscal Year 2005, we continued to operate in a very competitive market environment. Our
profitability was negatively impacted by the competitive pricing environment in both the print and
premedia segments. Our print production volume for the full year decreased approximately 13% from
Fiscal Year 2004. As a result of aggressive competitive bidding and continued weak pricing due to
a modest amount of excess industry capacity, we anticipate that we will continue to operate in a
very competitive pricing environment in the fiscal year ending March 31, 2006 (Fiscal Year 2006). We have been extremely focused on improved productivity and disciplined cost management. During
Fiscal Year 2005, we have been able to partially offset the negative impact of combined volume
losses and the negative pricing environment through efficiencies resulting from our various
restructuring initiatives and other cost reduction and productivity improvement programs across our
print and premedia operations as well as reductions in our selling, general and administrative
expense categories (see -Our Restructuring Results and Cost Reduction Initiatives below). We
anticipate continued improvements in our cost structure during Fiscal Year 2006 related to these
various restructuring programs and cost reduction initiatives. In April 2005, we executed a plan resulting in the sale of our print facility located in Pittsburg,
California for an aggregate selling price of approximately $8.1 million (including $0.1 million of
miscellaneous closing and settlement costs). See note 4 to our consolidated financial statements
appearing elsewhere in this Report. This action will improve our profitability and has improved
our liquidity. This facility was closed in March 2005 as a result of an approved restructuring
plan (see -Our Restructuring Results and Cost Reduction Initiatives below). In May 2005, we further improved our overall liquidity position through the execution of an amended
and restated credit agreement with Banc of America Securities as Sole Lead Arranger and Bank of
America N.A., as Administrative Agent, and certain lenders, which resulted in the refinancing of
our $70 million senior secured revolving credit facility with a new $90 million credit facility
(see -Liquidity and Capital Resources below and note 7 to our consolidated financial statements
found elsewhere in this Report). Our Restructuring Results and Cost Reduction Initiatives We have successfully implemented significant cost reductions annually over the past several years.
In the fourth quarter of Fiscal Year 2002, we approved a restructuring plan that was designed to
improve asset utilization to achieve new levels of operating efficiencies and greater profitability
for our print and premedia services segments. The key initiatives under this restructuring plan
included:  
    
    closing our Hanover, Pennsylvania print facility and our West Palm Beach, Florida premedia services facility;
    
    downsizing our Buffalo, New York premedia services facility; and
    
    eliminating certain administrative positions. These actions resulted in the elimination of 189 positions within our company. A large portion of work performed at the closed and downsized facilities, as well as the equipment
removed from those facilities, was reallocated to our other print and premedia services facilities.
These restructuring initiatives allowed us to improve our overall asset utilization.
Profitability was improved as a result of the reduction in overhead costs while we continued to
service our print customers and many of premedia services customers from the closed and downsized
facilities at our other print and premedia services facilities. In the fourth quarter of Fiscal Year 2003, we implemented a restructuring plan designed to further
improve profitability. We closed our premedia services facility in Nashville, Tennessee, which
allowed us to reallocate certain employees and equipment from that facility to our other
facilities. This plan resulted in the elimination of 30 positions within our company. 15




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In July 2003, we implemented a restructuring plan to further reduce selling, general and
administrative expenses in our print and premedia services segments. This plan resulted in the
termination of four administrative employees. In January 2004, we approved a restructuring plan for the print and premedia services segments that
was designed to improve operating efficiency and profitability. This plan included a consolidation
of capacity and the related downsizing of our print facility in Stevensville, Ontario, a reduction
of personnel in other print and premedia facilities and the elimination of certain selling and
administrative positions. These actions included the elimination of 208 positions within our
company. Our restructuring initiatives implemented in Fiscal Year 2005 included the approval of three
restructuring programs in the quarter ended March 31, 2005. These programs included initiatives
which resulted in (1) reduced headcount in the manufacturing and the selling and administrative
areas, (2) the closure and sale of the Pittsburg, California print facility and (3) the
consolidation of our two premedia services facilities in New York, New York. In final form, these
programs resulted in the elimination of 206 positions within our company. These most recent
initiatives further signify our discipline and ongoing commitment to maintain the most competitive
and efficient cost structure possible. In summary, our restructuring initiatives since January 2002 have resulted in the elimination of
approximately 637 positions within our company, the closure of two print facilities and two
premedia services facilities, the downsizing of one print facility and one premedia services
facility and the consolidation of two premedia services facilities. As a result of these actions,
we recognized restructuring expenses of $8.4 million, $7.7 million, $1.2 million and $8.6 million
in Fiscal Years 2005, 2004, 2003 and 2002, respectively. In Fiscal Years 2005, 2004, 2003 and
2002, we also recorded other charges associated with these programs of $1.6 million, $0.4 million,
$0.5 million and $4.3 million, respectively. We expect to make cash payments of approximately $7.1
million of the accrued restructuring costs during Fiscal Year 2006, $1.5 million during the fiscal
year ending March 31, 2007 (Fiscal Year 2007), approximately $0.5 million, in the fiscal year
ending March 31, 2008 (Fiscal Year 2008) and $0.8 million in total for years subsequent to Fiscal
Year 2008 associated with these programs. See note 15 to our consolidated financial statements
appearing elsewhere in this Report. In addition to benefits related to the above restructuring programs, we have also been successful
in improving our efficiencies and reducing our overall costs through ongoing productivity and
income improvement initiatives at our operating facilities. We have also been successful in
reducing our selling, general and administrative cost structure. The following table summarizes the expense (income) recorded relating to the restructuring and
other charges incurred in association with our restructuring plans by segment for the three most
recent fiscal years (in thousands): Fiscal Year
    
    
    Fiscal Year
    
    
    Fiscal Year
    
    
    Three Year2003
    
    
    2004
    
    
    2005
    
    
    TotalFiscal Year 2002 Plan CostsRestructuring costs:Severance & other employee costs  Print
    
    $
    (402
    )
    
    
    120
    
    
    
    (29
    )
    
    
    (311
    )Severance & other employee costs  Premedia
    
    
    (364
    )
    
    
    (19
    )
    
    
    
    
    
    
    (383
    )Lease termination costs  Print
    
    
    470
    
    
    
    584
    
    
    
    739
    
    
    
    1,793Lease termination costs  Premedia
    
    
    259
    
    
    
    (235
    )
    
    
    
    
    
    
    24Other costs  Print
    
    
    (68
    )
    
    
    (24
    )
    
    
    
    
    
    
    (92
    )Other costs  Premedia
    
    
    105
    
    
    
    (20
    )
    
    
    
    
    
    
    85Total restructuring costs
    
    
    
    
    
    
    406
    
    
    
    710
    
    
    
    1,116
 16




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##### Table of Contents



Fiscal Year
    
    
    Fiscal Year
    
    
    Fiscal Year
    
    
    Three Year2003
    
    
    2004
    
    
    2005
    
    
    TotalFiscal Year 2003 Plan CostsRestructuring costs:Severance & other employee costs  Print
    
    
    614
    
    
    
    (242
    )
    
    
    
    
    
    
    372Severance & other employee costs  Premedia
    
    
    464
    
    
    
    (87
    )
    
    
    (5
    )
    
    
    372Lease termination costs  Premedia
    
    
    19
    
    
    
    (7
    )
    
    
    
    
    
    
    12Other costs  Premedia
    
    
    94
    
    
    
    164
    
    
    
    (11
    )
    
    
    247Total restructuring costs
    
    
    1,191
    
    
    
    (172
    )
    
    
    (16
    )
    
    
    1,003Other charges:Asset impairment charge  Print
    
    
    197
    
    
    
    
    
    
    
    
    
    
    
    197Asset impairment charge  Premedia
    
    
    334
    
    
    
    
    
    
    
    
    
    
    
    334Total other charges
    
    
    531
    
    
    
    
    
    
    
    
    
    
    
    531July 2003 Plan CostsRestructuring costs:Severance & other employee costs  Print
    
    
    
    
    
    
    1,479
    
    
    
    12
    
    
    
    1,491Severance & other employee costs  Premedia
    
    
    
    
    
    
    287
    
    
    
    (12
    )
    
    
    275Total restructuring costs
    
    
    
    
    
    
    1,766
    
    
    
    
    
    
    
    1,766January 2004 Plan CostsRestructuring costs:Severance & other employee costs  Print
    
    
    
    
    
    
    4,692
    
    
    
    (234
    )
    
    
    4,458Severance & other employee costs  Premedia
    
    
    
    
    
    
    498
    
    
    
    (107
    )
    
    
    391Lease termination costs  Print
    
    
    
    
    
    
    117
    
    
    
    (3
    )
    
    
    114Other costs  Print
    
    
    
    
    
    
    386
    
    
    
    (275
    )
    
    
    111Other costs  Premedia
    
    
    
    
    
    
    75
    
    
    
    (75
    )
    
    
    Total restructuring costs
    
    
    
    
    
    
    5,768
    
    
    
    (694
    )
    
    
    5,074Other charges:Asset impairment charge  Print
    
    
    
    
    
    
    372
    
    
    
    
    
    
    
    372Total other charges
    
    
    
    
    
    
    372
    
    
    
    
    
    
    
    372Fiscal Year 2005 Plant and
SG&A Reduction Plan CostsRestructuring costs:Severance & other employee costs  Print
    
    
    
    
    
    
    
    
    
    
    3,044
    
    
    
    3,044Severance & other employee costs  Premedia
    
    
    
    
    
    
    
    
    
    
    458
    
    
    
    458Other Costs  Print
    
    
    
    
    
    
    
    
    
    
    200
    
    
    
    200Other costs  Premedia
    
    
    
    
    
    
    
    
    
    
    50
    
    
    
    50Total restructuring costs
    
    
    
    
    
    
    
    
    
    
    3,752
    
    
    
    3,752Fiscal Year 2005 Pittsburg
Facility Closure Plan CostsRestructuring costs:Severance & other employee costs  Print
    
    
    
    
    
    
    
    
    
    
    2,293
    
    
    
    2,293Lease termination costs  Print
    
    
    
    
    
    
    
    
    
    
    803
    
    
    
    803Other costs  Print
    
    
    
    
    
    
    
    
    
    
    40
    
    
    
    40Total restructuring costs
    
    
    
    
    
    
    
    
    
    
    3,136
    
    
    
    3,136Other charges:Asset impairment charge  Print
    
    
    
    
    
    
    
    
    
    
    1,266
    
    
    
    1,266Total other charges
    
    
    
    
    
    
    
    
    
    
    1,266
    
    
    
    1,266
 17




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##### Table of Contents



Fiscal Year
    
    
    Fiscal Year
    
    
    Fiscal Year
    
    
    Three Year2003
    
    
    2004
    
    
    2005
    
    
    TotalFiscal Year 2005 New York Premedia
Consolidation Plan CostsRestructuring costs:Severance & other employee costs  Premedia
    
    
    
    
    
    
    
    
    
    
    195
    
    
    
    195Lease termination costs  Premedia
    
    
    
    
    
    
    
    
    
    
    1,271
    
    
    
    1,271Other costs  Premedia
    
    
    
    
    
    
    
    
    
    
    15
    
    
    
    15Total restructuring costs
    
    
    
    
    
    
    
    
    
    
    1,481
    
    
    
    1,481Other charges:Asset impairment charge  Premedia
    
    
    
    
    
    
    
    
    
    
    402
    
    
    
    402Total other charges
    
    
    
    
    
    
    
    
    
    
    402
    
    
    
    402Total restructuring costs
    
    
    1,191
    
    
    
    7,768
    
    
    
    8,369
    
    
    
    17,328Total other charges
    
    
    531
    
    
    
    372
    
    
    
    1,668
    
    
    
    2,571Total restructuring costs and other charges
    
    $
    1,722
    
    
    
    8,140
    
    
    
    10,037
    
    
    
    19,899
 The following table summarizes our historical results of continuing operations for Fiscal
Years 2005, 2004 and 2003. Fiscal Year Ended March 31,2005
    
    
    2004
    
    
    2003(Dollars in thousands)SalesPrint
    
    $
    393,922
    
    
    
    418,004
    
    
    
    463,071Premedia Services
    
    
    55,591
    
    
    
    53,098
    
    
    
    54,068Total
    
    $
    449,513
    
    
    
    471,102
    
    
    
    517,139Gross ProfitPrint
    
    $
    30,575
    
    
    
    47,537
    
    
    
    57,826Premedia Services
    
    
    15,293
    
    
    
    14,239
    
    
    
    13,818Other
    
    
    4
    
    
    
    5
    
    
    
    2Total
    
    $
    45,872
    
    
    
    61,781
    
    
    
    71,646Gross MarginPrint
    
    
    7.8
    %
    
    
    11.4
    %
    
    
    12.5
    %Premedia Services
    
    
    27.5
    %
    
    
    26.8
    %
    
    
    25.6
    %Total
    
    
    10.2
    %
    
    
    13.1
    %
    
    
    13.9
    %
 18




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##### Table of Contents



Fiscal Year Ended March 31,2005
    
    
    2004
    
    
    2003(Dollars in thousands)EBITDAPrint (a)
    
    $
    22,997
    
    
    
    38,789
    
    
    
    52,415Premedia Services (a)
    
    
    10,059
    
    
    
    9,564
    
    
    
    7,160Other (b)
    
    
    (3,307
    )
    
    
    (7,299
    )
    
    
    (5,296
    )Total
    
    $
    29,749
    
    
    
    41,054
    
    
    
    54,279EBITDA MarginPrint
    
    
    5.8
    %
    
    
    9.3
    %
    
    
    11.3
    %Premedia Services
    
    
    18.1
    %
    
    
    18.0
    %
    
    
    13.2
    %Total
    
    
    6.6
    %
    
    
    8.7
    %
    
    
    10.5
    %
   (a)
    
    EBITDA for the print and premedia services segments in Fiscal Year 2005 includes the impact
of restructuring costs and other charges of $7.8 million and $2.2 million, respectively. In
Fiscal Year 2004, EBITDA for the print and premedia services segments includes the impact of
restructuring costs and other charges of $7.5 million and $0.6 million, respectively. EBITDA
for the print and premedia services segments in Fiscal Year 2003 includes the impact of
restructuring costs and other charges of $0.8 million and $0.9 million, respectively. For
additional information about our restructuring plan, see   Our Restructuring Results
and Cost Reduction Initiatives above.(b)
    
    Other operations include corporate general and administrative expenses, as well as revenues
and expenses associated with our digital visual effects business, Digiscope. Digiscope was
sold on June 5, 2003. The EBITDA loss of Digiscope included in the EBITDA table above for
Fiscal Years 2004 and 2003 was ($0.4) million and ($0.6) million, respectively. In addition,
other operations includes the write-off of deferred financing costs related to the 2003
Refinancing, defined below, of $3.2 million in Fiscal Year 2004. 19




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##### Table of Contents



EBITDA is presented and discussed because management believes that investors regard EBITDA as a key
measure of a leveraged companys operating performance as it removes the non-operating components
of interest, taxes, depreciation and amortization from the managed operational results of our
business. EBITDA is defined as earnings before net interest expense, income tax expense
(benefit), depreciation and amortization. EBITDA Margin is defined as EBITDA as a percentage of
net sales. EBITDA is not a measure of financial performance under U.S. generally accepted
accounting principles and should not be considered an alternative to net income (loss) (or any
other measure of performance under U.S. generally accepted accounting principles) as a measure of
performance or to cash flows from operating, investing or financing activities as an indicator of
cash flows or as a measure of liquidity. Certain covenants in the indenture governing the 10%
Notes and the Revolving Credit Facility, as amended, (defined below) are based on, or include
EBITDA, subject to certain adjustments. The following table provides reconciliation (in thousands)
of EBITDA to net income (loss): PremediaPrint
    
    
    Services
    
    
    Other
    
    
    TotalFiscal Year 2005EBITDA
    
    $
    22,997
    
    
    
    10,059
    
    
    
    (3,307
    )
    
    
    29,749Depreciation and amortization
    
    
    (19,867
    )
    
    
    (3,184
    )
    
    
    
    
    
    
    (23,051
    )Interest expense, net
    
    
    
    
    
    
    
    
    
    
    (34,050
    )
    
    
    (34,050
    )Income tax benefit
    
    
    
    
    
    
    
    
    
    
    1,685
    
    
    
    1,685Net income (loss)
    
    $
    3,130
    
    
    
    6,875
    
    
    
    (35,672
    )
    
    
    (25,667
    )Fiscal Year 2004EBITDA
    
    $
    38,789
    
    
    
    9,564
    
    
    
    (7,299
    )
    
    
    41,054Depreciation and amortization
    
    
    (20,733
    )
    
    
    (3,529
    )
    
    
    (26
    )
    
    
    (24,288
    )Interest expense, net
    
    
    
    
    
    
    
    
    
    
    (34,166
    )
    
    
    (34,166
    )Income tax expense
    
    
    
    
    
    
    
    
    
    
    (11,441
    )
    
    
    (11,441
    )Net income (loss)
    
    $
    18,056
    
    
    
    6,035
    
    
    
    (52,932
    )
    
    
    (28,841
    )Fiscal Year 2003EBITDA
    
    $
    52,415
    
    
    
    7,160
    
    
    
    (5,296
    )
    
    
    54,279Depreciation and amortization
    
    
    (19,760
    )
    
    
    (4,336
    )
    
    
    (355
    )
    
    
    (24,451
    )Interest expense, net
    
    
    
    
    
    
    
    
    
    
    (28,584
    )
    
    
    (28,584
    )Income tax expense
    
    
    
    
    
    
    
    
    
    
    (1,559
    )
    
    
    (1,559
    )Net income (loss)
    
    $
    32,655
    
    
    
    2,824
    
    
    
    (35,794
    )
    
    
    (315
    )
 20




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##### Table of Contents



Historical Results of Operations Fiscal Year 2005 vs. Fiscal Year 2004 Total sales decreased 4.6% to $449.5 million in Fiscal Year 2005 from $471.1 million in Fiscal Year
2004. This decrease reflected a decrease in print sales of $24.1 million, or 5.8%, offset in part
by an increase in premedia services sales of $2.5 million, or 4.7%. Total gross profit decreased
to $45.9 million, or 10.2% of sales, in Fiscal Year 2005 from $61.8 million, or 13.1% of sales, in
Fiscal Year 2004. EBITDA decreased to $29.7 million, or 6.6% of sales, in Fiscal Year 2005 from
$41.1 million, or 8.7% of sales, in Fiscal Year 2004. See the discussion of these changes by
segment below. Print Sales.Print sales decreased $24.1 million to $393.9 million in Fiscal Year 2005 from $418.0
million in Fiscal Year 2004. The decrease in Fiscal Year 2005 includes a decrease in print
production volume of approximately 13% and the impact of continued competitive pricing pressures.
The volume decline was largely attributable to certain share losses associated with the aggressive
pricing strategies of certain competitors. These decreases were offset in part by the impact of
increased paper prices and a decrease in customer supplied paper. See   Value Added
Revenue and Print Impressions for the Print Segment below. Gross Profit.Print gross profit decreased $16.9 million to $30.6 million in Fiscal Year 2005 from
$47.5 million in Fiscal Year 2004. Print gross margin decreased to 7.8% in Fiscal Year 2005 from
11.4% in Fiscal Year 2004. The decrease in gross profit includes the impact of reduced print
production volume and continued competitive pricing pressures. These decreases were offset in part
by net benefits from productivity improvements and various cost reduction programs at our
facilities. The decrease in gross margin includes these items, coupled with the impact of
increased paper prices and decreased levels of customer supplied paper reflected in sales. Our
gross margin may not be comparable from period to period because of the impact of changes in paper
prices and levels of customer supplied paper included within sales. Selling, General and Administrative Expenses.Print selling, general and administrative expenses
decreased $2.3 million to $19.5 million, or 5.0% of print sales, in Fiscal Year 2005, from $21.8
million, or 5.2% of print sales, in Fiscal Year 2004. This decrease includes benefits related to
various cost containment initiatives and the impact of the change in our estimates related to the
allowance for doubtful accounts. Restructuring Costs and Other Charges.Restructuring costs and other charges increased $0.3 million
to $7.8 million in Fiscal Year 2005 from $7.5 million in Fiscal Year 2004. See   Our
Restructuring Results and Cost Reduction Initiatives above. EBITDA.As a result of the above factors and excluding the impact of depreciation and amortization,
EBITDA for the print business decreased $15.8 million to $23.0 million in Fiscal Year 2005 from
$38.8 million in Fiscal Year 2004. Premedia Services Sales.Premedia services sales increased $2.5 million to $55.6 million in Fiscal Year 2005 from
$53.1 million in Fiscal Year 2004. These results are attributable primarily to increases in our
premedia production volume, including increases in our premedia packaging business. These
increases are offset in part by continued competitive pricing pressures in this segment. Gross Profit.Premedia services gross profit increased $1.1 million to $15.3 million in Fiscal
Year 2005 from $14.2 million in Fiscal Year 2004. Premedia services gross margin increased to
27.5% in Fiscal Year 2005 from 26.8% in Fiscal Year 2004. The increases in gross profit and gross
margin reflect increased premedia production volume and the impact of continued cost containment
initiatives. Selling, General and Administrative Expenses.Premedia services selling, general and
administrative expenses decreased $1.3 million to $6.2 million, or 11.2% of premedia services
sales in Fiscal Year 2005, from $7.5 million, or 14.0% of premedia services sales in Fiscal Year
2004. This decrease includes reductions in both the selling and administrative areas due to our
ongoing cost containment initiatives. Restructuring Costs and Other Charges.Restructuring costs and other charges increased $1.6 million
to $2.2 million in Fiscal Year 2005 from $0.6 million in Fiscal Year 2004. See   Our
Restructuring Results and Cost Reduction Initiatives above. 21




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##### Table of Contents



EBITDA.As a result of the above factors and excluding the impact of depreciation and
amortization, premedia services EBITDA increased $0.4 million to $10.0 million in Fiscal Year 2005
from $9.6 million in Fiscal Year 2004. Other Operations Other operations consist primarily of corporate general and administrative expenses. In Fiscal
Year 2005, EBITDA for other operations improved to a loss of $3.3 million from a loss of $7.3
million in Fiscal Year 2004. This change is primarily related to a $3.2 million loss on early
extinguishment of debt related to the write-off of deferred financing costs associated with our old
bank credit agreement and the 12  3/4% Notes and a $0.4 million loss related to the discontinued
operations of Digiscope in Fiscal Year 2004. The improvement also includes the impact of
reductions in certain employee related expenses during Fiscal Year 2005 as a result of our ongoing
cost containment initiatives. Interest Expense In Fiscal Year 2005, interest expense decreased slightly to $34.1 million from $34.2 million in
Fiscal Year 2004. This decrease includes $1.7 million of incremental interest expense included in
Fiscal Year 2004 related to the 30-day call provision associated with the 12 3/4% Notes, offset in
part by higher overall levels of indebtedness. See note 7 to our consolidated financial statements
appearing elsewhere in this Report. Income Taxes In Fiscal Year 2005, tax expense improved to a benefit of $1.7 million from expense of $11.4
million in Fiscal Year 2004. This improvement was primarily due to a Fiscal Year 2004 adjustment
to the valuation allowance of $12.8 million, which resulted in a corresponding debit to deferred
income tax expense, net of a Fiscal Year 2004 adjustment of $2.2 million recorded to reflect a
change in estimate with respect to our income tax liability, and amounts recorded in Fiscal Year
2005 to reflect the tax benefit from losses in foreign jurisdictions. The improvement also
includes a benefit of $0.4 million, recorded in Fiscal Year 2005, to reflect a change a change in
estimate with respect to our income tax liability. The Fiscal Year 2004 adjustment to the
valuation allowance of $12.8 million reflected a change in circumstances which resulted in a
judgment that, based on the provisions of SFAS 109 that restrict our ability to consider forecasts
of future income, a corresponding amount of deferred tax assets may not be realized. The change in
circumstances arose from our assessment of the economic climate, particularly the continuance of
competitive pricing pressures in our industry, and the expected increase in annual interest costs
arising from the issuance of our 10% Notes in July 2003 (see note 8 to our consolidated financial
statements appearing elsewhere in this Report) that provided negative evidence about our ability to
realize certain deferred tax assets. We will reverse our valuation allowance into income when and
to the extent sufficient positive evidence arises to support the realization of the related
deferred tax assets. Discontinued Operations In June 2003, we sold the operations of Digiscope for a de minimis amount. This resulted in a net
loss of approximately $0.4 million in the quarter ended June 30, 2003, which is net of zero income
tax benefits. As a result of this sale, Digiscope has been accounted for as a discontinued
operation. Sales attributable to Digiscope for Fiscal Year 2004 were $0.8 million. Net Loss As a result of the factors discussed above, our net loss improved to $25.7 million in Fiscal Year
2005 from $28.8 million in Fiscal Year 2004. Included in the Fiscal Year 2005 net loss were
restructuring costs and other charges of $10.0 million. Included in the Fiscal Year 2004 net loss
were the following charges which aggregate $24.1 million: (1) $8.1 million of restructuring costs
and other charges, (2) net non-cash deferred tax expense of $10.6 million associated with changes
in estimates related to our income tax accounts, (3) refinancing related expenses of $4.9 million
including the loss on early extinguishment of debt and incremental interest related to the 30-day
call provision associated with the 12  3/4% Notes and (4) discontinued operations losses of $0.5
million. 22




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##### Table of Contents



Minimum Pension Liability In compliance with Statement of Financial Accounting Standards No. 87, Employers Accounting for
Pensions (SFAS 87), we decreased our minimum pension liability to approximately $19.2 million in
Fiscal Year 2005 from approximately $20.2 million in Fiscal Year 2004. This decrease includes the
impact of pension contributions to our plans and investment market returns during the period,
offset in part by pension payments to plan participants, plan expenses and a reduction in our
discount rate from 6.5% to 6.25%. This liability represents the amount by which the accumulated
benefit obligation exceeds the fair value of the plan assets at March 31, 2005 and March 31, 2004.
The recording of this liability had no impact on our consolidated statements of operations for
Fiscal Years 2005 and 2004, but was recorded as a component of other comprehensive income (loss) in
our consolidated statements of stockholders deficit at March 31, 2005 and March 31, 2004. Fiscal Year 2004 vs. Fiscal Year 2003 Total sales decreased 8.9% to $471.1 million in Fiscal Year 2004 from $517.1 million in Fiscal Year
2003. This decrease reflected a decrease in print sales of $45.1 million, or 9.7%, and a decrease
in premedia services sales of $1.0 million, or 1.8%. Total gross profit decreased to $61.8
million, or 13.1% of sales, in Fiscal Year 2004 from $71.6 million, or 13.9% of sales, in Fiscal
Year 2003. EBITDA decreased to $41.1 million, or 8.7% of sales, in Fiscal Year 2004 from $54.3
million, or 10.5% of sales, in Fiscal Year 2003. See the discussion of these changes by segment
below. Print Sales.Print sales decreased $45.1 million to $418.0 million in Fiscal Year 2004 from $463.1
million in Fiscal Year 2003. The decrease in Fiscal Year 2004 was largely attributable to an
increase in customer supplied paper, the impact of competitive pricing pressures and certain
changes in product and customer mix. These decreases were offset in part by the impact of
increased paper prices and a slight increase in print production volume (see Value Added Revenue
and Print Impressions for the Print Segment below). Gross Profit.Print gross profit decreased $10.3 million to $47.5 million in Fiscal Year 2004 from
$57.8 million in Fiscal Year 2003. Print gross margin decreased to 11.4% in Fiscal Year 2004 from
12.5% in Fiscal Year 2003. The decrease in gross profit includes the impact of competitive pricing
pressures, certain changes in product and customer mix, foreign exchange losses associated with our
Canadian operations and increases in certain operating expenses including energy, pension and
health costs. These decreases were offset in part by the slight increase in print production
volume. The decrease in gross margin includes these items, coupled with the impact of increased
paper prices and increased levels of customer supplied paper reflected in sales. Our gross margin
may not be comparable from period to period because of the impact of changes in paper prices and
levels of customer supplied paper included within sales. Selling, General and Administrative Expenses.Print selling, general and administrative expenses

decreased $2.2 million to $21.8 million, or 5.2% of print sales, in Fiscal Year 2004, from $24.0
million, or 5.2% of print sales, in Fiscal Year 2003. This decrease includes benefits related to
various cost containment initiatives, offset in part by certain other increases including the
impact of the change in our estimates related to the allowance for doubtful accounts. Restructuring Costs and Other Charges.Restructuring costs and other charges increased $6.7 million
to $7.5 million in Fiscal Year 2004 from $0.8 million in Fiscal Year 2003. See   Our
Restructuring Results and Cost Reduction Initiatives above. EBITDA.As a result of the above factors and excluding the impact of depreciation and amortization,
EBITDA for the print business decreased $13.6 million to $38.8 million in Fiscal Year 2004 from
$52.4 million in Fiscal Year 2003. Premedia Services Sales.Premedia services sales decreased $1.0 million to $53.1 million in Fiscal Year 2004 from
$54.1 million in Fiscal Year 2003. The decrease in Fiscal Year 2004 includes the impact of
competitive pricing pressures and the continuance of weak overall premedia market conditions offset
in part by increases in our packaging premedia business. Gross Profit.Premedia services gross profit increased $0.4 million to $14.2 million in Fiscal
Year 2004 from $13.8 million in Fiscal Year 2003. Premedia services gross margin increased to
26.8% in Fiscal Year 2004 from 25.6% in Fiscal Year 2003. The increases in gross profit and gross
margin were primarily the result of reduced manufacturing costs related to various cost containment
programs, the closure of a premedia services facility and the increase in our packaging premedia
business. 23




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##### Table of Contents



Selling, General and Administrative Expenses.Premedia services selling, general and
administrative expenses decreased $2.3 million to $7.5 million, or 14.0% of premedia services
sales in Fiscal Year 2004, from $9.8 million, or 18.1% of premedia services sales in Fiscal Year
2003. This decrease includes reductions in both the selling and administrative areas due to
various cost containment initiatives. Restructuring Costs and Other Charges.Restructuring costs and other charges decreased $0.3 million
to $0.6 million in Fiscal Year 2004 from $0.9 million in Fiscal Year 2003. See   Our
Restructuring Results and Cost Reduction Initiatives above. EBITDA.As a result of the above factors and excluding the impact of depreciation and
amortization, premedia services EBITDA increased $2.4 million to $9.6 million in Fiscal Year 2004
from $7.2 million in Fiscal Year 2003. Other Operations Other operations consist primarily of corporate general and administrative expenses. In Fiscal
Year 2004, EBITDA for other operations increased to a loss of $7.3 million from a loss of $5.3
million in Fiscal Year 2003. This increase primarily includes the impact of a $3.2 million loss on
early extinguishment of debt related to the write-off of deferred financing costs associated with
our old bank credit agreement and the 12  3/4% Notes, offset in part by reduced losses related to the
discontinued operations of Digiscope and reductions in certain employee related expenses due
primarily to ongoing cost containment initiatives. Interest Expense In Fiscal Year 2004, interest expense increased 19.2% to $34.2 million from $28.7 million in Fiscal
Year 2003. This increase is largely due to the higher levels of indebtedness associated with our
2003 Refinancing. In addition, interest expense in Fiscal Year 2004 includes incremental interest
expense of approximately $1.7 million related to the 30-day call provision associated with the 12 3/4%
Notes. See note 7 to our consolidated financial statements appearing elsewhere in this Report. Income Taxes In Fiscal Year 2004, tax expense increased to $11.4 million from $1.6 million in Fiscal Year 2003.
This increase was primarily due to a Fiscal Year 2004 adjustment to the valuation allowance of
$12.8 million, which resulted in a corresponding debit to deferred income tax expense. This
adjustment reflected a change in circumstances which resulted in a judgment that, based on
provisions of SFAS 109 that restrict our ability to consider forecasts of future income, a
corresponding amount of deferred tax assets may not be realized. The change in circumstances arose
from our assessment of the economic climate, particularly the continuance of competitive pricing
pressures in our industry, and the expected increase in annual interest costs arising from the
issuance of our 10% Notes in July 2003 (see note 8 to the consolidated financial statements
appearing elsewhere in this Report) that provided negative evidence about our ability to realize
certain deferred tax assets. We will reverse our valuation allowance into income when and to the
extent sufficient positive evidence arises to support the realization of the related deferred tax
assets. The increase in tax expense from the adjustment to the valuation allowance was partially
offset by an adjustment of $2.2 million recorded in Fiscal Year 2004 to reflect a change in
estimate with respect to our income tax liability. Discontinued Operations In June 2003, we sold the operations of Digiscope for a de minimis amount. This resulted in a net
loss of approximately $0.4 million in the quarter ended June 30, 2003, which is net of zero income
tax benefits. As a result of this sale, Digiscope has been accounted for as a discontinued
operation, and accordingly, Digiscopes operating results for Fiscal Years 2004 and 2003 have been
classified and presented within discontinued operations in our consolidated financial statements
appearing elsewhere in this Report. Sales attributable to Digiscope for Fiscal Years 2004 and 2003
were $0.8 million and $3.2 million, respectively. Net Loss As a result of the factors discussed above, our net loss increased to $28.8 million in Fiscal Year
2004 from $0.3 million in Fiscal Year 2003. Included in the Fiscal Year 2004 net loss are the
following charges which aggregate $24.1 million: (1) $8.1 million of restructuring costs and other
charges, (2) net non-cash deferred tax expense of
$10.6 million associated with
changes in estimates related to our income tax accounts, (3) refinancing related expenses of $4.9
million including the loss 24




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on early extinguishment of debt and incremental interest related to the 30-day call provision
associated with the 12 3/4% Notes and (4) discontinued operations losses of $0.5 million. The Fiscal
Year 2003 net loss included $1.7 million of restructuring costs and other charges. Minimum Pension Liability In compliance with SFAS 87, we decreased our minimum pension liability to approximately $20.2
million in Fiscal Year 2004 from approximately $23.4 million in Fiscal Year 2003. This decrease
includes the impact of pension contributions to our plans and investment market returns during the
period, offset in part by pension payments to plan participants, plan expenses and a reduction in
our discount rate from 7.0% to 6.5%. This liability represents the amount by which the accumulated
benefit obligation exceeds the fair value of the plan assets at March 31, 2004 and March 31, 2003.
The recording of this liability had no impact on our consolidated statements of operations for
Fiscal Years 2004 and 2003, but was recorded as a component of other comprehensive income (loss) in
our consolidated statements of stockholders deficit at March 31, 2004 and March 31, 2003. Liquidity and Capital Resources On July 3, 2003, we sold $280 million aggregate principal amount of our 10% Notes as part of a
recapitalization involving Graphics, Holdings and certain affiliates of our Company, and also
entered into a $70 million senior secured revolving credit facility maturing on July 3, 2008, with
a syndicate of lenders (the Revolving Credit Facility), (collectively the 2003 Refinancing),
(see note 7 to our consolidated financial statements appearing elsewhere in this Report). The
primary objectives of this refinancing included the placement of a long-term capital structure
which (1) eliminated the near-term amortization requirements of our old bank credit agreement and
our 12 3/4% Notes, (2) provided strong liquidity and greater operating and financial flexibility and
(3) reduced our overall cost of capital. As part of the 2003 Refinancing, we repaid substantially
all existing indebtedness (excluding capital leases) through:  
    
    the repayment of all amounts outstanding under our old bank credit agreement, and the
concurrent termination of all related commitments thereunder;
    
    the issuance of letters of credit under the Revolving Credit Facility to replace
outstanding letters of credit; and
    
    effective August 3, 2003, the redemption of all of the 12 3/4% Notes, at a redemption price
equal to 100% of their aggregate principal amount, plus accrued and unpaid interest
thereon. In addition, we repurchased, and concurrently retired, all 5,223 outstanding shares of preferred
stock of Holdings, and canceled all outstanding options to purchase shares of preferred stock of
Holdings held by certain key officers, for an aggregate purchase price of $56.9 million. The
canceled options would have been exercisable for 582 shares of preferred stock of Holdings. As part of the 2003 Refinancing, we incurred $14.3 million of deferred financing fees through March
31, 2004. Of the total deferred financing fees, $4.9 million was paid to affiliates of Morgan
Stanley for the services they performed in conjunction with the Revolving Credit Facility and the
original private placement of the 10% Notes. We also incurred a charge of approximately $3.2
million in Fiscal Year 2004 related to the write-off of deferred financing costs associated with
the old bank credit agreement and the 12 3/4% Notes. In addition, we recorded incremental interest
expense of approximately $1.7 million in Fiscal Year 2004 related to the 30-day call provision
associated with the 12 3/4% Notes. Our primary sources of liquidity have been cash provided by operating activities and borrowings
under the Revolving Credit Facility. The Revolving Credit Facility, as amended, provides for:  
    
    maximum borrowings of $70 million subject to a borrowing base limitation based on
certain percentages of eligible accounts receivable, eligible inventory and the appraised
value of eligible machinery and equipment and real estate, subject to certain limitations,
maturing on July 3, 2008, including a letter of credit sub-facility of up to $40 million.
The borrowing base arrangement includes a provision whereby proceeds from collection of
substantially all of the Companys accounts receivable are deposited into bank accounts
which, under certain circumstances, are applied daily toward repayment of borrowings
outstanding, if any, under the Revolving Credit Facility. At March 31, 2005, we had borrowings outstanding under the Revolving Credit Facility totaling $16.0
million and had letters of credit outstanding of approximately $28.2 million. We had additional
borrowing availability of approximately $25.6 million. Scheduled repayments of existing capital
lease obligations during Fiscal Year 2006 are approximately $4.7 million. 25




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At March 31, 2005, we were in compliance with the financial covenant requirements set forth in the
Revolving Credit Facility, as amended. During the Fiscal Year 2005, we used net revolver borrowings of $16.0 million and $0.2 million in
proceeds from the sale of fixed assets primarily to fund the following:  
    
    $3.6 million of cash used by operating activities (see our Consolidated Statements of
Cash Flows appearing elsewhere in this Report),
    
    $6.9 million in cash capital expenditures, and
    
    $5.2 million to service other indebtedness (including capital lease obligations of $4.4
million and deferred financing fees related to the Revolving Credit Facility and the 10%
Notes of $0.8 million). Our cash on hand of approximately $2.5 million at March 31, 2005 is presented net of outstanding
checks within trade accounts payable at March 31, 2005. Accordingly, cash is presented at a
balance of $0 million in the March 31, 2005 balance sheet. At March 31, 2005, we had total indebtedness of $310.0 million, including borrowings under the
Revolving Credit Facility of $16.0 million, $280.0 million of our 10% Notes and capital lease
obligations of $14.0 million. The estimated fair value of our 10% Notes was $184.8 million, or
$95.2 million less than the carrying value. We have no off-balance sheet financial instruments
other than operating leases. We anticipate that our primary needs for liquidity will be to conduct our business, meet our debt
service requirements and make capital expenditures. We believe that we have sufficient liquidity
to meet our requirements over the next 12 months. On May 5, 2005, we entered into an Amended and Restated Credit Agreement with Banc of America
Securities, as Sole Lead Arranger, and Bank of America, N.A., as Administrative Agent, and certain
lenders (the 2005 Credit Agreement) which resulted in the refinancing of the Revolving Credit
Facility and significantly improved our liquidity position. The 2005 Credit Agreement is a $90
million secured facility comprised of:  
    
    A $55 million revolving credit facility ($40 million of which may be used for letters
of credit), which is not subject to a borrowing base limitation, maturing on December
15, 2009 (the 2005 Revolving Credit Facility); and
    
    A $35 million non-amortizing term loan facility maturing on December 15, 2009 (the
2005 Term Loan Facility). Interest on borrowings under the 2005 Credit Agreement is floating, based upon existing market
rates, plus agreed upon margin levels. In addition, Graphics is obligated to pay specified
commitment and letter of credit fees. Borrowings under the 2005 Term Loan Facility must be repaid in full on the facilitys maturity date
of December 15, 2009. Graphics is also required to prepay the 2005 Term Loan Facility and the 2005
Revolving Credit Facility under certain circumstances with excess cash flows and proceeds from
certain sales of assets, equity and incurrence of indebtedness. Borrowings under the 2005 Credit Agreement are secured by substantially all of Graphics assets.
In addition, Holdings has guaranteed all such indebtedness under the 2005 Credit Agreement, which
guarantee is secured by a pledge of all of Graphics capital stock. The 2005 Credit Agreement requires satisfaction of certain leverage ratio requirements. In
addition, the 2005 Credit Agreement includes various other customary affirmative and negative
covenants and events of default. The 2005 Credit Agreement places conditions upon our ability to,
among other things: make investments or dispositions, pay dividends and other distributions, incur
liens, incur additional indebtedness, make capital expenditures, enter into transactions with
affiliates, issue stock of subsidiaries, enter into agreements that contain restrictions affecting
subsidiaries and consummate mergers and acquisitions. We are currently in compliance with the
covenant requirements set forth in the 2005 Credit Agreement. As of April 30, 2005, we had approximately $2.8 million of unamortized deferred financing costs
associated with the Revolving Credit Facility. These costs will be amortized over the term of the
2005 Credit Agreement in accordance with the guidance set forth in Emerging Issues Task Force Issue
98-14, Debtors Accounting for Changes in Line-of-Credit or Revolving-Debt Arrangement (EITF
98-14). 26




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A significant portion of Graphics long-term obligations, including indebtedness under the 2005
Credit Agreement and the 10% Notes, has been fully and unconditionally guaranteed by Holdings.
Holdings is subject to certain restrictions under its guarantee of indebtedness under the 2005
Credit Agreement, including among other things, restrictions on mergers, acquisitions, incurrence
of additional debt and payment of cash dividends. Value Added Revenue and Print Impressions for the Print Segment We have included value-added revenue (VAR) information to provide a better understanding of sales
activity within our print segment. VAR is a non-GAAP measure and is defined as sales less the cost
of paper, ink and subcontract services. We generally pass these expenses through to our customers.
We have also included print impressions because we use this as an internal measure of production
throughput. Although we believe print impressions to be indicative of overall production volume,
total impressions may not be fully comparable period to period due to (1) differences in the type,
performance and width of press equipment utilized and (2) product mix produced. Fiscal Year Ended March 31,2005
    
    
    2004
    
    
    2003Print segment VAR (in thousands)
    
    $
    188,422
    
    
    
    214,675
    
    
    
    223,041Print impressions (in millions)
    
    
    11,279
    
    
    
    12,920
    
    
    
    12,888
 The following table provides a reconciliation of print segment sales to print segment VAR: Fiscal Year Ended March 31,2005
    
    
    2004
    
    
    2003(Dollars in thousands)Print segment sales
    
    $
    393,922
    
    
    
    418,004
    
    
    
    463,071Paper, ink and subcontract services
    
    
    205,500
    
    
    
    203,329
    
    
    
    240,030Print segment VAR
    
    $
    188,422
    
    
    
    214,675
    
    
    
    223,041
 Impact of Inflation In accordance with industry practice, we generally pass through increases in our costs, primarily
paper and ink, to customers in the cost of printed products, while decreases in paper costs
generally result in lower prices to our customers. In Fiscal Year 2003, paper prices were on
average at lower levels than comparable periods in the prior year. During Fiscal Year 2004 paper
prices fluctuated and ended at levels which were higher on average than the prior year. Paper
prices generally increased throughout Fiscal Year 2005. We expect that, as a result of our strong
relationships with key suppliers, our material costs will remain competitive within the industry. Seasonality Some of our print and premedia services business is seasonal in nature, particularly those revenues
that are derived from advertising inserts. Generally, our sales from advertising inserts are
highest during the following advertising periods: the Spring advertising season from March to May,
the Back-to-School advertising season from July to August, and the Thanksgiving/Christmas
advertising season from October to December. Sales of Sunday newspaper comics are not subject to
significant seasonal fluctuations. Our strategy includes, and will continue to include, the
mitigation of the seasonality of our print business by increasing our sales to customers whose own
sales are less seasonal, such as food and drug companies, which utilize advertising inserts more
frequently. 27




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##### Table of Contents



Environmental Environmental expenditures that relate to current operations are expensed or capitalized as
appropriate. Expenditures that relate to an existing condition caused by past operations and which
do not contribute to current or future period revenue generation are expensed. Environmental
liabilities are recorded when assessments or remedial efforts are probable and the related costs
can be reasonably estimated. We believe that environmental liabilities, currently and in the prior
periods discussed herein, are not material. We maintain a reserve of approximately $0.1 million in
our consolidated balance sheet at March 31, 2005, which we believe to be adequate. See Business 
Legal Proceedings  Environmental Matters appearing elsewhere in this Report. We do not
anticipate receiving insurance proceeds related to this liability or potential settlement. Our
management does not expect that any identified matters, individually or in the aggregate, will have
a material adverse effect on our consolidated financial statements as a whole. New Accounting Pronouncements In January 2003, the Financial Accounting Standards Board (FASB) issued Interpretation No. 46,
Consolidation of Variable Interest Entities (FIN 46), which was later revised in December 2003,
to expand upon and strengthen existing accounting guidance that addresses when a company should
include in its financial statements the assets, liabilities and activities of another entity.
Historically, a company generally has included another entity in its consolidated financial
statements only if it controlled the entity through voting interests. FIN 46, as revised and
interpreted, changes that guidance by requiring a variable interest entity, as defined, to be
consolidated by a company if that company is subject to a majority of the risk of loss from the
variable interest entitys activities or is entitled to receive a majority of the entitys residual
returns or both. FIN 46 also requires disclosure about variable interest entities that a company
is not required to consolidate but in which it has a significant variable interest. The
consolidation requirements of FIN 46 applied immediately to variable interest entities created
after December 31, 2003 and to existing entities created before December 31, 2003 in the first
fiscal year beginning after December 15, 2004. We have no variable interest entities created after
December 31, 2003. We have evaluated the requirements of FIN 46 for variable interest entities
created before December 31, 2003 and do not expect any effect on our consolidated financial
statements as a whole. In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123 (revised),
Accounting for Stock-Based Compensation (SFAS 123R). We account for share-based payments using
the fair value based method described in SFAS 123. The requirements of SFAS 123R generally are the
same as SFAS 123, except that SFAS 123R provides significant additional guidance regarding the
valuation of employee stock options. We currently use the Black-Scholes-Merton formula to estimate
the value of stock options granted to employees and expect to continue to use this acceptable
option valuation model upon the required adoption of SFAS 123R on April 1, 2006. SFAS 123R also
requires that the benefits of tax deductions in excess of recognized compensation cost be reported
as a financing cash flow, rather than as an operating cash flow as required under current guidance.
For the fiscal years ended March 31, 2005, 2004 and 2003, we recognized no operating cash flows
for such excess tax deductions. We do not anticipate the adoption of SFAS 123R will have a
material impact on our consolidated financial statements as a whole. Critical Accounting Policies Our consolidated financial statements and related public financial information are based on the
application of generally accepted accounting principles in the United States (GAAP). GAAP
requires the use of estimates, assumptions, judgments and subjective interpretations of accounting
principles that have an impact on the assets, liabilities, revenue and expense amounts reported.
These estimates can also affect supplemental information contained in our external disclosures
including information regarding contingencies, risk and financial condition. We base our estimates
on historical experience and on various other assumptions that we believe are reasonable under the
circumstances. Valuations based on estimates are reviewed for reasonableness on a consistent basis
throughout our company. Actual results may differ from these estimates under different assumptions
or conditions. See note 1 to our consolidated financial statements appearing elsewhere in this
Report. Critical accounting policies are defined as those that are reflective of significant judgments and
uncertainties, and potentially result in materially different results under different assumptions
and conditions. We believe the following critical accounting policies affect our more significant
judgments and estimates used in the preparation of our consolidated financial statements: 28




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Allowance for Doubtful Accounts We continuously monitor collections and payments from our customers. Allowances for doubtful
accounts are maintained based on historical payment patterns, aging of accounts receivable and
actual write-off history. We estimate losses resulting from the inability of our customers to make
required payments. If the financial condition of our customers was to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances may be required. The allowance
for doubtful accounts balance was approximately $1.8 million and $2.9 million at March 31, 2005 and
2004, respectively. Restructuring During Fiscal Years 2005, 2004 and 2003, we established restructuring reserves for our print and
premedia services segments. These reserves, for severance and other exit costs, required the use
of estimates. Though management believes these estimates accurately reflect the costs of these
plans, actual results may be different. Contingencies We have established reserves for environmental and legal contingencies at both the operating and
corporate levels. A significant amount of judgment and use of estimates is required to quantify
our ultimate exposure in these matters. The valuation of reserves for contingencies is reviewed on
a quarterly basis to assure that we are properly reserved. Reserve balances are adjusted to
account for changes in circumstances for ongoing issues and the establishment of additional
reserves for emerging issues. While we believe that the current level of reserves is adequate,
changes in the future could impact these determinations. Deferred Taxes We estimate our actual current tax expense, together with our temporary differences resulting from
differing treatment of items, such as fixed assets, for tax and accounting purposes. These
temporary differences result in deferred tax assets and liabilities. We must then assess the
likelihood that our deferred tax assets will be recovered from future taxable income or the
reversal of existing taxable temporary differences and to the extent we believe that recovery is
not likely, we must establish a valuation allowance. At March 31, 2005, we had a valuation
allowance of $54.8 million established against our deferred tax assets. We considered changes in
the allowance when calculating the tax provision in the statement of operations. Significant
management judgment is required in determining our provision for income taxes, our deferred tax
assets and liabilities and any valuation allowance recorded against our deferred tax assets. As a
result of changing circumstances, we may be required to record changes to the valuation allowance
against our deferred tax assets in the future. Contractual Obligations and Commercial Commitments The following table gives information about our existing material commitments under our
indebtedness and contractual obligations at March 31, 2005, which are net of imputed interest: Payments Due By PeriodContractual Obligations
    
    Total
    
    
    < 1 year
    
    
    1-3 years
    
    
    3-5 years
    
    
    > 5 years(Dollars in thousands)Long-term debt
    
    $
    296,000
    
    
    
    
    
    
    
    
    
    
    
    16,000
    
    
    
    280,000Capitalized lease obligations
    
    
    13,951
    
    
    
    4,667
    
    
    
    7,189
    
    
    
    2,095
    
    
    
    Operating lease obligations
    
    
    11,135
    
    
    
    3,085
    
    
    
    4,518
    
    
    
    2,972
    
    
    
    560Pension obligations (a)
    
    
    8,017
    
    
    
    8,017
    
    
    
    
    
    
    
    
    
    
    
    Total contractual cash
obligations
    
    $
    329,103
    
    
    
    15,769
    
    
    
    11,707
    
    
    
    21,067
    
    
    
    280,560
 
 (a)
    
    Although we expect to make contributions to our pension plan in future years, those
amounts cannot be estimated at this time. See note 10 to our consolidated financial
statements appearing elsewhere in this Report. 29




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In the quarter ended December 31, 1997, we entered into multi-year contracts to purchase a portion
of our raw materials to be used in our normal operations. In connection with such purchase
agreements, pricing for a portion of our raw materials is adjusted for certain movements in market
prices, changes in raw material costs and other specific price increases while purchase quantity
levels are variable based upon certain contractual requirements and conditions. We are deferring
certain contractual provisions over the life of the contracts, which are being recognized as the
purchase commitments are achieved and the related inventory is sold. The amount deferred at March
31, 2005 is $50.4 million and is included within Other liabilities in our consolidated balance
sheet. At March 31, 2005, we had no other significant contingent commitments. The following table
gives information about our other commercial commitments: Commitment Due By PeriodOther Commercial Commitments
    
    Total
    
    
    < 1 year
    
    
    1-3 years
    
    
    3-5 years
    
    
    > 5 years(Dollars in thousands)Standby letters of credit
    
    $
    28,197
    
    
    
    22,970
    
    
    
    750
    
    
    
    107
    
    
    
    4,370
 The standby letters of credit generally serve as collateral and a substantial portion are renewable
quarterly pursuant to the terms of certain long-term arrangements. 
 ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Qualitative Information.In the ordinary course of business, our exposure to market risks is
limited as discussed below. Market risk is the potential loss arising from adverse changes in
market rates and prices, such as interest and foreign currency exchange rates. Currently, we do
not utilize derivative financial instruments such as forward exchange contracts, future contracts,
options and swap agreements to mitigate such exposures. Interest rate risk for us primarily relates to interest rate fluctuations on variable rate debt. We have only one print facility outside the United States, in Canada, which is subject to foreign
currency exchange rate risk; however, any fluctuations in net asset values as a result of changes
in foreign currency exchange rates associated with activity at this one facility have been, and are
expected to continue to be, immaterial to our company as a whole. Quantitative Information.At March 31, 2005, we had fixed rate and variable rate debt (both
excluding capitalized lease obligations) approximating $280.0 million and $16.0 million,
respectively. At March 31, 2004, we had only fixed rate debt approximating $280.0 million,
excluding capital lease obligations. The estimated fair value of our debt instruments excluding
capital lease obligations, at March 31, 2005 was $200.8 million, or $95.2 million less than the
carrying value. The estimated fair value of our debt instruments, excluding capital lease
obligations, at March 31, 2004 was $249.2 million, or $30.8 million less than the carrying value.
At our March 31, 2005 borrowing levels, a 1% adverse change in interest rates would result in an
approximate $15 million reduction in the fair value of our fixed rate debt and would have resulted
in additional annual interest expense and related payments of approximately $0.2 million on our
variable rate debt. The above market risk discussions are forward-looking statements of market risk assuming the
occurrence of certain adverse market conditions. Actual results in the future may differ
materially from those projected as a result of actual developments in the market. 30




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ITEM 8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA The following consolidated financial statements of ACG Holdings, Inc. are included in this Report: Page No.Report of Independent Registered Public Accounting Firm
    
    
    32Consolidated Balance Sheets  March 31, 2005 and 2004
    
    
    33For the Years Ended March 31, 2005, 2004 and 2003:Consolidated Statements of Operations
    
    
    35Consolidated Statements of Stockholders Deficit
    
    
    36Consolidated Statements of Cash Flows
    
    
    37Notes to Consolidated Financial Statements
    
    
    39
 The following consolidated financial statement schedules of ACG Holdings, Inc. are included in Part
IV, Item 15:  I.
    
    Condensed Financial Information:Condensed Consolidated Financial Statements (parent company only)
for the years ended March 31, 2005, 2004 and 2003, and as of March 31,
2005 and 2004II.
    
    Valuation and qualifying accounts All other schedules specified under Regulation S-X for ACG Holdings, Inc. have been omitted because
they are either not applicable, not required, or because the information required is included in
the consolidated financial statements or notes thereto. 31




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##### Table of Contents



Report of Independent Registered Public Accounting Firm Board of Directors
ACG Holdings, Inc. We have audited the accompanying consolidated balance sheets of ACG Holdings, Inc. as
of March 31, 2005 and 2004, and the related consolidated statements of operations,
stockholders deficit, and cash flows for each of the three fiscal years in the
period ended March 31, 2005. Our audits also included the related financial
statement schedules. These financial statements and schedules are the responsibility
of the Companys management. Our responsibility is to express an opinion on these
financial statements and schedules based on our audits. We conducted our audits in accordance with the standards of the Public Company
Oversight Board (United States). Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. We were not engaged to perform an audit of the
Companys internal control over financial reporting. Our audits included
consideration of internal control over financial reporting as a basis for designing
audit procedures that are appropriate in the circumstances, but not for the purpose
of expressing an opinion on the effectiveness of the Companys internal control over
financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements, assessing the accounting principles used and significant
estimates made by management and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of ACG
Holdings, Inc. at March 31, 2005 and 2004, and the consolidated results of its
operations and its cash flows for each of the three fiscal years in the period ended
March 31, 2005, in conformity with U.S. generally accepted accounting principles.
Also, in our opinion, the related financial statement schedules, when considered in
relation to the basic financial statements taken as a whole, present fairly, in all
material respects, the information set forth therein. /s/ Ernst & Young LLP Nashville, Tennessee
June 6, 2005 32




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ACG HOLDINGS, INC. 
   March 31,2005
    
    
    2004AssetsCurrent assets:Cash
    
    $
    
    
    
    
    Receivables:Trade accounts, less allowance for doubtful accounts of
$1,783 and $2,853 at March 31, 2005 and 2004,
respectively
    
    
    46,992
    
    
    
    42,452Income tax receivable
    
    
    78
    
    
    
    Other
    
    
    3,420
    
    
    
    2,533Total receivables
    
    
    50,490
    
    
    
    44,985Inventories
    
    
    10,447
    
    
    
    8,524Deferred income taxes
    
    
    2,235
    
    
    
    2,313Prepaid expenses and other current assets
    
    
    5,192
    
    
    
    4,836Assets held for sale
    
    
    8,112
    
    
    
    Total current assets
    
    
    76,476
    
    
    
    60,658Property, plant and equipment:Land and improvements
    
    
    2,990
    
    
    
    2,963Buildings and improvements
    
    
    27,280
    
    
    
    28,706Machinery and equipment
    
    
    215,463
    
    
    
    228,431Furniture and fixtures
    
    
    12,722
    
    
    
    13,210Leased assets under capital leases
    
    
    23,309
    
    
    
    26,031Equipment installations in process
    
    
    5,331
    
    
    
    4,084287,095
    
    
    
    303,425Less accumulated depreciation
    
    
    (189,626
    )
    
    
    (182,874
    )Net property, plant and equipment
    
    
    97,469
    
    
    
    120,551Excess of cost over net assets acquired
    
    
    66,548
    
    
    
    66,548Other assets
    
    
    18,405
    
    
    
    20,156Total assets
    
    $
    258,898
    
    
    
    267,913
 See accompanying notes to consolidated financial statements. 33




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ACG HOLDINGS, INC.
Consolidated Balance Sheets
(Dollars in thousands, except par values) March 31,2005
    
    
    2004Liabilities and Stockholders DeficitCurrent liabilities:Current installments of capitalized leases
    
    $
    3,631
    
    
    
    4,144Obligations under capital leases held for sale
    
    
    1,036
    
    
    
    Trade accounts payable
    
    
    40,365
    
    
    
    29,727Accrued expenses
    
    
    42,104
    
    
    
    42,550Income tax payable
    
    
    
    
    
    
    9Total current liabilities
    
    
    87,136
    
    
    
    76,430Long-term debt and capitalized leases, excluding current installments
    
    
    305,284
    
    
    
    294,154Deferred income taxes
    
    
    8,148
    
    
    
    8,624Other liabilities
    
    
    71,070
    
    
    
    77,480Total liabilities
    
    
    471,638
    
    
    
    456,688Commitments and contingenciesStockholders deficit:Common stock, voting, $.01 par value, 5,852,223 shares authorized,
160,067 shares issued and outstanding at March 31, 2005 and 2004
    
    
    2
    
    
    
    2Additional paid-in capital
    
    
    2,203
    
    
    
    2,103Accumulated deficit
    
    
    (195,183
    )
    
    
    (169,516
    )Other accumulated comprehensive loss, net of tax
    
    
    (19,762
    )
    
    
    (21,364
    )Total stockholders deficit
    
    
    (212,740
    )
    
    
    (188,775
    )Total liabilities and stockholders deficit
    
    $
    258,898
    
    
    
    267,913
 See accompanying notes to consolidated financial statements. 34




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##### Table of Contents



ACG HOLDINGS, INC. 
   Year ended March 31,2005
    
    
    2004
    
    
    2003Sales
    
    $
    449,513
    
    
    
    471,102
    
    
    
    517,139Cost of sales
    
    
    403,641
    
    
    
    409,321
    
    
    
    445,493Gross profit
    
    
    45,872
    
    
    
    61,781
    
    
    
    71,646Selling, general and administrative expenses
    
    
    28,824
    
    
    
    32,734
    
    
    
    37,614Restructuring costs and other charges
    
    
    10,037
    
    
    
    8,140
    
    
    
    1,722Operating income
    
    
    7,011
    
    
    
    20,907
    
    
    
    32,310Other expense (income):Interest expense
    
    
    34,087
    
    
    
    34,175
    
    
    
    28,674Interest income
    
    
    (37
    )
    
    
    (9
    )
    
    
    (90
    )Loss on early extinguishment of debt
    
    
    
    
    
    
    3,196
    
    
    
    Other, net
    
    
    313
    
    
    
    489
    
    
    
    1,503Total other expense
    
    
    34,363
    
    
    
    37,851
    
    
    
    30,087Income (loss) from continuing
operations before income taxes
    
    
    (27,352
    )
    
    
    (16,944
    )
    
    
    2,223Income tax expense (benefit)
    
    
    (1,685
    )
    
    
    11,441
    
    
    
    1,559Income (loss) from continuing operations
    
    
    (25,667
    )
    
    
    (28,385
    )
    
    
    664Discontinued operations:Loss from operations, net of $0 tax
    
    
    
    
    
    
    12
    
    
    
    979Loss on disposal, net of $0 tax
    
    
    
    
    
    
    444
    
    
    
    Net loss
    
    $
    (25,667
    )
    
    
    (28,841
    )
    
    
    (315
    )
 See accompanying notes to consolidated financial statements. 35




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##### Table of Contents



ACG HOLDINGS, INC. 
   Series AAand BB
    
    
    
    
    
    
    
    
    
    
    OtherVoting
    
    
    convertible
    
    
    Additional
    
    
    
    
    
    
    accumulatedcommon
    
    
    preferred
    
    
    paid-in
    
    
    Accumulated
    
    
    comprehensivestock
    
    
    stock
    
    
    capital
    
    
    deficit
    
    
    income (loss)
    
    
    TotalBalances, March 31, 2002
    
    $
    1
    
    
    
    
    
    
    
    58,500
    
    
    
    (140,340
    )
    
    
    (14,181
    )
    
    $
    (96,020
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (315
    )
    
    
    
    
    
    
    (315
    )Other comprehensive income (loss), net of tax:Change in cumulative
translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    958
    
    
    
    958Change in minimum
pension liability
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (12,639
    )
    
    
    (12,639
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11,996
    )Exercise of options
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1Executive stock compensation
    
    
    
    
    
    
    
    
    
    
    316
    
    
    
    
    
    
    
    
    
    
    
    316Balances, March 31, 2003
    
    $
    2
    
    
    
    
    
    
    
    58,816
    
    
    
    (140,655
    )
    
    
    (25,862
    )
    
    $
    (107,699
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (28,841
    )
    
    
    
    
    
    
    (28,841
    )Other comprehensive income (loss), net of tax:Change in cumulative
translation
adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,295
    
    
    
    1,295Change in minimum
pension liability
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,203
    
    
    
    3,203Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (24,343
    )Repurchase of preferred stock
    
    
    
    
    
    
    
    
    
    
    (56,942
    )
    
    
    
    
    
    
    
    
    
    
    (56,942
    )Executive stock compensation
    
    
    
    
    
    
    
    
    
    
    229
    
    
    
    
    
    
    
    
    
    
    
    229Purchase of treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (20
    )
    
    
    
    
    
    
    (20
    )Balances, March 31, 2004
    
    $
    2
    
    
    
    
    
    
    
    2,103
    
    
    
    (169,516
    )
    
    
    (21,364
    )
    
    $
    (188,775
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (25,667
    )
    
    
    
    
    
    
    (25,667
    )Other comprehensive income (loss), net of tax:Change in cumulative
translation
adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    593
    
    
    
    593Change in minimum
pension liability
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,009
    
    
    
    1,009Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (24,065
    )Executive stock compensation
    
    
    
    
    
    
    
    
    
    
    100
    
    
    
    
    
    
    
    
    
    
    
    100Balances, March 31, 2005
    
    $
    2
    
    
    
    
    
    
    
    2,203
    
    
    
    (195,183
    )
    
    
    (19,762
    )
    
    $
    (212,740
    )
 See accompanying notes to consolidated financial statements. 36




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##### Table of Contents



ACG HOLDINGS, INC. 
   Year ended March 31,2005
    
    
    2004
    
    
    2003Cash flows from operating activities:Net loss
    
    $
    (25,667
    )
    
    
    (28,841
    )
    
    
    (315
    )Adjustments to reconcile net loss to net cash provided (used)
by operating activities:Other charges  non-cash (note 15)
    
    
    1,668
    
    
    
    328
    
    
    
    531Loss on early extinguishment of debt    non-cash
    
    
    
    
    
    
    3,196
    
    
    
    Depreciation
    
    
    22,594
    
    
    
    23,587
    
    
    
    23,526Depreciation related to discontinued operations
    
    
    
    
    
    
    26
    
    
    
    355Amortization of other assets
    
    
    457
    
    
    
    675
    
    
    
    570Amortization of deferred financing costs
    
    
    2,487
    
    
    
    2,191
    
    
    
    1,626Loss (gain) on disposals of property, plant and equipment
    
    
    (75
    )
    
    
    93
    
    
    
    (16
    )Impairment of asset
    
    
    
    
    
    
    
    
    
    
    750Deferred income tax expense (benefit)
    
    
    (398
    )
    
    
    10,534
    
    
    
    408Discontinued operations, net of tax
    
    
    
    
    
    
    873
    
    
    
    (547
    )Changes in assets and liabilities, net of effects of discontinued operations:Decrease (increase) in receivables
    
    
    (5,395
    )
    
    
    6,777
    
    
    
    1,160Decrease (increase) in current income taxes receivable
    
    
    (78
    )
    
    
    233
    
    
    
    782Decrease (increase) in inventories
    
    
    (1,968
    )
    
    
    1,765
    
    
    
    (999
    )Increase (decrease) in trade accounts payable
    
    
    10,440
    
    
    
    (9,626
    )
    
    
    13,035Increase (decrease) in accrued expenses
    
    
    385
    
    
    
    10,146
    
    
    
    (1,604
    )Increase (decrease) in current income taxes payable
    
    
    (9
    )
    
    
    9
    
    
    
    Increase (decrease) in other liabilities
    
    
    (6,312
    )
    
    
    (82
    )
    
    
    7,269Other
    
    
    (1,704
    )
    
    
    (721
    )
    
    
    (884
    )Total adjustments
    
    
    22,092
    
    
    
    50,004
    
    
    
    45,962Net cash provided (used) by operating activities
    
    
    (3,575
    )
    
    
    21,163
    
    
    
    45,647
 37




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##### Table of Contents



ACG HOLDINGS, INC.
Consolidated Statements of Cash Flows  Continued
(In thousands) Year ended March 31,2005
    
    
    2004
    
    
    2003Cash flows from investing activities:Purchases of property, plant and equipment
    
    
    (6,876
    )
    
    
    (13,096
    )
    
    
    (27,862
    )Proceeds from sales of property, plant and equipment
    
    
    176
    
    
    
    24
    
    
    
    295Proceeds from discontinued operations
    
    
    
    
    
    
    
    
    
    
    38Other
    
    
    (472
    )
    
    
    (46
    )
    
    
    83Net cash used by investing activities
    
    
    (7,172
    )
    
    
    (13,118
    )
    
    
    (27,446
    )Cash flows from financing activities:Revolver borrowings, net
    
    
    16,000
    
    
    
    
    
    
    
    Repayment of long-term debt, net
    
    
    
    
    
    
    (39,185
    )
    
    
    (11,652
    )Repayment of
12 3/4% senior subordinated notes
    
    
    
    
    
    
    (170,055
    )
    
    
    (1,700
    )Proceeds from issuance of 10% senior second secured notes
    
    
    
    
    
    
    280,000
    
    
    
    Deferred financing costs paid
    
    
    (800
    )
    
    
    (14,633
    )
    
    
    (850
    )Repayment of capital lease obligations
    
    
    (4,378
    )
    
    
    (7,089
    )
    
    
    (8,381
    )Repayment of capital lease obligations-discontinued operations
    
    
    
    
    
    
    
    
    
    
    (100
    )Repurchase and retirement of preferred stock and cancellation of
preferred stock options
    
    
    
    
    
    
    (56,942
    )
    
    
    Purchase of treasury stock
    
    
    
    
    
    
    (20
    )
    
    
    Exchange rate adjustment
    
    
    
    
    
    
    
    
    
    
    3Net cash provided (used) by financing activities
    
    
    10,822
    
    
    
    (7,924
    )
    
    
    (22,680
    )Effect of exchange rates on cash
    
    
    (75
    )
    
    
    (121
    )
    
    
    (68
    )Change in cash
    
    
    
    
    
    
    
    
    
    
    (4,547
    )Cash:Beginning of period
    
    
    
    
    
    
    
    
    
    
    4,547End of period
    
    $
    
    
    
    
    
    
    
    
    Supplemental disclosure of cash flow information:Cash paid (received) for:Interest
    
    $
    31,480
    
    
    
    27,668
    
    
    
    27,169Income taxes, net of refunds
    
    $
    (887
    )
    
    
    509
    
    
    
    180Non-cash investing activities:Assets purchased under capital lease obligations
    
    $
    31
    
    
    
    2,870
    
    
    
    790
 See accompanying notes to consolidated financial statements. 38




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##### Table of Contents



ACG HOLDINGS, INC. 
 Notes to Consolidated Financial Statements  (1)
    
    Summary of Significant Accounting PoliciesACG Holdings, Inc. (Holdings) has no operations or significant assets other than its
investment in American Color Graphics, Inc. (Graphics). Holdings and Graphics are
collectively referred to as the Company. Holdings is dependent upon distributions from
Graphics to fund its obligations. However, Graphics ability to pay dividends or lend to
Holdings was either restricted or prohibited under the terms of its debt agreements at
March 31, 2005, except that Graphics may pay specified amounts to Holdings (1) to enable
Holdings to pay its general operating expenses; (2) to permit Holdings to make payments in
respect of its indemnification obligations owing to directors, officers or other persons
under Holdings charter or by-laws or pursuant to written agreements with any such person,
or obligations in respect of director and officer insurance (including premiums therefor);
(3) to make payments in respect of indemnification obligations of Holdings in connection
with any issuance by Holdings of capital stock of Holdings; (4) for distributions and
restricted investments by Holdings in an aggregate amount of up to $0.5 million made to
permit repurchases of common stock of Holdings or to purchase options to purchase common
stock of Holdings granted to directors, officers and certain key employees of Holdings or
Graphics pursuant to stock option plans adopted by the board of directors of Holdings or
Graphics; and (5) for other distributions and restricted investments in an aggregate
amount outstanding of up to $0.5 million; provided however Graphics may make (I)
distributions and restricted investments under items (4) and (5) above only if no default
or event of default exists either before or after giving effect to such distribution or
restricted investment and (II) additional distributions and restricted investments in an
aggregate amount of $1.5 million under each of items (4) and (5) above if no default or
event of default exists either before or after giving effect to such distribution and
certain covenant test levels are met and availability under the Revolving Credit Facility
(as defined herein) is greater than $18.0 million. As of March 31, 2005 none of the
exceptions to the restrictions on Graphics ability to pay dividends or lend to Holdings,
discussed above, were applicable to Graphics and Holdings. The 10% Notes (as defined
herein) are fully and unconditionally guaranteed on a senior basis by Holdings, and by all
future domestic subsidiaries of Graphics. The Revolving Credit Facility is secured by
substantially all of the assets of Graphics. Holdings has guaranteed Graphics
indebtedness under the Revolving Credit Facility, which guarantee is secured by a pledge
of all of Graphics and Graphics subsidiaries stock.The two business segments of the commercial printing industry in which the Company
operates are (i) print and (ii) premedia services.Significant accounting policies are as follows:  (a)
    
    Basis of PresentationThe consolidated financial statements include the accounts of Holdings and all
greater than 50%  owned subsidiaries, which are consolidated under United States
generally accepted accounting principles.All significant intercompany transactions and balances have been eliminated in
consolidation.Earnings-per-share data has not been provided since Holdings common stock is
closely held.Certain prior period information has been reclassified to conform to current period
presentation.(b)
    
    Revenue RecognitionPrint revenues are recognized upon the completion of production. Shipment of
printed material generally occurs upon completion of this production process.
Materials are printed to unique customer specifications and are not returnable. 39




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##### Table of Contents



ACG HOLDINGS, INC. Notes to Consolidated Financial Statements  Premedia services revenues are recognized as services are performed. Delivery of
electronic files, films, proofs and plates generally occurs upon completion of the
production process. Services are performed to unique customer specifications and
are not returnable.Credits relating to specification variances and other customer adjustments have
historically not been significant for both the print and premedia services business
segments.(c)
    
    Cash and Cash EquivalentsThe Companys cash management process is governed by the terms of the Revolving
Credit Facility (defined herein), which is subject to a borrowing base limitation.
The borrowing base arrangement includes a provision whereby proceeds from
collection of substantially all of the Companys accounts receivable are deposited
into bank accounts which, under certain circumstances, are applied daily toward
repayment of borrowings outstanding, if any, under the Revolving Credit Facility
and allows for the investment of excess available cash into certain short-term
instruments.The Company also uses available cash balances to fund outstanding checks when
presented for payment. Cash on hand of approximately $2.5 million and $10.3
million at March 31, 2005 and 2004, respectively, is presented net of outstanding
checks, which resulted in a reclassification of $15.5 million and $8.9 million at
March 31, 2005 and 2004, respectively, to trade accounts payable in the
consolidated balance sheets. Upon presentation for payment, these checks are
funded through available cash balances or the Revolving Credit Facility.(d)
    
    Trade Accounts ReceivableTrade accounts receivable represents payments due from customers net of allowances
for doubtful accounts. The Company continuously monitors collections and payments
from its customers. Allowances for doubtful accounts are maintained based on
historical payment patterns, aging of accounts receivable and actual write-off
history. The Company estimates losses resulting from the inability of our
customers to make required payments.(e)
    
    InventoriesInventories are valued at the lower of first-in, first-out (FIFO) cost or market
(net realizable value).(f)
    
    Property, Plant and EquipmentProperty, plant and equipment is stated at cost. Depreciation, which includes
amortization of assets under capital leases, is based on the straight-line method
over the shorter of the estimated useful lives of the assets or the remaining terms
of the leases. Estimated useful lives used in computing depreciation and
amortization expense are 3 to 15 years for furniture and fixtures and machinery and
equipment, and 15 to 25 years for buildings and improvements. Expenses related to
maintenance and repairs are expensed as incurred.(g)
    
    Excess of Cost Over Net Assets AcquiredThe excess of cost over net assets acquired (or goodwill) is accounted for in
accordance with the guidance set forth in Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets (SFAS 142). SFAS 142
requires goodwill to be evaluated at least annually for impairment. The Company
performed the required annual impairment tests of goodwill as of December 31, 2004
and 2003, and noted no impairment. Due to changes in circumstances resulting from
certain changes in business operations, the Company also performed an impairment
test of goodwill as of March 31, 2005, and noted no impairment. 40




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##### Table of Contents



ACG HOLDINGS, INC. Notes to Consolidated Financial Statements  The Company has goodwill associated with its two distinct segments, print and
premedia services, and has determined that there are no additional reporting units
within these segments, as there are no further components representing a
business. Therefore, the impairment test for goodwill is calculated for each of
the segments. The test is calculated by deducting the estimated carrying value of
each reporting unit from the estimated enterprise value of each reporting unit,
respectively. The estimated enterprise value is calculated by multiplying 12
months trailing EBITDA (defined as earnings before net interest expense, income tax
expense, depreciation and amortization) by an assumed market multiple, which
the Company believes to be reasonable based upon recent sales activity of
businesses operating in comparable industries as the Companys segments. The
estimated carrying value is calculated by deducting the liabilities, excluding
interest-bearing debt, from total assets of the respective segment. A calculation
in which the estimated enterprise value exceeds the estimated carrying value
results in a conclusion of no impairment. If it is determined that the estimated
carrying value exceeds the estimated enterprise value, the Company would calculate
the implied fair value of goodwill by deducting the fair value of all tangible and
intangible net assets, including unrecognized intangible assets, of the segment
from the fair value of the segment. If the implied fair value of goodwill is less
than the carrying value, an impairment loss would be recognized.(h)
    
    Impairment of Long-Lived AssetsThe Company evaluates the recoverability of its long-lived assets in accordance
with Statement of Financial Accounting Standards No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets (SFAS 144). SFAS 144 requires
periodic assessment of certain long-lived assets for possible impairment when
events or circumstances indicate that the carrying amounts may not be
recoverable. Long-lived assets are grouped and evaluated for impairment at the
lowest level for which there are identifiable cash flows that are independent of
the cash flows of other groups of assets. If it is determined that the carrying
amounts of such long-lived assets are not recoverable, the assets are written down
to their fair value.(i)
    
    Other AssetsFinancing costs related to the Revolving Credit Facility (as defined herein) are
deferred and amortized over the term of the agreement. Costs related to the 10%
Notes (as defined herein) are deferred and amortized over the term of the 10%
Notes. Covenants not to compete are amortized over the terms of the underlying
agreements.(j)
    
    Income TaxesIncome taxes have been provided using the liability method in accordance with
Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes
(SFAS 109). Management has evaluated the need for a valuation allowance for
deferred tax assets and believes that certain deferred tax assets will more likely
than not be realized through the future reversal of existing taxable temporary
differences.(k)
    
    Foreign Currency TranslationThe assets and liabilities of the Companys Canadian facility, which include
interdivisional balances, are translated at year-end rates of exchange while
revenue and expense items are translated at average rates for the year.Translation adjustments are recorded as a separate component of stockholders
deficit. Since the transactions of the Canadian facility are denominated in its
functional currency and the interdivisional accounts are of a long-term investment
nature, no remeasurement gains and losses pertaining to such balances are included
in the Companys consolidated results of operations. 41




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##### Table of Contents



ACG HOLDINGS, INC. Notes to Consolidated Financial Statements  (l)
    
    EnvironmentalEnvironmental expenditures that relate to current operations are expensed or
capitalized as appropriate. Expenditures that relate to an existing condition
caused by past operations, and which do not contribute to current or future period
revenue generation, are expensed. Environmental liabilities are provided when
assessments and/or remedial efforts are probable and the related amounts can be
reasonably estimated.(m)
    
    Fair Value of Financial InstrumentsThe carrying amounts reflected in the consolidated balance sheets for receivables
and payables approximate their respective fair values. A discussion of the
carrying value and fair value of the Companys long-term debt is included in note 7
below. Fair values are based primarily on quoted prices for these or similar
instruments. The Company is not a party to any financial instruments with material
off-balance-sheet risk.(n)
    
    Concentration of Credit RiskFinancial instruments, which subject the Company to credit risk, consist primarily
of trade accounts receivable. Concentration of credit risk with respect to trade
accounts receivable is generally diversified due to the large number of entities
comprising the Companys customer base and their geographic dispersion. The
Company performs ongoing credit evaluations of its customers and maintains an
allowance for potential credit losses.(o)
    
    Use of EstimatesThe preparation of the financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.(p)
    
    Stock-Based CompensationThe Company has elected to follow Statement of Financial Accounting Standards No.
123, Accounting for Stock-Based Compensation (SFAS 123), in accounting for its
stock-based compensation plan. The Company believes that including the fair value
of compensation plans in determining net income is consistent with accounting for
the cost of all other forms of compensation.(q)
    
    Shipping and Handling CostsThe Companys shipping and handling costs are reflected within Cost of Sales in the
Consolidated Statements of Operations.(r)
    
    Impact of Recently Issued Accounting StandardsIn January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46),
which was later revised in December 2003, to expand upon and strengthen existing
accounting guidance that addresses when a company should include in its financial
statements the assets, liabilities and activities of another entity. Historically,
a company generally has included another entity in its consolidated financial
statements only if it controlled the entity through voting interests. FIN 46, as
revised and interpreted, changes that guidance by requiring a variable interest
entity, as defined, to be consolidated by a company if that company is subject to a
majority of the risk of loss from the variable interest entitys activities or is
entitled to receive a majority of the entitys residual returns or both. FIN 46
also requires disclosure about variable interest entities that a company is not
required to consolidate but in which it has a 42




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ACG HOLDINGS, INC. Notes to Consolidated Financial Statements  significant variable interest. The consolidation requirements of FIN 46 applied
immediately to variable interest entities created after December 31, 2003 and to
existing entities created before December 31, 2003 in the first fiscal year
beginning after December 15, 2004. The Company has no variable interest entities
created after December 31, 2003. The Company has evaluated the requirements of FIN
46 for variable interest entities created before December 31, 2003 and does not
expect any effect on its consolidated financial statements as a whole.In December 2004, the FASB issued Statement of Financial Accounting Standards No.
123 (revised), Accounting for Stock-Based Compensation (SFAS 123R). The
Company accounts for share-based payments using the fair value based method
described in SFAS 123. The requirements of SFAS 123R generally are the same as
SFAS 123, except that SFAS 123R provides significant additional guidance regarding
the valuation of employee stock options. The Company currently uses the
Black-Scholes-Merton formula to estimate the value of stock options granted to
employees and expects to continue to use this acceptable option valuation model
upon the required adoption of SFAS
123R on April 1, 2006. SFAS 123R also requires that the benefits of tax deductions
in excess of recognized compensation costs be reported as a financing cash flow,
rather than as an operating cash flow as required under current guidance. For the
fiscal years ended March 31, 2005, 2004 and 2003, the Company recognized no
operating cash flows for such excess tax deductions. The Company does not
anticipate the adoption of SFAS 123R will have a material impact on its
consolidated financial statements as a whole.  (2)
    
    Discontinued OperationsIn June 2003, the Company sold its digital visual effects business, Digiscope, for a de
minimis amount, which resulted in a loss of approximately $0.4 million, which is net of
zero income tax benefits. As a result of this sale, Digiscope has been accounted for as a
discontinued operation, and accordingly, Digiscopes operations are segregated and
reported within discontinued operations in the accompanying consolidated financial
statements. Sales, cost of sales, selling, general and administrative expenses and other
expenses attributable to Digiscope for the fiscal years ended March 31, 2004 and 2003 have
been classified and presented within discontinued operations. Sales attributable to
Digiscope for the fiscal years ended March 31, 2004 and 2003 were $0.8 million and $3.2
million, respectively.(3)
    
    InventoriesThe components of inventories are as follows (in thousands): March 31,2005
    
    
    2004Paper
    
    $
    8,503
    
    
    
    6,307Ink
    
    
    171
    
    
    
    185Supplies and other
    
    
    1,773
    
    
    
    2,032Total
    
    $
    10,447
    
    
    
    8,524
  (4)
    
    Assets and Liabilities Held for SaleAt March 31, 2005, the Company held certain assets and obligations under capital leases
for sale at a fair value of $8.1 million and $1.0 million, respectively. On March 16,
2005, the company ceased operations at the Pittsburg, California facility, resulting in
the write-off of certain assets totaling approximately $0.5 million (see note 15). In
March 2005, the Company also executed a letter of intent with a prospective buyer to sell
certain of the print facilitys other assets, some of which were subject to capital lease
obligations. On April 20, 2005, the Company completed the sale of these assets for an
aggregate selling price of approximately $8.1 million (including $0.1 million of
miscellaneous closing and settlement costs) and terminated $1.0
million of related capital lease obligations. In accordance with the guidance set 43




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ACG HOLDINGS, INC. Notes to Consolidated Financial Statements  forth in SFAS 144, the Company wrote down the assets held for sale to fair value,
resulting in a $0.7 million impairment charge, which is classified within restructuring
costs and other charges in the consolidated statement of operations for the fiscal year
ended March 31, 2005. The following table summarizes the assets and obligations under
capital leases held for sale at March 31, 2005. The carrying values as of March 31, 2004
are shown for comparability only and are not classified in the consolidated balance sheet
as of March 31, 2004 as assets and liabilities held for sale. March 31,2005
    
    
    2004Other receivables
    
    $
    112
    
    
    
    142Property, plant and equipment, net
    
    
    6,877
    
    
    
    8,577Other assets
    
    
    1,123
    
    
    
    1,203Total assets held for sale
    
    
    8,112
    
    
    
    9,922Obligations under capital leases held for sale
    
    
    (1,036
    )
    
    
    (1,260
    )Net assets and liabilities held for sale
    
    $
    7,076
    
    
    
    8,662
  (5)
    
    Other AssetsThe components of other assets are as follows (in thousands): March 31,2005
    
    
    2004Deferred financing costs, less accumulated
amortization of $4,182 in 2005 and $1,695
in 2004
    
    $
    10,894
    
    
    
    12,581Spare parts inventory, net of valuation allowance
of $100 in 2005 and 2004
    
    
    6,308
    
    
    
    6,714Other
    
    
    1,203
    
    
    
    861Total
    
    $
    18,405
    
    
    
    20,156
  (6)
    
    Accrued ExpensesThe components of accrued expenses are as follows (in thousands): March 31,2005
    
    
    2004Compensation and related taxes
    
    $
    2,817
    
    
    
    7,155Employee benefits
    
    
    17,328
    
    
    
    18,444Interest
    
    
    8,504
    
    
    
    8,452Restructuring
    
    
    9,922
    
    
    
    6,445Other
    
    
    3,533
    
    
    
    2,054Total
    
    $
    42,104
    
    
    
    42,550
 44




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ACG HOLDINGS, INC. Notes to Consolidated Financial Statements  (7)
    
    Notes Payable, Long-Term Debt and Capitalized LeasesLong-term debt, including capitalized leases, is summarized as follows (in thousands): March 31,2005
    
    
    2004Revolving Credit Facility
    
    $
    16,000
    
    
    
    10% Senior Second Secured Notes Due 2010
    
    
    280,000
    
    
    
    280,000Capitalized leases
    
    
    13,951
    
    
    
    18,298Total long-term debt and capitalized leases
    
    
    309,951
    
    
    
    298,298Less current installments
    
    
    4,667
    
    
    
    4,144Long-term debt and capitalized leases,
excluding current installments
    
    $
    305,284
    
    
    
    294,154
 45




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ACG HOLDINGS, INC. Notes to Consolidated Financial Statements July 3, 2003 Refinancing Transaction On July 3, 2003, the Company sold $280 million aggregate principal amount of its 10% Senior
Second Secured Notes Due 2010 (the 10% Notes) as part of a recapitalization involving
Graphics, Holdings and certain affiliates of the Company, and also entered into a $70 million
senior secured revolving credit facility maturing on July 3, 2008, with a syndicate of
lenders (the Revolving Credit Facility), (collectively the 2003 Refinancing). Graphics
repaid substantially all existing indebtedness (excluding capital leases) through:  
    
    the repayment of all amounts outstanding under the old bank credit agreement,
and the concurrent termination of all related commitments thereunder;
    
    the issuance of letters of credit under the Revolving Credit Facility to replace
outstanding letters of credit; and
    
    effective August 3, 2003, the redemption of all of the
12 3/4% Senior Subordinated
Notes Due 2005 (the 12 3/4% Notes), at a redemption price equal to 100% of their
aggregate principal amount, plus accrued and unpaid interest thereon. In addition, the Company repurchased, and concurrently retired, all 5,223 outstanding shares
of preferred stock of Holdings, and canceled all outstanding options to purchase shares of
preferred stock of Holdings held by certain key officers, for an aggregate purchase price of
$56.9 million. The canceled options would have been exercisable for 582 shares of preferred
stock of Holdings. In connection with the 2003 Refinancing, the Company incurred $14.3 million of deferred
financing fees through March 31, 2004. Of the total deferred financing fees, $4.9 million
was paid to affiliates of Morgan Stanley for the services they performed in conjunction with
the Revolving Credit Facility and the original private placement of the 10% Notes. The
Company also incurred a charge of approximately $3.2 million in the fiscal year ended March
31, 2004 related to the write-off of deferred financing costs associated with the old bank
credit agreement and the 12 3/4% Notes. In addition, the Company recorded incremental interest
expense of approximately $1.7 million in the fiscal year ended March 31, 2004 as a result of
the 30-day call provision related to the 12 3/4% Notes. The 10% Notes mature June 15, 2010, with interest payable semi-annually on June 15 and
December 15. The 10% Notes are redeemable at the option of Graphics in whole or in part on
June 15, 2007, at 105% of the principal amount, plus accrued interest. The redemption price
will decline each year after 2007 and will be 100% of the principal amount of the 10% Notes,
plus accrued interest, beginning on June 15, 2009. Upon a change of control, Graphics will
be required to make an offer to purchase the 10% Notes. The purchase price will equal 101%
of the principal amount of the 10% Notes on the date of purchase, plus accrued interest. In
addition, before June 15, 2006, Graphics may redeem up to 35% of the aggregate principal
amount of the 10% Notes with the proceeds of sales of certain kinds of capital stock at 110%
of its principal amount, plus accrued interest to the redemption date. Graphics may make
such redemption only if, after any such redemption, at least $150 million aggregate principal
amount of the 10% Notes remains outstanding. The Revolving Credit Facility provides for maximum borrowings of $70 million, including a
letter of credit sub-facility of up to $40 million. Borrowings under this facility, as
amended, are subject to a borrowing base limitation based on certain percentages of eligible
accounts receivable, eligible inventory and the appraised value of eligible machinery and
equipment and real estate, subject to certain limitations. The borrowing base arrangement
includes a provision whereby proceeds from collection of substantially all of the Companys
accounts receivable are deposited into bank accounts which, under certain circumstances, are
applied daily toward repayment of borrowings outstanding, if any, under the Revolving Credit
Facility. At March 31, 2005, the Company had borrowings outstanding under the Revolving
Credit Facility totaling $16.0 million and had letters of credit outstanding of approximately
$28.2 million. The Company had additional borrowing availability of approximately $25.6
million. 46




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ACG HOLDINGS, INC. Notes to Consolidated Financial Statements The Revolving Credit Facility is secured by substantially all of the assets of Graphics.
Holdings has guaranteed Graphics indebtedness under the Revolving Credit Facility, which
guarantee is secured by a pledge of all of Graphics and Graphics subsidiaries stock. Amounts outstanding under the Revolving Credit Facility, as amended, bear interest at a rate
equal to, at the Companys option, (a) an alternate base rate, plus an applicable margin of
2.00%, or (b) a reserve adjusted LIBOR rate, plus an applicable margin of 3.00%. The
applicable margins under both rate structures are subject to periodic downward adjustment
based upon the attainment of certain fixed charge coverage ratio levels. The Revolving Credit Facility, as amended, contains customary affirmative and negative
covenants, including but not limited to:  
    
    minimum fixed charge coverage ratio requirements; and
    
    limitations on acquisitions and investments, new subsidiaries, uses of proceeds,
indebtedness, liens, dividends and distributions, prepayments of certain
indebtedness, affiliate transactions, loans, asset dispositions and Holdings
business operations. The Company was in compliance with all such covenant requirements at March 31, 2005. May 5, 2005 Refinancing Transaction On May 5, 2005, the Company entered into an Amended and Restated Credit Agreement with Banc
of America Securities, as Sole Lead Arranger, and Bank of America, N.A., as Administrative
Agent, and certain lenders (the 2005 Credit Agreement) which resulted in the refinancing of
the Revolving Credit Facility and significantly improved the Companys liquidity position.
The 2005 Credit Agreement is a $90 million secured facility comprised of:  
    
    a $55 million revolving credit facility ($40 million of which may be used for
letters of credit), which is not subject to a borrowing base limitation, maturing on
December 15, 2009 (the 2005 Revolving Credit Facility); and
    
    a $35 million non-amortizing term loan facility maturing on December 15, 2009
(the 2005 Term Loan Facility). Interest on borrowings under the 2005 Credit Agreement is floating, based upon existing
market rates, plus agreed upon margin levels. In addition, Graphics is obligated to pay
specified commitment and letter of credit fees. Borrowings under the 2005 Term Loan Facility must be repaid in full on the facilitys
maturity date of December 15, 2009. Graphics is also required to prepay the 2005 Term Loan
Facility and the 2005 Revolving Credit Facility under certain circumstances with excess cash
flows and proceeds from certain sales of assets, equity and incurrence of indebtedness. Borrowings under the 2005 Credit Agreement are secured by substantially all of Graphics
assets. In addition, Holdings has guaranteed all such indebtedness under the 2005 Credit
Agreement, which guarantee is secured by a pledge of all of Graphics capital stock. The 2005 Credit Agreement requires satisfaction of certain leverage ratio requirements. In
addition, the 2005 Credit Agreement includes various other customary affirmative and negative
covenants and events of default. The 2005 Credit Agreement places conditions upon the
Companys ability to, among other things: make investments or dispositions, pay dividends
and other distributions, incur liens, incur additional indebtedness, make capital
expenditures, enter into transactions with affiliates, issue stock of subsidiaries, enter
into agreements that contain restrictions affecting subsidiaries and consummate mergers and
acquisitions. 47




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ACG HOLDINGS, INC. Notes to Consolidated Financial Statements As of April 30, 2005, the Company had approximately $2.8 million of unamortized deferred
financing costs associated with the Revolving Credit Facility. These costs will be amortized
over the term of the 2005 Credit Agreement in accordance with the guidance set forth in
Emerging Issues Task Force Issue 98-14, Debtors Accounting for Changes in Line-of-Credit or
Revolving-Debt Arrangement (EITF 98-14). Future maturities of long-term debt and future minimum obligations under capitalized leases
at March 31, 2005 are as follows (in thousands): Long-Term
    
    
    CapitalizedFiscal Year
    
    Debt
    
    
    Leases2006
    
    $
    
    
    
    $
    5,6092007
    
    
    
    
    
    
    4,3512008
    
    
    
    
    
    
    3,7362009
    
    
    16,000
    
    
    
    1,9662010
    
    
    
    
    
    
    2062011
    
    
    280,000
    
    
    
    Total
    
    $
    296,000
    
    
    
    15,868Imputed interest
    
    
    
    
    
    
    (1,917
    )Present value of minimum lease payments
    
    
    
    
    
    $
    13,951
 Capital leases have varying maturity dates and implicit interest rates which generally
approximate 7%-10%. The Company estimates that the fair value of debt instruments, excluding
capital lease obligations, was $200.8 million, or $95.2 million less than the carrying value,
at March 31, 2005. The Company estimated that the fair value of the Companys debt
instruments, excluding capital lease obligations, approximated $249.2 million, or $30.8
million less than the carrying value, at March 31, 2004. 48




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ACG HOLDINGS, INC. Notes to Consolidated Financial Statements  (8)
    
    Income TaxesDeferred income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and the amounts
as measured by tax laws and regulations. Significant components of the Companys deferred
tax liabilities and assets as of March 31, 2005 and 2004 are as follows (in thousands): March 31,2005
    
    
    2004Deferred tax liabilities:Book over tax basis in fixed assets
    
    $
    15,493
    
    
    
    18,024Foreign taxes
    
    
    4,953
    
    
    
    4,624Accumulated amortization
    
    
    2,428
    
    
    
    2,148Other, net
    
    
    2,921
    
    
    
    798Total deferred tax liabilities
    
    
    25,795
    
    
    
    25,594Deferred tax assets:Allowance for doubtful accounts
    
    
    699
    
    
    
    1,119Accrued expenses and other liabilities
    
    
    18,515
    
    
    
    18,448Net operating loss carryforwards
    
    
    46,484
    
    
    
    35,318AMT credit carryforwards
    
    
    1,203
    
    
    
    1,203Minimum pension liability
    
    
    7,524
    
    
    
    7,918Cumulative translation adjustment
    
    
    229
    
    
    
    462Total deferred tax assets
    
    
    74,654
    
    
    
    64,468Valuation allowance for deferred tax assets
    
    
    54,772
    
    
    
    45,185Net deferred tax assets
    
    
    19,882
    
    
    
    19,283Net deferred tax liabilities
    
    $
    5,913
    
    
    
    6,311
  Management has evaluated the need for a valuation allowance for deferred tax assets and
believes that certain deferred tax assets will more likely than not be realized through the
future reversal of existing taxable temporary differences of the Company. The valuation
allowance increased by $9.6 million during the fiscal year ended March 31, 2005 as a result
of an increase in the deferred tax items, which is net of a decrease of $0.4 million related
to the tax effect of the minimum pension liability, which is a component of other
comprehensive income (loss). 49




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ACG HOLDINGS, INC. Notes to Consolidated Financial Statements  The valuation allowance increased by $18.4 million during the fiscal year ended March 31,
2004. This increase includes a $12.8 million adjustment reflecting a change in circumstances
which resulted in a judgment that, based on the provisions in SFAS
109 that restrict the Companys
ability to consider forecasts of future income, a corresponding amount of deferred tax assets
may not be realized. The change in circumstances arose from an assessment of the economic
climate, particularly the continuance of competitive pricing
pressures in the industry
and the expected increase in annual interest costs arising from issuance of the 10% Notes,
that provided negative evidence about the Companys ability to realize certain deferred tax
assets. The increase also included a $5.6 million net increase in the deferred tax items,
net of a decrease of $1.3 million related to the tax effect of the minimum pension liability,
a component of other comprehensive income (loss).During fiscal years ended March 31, 2005 and 2004, the Company recorded adjustments of $0.4
million and $2.2 million, respectively, to reflect the tax benefit associated with a change
in estimate with respect to its income tax liability.Income tax expense (benefit) attributable to income
(loss) from continuing operations consists of
(in thousands): Year ended March 31,2005
    
    
    2004
    
    
    2003CurrentFederal
    
    $
    
    
    
    
    
    
    
    
    (274
    )State
    
    
    129
    
    
    
    203
    
    
    
    163Foreign
    
    
    (990
    )
    
    
    704
    
    
    
    1,262Total current
    
    
    (861
    )
    
    
    907
    
    
    
    1,151DeferredFederal
    
    
    (310
    )
    
    
    8,069
    
    
    
    30State
    
    
    (417
    )
    
    
    1,528
    
    
    
    (3
    )Foreign
    
    
    (97
    )
    
    
    937
    
    
    
    381Total deferred
    
    
    (824
    )
    
    
    10,534
    
    
    
    408Provision (benefit) for income taxes
    
    $
    (1,685
    )
    
    
    11,441
    
    
    
    1,559
 50




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ACG HOLDINGS, INC. Notes to Consolidated Financial Statements The effective tax rates for the fiscal years ended March 31, 2005, 2004 and 2003 were 6.2%,
(67.5)% and 70.1%, respectively. The difference between these effective tax rates relating to
continuing operations and the statutory federal income tax rate is composed of the following
items: Year Ended March 31,2005
    
    
    2004
    
    
    2003Statutory tax rate
    
    
    35.0
    %
    
    
    35.0
    %
    
    
    35.0
    %State income taxes, less
federal tax impact
    
    
    (0.1
    )
    
    
    (8.9
    )
    
    
    4.7Foreign taxes, less federal
tax impact
    
    
    2.3
    
    
    
    (2.7
    )
    
    
    53.6Other nondeductible expenses
    
    
    (0.5
    )
    
    
    7.2
    
    
    
    8.4Change in valuation
allowance
    
    
    (31.4
    )
    
    
    (104.0
    )
    
    
    (54.4
    )Change in cumulative translation
adjustment
    
    
    (2.0
    )
    
    
    (3.1
    )
    
    
    16.4Previously accrued taxes
    
    
    1.6
    
    
    
    13.1
    
    
    
    Other, net
    
    
    1.3
    
    
    
    (4.1
    )
    
    
    6.4Effective income tax rate
    
    
    6.2
    %
    
    
    (67.5
    )%
    
    
    70.1
    %
 As of March 31, 2005, the Company had available net operating loss carryforwards (NOLs) for
state purposes of $80.3 million, which can be used to offset future state taxable income. If
these NOLs are not utilized, they will begin to expire in 2006 and will be totally expired in
2025. As of March 31, 2005, the Company had available NOLs for federal purposes of $123.1 million,
which can be used to offset future federal taxable income. If these NOLs are not utilized,
they will begin to expire in 2011 and will be totally expired in 2025. The Company also had available an alternative minimum tax credit carryforward of $1.2 million,
which can be used to offset future taxes in years in which the alternative minimum tax does
not apply. This credit can be carried forward indefinitely. The Company has alternative minimum tax NOLs in the amount of $129.2 million, which will begin
to expire in 2011 and will be totally expired in 2025. 51




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ACG HOLDINGS, INC. Notes to Consolidated Financial Statements  (9)
    
    Other LiabilitiesThe components of other liabilities are as follows (in thousands): March 31,2005
    
    
    2004Deferred revenue agreements (see note 13)
    
    $
    50,385
    
    
    
    49,608Postretirement liabilities (see note 10)
    
    
    3,804
    
    
    
    4,173Pension liabilities
    
    
    14,094
    
    
    
    20,496Other
    
    
    2,787
    
    
    
    3,203Total
    
    $
    71,070
    
    
    
    77,480
  (10)
    
    Employee Benefit PlansDefined Benefit Pension PlansPension PlansThe Company sponsors defined benefit pension plans covering full-time employees of the Company
who had at least one year of service at December 31, 1994. Benefits under these plans
generally are based upon the employees years of service and, in the case of salaried
employees, compensation during the years immediately preceding retirement. The Companys
general funding policy is to contribute amounts within the annually calculated actuarial range
allowable as a deduction for federal income tax purposes. The plans assets are maintained by
trustees in separately managed portfolios consisting primarily of equity and fixed income
securities. In October 1994, the Board of Directors approved an amendment to the Companys
defined benefit pension plans, which resulted in the freezing of additional defined benefits
for future services under the plans effective January 1, 1995.Supplemental Executive Retirement PlanIn October 1994, the Board of Directors approved a new Supplemental Executive Retirement Plan
(SERP), which is a defined benefit plan, for certain key executives. Benefits under this
plan will be paid from the Companys assets. The aggregate accumulated benefit obligation
under this plan was approximately $1.9 million and $2.2 million at March 31, 2005 and March
31, 2004, respectively. 52




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ACG HOLDINGS, INC. Notes to Consolidated Financial Statements  Defined Benefit Postretirement PlansPostretirement BenefitsThe Company provides certain other postretirement benefits, primarily life and health
insurance. Full-time employees who are eligible for benefits under the defined benefit
pension plans, have attained age 55 and have at least five years of service are entitled to
postretirement health care and life insurance coverage. Postretirement life insurance
coverage is provided at no cost to eligible retirees. Special cost-sharing arrangements for
health care coverage are available to employees whose age plus years of service at the date of
retirement equals or exceeds 85 (Rule of 85). Any eligible retiree not meeting the Rule of
85 must pay 100% of the required health care insurance premium.Effective January 1, 1995, the Company amended the health care plan changing the health care
benefit for all employees retiring on or after January 1, 2000. This amendment had the effect
of reducing the accumulated postretirement benefit obligation by approximately $3 million.
This reduction is reflected as unrecognized prior service cost and is being amortized on a
straight line basis over 15.6 years, the average remaining years of service to full
eligibility of active plan participants at the date of the amendment.401(k)Defined Contribution PlanEffective January 1, 1995, the Company amended its 401(k) defined contribution plan. Eligible
participants may contribute up to 15% of their annual compensation subject to maximum amounts
established by the Internal Revenue Service and receive an employer-matching contribution on
amounts contributed. Through March 16, 2003, the employer-matching contribution was made
bi-weekly and equaled 2% of annual compensation for all plan participants plus 50% of the
first 6% of annual compensation contributed to the plan by each employee, subject to maximum
amounts established by the Internal Revenue Service. Beginning March 17, 2003 through
December 31, 2004, the employer matching contribution was made bi-weekly and equaled 25% of
the first 6% of annual compensation contributed to the plan by each employee, subject to
maximum amounts established by the Internal Revenue Service. Subsequent to December 31, 2004,
the employer matching contributions were made bi-weekly and equaled 50% of the first 6% of
annual compensation contributed to the plan by each employee, subject to maximum amounts
established by the Internal Revenue Service. The Companys contribution under this Plan
amounted to $1.1 million during the fiscal year ended March 31, 2005, $0.8 million during the
fiscal year ended March 31, 2004 and $3.9 million during the fiscal year ended March 31, 2003. 53




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ACG HOLDINGS, INC. Notes to Consolidated Financial Statements  The following table provides a reconciliation of the changes in the defined benefit plans benefit
obligations and fair value of plan assets for the fiscal years ended March 31, 2005 and 2004 and a
statement of the funded status of such plans as of March 31, 2005 and 2004 (in thousands): Defined Benefit
    
    
    Defined BenefitPension Plans
    
    
    Postretirement Plan2005
    
    
    2004
    
    
    2005
    
    
    2004Change in Benefit ObligationBenefit obligation at beginning of year
    
    $
    67,185
    
    
    
    61,953
    
    
    
    2,801
    
    
    
    3,159Service cost
    
    
    468
    
    
    
    390
    
    
    
    31
    
    
    
    30Interest cost
    
    
    4,217
    
    
    
    4,211
    
    
    
    170
    
    
    
    182Plan participants contributions
    
    
    
    
    
    
    
    
    
    
    368
    
    
    
    310Actuarial loss (gain)
    
    
    1,725
    
    
    
    4,197
    
    
    
    141
    
    
    
    (264
    )Expected benefit payments
    
    
    (3,971
    )
    
    
    (3,566
    )
    
    
    (688
    )
    
    
    (616
    )Benefit obligation at end of year
    
    $
    69,624
    
    
    
    67,185
    
    
    
    2,823
    
    
    
    2,801Change in Plan AssetsFair value of plan assets at beginning
of year
    
    $
    40,193
    
    
    
    32,481
    
    
    
    
    
    
    
    Actual return on plan assets
    
    
    4,176
    
    
    
    7,638
    
    
    
    
    
    
    
    Employer contributions:Pension Plans
    
    
    8,777
    
    
    
    3,235
    
    
    
    
    
    
    
    SERP
    
    
    500
    
    
    
    405
    
    
    
    
    
    
    
    Postretirement Plan
    
    
    
    
    
    
    
    
    
    
    319
    
    
    
    306Plan participants contributions
    
    
    
    
    
    
    
    
    
    
    368
    
    
    
    310Benefits paid
    
    
    (3,971
    )
    
    
    (3,566
    )
    
    
    (687
    )
    
    
    (616
    )Fair value of plan assets at end of year
    
    $
    49,675
    
    
    
    40,193
    
    
    
    
    
    
    
    Funded Status
    
    $
    (19,949
    )
    
    
    (26,992
    )
    
    
    (2,823
    )
    
    
    (2,801
    )Unrecognized net actuarial (gain) or loss
    
    
    19,178
    
    
    
    20,187
    
    
    
    (141
    )
    
    
    (325
    )Unrecognized prior service gain
    
    
    
    
    
    
    
    
    
    
    (1,188
    )
    
    
    (1,411
    )Plan participants contributions
    
    
    
    
    
    
    
    
    
    
    48
    
    
    
    64Additional minimum pension liability
    
    
    (19,178
    )
    
    
    (20,187
    )
    
    
    
    
    
    
    Accrued benefit liability
    
    $
    (19,949
    )
    
    
    (26,992
    )
    
    
    (4,104
    )
    
    
    (4,473
    )
 54




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ACG HOLDINGS, INC. Notes to Consolidated Financial Statements Defined Benefit Pension Plans
    
    
    Defined Benefit Postretirement Plan2005
    
    
    2004
    
    
    2005
    
    
    2004Weighted  Average AssumptionsDiscount rate  benefit obligation
    
    
    6.25
    %
    
    
    6.50
    %
    
    
    6.25
    %
    
    
    6.50
    %Expected return on plan assets
    
    
    8.50
    %
    
    
    8.50
    %
    
    
    N/A
    
    
    
    N/ARate of compensation increase
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/A
  The Company uses a December 31 measurement date for its defined benefit pension and
postretirement plans. For measurement purposes under the defined benefit postretirement
plan, a 12 percent annual rate of increase in the per capita cost of covered health care
benefits (including prescription drugs) was assumed for March 31, 2005. This rate was
assumed to decrease gradually to 5 percent through the fiscal year ending 2013 and remain at
that level thereafter. Defined Benefit Pension Plans
    
    
    Defined Benefit Postretirement Plan2005
    
    
    2004
    
    
    2003
    
    
    2005
    
    
    2004
    
    
    2003Components of Net Periodic Benefit Cost(in thousands)Service cost
    
    $
    468
    
    
    
    390
    
    
    
    410
    
    
    
    31
    
    
    
    30
    
    
    
    21Interest cost
    
    
    4,217
    
    
    
    4,211
    
    
    
    4,237
    
    
    
    170
    
    
    
    182
    
    
    
    216Expected return on plan assets
    
    
    (3,510
    )
    
    
    (2,710
    )
    
    
    (3,930
    )
    
    
    
    
    
    
    
    
    
    
    Amortization of prior service cost
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (222
    )
    
    
    (222
    )
    
    
    (222
    )Amortization of unrecognized loss
    
    
    2,022
    
    
    
    2,441
    
    
    
    697
    
    
    
    
    
    
    
    
    
    
    
    Settlement loss
    
    
    46
    
    
    
    31
    
    
    
    28
    
    
    
    
    
    
    
    
    
    
    
    Recognized net actuarial gain
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (43
    )
    
    
    (62
    )
    
    
    (46
    )Net periodic benefit (income) loss
    
    $
    3,243
    
    
    
    4,363
    
    
    
    1,442
    
    
    
    (64
    )
    
    
    (72
    )
    
    
    (31
    )
  Expected Future Benefit PaymentsThe following benefit payments, which reflect expected future service, as appropriate, are
expected to be paid (in thousands). Defined Benefit
    
    
    Defined BenefitFiscal Year
    
    Pension Plans
    
    
    Postretirement Plan (a)2006
    
    $
    4,076
    
    
    
    2592007
    
    
    4,188
    
    
    
    2672008
    
    
    4,332
    
    
    
    2702009
    
    
    4,373
    
    
    
    2732010
    
    
    4,452
    
    
    
    2742011  2015
    
    
    23,740
    
    
    
    1,309Total
    
    $
    45,161
    
    
    
    2,652
 
 (a)
    
    Represents expected benefit payments net of plan participants contributions. 55




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ACG HOLDINGS, INC. Notes to Consolidated Financial Statements  Assumed health care cost trend rates have a significant effect on the amounts reported for
the medical component of the defined benefit postretirement plan. A one-percentage point
change in the assumed health care cost trend rates would have the following effects (in
thousands): 1% Point
    
    
    1% PointIncrease
    
    
    DecreaseEffect on total of service and interest
cost components of expense
    
    $
    4
    
    
    
    (4
    )Effect on postretirement benefit obligation
    
    $
    70
    
    
    
    (64
    )
  In December 2003, the Medicare Prescription Drug, Improvement and Modernization Act of
2003 (the Act) was enacted. The Act introduced a prescription drug benefit under Medicare
(Medicare Part D) as well as a federal subsidy to sponsors of retiree healthcare benefit
plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. In
May 2004, the FASB issued FASB Staff Position No. FAS 106-2, Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of
2003 (FSP FAS 106-2), which discusses certain accounting and disclosure issues required by
the Act. FSP FAS 106-2 was effective in the quarter ended September 30, 2004 for the Company.The Company has concluded that the prescription drug benefits provided under its
postretirement plans are actuarially equivalent to the Medicare benefit as necessary to
qualify for the subsidy based on managements understanding of the Medicare Reform legislation
and confirmation from the Companys actuarial consultants. FSP FAS 106-2 provides two
alternative methods of transition when adopted, retroactive to the date of enactment or
prospective from the date of adoption. In the quarter ended September 30, 2004, the Company
adopted FSP FAS 106-2 and elected the retroactive transition method. Application of FSP FAS
106-2 resulted in a $0.1 million reduction in the accumulated postretirement benefit
obligation for the fiscal year ended March 31, 2005. The effect of the subsidy by net
periodic postretirement benefit cost component for fiscal year ended March 31, 2005 is shown
below (in thousands): Effect of SubsidyInterest cost
    
    $
    (9
    )Net amortization and deferral of actuarial (gain)/loss
    
    
    (15
    )Net periodic postretirement benefit cost
    
    
    (24
    )
  The estimated gross amount of subsidy receipts at March 31, 2005 are as follows (in
thousands): Fiscal Year
    
    Subsidy Receipts2006
    
    $
    52007
    
    
    222008
    
    
    222009
    
    
    222010
    
    
    212011-2015
    
    
    90Total
    
    $
    182
 56




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ACG HOLDINGS, INC. Notes to Consolidated Financial Statements  Plan AssetsThe Companys defined benefit pension plans reflect weighted-average target allocations as of
March 31, 2005 and the percentages of the fair value of plan assets are allocated at March
31, 2005 and 2004 by asset category as follows: TargetAllocation
    
    
    Percentage of Plan Assets2005
    
    
    2005
    
    
    2004Global equity securities
    
    
    78
    %
    
    
    75.2
    %
    
    
    81.3
    %Fixed income securities
    
    
    22
    %
    
    
    23.2
    %
    
    
    16.8
    %Cash
    
    
    0
    %
    
    
    1.6
    %
    
    
    1.9
    %Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
  The Companys pension plans long-term target asset allocation is shown above. The long-term
allocation targets reflect the Companys asset class return expectations and tolerance for
investment risk within the context of the pension plans long-term obligations. The
long-term asset allocation is supported by an analysis that incorporates historical and
expected returns by asset class as well as volatilities and correlations across asset classes
and the Companys liability profile. Due to market conditions and other factors, actual
asset allocations may vary from the target allocation outlined above.To develop the expected long-term rate of return on assets assumption, the Company considered
the historical returns and future expectations for returns for each asset class, as well as
the target asset allocation of the present portfolio. This resulted in the selection of the
8.5% long-term rate of return on asset assumption for 2005.It is the Companys practice to fund amounts for the defined benefit pension plans at least
sufficient to meet the minimum requirements set forth in applicable employee benefit laws and
local tax laws. Liabilities in excess of these funding levels are included in the Companys
consolidated balance sheets. Employer contributions for the defined benefit pension plans
for the fiscal year ending March 31, 2006 are estimated to be approximately $8.0 million.(11)
    
    Capital StockAt March 31, 2005, capital stock consists of Holdings common stock (Common Stock). Each
share of Common Stock is entitled to one vote on each matter common shareholders are entitled
to vote. Dividends on the Common Stock are discretionary by the Board of Directors and are
restricted or prohibited by the Revolving Credit Facility (see note 1).(12)
    
    Stock Option PlansCommon Stock Option PlansIn 1993, the Company established the ACG Holdings, Inc. Common Stock Option Plan. This plan,
as amended, (the 1993 Common Stock Option Plan) is administered by a committee of the Board
of Directors (the Committee) and currently provides for granting up to 17,322 shares of
Common Stock. On January 16, 1998, the Company established another common stock option plan
(the 1998 Common Stock Option Plan). This plan is administered by the Committee and
provides for granting up to 36,939 shares of Common Stock. The 1993 Common Stock Option Plan
and the 1998 Common Stock Option Plan are collectively referred to as the Common Stock
Option Plans. Stock options may be granted under the Common Stock Option Plans to
officers and other key employees of the Company at the exercise price per share of Common
Stock, as determined at the time of grant by the Committee in its sole discretion. All
options are 25% exercisable on the first anniversary date of a grant and vest in additional
25% increments on each of the next three anniversary dates of each grant. All options expire
10 years from the date of grant. 57




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ACG HOLDINGS, INC. Notes to Consolidated Financial Statements  A summary of activity under the Common Stock Option Plans is as follows: Weighted-AverageExercise
    
    
    ExercisableOptions
    
    
    Price ($)
    
    
    Options (a)Outstanding at March 31, 2002
    
    
    30,290
    
    
    
    13.15
    
    
    
    27,569Granted
    
    
    2,974
    
    
    
    .01Exercised
    
    
    (20,531
    )
    
    
    .01Forfeited
    
    
    (2,411
    )
    
    
    17.43Outstanding at March 31, 2003
    
    
    10,322
    
    
    
    .01
    
    
    
    6,617Granted
    
    
    
    
    
    
    Exercised
    
    
    (1,125
    )
    
    
    .01Forfeited
    
    
    
    
    
    
    Outstanding at March 31, 2004
    
    
    9,197
    
    
    
    .01
    
    
    
    6,946Granted
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    Forfeited
    
    
    (1,301
    )
    
    
    .01Outstanding at March 31, 2005
    
    
    7,896
    
    
    
    .01
    
    
    
    7,131
 
 (a)
    
    At March 31, 2005, 2004 and 2003 all exercisable options had a $.01/option exercise
price. Black-Scholes Option Pricing Model Wtd. Avg. AssumptionsFiscal Year
    
    #
    
    
    Wtd. Avg.
    
    
    Exercise
    
    
    Risk Free
    
    
    Annual
    
    
    
    
    
    
    ExpectedEnded
    
    Options
    
    
    Grant Date
    
    
    Price per
    
    
    Interest
    
    
    Dividend
    
    
    Expected
    
    
    LifeMarch 31,
    
    Granted
    
    
    Fair Value ($)
    
    
    Option ($)
    
    
    Rate (%)
    
    

Yield(%)
    
    

Volatility
    
    
    (Years)2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2003
    
    
    632
    
    
    
    343.73
    
    
    
    .01
    
    
    
    3.56
    
    
    
    
    
    
    
    
    
    
    
    52,342
    
    
    
    .01
    
    
    
    .01
    
    
    
    1.63
    
    
    
    
    
    
    
    
    
    
    
    52,974
  The weighted-average remaining contractual life of the options outstanding at March 31,
2005 was 4.3 years. A total of 7,569 options for shares (including 362 previously exercised
options that were subsequently canceled) of Holdings Common Stock were reserved for issuance,
but not granted under the Common Stock Option Plans at March 31, 2005.As a result of the SFAS 123 requirements, the Company recognized stock compensation expense
of $0.1 million related to the common stock option grants in the fiscal year ended March 31,
2005 and $0.2 million in each of the fiscal years ended March 31, 2004 and March 31, 2003.Preferred Stock Option PlanIn the fiscal year ended March 31, 1998, the Company established the ACG Holdings, Inc.
Series AA and Series BB convertible preferred stock (collectively Preferred Stock) Option
Plan (the Preferred Stock Option Plan). This plan was administered by the Committee and
provided for granting up to 583 shares of Preferred Stock. 58




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ACG HOLDINGS, INC. Notes to Consolidated Financial Statements  Stock options could be granted under this Preferred Stock Option Plan to officers and other
key employees of the Company at the exercise price per share of Preferred Stock, as
determined at the time of grant by the Committee in its sole discretion. All options were
fully vested and 100% exercisable at the date of grant. All options would have expired 10
years from date of grant. All 582 outstanding options to purchase shares of Preferred Stock
of Holdings were canceled concurrently with the 2003 Refinancing (see note 7).A summary of the Preferred Stock Option Plan is as follows: OptionsOutstanding at March 31, 2002
    
    
    555Granted
    
    
    27Exercised
    
    
    Forfeited
    
    
    Outstanding at March 31, 2003
    
    
    582Granted
    
    
    Exercised
    
    
    Forfeited
    
    
    (582
    )Outstanding
at March 31, 2004 and 2005
    
    
    
  As a result of the SFAS 123 requirements, the Company recognized approximately $0.1
million in the fiscal year ended March 31, 2003 related to the preferred stock option grant
during that fiscal year. There were no grants of preferred options in the fiscal years ended
March 31, 2005 and March 31, 2004 and therefore, the Company recognized no stock compensation
expense for those years.(13)
    
    Commitments and ContingenciesThe Company incurred rent expense of $4.3 million for each of the fiscal years ended March
31, 2005 and 2004, and incurred $4.5 million in the fiscal year ended March 31, 2003 under
various operating leases. Future minimum rental commitments under existing operating lease
arrangements at March 31, 2005 are as follows (in thousands): Fiscal Year2006
    
    $
    3,0852007
    
    
    2,6052008
    
    
    1,9132009
    
    
    1,5932010
    
    
    1,379Thereafter
    
    
    560Total
    
    $
    11,135
 59




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##### Table of Contents



ACG HOLDINGS, INC. Notes to Consolidated Financial Statements The Company has an employment agreement with one of its principal officers. This agreement
provides for a minimum salary level as well as incentive bonuses, which are payable if
specified management goals are attained. The aggregate commitment for future compensation at
March 31, 2005, excluding bonuses, was approximately $1.7 million. In the quarter ended December 31, 1997, the Company entered into multi-year contracts to
purchase a portion of the Companys raw materials to be used in its normal operations. In
connection with such purchase agreements, pricing for a portion of the Companys raw
materials is adjusted for certain movements in market prices, changes in raw material costs
and other specific price increases while purchase quantity levels are variable based upon
certain contractual requirements and conditions. The Company is deferring certain
contractual provisions over the life of the contracts, which are being recognized as the
purchase commitments are achieved and the related inventory is sold. The amount deferred at
March 31, 2005 is $50.4 million and is included within Other liabilities in the Companys
consolidated balance sheet. Graphics, together with over 300 other persons, has been designated by the U. S.
Environmental Protection Agency as a potentially responsible party (a PRP) under the
Comprehensive Environmental Response Compensation and Liability Act (CERCLA, also known as
Superfund) at a solvent recovery operation that closed in 1989. Although liability under
CERCLA may be imposed on a joint and several basis and the Companys ultimate liability is
not precisely determinable, the PRPs have agreed in writing that Graphics share of removal
costs is approximately 0.583%; therefore Graphics believes that its share of the anticipated
remediation costs at such site will not be material to its business or the Companys
consolidated financial statements as a whole. Graphics received written notice, dated May 10, 2004, of its potential liability in
connection with the Gibson Environmental Site at 2401 Gibson Street, Bakersfield, California.
Gibson Environmental, Inc. operated the (six acre) Site as a storage and treatment facility
for used oil and contaminated soil from June 1987 through October 1995. Graphics received
the notice and a Settlement Offer from LECG, a consultant representing approximately 60
companies comprising the Gibson Group Trust. Graphics has begun its investigation into this
matter but it believes its potential liability in connection with this Site will not be
material to its business or the Companys consolidated financial statements as a whole. Based upon an analysis of Graphics volumetric share of waste contributed to the sites, the
Company maintains a reserve of approximately $0.1 million in connection with these
liabilities in its consolidated balance sheets at March 31, 2005 and 2004. The Company
believes this amount is adequate to cover such liabilities. The Company has been named as a defendant in several legal actions arising from its normal
business activities. In the opinion of management, any liabilities that may arise from such
actions will not, individually or in the aggregate, have a material adverse effect on the
Companys consolidated financial statements as a whole. 60




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ACG HOLDINGS, INC. Notes to Consolidated Financial Statements  (14)
    
    Interim Financial Information (Unaudited)Quarterly financial information follows (in thousands): Sales
    
    
    Gross Profit
    
    
    Net Income (Loss)Fiscal Year 2005
    
    Quarter Ended:June 30
    
    $
    110,850
    
    
    
    12,863
    
    
    
    (2,188
    )September 30
    
    
    106,605
    
    
    
    10,623
    
    
    
    (3,463
    )December 31
    
    
    123,652
    
    
    
    13,392
    
    
    
    (2,286
    )March 31
    
    
    108,406
    
    
    
    8,994
    
    
    
    (17,730
    ) (a)Total
    
    $
    449,513
    
    
    
    45,872
    
    
    
    (25,667
    )Fiscal Year 2004
    
    Quarter Ended:June 30
    
    $
    121,687
    
    
    
    18,701
    
    
    
    3,101
    (b)September 30
    
    
    115,280
    
    
    
    14,674
    
    
    
    (22,680
    ) (c)December 31
    
    
    128,569
    
    
    
    17,230
    
    
    
    3,007
    (d)March 31
    
    
    105,566
    
    
    
    11,176
    
    
    
    (12,269
    ) (e)Total
    
    $
    471,102
    
    
    
    61,781
    
    
    
    (28,841
    )
   (a)
    
    Includes $10.0 million of pre-tax restructuring and other charges.(b)
    
    Includes $0.5 million in discontinued operations losses.(c)
    
    Includes $2.0 million of pre-tax restructuring charges, $3.2 million of pre-tax
charges related to the write-off of deferred financing costs, $12.8 million of expense
related to an adjustment to increase the deferred tax asset valuation allowance, and
$1.7 million of incremental interest expense as a result of the 30-day call provision
related to the 12 3/4% Notes.(d)
    
    Includes $2.2 million of income related to an adjustment recorded to reflect the
tax benefit associated with a change in estimate with respect to the Companys income
tax liability.(e)
    
    Includes $6.1 million of pre-tax restructuring and other charges.  (15)
    
    Restructuring Costs and Other ChargesFiscal Year 2005 Restructuring CostsNew York Premedia Consolidation PlanIn March 2005, the Companys Board of Directors approved a restructuring plan for the
premedia services segment designed to improve operating efficiencies and overall
profitability. This plan included the consolidation of the Companys two premedia facilities
located in New York, New York. This action resulted in the elimination of 10 positions
within the Company.As a result, the Company recorded a pre-tax restructuring charge of approximately $1.5
million in the quarter ended March 31, 2005 associated with this plan. This charge is
classified within restructuring and other charges in the consolidated statement of operations
for the fiscal year ended March 31, 2005. The costs of this restructuring plan were
accounted for in accordance with the guidance set forth in Statement of Financial Accounting
Standards No. 146, Accounting for Costs Associated with Exit or Disposal Activities (SFAS
146). This restructuring charge is composed of severance and related termination benefits,
lease termination costs primarily related to future lease commitments and other costs. 61




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ACG HOLDINGS, INC. Notes to Consolidated Financial Statements  The following table summarizes the activity related to this restructuring plan for the fiscal
year ended March 31, 2005 (in thousands): Initial Recording
    
    
    
    
    
    
    03/31/05of Restructuring
    
    
    
    
    
    
    RestructuringReserve
    
    
    Activity
    
    
    Reserve BalanceSeverance and other
employee costs
    
    $
    195
    
    
    
    
    
    
    
    195Lease termination costs
    
    
    1,271
    
    
    
    
    
    
    
    1,271Other costs
    
    
    15
    
    
    
    
    
    
    
    15$
    1,481
    
    
    
    
    
    
    
    1,481
  As of March 31, 2005 the Company believes the restructuring reserve of approximately $1.5
million is adequate. The process of consolidating the two premedia services facilities and
the elimination of certain personnel within the Company was substantially completed by April
30, 2005. The Company anticipates that $0.8 million of these costs will be paid by March 31,
2006, $0.4 million will be paid by March 31, 2007 and $0.1 million will be paid each year
following through March 31, 2010. These payments will be funded through cash generated from
operations and borrowings under the Companys 2005 Revolving Credit Facility.Pittsburg Facility Closure PlanIn March 2005, the Companys Board of Directors approved a restructuring plan for the print
segment to reduce manufacturing costs and improve profitability. This plan included the
closure of the Pittsburg, California print facility. This action resulted in the elimination
of 136 positions within the Company.As a result, the Company recorded a pre-tax restructuring charge of approximately $3.1
million in the quarter ended March 31, 2005 associated with this plan. This charge is
classified within restructuring and other charges in the consolidated statement of operations
for the fiscal year ended March 31, 2005. The cost of this restructuring plan was accounted
for in accordance with the guidance set forth in SFAS 146. This restructuring charge is
composed of severance and related termination benefits, lease termination costs and other
costs.The following table summarizes the activity related to this restructuring plan for the fiscal
year ended March 31, 2005 (in thousands): Initial Recording
    
    
    
    
    
    
    03/31/05of Restructuring
    
    
    
    
    
    
    RestructuringReserve
    
    
    Activity
    
    
    Reserve BalanceSeverance and other
employee costs
    
    $
    2,293
    
    
    
    (964
    )
    
    
    1,329Lease termination costs
    
    
    803
    
    
    
    (29
    )
    
    
    774Other costs
    
    
    40
    
    
    
    (3
    )
    
    
    37$
    3,136
    
    
    
    (996
    )
    
    
    2,140
 62




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ACG HOLDINGS, INC. Notes to Consolidated Financial Statements  As of March 31, 2005 the Company believes the restructuring reserve of approximately $2.1
million is adequate. The process of closing the print facility and the elimination of certain
personnel within the Company was completed by March 31, 2005. See note 4 to the consolidated
financial statements. The Company anticipates that these costs will be paid by March 31,
2006. These payments will be funded through cash generated from operations and borrowings
under the Companys 2005 Revolving Credit Facility.Plant and SG&A Reduction PlanIn February 2005, the Companys Board of Directors approved a restructuring plan for the
print and premedia services segments to reduce overhead costs and improve operating
efficiency and profitability. This plan resulted in the elimination of 60 positions within
the Company, including both facility and selling and administrative employees.As a result, the Company recorded a pre-tax restructuring charge of approximately $3.8
million in the quarter ended March 31, 2005 associated with this plan. This charge is
classified within restructuring costs and other charges in the consolidated statement of
operations for the fiscal year ended March 31, 2005. The cost of this restructuring plan was
accounted for in accordance with the guidance set forth in SFAS 146. This restructuring
charge is composed of severance and related termination benefits and other costs.The following table summarized the activity related to this restructuring plan for the fiscal
year ended March 31, 2005 (in thousands): Initial Recording
    
    
    
    
    
    
    03/31/05of Restructuring
    
    
    
    
    
    
    RestructuringReserve
    
    
    Activity
    
    
    Reserve BalanceSeverance and other
employee costs
    
    $
    3,502
    
    
    
    (294
    )
    
    
    3,208Other costs
    
    
    250
    
    
    
    (1
    )
    
    
    249$
    3,752
    
    
    
    (295
    )
    
    
    3,457
  As of March 31, 2005 the Company believes the restructuring reserve of approximately $3.5
million is adequate. Employee terminations related to this plan were substantially completed
by March 31, 2005. The Company anticipates that $2.7 million of these costs will be paid by
March 31, 2006, $0.7 million will be paid by March 31, 2007 and the remaining $0.1 million
will be paid by March 31, 2008. These payments will be funded through cash generated from
operations and borrowings under the Companys 2005 Revolving Credit Facility.Fiscal Year 2004 Restructuring CostsJanuary 2004 PlanIn January 2004, the Company implemented a restructuring plan for the print and premedia
services segments designed to improve operating efficiency and profitability. This plan
included a consolidation of capacity and the related downsizing of a print facility in
Stevensville, Ontario, a reduction of personnel in certain of the Companys other print and
premedia facilities and the elimination of certain selling and administrative positions.
These actions included the elimination of 208 positions within the Company.As a result, the Company recorded a pre-tax restructuring charge of approximately $5.7
million in the quarter ended March 31, 2004 associated with this plan. This charge is
classified within restructuring costs and other charges in the consolidated statement of
operations for the fiscal year ended March 31, 2004. The cost of this restructuring plan was
accounted for in accordance with the guidance set forth in SFAS 146. This restructuring
charge is composed primarily of severance and related termination benefits. The Company
reduced the restructuring reserve related to this plan by approximately $0.7 million in the
quarter ended March 31, 2005. This reduction was primarily the result of lower than
anticipated severance and other employee costs due to the terminated employees obtaining other employment during their severance periods. 63




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ACG HOLDINGS, INC. Notes to Consolidated Financial Statements  The following table summarizes the activity related to this restructuring plan for the fiscal
year ended March 31, 2005 (in thousands): 03/31/04
    
    
    
    
    
    
    
    
    
    
    03/31/05Restructuring
    
    
    
    
    
    
    Reserve
    
    
    RestructuringReserve Balance
    
    
    Activity
    
    
    Adjustment
    
    
    Reserve BalanceSeverance and
other employee costs
    
    $
    3,515
    
    
    
    (2,361
    )
    
    
    (341
    )
    
    
    813Lease termination costs
    
    
    3
    
    
    
    
    
    
    
    (3
    )
    
    
    Other costs
    
    
    442
    
    
    
    (15
    )
    
    
    (350
    )
    
    
    77$
    3,960
    
    
    
    (2,376
    )
    
    
    (694
    )
    
    
    890
  During the fiscal year ended March 31, 2004, $1.8 million of these costs were paid. As
of March 31, 2005, the Company believes the restructuring reserve of approximately $0.9
million is adequate. The Company anticipates the remaining $0.9 million will be paid during
the fiscal year ending March 31, 2006. These payments will be funded through cash generated
from operations and borrowings under the 2005 Revolving Credit Facility.July 2003 PlanIn July 2003, the Company implemented a restructuring plan for the print and premedia
services segments to further reduce its selling, general and administrative expenses. This
plan resulted in the termination of four administrative employees.As a result of this plan, the Company recorded a pre-tax restructuring charge of
approximately $1.8 million in the quarter ended September 30, 2003. This charge is
classified within restructuring costs and other charges in the consolidated statement of
operations for the fiscal year ended March 31, 2004. The cost of this restructuring plan was
accounted for in accordance with the guidance set forth in SFAS 146. The restructuring
charge is composed of severance and related termination benefits.The following table summarizes the activity related to this restructuring plan for the fiscal
year ended March 31, 2005 (in thousands): 03/31/04
    
    
    
    
    
    
    03/31/05Restructuring
    
    
    
    
    
    
    RestructuringReserve Balance
    
    
    Activity
    
    
    Reserve BalanceSeverance and other
employee costs
    
    $
    1,117
    
    
    
    (687
    )
    
    
    430
  During the fiscal year ended March 31, 2004, $0.7 million of these costs were paid. As
of March 31, 2005, the Company believes the restructuring reserve of approximately $0.4
million is adequate. The Company anticipates that approximately $0.3 million of the
restructuring balance will be paid by March 31, 2006 and the remaining $0.1 million will be
paid during the fiscal year ending March 31, 2007. These payments will be funded through
cash generated from operations and borrowings under the 2005 Revolving Credit Facility.Fiscal Year 2003 Restructuring CostsIn the fourth quarter of Fiscal Year 2003, the Companys Board of Directors approved a
restructuring plan for the print and premedia services segments designed to improve operating
efficiency and profitability. This plan included the closing of a premedia services facility
in Nashville, Tennessee, a reduction of personnel in both the print and premedia services
segments and the elimination of certain administrative personnel. These combined actions
resulted in the elimination of 30 positions within the Company. 64




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ACG HOLDINGS, INC. Notes to Consolidated Financial Statements  As a result of this plan, the Company recorded a pre-tax restructuring charge of
approximately $1.2 million in the fourth quarter of the fiscal year ended March 31, 2003.
This charge is classified within restructuring costs and other charges in the consolidated
statement of operations for the fiscal year ended March 31, 2003. The cost of this
restructuring plan was accounted for in accordance with the guidance set forth in SFAS 146.
The restructuring charge is primarily composed of severance and related termination benefits.
The Company reduced the restructuring reserve related to this plan by approximately $0.2
million in the quarter ended March 31, 2004 and by less than $0.1 million in the quarter
ended March 31, 2005. This reduction was primarily the result of lower than anticipated
severance and other employee costs due to the terminated employees obtaining other employment
during their severance periods.The following table summarizes the activity related to this restructuring plan for the fiscal
year ended March 31, 2005 (in thousands): 03/31/04
    
    
    
    
    
    
    
    
    
    
    03/31/05Restructuring
    
    
    
    
    
    
    Reserve
    
    
    RestructuringReserve Balance
    
    
    Activity
    
    
    Adjustment
    
    
    Reserve BalanceSeverance and other
employee costs
    
    $
    12
    
    
    
    (7
    )
    
    
    (5
    )
    
    
    Other costs
    
    
    24
    
    
    
    (13
    )
    
    
    (11
    )
    
    
    $
    36
    
    
    
    (20
    )
    
    
    (16
    )
    
    
    
  During the fiscal year ended March 31, 2003, $0.1 million of these costs were paid and in
fiscal year ended March 31, 2004, $0.9 million was paid. The process of closing a premedia
services facility, and the elimination of certain personnel within the Company was completed
by March 31, 2003.Fiscal Year 2002 Restructuring CostsIn January 2002, the Companys Board of Directors approved a restructuring plan for the print
and premedia services segments designed to improve asset utilization, operating efficiency
and profitability. This plan included the closing of a print facility in Hanover,
Pennsylvania, and a premedia services facility in West Palm Beach, Florida, the downsizing of
a Buffalo, New York premedia services facility and the elimination of certain administrative
personnel. This action resulted in the elimination of 189 positions within the Company.As a result of this plan, the Company recorded a pre-tax restructuring charge of
approximately $8.6 million in the fourth quarter of the fiscal year ended March 31, 2002.
This charge was classified within restructuring costs and other charges in the consolidated
statement of operations for the fiscal year ended March 31, 2002. The cost of this
restructuring plan was accounted for in accordance with the guidance set forth in Emerging
Issues Task Force Issue 94-3, Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a
Restructuring) (EITF 94-3). The restructuring charge included severance and related
termination benefits, lease termination costs primarily related to future lease commitments,
equipment deinstallation costs directly associated with the disassembly of certain printing
presses and other equipment, and other costs primarily including legal fees, site clean-up
costs and the write-off of certain press related parts that provided no future use or
functionality. The Company recorded an additional $0.2 million of restructuring charges
related to this plan in each of the quarters ended March 31, 2004 and September 30, 2003 and
$0.7 million in the quarter ended March 31, 2005. These charges are primarily related to
future lease commitments and are classified within restructuring costs and other charges in
the consolidated statements of operations for the fiscal years ended March 31, 2004 and 2005. 65




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ACG HOLDINGS, INC. Notes to Consolidated Financial Statements The following table summarizes the activity related to this restructuring plan for the fiscal
year ended March 31, 2005 (in thousands): 03/31/04
    
    
    
    
    
    
    
    
    
    
    03/31/05Restructuring
    
    
    
    
    
    
    
    
    
    
    RestructuringReserve Balance
    
    
    Activity
    
    
    Reserve Adjustment
    
    
    Reserve BalanceSeverance and other
employee costs
    
    $
    100
    
    
    
    (71
    )
    
    
    (29
    )
    
    
    Lease termination
costs
    
    
    1,232
    
    
    
    (447
    )
    
    
    739
    
    
    
    1,524$
    1,332
    
    
    
    (518
    )
    
    
    710
    
    
    
    1,524
  The process of closing two facilities and downsizing one facility, including equipment
deinstallation and relocation of that equipment to other facilities within the Company, was
completed by March 31, 2002. During fiscal year ended March 31, 2004, $0.9 million of these
costs were paid and in the fiscal years ended March 31, 2003 and 2002, $3.4 million of these
costs were paid in each year. As of March 31, 2005, the Company believes the restructuring
reserve of approximately $1.5 million is adequate. The Company anticipates that $0.3 million
of the restructuring reserve balance will be paid in each of the fiscal years ending March
31, 2006, 2007 and 2008 and $0.2 million will be paid each fiscal year following through March
31, 2011. These payments will be funded through cash generated from operations and
borrowings under the 2005 Revolving Credit Facility.Other ChargesThe Company recorded an impairment charge of approximately $1.6 million in the fourth quarter
of the fiscal year ended March 31, 2005, $0.4 million in the fourth quarter of the fiscal
year ended March 31, 2004 and $0.5 million in the fourth quarter of the fiscal year ended
March 31, 2003 to reflect the decision to abandon certain Company assets and to write-down
other assets to fair value. The $1.6 million impairment charge recorded in the fourth
quarter of fiscal year ended March 31, 2005, included $1.2 million related to the write-off
of certain assets and the write-down to fair value of the assets held for sale in the
Pittsburg, California print facility (see note 4). The provision was based on a review of
the Companys long-lived assets in accordance with SFAS 144. These impairment charges are
classified within restructuring costs and other charges in the consolidated statements of
operations.(16)
    
    Parent Guarantee of Subsidiary DebtGraphics, the issuer of the 10% Notes, is a wholly owned subsidiary of Holdings. Holdings
has no other subsidiaries. Holdings has fully and unconditionally guaranteed the payment of
principal and interest on the 10% Notes. The 10% Notes are fully and unconditionally
guaranteed on a senior basis by Holdings and by all future domestic subsidiaries of Graphics.
Holdings conducts no business other than as the sole shareholder of Graphics and has no
significant assets other than the capital stock of Graphics, all of which is pledged to
secure Holdings obligations under the Revolving Credit Facility. Holdings is dependent upon
distributions from Graphics to fund its obligations. Graphics ability to pay dividends or
lend funds to Holdings is restricted or prohibited (see note 1 for a discussion of those
restrictions and prohibitions).(17)
    
    Industry Segment InformationThe Company has significant operations principally in two industry segments: (1) print and
(2) premedia services. All of the Companys print business and assets are attributed to the
print division and all of the Companys premedia services business and assets are attributed
to the premedia services division. The Companys corporate expenses have been segregated and
do not constitute a reportable segment. 66




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ACG HOLDINGS, INC. Notes to Consolidated Financial Statements The Company has two reportable segments: (1) print and (2) premedia services. The print
business produces advertising inserts, comics (Sunday newspaper comics, comic insert
advertising and comic books), and other publications. The Companys premedia services
business assists customers in the capture, manipulation, storage, transmission and
distribution of images. The majority of the premedia services work leads to the production
of four-color separations in a format appropriate for use by printers. The accounting policies of the segments are the same as those described in the summary of
significant accounting policies. The Company evaluates performance based on segment EBITDA,
which is defined as earnings before net interest expense, income tax expense (benefit),
depreciation and amortization. The Company generally accounts for intersegment revenues and
transfers as if the revenues or transfers were to third parties, that is, at current market
prices. Certain reclassifications have been made to prior year balances to conform with the
current year presentation . In the first quarter of the fiscal year ended March 31, 2004, the Company sold its
digital visual effects business, Digiscope, for a de minimis amount and recorded a net loss
of approximately $0.4 million. Segment operating results for the fiscal years ended March
31, 2004 and 2003 have been reclassified to present Digiscopes operating results as a
discontinued operation. In addition, fiscal year ended March 31, 2003 below reflects a
reclassification to the print segment of certain premedia revenues and expenses performed in
the print facilities previously presented within the premedia services segment. During the
fiscal year ended March 31, 2005, the Companys segment reporting has been revised, and prior
year disclosures have been reclassified, to reflect the current approach used by the Chief
Operating Decision Maker in evaluating segment operating results. These reclassifications do
not impact any of the Companys previously reported consolidated results. The Companys reportable segments are business units that offer different products and
services. They are managed separately because each segment requires different technology and
marketing strategies. A substantial portion of the revenue, long-lived assets and other
assets of the Companys reportable segments are attributed to or located in the United
States. Print
    
    
    Premedia Services
    
    
    Corporate and Other(In thousands)
    
    (a)
    
    
    (a)
    
    
    (b)
    
    
    TotalFiscal Year 2005Sales
    
    $
    393,922
    
    
    
    55,591
    
    
    
    
    
    
    
    449,513EBITDA
    
    $
    22,997
    
    
    
    10,059
    
    
    
    (3,307
    )
    
    
    29,749Depreciation and amortization
    
    
    (19,867
    )
    
    
    (3,184
    )
    
    
    
    
    
    
    (23,051
    )Interest expense
    
    
    
    
    
    
    
    
    
    
    (34,087
    )
    
    
    (34,087
    )Interest income
    
    
    
    
    
    
    
    
    
    
    37
    
    
    
    37Income tax benefit
    
    
    
    
    
    
    
    
    
    
    1,685
    
    
    
    1,685Net income (loss)
    
    $
    3,130
    
    
    
    6,875
    
    
    
    (35,672
    )
    
    
    (25,667
    )Total assets
    
    $
    230,490
    
    
    
    15,179
    
    
    
    13,229
    
    
    
    258,898Total goodwill
    
    $
    64,656
    
    
    
    1,892
    
    
    
    
    
    
    
    66,548Total capital expenditures
    
    $
    5,418
    
    
    
    1,489
    
    
    
    
    
    
    
    6,907
 67




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ACG HOLDINGS, INC. Notes to Consolidated Financial Statements Premedia
    
    
    Corporate and(In thousands)
    
    Print (a)
    
    
    Services (a)
    
    
    Other (b)
    
    
    TotalFiscal Year 2004Sales
    
    $
    418,004
    
    
    
    53,098
    
    
    
    
    
    
    
    471,102EBITDA
    
    $
    38,789
    
    
    
    9,564
    
    
    
    (7,299
    )
    
    
    41,054Depreciation and amortization
    
    
    (20,733
    )
    
    
    (3,529
    )
    
    
    
    
    
    
    (24,262
    )Depreciation from
discontinued operations
    
    
    
    
    
    
    
    
    
    
    (26
    )
    
    
    (26
    )Interest expense
    
    
    
    
    
    
    
    
    
    
    (34,175
    )
    
    
    (34,175
    )Interest income
    
    
    
    
    
    
    
    
    
    
    9
    
    
    
    9Income tax expense
    
    
    
    
    
    
    
    
    
    
    (11,441
    )
    
    
    (11,441
    )Net income (loss)
    
    $
    18,056
    
    
    
    6,035
    
    
    
    (52,932
    )
    
    
    (28,841
    )Total assets
    
    $
    237,680
    
    
    
    15,316
    
    
    
    14,917
    
    
    
    267,913Total goodwill
    
    $
    64,656
    
    
    
    1,892
    
    
    
    
    
    
    
    66,548Total capital expenditures
    
    $
    14,465
    
    
    
    1,501
    
    
    
    
    
    
    
    15,966Fiscal Year 2003Sales
    
    $
    463,071
    
    
    
    54,068
    
    
    
    
    
    
    
    517,139EBITDA
    
    $
    52,415
    
    
    
    7,160
    
    
    
    (5,296
    )
    
    
    54,279Depreciation and amortization
    
    
    (19,760
    )
    
    
    (4,336
    )
    
    
    
    
    
    
    (24,096
    )Depreciation from
discontinued operations
    
    
    
    
    
    
    
    
    
    
    (355
    )
    
    
    (355
    )Interest expense
    
    
    
    
    
    
    
    
    
    
    (28,674
    )
    
    
    (28,674
    )Interest income
    
    
    
    
    
    
    
    
    
    
    90
    
    
    
    90Income tax expense
    
    
    
    
    
    
    
    
    
    
    (1,559
    )
    
    
    (1,559
    )Net income (loss)
    
    $
    32,655
    
    
    
    2,824
    
    
    
    (35,794
    )
    
    
    (315
    )Total assets
    
    $
    250,039
    
    
    
    17,405
    
    
    
    10,997
    
    
    
    278,441Total goodwill
    
    $
    64,656
    
    
    
    1,892
    
    
    
    
    
    
    
    66,548Total capital expenditures
    
    $
    26,534
    
    
    
    2,118
    
    
    
    
    
    
    
    28,652
 
 (a)
    
    EBITDA for the print and premedia services segments in Fiscal Year 2005 includes the
impact of restructuring costs and other charges of $7.8 million and $2.2 million,
respectively. In Fiscal Year 2004, EBITDA for the print and premedia services segments
includes the impact of restructuring costs and other charges of $7.5 million and $0.6 million,
respectively. EBITDA for the print and premedia services segments in Fiscal Year 2003
includes the impact of restructuring costs and other charges of $0.8 million and $0.9 million,
respectively.(b)
    
    EBITDA for corporate and other includes corporate general and administrative expenses, as
well as revenues and expenses associated with our digital visual effects business, Digiscope.
Digiscope was sold on June 5, 2003. The EBITDA loss of Digiscope included in the EBITDA table
above for Fiscal Years 2004 and 2003 was ($0.4) million and ($0.6) million, respectively. In
addition, corporate and other includes the write-off of deferred financing costs related to
the 2003 Refinancing of $3.2 million in Fiscal Year 2004. 68




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ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE None. 
 ITEM 9A.CONTROLS AND PROCEDURES As of March 31, 2005, an evaluation was performed under the supervision and with the participation
of our management, including the Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and procedures (as defined in
Rules 13a-14(c) and 15-d-14(c) promulgated under the Securities Exchange Act of 1934, as amended).
Based on that evaluation, our management including the Chief Executive Officer and Chief Financial
Officer, concluded that the disclosure controls and procedures were effective as of March 31, 2005.
There have been no significant changes in our internal controls or in other factors that could
significantly affect internal controls subsequent to March 31, 2005. There have not been any
changes in our internal controls over financial reporting during the period covered by this annual
report on Form 10-K that have materially affected, or are reasonably likely to materially affect,
our internal controls over financial reporting. 
 ITEM 9B.OTHER INFORMATION None. 69




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PART III 
 ITEM 10.DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The following table provides certain information about each of the current directors and executive
officers of Holdings and Graphics (ages as of March 31, 2005). All directors hold office until
their successors are duly elected and qualified. Name
    
    Age
    
    Position with Graphics and/or HoldingsStephen M. Dyott
    
    
    53
    
    
    Chairman, President, Chief Executive Officer and DirectorTimothy M. Davis
    
    
    50
    
    
    Senior Vice President/Administration, Secretary and General CounselPatrick W. Kellick
    
    
    47
    
    
    Senior Vice President/Chief Financial Officer and Assistant SecretaryStuart R. Reeve
    
    
    41
    
    
    President, New Business DevelopmentKathleen A. DeKam
    
    
    44
    
    
    President, Print and Premedia ServicesEric T. Fry
    
    
    38
    
    
    DirectorMichael C. Hoffman
    
    
    42
    
    
    DirectorHwan-Yoon Chung
    
    
    31
    
    
    Director
 Stephen M. Dyotthas been the Chairman and Chief Executive Officer of Graphics and Holdings since
September 1996, President of Holdings since February 1995, President of Graphics since 1991 and
Director of Graphics and Holdings since September 1994. Mr. Dyott was Chief Operating Officer of
Holdings from February 1995 to September 1996 and Chief Operating Officer of Graphics from 1991 to
September 1996. Prior to joining Graphics, Mr. Dyott was the Vice President and General Manager -
Flexible Packaging of American National Can Company (ANCC) from 1988 to 1991 and the Vice
President and General Manager  Tube Packaging of ANCC from 1985 to 1987. Timothy M. Davishas been the Senior Vice President/Administration, Secretary and General Counsel
of Holdings and Graphics since 1989. Prior to joining Holdings and Graphics, Mr. Davis was the
Assistant General Counsel of MacMillan, Inc., counsel to affiliates of Maxwell Communication
Corporation North America from January 1989 to June 1989 and an attorney in private practice from
1981 to 1989. Patrick W. Kellickhas been the Senior Vice President and Chief Financial Officer of Holdings and
Graphics since 2002 and Assistant Secretary of Holdings and Graphics since 1995. Prior to 2002,
Mr. Kellick was the Senior Vice President/Corporate Controller of Holdings and Graphics from 1997
to 2002, Vice President/Corporate Controller of Holdings and Graphics from 1989 to 1997 and
Corporate Controller of Graphics from 1987 to 1989. Prior to joining Holdings and Graphics, he
served in various financial positions with Williams Precious Metals (a division of Brush Wellman,
Inc.) from 1984 to 1987, including Chief Financial Officer from 1986 to 1987 and was an auditor
with KPMG from 1979 to 1984. Stuart R. Reevehas been the President, New Business Development since 2003. Prior to 2003, Mr.
Reeve served as President, Retail and Newspaper Services of Graphics from 2002 to 2003, Executive
Vice President, Operations of Graphics from 1999 to 2002, Executive Vice President Sales and
Marketing of Graphics from 1997 to 1999, Senior Vice President Commercial Sales of Graphics from
1995 to 1997, Vice President Sales  Midwest of Graphics from 1994 to 1995, Vice President Sales -
West of Graphics from 1991 to 1994 and as a Sales Executive of Graphics from 1989 to 1991. Kathleen A. DeKamhas been President, Print and Premedia Services since 2004. Prior to 2004, Ms.
DeKam was the President of Premedia Services from 1998 to 2004, the Vice President of Human
Resources of Premedia Services from 1996 to 1998, Director of Human Resources of Premedia Services
from 1995 to 1996 and Manager of Human Resources for various print plants of Graphics from 1986 to
1995. Eric T. Fryhas been a Director of Holdings and Graphics since 1996. Mr. Fry has been a Managing
Director of Metalmark Capital LLC since its formation in 2004. Prior
to joining Metalmark, he was a Managing Director of Morgan Stanley
& Co. Incorporated (MS & Co.), and Morgan Stanley Capital Partners from 2002 to 2004, and Executive
Director of Morgan Stanley Capital Partners from 1998 to 2001. He
joined MS & Co. initially in 1989. Mr. Fry serves as a
Director of Direct Response Corporation, EnerSys, Homesite Group, Inc., Vanguard Health Systems and
The Underwriter Group Limited. 70




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##### Table of Contents



Michael C. Hoffmanhas been a Director of Holdings and Graphics since 2003. Mr. Hoffman has been a
Managing Director of Metalmark Capital LLC since 2004. Prior to
joining Metalmark, he was a Managing
Director of Morgan Stanley Capital Partners from 1998 to 2004. He
joined MS & Co.
in 1986 and worked in the firms Strategic Planning Group prior to joining Morgan
Stanley Private Equity in 1990. Mr. Hoffman is a Director
of Aventine Renewable Energy, Inc. and Enersys, and is former
Director of Jefferson Smurfit Corporation and eAccess Limited. Hwan-Yoon Chunghas been a Director of Holdings and Graphics since 2004. Mr. Chung has been a
Principal of Metalmark Capital LLC since 2004. Prior to joining
Metalmark, he was an Executive Director
of Morgan Stanley Capital Partners from 2003 to 2004. He joined Morgan Stanley Capital Partners in
1998. Prior to joining Morgan Stanley Capital Partners, he was an Associate in the Restructuring
and Reorganization Group at the Blackstone Group L.P. Code of Ethics We have adopted a code of ethics that applies to our principal executive officer, principal
financial officer, principal accounting officer or controller and all other employees. We will
provide a copy of the code of ethics to any person, without charge, upon written request made to
our Corporate Secretary at American Color Graphics, Inc., 100 Winners Circle, Suite 300, Brentwood,
Tennessee 37027. Audit Committee Financial Expert We are not required to maintain an audit committee or an audit committee financial expert as we do
not have exchange listed securities. However, the Companys Board of Directors in many ways serves
in the capacity of an audit committee. 71




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ITEM 11.EXECUTIVE COMPENSATION Summary Compensation Table The following table presents information concerning compensation for services to Holdings and
Graphics during Fiscal Years 2005, 2004 and 2003 of the Chief Executive Officer and the four other
most highly compensated executive officers who we refer to as the Named Executive Officers of
Holdings and/or Graphics. Summary Compensation Table Long-Term CompensationAnnual Compensation
    
    
    Awards
    
    
    PayoutsRestricted
    
    
    Securities Under-Name and Principal
    
    
    
    
    
    
    
    
    
    
    
    Other Annual
    
    
    Stock
    
    
    lying Options/
    
    
    
    
    
    
    All OtherPosition
    
    Period
    
    Salary
    
    
    Bonus
    
    
    Compensation
    

    
    Award(s)
    
    
    SARs (#)
    
    
    LTIP Payouts (a)
    
    
    CompensationStephen M. Dyott
Chairman, President,
    
    Fiscal Year 2005
    
    $
    575,000
    
    
    $
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Chief Executive
    
    Fiscal Year 2004
    
    $
    575,000
    
    
    $
    325,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    2,362,797
    
    
    
    Officer & Director
    
    Fiscal Year 2003
    
    $
    575,000
    
    
    $
    425,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stuart R. Reeve
President, New
    
    Fiscal Year 2005
    
    $
    350,000
    
    
    $
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Business
    
    Fiscal Year 2004
    
    $
    350,000
    
    
    $
    50,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Development
    
    Fiscal Year 2003
    
    $
    350,000
    
    
    $
    50,000
    
    
    
    
    
    
    
    
    
    
    
    360
    
    
    
    
    
    
    
    Kathleen A. DeKam
President, Print
    
    Fiscal Year 2005
    
    $
    324,039
    
    
    $
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    and Premedia
    
    Fiscal Year 2004
    
    $
    275,000
    
    
    $
    75,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Services
    
    Fiscal Year 2003
    
    $
    275,000
    
    
    $
    75,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Timothy M. Davis
Senior Vice President/
Administration,
    
    Fiscal Year 2005
    
    $
    314,615
    
    
    $
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Secretary & General
    
    Fiscal Year 2004
    
    $
    295,000
    
    
    $
    100,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    712,076
    
    
    
    Counsel
    
    Fiscal Year 2003
    
    $
    295,000
    
    
    $
    125,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Patrick W. Kellick
Senior Vice President,
    
    Fiscal Year 2005
    
    $
    304,231
    
    
    $
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Chief Financial Officer
    
    Fiscal Year 2004
    
    $
    265,000
    
    
    $
    100,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    219,377
    
    
    
    & Assistant Secretary
    
    Fiscal Year 2003
    
    $
    242,769
    
    
    $
    75,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 
 (a)
    
    Represents a gain recognized from the cancellation of all outstanding options to
purchase shares of preferred stock of Holdings held by certain key officers as a part of the
2003 Refinancing (see note 7 to our consolidated financial statements appearing elsewhere in
this Report). 72




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The following table presents information concerning the fiscal year-end value of unexercised stock
options held by the Named Executive Officers. Aggregated Option/SAR Exercises in Last Fiscal Year
and Fiscal Year-End Option/SAR Values Number of Securities
    
    Value of UnexercisedUnderlying Unexercised
    
    In-the-MoneyShares Acquired
    
    
    
    Options/SARs at 3/31/05
    
    Options/ SARs at 3/31/05on Exercise (#)
    
    Value Realized($)
    
    Exercisable/Unexercisable (#)
    
    Exercisable/Unexercisable ($)Common Stock
Option Plans (a)Stephen M. Dyott
    
    
    
    
    
    0 / 0
    
    (a)Stuart R. Reeve
    
    
    
    
    
    290.25 / 180.00
    
    (a)Kathleen A. DeKam
    
    
    
    
    
    402.25 / 0
    
    (a)Timothy M. Davis
    
    
    
    
    
    0/0
    
    (a)Patrick W. Kellick
    
    
    
    
    
    450.00 / 450.00
    
    (a)
 
 (a)
    
    Holdings common stock has not been registered or publicly traded and, therefore a public
market price of the stock is not available. At March 31, 2005 we believe the fair market
value to be $0 per share of Common Stock. Pension Plan Graphics sponsors the American Color Graphics, Inc. Salaried Employees Pension Plan (the Pension
Plan), a defined benefit pension plan covering full-time salaried employees of Graphics who had at
least one year of service as of December 31, 1994. In October 1994, the Board of Directors approved an amendment to the Pension Plan that resulted in
the freezing of additional defined benefits for future services under such plan effective January
1, 1995 (see note 10 to our consolidated financial statements appearing elsewhere in this Report). At March 31, 2005, all of the Named Executive Officers had vested in the Pension Plan. At March
31, 2005, the Named Executive Officers had the following amounts of credited service (original hire
date through January 1, 1995) and annual benefit payable upon retirement at age 65 under the
Pension Plan: Stephen M. Dyott (3 years, 3 months; $8,220), Stuart R. Reeve (5 years, 4 months;
$9,185), Kathleen A. DeKam (8 years, 4 months; $4,556), Timothy M. Davis (5 years, 5 months;
$11,700) and Patrick W. Kellick (6 years, 5 months; $11,456). The basic benefit payable under the Pension Plan is a five-year certain single life annuity
equivalent to (a) 1% of a participants final average monthly compensation plus (b) 0.6% of a
participants final average monthly compensation in excess of 40% of the monthly maximum Social
Security wage base in the year of retirement multiplied by years of credited service (not to exceed
30 years of service). For purposes of the Pension Plan, final average compensation (which, for
the Named Executive Officers, is reflected in the salary and bonus columns of the Summary
Compensation Table) means the average of a participants five highest consecutive calendar years of
total earnings (which includes bonuses) from the last 10 years of service. The maximum monthly
benefit payable from the Pension Plan is $5,000. The basic benefit under the Pension Plan is payable upon completion of five years of vesting
service and retirement on or after attaining age 65. Participants may elect early retirement under
the Pension Plan upon completion of five years of vesting service and the attainment of age 55, and
receive the basic benefit reduced by 0.4167% for each month that the benefit commencement date
precedes the attainment of age 65. A deferred vested benefit is available to those participants
who separate from service before retirement provided the participant has at least five years of
vesting service. Supplemental Executive Retirement Plan In October 1994, we approved a new Supplemental Executive Retirement Plan, which is a defined
benefit plan. At March 31, 2005, the plan included the following Named Executive Officers, two
other executives and one former executive. The plan provides for a basic annual benefit payable
upon completion of five years vesting service (April 1, 1994 through March 31, 1999 for Messrs.
Dyott, Davis and Kellick and July 1, 1997 through June 30, 2002 for Messr. 73




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##### Table of Contents



Reeve) and retirement on or after attaining age 65, or the present value of such benefit at an
earlier date under certain circumstances. At March 31, 2005, the Named Executive Officers have the
following basic annual benefit payable under this plan at age 65: Stephen M. Dyott
    
    $
    100,000Stuart R. Reeve
    
    $
    50,000Timothy M. Davis
    
    $
    75,000Patrick W. Kellick
    
    $
    50,000
 Such benefits will be paid from our assets (see note 10 to our consolidated financial
statements appearing elsewhere in this Report). Compensation of Directors Directors of Holdings and Graphics do not receive a salary or an annual retainer for their services
but are reimbursed for expenses incurred with respect to such services. Employment Agreements On October 19, 1998, Graphics entered into an employment agreement with Stephen M. Dyott, which we
refer to as the Dyott Employment Agreement, which replaced the agreement entered into by Graphics
and Mr. Dyott on April 3, 1993. The Dyott Employment Agreement has an initial term of three years.
The term under the Dyott Employment Agreement is automatically extended for one-year periods
absent at least one years written notice of an intent by either party not to renew. The Dyott
Employment Agreement provides for the payment of an annual salary, annual bonus and all other
employee benefits and perquisites made available to Graphics senior executives generally. Under the Dyott Employment Agreement, if the employees employment is terminated by Graphics
without cause (cause, as defined in the Dyott Employment Agreement, means a material breach by
the employee of his obligations under the Dyott Employment Agreement; continued failure or refusal
of the employee to substantially perform his duties to Graphics; a willful and material violation
of Federal or state law applicable to Graphics or the employees conviction of a felony or
perpetration of a common law fraud; or other willful misconduct that is injurious to Graphics) or
by the employee for good reason (which, as defined in the Dyott Employment Agreement, means a
decrease in base pay or a failure by Graphics to pay material compensation due and payable; a
material diminution of the employees responsibilities or title; a material change in the
employees principal employment location; or a material breach by Graphics of a material term of
the Dyott Employment Agreement), the employee will be entitled to a pro rata portion of the bonus
for the year employment was terminated payable at the time bonuses are generally paid and salary
continuation payments (and certain other benefits) for a period of three years beginning on the
date of termination. The Dyott Employment Agreement contains confidentiality obligations that
survive indefinitely, non-solicitation obligations that end on the second anniversary of the date
employment has ceased and non-competition obligations that end on the third anniversary of the date
employment has ceased. On August 1, 1999, Graphics entered into a severance agreement with Stuart R. Reeve which provides
that in the event the employees employment is terminated by Graphics without cause, as defined
above (but also including as cause competition with Graphics), or by the employee for good
reason, as defined above, the employee will be entitled to a pro rata portion of the bonus for the
year employment was terminated payable at the time bonuses are generally paid and salary and
benefit continuation for two years following termination. Such base salary payments will be
reduced, after the first twelve months from the date of termination, to the extent the employee
receives compensation from another employer. The severance agreement contains confidentiality
obligations that survive indefinitely and non-solicitation and non-competition obligations that end
on the second anniversary of the date employment has ceased. On November 19, 2000, Graphics entered into a severance agreement with Kathleen A. DeKam which
provides that in the event the employees employment is terminated by Graphics without cause, as
defined above (but also including as cause competition with Graphics), or by the employee for
good reason, as defined above, the employee will be entitled to a pro rata portion of the bonus
for the year employment was terminated payable at the time bonuses are generally paid and salary
and benefit continuation for two years following termination. The severance agreement contains
confidentiality obligations that survive indefinitely and non-solicitation and non-competition
obligations that end on the second anniversary of the date employment ceased. 74




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On July 15, 1998, Graphics entered into a severance agreement with Timothy M. Davis which provides
that in the event the employees employment is terminated by Graphics without cause, as defined
above (but also including as cause competition with Graphics), or by the employee for good
reason, as defined above, the employee will be entitled to a pro rata portion of the bonus for the
year employment was terminated payable at the time bonuses are generally paid and salary and
benefit continuation for three years following termination. The severance agreement contains
confidentiality obligations that survive indefinitely and non-solicitation and non-competition
obligations that end on the third anniversary of the date employment has ceased. Graphics is also party to a severance agreement dated as of October 3, 1996 and amended on August
30, 2004, with Patrick Kellick, which provides that in the event the employees employment is
terminated by Graphics without cause, as defined above (but also including as cause competition
with Graphics), or by the employee for good reason, as defined above, the employee will be
entitled to a pro rata portion of the bonus for the year employment was terminated payable at the
time bonuses are generally paid and the employee will be entitled to salary and benefit
continuation for two years following termination. The severance agreement contains confidentiality
obligations that survive indefinitely and non-solicitation and non-compete obligations that end on
the second anniversary of the date employment ceased. Compensation Committee Interlocks and Insider Participation in Compensation Decisions We do not maintain a formal compensation committee. Stephen M. Dyott sets compensation in
conjunction with the Board of Directors. 75




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##### Table of Contents



ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS The following table sets forth information, as of March 31, 2005, concerning the persons having
beneficial ownership of more than five percent of the capital stock of Holdings and the beneficial
ownership thereof by each director and Named Executive Officer of Holdings and by all directors and
executive officers of Holdings as a group. Each holder below has sole voting power and sole
investment power over the shares designated below. Shares ofHoldings CommonName
    
    Stock
    
    
    Percent of ClassMorgan Stanley Capital Partners III, L.P.
MSCP 892 Investors, L.P.

c/o Metalmark Capital LLC
1177 Avenue of the Americas
New York, NY 10036
    
    
    22,497.9
    
    
    
    14.1Morgan Stanley Capital Investors, L.P.
The Morgan Stanley Leveraged Equity Fund II, L.P.
1585 Broadway
New York, NY 10036
    
    
    835.159,450.0
    
    
    
    0.537.1First Plaza Group Trust
c/o Mellon Bank, N.A.
1 Mellon Bank Center
Pittsburgh, PA 15258
    
    
    17,000.0
    
    
    
    10.6Directors and Named Executive Officers:Stephen M. Dyott
    
    
    14,970.0
    
    
    
    9.4Stuart R. Reeve (a)
    
    
    2,520.0
    
    
    
    1.6Kathleen A. DeKam (b)
    
    
    1,809.0
    
    
    
    1.1Timothy M. Davis
    
    
    3,618.0
    
    
    
    2.3Patrick W. Kellick (c)
    
    
    2,259.0
    
    
    
    1.4Eric T. Fry
    
    
    
    
    
    
    Michael C. Hoffman
    
    
    
    
    
    
    Hwan-Yoon Chung
    
    
    
    
    
    
    All directors and executive officers as a
Group (8 persons, including Messrs.
Dyott, Reeve, Davis and Kellick and Mme.
DeKam) (d)
    
    
    25,176.0
    
    
    
    15.6
 
 (a)
    
    Includes 380.25 common stock options exercisable within 60 days.(b)
    
    Includes 402.25 common stock options exercisable within 60 days.(c)
    
    Includes 450.00 common stock options exercisable within 60 days.(d)
    
    Includes 1,232.50 common stock options exercisable within 60 days. 76




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ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Relationship With
Metalmark and Morgan Stanley Morgan Stanley Capital Partners III, L.P., MSCP III 892 Investors, L.P., Morgan Stanley Capital Investors, L.P.
and The Morgan Stanley Leveraged Equity Fund II, L.P. (collectively,
the Morgan Stanley Funds) hold
approximately 52% of the outstanding shares of our common stock. The general partners of such limited partnerships are wholly owned subsidiaries of Morgan Stanley.
Metalmark Capital LLC is an independent private equity firm established in 2004 by former
principals of Morgan Stanley Capital Partners to manage Morgan
Stanley Capital Partners
private equity funds and to make private equity investments in a broad range of industries
(Metalmark). An affiliate of Metalmark manages Morgan Stanley Capital Partners III, L.P. and MSCP III 892 Investors, L.P.
pursuant to a subadvisory agreement. In addition, under such subadvisory arrangement, Morgan Stanley Capital Investors, L.P. and The
Morgan Stanley Leveraged Equity Fund II, L.P. are effectively obligated to vote or direct the vote and to dispose or direct
the disposition of any or our shares owned directly by them on the same terms and conditions as are
determined by Metalmark with respect to shares held by Morgan Stanley Capital Partners III, L.P. and MSCP III 892 Investors, L.P. Morgan Stanley Senior
Funding, Inc. received interest payments for the fiscal year ended March 31, 2004 based on its
participation during the course of the year related to our old bank credit agreement. As part of
the 2003 Refinancing, $4.9 million was paid to affiliates of Morgan Stanley for the services they
performed in conjunction with the Revolving Credit Facility and the original private placement of
the 10% Notes. Stockholders Agreement Holdings, the Morgan Stanley Funds and other stockholders of
Holdings entered into an amended and restated stockholders
agreement, dated as of August 14, 1995,
as subsequently amended as of January 16, 1998. The stockholders agreement gives the Morgan Stanley Funds
the right to designate a director of Holdings. The stockholders agreement contains rights of
first refusal with regard to the issuance by Holdings of equity securities and sales by the
stockholders of equity securities of Holdings owned by them, specified tag along and drag along
provisions and registration rights. The stockholders agreement also restricts our ability to
enter into affiliate transactions unless the transaction is fair and reasonable, with terms no less
favorable to us than if the transaction was completed on an arms length basis. Tax Sharing Agreement Holdings and Graphics are parties to an amended and restated tax sharing agreement effective July
27, 1989. Under the terms of the agreement, Graphics (whose income is consolidated with that of
Holdings for U. S. federal income tax purposes) is liable to Holdings for amounts representing U.
S. federal income taxes calculated on a stand-alone basis. Each year Graphics pays to Holdings
the lesser of (a) Graphics U. S. federal tax liability computed on a stand-alone basis and (b) its
allocable share of the U. S. federal tax liability of the consolidated group. Accordingly,
Holdings is not currently reimbursed for the separate tax liability of Graphics to the extent
Holdings losses reduce consolidated tax liability. Reimbursement for the use of such Holdings
losses will occur when the losses may be used to offset Holdings income computed on a stand-alone
basis. Graphics has also agreed to reimburse Holdings in the event of any adjustment (including
interest or penalties) to consolidated income tax returns based upon Graphics obligations with
respect thereto. No reimbursement obligation currently exists between Graphics and Holdings. Also
under the terms of the tax sharing agreement, Holdings has agreed to reimburse Graphics for
refundable U. S. federal income tax equal to an amount which would be refundable to Graphics had
Graphics filed separate U. S. federal income tax returns for all years under the agreement.
Graphics and Holdings have also agreed to treat foreign, state and local income and franchise taxes
for which there is consolidated or combined reporting in a manner consistent with the treatment of
U. S. federal income taxes as described above. Transactions With Management and Others In conjunction with the 2003 Refinancing (see note 7 to our consolidated financial statements
appearing elsewhere in this Report), we repurchased and currently retired all 5,223 outstanding
shares of preferred stock of Holdings. Of the total number of shares repurchased and retired,
approximately 23 shares belonged to Stephen M. Dyott and were repurchased for approximately $0.2
million. This resulted in a loss to Mr. Dyott, as he originally purchased the shares for
approximately $0.3 million. 77




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##### Table of Contents



ITEM 14.PRINCIPAL ACCOUNTANT FEES AND SERVICES The following table represents fees for professional audit services rendered by Ernst & Young LLP
for the audit of our annual financial statements for the fiscal years ended March 31, 2005 and
March 31, 2004 and fees billed for other services rendered by Ernst & Young LLP during those
periods. The fees for the annual audit and quarterly reviews reflect the fees for the year on an
accrual/estimated basis as required by the Securities and Exchange Commission disclosure rules.
Otherwise, the amounts reported reflect actual fees invoiced during the Companys fiscal year. Fiscal Year Ended March 31,2005
    
    
    2004(in thousands)Audit fees (a)
    
    $
    406
    
    
    
    520Audit-related fees (b)
    
    
    75
    
    
    
    165Tax fees (c)
    
    
    121
    
    
    
    53All other fees
    
    
    
    
    
    
    Total fees
    
    $
    602
    
    
    
    738
 
 (a)
    
    Audit fees consist of fees for professional services related to the audit of our
consolidated financial statements, review of financial statements included in our
quarterly reports, comfort letters and other services related to SEC matters, as well as
services that are normally provided by the independent auditor in connection with
statutory filings or engagements.(b)
    
    Audit-related fees consist primarily of fees for professional services related to
assistance with our internal control reviews, documentation of our policies and
procedures and employee pension and benefit plan audits.(c)
    
    Tax fees include the review of federal, state, local and Canadian tax returns as
well as tax planning and consultation on new tax legislation, regulations, rulings and
developments. Board of Directors Pre-Approval Policies The Board of Directors has established pre-approval policies and procedures pursuant to which all
audit and auditor provided non-audit engagement fees and terms must be approved. Pre-approval is
generally provided for up to one year and is detailed as to the particular service or category of
services. The Board of Directors is also responsible for considering, to the extent applicable,
whether the independent auditors provision of other non-audit services to the Company is
compatible with maintaining the independence of the independent auditors. All services provided by Ernst & Young LLP in the fiscal year ended March 31, 2005 were
pre-approved by the Board of Directors. 78




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##### Table of Contents



PART IV 
 ITEM 15.EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a)
    
    The following documents are filed as a part of this Report:Reports of Independent
Registered Public Accounting Firm1 and 2.
    
    Financial Statements: The following Consolidated Financial Statements of
Holdings are included in Part II, Item 8:Consolidated balance sheets  March 31, 2005 and 2004For the Years Ended March 31, 2005, 2004 and 2003:Consolidated statements of operationsConsolidated statements of stockholders deficitConsolidated statements of cash flowsNotes to Consolidated Financial StatementsFinancial Statement Schedules: The following financial statement schedules of Holdings
are filed as a part of this Report.
 Schedules
    
    Page No.I.
    
    Condensed Financial Information of Registrant:Condensed Financial Statements (parent company only) for the years ended
March 31, 2005, 2004 and 2003 and as of March 31, 2005 and 2004
    
    
    82II.
    
    Valuation and qualifying accounts
    
    
    89Schedules not listed above have been omitted because they are not applicable or are not
required, or the information required to be set-forth therein is included in the Consolidated
Financial Statements or notes thereto.3. Exhibits: The exhibits listed on the accompanying Index to Exhibits immediately
following the financial statement schedules are filed as part of this Report.
 Exhibit No.
    
    Description3.1
    
    Certificate of Incorporation of Graphics, as amended to date*3.2
    
    By-laws of Graphics, as amended to date*3.3
    
    Restated Certificate of Incorporation of Holdings, as amended to date*3.4
    
    By-laws of Holdings, as amended to date*10.1
    
    Amended and Restated Credit Agreement dated as of May 5, 2005, among Graphics and
Holdings; with Banc of America Securities as Sole Lead Arranger and Bank of America, N.A., as
Administrative Agent, and certain lenders####10.2
    
    Employment Agreement, dated as of October 19, 1998, between Graphics and Stephen
M. Dyott***10.3
    
    Severance Letter, dated August 1, 1999, between Graphics and Stuart Reeve***10.4
    
    Severance Letter, dated October 3, 1996, between Graphics and Patrick Kellick****10.4 (a)
    
    Amendment to Severance Letter, dated August 30, 2004 between Graphics and Patrick
Kellick *****10.5
    
    Severance Letter, dated July 15, 1998, between Graphics and Timothy M. Davis 10.6
    
    Severance Letter, dated November 19, 2000, between Graphics and Kathleen A. DeKam10.7
    
    Amended and Restated Stockholders Agreement, dated as of August 14, 1995, among
Holdings,
the Morgan Stanley Leveraged Equity Fund II, L.P., Morgan Stanley
Capital Partners III, L.P. and the additional parties named therein**
 79




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##### Table of Contents



Exhibit No.
    
    Description10.7(a)
    
    Amendment No. 1, dated January 16, 1998, to Amended and Restated Stockholders
Agreement
dated as of August 14, 1995, among Holdings, the Morgan Stanley Leveraged
Equity Fund II,L.P., Morgan Stanley Capital Partners III, L.P., and the
additional parties named herein10.8
    
    Stock Option Plan of Holdings10.10
    
    Holdings Common Stock Option Plan10.12
    
    Credit Agreement dated as of July 3, 2003, among Graphics; Bank of America,
N.A., as Administrative Agent, Collateral Agent and as a Lender; Morgan Stanley Senior
Funding, Inc., as Documentation Agent; GECC Capital Markets Group Inc., as Syndication
Agent; and the financial institutions named therein as Lenders#10.12(a)
    
    First Amendment to Credit Agreement dated as of February 9, 2004 to Credit
Agreement dated as of July 3, 2003, among Graphics; Bank of America, N. A., as
Administrative Agent, Collateral Agent and as a Lender; Morgan Stanley Senior Funding,
Inc., as Documentation Agent; GECC Capital Markets Group Inc., as Syndication Agent; and
the financial institutions named therein as Lenders###10.12(b)
    
    Second Amendment to Credit Agreement dated as of February 11, 2005 to Credit
Agreement dated as of July 3, 2003, among Graphics; Bank of America, N.A., as
Administrative Agent, Collateral Agent and as a Lender; GECC Capital markets Group,
Inc., as Syndication Agent; and the financial institutions named therein as
Lenders10.12(c)
    
    Third Amendment to Credit Agreement dated as of April 7, 2005 to Credit
Agreement dated as of July 3, 2003, among Graphics; Bank of America, N.A., as
Administrative Agent, Collateral Agent and as a Lender; GECC Capital Markets Group, Inc.
as Syndication Agent; and the financial institutions named therein as Lenders10.13
    
    Indenture (including the form of the 10% Notes) dated as of July 3, 2003, among
Graphics, Holdings and The Bank of New York#10.14
    
    Purchase Agreement dated June 19, 2003, among Graphics, Holdings and Morgan
Stanley & Co. Incorporated, Banc of America Securities LLC and Credit Suisse First
Boston LLC, as Initial Purchasers##10.15
    
    Registration Rights Agreement dated June 19, 2003, among Graphics, Holdings and
Morgan Stanley & Co. Incorporated, Banc of America Securities LLC and Credit Suisse
First Boston LLC##10.16
    
    Intercreditor Agreement dated July 3, 2003, by and among Bank of America, N.A.,
The Bank of New York and Graphics##10.17
    
    Security Agreement dated July 3, 2003, among Graphics, Holdings and the Bank of
New York##10.18
    
    Pledge Agreement dated July 3, 2003, by Graphics and Holdings in favor of The
Bank of New York, as Trustee##12.1
    
    Statement Re: Computation of Ratio of Earnings to Fixed Charges21.1
    
    List of Subsidiaries31.1
    
    Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer31.2
    
    Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer32.1
    
    Certification of Chief Executive Officer and Chief Financial Officer Pursuant to
18 U.S.C. Section 1350
 80




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##### Table of Contents



*
    
    Incorporated by reference from Amendment No. 2 to Form S-1 filed on October 4, 1993  Registration number 33-65702.
    
    Incorporated by reference from the Annual Report on Form 10-K for the fiscal year ended March 31, 1999 
Commission file number 33-97090.#
    
    Incorporated by reference from Post Effective Amendment No. 9 to Form S-1 filed on July 16, 2003  Commission file
number 33-97090.##
    
    Incorporated by reference from Form S-4 filed on November 6, 2003  Registration number 33-97090.**
    
    Incorporated by reference from Form S-4 filed on September 19, 1995  Registration number 33-97090.
    
    Incorporated by reference from Amendment No. 2 to Form S-4 filed on November 22, 1995  Registration number
33-97090.***
    
    Incorporated by reference from the Annual Report on Form 10-K for the fiscal year ended March 31, 2000 -
Commission file number 33-97090.
    
    Incorporated by reference from the Quarterly Report on Form 10-Q for the quarter ended December 31, 2004 
Commission file number 33-97090.###
    
    Incorporated by reference from the Quarterly Report on Form 10-Q for the quarter ended December 31, 2003 
Commission file number 33-97090.****
    
    Incorporated by reference from the Annual Report on Form 10-K for the fiscal year ended March 31, 2004 
Commission file number 33-97090.
    
    Incorporated by reference from the Annual Report on Form 10-K for the fiscal year ended March 31, 1998 
Commission file number 33-97090.####
    
    Incorporated by reference from the Form 8-K filed May 6, 2005  Commission file number 33-97090.*****
    
    Incorporated by reference from the Form 8-K filed September 1, 2004  Commission file number 33-97090. 81




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##### Table of Contents



SCHEDULE I  CONDENSED FINANCIAL INFORMATION OF REGISTRANT
ACG HOLDINGS, INC.
Parent Company Only
Condensed Balance Sheets
(Dollars in thousands except par values) March 31,2005
    
    
    2004AssetsCurrent assets:Receivable from subsidiary
    
    $
    1,299
    
    
    
    1,199Income taxes receivable
    
    
    
    
    
    
    Total assets
    
    $
    1,299
    
    
    
    1,199Liabilities and Stockholders DeficitLiabilities of subsidiary in excess of assets
    
    $
    214,003
    
    
    
    189,938Income taxes payable
    
    
    36
    
    
    
    36Total liabilities
    
    
    214,039
    
    
    
    189,974Commitments and contingenciesStockholders deficit:Common stock, voting, $.01 par value, 5,852,223
shares authorized, 160,067 shares issued and
outstanding at March 31, 2005 and 2004
    
    
    2
    
    
    
    2Additional paid-in capital
    
    
    2,203
    
    
    
    2,103Accumulated deficit
    
    
    (195,183
    )
    
    
    (169,516
    )Other accumulated comprehensive loss, net of tax
    
    
    (19,762
    )
    
    
    (21,364
    )Total stockholders deficit
    
    
    (212,740
    )
    
    
    (188,775
    )Total liabilities and stockholders deficit
    
    $
    1,299
    
    
    
    1,199
 See accompanying notes to condensed financial statements. 82




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##### Table of Contents



SCHEDULE I  CONDENSED FINANCIAL INFORMATION OF REGISTRANT
ACG HOLDINGS, INC.
Parent Company Only
Condensed Statements of Operations
(In thousands) Year ended March 31,2005
    
    
    2004
    
    
    2003Equity in loss of subsidiary
    
    $
    25,667
    
    
    
    28,841
    
    
    
    315Net loss
    
    $
    25,667
    
    
    
    28,841
    
    
    
    315
 See accompanying notes to condensed financial statements. 83




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##### Table of Contents



SCHEDULE I  CONDENSED FINANCIAL INFORMATION OF REGISTRANT
ACG HOLDINGS, INC.
Parent Company Only
Condensed Statements of Cash Flows
(In thousands) Year ended March 31,2005
    
    
    2004
    
    
    2003Cash flows from operating activities
    
    $
    
    
    
    
    
    
    
    
    Cash flows from investing activities
    
    
    
    
    
    
    
    
    
    
    Cash flows from financing activities
    
    
    
    
    
    
    
    
    
    
    Net change in cash
    
    $
    
    
    
    
    
    
    
    
    
 See accompanying notes to condensed financial statements. 84




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##### Table of Contents



SCHEDULE I  CONDENSED FINANCIAL INFORMATION OF REGISTRANT
ACG HOLDINGS, INC.
Parent Company Only
Notes to Condensed Financial Statements Description of ACG Holdings, Inc. Our Company was formed in April 1989 under the name GBP Holdings, Inc. to effect the purchase of
all the capital stock of GBP Industries, Inc. from its stockholders in a leveraged buyout
transaction. In October 1989, GBP Holdings, Inc. changed its name to Sullivan Holdings, Inc. and
GBP Industries, Inc. changed its name to Sullivan Graphics, Inc. Effective June 1993, Sullivan
Holdings, Inc. changed its name to Sullivan Communications, Inc. Effective July 1997, Sullivan
Communications, Inc. changed its name to ACG Holdings, Inc. (Holdings) and Sullivan Graphics,
Inc. changed its name to American Color Graphics, Inc. (Graphics). Holdings has no operations or significant assets other than its investment in Graphics. Holdings
is dependent upon distributions from Graphics to fund its obligations. Under the terms of its debt
agreements at March 31, 2005, Graphics ability to pay dividends or lend to Holdings is either
restricted or prohibited, except that Graphics may pay specified amounts to Holdings to fund the
payment of Holdings obligations pursuant to a tax sharing agreement (see note 5). On April 8, 1993 (the Acquisition Date), pursuant to an Agreement and Plan of Merger dated as of
March 12, 1993, as amended (the Merger Agreement), between Holdings and SGI Acquisition Corp.
(Acquisition Corp.), Acquisition Corp. was merged with and into Holdings (the Acquisition).
Acquisition Corp. was formed by The Morgan Stanley Leveraged Equity Fund II, L.P., certain
institutional investors, and certain members of management (the Purchasing Group) for the purpose
of acquiring a majority interest in Holdings. Acquisition Corp. acquired a substantial and
controlling majority interest in Holdings in exchange for $40 million in cash. In the Acquisition,
Holdings continued as the surviving corporation and the separate corporate existence of Acquisition
Corp. was terminated.  1.
    
    Basis of PresentationThe accompanying condensed financial statements (parent company only) include the accounts of
Holdings and its investments in Graphics accounted for in accordance with the equity method,
and do not present the financial statements of Holdings and its subsidiary on a consolidated
basis. These parent company only financial statements should be read in conjunction with ACG
Holdings, Inc. consolidated financial statements. The Acquisition was accounted for under
the purchase method of accounting applying the provisions of Accounting Principles Board
Opinion No. 16 (APB 16).2.
    
    GuaranteesAs set forth in ACG Holdings, Inc. consolidated financial statements, a substantial portion
of Graphics long-term obligations has been guaranteed by Holdings.Holdings has guaranteed Graphics indebtedness under the Revolving Credit Facility, which
guarantee is secured by a pledge of all of Graphics stock. Borrowings under the Revolving
Credit Facility are secured by substantially all assets of Graphics. Holdings is restricted
under its guarantee of the Revolving Credit Facility from, among other things, entering into
mergers, acquisitions, incurring additional debt, or paying cash dividends.On July 3, 2003, Graphics issued $280 million of 10% Senior Second Secured Notes Due 2010
(the 10% Notes) bearing interest at 10% and maturing June 15, 2010. The 10% Notes are
fully and unconditionally guaranteed on a senior basis by Holdings, and by all future
domestic subsidiaries of Graphics. 85




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##### Table of Contents



SCHEDULE I  CONDENSED FINANCIAL INFORMATION OF REGISTRANT
ACG HOLDINGS, INC.
Parent Company Only
Notes to Condensed Financial Statements  3.
    
    Dividends from Subsidiaries and InvesteesNo cash dividends were paid to Holdings from any consolidated subsidiaries, unconsolidated
subsidiaries or investees accounted for by the equity method during the periods reflected in
these condensed financial statements.4.
    
    Tax Sharing AgreementHoldings and Graphics (collectively the Company) are parties to an amended and restated tax
sharing agreement effective July 27, 1989. Under the terms of the agreement, Graphics (whose
income is consolidated with that of Holdings for U. S. federal income tax purposes) is liable
to Holdings for amounts representing U. S. federal income taxes calculated on a stand-alone
basis. Each year Graphics pays to Holdings the lesser of (i) Graphics U. S. federal tax
liability computed on a stand-alone basis and (ii) its allocable share of the U. S. federal
tax liability of the consolidated group. Accordingly, Holdings is not currently reimbursed
for the separate tax liability of Graphics to the extent Holdings losses reduce the
consolidated tax liability. Reimbursement for the use of such Holdings losses will occur
when the losses may be used to offset Holdings income computed on a stand-alone basis.
Graphics has also agreed to reimburse Holdings in the event of any adjustment (including
interest or penalties) to consolidated income tax returns based upon Graphics obligations
with respect thereto. No reimbursement obligation currently exists between Graphics and
Holdings. Also under the terms of the tax sharing agreement, Holdings has agreed to
reimburse Graphics for refundable U. S. federal income taxes equal to an amount which would
be refundable to Graphics had Graphics filed separate U. S. federal income tax returns for
all years under the agreement. Graphics and Holdings have also agreed to treat foreign,
state and local income and franchise taxes for which there is consolidated or combined
reporting in a manner consistent with the treatment of U. S. federal income taxes as
described above.5.
    
    Refinancing TransactionOn July 3, 2003, the Company sold $280 million aggregate principal amount of its 10% Notes as
part of a recapitalization involving Graphics, Holdings and certain affiliates of the Company
and also entered into a $70 million senior secured revolving credit facility maturing on July
3, 2008, with a syndicate of lenders (the Revolving Credit Facility), (collectively the
2003 Refinancing). Graphics repaid substantially all existing indebtedness (excluding
capital leases) through:  
    
    the repayment of all amounts outstanding under the old bank credit agreement,
and the concurrent termination of all related commitments thereunder;
    
    the issuance of letters of credit under the Revolving Credit Facility to replace
outstanding letters of credit; and
    
    effective August 3, 2003, the redemption of all of the 12 3/4% Senior Subordinated
Notes Due 2005 (the 12 3/4% Notes), at a redemption price equal to 100% of their
aggregate principal amount, plus accrued and unpaid interest thereon. In addition, the Company repurchased, and concurrently retired, all 5,223 outstanding shares
of preferred stock of Holdings, and canceled all outstanding options to purchase shares of
the preferred stock of Holdings held by certain key officers, for an aggregate purchase price
of $56.9 million. The canceled options would have been exercisable for 582 shares of
preferred stock of Holdings. The 10% Notes mature June 15, 2010, with interest payable semi-annually on June 15 and
December 15. The 10% Notes are redeemable at the option of Graphics in whole or in part on
June 15, 2007, at 105% of the principal amount, plus accrued interest. The
redemption price will decline each year after 2007 and will be 100% of the principal amount
of the 10% Notes, plus accrued interest, beginning on June 15, 2009. Upon a change of
control, Graphics will be required to make an offer to purchase the 10% Notes. The purchase
price will equal 101% of the principal amount of the 10% Notes on the date of purchase, plus
accrued interest. 86




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SCHEDULE I  CONDENSED FINANCIAL INFORMATION OF REGISTRANT
ACG HOLDINGS, INC.
Parent Company Only
Notes to Condensed Financial Statements In addition, before June 15, 2006, Graphics may redeem up to 35% of the aggregate principal
amount of the 10% Notes with the proceeds of sales of certain kinds of capital stock at 110%
of its principal amount, plus accrued interest to the redemption date. Graphics may make
such redemption only if, after any such redemption, at least $150 million aggregate principal
amount of the 10% Notes remains outstanding. The Revolving Credit Facility provides for maximum borrowings of $70 million, including a
letter of credit sub-facility of up to $40 million. Borrowings under this facility, as
amended, are subject to a borrowing base limitation based on certain percentages of eligible
accounts receivable, eligible inventory and the appraised value of eligible machinery and
equipment and real estate, subject to certain limitations. The borrowing base arrangement
includes a provision whereby proceeds from collection of substantially all of the Companys
accounts receivable are deposited into bank accounts which are applied daily toward repayment
of borrowings outstanding, if any, under the Revolving Credit Facility. At March 31, 2005,
the Company had borrowings outstanding under the Revolving Credit Facility totaling $16.0
million and had letters of credit outstanding of approximately $28.2 million. The Company
had additional borrowing availability of approximately $25.6 million. Amounts outstanding under the Revolving Credit Facility, as amended, bear interest at a rate
equal to, at the Companys option, (a) an alternate base rate, plus an applicable margin of
2.00% or (b) a reserve adjusted LIBOR rate, plus an applicable margin of 3.00%. The
applicable margins under both rate structures are subject to periodic downward adjustment
based upon the attainment of certain fixed charge coverage ratio levels. The Revolving Credit Facility, as amended, contains customary affirmative and negative
covenants, including but not limited to:  
    
    minimum fixed charge coverage ratio requirements; and
    
    limitations on acquisitions and investments, new subsidiaries, uses of proceeds,
indebtedness, liens, dividends and distributions, prepayments of certain
indebtedness, affiliate transactions, loans, asset dispositions and Holdings
business operations. On May 5, 2005, the Company entered into an Amended and Restated Credit Agreement with Banc
of America Securities, as Sole Lead Arranger, and Bank of America, N.A., as Administrative
Agent, and certain lenders (the 2005 Credit Agreement) which resulted in the refinancing of
the Revolving Credit Facility and significantly improved the Companys liquidity position.
The 2005 Credit Agreement is a $90 million secured facility comprised of:  
    
    a $55 million revolving credit facility ($40 million of which may be used for
letters of credit), which is not subject to a borrowing base limitation, maturing on
December 15, 2009 (the 2005 Revolving Credit Facility); and
    
    a $35 million non-amortizing term loan facility maturing on December 15, 2009
(the 2005 Term Loan Facility). Interest on borrowings under the 2005 Credit Agreement is floating, based upon existing
market rates, plus agreed upon margin levels. In addition, Graphics is obligated to pay
specified commitment and letter of credit fees. Borrowings under the 2005 Term Loan Facility must be repaid in full on the facilitys
maturity date of December 15, 2009. Graphics is also required to prepay the 2005 Term Loan
Facility and the 2005 Revolving Credit Facility under certain circumstances with excess cash
flows and proceeds from certain sales of assets, equity and incurrence of indebtedness. Borrowings under the 2005 Credit Agreement are secured by substantially all of Graphics
assets. In addition, Holdings has guaranteed all such indebtedness under the 2005 Credit
Agreement, which guarantee is secured by a pledge of all of Graphics capital stock. 87




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The 2005 Credit Agreement requires satisfaction of certain leverage ratio requirements. In
addition, the 2005 Credit Agreement includes various other customary affirmative and negative
covenants and events of default. The 2005 Credit Agreement places conditions upon the
Companys ability to, among other things: make investments or dispositions, pay dividends
and other distributions, incur liens, incur additional indebtedness, make capital
expenditures, enter into transactions with affiliates, issue stock of subsidiaries, enter
into agreements that contain restrictions affecting subsidiaries and consummate mergers and
acquisitions. 88




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##### Table of Contents



SCHEDULE II  VALUATION AND QUALIFYING ACCOUNTS
ACG HOLDINGS, INC. Balance at
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance at End ofBeginning of Period
    
    
    Expense / (Income)
    
    
    Write-offs
    
    
    Other Adjustments
    
    
    Period(in thousands)Fiscal Year ended March 31, 2005Allowance for doubtful accounts
    
    $
    2,853
    
    
    
    257
    
    
    
    (1,327
    )
    
    
    
    
    
    
    1,783Reserve for inventory obsolescence
    
    $
    285
    
    
    
    114
    
    
    
    (132
    )
    
    
    
    
    
    
    267Income tax valuation allowance
    
    $
    45,185
    
    
    
    
    
    
    
    
    
    
    
    9,587
    (a)
    
    
    54,772Fiscal Year ended March 31, 2004Allowance for doubtful accounts
    
    $
    2,524
    
    
    
    998
    
    
    
    (689
    )
    
    
    20
    
    
    $
    2,853Reserve for inventory obsolescence
    
    $
    385
    
    
    
    (20
    )
    
    
    (80
    )
    
    
    
    
    
    $
    285Income tax valuation allowance
    
    $
    26,815
    
    
    
    12,800
    (b)
    
    
    
    
    
    
    5,570
    (a)
    
    $
    45,185Fiscal Year ended March 31, 2003Allowance for doubtful accounts
    
    $
    2,537
    
    
    
    873
    
    
    
    (886
    )
    
    
    
    
    
    $
    2,524Reserve for inventory obsolescence
    
    $
    390
    
    
    
    (1
    )
    
    
    (4
    )
    
    
    
    
    
    $
    385Income tax valuation allowance
    
    $
    23,346
    
    
    
    
    
    
    
    
    
    
    
    3,469
    (c)
    
    $
    26,815
 
 (a)
    
    The increase in the valuation allowance relates to current year losses for which no tax
benefit has been recorded, partially offset by a decrease in deferred tax assets related to
the minimum pension liability.(b)
    
    The increase in the valuation allowance relates to a reduction in projected future use of
deferred tax assets.(c)
    
    The increase in the valuation allowance primarily relates to an increase in deferred tax
assets resulting from an increase in the minimum pension liability, partially offset by a
decrease in other temporary differences generating deferred tax assets. 89




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##### Table of Contents



SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. ACG Holdings, Inc. American Color Graphics, Inc. /s/               Stephen M. Dyott
    
    DateJune 28, 2005Stephen M. DyottChairman, President and Chief Executive OfficerACG Holdings, Inc.Chairman and Chief Executive OfficerAmerican Color Graphics, Inc.Director of ACG Holdings, Inc. and American Color Graphics, Inc.
 Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed
below by the following persons on behalf of the registrant and in the capacities and on the dates
indicated. Signature
    
    Title
    
    Date/s/ Patrick W. Kellick
    
    Senior Vice President
    
    June 28, 2005(Patrick W. Kellick)
    
    Chief Financial Officerand Assistant Secretary/s/ Michael C. Hoffman
    
    Director
    
    June 28, 2005(Michael C. Hoffman)/s/ Eric T. Fry
    
    Director
    
    June 28, 2005(Eric T. Fry)/s/ Hwan-Yoon Chung
    
    Director
    
    June 28, 2005(Hwan-Yoon Chung)
 90




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##### Table of Contents



ACG HOLDINGS, INC. Annual Report on Form 10-K
 Fiscal Year Ended March 31, 2005
 
 Index to Exhibits Exhibit No.
    
    Description10.6
    
    Severance Letter, dated November 19, 2000, between Graphics and Kathleen A. DeKam10.12 (c)
    
    Third Amendment to Credit Agreement dated as of April 7, 2005 to Credit Agreement dated as
of July 3, 2003, among Graphics; Bank of America, N.A., as Administrative Agent, Collateral
Agent and as a Lender; GECC Capital markets Group, Inc., as
Syndication Agent; and the
financial institutions named therein as Lenders12.1
    
    Statement Re: Computation of Ratio of Earnings to Fixed Charges21.1
    
    List of Subsidiaries31.1
    
    Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer31.2
    
    Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer32.1
    
    Certification of Chief Executive Officer and Chief Financial Officer Pursuant to
18 U.S.C. Section 1350
 91