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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 FORM 10-K (Mark One) [X ]
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended March 31, 2004
 or [   ]
    
    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)Registrants 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)Registrants 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 [X]    No [   ] 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.    [X] Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [   ] No [X] 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, 2004 (all of which are privately owned and not traded on a
public market). DOCUMENTS INCORPORATED BY REFERENCE
None




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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
    
    
    9PART IIItem 5.
    
    Market for Registrants Common Equity and Related Stockholder Matters
    
    
    10Item 6.
    
    Selected Financial Data
    
    
    10Item 7.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    14Item 7A.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    28Item 8.
    
    Financial Statements and Supplementary Data
    
    
    29Item 9.
    
    Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
    
    
    61Item 9A.
    
    Controls and Procedures
    
    
    61PART IIIItem 10.
    
    Directors and Executive Officers of the Registrant
    
    
    62Item 11.
    
    Executive Compensation
    
    
    64Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    69Item 13.
    
    Certain Relationships and Related Transactions
    
    
    70Item 14.
    
    Principal Accountant Fees and Services
    
    
    71PART IVItem 15.
    
    Exhibits, Financial Statement Schedules and Reports on Form 8-K
    
    
    72Signatures
    
    
    82Ex-10.4 Severance LetterEx-12.1 / Computation of Ratio of EarningsEx-21.1 List of SubsidiariesEx-31.1 Section 302 Certification 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 national
footprint, which provides distribution efficiencies and shorter turnaround
times. Customers for our print services include approximately 205 national and
regional retailers and approximately 170 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, 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, 2004 (Fiscal Year
2004), retail advertising inserts accounted for 86% of our total print segment
sales, and in the fiscal year ended March 31, 2003 (Fiscal Year 2003), and
the fiscal year ended March 31, 2002 (Fiscal Year 2002), accounted for 87% of
our total print segment sales. Customers in the advertising insert segment of the print industry, particularly
large customers with a national presence, have increasingly demanded broader
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 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, national presence 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, 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 170 newspapers and approximately 205 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 Eckerd, grocery
chains such as Jewel Foods, and clothing retailers such as Kohls 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 48 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
integrate 3




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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 Footprint. In our print division, we believe our eight 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 most major cities in the United States. Over the last
two years, we have restructured our print operations. In Fiscal Year 2004, we
consolidated our capacity with the related downsizing of one of our print
facilities and in Fiscal Year 2003 we acquired five printing presses and
repositioned seven other existing presses. These restructuring initiatives
have enhanced our production and distribution networks flexibility, turnaround
times and logistical capabilities, allowing us to better distribute print
products nationally 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 with our national footprint and our 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 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. Over the last 3 years in our print segment, we have closed
one print facility, consolidated our capacity including the related downsizing
of another facility, and have reduced our headcount while increasing our
overall capacity. 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 eight 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 ten 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 recently 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 large-scale projects that will enable
us to utilize the full breadth of the services and technologies we offer. 4




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Continuing to Reduce Costs.We have a disciplined approach to cost reductions
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
program includes 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 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 89%, 90% and 88% of our
sales in Fiscal Years 2004, 2003 and 2002, respectively, produces advertising
inserts, comics and other publications. Advertising Inserts.Retail advertising inserts accounted for 86% of print
sales in Fiscal Year 2004 and 87% of print sales in Fiscal Years 2003 and 2002.
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 205 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 8% of print sales in Fiscal Year 2004 and 7% of
print sales in Fiscal Years 2003 and 2002. 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 170 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 6% of print sales in Fiscal
Years 2004, 2003 and 2002. Print Production.Our network of nine print plants in the United States and
Canada is strategically well positioned to service our customers, providing us
with distribution efficiencies and shorter 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 48 heatset offset presses, two coldset
offset presses and nine flexographic presses, 56 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. 5




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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 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 11%, 10% and 12% of
our Fiscal Years 2004, 2003 and 2002 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 nationwide within our print plants, our six stand-alone service
locations and through our managed services sites, which are premedia services
facilities at a customer location. We assist customers in the capture, manipulation, 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. For example, we began
offering our ColorSpace suite of services in Fiscal Year 2003, which provides
our customers with better control of color, increased process control, shorter
time to market and lower production costs. 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 49% 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 6




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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. No single customer accounted for sales in excess of 10% of our consolidated
sales in Fiscal Year 2004. Our top ten customers accounted for approximately
48% of our consolidated sales in Fiscal Year 2004. 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 approximately 30 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 approximately 20 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 ink and related products under long-term ink 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 7




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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, and who 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. Our Employees As of May 31, 2004, we had a total of approximately 2,250 employees.
Approximately 150 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 15 locations in 11 states and Canada. We own seven print plants
in the United States and one in Canada and lease one print plant in the United
States. Our premedia services business has six stand-alone production
locations, all of which are leased. The premedia services division also
operates premedia services facilities on the premises of several 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, 2004. We
believe this amount is adequate to cover such liabilities. 8




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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 9




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##### Table of Contents



PART II 
  ITEM 5.
    MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Market Information There is no established public market for the common stock of either
Holdings or Graphics. Holders As of May 31, 2004, 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, 2004, 2003, 2002, 2001 and 2000. The balance sheet data as of March
31, 2004, 2003, 2002, 2001, 2000 and the statements of operations data for the
fiscal years ended March 31, 2004, 2003, 2002, 2001 and 2000 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, 2001 and 2000, 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. 10




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##### Table of Contents



ACG Holdings, Inc.
Selected Financial Data Fiscal Year Ended March 31,2004
    
    2003
    
    2002
    
    2001
    
    2000(Dollars in thousands)Statements of Operations Data:Sales
    
    $
    471,102
    
    
    
    517,139
    
    
    
    539,208
    
    
    
    600,021
    
    
    
    550,698Cost of sales
    
    
    409,321
    
    
    
    445,493
    
    
    
    460,283
    
    
    
    501,338
    
    
    
    457,913Gross profit
    
    
    61,781
    
    
    
    71,646
    
    
    
    78,925
    
    
    
    98,683
    
    
    
    92,785Selling, general and administrative expenses
    
    
    32,734
    
    
    
    37,614
    
    
    
    38,523
    
    
    
    44,471
    
    
    
    44,666Restructuring costs and other special charges (a)
    
    
    8,140
    
    
    
    1,722
    
    
    
    12,920
    
    
    
    
    
    
    
    Operating income
    
    
    20,907
    
    
    
    32,310
    
    
    
    27,482
    
    
    
    54,212
    
    
    
    48,119Interest expense, net
    
    
    34,166
    
    
    
    28,584
    
    
    
    29,806
    
    
    
    32,929
    
    
    
    33,798Loss on early extinguishment of debt (b)
    
    
    3,196
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other expense
    
    
    489
    
    
    
    1,503
    
    
    
    624
    
    
    
    1,154
    
    
    
    627Income tax expense (benefit) (c)
    
    
    11,441
    
    
    
    1,559
    
    
    
    (5,073
    )
    
    
    (4,927
    )
    
    
    2,189Income (loss) from continuing operations
    
    
    (28,385
    )
    
    
    664
    
    
    
    2,125
    
    
    
    25,056
    
    
    
    11,505Discontinued operations: (d)Loss from operations, net of $0 tax
    
    
    12
    
    
    
    979
    
    
    
    1,403
    
    
    
    633
    
    
    
    2,035Loss on disposal, net of $0 tax
    
    
    444
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income (loss)
    
    $
    (28,841
    )
    
    
    (315
    )
    
    
    722
    
    
    
    24,423
    
    
    
    9,470Balance Sheet Data (at end of period):Working capital (deficit)
    
    $
    (15,772
    )
    
    
    (29,820
    )
    
    
    (865
    )
    
    
    15,288
    
    
    
    (2,973
    )Total assets
    
    $
    267,913
    
    
    
    278,441
    
    
    
    280,513
    
    
    
    302,202
    
    
    
    303,812Long-term debt and capitalized leases, including current installments
    
    $
    298,298
    
    
    
    231,757
    
    
    
    252,792
    
    
    
    261,706
    
    
    
    277,344Stockholders deficit
    
    $
    (188,775
    )
    
    
    (107,699
    )
    
    
    (96,020
    )
    
    
    (85,867
    )
    
    
    (109,389
    )Other Data:Net cash provided by operating activities
    
    $
    21,163
    
    
    
    45,647
    
    
    
    38,216
    
    
    
    40,913
    
    
    
    38,774Net cash used by investing activities
    
    $
    (13,118
    )
    
    
    (27,446
    )
    
    
    (16,493
    )
    
    
    (19,006
    )
    
    
    (24,145
    )Net cash used by financing activities
    
    $
    (7,924
    )
    
    
    (22,680
    )
    
    
    (17,189
    )
    
    
    (21,968
    )
    
    
    (14,576
    )Capital expenditures (including lease obligations entered into)
    
    $
    15,966
    
    
    
    28,652
    
    
    
    24,550
    
    
    
    25,271
    
    
    
    22,724Ratio of earnings to fixed charges (e)
    
    
    
    
    
    
    1.07x
    
    
    
    
    
    
    
    1.58x
    
    
    
    1.38xEBITDA (f)
    
    $
    41,054
    
    
    
    54,279
    
    
    
    56,654
    
    
    
    87,111
    
    
    
    79,243
 11




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##### Table of Contents



NOTES TO SELECTED FINANCIAL DATA  (a)
    
    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.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.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 $0.4 million of costs for this plan in Fiscal Year 2004.In addition, we recorded $0.4 million, $0.5 million and $4.3 million of
other special charges in our print and premedia services divisions in
Fiscal Year 2004, Fiscal Year 2003 and Fiscal Year 2002, respectively.
See note 14 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 123⁄4% Senior Subordinated Notes Due 2005 (the 123⁄4% Notes) .(c)
    
    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 6
to our consolidated financial statements appearing elsewhere in the
Report) that have 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 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 includes 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 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 loss,
partially offset by a decrease in other temporary differences generating
deferred tax assets.In the fourth quarter of 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 includes 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 loss. 12




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##### Table of Contents



(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, 2001 and 2000 have been reclassified and presented within
discontinued operations.(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 2004 and 2002
was $16.9 million and $2.9 million, respectively.(f)
    
    We have included EBITDA because we believe that investors regard EBITDA
as a key measure of a leveraged companys performance and ability to meet
its future debt service requirements. 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
accounting principles generally accepted in the United States and should
not be considered an alternative to net income (or any other measure of
performance under accounting principles generally accepted in the United
States) 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 31,2004
    
    2003
    
    2002
    
    2001
    
    2000(In thousands)EBITDA
    
    $
    41,054
    
    
    
    54,279
    
    
    
    56,654
    
    
    
    87,111
    
    
    
    79,243Depreciation and amortization
    
    
    (24,288
    )
    
    
    (24,451
    )
    
    
    (31,199
    )
    
    
    (34,686
    )
    
    
    (33,786
    )Interest expense, net
    
    
    (34,166
    )
    
    
    (28,584
    )
    
    
    (29,806
    )
    
    
    (32,929
    )
    
    
    (33,798
    )Income tax (expense) benefit
    
    
    (11,441
    )
    
    
    (1,559
    )
    
    
    5,073
    
    
    
    4,927
    
    
    
    (2,189
    )Net income (loss)
    
    $
    (28,841
    )
    
    
    (315
    )
    
    
    722
    
    
    
    24,423
    
    
    
    9,470
  The following items are included in the determination of EBITDA and net
income (loss) above: Fiscal Year Ended March 31,2004
    
    2003
    
    2002
    
    2001
    
    2000(In thousands)Restructuring costs
    
    $
    7,768
    
    
    
    1,191
    
    
    
    8,638
    
    
    
    
    
    
    
    Other special charges
    
    
    372
    
    
    
    531
    
    
    
    4,282
    
    
    
    
    
    
    
    Non-recurring plant
consolidation costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    505Loss on early extinguishment of debt
    
    
    3,196
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Loss from discontinued operations
    
    
    456
    
    
    
    979
    
    
    
    1,403
    
    
    
    633
    
    
    
    2,035Total
    
    $
    11,792
    
    
    
    2,701
    
    
    
    14,323
    
    
    
    633
    
    
    
    2,540
 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 two
years as a result of a weak retail market, continuing excess industry capacity
and the aggressive pricing strategies of certain competitors. Our pricing
levels in the fiscal year ending March 31, 2005 (Fiscal Year 2005) are
projected to be lower on average than prices during Fiscal Year 2004. 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 the application of certain digital premedia production methodologies,
technological leadership, facility consolidation and continued cost containment
initiatives. 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 2004, retail advertising inserts accounted for 86% of
our total print segment sales and in both Fiscal Years 2003 and 2002 accounted
for 87% of our total print segment sales. 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. In Fiscal Year 2002, demand for advertising declined, resulting in
reduced paper requirements. The reduction in demand resulted in a decline in
paper prices throughout Fiscal Year 2002. 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. 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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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, and who utilize
retail advertising inserts more frequently. Recent Performance During Fiscal Year 2004, 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. In addition, we
experienced increases in various operating costs including health, energy,
pension and bad debt expenses as well as increased foreign exchange losses.
Our print production volume for the full year showed a slight improvement
versus Fiscal Year 2003. Production volume in the fourth quarter ended March
31, 2004, however, declined approximately 5% from the comparable period in the
prior year. This decline was largely due to certain customer share losses
associated with the aggressive pricing strategies of certain competitors. We
anticipate that as a result of these share losses, our volume levels in Fiscal
Year 2005 will be lower than in Fiscal Year 2004. In this environment, we have been extremely focused on improved productivity
and disciplined cost management. We have been able to partially offset the
negative impact of the above items 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 2005
related to these various restructuring programs and cost reduction initiatives. In June 2003, we made a strategic decision to sell the operations of our
digital visual effects business, Digiscope. The sale of 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 and 2002 have been reclassified and presented
within discontinued operations. Our Restructuring Results and Cost Reduction Initiatives We have successfully implemented significant cost reductions annually over the
past several years. In January of 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
led to increased sales and 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. 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. These programs
allowed us to further decrease our manufacturing and overhead costs. 15




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##### Table of Contents



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 a 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. We anticipate annualized cost savings
from this recent initiative to approximate $10 million. In summary, our restructuring initiatives since January 2002 have resulted in
the elimination of approximately 431 positions within our company, the closure
of one print facility and two premedia services facilities and the downsizing
of one print facility and one premedia services facility. As a result of these
actions, we recognized restructuring expenses of $7.7 million, $1.2 million and
$8.6 million, in Fiscal Years 2004, 2003 and 2002, respectively. In Fiscal
Years 2004, 2003 and 2002, we also recorded other special charges associated
with these programs of $0.4 million, $0.5 million and $4.3 million,
respectively. We expect to make cash payments of approximately $4.9 million of
the accrued restructuring costs during Fiscal Year 2005, $1.4 million during fiscal year ending March 31, 2006
(Fiscal Year 2006) and the remainder, approximately $0.1 million, in the
fiscal year ending March 31, 2007 (Fiscal Year 2007) associated with these
programs. See note 14 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. 16




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##### Table of Contents



The following table summarizes our historical results of continuing operations
for Fiscal Years 2004, 2003 and 2002. Certain prior period presentation has
been reclassified to conform to current period information for both the print
and premedia services divisions. Fiscal Year Ended March 31,2004
    
    2003
    
    2002(Dollars in thousands)SalesPrint
    
    $
    418,004
    
    
    
    463,071
    
    
    
    475,955Premedia Services
    
    
    53,098
    
    
    
    54,068
    
    
    
    63,253Total
    
    $
    471,102
    
    
    
    517,139
    
    
    
    539,208Gross ProfitPrint
    
    $
    47,537
    
    
    
    57,826
    
    
    
    64,713Premedia Services
    
    
    14,239
    
    
    
    13,818
    
    
    
    14,198Other
    
    
    5
    
    
    
    2
    
    
    
    14Total
    
    $
    61,781
    
    
    
    71,646
    
    
    
    78,925Gross MarginPrint
    
    
    11.4
    %
    
    
    12.5
    %
    
    
    13.6
    %Premedia Services
    
    
    26.8
    %
    
    
    25.6
    %
    
    
    22.5
    %Total
    
    
    13.1
    %
    
    
    13.9
    %
    
    
    14.6
    %Operating Income (Loss)Print (a)
    
    $
    18,300
    
    
    
    33,000
    
    
    
    33,188Premedia Services (a)
    
    
    6,119
    
    
    
    3,129
    
    
    
    765Other (b)
    
    
    (3,512
    )
    
    
    (3,819
    )
    
    
    (6,471
    )Total
    
    $
    20,907
    
    
    
    32,310
    
    
    
    27,482
  (a)
    
    Print and premedia services operating income in Fiscal Year 2004
includes the impact of restructuring costs of $7.1 million and $0.6
million, respectively. Print operating income in Fiscal Year 2004 also
includes $0.4 million of other special charges. In Fiscal Year 2003, both
print and premedia services operating income includes the impact of
restructuring costs of $0.6 million each. Print and premedia services
operating income in Fiscal Year 2003 also includes $0.2 million and $0.3
million, respectively, of other special charges related to non-cash asset
write-offs and write-downs. Print and premedia services operating income
in Fiscal Year 2002 includes the impact of restructuring costs of $6.5
million and $2.1 million, respectively. Print and premedia services
operating income in Fiscal Year 2002 also includes $3.9 million and $0.4
million of other special charges related to non-cash asset write-offs and
write-downs, respectively. See Our Restructuring Results and Cost
Reduction Initiatives above.  (b)
    
    Also includes corporate general and administrative expenses in Fiscal
Years 2004, 2003 and 2002, and $3.0 million of goodwill amortization
expense in Fiscal Year 2002. 17




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##### Table of Contents



Historical Results of Operations 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. Total operating income decreased to $20.9 million, or 4.4% of
sales, in Fiscal Year 2004 from $32.3 million, or 6.2% 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 Special Charges.Restructuring costs and other
special 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. Operating Income.As a result of the above factors, operating income from the
print business decreased $14.7 million to $18.3 million in Fiscal Year 2004
from $33.0 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. 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 Special Charges.Restructuring costs and other
special 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. 18




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##### Table of Contents



Operating Income.As a result of the above factors, premedia services
operating income increased $3.0 million to $6.1 million in Fiscal Year 2004
from $3.1 million in Fiscal Year 2003. Other Operations Other operations consist of corporate general and administrative expenses. In
Fiscal Year 2004, operating losses from other operations improved to a loss of
$3.5 million from a loss of $3.8 million in Fiscal Year 2003. This decrease
primarily includes the impact of reductions in certain employee related
expenses. 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 6 to our consolidated financial statements
appearing elsewhere in this Report. Loss on Early Extinguishment of Debt In Fiscal Year 2004, we incurred a charge of approximately $3.2 million, net of
$0 taxes, related to the write-off of deferred financing costs associated with
our old bank credit agreement and the 12 3/4% Notes. See note 6 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 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 6 to our consolidated
financial statements appearing elsewhere in this Report) that have 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 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 Year 2003 have been
reclassified and presented within discontinued operations in our consolidated
financial statements appearing elsewhere in this Report. Net Income (Loss) As a result of the factors discussed above, our net income (loss) increased to
a loss of $28.8 million in Fiscal Year 2004 from a loss of $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 special charges, (2) net non-cash deferred tax expense of $10.6
million associated with changes in estimates related to the Companys 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. The Fiscal Year 2003 net loss included $1.7
million of restructuring costs and other special charges. 19




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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 $20.2 million in Fiscal Year 2004 from
approximately $23.4 million in Fiscal Year 2003. This decrease included the
impact of improved investment markets during calendar year 2003, offset in part
by a reduction in our discount rate from 7.0% to 6.5%. This liability
represented the amount by which the accumulated benefit obligation exceeded 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 loss in our consolidated statements of stockholders
deficit at March 31, 2004 and March 31, 2003. Fiscal Year 2003 vs. Fiscal Year 2002 Total sales decreased 4.1% to $517.1 million in Fiscal Year 2003 from $539.2
million in Fiscal Year 2002. This decrease primarily reflected a decrease in
print sales of $12.9 million, or 2.7%, and a decrease in premedia services
sales of $9.2 million, or 14.5%. Total gross profit decreased to $71.6
million, or 13.9% of sales, in Fiscal Year 2003 from $78.9 million, or 14.6% of
sales, in Fiscal Year 2002. Total operating income increased to $32.3 million,
or 6.2% of sales, in Fiscal Year 2003 from $27.5 million, or 5.1% of sales, in
Fiscal Year 2002. See the discussion of these changes by segment below. Print Sales.Print sales decreased $12.9 million to $463.1 million in Fiscal Year
2003 from $476.0 million in Fiscal Year 2002. The decrease in Fiscal Year 2003
was largely attributable to the impact of decreased paper prices, as well as an
increase in customer supplied paper and the impact of competitive pricing
pressures and certain changes in product and customer mix. These decreases
were offset in part by an increase of approximately 7.4% in print production
volume (see Value Added Revenue and Print Impressions for the Print Segment
below) as a result of sales successes with new customers and increasing our
share of the business with certain existing customers. Gross Profit.Print gross profit decreased $6.9 million to $57.8 million in
Fiscal Year 2003 from $64.7 million in Fiscal Year 2002. Print gross margin
decreased to 12.5% in Fiscal Year 2003 from 13.6% in Fiscal Year 2002. The
decrease in gross profit includes certain expenses incurred during Fiscal Year
2003 associated with the installation and start-up of 12 printing presses
including seven presses relocated from our other print facilities, the impact
of competitive pricing pressures and certain changes in product and customer
mix. These decreases were offset in part by the increased print production
volume. The decrease in gross margin includes these items offset in part by the
impact of decreased 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 increased $2.8 million to $24.0 million, or 5.2% of
print sales, in Fiscal Year 2003, from $21.2 million, or 4.5% of print sales,
in Fiscal Year 2002. This increase was primarily attributable to the impact in
Fiscal Year 2002 of the change in our estimates related to the allowance for
doubtful accounts, as well as increases in selling and administrative costs. Restructuring Costs and Other Special Charges.Restructuring costs and other
special charges decreased $9.6 million to $0.8 million in Fiscal Year 2003 from
$10.4 million in Fiscal Year 2002. See Our Restructuring Results and Cost
Reduction Initiatives above. Operating Income.As a result of the above factors, operating income from the
print business decreased $0.2 million to $33.0 million in Fiscal Year 2003 from
$33.2 million in Fiscal Year 2002. Premedia Services Sales.Premedia services sales decreased $9.2 million to $54.1 million in
Fiscal Year 2003 from $63.3 million in Fiscal Year 2002. The decrease in
Fiscal Year 2003 was largely the result of reduced premedia services production
volume associated with weak market conditions, as well as the impact of certain
premedia facility closures. See Our Restructuring Results and Cost Reduction
Initiatives above. Gross Profit.Premedia services gross profit decreased $0.4 million to $13.8
million in Fiscal Year 2003 from $14.2 million in Fiscal Year 2002. Premedia
services gross margin increased to 25.6% in Fiscal Year 2003 from 22.5% in
Fiscal 20




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##### Table of Contents



Year 2002. The decrease in gross profit was primarily the result of reduced
premedia services production volume, offset in part by reduced manufacturing
costs related to various cost containment programs and certain premedia
services facility closures. Selling, General and Administrative Expenses.Premedia services selling,
general and administrative expenses decreased $1.1 million to $9.8 million, or
18.1% of premedia services sales in Fiscal Year 2003, from $10.9 million, or
17.2% of premedia services sales in Fiscal Year 2002. This decrease was
primarily attributable to decreased selling expenses. Restructuring Costs and Other Special Charges.Restructuring costs and other
special charges decreased $1.6 million to $0.9 million in Fiscal Year 2003 from
$2.5 million in Fiscal Year 2002. See Our Restructuring Results and Cost
Reduction Initiatives above. Operating Income.As a result of the above factors, premedia services
operating income increased $2.3 million to $3.1 million in Fiscal Year 2003
from $0.8 million in Fiscal Year 2002. Other Operations Other operations consist of corporate general, administrative and other
expenses, including for Fiscal Year 2002, amortization
expense. In Fiscal Year 2003, operating losses from other operations improved
to a loss of $3.8 million from a loss of $6.5 million in Fiscal Year 2002.
This improvement was due to a reduction in goodwill amortization expense of
$3.0 million, offset in part by increases in certain corporate general and
administrative expenses. Non-cash amortization expenses, which primarily include goodwill amortization,
within other operations, were not incurred in Fiscal Year 2003 and were $3.0
million in Fiscal Year 2002. Interest Expense In Fiscal Year 2003, interest expense decreased 4.3% to $28.7 million from
$30.0 million in Fiscal Year 2002. This decrease reflected both lower levels
of indebtedness and lower borrowing costs. Income Taxes In Fiscal Year 2003, tax expense (benefit) increased to expense of $1.6 million
from benefit of $5.1 million in Fiscal Year 2002. This increase was primarily
due to a Fiscal Year 2002 adjustment to the valuation allowance of $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. 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 2003 and 2002 have
been reclassified and presented within discontinued operations in our
consolidated financial statements appearing elsewhere in this Report. Net Income (Loss) As a result of the factors discussed above, our net income (loss) decreased to
a loss of $0.3 million in Fiscal Year 2003 from income of $0.7 million in
Fiscal Year 2002. Fiscal Year 2003 net loss included $1.2 million of
restructuring costs and $0.5 million of other special charges related to asset
write-offs and write-downs associated with the Fiscal Year 2003 restructuring
plan. Fiscal Year 2002 net income included $8.6 million of restructuring costs
and $4.3 million of other special charges related to asset write-offs
associated with the Fiscal Year 2002 restructuring plan. Minimum Pension Liability In compliance with SFAS 87, we increased our minimum pension liability to
approximately $23.4 million in Fiscal Year 2003 from approximately $10.8
million in Fiscal Year 2002. This increase included the impact of weak
investment markets during calendar year 2002 and a reduction in our discount
rate from 7.5% to 7.0%. This liability represented the amount by which the
accumulated benefit obligation exceeded the fair value of the plan assets at
March 31, 2003 and March 31, 2002. 21




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##### Table of Contents



The recording of this liability had no impact on our consolidated statements of
operations for Fiscal Years 2003 and 2002, but was recorded as a component of
other comprehensive loss in our consolidated statements of stockholders
deficit at March 31, 2003 and March 31, 2002. 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 6 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 123⁄4% 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 123⁄4%
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 123⁄4% 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 123⁄4% Notes. Our primary sources of liquidity are 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 are applied daily
toward repayment of borrowings outstanding, if any, under the Revolving
Credit Facility. At March 31, 2004, we had no borrowings outstanding under the Revolving Credit
Facility and had letters of credit outstanding of approximately $30.6 million.
We had additional borrowing availability of approximately $39.4 million.
Scheduled repayments of existing capital lease obligations during Fiscal Year
2005 are approximately $4.1 million. During the Fiscal Year 2004, we used net cash provided by operating activities
of $21.1 million (see the Consolidated Statements of Cash Flows appearing
elsewhere in this Report) and proceeds from the 2003 Refinancing of $280
million primarily to fund the following expenditures:  
    
    $39.2 million to repay indebtedness outstanding under the old bank credit agreement,
    
    $170.1 million to redeem the 123⁄4% Notes,
    
    $56.9 million to repurchase and retire all outstanding shares of
preferred stock of Holdings, and cancel all outstanding options to
purchase shares of preferred stock of Holdings,
    
    $14.3 million for fees and expenses paid to date related to the 2003 Refinancing,
    
    $13.1 million in cash capital expenditures, and
    
    $7.5 million to service other indebtedness (including capital lease
obligations of $7.1 million and deferred financing fees related to the
old bank credit agreement and the 123⁄4% Notes of $0.4 million). 22




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Our cash on hand of approximately $10.3 million at March 31, 2004 is presented
net of outstanding checks within trade accounts payable at March 31, 2004.
Accordingly, cash is presented at a balance of $0 million in the March 31, 2004
balance sheet. Our primary sources of liquidity have been cash provided by operating
activities and borrowings under the Revolving Credit Facility. We anticipate
that our primary needs for liquidity will be to conduct our business, meet our
debt service requirements, make capital expenditures and, if we elect, redeem,
repay or repurchase outstanding indebtedness including repurchases of our 10%
Notes in privately negotiated transactions, or in open market purchases, to the
extent permitted by the Revolving Credit Facility, as amended. We believe that
we have sufficient liquidity to meet our requirements over the next 12 months. At March 31, 2004, we had total indebtedness of $298.3 million, which includes
$280.0 million of our 10% Notes and capital lease obligations of $18.3 million.
The estimated fair value of our 10% Notes was $249.2 million, or $30.8 million
less than the carrying value. We have no off-balance sheet financial
instruments. We are currently in compliance with the financial covenant requirements set
forth in the Revolving Credit Facility, as amended. A significant portion of Graphics long-term obligations, including
indebtedness under the Revolving Credit Facility 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 Revolving
Credit Facility, including among other things, restrictions on mergers,
acquisitions, incurrence of additional debt and payment of cash dividends. See
note 1 to our consolidated financial statements appearing elsewhere in this
Report. EBITDA and EBITDA Margin The following table is a summary of our EBITDA and EBITDA margin for Fiscal
Years 2004, 2003 and 2002: Fiscal Year Ended March 31,2004
    
    2003
    
    2002(Dollars in thousands)EBITDAPrint (a)
    
    $
    38,789
    
    
    
    52,415
    
    
    
    55,362Premedia Services (a)
    
    
    9,564
    
    
    
    7,160
    
    
    
    5,590Other (b)
    
    
    (7,299
    )
    
    
    (5,296
    )
    
    
    (4,298
    )Total
    
    $
    41,054
    
    
    
    54,279
    
    
    
    56,654EBITDA MarginPrint
    
    
    9.3
    %
    
    
    11.3
    %
    
    
    11.6
    %Premedia Services
    
    
    18.0
    %
    
    
    13.2
    %
    
    
    8.8
    %Total
    
    
    8.7
    %
    
    
    10.5
    %
    
    
    10.5
    %
  (a)
    
    EBITDA for the print and premedia services segments in Fiscal Year 2004
includes the impact of restructuring costs and other special charges of
$7.5 million and $0.6 million, respectively. In Fiscal Year 2003, EBITDA
for the print and premedia services segments includes the impact of
restructuring costs and other special charges of $0.8 million and $0.9
million, respectively. EBITDA for the print and premedia services
segments in Fiscal Year 2002 includes the impact of restructuring costs
and other special charges of $10.4 million and $2.5 million, respectively.
For additional information about our restructuring plan, see Our
Restructuring Results and Cost Reduction Initiatives above. 23




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##### Table of Contents



(b)
    
    Other operations include corporate general and administrative 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, 2003
and 2002 was ($0.4) million, ($0.6) million and ($0.6) million,
respectively. In addition, other operations includes the write-off of
deferred financing costs related to the 2003 Refinancing of $3.2 million
in Fiscal Year 2004. EBITDA is presented and discussed because management believes that investors
regard EBITDA as a key measure of a leveraged companys performance and ability
to meet its future debt service requirements. EBITDA is defined as earnings
before net interest expense, income tax expense (benefit), depreciation and
amortization. This calculation of EBITDA differs from the EBITDA disclosed in
note 16 to our consolidated financial statements appearing elsewhere in the
Report. The definition in note 16 follows the guidelines required under the
provisions of Financial Accounting Standards Board Statement of Financial
Accounting Standard No. 131 Disclosures about Segments of an Enterprise and
Related Information and is reflective of managements calculation of EBITDA.
EBITDA Margin is defined as EBITDA as a percentage of net sales. EBITDA is
not a measure of financial performance under accounting principles generally
accepted in the United States and should not be considered an alternative to
net income (or any other measure of performance under accounting principles
generally accepted in the United States) 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 Senior Second
Secured Notes Indenture and the Revolving Credit Facility 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 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
    )Fiscal Year 2002EBITDA
    
    $
    55,362
    
    
    
    5,590
    
    
    
    (4,298
    )
    
    
    56,654Depreciation and amortization
    
    
    (22,147
    )
    
    
    (5,225
    )
    
    
    (3,827
    )
    
    
    (31,199
    )Interest expense, net
    
    
    
    
    
    
    
    
    
    
    (29,806
    )
    
    
    (29,806
    )Income tax benefit
    
    
    
    
    
    
    
    
    
    
    5,073
    
    
    
    5,073Net income (loss)
    
    $
    33,215
    
    
    
    365
    
    
    
    (32,858
    )
    
    
    722
 24




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##### Table of Contents



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 31,2004
    
    2003
    
    2002Print segment VAR (in thousands)
    
    $
    214,675
    
    
    
    223,041
    
    
    
    220,650Print impressions (in millions)
    
    
    12,920
    
    
    
    12,888
    
    
    
    12,004
 The following table provides a reconciliation of print segment sales to print
segment VAR: Fiscal Year Ended March 31,2004
    
    2003
    
    2002(Dollars in thousands)Print segment sales
    
    $
    418,004
    
    
    
    463,071
    
    
    
    475,955Paper, ink and subcontract services
    
    
    203,329
    
    
    
    240,030
    
    
    
    255,305Print segment VAR
    
    $
    214,675
    
    
    
    223,041
    
    
    
    220,650
 Amortization of Goodwill Goodwill was amortized on a straight-line basis by business segment through
Fiscal Year 2002. Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets (SFAS 142), was effective for fiscal
years beginning after December 15, 2001. In compliance with this
pronouncement, we adopted SFAS 142 on April 1, 2002. As a result, we did not
amortize goodwill during Fiscal Years 2004 or 2003. Instead, we now evaluate
goodwill for indicators of impairment at least annually in accordance with the
provision of SFAS 142. A reconciliation of previously reported net income
(loss) to the pro forma amount adjusted for the exclusion of amortization of
goodwill, net of the related income tax effect, is as follows: Fiscal Year Ended March 31,2004
    
    2003
    
    2002(Dollars in thousands)Reported net income (loss)
    
    $
    (28,841
    )
    
    
    (315
    )
    
    
    722Add: Goodwill amortization,
net of tax
    
    
    
    
    
    
    
    
    
    
    3,012Pro forma net income (loss)
    
    $
    (28,841
    )
    
    
    (315
    )
    
    
    3,734
 In the quarter ended September 30, 2002, we performed the initial assessment of
impairment as of April 1, 2002 and noted no impairment. We performed the
required annual impairment tests of goodwill as of December 31, 2003 and 2002,
and noted no impairment. 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 2002, demand for advertising declined, resulting
in reduced paper requirements. The reduction in paper requirements resulted in
a decline in paper prices throughout Fiscal Year 2002. In Fiscal Year 2003,
paper prices were on average at 25




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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. 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, and who utilize
advertising inserts more frequently. 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,
2004, 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 November 2002, the Emerging Issues Task Force (EITF) reached a Consensus
on Issue No. 02-16, Accounting by a Customer (including a Reseller) for
Certain Consideration Received from a Vendor (EITF 02-16). EITF 02-16
addresses the accounting and income statement classification for consideration
given by a vendor to a reseller in connection with the sale of the vendors
products or for the promotion or sales of the vendors products. The EITF
concluded that such consideration received from vendors should be reflected as
a decrease in prices paid for inventory and recognized in cost of sales as the
related inventory is sold, unless specific criteria are met qualifying the
consideration for treatment as revenues or reimbursement of specific,
identifiable incremental costs. As clarified by the EITF in January 2003, this
issue was effective for arrangements with vendors initiated on or after January
1, 2003. The provisions of this consensus have been applied prospectively and
are materially consistent with our existing accounting policy. Accordingly,
the adoption of EITF 02-16 did not and will not have a material impact on our
consolidated financial statements as a whole. 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 the company is not required to consolidate but
in which it has a significant variable interest. The consolidation
requirements of FIN 46 apply 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 and do not expect any effect on our consolidated
financial statements as a whole. In December 2003, the FASB issued Statement of Financial Accounting Standards
No. 132 (revised), Employers Disclosures about Pensions and other
Postretirement Benefits (SFAS 132R). This standard prescribes employers
disclosures about pension plans and other postretirement benefit plans, but
does not change the measurement of recognition of those plans. SFAS 132R
retains and revises the disclosure requirements contained in the original
standard. It also requires additional disclosures about the assets,
obligations, cash flows, and net periodic benefit costs of defined benefit 26




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pension plans and other postretirement benefit plans. For public companies,
SFAS 132R is generally effective for fiscal years ending after December 15,
2003. The revised disclosure requirements are incorporated in note 9 to our
consolidated financial statements found elsewhere in this Report. Critical Accounting Policies Our consolidated financial statements and related public financial information
are based on the application of accounting principles generally accepted 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 and conservatism 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: 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 $2.9 million and $2.5 million at March 31, 2004 and 2003,
respectively. Restructuring During the Fiscal Years 2004, 2003 and 2002, 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, 2004, we had a valuation allowance of $45.2 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. 27




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##### Table of Contents



Contractual Obligations and Commercial Commitments The following table gives information about our existing material commitments
under our indebtedness and contractual obligations, which excludes the effect
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
    
    $
    280,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    280,000Capitalized lease obligations
    
    
    18,298
    
    
    
    4,144
    
    
    
    8,071
    
    
    
    5,879
    
    
    
    204Operating lease obligations (a)
    
    
    13,637
    
    
    
    3,571
    
    
    
    5,907
    
    
    
    2,583
    
    
    
    1,576Pension obligations (b)
    
    
    8,777
    
    
    
    8,777
    
    
    
    
    
    
    
    
    
    
    
    Total contractual cash
obligations
    
    $
    320,712
    
    
    
    16,492
    
    
    
    13,978
    
    
    
    8,462
    
    
    
    281,780
  (a)
    
    Includes amounts due under an operating lease of a facility that was
closed as part of the 2002 restructuring plan. In our estimate of the
related restructuring reserve, we have estimated that the facility will
be fully subleased prior to the end of the contractual term of the lease.(b)
    
    Although we expect to make contributions to our pension plan in
future years, those amounts cannot be estimated at this time. See note
9 to our consolidated financial statements appearing elsewhere in this Report. 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, 2004 is $49.6 million and is
included within Other liabilities in our consolidated balance sheet. At March
31, 2004, we had no other significant contingent commitments. The following
table gives information about our other commercial commitments: Other Commercial
    
    
    
    
    
    Commitment Due By PeriodCommitments
    
    Total
    
    < 1 year
    
    1-3 years
    
    3-5 years
    
    > 5 years(Dollars in thousands)Standby letters of credit
    
    $
    30,579
    
    
    
    26,053
    
    
    
    
    
    
    
    750
    
    
    
    3,776
 The standby letters of credit generally serve as collateral and generally 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 is described 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, 2004, we had only fixed rate debt
approximating $280.0 million, excluding capital lease obligations. At March
31, 2003, we had fixed rate and variable rate debt (both excluding capitalized
lease obligations) approximating $170.1 million and $39.2 million,
respectively. 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. The carrying values of such debt
instruments approximated their estimated fair value as of March 31, 2003. At
our March 31, 2004 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. At our March 31, 2003 borrowing levels, a 1% adverse change
in interest rates would have 28




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resulted in an immaterial effect on the fair value of our fixed rate debt and
would have also had an immaterial impact on earnings and cash flows relating to
our variable rate. 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. 
 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 Auditors
    
    
    30Consolidated
Balance Sheets - March 31, 2004 and 2003
    
    
    31For the Years Ended March 31, 2004, 2003 and 2002:Consolidated Statements of Operations
    
    
    33Consolidated Statements of Stockholders Deficit
    
    
    34Consolidated Statements of Cash Flows
    
    
    35Notes to Consolidated Financial Statements
    
    
    37
 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, 2004, 2003 and 2002, and as
of March 31, 2004 and 2003II.
    
    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. 29




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##### Table of Contents



Report of Independent Auditors Board of Directors
ACG Holdings, Inc. We have audited the accompanying consolidated balance sheets of ACG
Holdings, Inc. as of March 31, 2004 and 2003, 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, 2004. 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 auditing standards
generally accepted in the 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. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as
well as 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, 2004 and 2003,
and the consolidated results of their operations and their cash
flows for each of the three fiscal years in the period ended March
31, 2004, in conformity with accounting principles generally
accepted in the United States. 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. As discussed in note 1 to the consolidated financial statements, in
the fiscal year ended March 31, 2003, the Company adopted the
provisions of Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets. /s/ Ernst & Young LLP
 Nashville, Tennessee
May 19, 2004 30




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##### Table of Contents



ACG HOLDINGS, INC.
Consolidated Balance Sheets
(In thousands) March 31,2004
    
    2003AssetsCurrent assets:Cash
    
    $
    
    
    
    
    Receivables:Trade accounts, less allowance for doubtful accounts of
$2,853 and $2,524 at March 31, 2004 and 2003,
respectively
    
    
    42,452
    
    
    
    49,402Income tax receivable
    
    
    
    
    
    
    233Other
    
    
    2,533
    
    
    
    2,227Total receivables
    
    
    44,985
    
    
    
    51,862Inventories
    
    
    8,524
    
    
    
    10,203Deferred income taxes
    
    
    2,313
    
    
    
    6,246Prepaid expenses and other current assets
    
    
    4,836
    

    
    
    4,296Current assets of discontinued operations
    
    
    
    
    
    
    866Total current assets
    
    
    60,658
    
    
    
    73,473Property, plant and equipment:Land and improvements
    
    
    2,963
    
    
    
    2,932Buildings and improvements
    
    
    28,706
    
    
    
    26,992Machinery and equipment
    
    
    228,431
    
    
    
    221,079Furniture and fixtures
    
    
    13,210
    
    
    
    12,712Leased assets under capital leases
    
    
    26,031
    
    
    
    43,612Equipment installations in process
    
    
    4,084
    
    
    
    2,853303,425
    
    
    
    310,180Less accumulated depreciation
    
    
    (182,874
    )
    
    
    (183,167
    )Net property, plant and equipment
    
    
    120,551
    
    
    
    127,013Excess of cost over net assets acquired
    
    
    66,548
    
    
    
    66,548Other assets
    
    
    20,156
    
    
    
    11,125Long-term assets of discontinued operations
    
    
    
    
    
    
    282Total assets
    
    $
    267,913
    
    
    
    278,441
 See accompanying notes to consolidated financial statements. 31




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ACG HOLDINGS, INC.
Consolidated Balance Sheets
(Dollars in thousands, except par values and liquidation preference) March 31,2004
    
    2003Liabilities and Stockholders DeficitCurrent liabilities:Current installments of long-term debt and capitalized leases
    
    $
    4,144
    
    
    
    31,698Trade accounts payable
    
    
    29,727
    
    
    
    39,044Accrued expenses
    
    
    42,550
    
    
    
    32,302Income tax payable
    
    
    9
    
    
    
    Current liabilities of discontinued operations
    
    
    
    
    
    
    249Total current liabilities
    
    
    76,430
    
    
    
    103,293Long-term debt and capitalized leases, excluding current installments
    
    
    294,154
    
    
    
    200,059Deferred income taxes
    
    
    8,624
    
    
    
    2,023Other liabilities
    
    
    77,480
    
    
    
    80,765Total liabilities
    
    
    456,688
    
    
    
    386,140Commitments and contingenciesStockholders deficit:Common stock, voting, $.01 par value, 5,852,223 shares authorized,
160,067 and 163,929 shares issued and outstanding at March 31,
2004 and 2003, respectively
    
    
    2
    
    
    
    2Preferred stock, $.01 par value, 15,823 shares authorized, none
issued and outstanding as of March 31, 2004; as of March 31, 2003,
3,617 shares Series AA convertible preferred stock issued and
outstanding, $39,442,500 liquidation preference, and 1,606 shares
Series BB convertible preferred stock issued and outstanding,
$17,500,000 liquidation preference
    
    
    
    
    
    
    Additional paid-in capital
    
    
    2,103
    
    
    
    58,816Accumulated deficit
    
    
    (169,516
    )
    
    
    (140,655
    )Other accumulated comprehensive loss, net of tax
    
    
    (21,364
    )
    
    
    (25,862
    )Total stockholders deficit
    
    
    (188,775
    )
    
    
    (107,699
    )Total liabilities and stockholders deficit
    
    $
    267,913
    
    
    
    278,441
 See accompanying notes to consolidated financial statements. 32




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ACG HOLDINGS, INC.
Consolidated Statements of Operations
(In thousands) Year ended March 31,2004
    
    2003
    
    2002Sales
    
    $
    471,102
    
    
    
    517,139
    
    
    
    539,208Cost of sales
    
    
    409,321
    
    
    
    445,493
    
    
    
    460,283Gross profit
    
    
    61,781
    
    
    
    71,646
    
    
    
    78,925Selling, general and administrative expenses
    
    
    32,734
    
    
    
    37,614
    
    
    
    35,511Amortization of goodwill
    
    
    
    
    
    
    
    
    
    
    3,012Restructuring costs and other special charges
    
    
    8,140
    
    
    
    1,722
    
    
    
    12,920Operating income
    
    
    20,907
    
    
    
    32,310
    
    
    
    27,482Other expense (income):Interest expense
    
    
    34,175
    
    
    
    28,674
    
    
    
    29,973Interest income
    
    
    (9
    )
    
    
    (90
    )
    
    
    (167
    )Loss on early extinguishment of debt
    
    
    3,196
    
    
    
    
    
    
    
    Other, net
    
    
    489
    
    
    
    1,503
    
    
    
    624Total other expense
    
    
    37,851
    
    
    
    30,087
    
    
    
    30,430Income (loss) from continuing
operations before income taxes
    
    
    (16,944
    )
    
    
    2,223
    
    
    
    (2,948
    )Income tax expense (benefit)
    
    
    11,441
    
    
    
    1,559
    
    
    
    (5,073
    )Income (loss) from continuing operations
    
    
    (28,385
    )
    
    
    664
    
    
    
    2,125Discontinued operations:Loss from operations, net of $0 tax
    
    
    12
    
    
    
    979
    
    
    
    1,403Loss on disposal, net of $0 tax
    
    
    444
    
    
    
    
    
    
    
    Net income (loss)
    
    $
    (28,841
    )
    
    
    (315
    )
    
    
    722
 See accompanying notes to consolidated financial statements. 33




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ACG HOLDINGS, INC.
Consolidated Statements of Stockholders Deficit
(In thousands) Series AAand BB
    
    
    
    
    
    
    
    
    
    OtherVoting
    
    convertible
    
    Additional
    
    
    
    
    
    accumulatedcommon
    
    preferred
    
    paid-in
    
    Accumulated
    
    comprehensivestock
    
    stock
    
    capital
    
    deficit
    
    income (loss)
    
    TotalBalances, March 31, 2001
    
    $
    1
    
    
    
    
    
    
    
    58,370
    
    
    
    (141,062
    )
    
    
    (3,176
    )
    
    $
    (85,867
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    722
    
    
    
    
    
    
    
    722Other comprehensive loss, net of tax:Change in cumulative
translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (254
    )
    
    
    (254
    )Change in minimum pension
liability
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,751
    )
    
    
    (10,751
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,283
    )Executive stock compensation
    
    
    
    
    
    
    
    
    
    
    130
    
    
    
    
    
    
    
    
    
    
    
    130Balances, March 31, 2002
    
    $
    1
    
    
    
    
    
    
    
    58,500
    
    
    
    (140,340
    )
    
    
    (14,181
    )
    
    $
    (96,020
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (315
    )
    
    
    
    
    
    
    (315
    )Other comprehensive 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 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
    )
 See accompanying notes to consolidated financial statements. 34




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ACG HOLDINGS, INC.
Consolidated Statements of Cash Flows
(In thousands) Year ended March 31,2004
    
    2003
    
    2002Cash flows from operating activities:Net income (loss)
    
    $
    (28,841
    )
    
    
    (315
    )
    
    
    722Adjustments to reconcile net income (loss) to net cash provided
by operating activities:Other
special charges - non-cash
    
    
    328
    
    
    
    531
    
    
    
    4,282Loss on
early extinguishment of debt - non-cash
    
    
    3,196
    
    
    
    
    
    
    
    Depreciation
    
    
    23,587
    
    
    
    23,526
    
    
    
    26,209Depreciation related to discontinued operations
    
    
    26
    
    
    
    355
    
    
    
    815Amortization of goodwill
    
    
    
    
    
    
    
    
    
    
    3,012Amortization of other assets
    
    
    675
    
    
    
    570
    
    
    
    1,163Amortization of deferred financing costs
    
    
    2,191
    
    
    
    1,626
    
    
    
    1,420Loss (gain) on disposals of property, plant and equipment
    
    
    93
    
    
    
    (16
    )
    
    
    134Impairment of asset
    
    
    
    
    
    
    750
    
    
    
    Deferred income tax expense (benefit)
    
    
    10,534
    
    
    
    408
    
    
    
    (5,360
    )Discontinued operations, net of tax
    
    
    873
    
    
    
    (547
    )
    
    
    174Changes in assets and liabilities, net of effects of discontinued operations:Decrease in receivables
    
    
    6,777
    
    
    
    1,160
    
    
    
    11,252Decrease (increase) in current income taxes receivable
    
    
    233
    
    
    
    782
    
    
    
    (1,015
    )Decrease (increase) in inventories
    
    
    1,765
    
    
    
    (999
    )
    
    
    3,701Increase (decrease) in trade accounts payable
    
    
    (9,626
    )
    
    
    13,035
    
    
    
    (10,322
    )Increase (decrease) in accrued expenses
    
    
    10,146
    
    
    
    (1,604
    )
    
    
    2,856Increase (decrease) in current income taxes payable
    
    
    9
    
    
    
    
    
    
    
    (174
    )Increase (decrease) in other liabilities
    
    
    (82
    )
    
    
    7,269
    
    
    
    2,247Other
    
    
    (721
    )
    
    
    (884
    )
    
    
    (2,900
    )Total adjustments
    
    
    50,004
    
    
    
    45,962
    
    
    
    37,494Net cash provided by operating activities
    
    
    21,163
    
    
    
    45,647
    
    
    
    38,216
 35




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ACG HOLDINGS, INC.
Consolidated Statements of Cash Flows - Continued
(In thousands) Year ended March 31,2004
    
    2003
    
    2002Cash flows from investing activities:Purchases of property, plant and equipment
    
    
    (13,096
    )
    
    
    (27,862
    )
    
    
    (16,532
    )Purchases of property, plant and equipment  discontinued operations
    
    
    
    
    
    
    
    
    
    
    (239
    )Proceeds from sales of property, plant and equipment
    
    
    24
    
    
    
    295
    
    
    
    400Proceeds from discontinued operations
    
    
    
    
    
    
    38
    
    
    
    Other
    
    
    (46
    )
    
    
    83
    
    
    
    (122
    )Net cash used by investing activities
    
    
    (13,118
    )
    
    
    (27,446
    )
    
    
    (16,493
    )Cash flows from financing activities:Repayment of long-term debt, net
    
    
    (39,185
    )
    
    
    (11,652
    )
    
    
    (992
    )Repayment of
123⁄4% senior subordinated notes
    
    
    (170,055
    )
    
    
    (1,700
    )
    
    
    (8,245
    )Proceeds from issuance of 10% senior second secured notes
    
    
    280,000
    
    
    
    
    
    
    
    Deferred financing costs paid
    
    
    (14,633
    )
    
    
    (850
    )
    
    
    (483
    )Repayment of capital lease obligations
    
    
    (7,089
    )
    
    
    (8,381
    )
    
    
    (6,984
    )Repayment of capital lease obligations-discontinued operations
    
    
    
    
    
    
    (100
    )
    
    
    (469
    )Repurchase and retirement of preferred stock and cancellation of
preferred stock options
    
    
    (56,942
    )
    
    
    
    
    
    
    Purchase of treasury stock
    
    
    (20
    )
    
    
    
    
    
    
    Exchange rate adjustment
    
    
    
    
    
    
    3
    
    
    
    (16
    )Net cash used by financing activities
    
    
    (7,924
    )
    
    
    (22,680
    )
    
    
    (17,189
    )Effect of exchange rates on cash
    
    
    (121
    )
    
    
    (68
    )
    
    
    13Change in cash
    
    
    
    
    
    
    (4,547
    )
    
    
    4,547Cash:Beginning of period
    
    
    
    
    
    
    4,547
    
    
    
    End of period
    
    $
    
    
    
    
    
    
    
    
    4,547Supplemental disclosure of cash flow information:Cash paid for:Interest
    
    $
    27,668
    
    
    
    27,169
    
    
    
    28,320Income taxes, net of refunds
    
    $
    509
    
    
    
    180
    
    
    
    1,530Non-cash investing activities:Assets purchased under capital lease obligations
    
    $
    2,870
    
    
    
    790
    
    
    
    7,779
 See accompanying notes to consolidated financial statements. 36




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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, 2004, 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 (I) distributions and restricted
investments under items (4) and (5) above can only be made if no default
or event of default exists either before or after giving effect to such
distribution or restricted investment and (II) can make 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. 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 accounting principles generally accepted in the
United States.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. Credits relating to
specification variances and other customer adjustments have
historically not been significant. 37




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ACG HOLDINGS, INC. Notes to Consolidated Financial Statements  (c)
    
    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. We estimate losses resulting from the inability of our
customers to make required payments.(d)
    
    InventoriesInventories are valued at the lower of first-in, first-out
(FIFO) cost or market (net realizable value).(e)
    
    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.(f)
    
    Excess of Cost Over Net Assets AcquiredThe excess of cost over net assets acquired (or goodwill) was
amortized on a straight-line basis over a range of 5 to 40 years
for each of its principal business segments through the fiscal
year ended March 31, 2002. The Company adopted Statement of
Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets (SFAS 142), on April 1, 2002.SFAS 142, which no longer requires the amortization of goodwill and
instead requires goodwill to be evaluated at least annually for
impairment, was effective for fiscal years beginning after December
15, 2001. A reconciliation of previously reported net income
(loss) to the pro forma amount adjusted for the exclusion of
amortization of goodwill, net of the related income tax effect, is
as follows (in thousands): Fiscal Year Ended March 31,2004
    
    2003
    
    2002Reported net income (loss)
    
    $
    (28,841
    )
    
    
    (315
    )
    
    
    722Add: Goodwill amortization,
net of tax
    
    
    
    
    
    
    
    
    
    
    3,012Pro forma net income (loss)
    
    $
    (28,841
    )
    
    
    (315
    )
    
    
    3,734
  In the quarter ended September 30, 2002, the Company performed its
initial assessment of impairment as of April 1, 2002 and noted no
impairment. The Company performed the required annual impairment
tests of goodwill as of December 31, 2003 and 2002, and noted no
impairment.(g)
    
    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 38




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ACG HOLDINGS, INC. Notes to Consolidated Financial Statements  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.(h)
    
    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, which are generally 5 years.(i)
    
    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.(j)
    
    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
transaction adjustments are included in the Companys consolidated
results of operations.(k)
    
    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.(l)
    
    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 6 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.(m)
    
    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. 39




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ACG HOLDINGS, INC. Notes to Consolidated Financial Statements  (n)
    
    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.(o)
    
    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.(p)
    
    Shipping and Handling CostsThe Companys shipping and handling costs are reflected within Cost
of Sales in the Consolidated Statements of Operations.(q)
    
    Impact of Recently Issued Accounting StandardsIn November 2002, the Emerging Issues Task Force (EITF) reached a
Consensus on Issue No. 02-16, Accounting by a Customer (including
a Reseller) for Certain Consideration Received from a Vendor
(EITF 02-16). EITF 02-16 addresses the accounting and income
statement classification for consideration given by a vendor to a
reseller in connection with the sale of the vendors products or
for the promotion or sales of the vendors products. The EITF
concluded that such consideration received from vendors should be
reflected as a decrease in prices paid for inventory and recognized
in cost of sales as the related inventory is sold, unless specific
criteria are met qualifying the consideration for treatment as
revenues or reimbursement of specific, identifiable incremental
costs. As clarified by the EITF in January 2003, this issue was
effective for arrangements with vendors initiated on or after
January 1, 2003. The provisions of this consensus have been
applied prospectively and are materially consistent with the
Companys existing accounting policy. Accordingly, the adoption of
EITF 02-16 did not and will not have a material impact on the
Companys consolidated financial statements as a whole.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 the company is not
required to consolidate but in which it has a significant variable
interest. The consolidation requirements of FIN 46 apply
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 and
does not expect any effect on its consolidated financial statements
as a whole.In December 2003, the FASB issued Statement of Financial Accounting
Standards No. 132 (revised), Employers Disclosures about Pensions
and other Postretirement Benefits (SFAS 132R). This 40




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ACG HOLDINGS, INC. Notes to Consolidated Financial Statements  standard prescribes employers disclosures about pension plans and
other postretirement benefit
plans, but does not change the measurement of recognition of those
plans. SFAS 132R retains and revises the disclosure requirements
contained in the original standard. It also requires additional
disclosures about the assets, obligations, cash flows, and net
periodic benefit costs of defined benefit pension plans and other
postretirement benefit plans. For public companies, SFAS 132R is
generally effective for fiscal years ending after December 15,
2003. The revised disclosure requirements are incorporated in note
9.  (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, 2003 and
March 31, 2002 have been reclassified and presented within discontinued
operations.(3)
    
    InventoriesThe components of inventories are as follows (in thousands): March 31,2004
    
    2003Paper
    
    $
    6,307
    
    
    
    7,973Ink
    
    
    185
    
    
    
    164Supplies and other
    
    
    2,032
    
    
    
    2,066Total
    
    $
    8,524
    
    
    
    10,203
  (4)
    
    Other AssetsThe components of other assets are as follows (in thousands): March 31,2004
    
    2003Deferred financing costs, less accumulated
amortization of $1,695 in 2004 and $8,898
in 2003
    
    $
    12,581
    
    
    
    3,335Spare parts inventory, net of valuation allowance
of $100 in 2004 and 2003
    
    
    6,714
    
    
    
    6,058Other
    
    
    861
    
    
    
    1,732Total
    
    $
    20,156
    
    
    
    11,125
 41




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ACG HOLDINGS, INC. Notes to Consolidated Financial Statements  (5)
    
    Accrued ExpensesThe components of accrued expenses are as follows (in thousands): March 31,2004
    
    2003Compensation and related taxes
    
    $
    7,155
    
    
    
    10,007Employee benefits
    
    
    18,444
    
    
    
    12,680Interest
    
    
    8,452
    
    
    
    4,048Restructuring
    
    
    6,445
    
    
    
    2,961Other
    
    
    2,054
    
    
    
    2,606Total
    
    $
    42,550
    
    
    
    32,302
  (6)
    
    Notes Payable, Long-Term Debt and Capitalized LeasesLong-term debt, including capitalized leases, is summarized as follows
(in thousands): March 31,2004
    
    2003Bank Credit Agreement:Series A Term Loan
    
    $
    
    
    
    
    4,230Series B Term Loan
    
    
    
    
    
    
    34,945
    
    
    
    39,17510% Senior Second Secured Notes Due 2010
    
    
    280,000
    
    
    
    123⁄4% Senior Subordinated Notes Due 2005
    
    
    
    
    
    
    170,055Capitalized leases
    
    
    18,298
    
    
    
    22,517Other
    
    
    
    
    
    
    10Total long-term debt and capitalized leases
    
    
    298,298
    
    
    
    231,757Less current installments
    
    
    4,144
    
    
    
    31,698Long-term debt and capitalized leases,
excluding current installments
    
    $
    294,154
    
    
    
    200,059
 42




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ACG HOLDINGS, INC. Notes to Consolidated Financial Statements July 3, 2003
Refinancing Transactions 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
123⁄4% Senior Subordinated Notes Due 2005 (the 123⁄4%
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 123⁄4%
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 123⁄4% 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 are applied daily toward repayment of
borrowings outstanding, if any, under the Revolving Credit Facility. At
March 31, 2004, the Company had no borrowings outstanding under the
Revolving Credit Facility and had letters of credit outstanding of
approximately $30.6 million. The Company had additional borrowing
availability of approximately $39.4 million. 43




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##### Table of Contents



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, 2004. Future maturities of long-term debt and future minimum obligations under
capitalized leases at March 31, 2004 are as follows (in thousands): Long-Term
    
    CapitalizedFiscal year
    
    Debt
    
    Leases2005
    
    $
    
    
    
    $
    5,5372006
    
    
    
    
    
    
    5,0942007
    
    
    
    
    
    
    4,6652008
    
    
    
    
    
    
    4,1912009
    
    
    
    
    
    
    2,067Thereafter
    
    
    280,000
    
    
    
    206Total
    
    $
    280,000
    
    
    
    21,760Imputed interest
    
    
    
    
    
    
    (3,462
    )Present value of minimum lease payments
    
    
    
    
    
    $
    18,298
 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 was $249.2 million, or $30.8 million less than
the carrying value, at March 31, 2004. The Company estimated that the
carrying amounts of the Companys debt instruments approximated their
fair value at March 31, 2003. 44




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##### Table of Contents



ACG HOLDINGS, INC. Notes to Consolidated Financial Statements  (7)
    
    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, 2004 and 2003 are as follows (in
thousands): March 31,2004
    
    2003Deferred tax liabilities:Book over tax basis in fixed assets
    
    $
    18,024
    
    
    
    19,512Foreign taxes
    
    
    4,624
    
    
    
    3,687Accumulated amortization
    
    
    2,148
    
    
    
    1,885Other, net
    
    
    798
    
    
    
    3,973Total deferred tax liabilities
    
    
    25,594
    
    
    
    29,057Deferred tax assets:Allowance for doubtful accounts
    
    
    1,119
    
    
    
    997Accrued expenses and other liabilities
    
    
    18,448
    
    
    
    20,158Net operating loss carryforwards
    
    
    35,318
    
    
    
    27,592AMT credit carryforwards
    
    
    1,203
    
    
    
    1,203Minimum pension liability
    
    
    7,918
    
    
    
    9,175Cumulative translation adjustment
    
    
    462
    
    
    
    970Total deferred tax assets
    
    
    64,468
    
    
    
    60,095Valuation allowance for deferred tax assets
    
    
    45,185
    
    
    
    26,815Net deferred tax assets
    
    
    19,283
    
    
    
    33,280Net deferred tax (assets) liabilities
    
    $
    6,311
    
    
    
    (4,223
    )
  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 $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 have provided negative
evidence about the Companys ability to realize certain deferred tax
assets. The increase also includes a $5.6 million net increase in the
deferred tax items, which is net of a decrease of $1.3 million related to
the tax effect of the minimum pension liability, which is a component of
other comprehensive loss. 45




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ACG HOLDINGS, INC. Notes to Consolidated Financial Statements During the fiscal year ended March 31, 2004, the Company recorded an
adjustment of $2.2 million 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 31,2004
    
    2003
    
    2002CurrentFederal
    
    $
    
    
    
    
    (274
    )
    
    
    (445
    )State
    
    
    203
    
    
    
    163
    
    
    
    249Foreign
    
    
    704
    
    
    
    1,262
    
    
    
    483Total current
    
    
    907
    
    
    
    1,151
    
    
    
    287DeferredFederal
    
    
    8,069
    
    
    
    30
    
    
    
    (4,505
    )State
    
    
    1,528
    
    
    
    (3
    )
    
    
    (909
    )Foreign
    
    
    937
    
    
    
    381
    
    
    
    54Total deferred
    
    
    10,534
    
    
    
    408
    
    
    
    (5,360
    )Provision (benefit) for income taxes
    
    $
    11,441
    
    
    
    1,559
    
    
    
    (5,073
    )
 The effective tax rates for the fiscal years ended March 31, 2004, 2003 and
2002 were (67.5)%, 125.3% and 116.6%, 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 31,2004
    
    2003
    
    2002Statutory tax rate
    
    
    35.0
    %
    
    
    35.0
    %
    
    
    35.0
    %State income taxes, less
federal tax impact
    
    
    (8.9
    )
    
    
    8.4
    
    
    
    9.9Foreign taxes, less federal
tax impact
    
    
    (2.7
    )
    
    
    95.8
    
    
    
    (8.3
    )Amortization
    
    
    
    
    
    
    
    
    
    
    (14.1
    )Other nondeductible expenses
    
    
    7.2
    
    
    
    15.0
    
    
    
    (4.4
    )Change in valuation
allowance
    
    
    (104.0
    )
    
    
    (69.6
    )
    
    
    96.9Change in cumulative translation
adjustment
    
    
    (3.1
    )
    
    
    29.3
    
    
    
    2.3Previously accrued taxes
    
    
    13.1
    
    
    
    
    
    
    
    Other, net
    
    
    (4.1
    )
    
    
    11.4
    
    
    
    (0.7
    )Effective income tax rate
    
    
    (67.5
    )%
    
    
    125.3
    %
    
    
    116.6
    %
 46




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##### Table of Contents



ACG HOLDINGS, INC. Notes to Consolidated Financial Statements  As of March 31, 2004, the Company had available net operating loss
carryforwards (NOLs) for state purposes of $52.3 million, which can be
used to offset future state taxable income. If these NOLs are not
utilized, they will begin to expire in 2005 and will be totally expired in
2024.As of March 31, 2004, the Company had available NOLs for federal purposes
of $94.6 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 2024.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 $95.6
million, which will begin to expire in 2011 and will be totally expired in
2024.(8)
    
    Other LiabilitiesThe components of other liabilities are as follows (in thousands): March 31,2004
    
    2003Deferred revenue agreements (see note 12)
    
    $
    49,608
    
    
    
    44,582Long-term pension and postretirement liabilities
    
    
    4,482
    
    
    
    9,756Minimum pension liability
    
    
    20,187
    
    
    
    23,390Other
    
    
    3,203
    
    
    
    3,037Total
    
    $
    77,480
    
    
    
    80,765
  (9)
    
    Employee Benefit PlansDefined Benefit Pension PlansPension Plans

The 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 Plan

In 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 $2.2 million and $2.3 million at March 31, 2004 and
March 31, 2003, respectively. 47




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ACG HOLDINGS, INC. Notes to Consolidated Financial Statements Defined Benefit Postretirement Plans Postretirement
Benefits

The Company provides certain other postretirement benefits for employees,
primarily life and health insurance. Full-time employees who 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 Plan Effective 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. Subsequent to March 16, 2003, 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. The Companys

contribution under this Plan amounted to $0.8 million during the fiscal
year ended March 31, 2004, $3.9 million during the fiscal year ended March
31, 2003 and $4.1 million during the fiscal year ended March 31, 2002. 48




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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, 2004 and 2003 and a statement of the funded status of
such plans as of March 31, 2004 and 2003 (in thousands): Defined Benefit
    
    Defined BenefitPension Plans
    
    Postretirement Plan2004
    
    2003
    
    2004
    
    2003Change in Benefit ObligationBenefit obligation at beginning of year
    
    $
    61,953
    
    
    
    58,154
    
    
    
    3,159
    
    
    
    2,842Service cost
    
    
    390
    
    
    
    410
    
    
    
    30
    
    
    
    21Interest cost
    
    
    4,211
    
    
    
    4,237
    
    
    
    182
    
    
    
    216Plan participants contributions
    
    
    
    
    
    
    
    
    
    
    310
    
    
    
    274Actuarial loss (gain)
    
    
    4,197
    
    
    
    3,073
    
    
    
    (264
    )
    
    
    455Expected benefit payments
    
    
    (3,566
    )
    
    
    (3,921
    )
    
    
    (616
    )
    
    
    (649
    )Benefit obligation at end of year
    
    $
    67,185
    
    
    
    61,953
    
    
    
    2,801
    
    
    
    3,159Change in Plan AssetsFair value of plan assets at beginning
of year
    
    $
    32,481
    
    
    
    40,225
    
    
    
    
    
    
    
    Actual return on plan assets
    
    
    7,638
    
    
    
    (6,426
    )
    
    
    
    
    
    
    Employer contributions
    
    
    3,640
    
    
    
    2,603
    
    
    
    306
    
    
    
    375Plan participants contributions
    
    
    
    
    
    
    
    
    
    
    310
    
    
    
    274Benefits paid
    
    
    (3,566
    )
    
    
    (3,921
    )
    
    
    (616
    )
    
    
    (649
    )Fair value of plan assets at end of year
    
    $
    40,193
    
    
    
    32,481
    
    
    
    
    
    
    
    Funded Status
    
    $
    (26,992
    )
    
    
    (29,472
    )
    
    
    (2,801
    )
    
    
    (3,159
    )Unrecognized net actuarial (gain) or loss
    
    
    20,187
    
    
    
    23,390
    
    
    
    (325
    )
    
    
    (123
    )Unrecognized prior service gain
    
    
    
    
    
    
    
    
    
    
    (1,411
    )
    
    
    (1,633
    )Plan participants contributions
    
    
    
    
    
    
    
    
    
    
    64
    
    
    
    96Additional minimum pension liability
    
    
    (20,187
    )
    
    
    (23,390
    )
    
    
    
    
    
    
    Accrued benefit liability
    
    $
    (26,992
    )
    
    
    (29,472
    )
    
    
    (4,473
    )
    
    
    (4,819
    )
 49




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ACG HOLDINGS, INC.
Notes to Consolidated Financial Statements Defined Benefit Pension Plans
    
    Defined Benefit Postretirement Plan2004
    
    2003
    
    2004
    
    2003Weighted
 Average AssumptionsDiscount rate  benefit obligation
    
    
    6.5
    %
    
    
    7.00
    %
    
    
    6.5
    %
    
    
    7.00
    %Expected return on plan assets
    
    
    8.5
    %
    
    
    10.00
    %
    
    
    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,
an 11 percent annual rate of increase in the per capita cost of covered
health care benefits (including prescription drugs) was assumed for March
31, 2004. This rate was assumed to decrease gradually to 5 percent
through the fiscal year ending 2011 and remain at that level thereafter. Defined Benefit Pension Plans
    
    Defined Benefit Postretirement Plan2004
    
    2003
    
    2002
    
    2004
    
    2003
    
    2002Components of Net Periodic Benefit Cost
(in thousands)Service cost
    
    $
    390
    
    
    
    410
    
    
    
    431
    
    
    
    30
    
    
    
    21
    
    
    
    7Interest cost
    
    
    4,211
    
    
    
    4,237
    
    
    
    4,256
    
    
    
    182
    
    
    
    216
    
    
    
    185Expected return on plan assets
    
    
    (2,710
    )
    
    
    (3,930
    )
    
    
    (4,693
    )
    
    
    
    
    
    
    
    
    
    
    Amortization of prior service cost
    
    
    
    
    
    
    
    
    
    
    (102
    )
    
    
    (222
    )
    
    
    (222
    )
    
    
    (222
    )Amortization of unrecognized loss
    
    
    2,441
    
    
    
    697
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Curtailment gain
    
    
    
    
    
    
    
    
    
    
    (94
    )
    
    
    
    
    
    
    
    
    
    
    Settlement loss
    
    
    31
    
    
    
    28
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Recognized net actuarial gain
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (62
    )
    
    
    (46
    )
    
    
    (169
    )Net periodic benefit (income) loss
    
    $
    4,363
    
    
    
    1,442
    
    
    
    (202
    )
    
    
    (72
    )
    
    
    (31
    )
    
    
    (199
    )
 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

Effect on postretirement benefit obligation
    
    $4
$68
    
    (4)
(62)
 In
December 2003, the Medicare Prescription Drug Improvement and
Modernization Act of 2003 (the "Act") was enacted. The Act introduces a
prescription drug benefit under Medicare ("Medicare Part D") as well as
a federal subsidy to sponsors of retiree health care benefit plans
that provide a benefit that is at least actuarially equivalent to
Medicare Part D. Due to uncertainties in determining the impact the
Act could have on the Companys accumulated postretirement benefit
obligation and net periodic postretirement benefit cost, the
consolidated financial statements do not reflect the effect the Act
may have on the Companys  postretirement plan. Upon resolution of such
uncertainties, which are substantially beyond the Companys control, the
Companys postretirement plan will recognize the effects of the
Act, which are not likely to be material. 50




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##### Table of Contents



ACG HOLDINGS, INC. Notes to Consolidated Financial Statements Plan Assets The Companys defined benefit pension plans reflect weighted-average
target allocations as of March 31, 2004 and the percentages of the fair
value of plan assets are allocated at March 31, 2004 and 2003 by asset
category as follows: TargetAllocation
    
    Percentage of Plan Assets2004
    
    2004
    
    2003Global equity securities
    
    
    78
    %
    
    
    81.3
    %
    
    
    75.4
    %Fixed income securities
    
    
    22
    %
    
    
    16.8
    %
    
    
    22.0
    %Cash
    
    
    0
    %
    
    
    1.9
    %
    
    
    2.6
    %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 2004. 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, 2005 are
estimated to be approximately $8.8 million. (10) Capital Stock At March 31, 2004, 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). (11) Stock Option Plans Common Stock Option Plans In 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. 51




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##### Table of Contents



ACG HOLDINGS, INC. Notes to Consolidated Financial Statements A summary of activity under the Common Stock Option Plans is as follows: Weighted-Average
    
    ExercisableOptions
    
    Exercise Price ($)
    
    Options (a)Outstanding at March 31, 2001
    
    
    29,840
    
    
    
    13.35
    
    
    
    19,087Granted
    
    
    450
    
    
    
    .01Exercised
    
    
    
    
    
    
    Forfeited
    
    
    
    
    
    
    Outstanding at March 31, 2002
    
    
    30,290
    
    
    
    13.15
    
    
    
    27,569Granted
    
    
    2,974
    
    
    
    .01Exercised
    
    
    (20,531
    )
    
    
    7.98Forfeited
    
    
    (2,411
    )
    
    
    37.34Outstanding at March 31, 2003
    
    
    10,322
    
    
    
    14.01
    
    
    
    6,617Granted
    
    
    
    
    
    
    Exercised
    
    
    (1,125
    )
    
    
    .01Forfeited
    
    
    
    
    
    
    Outstanding at March 31, 2004
    
    
    9,197
    
    
    
    15.72
    
    
    
    6,946
   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)2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2003
    
    
    632
    
    
    
    343.73
    
    
    
    .01
    
    
    
    3.56
    
    
    
    
    
    
    
    
    
    
    
    52,342
    
    
    
    .01
    
    
    
    .01
    
    
    
    1.63
    
    
    
    
    
    
    
    
    
    
    
    52,9742002
    
    
    450
    
    
    
    969.36
    
    
    
    .01
    
    
    
    3.76
    
    
    
    
    
    
    
    
    
    
    
    5
 The weighted-average remaining contractual life of the options outstanding
at March 31, 2004 was 3.7 years. A total of 6,268 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, 2004. As a result of the SFAS 123 requirements, the Company recognized stock
compensation expense of $0.2 million related to the common stock option
grants in each of the fiscal years ended March 31, 2004 and March 31, 2003
and $0.1 million in the fiscal year ended March 31, 2002. Preferred Stock Option Plan In 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. 52




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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 6). A summary of the Preferred Stock Option Plan is as follows: OptionsOutstanding at March 31, 2001
    
    
    555Granted
    
    
    Exercised
    
    
    Forfeited
    
    
    Outstanding at March 31, 2002
    
    
    555Granted
    
    
    27Exercised
    
    
    Forfeited
    
    
    Outstanding at March 31, 2003
    
    
    582Granted
    
    
    Exercised
    
    
    Canceled
    
    
    (582
    )Outstanding at March 31, 2004
    
    
    
 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, 2004 and
March 31, 2002 and therefore, the Company recognized no stock compensation
expense for those years. (12) Commitments and Contingencies The Company incurred rent expense for the fiscal years ended March 31,
2004, 2003 and 2002 of $4.3 million, $4.5 million and $4.7 million,
respectively, under various operating leases. Future minimum rental
commitments under existing operating lease arrangements at March 31, 2004
are as follows (in thousands): Fiscal Year2005
    
    
    
    
    
    $
    3,5712006
    
    
    
    
    
    
    3,1672007
    
    
    
    
    
    
    2,7402008
    
    
    
    
    
    
    1,4332009
    
    
    
    
    
    
    1,150Thereafter
    
    
    
    
    
    
    1,576Total
    
    
    
    
    
    $
    13,637
 53




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ACG HOLDINGS, INC. Notes to Consolidated Financial Statements The Company has employment agreements with one of its principal officers
and two other employees. Such agreements provide for minimum salary
levels as well as for incentive bonuses, which are payable if specified
management goals are attained. The aggregate commitment for future
compensation at March 31, 2004, excluding bonuses, was approximately $2.8
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, 2004 is $49.6 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, 2004 and 2003. 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 of the Company. 54




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ACG HOLDINGS, INC. Notes to Consolidated Financial Statements (13) Interim Financial Information (Unaudited) Quarterly financial information follows (in thousands): Sales
    
    Gross Profit
    
    Net Income (Loss)Fiscal Year 2004
    
    Quarter Ended:June 30
    
    $
    121,687
    
    
    
    18,701
    
    
    
    3,101
    (a)September 30
    
    
    115,280
    
    
    
    14,674
    
    
    
    (22,680
    ) (b)December 31
    
    
    128,569
    
    
    
    17,230
    
    
    
    3,007
    (c)March 31
    
    
    105,566
    
    
    
    11,176
    
    
    
    (12,269
    ) (d)Total
    
    $
    471,102
    
    
    
    61,781
    
    
    
    (28,841
    )Fiscal Year 2003
    
    Quarter Ended:June 30
    
    $
    127,455
    
    
    
    20,973
    
    
    
    4,459September 30
    
    
    130,076
    
    
    
    17,755
    
    
    
    1,122December 31
    
    
    141,913
    
    
    
    19,523
    
    
    
    2,221March 31
    
    
    117,695
    
    
    
    13,395
    
    
    
    (8,117
    ) (e)Total
    
    $
    517,139
    
    
    
    71,646
    
    
    
    (315
    )
  (a)
    
    Includes $0.5 million in discontinued operations losses.(b)
    
    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.(c)
    
    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.(d)
    
    Includes $6.1 million of pre-tax restructuring and other
special charges.(e)
    
    Includes $1.7 million of pre-tax restructuring and other
special charges. (14) Restructuring Costs and Other Special Charges Fiscal Year 2004 Restructuring Costs January 2004 Plan In January 2004, the Company approved 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 special 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 Statement of Financial Accounting Standards No. 146, Accounting
for Costs Associated with Exit or Disposal Activities (SFAS 146). This
restructuring charge is composed primarily of severance and related
termination benefits. 55




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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, 2004 (in thousands): Initial Recording
    
    
    
    
    
    03/31/04of Restructuring
    
    
    
    
    
    RestructuringReserve
    
    Activity
    
    Reserve BalanceSeverance and other employee costs
    
    $
    5,190
    
    
    
    (1,675
    )
    
    
    3,515Lease termination costs
    
    
    117
    
    
    
    (114
    )
    
    
    3Other costs
    
    
    461
    
    
    
    (19
    )
    
    
    442$
    5,768
    
    
    
    (1,808
    )
    
    
    3,960
 As of March 31, 2004, the Company believes the restructuring reserve of
approximately $4.0 million is adequate. The Company anticipates that
approximately $3.6 million of the restructuring balance will be paid by
March 31, 2005 and the remaining $0.4 million will be paid during the
fiscal year ending March 31, 2006. These costs will be funded through
cash generated from operations and borrowings under the Revolving Credit
Facility, as amended. July 2003 Plan In 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
special 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, 2004 (in thousands): Initial Recording
    
    
    
    
    
    
    
    
    
    03/31/04of Restructuring
    
    
    
    
    
    Reserve
    
    RestructuringReserve
    
    Activity
    
    Adjustment
    
    Reserve BalanceSeverance and other
employee costs
    
    $
    1,775
    
    
    
    (649
    )
    
    
    (9
    )
    
    
    1,117
 As of March 31, 2004, the Company believes the restructuring reserve of
approximately $1.1 million is adequate. The Company anticipates that
approximately $0.7 million of the restructuring balance will be paid by
March 31, 2005, approximately $0.3 million will be paid during the fiscal
year ending March 31, 2006 and the remaining $0.1 million will be paid
during the fiscal year ending March 31, 2007. These costs will be funded
through cash generated from operations and borrowings under the Revolving
Credit Facility, as amended. Fiscal Year 2003 Restructuring Costs In 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. 56




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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 was classified within
restructuring costs and
other special 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. 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, 2004 (in thousands): 03/31/03
    
    
    
    
    
    
    
    
    
    03/31/04Restructuring
    
    
    
    
    
    Reserve
    
    RestructuringReserve Balance
    
    Activity
    
    Adjustment
    
    Reserve BalanceSeverance and other
employee costs
    
    $
    979
    
    
    
    (768
    )
    
    
    (199
    )
    
    
    12Other costs
    
    
    103
    
    
    
    (106
    )
    
    
    27
    
    
    
    24$
    1,082
    
    
    
    (874
    )
    
    
    (172
    )
    
    
    36
  During the fiscal year ended March 31, 2003, $0.1 million of these costs
were paid. As of March 31, 2004, the Company believes the remaining
restructuring reserve of less than $0.1 million is adequate. The process
of closing a premedia services facility, and the elimination of certain
personnel within the Company was completed by March 31, 2003. The Company
anticipates that the remaining costs will be paid before March 31, 2005.
These costs will be funded through cash generated from operations and
borrowings under the Companys Revolving Credit Facility, as amended. Fiscal Year 2002 Restructuring Costs In 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 special 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. These charges are related to
future lease commitments and are classified within restructuring costs and
other special charges in the consolidated statements of operations for the
fiscal year ended March 31, 2004. 57




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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, 2004 (in thousands): 03/31/03
    
    
    
    
    
    
    
    
    
    03/31/04Restructuring
    
    
    
    
    
    
    
    
    
    RestructuringReserve
    
    
    
    
    
    Additional
    
    ReserveBalance
    
    Activity
    
    Reserve
    
    BalanceSeverance and other
employee costs
    
    $
    498
    
    
    
    (398
    )
    
    
    
    
    
    
    100Lease termination
costs
    
    
    1,311
    
    
    
    (485
    )
    
    
    406
    
    
    
    1,232Other costs
    
    
    70
    
    
    
    (70
    )
    
    
    
    
    
    
    $
    1,879
    
    
    
    (953
    )
    
    
    406
    
    
    
    1,332
 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 the fiscal years ended March 31, 2003 and March 31, 2002, $3.4
million of these costs were paid in each year. As of March 31, 2004, the
Company believes the restructuring reserve of approximately $1.3 million
is adequate. The Company anticipates that $0.6 million of the
restructuring reserve balance will be paid by March 31, 2005 and the
remaining $0.7 million will be paid by March 31, 2006. These costs will
be funded through cash generated from operations and borrowings under the
Revolving Credit Facility, as amended. Other Special Charges The Company recorded an impairment charge of approximately $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. 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 special charges in the consolidated statements of
operations. The Company also recorded an impairment charge of approximately $4.3
million in the fourth quarter of the fiscal year ended March 31, 2002 to
reflect the decision to abandon certain Company assets. The provision was
based on a review of the Companys long-lived assets in accordance with
SFAS 121. This impairment charge is classified within restructuring costs
and other special charges in the consolidated statement of operations. (15) Parent Guarantee of Subsidiary Debt Graphics, 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). (16) Industry Segment Information The 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. 58




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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, 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 as calculated by management, which is
defined as earnings before net interest expense, income tax expense
(benefit), depreciation, amortization, other non-cash expenses, other
special charges related to asset write-offs and write-downs, other expense
(income), restructuring costs and discontinued operations. 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 ending 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 all periods below have been reclassified to present
Digiscopes operating results as a discontinued operation. In addition,
fiscal years ended March 31, 2003 and 2002 below reflect a
reclassification to the print segment of certain premedia revenues and
expenses performed in the print facilities previously presented within the
premedia services segment. We revised and reclassified the segment
reporting 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. Premedia
    
    Corporate(In thousands)
    
    Print
    
    Services
    
    and Other
    
    TotalFiscal Year 2004Sales
    
    $
    418,004
    
    
    
    53,098
    
    
    
    
    
    
    
    471,102EBITDA as calculated by management
    
    $
    46,506
    
    
    
    10,315
    
    
    
    (3,512
    )
    
    
    53,309Depreciation and amortization
    
    
    (20,733
    )
    
    
    (3,529
    )
    
    
    
    
    
    
    (24,262
    )Other special charges  SFAS 144
    
    
    (372
    )
    
    
    
    
    
    
    
    
    
    
    (372
    )Restructuring costs
    
    
    (7,101
    )
    
    
    (667
    )
    
    
    
    
    
    
    (7,768
    )Operating income (loss)
    
    
    18,300
    
    
    
    6,119
    
    
    
    (3,512
    )
    
    
    20,907Loss on early extinguishment of debt
    
    
    
    
    
    
    
    
    
    
    (3,196
    )
    
    
    (3,196
    )Interest expense
    
    
    
    
    
    
    
    
    
    
    (34,175
    )
    
    
    (34,175
    )Interest income
    
    
    
    
    
    
    
    
    
    
    9
    
    
    
    9Other, net
    
    
    (244
    )
    
    
    (84
    )
    
    
    (161
    )
    
    
    (489
    )Income tax expense
    
    
    
    
    
    
    
    
    
    
    (11,441
    )
    
    
    (11,441
    )Depreciation from discontinued operations
    
    
    
    
    
    
    
    
    
    
    (26
    )
    
    
    (26
    )Discontinued operations excluding
depreciation
    
    
    
    
    
    
    
    
    
    
    (430
    )
    
    
    (430
    )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
    
    
    
    
    
    
    
    15,966
 59




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ACG HOLDINGS, INC. Notes to Consolidated Financial Statements Premedia
    
    Corporate(In thousands)
    
    Print
    
    Services
    
    and Other
    
    TotalFiscal Year 2003Sales
    
    $
    463,071
    
    
    
    54,068
    
    
    
    
    
    
    
    517,139EBITDA as calculated by management
    
    $
    53,571
    
    
    
    8,376
    
    
    
    (3,819
    )
    
    
    58,128Depreciation and amortization
    
    
    (19,760
    )
    
    
    (4,336
    )
    
    
    
    
    
    
    (24,096
    )Other special charges  SFAS 144
    
    
    (197
    )
    
    
    (334
    )
    
    
    
    
    
    
    (531
    )Restructuring costs
    
    
    (614
    )
    
    
    (577
    )
    
    
    
    
    
    
    (1,191
    )Operating income (loss)
    
    
    33,000
    
    
    
    3,129
    
    
    
    (3,819
    )
    
    
    32,310Interest expense
    
    
    
    
    
    
    
    
    
    
    (28,674
    )
    
    
    (28,674
    )Interest income
    
    
    
    
    
    
    
    
    
    
    90
    
    
    
    90Other, net
    
    
    (345
    )
    
    
    (305
    )
    
    
    (853
    )
    
    
    (1,503
    )Income tax expense
    
    
    
    
    
    
    
    
    
    
    (1,559
    )
    
    
    (1,559
    )Depreciation from discontinued operations
    
    
    
    
    
    
    
    
    
    
    (355
    )
    
    
    (355
    )Discontinued operations excluding
depreciation
    
    
    
    
    
    
    
    
    
    
    (624
    )
    
    
    (624
    )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
    
    
    
    
    
    
    
    28,652Fiscal Year 2002Sales
    
    $
    475,955
    
    
    
    63,253
    
    
    
    
    
    
    
    539,208EBITDA as calculated by management
    
    $
    65,701
    
    
    
    8,544
    
    
    
    (3,459
    )
    
    
    70,786Depreciation and amortization
    
    
    (22,147
    )
    
    
    (5,225
    )
    
    
    (3,012
    )
    
    
    (30,384
    )Other special charges  SFAS 121
    
    
    (3,875
    )
    
    
    (407
    )
    
    
    
    
    
    
    (4,282
    )Restructuring costs
    
    
    (6,491
    )
    
    
    (2,147
    )
    
    
    
    
    
    
    (8,638
    )Operating income (loss)
    
    
    33,188
    
    
    
    765
    
    
    
    (6,471
    )
    
    
    27,482Interest expense
    
    
    
    
    
    
    
    
    
    
    (29,973
    )
    
    
    (29,973
    )Interest income
    
    
    
    
    
    
    
    
    
    
    167
    
    
    
    167Other, net
    
    
    27
    
    
    
    (400
    )
    
    
    (251
    )
    
    
    (624
    )Income tax benefit
    
    
    
    
    
    
    
    
    
    
    5,073
    
    
    
    5,073Depreciation from discontinued operations
    
    
    
    
    
    
    
    
    
    
    (815
    )
    
    
    (815
    )Discontinued operations excluding
depreciation
    
    
    
    
    
    
    
    
    
    
    (588
    )
    
    
    (588
    )Net income (loss)
    
    $
    33,215
    
    
    
    365
    
    
    
    (32,858
    )
    
    
    722Total assets
    
    $
    240,816
    
    
    
    20,908
    
    
    
    18,789
    
    
    
    280,513Total goodwill
    
    $
    64,656
    
    
    
    1,892
    
    
    
    
    
    
    
    66,548Total capital expenditures
    
    $
    21,851
    
    
    
    2,460
    
    
    
    239
    
    
    
    24,550
 60




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##### Table of Contents



ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE None. 
 ITEM 9A. CONTROLS AND PROCEDURES As of March 31, 2004, 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, 2004. There have been no significant
changes in our internal controls or in other factors that could significantly
affect internal controls subsequent to March 31, 2004. 61




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##### Table of Contents



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,
2004). All directors hold office until their successors are duly elected and
qualified. Name
    
    Age
    
    Position with Graphics and/or HoldingsStephen M. Dyott
    
    
    52
    
    
    Chairman, President, Chief Executive Officer and DirectorTimothy M. Davis
    
    
    49
    
    
    Senior Vice President/Administration, Secretary and General CounselPatrick W. Kellick
    
    
    46
    
    
    Senior Vice President/Chief Financial Officer and Assistant SecretaryStuart R. Reeve
    
    
    40
    
    
    President, New Business DevelopmentLarry R. Williams
    
    
    63
    
    
    Executive Vice President, Purchasing of GraphicsKathleen A. DeKam
    
    
    43
    
    
    President of American ColorAngela C. Marshall
    
    
    41
    
    
    Corporate Controller/Chief Accounting OfficerEric T. Fry
    
    
    37
    
    
    DirectorMichael C. Hoffman
    
    
    41
    
    
    DirectorHwan-Yoon Chung
    
    
    30
    
    
    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. Larry R. Williamshas been the Executive Vice President, Purchasing of Graphics
since 1997. Prior to 1997, Mr. Williams served as Senior Vice President 
Purchasing, Marketing and Newspaper Sales of Graphics from 1996 to 1997 and
Senior Vice President of Purchasing / Transportation of Graphics from 1993 to
1996. Prior to joining Holdings and Graphics, he was an Independent Management Consultant from 1992 to 1993 and
Senior Vice President, Operations Support for Ryder Systems from 1990 to 1992. Kathleen A. DeKamhas been the President of American Color since 1998. Prior
to 1998, Ms. DeKam was the Vice President of Human Resources of American Color
from 1996 to 1998, Director of Human Resources of American Color from 1995 to
1996 and Manager of Human Resources for various print plants of Graphics from
1986 to 1995. 62




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##### Table of Contents



Angela C. Marshallhas been the Corporate Controller of Holdings and Graphics
since 2002. Prior to 2002, Ms. Marshall was the Assistant Corporate Controller
of Holdings and Graphics from 1999 to 2002, Director of Corporate Accounting
and Financial Reporting of Graphics from 1998 to 1999 and Financial Reporting
Manager of Graphics from 1994 to 1998. Prior to joining Graphics, she was the Manager of Financial
Controls of Berol Corporation from 1993 to 1994, Corporate Controller of QSC
Finishing, Inc. from 1990 to 1993, Controller of Maryland Farms Development
Company from 1988 to 1990 and an Auditor with KPMG from 1984 to 1988. Eric T. Fryhas been a Director of Graphics and Holdings since 1996. Mr. Fry
is a Managing Director of Morgan Stanley Capital Partners. He joined Morgan
Stanley & Co. Incorporated initially in 1989 and is currently a Managing
Director of Morgan Stanley & Co. Incorporated. He is also a Director of Cross
Country Healthcare, Inc., EnerSys Inc., Direct Response Corporation, Homesite
Group, LifeTrust America, Vanguard Health Systems and The Underwriter Group
Limited. Michael C. Hoffmanhas been a Director of Graphics and Holdings since 2003.
Mr. Hoffman is a Managing Director of Morgan Stanley Capital Partners. He
joined Morgan Stanley & Co. Incorporated in 1986 and worked in the firms
Strategic Planning Group prior to joining Morgan Stanley Capital Partners in
1990. He is also a Director of Aventine Renewable Energy. Hwan-Yoon
Chunghas been a Director of Graphics and Holdings since 2004.
Mr. Chung is an Executive Director of Morgan Stanley Capital
Partners. 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. Morgan
Stanley and Morgan Stanley Capital Partners have announced that a
team of investment professionals from Morgan Stanley Capital
Partners, led by Howard Hoffen and senior members of the Capital
Partners group including Mr. Fry, Mr. Hoffman and Mr. Chung, will
establish a new independent private equity firm, Metalmark Capital,
LLC, to manage Morgan Stanley Capital Partners III and certain of its
related funds on a sub-advisory basis. Subject to certain regulatory
approvals, this sub-advisory relationship is expected to commence in
the third quarter of 2004. 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. 63




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##### Table of Contents



ITEM 11. EXECUTIVE COMPENSATION Summary Compensation Table The following table presents information concerning compensation for services
to Holdings and Graphics during Fiscal Years 2004, 2003 and 2002 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
    
    PayoutsSecuritiesOther
    
    
    
    
    
    Under-Annual
    
    Restricted
    
    lying
    
    
    
    
    
    All OtherName and Principal
    
    
    
    
    
    
    
    
    
    
    
    
    
    Compen-
    
    Stock
    
    Options/
    
    LTIP
    
    Compen-Position
    
    Period
    
    Salary
    
    Bonus
    
    sation
    
    Award(s)
    
    SARs (#)
    
    Payouts (a)
    
    sationStephen M. Dyott
    
    Fiscal Year 2004
    
    $
    575,000
    
    
    $
    325,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    2,362,797
    
    
    
    Chairman, President,
    
    Fiscal Year 2003
    
    $
    575,000
    
    
    $
    425,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Chief Executive Officer
    
    Fiscal Year 2002
    
    $
    575,000
    
    
    $
    700,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    & DirectorLarry R. Williams
    
    Fiscal Year 2004
    
    $
    350,000
    
    
    $
    50,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Executive Vice President,
    
    Fiscal Year 2003
    
    $
    350,000
    
    
    $
    200,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Purchasing of Graphics
    
    Fiscal Year 2002
    
    $
    350,000
    
    
    $
    175,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stuart R. Reeve
    
    Fiscal Year 2004
    
    $
    350,000
    
    
    $
    50,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    President, New Business
    
    Fiscal Year 2003
    
    $
    350,000
    
    
    $
    50,000
    
    
    
    
    
    
    
    
    
    
    
    360
    
    
    
    
    
    
    
    Development
    
    Fiscal Year 2002
    
    $
    300,000
    
    
    $
    200,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Timothy M. Davis
    
    Fiscal Year 2004
    
    $
    295,000
    
    
    $
    100,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    712,076
    
    
    
    Senior Vice President/
    
    Fiscal Year 2003
    
    $
    295,000
    
    
    $
    125,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Administration, Secretary&
    
    Fiscal Year 2002
    
    $
    295,000
    
    
    $
    200,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    General CounselPatrick W. Kellick
    
    Fiscal Year 2004
    
    $
    265,000
    
    
    $
    100,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    219,377
    
    
    
    Senior Vice President,
    
    Fiscal Year 2003
    
    $
    242,769
    
    
    $
    75,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Chief
Financial Officer &
    
    Fiscal Year 2002
    
    $
    215,000
    
    
    $
    120,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Assistant Secretary
  (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 6 to our
consolidated financial statements appearing elsewhere in this Report). 64




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##### Table of Contents



The following table presents information concerning the options granted to the
Named Executive Officers during the last fiscal year. Option/SAR Grants in Last Fiscal Year AlternativeTo (f) and (g)Grant DateIndividual Grants
    
    Value% of TotalNumber of
    
    Options/ SARsSecurities
    
    Granted to
    
    
    
    
    
    
    
    
    
    GrantUnderlying
    
    Employees
    
    Exercise or Base
    
    
    
    
    
    DateOptions/SARs
    
    in Fiscal Year
    
    Price
    
    Expiration
    
    PresentName
    
    Granted (#)
    
    2004
    
    ($/sh)
    
    Date
    
    Value ($)Common Stock Option PlansNone
 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-Money Options/ SARs atShares Acquired
    
    Value
    
    Options/SARs at 3/31/04
    
    3/31/04 Exercisable/Unexercisableon Exercise (#)
    
    Realized($)
    
    Exercisable/Unexercisable (#)
    
    ($)Common Stock Option Plans (a)Stephen M. Dyott
    
    
    
    
    
    
    
    
    
    
    0 / 0
    
    
    
    (a
    )Larry R. Williams
    
    
    
    
    
    
    
    
    
    
    0 / 0
    
    
    
    (a
    )Stuart R. Reeve
    
    
    
    
    
    
    
    
    
    
    200.25 / 470.25
    
    
    
    (a
    )Timothy M. Davis
    
    
    
    
    
    
    
    
    
    
    0 / 0
    
    
    
    (a
    )Patrick W. Kellick
    
    
    
    
    
    
    
    
    
    
    225.00 / 900.00
    
    
    
    (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, 2004 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 9 to our
consolidated financial statements appearing elsewhere in this Report). At March 31, 2004, all of the Named Executive Officers had vested in the
Pension Plan. At March 31, 2004, 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), Larry R. Williams (1 year,
5 months; $3,192), Stuart R. Reeve (5 years, 4 months; $9,185), 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 65




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##### Table of Contents



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 and currently includes the 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, Williams,
Davis and Kellick and July 1, 1997 through June 30, 2002 for Messr. 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, 2004, the Named
Executive Officers have the following basic annual benefit payable under this
plan at age 65: Stephen M. Dyott
    
    $
    100,000Larry R. Williams
    
    $
    50,000Stuart R. Reeve
    
    $
    50,000Timothy M. Davis
    
    $
    75,000Patrick W. Kellick
    
    $
    50,000
 Such benefits will be paid from our assets (see note 9 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. 66




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##### Table of Contents



Graphics is also party to an employment agreement dated as of September 1,
1995, with Larry R. Williams, which provides for an annual salary, annual bonus
and all other employee benefits and perquisites made available to Graphics
senior executives generally. The term of Mr. Williams agreement provided for
an initial period of two years with one year automatic extensions. Such
agreement also provides that in the event the employees employment is
terminated by Graphics without cause, as defined above, or by the employee
for good reason, as defined above, the employee will be entitled to base
salary continuation for two years following termination. The employment
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 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 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,
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. Such salary payments
will be reduced to the extent the employee receives compensation from another
employer. 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. 67




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Repriced Options During Fiscal Year 1998, certain common stock option agreements were modified
to reprice options previously granted with a $50 exercise price to a $.01
exercise price. Based upon the Board of Directors determination, the new
exercise price was not less than the fair market value of such options. See
note 11 to our consolidated financial statements appearing elsewhere in this
Report. The following table presents information concerning all repricing of
options and SARs held by any executive officer during the last ten completed
fiscal years. Ten Year Option / SAR Repricings Number ofSecurities
    
    Market Price of
    
    Exercise
    
    
    
    
    
    Length of OriginalUnderlying
    
    Stock at Time of
    
    Price at
    
    New
    
    Option TermOptions/SARs
    
    Repricing or
    
    Time of
    
    Exercise
    
    Remaining at DateRepriced or
    
    Amendment
    
    Repricing
    
    Price
    
    of Repricing orName
    
    Date
    
    Amended (#)
    
    ($)
    
    ($)
    
    ($)
    
    AmendmentStephen M. Dyott
    
    
    01/16/98
    
    
    
    1,761
    
    
    
    
    
    
    
    50
    
    
    
    .01
    
    
    8 yrs. 6 mo.Chairman, President,
    
    
    01/16/98
    
    
    
    380
    
    
    
    
    
    
    
    50
    
    
    
    .01
    
    
    7 yrs. 6 mo.Chief Executive Officer &
    
    
    01/16/98
    
    
    
    859
    
    
    
    
    
    
    
    50
    
    
    
    .01
    
    
    6 yrs. 5 mo.Director
    
    
    01/16/98
    
    
    
    2,300
    
    
    
    
    
    
    
    50
    
    
    
    .01
    
    
    5 yrs. 0 mo.Larry R. Williams
    
    
    01/16/98
    
    
    
    125
    
    
    
    
    
    
    
    50
    
    
    
    .01
    
    
    8 yrs. 6 mo.Executive Vice President,
    
    
    01/16/98
    
    
    
    526
    
    
    
    
    
    
    
    50
    
    
    
    .01
    
    
    6 yrs. 5 mo.Purchasing of GraphicsStuart R. Reeve
    
    
    01/16/98
    
    
    
    91
    
    
    
    
    
    
    
    50
    
    
    
    .01
    
    
    8 yrs. 6 mo.President, New Business
    
    
    01/16/98
    
    
    
    140
    
    
    
    
    
    
    
    50
    
    
    
    .01
    
    
    7 yrs. 6 mo.Development
    
    
    01/16/98
    
    
    
    420
    
    
    
    
    
    
    
    50
    
    
    
    .01
    
    
    6 yrs. 5 mo.Timothy M. Davis
    
    
    01/16/98
    
    
    
    290
    
    
    
    
    
    
    
    50
    
    
    
    .01
    
    
    8 yrs. 6 mo.Senior Vice President/
    
    
    01/16/98
    
    
    
    535
    
    
    
    
    
    
    
    50
    
    
    
    .01
    
    
    6 yrs. 5 mo.Administration, Secretary
    
    
    01/16/98
    
    
    
    255
    
    
    
    
    
    
    
    50
    
    
    
    .01
    
    
    5 yrs. 0 mo.& General CounselPatrick W. Kellick
    
    
    01/16/98
    
    
    
    257
    
    
    
    
    
    
    
    50
    
    
    
    .01
    
    
    8 yrs. 6 mo.Senior Vice President,
    
    
    01/16/98
    
    
    
    105
    
    
    
    
    
    
    
    50
    
    
    
    .01
    
    
    6 yrs. 5 mo.Chief Financial Officer &
Assistant Secretary
 68




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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
 The following table sets forth information, as of March 31, 2004, 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 of HoldingsName
    
    Common Stock
    
    Percent of ClassThe Morgan Stanley Leveraged Equity
Fund II, L.P.1585 BroadwayNew York, NY 10036
    
    
    59,450.0
    
    
    
    37.1MSCP III Entities (a)1585 BroadwayNew York, NY 10036
    
    
    23,333.0
    
    
    
    14.6First Plaza Group Trustc/o Mellon Bank, N.A.1 Mellon Bank CenterPittsburgh, PA 15258
    
    
    17,000.0
    
    
    
    10.6Directors and Named Executive Officers:Stephen M. Dyott
    
    
    14,970.0
    
    
    
    9.4Larry R. Williams
    
    
    1,809.0
    
    
    
    1.1Stuart R. Reeve (b)
    
    
    2,430.0
    
    
    
    1.5Timothy M. Davis
    
    
    3,618.0
    
    
    
    2.3Patrick W. Kellick (c)
    
    
    2,034.0
    
    
    
    1.3Eric T. Fry
    
    
    
    
    
    
    Michael C. Hoffman
    
    
    
    
    
    
    Hwan-Yoon Chung
    
    
    
    
    
    
    All directors and executive officers as a
Group (9 persons, including Messrs.
Dyott, Williams, Reeve, Davis and
Kellick) (d)
    
    
    26,895.0
    
    
    
    16.7
  (a)
    
    Includes Morgan Stanley Capital Partners III, L.P., Morgan Stanley
Capital Investors, L.P. and MSCP III 892 Investors, L.P.(b)
    
    Includes 290 common stock options exercisable within 60 days.(c)
    
    Includes 225 common stock options exercisable within 60 days.(d)
    
    Includes 1,142 common stock options exercisable within 60 days. 69




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##### Table of Contents



ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Relationship With Morgan Stanley MSCP Funds, defined below, is affiliated with entities that beneficially own
approximately 52% of the outstanding shares of Common Stock of Holdings.
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 the 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 Leveraged Equity Fund II, L.P. (MSLEF II), other
entities affiliated with Morgan Stanley & Co. Incorporated (MS&Co. Inc.)
MSLEF II and MS&Co., Inc. collectively (MSCP 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 MSCP Funds the right to designate a director
of Holdings and gives certain minority stockholders not affiliated with us 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 6 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 Messr. Dyott as he originally purchased the
shares for approximately $0.3 million. 70




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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, 2004 and March 31, 2003 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 31,2004
    
    2003(in thousands)Audit fees (a)
    
    $
    520
    
    
    
    242Audit-related fees (b)
    
    
    105
    
    
    
    308Tax fees (c)
    
    
    53
    
    
    
    45All other fees
    
    
    
    
    
    
    Total fees
    
    $
    738
    
    
    
    595
  (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 auditors 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,
2004 were pre-approved by the Board of Directors. 71




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PART IV 
 ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K  (a)
    
    The following documents are filed as a part of this Report: Reports of Independent Auditors  1
    
    and 2.         Financial Statements: The following Consolidated Financial Statements of Holdings are included in Part II, Item 8: Consolidated balance sheets  March 31, 2004 and 2003 For the Years Ended March 31, 2004, 2003 and 2002: Consolidated statements of operations    Notes to Consolidated Financial Statements Financial 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, 2004, 2003 and 2002 and as of March 31, 2004 and 2003
    
    
    75II.
    
    Valuation and qualifying accounts
    
    
    81
 Schedules 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*10.2
    
    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 Kellick10.5
    
    Severance Letter, dated July 15, 1998, between Graphics and Timothy M. Davis10.6
    
    Severance Letter, dated September 1, 1995, between Graphics and Larry Williams10.6(a)
    
    Amendment to Severance Letter, dated June 3, 1999, between
Graphics and Larry Williams*****10.7
    
    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**10.7 (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
 72




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##### Table of Contents



Exhibit No.
    
    Description10.10
    
    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###10.13
    
    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
   *
    
    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, 2003 
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 Quarterly Report on Form 10-Q for the quarter ended June 30, 1999  Commission
file number 33-97090. 73




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(b)
    
    Reports on Form 8-K:Form 8-K filed with the Securities and Exchange Commission on February 9,
2004, under Item 7 announced American Color Graphics, Inc. will host a
teleconference to discuss its financial results for the third quarter of
the fiscal year ended March 31, 2004.Form 8-K filed with the Securities and Exchange Commission on February 12,
2004, under Item 12 announced American Color Graphics, Inc.s financial
results for the third fiscal quarter and the nine month period ended
December 31, 2003.There were no other reports filed on Form 8-K in the quarter ended March
31, 2004.Form 8-K filed with the Securities and Exchange Commission on May 13,
2004, under Item 7 announced American Color Graphics, Inc. will host a
teleconference to discuss its financial results for the fourth fiscal
quarter and the fiscal year ended March 31, 2004.Form 8-K filed with the Securities and Exchange Commission on May 19,
2004, under Item 12 announced American Color Graphics, Inc.s financial
results for the fourth fiscal quarter and the fiscal year ended March 31,
2004. 74




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SCHEDULE I  CONDENSED FINANCIAL INFORMATION OF REGISTRANT
ACG HOLDINGS, INC.
Parent Company Only
Condensed Balance Sheets
(Dollars in thousands except par values and liquidation preference) March 31,2004
    
    2003AssetsCurrent assets:Receivable from subsidiary
    
    $
    1,199
    
    
    
    606Income taxes receivable
    
    
    
    
    
    
    348Total assets
    
    $
    1,199
    
    
    
    954Liabilities and Stockholders DeficitLiabilities of subsidiary in excess of assets
    
    $
    189,938
    
    
    
    108,653Income taxes payable
    
    
    36
    
    
    
    Total liabilities
    
    
    189,974
    
    
    
    108,653Commitments and contingenciesStockholders deficit:Common stock, voting, $.01 par value, 5,852,223
shares authorized, 160,067 and 163,929 shares
issued and outstanding at March 31, 2004 and
2003, respectively
    
    
    2
    
    
    
    2Preferred stock, $.01 par value, 15,823 shares
authorized, none issued and outstanding as of
March 31, 2004; as of March 31, 2003, 3,617
shares Series AA convertible preferred stock
issued and outstanding, $39,442,500 liquidation
preference, and 1,606 shares Series BB
convertible preferred stock issued and
outstanding, $17,500,000 liquidation preference
    
    
    
    
    
    
    Additional paid-in capital
    
    
    2,103
    
    
    
    58,816Accumulated deficit
    
    
    (169,516
    )
    
    
    (140,655
    )Other accumulated comprehensive loss, net of tax
    
    
    (21,364
    )
    
    
    (25,862
    )Total stockholders deficit
    
    
    (188,775
    )
    
    
    (107,699
    )Total liabilities and stockholders deficit
    
    $
    1,199
    
    
    
    954
 See accompanying notes to condensed financial statements. 75




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SCHEDULE I  CONDENSED FINANCIAL INFORMATION OF REGISTRANT
ACG HOLDINGS, INC.
Parent Company Only
Condensed Statements of Operations
(In thousands) Year ended March 31,2004
    
    2003
    
    2002Equity in income(loss) of subsidiary
    
    $
    (28,841
    )
    
    
    (315
    )
    
    
    722Net income(loss)
    
    $
    (28,841
    )
    
    
    (315
    )
    
    
    722
 See accompanying notes to condensed financial statements. 76




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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 31,2004
    
    2003
    
    2002Cash 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. 77




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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, 2004,
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 4). 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 Presentation`The 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. 78




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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
123⁄4% Senior Subordinated Notes Due 2005 (the 123⁄4%
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. 79




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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, 2004, the Company had no borrowings under the Revolving Credit
Facility and had letters of credit outstanding of approximately $30.6
million. The Company had additional borrowing availability of
approximately $39.4 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. 80




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##### Table of Contents



SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTSACG HOLDINGS, INC. Balance at
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance atBeginning
    
    Expense /
    
    
    
    
    
    
    
    
    
    Other
    
    
    
    
    
    End ofof Period
    
    (Income)
    
    
    
    
    
    Write-offs
    
    Adjustments
    
    
    
    
    
    Period(in thousands)Fiscal 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
    
    
    
    (a
    )
    
    
    
    
    
    
    5,570
    
    
    
    (b
    )
    
    $
    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
    )
    
    $
    26,815Fiscal Year ended March 31, 2002Allowance for doubtful accounts
    
    $
    3,840
    
    
    
    (602
    )
    
    
    
    
    
    
    (701
    )
    
    
    
    
    
    
    
    
    
    $
    2,537Reserve for inventory obsolescence
    
    $
    485
    
    
    
    (62
    )
    
    
    
    
    
    
    (33
    )
    
    
    
    
    
    
    
    
    
    $
    390Income tax valuation allowance
    
    $
    23,469
    
    
    
    (5,500
    )
    
    
    (d
    )
    
    
    
    
    
    
    5,377
    
    
    
    (e
    )
    
    $
    23,346
  (a)
    
    The increase in the valuation allowance relates to a reduction in projected
future use of deferred tax assets.  (b)
    
    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.  (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.  (d)
    
    The decrease in the valuation allowance relates to projected future use of
deferred tax assets.  (e)
    
    The increase in the valuation allowance primarily relates to an increase
in deferred tax assets resulting from an increase in the minimum pension
liability and an increase in other temporary differences generating
deferred tax assets. 81




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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. Date/s/ Stephen M. Dyott
    
    June 28, 2004Stephen 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 

(Patrick W. Kellick)
    
    Senior Vice President
Chief Financial Officer
and Assistant Secretary
    
    June 28, 2004/s/Angela C. Marshall
(Angela C. Marshall)
    
    Corporate Controller
(Chief Accounting Officer)
    
    June 28, 2004/s/Michael C. Hoffman 

(Michael C. Hoffman)
    
    Director
    
    June 28, 2004/s/Eric T. Fry 

(Eric T. Fry)
    
    Director
    
    June 28, 2004/s/Hwan-Yoon Chung 

(Hwan-Yoon Chung)
    
    Director
    
    June 28, 2004
 82




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##### Table of Contents



ACG HOLDINGS, INC.
Annual Report on Form 10-K
Fiscal Year Ended March 31, 2004 Index to Exhibits Exhibit No.
    
    Description10.4
    
    Severance Letter, dated October 3, 1996, between Graphics and Patrick Kellick12.1
    
    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
 83