AMERICAN COLOR GRAPHICS INC - 10-Q Quarterly Report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q


(Mark One)
[ X ]		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the quarterly period ended December 31, 2003
		or

[ ]		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the transition period from __________to __________

		Commission file number 33-97090

ACG HOLDINGS, INC.

(Exact name of registrant as specified in its charter)


Delaware (State or other jurisdiction of incorporation or organization)		62-1395968 (I.R.S. Employer Identification Number)

100 Winners Circle
Brentwood, Tennessee 37027
(615) 377-0377

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

AMERICAN COLOR GRAPHICS, INC.

(Exact name of registrant as specified in its charter)


New York (State or other jurisdiction of incorporation or organization)		16-1003976 (I.R.S. Employer Identification Number)

100 Winners Circle
Brentwood, Tennessee 37027
(615) 377-0377

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X] No [ ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2) of the Exchange Act.

Yes [ ] No [X]

ACG Holdings, Inc. has 160,067 shares outstanding of its Common Stock, $.01 Par Value, as of January 31, 2004 (all of which are privately owned and not traded on a public market).

INDEX

TABLE OF CONTENTS


		Condensed Consolidated Balance Sheets
		Condensed Consolidated Statements of Operations
		Condensed Consolidated Statements of Operations
		Condensed Consolidated Statements of Cash Flows
		Notes to Condensed Consolidated Financial Statements
	Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosures About Market Risk
	Item 4. Controls and Procedures
Part II Other Information
	Item 1. Legal Proceedings
	Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
	Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
EXHIBIT INDEX
EX 10.12.A AMENDMENT TO CREDIT AGREEMENT
EX-12.1 COMPUTATION OF RATIO OF EARNINGS
EX-31.1 CEO CERTIFICATION
EX-31.2 CFO CERTIFICATION
EX-32.1 SARBANES CEO AND CFO CERTIFICATION


		Page No.

Part I.	Financial Information
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets as of December 31, 2003 and March 31, 2003		3
	Condensed Consolidated Statements of Operations for the Three Months Ended December 31, 2003 and 2002		5
	Condensed Consolidated Statements of Operations for the Nine Months Ended December 31, 2003 and 2002		6
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended December 31, 2003 and 2002		7
	Notes to Condensed Consolidated Financial Statements		8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		18
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		30
Item 4.	Controls and Procedures		30
Part II.	Other Information
Item 1.	Legal Proceedings		31
Item 2.	Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities		31
Item 6.	Exhibits and Reports on Form 8-K		31
	Signatures		32
	Exhibit Index		33

ACG HOLDINGS, INC.
Condensed Consolidated Balance Sheets
(In thousands)


				December 31, 2003			March 31, 2003

				(Unaudited)
Assets
Current assets:
	Cash			$	—			—
	Receivables:
		Trade accounts, less allowance for doubtful accounts of $2,933 and $2,544 at December 31, 2003 and March 31, 2003, respectively			49,407			49,402
		Income tax receivable			38			233
		Other			3,485			2,227

			Total receivables		52,930			51,862
	Inventories				9,030			10,203
	Deferred income taxes				2,442			6,246
	Prepaid expenses and other current assets				4,358			4,296
	Current assets of discontinued operations				—			866

			Total current assets		68,760			73,473
Property, plant and equipment					311,108			310,180
Less accumulated depreciation					(187,114	)		(183,167	)

			Net property, plant and equipment		123,994			127,013
Excess of cost over net assets acquired					66,548			66,548
Deferred financing costs					12,527			3,335
Other assets					7,597			7,790
Long-term assets of discontinued operations					—			282

			Total assets	$	279,426			278,441

See accompanying notes to condensed consolidated financial statements.

ACG HOLDINGS, INC.
Condensed Consolidated Balance Sheets
(Dollars in thousands, except par values and liquidation preference)


			December 31, 2003			March 31, 2003

			(Unaudited)
Liabilities and Stockholders’ Deficit
Current liabilities:
	Current installments of long-term debt and capitalized leases		$	5,348			31,698
	Trade accounts payable			36,626			39,044
	Accrued expenses			29,449			32,302
	Current liabilities of discontinued operations			—			249

		Total current liabilities		71,423			103,293
Long-term debt and capitalized leases, excluding current installments				302,371			200,059
Deferred income taxes				8,873			2,023
Other liabilities				76,421			80,765

		Total liabilities		459,088			386,140

Commitments and contingencies (Note 7)

Stockholders’ deficit:
	Common stock, voting, $.01 par value, 5,852,223 shares authorized, 165,054 and 163,929 shares issued and outstanding at December 31, 2003 and March 31, 2003, respectively			2			2
	Preferred stock, $.01 par value, 15,823 shares authorized, none issued and outstanding as of December 31, 2003, 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			2,045			58,816
	Accumulated deficit			(157,227	)		(140,655	)
	Other accumulated comprehensive loss, net of tax			(24,482	)		(25,862	)

		Total stockholders’ deficit		(179,662	)		(107,699	)

		Total liabilities and stockholders’ deficit	$	279,426			278,441

See accompanying notes to condensed consolidated financial statements.

ACG HOLDINGS, INC.
Condensed Consolidated Statements of Operations
(In thousands)
(Unaudited)


				Three Months Ended
				December 31,

				2003			2002

Sales				$	128,569			141,913
Cost of sales					111,339			122,390

		Gross profit			17,230			19,523
Selling, general and administrative expenses					7,519			9,460

		Operating income			9,711			10,063
Other expense (income):
	Interest expense				8,412			7,149
	Interest income				(1	)		(6	)
	Other, net				83			38

		Total other expense			8,494			7,181

		Income from continuing operations before income taxes			1,217			2,882
Income tax expense (benefit):
	Current				406			532
	Deferred				(2,196	)		(114	)

		Total income tax expense (benefit)			(1,790	)		418

		Income from continuing operations			3,007			2,464
Discontinued operations:
		Loss from operations, net of $0 tax			—			243

			Net income	$	3,007			2,221

See accompanying notes to condensed consolidated financial statements.

ACG HOLDINGS, INC.
Condensed Consolidated Statements of Operations
(In thousands)
(Unaudited)


				Nine Months Ended
				December 31,

				2003			2002

Sales				$	365,536			399,444
Cost of sales					314,931			341,193

		Gross profit			50,605			58,251
Selling, general and administrative expenses					23,842			26,480
Restructuring costs					2,000			—

		Operating income			24,763			31,771
Other expense (income):
	Interest expense				25,713			21,454
	Interest income				(8	)		(83	)
	Loss on early extinguishment of debt				3,196			—
	Other, net				294			520

		Total other expense			29,195			21,891

		Income (loss) from continuing operations before income taxes			(4,432	)		9,880
Income tax expense:
	Current				1,030			1,258
	Deferred				10,654			75

		Total income tax expense			11,684			1,333

		Income (loss) from continuing operations			(16,116	)		8,547
Discontinued operations:
		Loss from operations, net of $0 tax			12			745
		Loss on sale, net of $0 tax			444			—

			Net income (loss)	$	(16,572	)		7,802

See accompanying notes to condensed consolidated financial statements.

ACG HOLDINGS, INC.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)


				Nine Months Ended
				December 31,

				2003			2002

Cash flows provided (used) by operating activities:
Net income (loss)				$	(16,572	)		7,802
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
		Depreciation			17,708			17,354
		Depreciation related to discontinued operations			26			308
		Amortization of other assets			497			411
		Amortization of deferred financing costs			1,591			1,175
		Write-off of deferred financing costs			3,196			—
		Deferred income tax expense			10,654			75
		Discontinued operations, net of tax			430			437
		Decrease (increase) in working capital and other			(9,360	)		351

			Net cash provided by operating activities		8,170			27,913
Cash flows provided (used) by investing activities:
		Purchases of property, plant and equipment			(10,501	)		(24,944	)
		Proceeds from sales of property, plant and equipment			24			259
		Other			260			(18	)

			Net cash used by investing activities		(10,217	)		(24,703	)
Cash flows provided (used) by financing activities:
		Repayment of long-term debt, net			(39,185	)		(9,428	)
		Net increase in revolver borrowings			7,164			10,731
		Repayment of 12 ¾% senior subordinated notes			(170,055	)		(1,700	)
		Proceeds from issuance of 10% senior second secured notes			280,000			—
		Repayment of capital lease obligations			(4,832	)		(6,799	)
		Repayment of capital lease obligations – discontinued operations			—			(100	)
		Payment of deferred financing costs			(13,979	)		(458	)
		Repurchase and retire preferred stock and cancel preferred stock options			(56,942	)		—
		Other, net			—			(3	)

			Net cash provided (used) by financing activities		2,171			(7,757	)
	Effect of exchange rates on cash				(124	)		—

Net change in cash					—			(4,547	)
Cash:
	Beginning of period				—			4,547

	End of period			$	—			—

Non-cash investing activity:
	Equipment purchases under capital leases			$	2,870			725

See accompanying notes to condensed consolidated financial statements.

ACG HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

Description of the Company

ACG Holdings, Inc. (“Holdings”) has no operations or significant assets other than its investment in American Color Graphics, Inc. (“Graphics”), (collectively the “Company”). Holdings owns 100% of the outstanding voting shares of Graphics. The two business segments of the commercial printing industry in which the Company operates are (i) print and (ii) premedia services.

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and are in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. The operating results for the three and nine-month periods ended December 31, 2003 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2004. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in the Company’s Form 10-K for the fiscal year ended March 31, 2003, as reclassified in the Company’s current report on Form 8-K dated November 6, 2003, as filed with the Securities and Exchange Commission.

The 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. Certain prior period information has been reclassified to conform to current period presentation.

2. Discontinued Operations

In June 2003, the Company sold its digital visual effects business, (“Digiscope”), for a de minimis amount, which resulted in a net loss of approximately $0.4 million, which is net of zero income tax benefits. The sale of Digiscope has been accounted for as a discontinued operation, and accordingly, Digiscope’s operations are segregated and reported within discontinued operations in the accompanying condensed consolidated financial statements. Sales, cost of sales, selling, general and administrative expenses and other expenses attributable to Digiscope for the three and nine months ended December 31, 2002 have been reclassified and presented within discontinued operations.

3. Inventories

The components of inventories are as follows (in thousands):


		December 31,		March 31,
		2003		2003

Paper		$	6,919		7,973
Ink			187		164
Supplies and other			1,924		2,066

	Total inventories	$	9,030		10,203

ACG HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

4. 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 12 ¾% Senior Subordinated Notes Due 2005 (the “12 ¾% 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 $13.6 million of deferred financing fees through December 31, 2003. 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 nine months ended December 31, 2003 related to the write-off of deferred financing costs associated with the old bank credit agreement and the 12 ¾% Notes. In addition, the Company recorded incremental interest expense of approximately $1.7 million in the nine months ended December 31, 2003 as a result of the 30 day call provision related to the 12 ¾% Notes.

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 December 31, 2003, the Company had additional borrowing availability under the Revolving Credit Facility of $31.7 million.

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.

ACG HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

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.

5. Comprehensive Income (Loss)

Statement of Financial Accounting Standards No. 130, “Reporting Comprehensive Income,” requires foreign currency translation adjustments, minimum pension liability adjustments and unrealized gains or losses on available-for-sale securities to be included in comprehensive income (loss).

Total comprehensive income (loss) for the three and nine months ended December 31, 2003 and 2002 are as follows (in thousands):


		Three Months Ended					Nine Months Ended
		December 31,					December 31,

		2003		2002			2003			2002

Net income (loss)		$	3,007		2,221			(16,572	)		7,802
	Foreign currency translation adjustment, net of tax		331		(67	)		1,380			119

Total comprehensive income (loss)		$	3,338		2,154			(15,192	)		7,921

6. Income Taxes

Income taxes have been provided using the liability method in accordance with Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes” (“SFAS 109”). Deferred 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.

The Company recorded an income tax benefit of $1.8 million and income tax expense of $11.7 million for the three and nine months ended December 31, 2003, respectively compared to expense of $0.4 million and expense of $1.3 million for the three and nine months ended December 31, 2002, respectively. The increase in income tax benefit in the three months ended December 31, 2003 is primarily due to an adjustment of $2.2 million to reflect a change in estimate with respect to the Company’s income tax liability. The increase in income tax expense in the nine months ended December 31, 2003 is primarily due to an adjustment, recorded in the three months ended September 30, 2003, to increase the deferred tax asset valuation allowance by $12.8 million. This adjustment reflected 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 the issuance of the 10% Notes that have provided negative evidence about the Company’s ability to realize certain deferred tax assets. The Company will reverse its valuation allowance into income when and to the extent sufficient positive evidence arises to support the realization of the related deferred tax assets.

ACG HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

7. Commitments and Contingencies

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. In addition, the Company has a consulting agreement with one former employee. The aggregate commitment for future compensation at December 31, 2003, excluding bonuses, was approximately $2.0 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. The Company is deferring certain contractual provisions over the life of the contracts, which are being recognized as the purchase commitments are achieved. The amount deferred at December 31, 2003 is $45.6 million and is included within Other liabilities in the Company’s condensed 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% and therefore Graphics believes that its share of the anticipated remediation costs at such site will not be material to its business or financial condition. Based upon an analysis of Graphics’ volumetric share of waste contributed to the site and the agreement among the PRPs, the Company maintains a reserve of approximately $0.1 million in connection with this liability on its condensed consolidated balance sheet at December 31, 2003. The Company believes this amount is adequate to cover such liability.

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 condensed consolidated financial statements of the Company.

8. Restructuring Costs

Fiscal Year 2004 Restructuring Costs

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 was classified within restructuring costs in the accompanying condensed consolidated statements of operations in the nine month period ended December 31, 2003. 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”). The restructuring charge is composed of severance and related termination benefits.

ACG HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

The following table summarizes the activity related to this restructuring plan for the nine months ended December 31, 2003 (in thousands):

Initial Recording

12/31/03

of Restructuring

Restructuring

Reserve

Activity

Reserve Balance

Severance and other employee costs

1,775

(373

)

1,402

As of December 31, 2003, the Company believes the restructuring reserve of approximately $1.4 million is adequate. The Company anticipates that approximately $0.3 million of the restructuring balance will be paid by March 31, 2004, approximately $0.7 million will be paid during fiscal year ending March 31, 2005, approximately $0.3 million will be paid during fiscal year ending March 31, 2006 and the remaining $0.1 million will be paid during 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 the fiscal year ended March 31, 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.

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 statements of operations in 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 following table summarizes the activity related to this restructuring plan for the nine months ended December 31, 2003 (in thousands):


	03/31/03					12/31/03
	Restructuring					Restructuring
	Reserve Balance		Activity			Reserve Balance

Severance and other employee costs	$	979		(719	)		260
Other costs		103		(93	)		10

	$	1,082		(812	)		270

The process of closing a premedia services facility, and the elimination of certain personnel within the Company was completed by March 31, 2003. During the fiscal year ended March 31, 2003, $0.1 million of these costs were paid. As of December 31, 2003, the Company believes the restructuring reserve of approximately $0.3 million is adequate. The Company anticipates that $0.1 million of the remaining costs will be paid by March 31, 2004 and the remaining $0.2 million will be paid by March 31, 2005. These costs will be funded through cash generated from operations and borrowings under the Revolving Credit Facility, as amended.

ACG HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

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 statements of operations in 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 the quarter ended September 30, 2003. This charge relates to future lease commitments and is classified within restructuring costs in the accompanying condensed consolidated statements of operations for the nine months ended December 31, 2003.

The following table summarizes the activity related to this restructuring plan for the nine months ended December 31, 2003 (in thousands):


	03/31/03							12/31/03
	Restructuring							Restructuring
	Reserve					Additional		Reserve
	Balance		Activity			Reserve		Balance

Severance and other employee costs	$	498		(211	)		—		287
Lease termination costs		1,311		(468	)		225		1,068
Other costs		70		(22	)		—		48

	$	1,879		(701	)		225		1,403

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, $3.3 million and $3.4 million of these costs were paid, respectively. As of December 31, 2003, the Company believes the restructuring reserve of approximately $1.4 million is adequate. The Company anticipates that $0.3 million of the restructuring reserve balance will be paid by March 31, 2004, $0.5 million will be paid by March 31, 2005 and the remaining $0.6 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.

ACG HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

9. 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.

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 each of the segments are the same as those used by the Company in its condensed consolidated financial statements. The Company evaluates performance based on segment EBITDA as calculated by management, which is defined as earnings before net interest expense, income tax expense, depreciation, amortization, restructuring costs, loss on early extinguishment of debt, other expense (income) and discontinued operations. This calculation differs from the EBITDA disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations as that definition includes the impact of restructuring costs, loss on early extinguishment of debt, other expense (income) 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 period balances to conform with the current period presentation.

In June 2003, the Company sold its digital visual effects business, Digiscope, for a de minimis amount and recorded a net loss of approximately $0.4 million, which is net of zero income tax benefits. Segment operating results for the three and nine months ended December 31, 2002 have been reclassified to present Digiscope’s operating results as a discontinued operation. In addition, the three and nine months ended December 31, 2002 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 the Company’s previously reported consolidated results.

ACG HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

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			Total

Nine Months Ended December 31, 2003
Segment revenues		$	325,848			39,688			—			365,536
EBITDA as calculated by management		$	39,491			7,830			(2,353	)		44,968
	Depreciation and amortization		(15,493	)		(2,712	)		—			(18,205	)
	Restructuring costs		(1,716	)		(284	)		—			(2,000	)

Operating income (loss)			22,282			4,834			(2,353	)		24,763
	Interest expense		—			—			(25,713	)		(25,713	)
	Interest income		—			—			8			8
	Loss on early extinguishment of debt		—			—			(3,196	)		(3,196	)
	Other, net		(75	)		(29	)		(190	)		(294	)
	Income tax expense		—			—			(11,684	)		(11,684	)
	Depreciation from discontinued operations		—			—			(26	)		(26	)
	Discontinued operations excluding depreciation		—			—			(430	)		(430	)

Net income (loss)		$	22,207			4,805			(43,584	)		(16,572	)

Total assets		$	250,608			13,788			15,030			279,426
Total goodwill		$	64,656			1,892			—			66,548
Total capital expenditures		$	12,331			1,040			—			13,371

Nine Months Ended December 31, 2002
Segment revenues		$	358,835			40,609			—			399,444
EBITDA as calculated by management		$	46,272			6,085			(2,821	)		49,536
	Depreciation and amortization		(14,573	)		(3,192	)		—			(17,765	)

Operating income (loss)			31,699			2,893			(2,821	)		31,771
	Interest expense		—			—			(21,454	)		(21,454	)
	Interest income		—			—			83			83
	Other, net		(179	)		(234	)		(107	)		(520	)
	Income tax expense		—			—			(1,333	)		(1,333	)
	Depreciation from discontinued operations		—			—			(308	)		(308	)
	Discontinued operations excluding depreciation		—			—			(437	)		(437	)

Net income (loss)		$	31,520			2,659			(26,377	)		7,802

Total assets		$	259,458			18,802			13,011			291,271
Total goodwill		$	64,656			1,892			—			66,548
Total capital expenditures		$	24,005			1,664			—			25,669

ACG HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)


					Premedia			Corporate
(In thousands)		Print			Services			and Other			Total

Three Months Ended December 31, 2003
Segment revenues		$	115,340			13,229			—			128,569
EBITDA as calculated by management		$	13,657			2,753			(636	)		15,774
	Depreciation and amortization		(5,215	)		(848	)		—			(6,063	)

Operating income (loss)			8,442			1,905			(636	)		9,711
	Interest expense		—			—			(8,412	)		(8,412	)
	Interest income		—			—			1			1
	Other, net		(44	)		(5	)		(34	)		(83	)
	Income tax benefit		—			—			1,790			1,790

Net income (loss)		$	8,398			1,900			(7,291	)		3,007

Total assets		$	250,608			13,788			15,030			279,426
Total goodwill		$	64,656			1,892			—			66,548
Total capital expenditures		$	870			361			—			1,231

Three Months Ended December 31, 2002
Segment revenues		$	128,349			13,564			—			141,913
EBITDA as calculated by management		$	14,809			2,603			(1,040	)		16,372
	Depreciation and amortization		(5,224	)		(1,085	)		—			(6,309	)

Operating income (loss)			9,585			1,518			(1,040	)		10,063
	Interest expense		—			—			(7,149	)		(7,149	)
	Interest income		—			—			6			6
	Other, net		22			(50	)		(10	)		(38	)
	Income tax expense		—			—			(418	)		(418	)
	Depreciation from discontinued operations		—			—			(71	)		(71	)
	Discontinued operations excluding depreciation		—			—			(172	)		(172	)

Net income (loss)		$	9,607			1,468			(8,854	)		2,221

Total assets		$	259,458			18,802			13,011			291,271
Total goodwill		$	64,656			1,892			—			66,548
Total capital expenditures		$	3,549			550			—			4,099

ACG HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

10. Impact of Recently Issued Accounting Standards

In April 2002, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 145, “Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections” (“SFAS 145”). SFAS 145 rescinds Statement of Financial Accounting Standards No. 4, “Reporting Gains and Losses from Extinguishment of Debt” (“SFAS 4”), which required all gains and losses from extinguishment of debt to be aggregated and, if material, classified as an extraordinary item, net of the related income tax effect. As a result, the criteria in Accounting Principles Board Opinion No. 30 will now be used to classify those gains and losses. SFAS 145 amends Statement of Financial Accounting Standards No. 13, “Accounting for Leases” (“SFAS 13”), to require that certain lease modifications that have economic effects similar to sale-leaseback transactions be accounted for in the same manner as sale-leaseback transactions. SFAS 145 makes various technical corrections to existing pronouncements. While those corrections are not substantive in nature, in some instances, they may change accounting practice. The provisions of SFAS 145 are effective for financial statements issued for fiscal years beginning after May 15, 2002, and interim periods within those fiscal years. In accordance with the guidance set forth in SFAS 145, the Company classified the $3.2 million charge incurred in the nine month period ended December 31, 2003 related to the write-off of deferred financing costs associated with the old bank credit agreement and the 12 3/4% Notes as Other expense in the accompanying condensed consolidated statements of operations.

In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”) 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. Until now, a company generally has included another entity in its consolidated financial statements only if it controlled the entity through voting interests. FIN 46 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 January 31, 2003 and to existing entities in the first fiscal year or interim period ending after December 15, 2003. Certain of the disclosure requirements apply in all financial statements issued after January 31, 2003, regardless of when the variable interest entity was established. The Company has evaluated the requirements of FIN 46 and does not expect any effect on its consolidated financial position or operating results.

11. Subsequent Event

In January 2004, the Company approved a 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 in total will result in the elimination of approximately 170 positions within the Company. As a result, the Company plans to record a pre-tax restructuring charge of approximately $5.8 million in the quarter ending March 31, 2004 associated with this plan. This restructuring charge is composed primarily of severance and related termination benefits. The cost of this restructuring plan will be accounted for in accordance with the guidance set forth in SFAS 146.

ACG HOLDINGS, INC.
Management’s Discussion and Analysis of
Financial Condition and Results of Operations

Special Note Regarding Forward Looking Statements

This Quarterly Report on Form 10-Q (this “Report”) contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. Discussions containing such forward-looking statements may be found in this section, as well as within this Report generally. In addition, when used in this Report, the words “believes,” “intends,” “expects,” “may,” “will,” “estimates,” “should,” “could,” “anticipates,” “plans” or other comparable terms are intended to identify forward-looking statements. Forward-looking statements are subject to a number of risks and uncertainties. Actual results in the future could differ materially from those described in the forward-looking statements as a result of many factors outside of the control of ACG Holdings, Inc. (“Holdings”), together with its wholly-owned subsidiary, American Color Graphics, Inc. (“Graphics”), including, but not limited to:

• 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,

• 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.

ACG HOLDINGS, INC.
Management’s Discussion and Analysis of
Financial Condition and Results of Operations

Results of Operations

General

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 nine month period ended December 31, 2003, which is net of zero income tax benefits. The sale of Digiscope has been accounted for as a discontinued operation, and accordingly, Digiscope’s operations are reclassified and presented within discontinued operations in the accompanying condensed consolidated financial statements. Sales, costs of sales, selling, general and administrative expenses and other expenses attributable to Digiscope for the three and nine months ended December 31, 2002 have been reclassified and presented within discontinued operations.

In July 2003, we implemented a plan to further reduce our selling, general and administrative expenses. This plan resulted in the termination of four administrative employees. We recorded a pre-tax restructuring charge of approximately $1.8 million in the quarter ended September 30, 2003 associated with this plan. This restructuring charge is composed of severance and related termination benefits. The cost of this restructuring plan was accounted for in accordance with the guidance set forth in SFAS 146. We also recorded an additional $0.2 million of restructuring charges related to the Fiscal Year 2002 restructuring plan (see note 8 to our condensed consolidated financial statements) in the quarter ended September 30, 2003. This charge is related to future lease commitments and is classified within restructuring costs in our condensed consolidated statements of operations for the nine months ended December 31, 2003.

In January 2004, we approved a plan for our print and premedia services segments designed to improve operating efficiency and profitability. This plan included a consolidation of capacity and the related downsizing of our print facility in Stevensville, Ontario, a reduction of personnel in certain of our other print and premedia facilities and the elimination of certain selling and administrative positions. These actions in total will result in the elimination of approximately 170 positions within the Company. As a result, we plan to record a pre-tax restructuring charge of approximately $5.8 million in the quarter ending March 31, 2004 associated with this plan. This restructuring charge is composed primarily of severance and related termination benefits. The cost of this restructuring plan will be accounted for in accordance with the guidance set forth in SFAS 146.

ACG HOLDINGS, INC.
Management’s Discussion and Analysis of
Financial Condition and Results of Operations

The following table, including certain reclassifications in prior year results to conform with current year presentation, summarizes our results of operations for the three months ended December 31, 2003 (the “2003 Three-Month Period”), the three months ended December 31, 2002 (the “2002 Three-Month Period”), the nine months ended December 31, 2003 (the “2003 Nine-Month Period”) and the nine months ended December 31, 2002 (the “2002 Nine-Month Period”):


			Three Months Ended						Nine Months Ended
			December 31,						December 31,

			2003			2002			2003			2002

						(Dollars in thousands)
Sales:
	Print		$	115,340			128,349			325,848			358,835
	Premedia Services			13,229			13,564			39,688			40,609

		Total	$	128,569			141,913			365,536			399,444
Gross Profit:
	Print		$	13,653			15,815			39,986			48,097
	Premedia Services			3,566			3,707			10,612			10,152
	Other (a)			11			1			7			2

		Total	$	17,230			19,523			50,605			58,251
Gross Margin:
	Print			11.8	%		12.3	%		12.3	%		13.4	%
	Premedia Services			27.0	%		27.3	%		26.7	%		25.0	%
		Total		13.4	%		13.8	%		13.8	%		14.6	%
Operating Income (Loss):
	Print (b)		$	8,442			9,585			22,282			31,699
	Premedia Services (b)			1,905			1,518			4,834			2,893
	Other (a)			(636	)		(1,040	)		(2,353	)		(2,821	)

		Total	$	9,711			10,063			24,763			31,771

(a) Includes corporate general and administrative expenses.

(b) In the 2003 Nine-Month Period, print and premedia services’ operating incomes include the impact of restructuring costs of $1.7 million and $0.3 million, respectively.

ACG HOLDINGS, INC.
Management’s Discussion and Analysis of
Financial Condition and Results of Operations

Print

Sales. In the 2003 Nine-Month Period, print sales decreased $33.0 million to $325.8 million from $358.8 million in the 2002 Nine-Month Period. The decrease in the 2003 Nine-Month Period includes 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 increased paper prices and an approximate 2% increase in print production volume. See “—Value Added Revenue and Print Impressions for the Print Segment” below.

In the 2003 Three-Month Period, print sales decreased $13.0 million to $115.3 million from $128.3 million in the 2002 Three-Month Period. The decrease in the 2003 Three-Month Period includes 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 increased paper prices.

Gross Profit. In the 2003 Nine-Month Period, print gross profit decreased $8.1 million to $40.0 million from $48.1 million in the 2002 Nine-Month Period. In the 2003 Nine-Month Period, print gross margin decreased to 12.3% from 13.4% in the 2002 Nine-Month Period. 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 increased 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 in sales.

In the 2003 Three-Month Period, print gross profit decreased $2.1 million to $13.7 million from $15.8 million in the 2002 Three-Month Period. In the 2003 Three-Month Period, print gross margin decreased to 11.8% from 12.3% in the 2002 Three-Month Period. 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 benefits from productivity improvements and various cost containment programs at our facilities. 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 in sales.

Selling, General and Administrative Expenses. In the 2003 Nine-Month Period, print selling, general and administrative expenses decreased $0.4 million to $16.0 million, or 4.9% of print sales, from $16.4 million, or 4.6% of print sales in the 2002 Nine-Month Period. This decrease includes reductions in certain administrative costs, offset in part by the impact of the change in our estimates related to the allowance for doubtful accounts.

In the 2003 Three-Month Period, print selling, general and administrative expenses decreased $1.0 million to $5.2 million, or 4.5% of print sales, from $6.2 million, or 4.9% of print sales in the 2002 Three-Month Period. This decrease primarily includes reductions in certain administrative costs.

Restructuring Costs. Restructuring costs were $1.7 million in the 2003 Nine-Month Period and none were incurred in the 2003 Three-Month Period. We incurred no restructuring costs in the 2002 Three or Nine-Month Periods. See note 8 to our condensed consolidated financial statements appearing elsewhere in this Report.

ACG HOLDINGS, INC.
Management’s Discussion and Analysis of
Financial Condition and Results of Operations

Operating Income. As a result of the factors discussed above, print operating income decreased to $22.3 million in the 2003 Nine-Month Period from $31.7 million in the 2002 Nine-Month Period and decreased to $8.4 million in the 2003 Three-Month Period from $9.6 million in the 2002 Three-Month Period.

Premedia Services

Sales. In the 2003 Nine-Month Period, premedia services’ sales decreased $0.9 million to $39.7 million from $40.6 million in the 2002 Nine-Month Period. These results include the impact of competitive pricing pressures and the continuance of weak premedia market conditions.

In the 2003 Three-Month Period, premedia services’ sales decreased $0.3 million to $13.2 million from $13.5 million in the 2002 Three-Month Period. These results include the impact of competitive pricing pressures and the continuance of weak premedia market conditions.

Gross Profit. In the 2003 Nine-Month Period, premedia services’ gross profit increased $0.4 million to $10.6 million from $10.2 million in the 2002 Nine-Month Period. In the 2003 Nine-Month Period, premedia services’ gross margin increased to 26.7% from 25.0% in the 2002 Nine-Month Period. The increase in gross profit and gross margin for the 2003 Nine-Month Period is primarily the result of reduced manufacturing costs related to various cost containment programs and the closure of a premedia facility.

In the 2003 Three-Month Period, premedia services’ gross profit remained relatively unchanged at $3.6 million versus $3.7 million in the 2002 Three-Month Period. In the 2003 Three-Month Period, premedia services’ gross margin decreased to 27.0% from 27.3% in the 2002 Three-Month Period.

Selling, General and Administrative Expenses. In the 2003 Nine-Month Period, premedia services’ selling, general and administrative expenses decreased $1.8 million to $5.5 million, or 13.8% of premedia services’ sales, from $7.3 million, or 17.9% of premedia services’ sales in the 2002 Nine-Month Period. The decrease in the 2003 Nine-Month Period includes decreases in both the selling and administrative areas due to various cost containment initiatives.

In the 2003 Three-Month Period, premedia services’ selling, general and administrative expenses decreased $0.5 million to $1.7 million, or 12.6% of premedia services’ sales, from $2.2 million, or 16.1% of premedia services’ sales in the 2002 Three-Month Period. The decrease in the 2003 Three-Month Period includes decreases in both the selling and administrative areas due to various cost containment initiatives.

Restructuring Costs. Restructuring costs were $0.3 million in the 2003 Nine-Month Period and none were incurred in the 2003 Three-Month Period. We incurred no restructuring costs in the 2002 Three or Nine-Month Periods. See note 8 to our condensed consolidated financial statements appearing elsewhere in this Report.

Operating Income. As a result of the factors discussed above, premedia services’ operating income increased to $4.8 million in the 2003 Nine-Month Period from $2.9 million in the 2002 Nine-Month Period and increased to $1.9 million in the 2003 Three-Month Period from $1.5 million in the 2002 Three-Month Period.

Other Operations

Other operations consist of corporate general and administrative expenses. In the 2003 Nine-Month Period, operating losses from other operations improved to a loss of $2.4 million from a loss of $2.8 million in the 2002 Nine-Month Period. In the 2003 Three-Month Period, operating losses from other operations improved to a loss of $0.6 million from a loss of $1.0 million in the 2002 Three-Month Period. The decreases in both the 2003 Nine-Month Period and the 2003 Three-Month Period include decreases in certain employee related expenses.

ACG HOLDINGS, INC.
Management’s Discussion and Analysis of
Financial Condition and Results of Operations

Interest Expense

In the 2003 Nine-Month Period, interest expense increased to $25.7 million from $21.5 million in the 2002 Nine-Month Period and increased to $8.4 million in the 2003 Three-Month Period from $7.1 million in the 2002 Three-Month Period. These increases include the impact of higher levels of indebtedness associated with our 2003 Refinancing. In addition, interest expense in the 2003 Nine-Month Period, includes incremental interest expense of approximately $1.7 million, related to the 30 day call provision associated with the 12 3/4% Notes.

Loss on Early Extinguishment of Debt

In the 2003 Nine-Month Period, 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 4 to our condensed consolidated financial statements appearing elsewhere in this Report.

Income Taxes

In the 2003 Nine-Month Period, income tax expense increased to $11.7 million from $1.3 million in the 2002 Nine-Month Period. In the 2003 Three-Month Period income tax expense improved to a benefit of $1.8 million from expense of $0.4 million in the 2002 Three-Month Period. The increase in the 2003 Nine-Month Period is primarily due to an adjustment, recorded in the quarter ended September 30, 2003, to increase the deferred tax asset valuation allowance by $12.8 million. 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 4 to our condensed 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 the income tax benefit in the 2003 Three-Month Period is primarily due to an adjustment of $2.2 million 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, which resulted in a net loss of approximately $0.4 million, which is net of zero income tax benefits. The sale of Digiscope has been accounted for as a discontinued operation, and accordingly, Digiscope’s operations for the 2002 Three and Nine-Month Periods have been reclassified and presented within discontinued operations in the accompanying condensed consolidated statements of operations.

Net Income (Loss)

As a result of the factors discussed above, net income (loss) decreased to a loss of $16.6 million in the 2003 Nine-Month Period from income of $7.8 million in the 2002 Nine-Month Period and in the 2003 Three-Month Period, net income increased to $3.0 million from $2.2 million in the 2002 Three-Month Period.

Liquidity and Capital Resources

On July 3, 2003, we refinanced all of our existing indebtedness (excluding capital leases) in connection with the 2003 Refinancing. The primary objectives of this refinancing included the placement of a long-term capital

ACG HOLDINGS, INC.
Management’s Discussion and Analysis of
Financial Condition and Results of Operations

structure which (1) eliminated the near-term amortization requirements of our old bank credit agreement and our 12 ¾% 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 sold $280 million aggregate principal amount of our 10% Notes and also entered into the Revolving Credit Facility. We repaid substantially all existing indebtedness (excluding capital leases) through:

• the repayment of all amounts outstanding under our old bank credit agreement, and the concurrent termination of all related commitments thereunder;

• the issuance of letters of credit under the Revolving Credit Facility to replace outstanding letters of credit; and

• effective August 3, 2003, the redemption of all of the 12 ¾% 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 $13.6 million of deferred financing fees through December 31, 2003. 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 the 2003 Nine-Month Period related to the write-off of deferred financing costs associated with the old bank credit agreement and the 12 ¾% Notes. In addition, we recorded incremental interest expense of approximately $1.7 million in the 2003 Nine-Month Period related to the 30 day call provision associated with the 12 ¾% 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.

At December 31, 2003, we had borrowings outstanding under the Revolving Credit Facility of $7.2 million and had letters of credit outstanding of approximately $31.1 million. We had additional borrowing availability under the Revolving Credit Facility of approximately $31.7 million. Payments due on existing capital lease obligations during the remainder of our fiscal year ending March 31, 2004 (“Fiscal Year 2004”) are approximately $2.2 million.

During the 2003 Nine-Month Period, we used net cash provided by operating activities of $8.2 million (see Condensed Consolidated Statements of Cash Flows appearing elsewhere in this Report), proceeds from the 2003 Refinancing of $280 million and net revolver borrowings of $7.2 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 12 ¾% 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,

• $13.6 million for fees and expenses paid to date related to the 2003 Refinancing,

ACG HOLDINGS, INC.
Management’s Discussion and Analysis of
Financial Condition and Results of Operations

• $10.5 million in cash capital expenditures, and

• $5.1 million to service other indebtedness (including capital lease obligations of $4.8 million and deferred financing fees related to the old bank credit agreement and the 12 ¾% Notes of $0.3 million).

Our cash-on-hand of approximately $6.2 million is presented net of outstanding checks within trade accounts payable at December 31, 2003. Accordingly, cash is presented at a balance of $0 million in the December 31, 2003 condensed consolidated balance sheet.

We plan to continue our program of upgrading our print and premedia services equipment. We anticipate that total Fiscal Year 2004 capital expenditures, including maintenance, cost reduction and customer support capital, will approximate $16 million. This will include cash capital expenditures of approximately $13 million and capital lease spending of approximately $3 million.

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.

At December 31, 2003, we had total indebtedness of $307.7 million, including borrowings under the Revolving Credit Facility of $7.2 million, capital lease obligations of $20.5 million and $280.0 million of our 10% Notes. We have no off-balance sheet financial instruments. We are currently in compliance with all financial covenants 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.

EBITDA and EBITDA Margin

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, depreciation and amortization. This calculation of EBITDA differs from the EBITDA disclosed in note 9 to our condensed consolidated financial statements appearing elsewhere in this Report. The definition in note 9 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 10% Senior Second Secured Notes Indenture and the Revolving Credit Facility, as amended, are based on, or include EBITDA, subject to certain adjustments.

ACG HOLDINGS, INC.
Management’s Discussion and Analysis of
Financial Condition and Results of Operations


		Three Months Ended						Nine Months Ended
		December 31,						December 31,

		2003			2002			2003			2002

					(Dollars in thousands)
EBITDA:
Print (a)		$	13,613			14,831			37,700			46,093
Premedia Services (a)			2,748			2,553			7,517			5,851
Other (b)			(670	)		(1,222	)		(6,169	)		(3,365	)

	Total	$	15,691			16,162			39,048			48,579
EBITDA Margin:
Print			11.8	%		11.6	%		11.6	%		12.8	%
Premedia Services			20.8	%		18.8	%		18.9	%		14.4	%
	Total		12.2	%		11.4	%		10.7	%		12.2	%

(a) In the 2003 Nine-Month Period, EBITDA for the print and premedia services’ segments includes the impact of restructuring costs of $1.7 million and $0.3 million, respectively.

(b) Other operations includes corporate general and administrative expenses as well as discontinued operations. In addition, other operations includes the write-off of deferred financing costs related to the 2003 Refinancing of $3.2 million in the 2003 Nine-Month Period.

The following table provides a reconciliation (in thousands) of EBITDA to net income (loss):


					Premedia
		Print			Services			Other			Total

Three Months Ended December 31, 2003
EBITDA		$	13,613			2,748			(670	)		15,691
	Depreciation and amortization		(5,215	)		(848	)		—			(6,063	)
	Interest expense, net		—			—			(8,411	)		(8,411	)
	Income tax benefit		—			—			1,790			1,790

Net income (loss)		$	8,398			1,900			(7,291	)		3,007

Three Months Ended December 31, 2002
EBITDA		$	14,831			2,553			(1,222	)		16,162
	Depreciation and amortization		(5,224	)		(1,085	)		(71	)		(6,380	)
	Interest expense, net		—			—			(7,143	)		(7,143	)
	Income tax expense		—			—			(418	)		(418	)

Net income (loss)		$	9,607			1,468			(8,854	)		2,221

ACG HOLDINGS, INC.
Management’s Discussion and Analysis of
Financial Condition and Results of Operations


					Premedia
		Print			Services			Other			Total

Nine Months Ended December 31, 2003
EBITDA		$	37,700			7,517			(6,169	)		39,048
	Depreciation and amortization		(15,493	)		(2,712	)		(26	)		(18,231	)
	Interest expense, net		—			—			(25,705	)		(25,705	)
	Income tax expense		—			—			(11,684	)		(11,684	)

Net income (loss)		$	22,207			4,805			(43,584	)		(16,572	)

Nine Months Ended December 31, 2002
EBITDA		$	46,093			5,851			(3,365	)		48,579
	Depreciation and amortization		(14,573	)		(3,192	)		(308	)		(18,073	)
	Interest expense, net		—			—			(21,371	)		(21,371	)
	Income tax expense		—			—			(1,333	)		(1,333	)

Net income (loss)		$	31,520			2,659			(26,377	)		7,802

Value Added Revenue and Print Impressions for the Print Segment

We have included value-added revenue, or 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.


	Three Months Ended				Nine Months Ended
	December 31,				December 31,

	2003		2002		2003		2002

Print Segment VAR (in thousands)	$	56,618		59,671		166,790		170,713
Print Segment Impressions (in millions)		3,573		3,573		9,995		9,804

ACG HOLDINGS, INC.
Management’s Discussion and Analysis of
Financial Condition and Results of Operations

The following table provides a reconciliation of print segment sales to print segment VAR:


		Three Months Ended				Nine Months Ended
		December 31,				December 31,

		2003		2002		2003		2002

				(In thousands)
Print Segment Sales		$	115,340		128,349		325,848		358,835
	Paper, Ink and Subcontract Services		58,722		68,678		159,058		188,122

Print Segment VAR		$	56,618		59,671		166,790		170,713

New Accounting Pronouncements

In April 2002, the FASB issued SFAS 145. SFAS 145 rescinds SFAS 4, which required all gains and losses from extinguishment of debt to be aggregated and, if material, classified as an extraordinary item, net of the related income tax effect. As a result, the criteria in Accounting Principles Board Opinion No. 30 will now be used to classify those gains and losses. SFAS 145 amends SFAS 13, to require that certain lease modifications that have economic effects similar to sale-leaseback transactions be accounted for in the same manner as sale-leaseback transactions. SFAS 145 makes various technical corrections to existing pronouncements. While those corrections are not substantive in nature, in some instances, they may change accounting practice. The provisions of SFAS 145 are effective for financial statements issued for fiscal years beginning after May 15, 2002, and interim periods within those fiscal years. In accordance with the guidance set forth in SFAS 145, we classified the $3.2 million charge incurred in the 2003 Nine-Month Period related to the write-off of deferred financing costs associated with our old bank credit agreement and the 12 3/4% Notes as Other expense in the accompanying condensed consolidated statements of operations.

In January 2003, the FASB issued FIN 46 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. Until now, a company generally has included another entity in its consolidated financial statements only if it controlled the entity through voting interests. FIN 46 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 January 31, 2003 and to existing entities in the first fiscal year or interim period ending after December 15, 2003. Certain of the disclosure requirements apply in all financial statements issued after January 31, 2003, regardless of when the variable interest entity was established. We have evaluated the requirements of FIN 46 and do not expect any effect on our consolidated financial position or operating results.

ACG HOLDINGS, INC.
Management’s Discussion and Analysis of
Financial Condition and Results of Operations

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

				< 1		1-3		3-5		> 5
Contractual Obligations		Total		year		years		years		years

				(Dollars in thousands)
Long-term debt		$	287,164		—		—		7,164		280,000
Capitalized lease obligations			20,555		5,348		8,093		6,886		228
Operating lease obligations			9,920		4,517		3,419		1,670		314

	Total contractual cash obligations	$	317,639		9,865		11,512		15,720		280,542

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. We are deferring certain contractual provisions over the life of the contracts, which are being recognized as the purchase commitments are achieved. The amount deferred at December 31, 2003 is $45.6 million and is included within Other liabilities in our consolidated balance sheet. At December 31, 2003, we had no other significant contingent commitments. The following table gives information about our other commercial commitments:

Commitment Due

Other Commercial

< 1

1-3

3-5

> 5

Commitments

Total

year

years

(Dollars in thousands)

Standby letters of credit

31,164

26,638

—

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.

ACG HOLDINGS, INC.
Part I

Item 3. 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.

Interest rate risk for us primarily relates to interest rate fluctuations on variable rate debt.

Foreign currency exchange rate risk is minimal as we have only one print facility outside the United States, in Canada, and any fluctuations in net asset values as a result of changes in foreign currency exchange rates associated with activity at this one facility would be immaterial to our company as a whole.

Quantitative Information

At December 31, 2003, we had fixed rate debt and variable rate debt (both excluding capitalized lease obligations) approximating $280.0 million and $7.2 million, respectively. The carrying values of such debt instruments approximated their estimated fair values as of December 31, 2003. At our December 31, 2003 borrowing levels, a 1% adverse change in interest rates would result in an approximate $15 million reduction in the fair value of our fixed rate debt and would have 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 4. Controls and Procedures.

As of December 31, 2003, an evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) promulgated under the Securities Exchange Act of 1934, as amended). Based on that evaluation, the Company’s management, including the Chief Executive Officer and Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2003. There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect internal controls subsequent to December 31, 2003.

ACG HOLDINGS, INC.
Part II Other Information

Item 1. Legal Proceedings.

There have been no significant changes since March 31, 2003. Reference is made to “Business – Legal Proceedings” disclosure in our Amendment No. 1 on Form S-1 to Form S-4 as filed with the Securities and Exchange Commission on November 26, 2003.

Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities.

Recent Sales of Unregistered Securities

During the quarter ended December 31,2003, an officer exercised options to purchase an aggregate of 1,125 shares of Holdings’ common stock for $.01/share. The securities that were sold were exempt from registration on the basis that such an officer is an “accredited investor” as defined by the rules of the Securities Act of 1933, as amended.

Item 6. Exhibits and Reports on Form 8-K.

(a) Exhibits


Exhibit No.		Description

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

12.1		Statement Re: Computation of Ratio of Earnings to Fixed Charges

31.1		Rule 13a – 14(a)/15d-14(a) Certification of Chief Executive Officer

31.2		Rule 13a – 14(a)/15d-14(a) Certification of Chief Financial Officer

32.1		Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350

(b) Reports on Form 8-K

Form 8-K filed with the Securities and Exchange Commission on November 6, 2003 under Item 7 announced American Color Graphics, Inc.’s financial results for the second fiscal quarter and the six month period ended September 30, 2003 and under Item 9 announced that the financial results for the fiscal years ended March 31, 2003, 2002 and 2001 had been reclassified.

There were no other reports filed on Form 8-K in the quarter ended December 31, 2003.

Form 8-K filed with the Securities and Exchange Commission on February 9, 2004 under Item 5, announced American Color Graphics, Inc. will host a teleconference to discuss its financial results of the third quarter of fiscal year ending March 31, 2004.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, Holdings and Graphics 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: February 12, 2004	By	/s/ Patrick W. Kellick

	Patrick W. Kellick
	Senior Vice President/Chief Financial Officer and Assistant Secretary
	(Authorized Officer and Principal Financial Officer)

Date: February 12, 2004	By	/s/ Angela C. Marshall

	Angela C. Marshall
	Corporate Controller
	(Chief Accounting Officer)

EXHIBIT INDEX


Exhibit No.	Description	Page

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		34

12.1	Statement Re: Computation of Ratio of Earnings to Fixed Charges		48

31.1	Rule 13a – 14(a)/15d-14(a) Certification of Chief Executive Officer		49

31.2	Rule 13a – 14(a)/15d-14(a) Certification of Chief Financial Officer		50

32.1	Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350		51

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	•		the repayment of all amounts outstanding under the old bank credit agreement, and the concurrent termination of all related commitments thereunder;

	•		the issuance of letters of credit under the Revolving Credit Facility to replace outstanding letters of credit; and

	•		effective August 3, 2003, the redemption of all of the 12 ¾% Senior Subordinated Notes Due 2005 (the “12 ¾% Notes”), at a redemption price equal to 100% of their aggregate principal amount, plus accrued and unpaid interest thereon.

	•		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.

	•		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,

	•		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.

(a)		Includes corporate general and administrative expenses.

(b)		In the 2003 Nine-Month Period, print and premedia services’ operating incomes include the impact of restructuring costs of $1.7 million and $0.3 million, respectively.

	•		$39.2 million to repay indebtedness outstanding under the old bank credit agreement,

	•		$170.1 million to redeem the 12 ¾% 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,

	•		$13.6 million for fees and expenses paid to date related to the 2003 Refinancing,

	•		$10.5 million in cash capital expenditures, and

	•		$5.1 million to service other indebtedness (including capital lease obligations of $4.8 million and deferred financing fees related to the old bank credit agreement and the 12 ¾% Notes of $0.3 million).

(a)		In the 2003 Nine-Month Period, EBITDA for the print and premedia services’ segments includes the impact of restructuring costs of $1.7 million and $0.3 million, respectively.

(b)		Other operations includes corporate general and administrative expenses as well as discontinued operations. In addition, other operations includes the write-off of deferred financing costs related to the 2003 Refinancing of $3.2 million in the 2003 Nine-Month Period.

		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.

		Interest rate risk for us primarily relates to interest rate fluctuations on variable rate debt.

		Foreign currency exchange rate risk is minimal as we have only one print facility outside the United States, in Canada, and any fluctuations in net asset values as a result of changes in foreign currency exchange rates associated with activity at this one facility would be immaterial to our company as a whole.

		Quantitative Information

		At December 31, 2003, we had fixed rate debt and variable rate debt (both excluding capitalized lease obligations) approximating $280.0 million and $7.2 million, respectively. The carrying values of such debt instruments approximated their estimated fair values as of December 31, 2003. At our December 31, 2003 borrowing levels, a 1% adverse change in interest rates would result in an approximate $15 million reduction in the fair value of our fixed rate debt and would have 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.

		Recent Sales of Unregistered Securities

		During the quarter ended December 31,2003, an officer exercised options to purchase an aggregate of 1,125 shares of Holdings’ common stock for $.01/share. The securities that were sold were exempt from registration on the basis that such an officer is an “accredited investor” as defined by the rules of the Securities Act of 1933, as amended.

	(b)	Reports on Form 8-K

		Form 8-K filed with the Securities and Exchange Commission on November 6, 2003 under Item 7 announced American Color Graphics, Inc.’s financial results for the second fiscal quarter and the six month period ended September 30, 2003 and under Item 9 announced that the financial results for the fiscal years ended March 31, 2003, 2002 and 2001 had been reclassified.

		There were no other reports filed on Form 8-K in the quarter ended December 31, 2003.

		Form 8-K filed with the Securities and Exchange Commission on February 9, 2004 under Item 5, announced American Color Graphics, Inc. will host a teleconference to discuss its financial results of the third quarter of fiscal year ending March 31, 2004.