UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

(Mark One)

or

ACG HOLDINGS, INC.

AMERICAN COLOR GRAPHICS, INC.

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

INDEX

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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.

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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

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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.

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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.

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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

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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

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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.

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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     None.

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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.

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ACG Holdings, Inc.
Selected Financial Data

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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 12¾% Senior Subordinated Notes Due 2005 (the “12¾% 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.

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(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):

The following items are included in the determination of EBITDA and net income (loss) above:

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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.

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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.

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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.

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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.

(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.

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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.

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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.

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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

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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.

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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 12¾% 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 12¾% 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 12¾% 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 12¾% 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:

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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 12¾% 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 12¾% Notes of $0.4 million).

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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:

(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.

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(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):

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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.

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

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:

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

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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

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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.

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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:

(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:

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

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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:

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 2003
II.		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.

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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.”

Nashville, Tennessee
May 19, 2004

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

See accompanying notes to consolidated financial statements.

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

See accompanying notes to consolidated financial statements.

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

See accompanying notes to consolidated financial statements.

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ACG HOLDINGS, INC.
Consolidated Statements of Stockholders’ Deficit
(In thousands)

See accompanying notes to consolidated financial statements.

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

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ACG HOLDINGS, INC.
Consolidated Statements of Cash Flows - Continued
(In thousands)