UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

ACG HOLDINGS, INC.

(615) 377-0377
(Registrant’s Telephone Number, Including Area Code)

AMERICAN COLOR GRAPHICS, INC.

(615) 377-0377
(Registrant’s Telephone Number, Including Area Code)

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

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

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

INDEX

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ACG HOLDINGS, INC.

     See accompanying notes to condensed consolidated financial statements.

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

     See accompanying notes to condensed consolidated financial statements.

4

ACG HOLDINGS, INC.

     See accompanying notes to condensed consolidated financial statements.

5

ACG HOLDINGS, INC.

     See accompanying notes to condensed consolidated financial statements.

6

ACG HOLDINGS, INC.

     See accompanying notes to condensed consolidated financial statements.

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ACG HOLDINGS, INC.

Description of the Company

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

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and are in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. The operating results for the three and six-month periods ended September 30, 2004 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2005. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in the Company’s Form 10-K for the fiscal year ended March 31, 2004 and the Company’s Post-Effective Amendment No. 1 to Registration Statement No. 333-110291 on Form S-1.

The preparation of the financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

2. Discontinued Operations

In June 2003, the Company sold its digital visual effects business, Digiscope, for a de minimis amount, which resulted in a loss of approximately $0.4 million, which is net of zero income tax benefit. As a result of this sale, Digiscope has been accounted for as a discontinued operation, and accordingly, Digiscope’s operations are segregated and reported within discontinued operations in the accompanying condensed consolidated financial statements.

3. Inventories

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

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

4. July 3, 2003 Refinancing Transactions

On July 3, 2003, the Company sold $280 million aggregate principal amount of its 10% Senior Second Secured Notes Due 2010 (the “10% Notes”) as part of a recapitalization involving Graphics, Holdings and certain affiliates of the Company and also entered into a $70 million senior secured revolving credit facility maturing on July 3, 2008, with a syndicate of lenders (the “Revolving Credit Facility”), (collectively the “2003 Refinancing”). Graphics repaid substantially all existing indebtedness (excluding capital leases) through:

•

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

•

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

•

effective August 3, 2003, the redemption of all of the 12¾% Senior Subordinated Notes Due 2005 (the “12¾% Notes”), at a redemption price equal to 100% of their aggregate principal amount, plus accrued and unpaid interest thereon.

In addition, the Company repurchased, and concurrently retired, all 5,223 outstanding shares of preferred stock of Holdings, and canceled all outstanding options to purchase shares of preferred stock of Holdings held by certain key officers, for an aggregate purchase price of $56.9 million. The canceled options would have been exercisable for 582 shares of preferred stock of Holdings.

In connection with the 2003 Refinancing, the Company has incurred $14.4 million of deferred financing fees. Of the total deferred financing fees, $4.9 million was paid to affiliates of Morgan Stanley for the services they performed in conjunction with the Revolving Credit Facility and the original private placement of the 10% Notes. The Company also incurred a charge of approximately $3.2 million in the quarter ended September 30, 2003 related to the write-off of deferred financing costs associated with the old bank credit agreement and the 12¾% Notes. In addition, the Company recorded incremental interest expense of approximately $1.7 million in the quarter ended September 30, 2003 as a result of the 30 day call provision related to the 12¾% Notes.

The Revolving Credit Facility provides for maximum borrowings of $70 million, including a letter of credit sub-facility of up to $40 million. Borrowings under this facility, as amended, are subject to a borrowing base limitation based on certain percentages of eligible accounts receivable, eligible inventory and the appraised value of eligible machinery and equipment and real estate, subject to certain limitations. The borrowing base arrangement includes a provision whereby proceeds from collection of substantially all of the Company’s accounts receivable are deposited into bank accounts which are applied daily toward repayment of borrowings outstanding, if any, under the Revolving Credit Facility. At September 30, 2004, the Company had borrowings outstanding under the Revolving Credit Facility of $15.4 million and had letters of credit outstanding of approximately $28.7 million. The Company had additional borrowing availability under the Revolving Credit Facility of approximately $25.9 million.

The Revolving Credit Facility is secured by substantially all of the assets of Graphics. Holdings has guaranteed Graphics’ indebtedness under the Revolving Credit Facility, which guarantee is secured by a pledge of all of Graphics’ and Graphics’ subsidiaries’ stock.

Amounts outstanding under the Revolving Credit Facility, as amended, bear interest at a rate equal to, at the Company’s option, (a) an alternate base rate, plus an applicable margin of 2.00% or (b) a reserve adjusted LIBOR rate, plus an applicable margin of 3.00%. The applicable margins under both rate structures are subject to periodic downward adjustment based upon the attainment of certain fixed charge coverage ratio levels.

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

The Revolving Credit Facility, as amended, contains customary affirmative and negative covenants, including but not limited to:

•

minimum fixed charge coverage ratio requirements; and

•

limitations on acquisitions and investments, new subsidiaries, uses of proceeds, indebtedness, liens, dividends and distributions, prepayments of certain indebtedness, affiliate transactions, loans, asset dispositions and Holdings’ business operations.

The Company was in compliance with all such covenant requirements at September 30, 2004.

5. Comprehensive Loss

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

Total comprehensive loss for the three and six months ended September 30, 2004 and 2003 are as follows (in thousands):

6. Income Taxes

Income taxes have been provided using the liability method in accordance with Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes” (“SFAS 109”). Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts as measured by tax laws and regulations.

The Company recorded income tax benefit of $1.3 million and $1.0 million for the three and six months ended September 30, 2004, respectively, compared to expense of $12.9 million and $13.5 million for the three and six months ended September 30, 2003, respectively.

The income tax expense for both the three and six months ended September 30, 2003 primarily relates to an adjustment, recorded in the three months ended September 30, 2003, to increase the deferred tax asset valuation allowance by $12.8 million. This adjustment reflected a change in circumstances which resulted in a judgment that, based on the provisions in SFAS 109 that restrict the Company’s ability to consider forecasts of future income, a corresponding amount of deferred tax assets may not be realized. The change in circumstances arose from an assessment of the economic climate, particularly the continuance of competitive pricing pressures in the industry, and the expected increase in annual interest costs arising from the issuance of the 10% Notes that provided negative evidence about the Company’s ability to realize certain deferred tax assets. The Company will reverse its valuation allowance into income when and to the extent sufficient

10

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

positive evidence arises to support the realization of the related deferred tax assets. Tax benefit from U.S. losses in the three and six months ended September 30, 2003 was primarily offset by an increase in the valuation allowance and foreign tax expense.

The income tax benefit in the three and six months ended September 30, 2004 relates primarily to tax benefit in foreign jurisdictions. Tax benefit from U.S. losses in the three and six months ended September 30, 2004 was primarily offset by an increase in the valuation allowance.

7. Employee Benefit Plans

Components of Net Periodic Benefit Cost (in thousands)

In December 2003, the Medicare Prescription Drug Improvement and Modernization Act of 2003 (the “Act”) was enacted. The Act introduces a prescription drug benefit under Medicare (“Medicare Part D”) as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. Due to uncertainties in determining the impact the Act could have on the Company’s accumulated postretirement benefit obligation and net periodic postretirement benefit cost, the condensed consolidated financial statements do not reflect the effect the Act may have on the Company’s

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

postretirement plan. Upon resolution of such uncertainties, which are substantially beyond the Company’s control, the Company’s postretirement plan will recognize the effects of the Act, which are not likely to be material.

8. Commitments and Contingencies

The Company has employment agreements with one of its principal officers and two other employees. Such agreements provide for minimum salary levels as well as for incentive bonuses, which are payable if specified management goals are attained. The aggregate commitment for future compensation at September 30, 2004, excluding bonuses, is approximately $2.8 million.

In the quarter ended December 31, 1997, the Company entered into multi-year contracts to purchase a portion of the Company’s raw materials to be used in its normal operations. In connection with such purchase agreements, pricing for a portion of the Company’s raw materials is adjusted for certain movements in market prices, changes in raw material costs and other specific price increases while purchase quantity levels are variable based upon certain contractual requirements and conditions. The Company is deferring certain contractual provisions over the life of the contracts, which are being recognized as the purchase commitments are achieved and the related inventory is sold. The amount deferred at September 30, 2004 is $47.7 million and is included within Other liabilities in the Company’s condensed consolidated balance sheet.

Graphics, together with over 300 other persons, has been designated by the U. S. Environmental Protection Agency as a potentially responsible party (a “PRP”) under the Comprehensive Environmental Response Compensation and Liability Act (“CERCLA”, also known as “Superfund”) at a solvent recovery operation that closed in 1989. Although liability under CERCLA may be imposed on a joint and several basis and the Company’s ultimate liability is not precisely determinable, the PRPs have agreed in writing that Graphics’ share of removal costs is approximately 0.583%; therefore Graphics believes that its share of the anticipated remediation costs at such site will not be material to its business or the Company’s condensed consolidated financial statements as a whole.

Graphics received written notice, dated May 10, 2004, of its potential liability in connection with the Gibson Environmental Site at 2401 Gibson Street, Bakersfield, California. Gibson Environmental, Inc. operated the six acre site as a storage and treatment facility for used oil and contaminated soil from June 1987 through October 1995. Graphics received the notice and a settlement offer from LECG, a consultant representing approximately 60 companies comprising the Gibson Group Trust. Graphics has begun its investigation into this matter but it believes its potential liability in connection with this site will not be material to its business or the Company’s condensed consolidated financial statements as a whole.

Based upon an analysis of Graphics’ volumetric share of waste contributed to the sites, the Company maintains a reserve of approximately $0.1 million in connection with these liabilities in its condensed consolidated balance sheet at September 30, 2004. The Company believes this amount is adequate to cover such liabilities.

The Company has been named as a defendant in several legal actions arising from its normal business activities. In the opinion of management, any liabilities that may arise from such actions will not, individually or in the aggregate, have a material adverse effect on the condensed consolidated financial statements of the Company.

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

9. Restructuring Costs

Fiscal Year 2004 Restructuring Costs

January 2004 Plan

In January 2004, the Company approved a restructuring plan for the print and premedia services segments designed to improve operating efficiency and profitability. This plan included a consolidation of capacity and the related downsizing of a print facility in Stevensville, Ontario, a reduction of personnel in certain of the Company’s other print and premedia facilities and the elimination of certain selling and administrative positions. These actions included the elimination of 208 positions within the Company.

As a result, the Company recorded a pre-tax restructuring charge of approximately $5.7 million in the quarter ended March 31, 2004 associated with this plan. This charge was classified within restructuring costs and other charges in the consolidated statement of operations for the fiscal year ended March 31, 2004. The cost of this restructuring plan was accounted for in accordance with the guidance set forth in Statement of Financial Accounting Standards No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS 146”). This restructuring charge was composed primarily of severance and related termination benefits.

The following table summarizes the activity related to this restructuring plan for the six months ended September 30, 2004 (in thousands):

During the fiscal year ended March 31, 2004, $1.8 million of these costs were paid. As of September 30, 2004, the Company believes the restructuring reserve of approximately $2.2 million is adequate. The Company anticipates that approximately $1.0 million of the restructuring balance will be paid by March 31, 2005 and the remaining $1.2 million will be paid during the fiscal year ending March 31, 2006. These costs will be funded through cash generated from operations and borrowings under the Revolving Credit Facility, as amended.

July 2003 Plan

In July 2003, the Company implemented a restructuring plan for the print and premedia services segments to further reduce its selling, general and administrative expenses. This plan resulted in the termination of four administrative employees.

As a result of this plan, the Company recorded a pre-tax restructuring charge of approximately $1.8 million in the quarter ended September 30, 2003. This charge was classified within restructuring costs in the condensed consolidated statements of operations in the quarter ended September 30, 2003. The cost of this restructuring plan was accounted for in accordance with the guidance set forth in SFAS 146. The restructuring charge was composed of severance and related termination benefits.

13

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

The following table summarizes the activity related to this restructuring plan for the six months ended September 30, 2004 (in thousands):

During the fiscal year ended March 31, 2004, $0.7 million of these costs were paid. As of September 30, 2004, the Company believes the restructuring reserve of approximately $0.7 million is adequate. The Company anticipates that approximately $0.3 million of the restructuring balance will be paid by March 31, 2005, approximately $0.3 million will be paid during the fiscal year ending March 31, 2006 and the remaining $0.1 million will be paid during the fiscal year ending March 31, 2007. These costs will be funded through cash generated from operations and borrowings under the Revolving Credit Facility, as amended.

Fiscal Year 2003 Restructuring Costs

In the fourth quarter of the fiscal year ended March 31, 2003, the Company’s Board of Directors approved a restructuring plan for the print and premedia services segments designed to improve operating efficiency and profitability. This plan included the closing of a premedia services facility in Nashville, Tennessee, a reduction of personnel in both the print and premedia services segments and the elimination of certain administrative personnel. These combined actions resulted in the elimination of 30 positions within the Company.

As a result of this plan, the Company recorded a pre-tax restructuring charge of approximately $1.2 million in the fourth quarter of the fiscal year ended March 31, 2003. This charge was classified within restructuring costs and other charges in the consolidated statements of operations in the fiscal year ended March 31, 2003. The cost of this restructuring plan was accounted for in accordance with the guidance set forth in SFAS 146. The restructuring charge was composed primarily of severance and related termination benefits. The Company reduced the restructuring reserve related to this plan by approximately $0.2 million in the quarter ended March 31, 2004. This reduction was primarily the result of lower than anticipated severance and other employee costs due to the terminated employees obtaining other employment during their severance periods.

The following table summarizes the activity related to this restructuring plan for the six months ended September 30, 2004 (in thousands):

The process of closing a premedia services facility and the elimination of certain personnel within the Company were completed by March 31, 2003. During the fiscal years ended March 31, 2004 and March 31, 2003, $0.9 million and $0.1 million of these costs were paid, respectively. As of September 30, 2004, the Company believes the remaining restructuring reserve of less than $0.1 million is adequate. The Company anticipates that the remaining costs will be paid before March 31, 2005. These costs will be funded through cash generated from operations and borrowings under the Revolving Credit Facility, as amended.

14

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

Fiscal Year 2002 Restructuring Costs

In January 2002, the Company’s Board of Directors approved a restructuring plan for the print and premedia services segments designed to improve asset utilization, operating efficiency and profitability. This plan included the closing of a print facility in Hanover, Pennsylvania, and a premedia services facility in West Palm Beach, Florida, the downsizing of a Buffalo, New York premedia services facility and the elimination of certain administrative personnel. This action resulted in the elimination of 189 positions within the Company.

As a result of this plan, the Company recorded a pre-tax restructuring charge of approximately $8.6 million in the fourth quarter of the fiscal year ended March 31, 2002. This charge was classified within restructuring costs and other charges in the consolidated statements of operations in the fiscal year ended March 31, 2002. The cost of this restructuring plan was accounted for in accordance with the guidance set forth in Emerging Issues Task Force Issue 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring)” (“EITF 94-3”). The restructuring charge included severance and related termination benefits, lease termination costs primarily related to future lease commitments, equipment deinstallation costs directly associated with the disassembly of certain printing presses and other equipment, and other costs including primarily legal fees, site clean-up costs and the write-off of certain press related parts that provided no future use or functionality. The Company recorded an additional $0.2 million of restructuring charges related to this plan in each of the quarters ended March 31, 2004 and September 30, 2003. These charges were related to future lease commitments and were classified within restructuring costs and other charges in the consolidated statements of operations for the fiscal year ended March 31, 2004.

The following table summarizes the activity related to this restructuring plan for the six months ended September 30, 2004 (in thousands):

The process of closing two facilities and downsizing one facility, including equipment deinstallation and relocation of that equipment to other facilities within the Company, was completed by March 31, 2002. During the fiscal year ended March 31, 2004, $0.9 million of these costs were paid. During each of the fiscal years ended March 31, 2003 and March 31, 2002, $3.4 million of these costs were paid. As of September 30, 2004, the Company believes the restructuring reserve of approximately $1.1 million is adequate. The Company anticipates that $0.3 million of the restructuring reserve balance will be paid by March 31, 2005 and the remaining $0.8 million will be paid by March 31, 2006. These costs will be funded through cash generated from operations and borrowings under the Revolving Credit Facility, as amended.

15

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

10. Industry Segment Information

The Company has significant operations principally in two industry segments: (1) print and (2) premedia services. All of the Company’s print business and assets are attributed to the print division and all of the Company’s premedia services business and assets are attributed to the premedia services division. The Company’s corporate expenses have been segregated and do not constitute a reportable segment.

The Company has two reportable segments: (1) print and (2) premedia services. The print business produces advertising inserts, comics and other publications. The Company’s premedia services business assists customers in the capture, manipulation, transmission and distribution of images. The majority of the premedia services work leads to the production of four-color separations in a format appropriate for use by printers.

The accounting policies of each of the segments are the same as those used by the Company in its condensed consolidated financial statements. The Company evaluates performance based on segment EBITDA as calculated by management, which is defined as earnings before net interest expense, income tax expense, depreciation, amortization, other expense (income) and discontinued operations. This calculation differs from the EBITDA disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations as that definition includes the impact of other expense (income) and discontinued operations. The Company generally accounts for intersegment sales and transfers as if the sales or transfers were to third parties; that is, at current market prices.

In June 2003, the Company sold its digital visual effects business, Digiscope, for a de minimis amount and recorded a net loss of approximately $0.4 million, which is net of zero income tax benefit. As a result of this sale, Digiscope has been accounted for as a discontinued operation, and accordingly, Digiscope’s operations are segregated and reported within discontinued operations in the accompanying condensed consolidated financial statements.

The Company’s reportable segments are business units that offer different products and services. They are managed separately because each segment requires different technology and marketing strategies. A substantial portion of the sales, long-lived assets and other assets of the Company’s reportable segments are attributed to or located in the United States.

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

17

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

11. Impact of Recently Issued Accounting Standards

In January 2003, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”), which was later revised in December 2003, to expand upon and strengthen existing accounting guidance that addresses when a company should include in its financial statements the assets, liabilities and activities of another entity. Historically, a company generally has included another entity in its consolidated financial statements only if it controlled the entity through voting interests. FIN 46, as revised and interpreted, changes that guidance by requiring a variable interest entity, as defined, to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or is entitled to receive a majority of the entity’s residual returns or both. FIN 46 also requires disclosure about variable interest entities that a company is not required to consolidate but in which it has a significant variable interest. The consolidation requirements of FIN 46 apply immediately to variable interest entities created after December 31, 2003 and to existing entities created before December 31, 2003 in the first fiscal year beginning after December 15, 2004. The Company has no variable interest entities created after December 31, 2003. The Company has evaluated the requirements of FIN 46 and does not expect any effect on its condensed 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 pension plans and other postretirement benefit plans. Further, it requires certain disclosures in interim financial statements. For public companies, SFAS 132R was generally effective for fiscal years ending after December 15, 2003. The revised disclosure requirements are incorporated in note 7.

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

Special Note Regarding Forward Looking Statements

This Quarterly Report on Form 10-Q (this “Report”) contains forward-looking statements within the meaning of the “safe harbor” provisions of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Discussions containing such forward-looking statements may be found in this section, as well as within this Report generally. In addition, when used in this Report, the words “believes,” “intends,” “expects,” “may,” “will,” “estimates,” “should,” “could,” “anticipates,” “plans” or other comparable terms are intended to identify forward-looking statements. Forward-looking statements are subject to a number of risks and uncertainties. Actual results in the future could differ materially from those described in the forward-looking statements as a result of many factors outside of the control of ACG Holdings, Inc. (“Holdings”), together with its wholly-owned subsidiary, American Color Graphics, Inc. (“Graphics”), including, but not limited to:

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a failure to achieve expected cost reductions or to execute other key strategies,

•

fluctuations in the cost of paper, ink and other key raw materials,

•

changes in the advertising and print markets,

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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.

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

The following table summarizes our results of operations for the three months ended September 30, 2004 (the “2004 Three-Month Period”), the three months ended September 30, 2003 (the “2003 Three-Month Period”), the six months ended September 30, 2004 (the “2004 Six-Month Period”) and the six months ended September 30, 2003 (the “2003 Six-Month Period”):

(a)		Includes corporate general and administrative expenses.
(b)		In both the 2003 Three and Six-Month Periods, print and premedia services’ operating incomes include the impact of restructuring costs of $1.7 million and $0.3 million, respectively.

Print

Sales. In the 2004 Six-Month Period, print sales decreased $20.9 million to $189.6 million from $210.5 million in the 2003 Six-Month Period. The decrease in the 2004 Six-Month Period includes a decrease in print production volume of approximately 15% and the impact of continued competitive pricing pressures. The volume decline was largely attributable to certain customer share losses associated with the aggressive pricing strategies of certain competitors. These decreases were offset in part by increased paper prices.

In the 2004 Three-Month Period, print sales decreased $9.7 million to $92.4 million from $102.1 million in the 2003 Three-Month Period. The decrease in the 2004 Three-Month Period includes a decrease in print production volume of approximately 16% and the impact of continued competitive pricing pressures. The volume decline was largely attributable to certain customer share losses associated with the aggressive pricing strategies of certain competitors. These decreases were offset in part by increased paper prices.

20

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

Gross Profit. In the 2004 Six-Month Period, print gross profit decreased $10.7 million to $15.6 million from $26.3 million in the 2003 Six-Month Period. In the 2004 Six-Month Period, print gross margin decreased to 8.2% from 12.5% in the 2003 Six-Month Period. The decrease in gross profit includes the impact of reduced print production volume and continued competitive pricing pressures. These decreases were offset in part by benefits from productivity improvements and various cost reduction programs at our facilities. The decrease in gross margin includes these items, coupled with the impact of increased paper prices reflected in sales. Our gross margin may not be comparable from period to period because of the impact of changes in paper prices included in sales.

In the 2004 Three-Month Period, print gross profit decreased $4.8 million to $6.5 million from $11.3 million in the 2003 Three-Month Period. In the 2004 Three-Month Period, print gross margin decreased to 7.0% from 11.1% in the 2003 Three-Month Period. The decrease in gross profit includes the impact of reduced print production volume and continued competitive pricing pressures. These decreases were offset in part by benefits from productivity improvements and various cost reduction programs at our facilities. The decrease in gross margin includes these items, coupled with the impact of increased paper prices reflected in sales. Our gross margin may not be comparable from period to period because of the impact of changes in paper prices included in sales.

Selling, General and Administrative Expenses. In the 2004 Six-Month Period, print selling, general and administrative expenses decreased $1.9 million, or 17.5%, to $8.9 million, or 4.7% of print sales, from $10.8 million, or 5.1% of print sales, in the 2003 Six-Month Period. This decrease includes the impact of the change in our estimates related to the allowance for doubtful accounts and other reductions in certain administrative costs as a result of our ongoing cost containment initiatives.

In the 2004 Three-Month Period, print selling, general and administrative expenses decreased $1.4 million, or 24.0%, to $4.6 million, or 5.0% of print sales, from $6.0 million, or 5.9% of print sales, in the 2003 Three-Month Period. This decrease includes the impact of the change in our estimates related to the allowance for doubtful accounts and other reductions in certain administrative costs as a result of our ongoing cost containment initiatives.

Restructuring Costs. Restructuring costs were $1.7 million in both the 2003 Three and Six-Month Period. We incurred no restructuring costs in the 2004 Three or Six-Month Period. See note 9 to our condensed consolidated financial statements appearing elsewhere in this Report for further discussion of our restructuring initiatives.

Operating Income. As a result of the factors discussed above, print operating income decreased to $6.7 million in the 2004 Six-Month Period from $13.8 million in the 2003 Six-Month Period and decreased to $1.9 million in the 2004 Three-Month Period from $3.6 million in the 2003 Three-Month Period.

Premedia Services

Sales. In the 2004 Six-Month Period, premedia services’ sales increased $1.3 million to $27.8 million from $26.5 million in the 2003 Six-Month Period. These results are attributable primarily to increases in our premedia production volume, including increases in our premedia packaging business. These increases were offset in part by continued competitive pricing pressures in this segment.

In the 2004 Three-Month Period, premedia services’ sales increased approximately $1.1 million to $14.2 million from $13.1 million in the 2003 Three-Month Period. These results are attributable primarily to increases in our premedia production volume, including increases in our premedia packaging business. These increases were offset in part by continued competitive pricing pressures in this segment.

21

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

Gross Profit. In the 2004 Six-Month Period, premedia services’ gross profit increased $0.9 million to $7.9 million from $7.0 million in the 2003 Six-Month Period. In the 2004 Six-Month Period, premedia services’ gross margin increased to 28.4% from 26.6% in the 2003 Six-Month Period. The increase in both gross profit and gross margin include the increases in premedia production volume.

In the 2004 Three-Month Period, premedia services’ gross profit increased $0.8 million to $4.1 million from $3.3 million in the 2003 Three-Month Period. In the 2004 Three-Month Period, premedia services’ gross margin increased to 29.2% from 25.5% in the 2003 Three-Month Period. The increase in both gross profit and gross margin include the increases in premedia production volume.

Selling, General and Administrative Expenses. In the 2004 Six-Month Period, premedia services’ selling, general and administrative expenses decreased $0.8 million, or 20.5%, to $3.0 million, or 11.0% of premedia services’ sales, from $3.8 million, or 14.5% of premedia services’ sales in the 2003 Six-Month Period. The decrease in the 2004 Six-Month Period includes decreases in both the selling and administrative areas due to our ongoing cost containment initiatives.

In the 2004 Three-Month Period, premedia services’ selling, general and administrative expenses decreased $0.4 million, or 20.4%, to $1.5 million, or 10.7% of premedia services’ sales, from $1.9 million, or 14.5% of premedia services’ sales in the 2003 Three-Month Period. The decrease in the 2004 Three-Month Period includes decreases in both the selling and administrative areas due to our ongoing cost containment initiatives.

Restructuring Costs. Restructuring costs were $0.3 million in both the 2003 Three and Six-Month Period. We incurred no restructuring costs in the 2004 Three or Six-Month Period. See note 9 to our condensed consolidated financial statements appearing elsewhere in this Report for further discussion of our restructuring initiatives.

Operating Income. As a result of the factors discussed above, premedia services’ operating income increased to $4.8 million in the 2004 Six-Month Period from $2.9 million in the 2003 Six-Month Period and increased to $2.6 million in the 2004 Three-Month Period from $1.2 million in the 2003 Three-Month Period.

Other Operations

Other operations consist primarily of corporate general and administrative expenses. In the 2004 Six-Month Period, operating losses from other operations improved slightly to a loss of $1.5 million from a loss of $1.7 million in the 2003 Six-Month Period. In the 2004 Three-Month Period, operating losses from other operations improved slightly to a loss of $0.8 million from a loss of $1.0 million in the 2003 Three-Month Period.

Interest Expense

In the 2004 Six-Month Period, interest expense decreased to $16.9 million from $17.3 million in the 2003 Six-Month Period and decreased to $8.5 million in the 2004 Three-Month Period from $10.1 million in the 2003 Three-Month Period. These decreases include the $1.7 million of incremental interest expense included in both the 2003 Three and Six-Month Periods, related to the 30 day call provision associated with the 12¾% Notes, offset in part by the higher overall levels of indebtedness associated with the 2003 Refinancing.

Loss on Early Extinguishment of Debt

In the 2003 Three and Six-Month Periods, 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 12¾% Notes. See note 4 to our condensed consolidated financial statements appearing elsewhere in this Report.

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

Income Taxes

In the 2004 Six-Month Period, income tax expense improved to a benefit of $1.0 million from expense of $13.5 million in the 2003 Six-Month Period. In the 2004 Three-Month Period, income tax expense improved to a benefit of $1.3 million from expense of $12.9 million in the 2003 Three-Month Period.

The improvement in both the 2004 Six-Month Period and the 2004 Three-Month Period is primarily due to an adjustment, recorded in the 2003 Three-Month Period, to increase the deferred tax asset valuation allowance by $12.8 million. This adjustment reflected a change in circumstances which resulted in a judgment that, based on the provisions of SFAS 109 that restrict our ability to consider forecasts of future income, a corresponding amount of deferred tax assets may not be realized. The change in circumstances arose from our assessment of the economic climate, particularly the continuance of competitive pricing pressures in our industry, and the expected increase in annual interest costs arising from the issuance of the 10% Notes in July 2003 (see note 4 to our condensed consolidated financial statements appearing elsewhere in this Report) that provided negative evidence about our ability to realize certain deferred tax assets. We will reverse our valuation allowance into income when and to the extent sufficient positive evidence arises to support the realization of the related deferred tax assets. Tax benefit from U.S. losses in the 2003 Three and Six-Month Periods was primarily offset by an increase in the valuation allowance and foreign tax expense.

The income tax benefit in the 2004 Three and Six-Month Periods relates primarily to tax benefit in foreign jurisdictions. Tax benefit from U.S. losses in the 2004 Three and Six-Month Periods was primarily offset by an increase in the valuation allowance.

Discontinued Operations

In June 2003, we sold our digital visual effects business, Digiscope, for a de minimis amount, which resulted in a net loss of approximately $0.4 million, which is net of zero income tax benefit. As a result of this sale, Digiscope has been accounted for as a discontinued operation.

Net Loss

As a result of the factors discussed above, net loss improved to $5.7 million in the 2004 Six-Month Period from $19.6 million in the 2003 Six-Month Period and in the 2004 Three-Month Period net loss improved to $3.5 million from $22.7 million in the 2003 Three-Month Period.

Liquidity and Capital Resources

Our primary sources of liquidity are cash provided by operating activities and borrowings under the Revolving Credit Facility. The Revolving Credit Facility, as amended, provides for maximum borrowings of $70 million subject to a borrowing base limitation based on certain percentages of eligible accounts receivable, eligible inventory and the appraised value of eligible machinery and equipment and real estate, subject to certain limitations, maturing on July 3, 2008, including a letter of credit sub-facility of up to $40 million. The borrowing base arrangement includes a provision whereby proceeds from collection of substantially all of our accounts receivable are deposited into bank accounts which are applied daily toward repayment of borrowings outstanding, if any, under the Revolving Credit Facility.

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

At September 30, 2004, we had borrowings outstanding under the Revolving Credit Facility of $15.4 million and letters of credit outstanding of approximately $28.7 million. We had additional borrowing availability under the Revolving Credit Facility of approximately $25.9 million. Payments due on existing capital lease obligations during the remainder of our fiscal year ending March 31, 2005 are approximately $2.1 million.

During the 2004 Six-Month Period, we used net revolver borrowings of $15.4 million and $0.2 million in proceeds from the sale of fixed assets primarily to fund the following:

•		$9.8 million of operating activities (see our condensed consolidated statements of cash flows appearing elsewhere in this Report),
•		$3.2 million in cash capital expenditures; and
•		$2.5 million to service other indebtedness (including capital lease obligations of $2.1 million and deferred financing fees related to the Revolving Credit Facility and the 10% Notes of $0.4 million).

Our cash-on-hand of approximately $0.9 million is presented net of outstanding checks within trade accounts payable at September 30, 2004. Accordingly, cash is presented at a balance of $0 million in the September 30, 2004 condensed consolidated 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 September 30, 2004, we had total indebtedness of $311.7 million, including borrowings under the Revolving Credit Facility of $15.4 million, capital lease obligations of $16.3 million and $280.0 million of our 10% Notes. 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.

EBITDA and EBITDA Margin

EBITDA is presented and discussed because management believes that investors regard EBITDA as a key measure of a leveraged company’s performance and ability to meet its future debt service requirements. “EBITDA” is defined as earnings before net interest expense, income tax expense, depreciation and amortization. This calculation of EBITDA differs from the EBITDA disclosed in note 10 to our condensed consolidated financial statements appearing elsewhere in this Report. The definition in note 10 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 U.S. generally accepted accounting principles and should not be considered an alternative to net income (loss), or any other measure of

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

performance under U.S. generally accepted accounting principles, as a measure of performance, or to cash flows from operating, investing or financing activities as an indicator of cash flows, or as a measure of liquidity. Certain covenants in the indenture governing the 10% Notes and the Revolving Credit Facility, as amended, are based on, or include EBITDA, subject to certain adjustments.

(a)		In both the 2003 Three and Six-Month Periods, EBITDA for the print and premedia services’ segments includes the impact of restructuring costs of $1.7 million and $0.3 million, respectively.
(b)		Other operations includes corporate general and administrative expenses. In addition, other operations include the write-off of deferred financing costs related to our 2003 Refinancing of $3.2 million in both the 2003 Three and Six-Month Periods and discontinued operations losses of $0.4 million in the 2003 Six-Month Period.

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

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

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 also have 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.

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

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

New Accounting Pronouncements

In January 2003, the FASB issued FIN 46, which was later revised in December 2003, to expand upon and strengthen existing accounting guidance that addresses when a company should include in its financial statements the assets, liabilities and activities of another entity. Historically, a company generally has included another entity in its consolidated financial statements only if it controlled the entity through voting interests. FIN 46, as revised and interpreted, changes that guidance by requiring a variable interest entity, as defined, to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or is entitled to receive a majority of the entity’s residual returns or both. FIN 46 also requires disclosure about variable interest entities that a company is not required to consolidate but in which it has a significant variable interest. The consolidation requirements of FIN 46 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 condensed consolidated financial statements as a whole.

In December 2003, the FASB issued 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 pension plans and other postretirement benefit plans. Further, it requires certain disclosures in interim financial statements. For public companies, SFAS 132R was generally effective for fiscal years ending after December 15, 2003. The revised disclosure requirements are incorporated in note 7 to our condensed consolidated financial statements appearing elsewhere in this Report.

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ACG HOLDINGS, INC.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Qualitative Information. In the ordinary course of business, our exposure to market risks is limited as is described below. Market risk is the potential loss arising from adverse changes in market rates and prices, such as interest and foreign currency exchange rates. Currently, we do not utilize derivative financial instruments such as forward exchange contracts, future contracts, options and swap agreements 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 September 30, 2004 we had fixed and variable rate debt (both excluding capital lease obligations) of approximately $280.0 million and $15.4 million, respectively. At March 31, 2004, we had only fixed rate debt approximating $280.0 million, excluding capital lease obligations. The estimated fair value of our debt instruments, excluding capital lease obligations, at September 30, 2004 was $224.0 million, or $56.0 million less than the carrying value, and at March 31, 2004 was $249.2 million, or $30.8 million less than the carrying value. At our September 30, 2004 and 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.

The above market risk discussions are forward-looking statements of market risk assuming the occurrence of certain adverse market conditions. Actual results in the future may differ materially from those projected as a result of actual developments in the market.

Item 4. Controls and Procedures.

As of September 30, 2004, an evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) promulgated under the Securities Exchange Act of 1934, as amended). Based on that evaluation, the Company’s management, including the Chief Executive Officer and Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2004. There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect internal controls subsequent to September 30, 2004. There have not been any changes in our internal controls over financial reporting during the period covered by this quarterly report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

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ACG HOLDINGS, INC.

Item 1. Legal Proceedings.

There have been no significant changes since March 31, 2004. Reference is made to “Business – Legal Proceedings” disclosure in our Form 10-K filed for the fiscal year ended March 31, 2004.

Item 6. Exhibits.

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SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, Holdings and Graphics have duly caused this Report to be signed on their behalf by the undersigned thereunto duly authorized.

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EXHIBIT INDEX

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