ACG Holdings, Inc. / American Color Graphics, Inc.

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K/A

(Mark One)


þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended March 31, 2007


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 33-97090

ACG HOLDINGS, INC.

(Exact name of registrant as specified in its charter)


Delaware		62-1395968
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

100 Winners Circle, Brentwood, Tennessee		37027
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number including area code		(615) 377-0377

AMERICAN COLOR GRAPHICS, INC.

(Exact name of registrant as specified in its charter)


New York		16-1003976
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

100 Winners Circle, Brentwood, Tennessee		37027
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number including area code		(615) 377-0377

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes o No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes o No þ

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 o No þ

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. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o Accelerated filer o Non-accelerated filer þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). o Yes þ No

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 173,254 shares outstanding of its common stock, $.01 Par Value, as of August 31, 2007 (all of which are privately owned and not traded on a public market).

DOCUMENTS INCORPORATED BY REFERENCE
None

PART I

Special Note Regarding Forward-Looking Statements

This Annual Report on Form 10-K/A (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 1A and 7 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” or “Company”), which 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 1A. RISK FACTORS

Our consolidated results of operations, financial condition and cash flows can be adversely affected by various risks. These risks include, but are not limited to, the principal factors listed below and the other matters set forth in this annual report on Form 10-K/A.

Our substantial indebtedness could have a material adverse effect on our financial health and our ability to obtain financing, and to refinance our existing indebtedness, in the future and to react to changes in our business.

We have a significant amount of indebtedness. At March 31, 2007, we had total indebtedness of $352.1 million, comprised of:

•

$61.9 million of borrowings outstanding under our $90.0 million Amended and Restated Credit Agreement with Banc of America Securities, LLC, as Sole Lead Arranger and Sole Book Manager, and Bank of America, N.A., as

			Administrative Agent, and certain lenders (as amended, the “2005 Credit Agreement”), including a $35.0 million term loan payable in full on December 15, 2009 (the “2005 Term Loan Facility”) and $26.9 million of borrowings under a revolving credit facility that expires on December 15, 2009 (the “2005 Revolving Credit Facility”), when all borrowings thereunder become payable in full;

	•		$4.7 million of borrowings outstanding under our $35 million revolving trade receivables facility (as amended, the “Receivables Facility”) entered into on September 26, 2006 with Banc of America Securities, LLC, as Sole Lead Arranger and Sole Book Manager, and Bank of America, N.A., as Administrative Agent, Collateral Agent and Lender, and certain other lenders (which facility expires on December 15, 2009, when all borrowings thereunder become payable in full);

	•		$280.0 million of our outstanding 10% Senior Second Secured Notes Due 2010 (the “10% Notes”), which mature on June 15, 2010; and

	•		$5.5 million of capital lease obligations.

In addition, we had letters of credit outstanding under the 2005 Revolving Credit Facility of $22.2 million. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” for additional information about our indebtedness, including information about our additional borrowing capacity under the 2005 Credit Agreement and the Receivables Facility.

Our significant amount of indebtedness could have important consequences for our financial condition. For example, it could:

	•		make it more difficult for us to satisfy our obligations under our 10% Notes, our 2005 Credit Agreement and our Receivables Facility;

	•		require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, which would reduce the availability of our cash flow from operations to fund working capital, capital expenditures or other general corporate purposes;

	•		make it more difficult to refinance our obligations, including those under the 2005 Credit Agreement, the Receivables Facility and the 10% Notes, as they come due;

	•		limit our ability to purchase paper and other raw materials under satisfactory credit terms thereby limiting our sources of supply or increasing the cash required to fund operations, or both;

	•		limit our ability to borrow additional funds in the future, if we need them, due to financial and restrictive covenants in our indebtedness;

	•		increase our vulnerability to general adverse economic and general industry conditions, including interest rate fluctuations, because a portion of our borrowings are and will continue to be at variable rates of interest;

	•		limit our flexibility in planning for, or reacting to, changes in our business and industry; and

	•		place us at a disadvantage compared with competitors that have proportionately less debt.

Despite current indebtedness levels, we may be able to incur additional indebtedness in the future. If new debt is added to our current indebtedness levels, the related risks that we now face would intensify.

Based on our management’s current forecasts and our current capital structure (and without giving effect to the proposed Vertis Merger (see note 18 to our consolidated financial statements appearing elsewhere in this Report) or any other actions that we may take), we cannot provide any assurance that we will be able to comply with the first lien coverage ratio covenants in our 2005 Credit Agreement and our Receivables Facility after November 29, 2007. Accordingly, pursuant to Emerging Issues Task Force Issue 86-30 “Classification of Obligations When a Violation is Waived by the Creditor” (“EITF 86-30”) and Statement of Financial Accounting Standards No. 78, “Classification of Obligations That Are Callable by the Creditor-an amendment of ARB No. 43, Chapter 3A (“SFAS 78”), we have classified all amounts outstanding under the 2005 Credit Agreement, the Receivables Facility, the 10% Notes, and all our capital lease obligations as current liabilities in

the accompanying March 31, 2007 consolidated balance sheet. No amounts under the 2005 Credit Agreement, Receivables Facility or 10% Notes or capital lease obligations were due but unpaid at March 31, 2007, or August 31, 2007. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” for additional information about our covenant compliance and indebtedness.

In Fiscal Years 2007, 2006, 2005, and 2004, our earnings were insufficient to cover fixed charges. Our ability to make payments on our indebtedness, to refinance our existing indebtedness and to operate our business depends on our ability to generate significant amounts of cash in the future. Our ability to generate such significant amounts of cash depends on many factors beyond our control.

Our earnings were insufficient to cover fixed charges for the Fiscal Years 2007, 2006, 2005 and 2004 by $20.7 million, $19.1 million, $28.0 million and $16.7 million, respectively. The deficiency of earnings to cover fixed charges is computed by subtracting earnings before fixed charges, income taxes and discontinued operations from fixed charges. Fixed charges consist of interest expense, net amortization of debt issuance expense, and the portion of operating lease rental expense that we deem to be representative of interest. Borrowings under our 2005 Credit Agreement and Receivables Facility bear interest at floating rates. If interest rates rise significantly, our fixed charges will increase and our ability to meet our debt service obligations may be adversely affected.

Our ability to make payments on our indebtedness, to refinance our existing indebtedness, and to fund working capital needs, planned capital expenditures and other general corporate requirements will depend on our ability to generate significant amounts of cash and secure financing and refinancing in the future. This ability, to an extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors beyond our control.

If our business does not generate sufficient cash flow from operations, and sufficient future borrowings are not available to us under the 2005 Credit Agreement, the Receivables Facility or from other sources of financing, we may not be able to repay or refinance our indebtedness, operate our business or fund our other liquidity needs.

We can provide no assurances that we will be able to generate earnings before fixed charges at or above current levels or that we will be able to meet our debt service obligations, including our obligations under the 2005 Credit Agreement, the Receivables Facility and the 10% Notes. If we do not generate sufficient cash flow to meet our debt service obligations, we could face liquidity problems and we might be required to seek waivers or amendments from the requisite lenders under our 2005 Credit Agreement or our Receivables Facility or the requisite holders of our 10% Notes, or all three thereof, under the documentation therefor, refinance one or both of our 2005 Credit Agreement or Receivables Facility, incur additional indebtedness above currently permitted levels (if the requisite lenders under our bank credit facilities and the requisite holders of our 10% Notes permit it), seek to exchange some or all of our 10% Notes for other securities of the Company, sell the entire Company to another party or dispose of material assets or operations, reduce or delay capital expenditures or otherwise reduce our expenses, or take other material actions that could have a material adverse effect on us. We can provide no assurances that any such refinancing or restructuring of our debt or any other such actions could be accomplished or as to the timing or terms thereof. The proceeds from any sale of our assets in all likelihood would have to be applied to the reduction of our first priority secured debt.

We can provide no assurances that we will be able to obtain additional debt financing, as a result of, among other things, our anticipated high levels of indebtedness and the debt incurrence restrictions imposed by the agreements governing our indebtedness and because we pledged substantially all our assets as collateral to secure obligations under our various existing financing agreements, including the 2005 Credit Agreement, the Receivables Facility and the 10% Notes.

See “—Our substantial indebtedness could have a material adverse effect on our financial health and our ability to obtain financing, and to refinance our existing indebtedness, in the future and to react to changes in our business” above, regarding classification of our indebtedness as a current liability in the March 31, 2007 consolidated balance sheet.

The agreements and instruments governing our indebtedness contain restrictions and limitations that could significantly affect our ability to operate our business.

The 2005 Credit Agreement and the Receivables Facility require satisfaction of:

	•		a first lien leverage ratio test; and

	•		a minimum total liquidity test.

In addition, the 2005 Credit Agreement includes various other customary affirmative and negative covenants and events of default. These covenants, among other things, restrict our ability and the ability of Holdings to:

	•		incur or guarantee additional debt;

	•		create or permit to exist certain liens;

	•		pledge assets or engage in sale-leaseback transactions;

	•		make capital expenditures, other investments or acquisitions;

	•		prepay, redeem, acquire for value, refund, refinance, or exchange certain debt (including the 10% Notes), subject to certain exceptions;

	•		repurchase or redeem equity interests;

	•		change the nature of our business;

	•		pay dividends or make other distributions;

	•		enter into transactions with affiliates;

	•		dispose of assets or enter into mergers or other business combinations; and

	•		place restrictions on dividends, distributions or transfers to us or Holdings from our subsidiaries.

The 2005 Credit Agreement also requires delivery to the lenders of our annual consolidated financial statements accompanied by a report and opinion of our independent certified public accountants that is not subject to any “going concern” qualification.

These restrictions could limit our ability to obtain future financing, make needed capital expenditures, withstand a future downturn in our business or the economy in general, conduct operations or otherwise take advantage of business opportunities that may arise.

The Receivables Facility contains other customary affirmative and negative covenants and events of default. It also contains other covenants customary for facilities of this type, including requirements related to credit and collection policies, deposits of collections and maintenance by each party of its separate corporate identity, including maintenance of separate records, books, assets and liabilities and disclosures about the transactions in the financial statements of Holdings and its consolidated subsidiaries. The Receivables Facility also requires delivery to the lenders of our annual consolidated financial statements accompanied by a report and opinion of our independent certified public accountants that is not subject to any “going concern” qualification. Failure to meet these covenants could lead to an acceleration of the obligations under the Receivables Facility, following which the lenders would have the right to sell the assets securing the Receivables Facility.

Events beyond our control, including changes in general economic and business conditions, may affect our ability to meet the first lien leverage ratio test and the minimum total liquidity test referred to above. We can provide no assurances that we will meet either of these tests or that the lenders under the 2005 Credit Agreement or the Receivables Facility will waive any default arising from any failure to meet either of these tests.

On June 13, 2007, the 2005 Credit Agreement and the Receivables Facility were amended to (a) increase the maximum permissible first lien leverage ratios as of the last day of our fiscal quarters ending September 30, and December 31, 2007, and March 31, 2008, and (b) require that we maintain certain levels of minimum total liquidity at November 30, December 13, and December 31, 2007, and at the end of each month thereafter through March 31, 2008.

At March 31, 2007, and August 31, 2007, we were in compliance with the covenant requirements set forth in the 2005 Credit Agreement and the Receivables Facility, as amended. We were not in compliance with certain reporting requirements under our 2005 Credit Agreement and Receivables Facility subsequent to March 31, 2007. On August 31, 2007, the lenders under both facilities waived such noncompliance. One such waiver related to our failure to deliver our restated consolidated financial statements for the fiscal years ended March 31, 2007, 2006 and 2005 accompanied by a report and opinion of our independent certified public accountants that was not subject to any “going concern” qualification. See the Report of Independent Registered Public Accounting Firm, which contains a “going concern” qualification, accompanying our restated consolidated financial statements included in this Report. The lenders under both facilities waived such noncompliance with respect to the delivery of such Report of Independent Registered Public Accounting Firm until November 29, 2007.

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources” for information about amendments to our credit facilities on June 13, 2007, and August 31, 2007.

The indenture for the 10% Notes limits Graphics’ and its restricted subsidiaries’ ability, among other things, to:

	•		incur additional debt;

	•		pay dividends, acquire shares of capital stock, make payments on subordinated debt or make investments;

	•		make distributions from restricted subsidiaries;

	•		issue or sell capital stock of restricted subsidiaries;

	•		issue guarantees;

	•		sell or exchange assets;

	•		enter into transactions with shareholders and affiliates;

	•		enter into sale-leaseback transactions;

	•		create liens; and

	•		effect mergers.

The 10% Note indenture requires that Graphics commence, within 30 days of the occurrence of a Change of Control (as defined therein), and consummate an offer to purchase all 10% Notes then outstanding, at a purchase price equal to 101% of their principal amount, plus accrued interest (if any) to the payment date. The 10% Notes indenture provides that such covenant can be amended or waived with the consent of the holders of the requisite percentage of the 10% Notes. There can be no assurance that such consent could be obtained.

There can be no assurance that Graphics would have sufficient funds available at the time of any such Change of Control to make any debt payment (including repurchases of the 10% Notes) required by the foregoing covenant (as well as may be contained in other securities of Graphics that might be outstanding at the time). The above covenant requiring Graphics to repurchase the 10% Notes would, unless consents are obtained from the requisite creditors, require Graphics to repay all

indebtedness then outstanding which by its terms would prohibit such 10% Note repurchase, either prior to or concurrently with such 10% Note repurchase.
See the 10% Note indenture and the related intercreditor and security agreements for a description of the terms of the 10% Notes.

A breach of a covenant in any of our debt agreements or instruments could result in an event of default under such debt agreement or instrument. In addition, the 2005 Credit Agreement, the Receivables Facility and our capital lease debt obligations contain customary cross default provisions. The 10% Notes indenture contains a cross acceleration provision and, with respect to certain principal payment requirements, a cross default provision.

If an event of default under the 2005 Credit Agreement or the Receivables Facility occurs, the lenders thereunder could elect to declare all amounts outstanding thereunder, together with accrued interest, to be immediately due and payable. The lenders thereunder would also have the right in these circumstances to terminate any commitments they made to provide further borrowings. If we are unable to repay outstanding borrowings when due, the lenders under the 2005 Credit Agreement and the Receivables Facility will also have the right to proceed against the collateral, including our available cash and our pledged assets, granted to them to secure the indebtedness. If the indebtedness under the 2005 Credit Agreement and the Receivables Facility were to be accelerated, we cannot assure you that our assets would be sufficient to repay that indebtedness and our other indebtedness in full. If not cured or waived, such default could have a material adverse effect on our business and our prospects.

See “-Our substantial indebtedness could have a material adverse effect on our financial health and our ability to obtain financing, and to refinance our existing indebtedness, in the future and to react to changes in our business” above, regarding classification of our indebtedness as a current liability in the March 31, 2007 consolidated balance sheet.

Our proposed merger with Vertis, Inc. may not occur.

On July 23, 2007, Holdings entered into a letter of intent with Vertis, Inc. (“Vertis”), with respect to the proposed merger of Holdings with Vertis or an affiliate of Vertis (the “Vertis Merger”). Upon the closing of the Vertis Merger, Graphics would become a wholly-owned subsidiary of Vertis. The closing is subject to the execution of a mutually acceptable definitive merger agreement, the satisfaction of customary closing conditions and the receipt of necessary approvals. The Vertis Merger would be subject to the amendment, refinancing, or repayment in full of the parties’ senior secured credit facilities and the successful exchange of the parties’ outstanding notes (or another mutually satisfactory arrangement). There can be no assurance that a definitive merger agreement can or will be signed or that it will be signed by any particular date. If signed, there can be no assurance that the transaction can or will be completed or that it will be completed by any particular date.

The letter of intent provides for a period of exclusivity with respect to the negotiations of a merger agreement. Such exclusivity period has been extended to September 3, 2007. The date on which the letter of intent may be terminated by either party thereto has also been extended to September 3, 2007. The parties have also agreed that, for such purposes, such date shall be automatically extended thereafter for additional one week periods, unless either party notifies the other that it will not extend such date prior to the end of any such additional one week period.

If we are unable to retain key management personnel, our business could be adversely affected.

Our success is dependent to a large degree upon the continued service of key members of our management, particularly Stephen M. Dyott, our Chairman and Chief Executive Officer, Patrick W. Kellick, our Chief Financial Officer, Kathleen A. DeKam, our President of Graphics, Stuart R. Reeve, our President, New Business Development and Denis S. Longpré, our Executive Vice President, Sales. The loss of any of these key executives could have a material adverse effect on our business, financial condition and results of operations. See “Executive Compensation-Termination and Change in Control Payments” in the Form 10-K for the fiscal year ended March 31, 2007 for information concerning certain agreements with such persons concerning their employment by us.

We are subject to competitive pressures.

Overall, commercial printing in the United States is a large, highly fragmented, capital-intensive industry. We compete with numerous national, regional and local printers, although there has been significant consolidation in our industry over the last decade. Our largest competitors are Vertis, Inc. and Quebecor World Inc. and, to a lesser degree, R.R. Donnelley & Sons Company. The 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 have experienced significant competitive pricing pressures in recent years as a result of industry overcapacity and the aggressive pricing strategies of certain competitors that have negatively impacted our profitability. We believe there continues to be a modest amount of excess capacity in the printing industry. Continued competitive pricing or any future periods of economic downturn could further adversely affect our profitability and overall levels of cash flow.

Our premedia services segment competes with numerous premedia services firms on both a national and regional basis. The industry consists of small local and regional companies, with only a few national full-service premedia services companies such as Graphics, none of which has a significant nationwide market share. In addition, there has been a recent onset of competition from offshore premedia services companies who are competing on price. We believe that we need to remain focused on delivering advanced technology based workflow solutions and superior customer service in order to remain competitive with U.S. and offshore based companies.

Any future periods of economic downturn could result in continuing increased competition and possibly affect our sales and profitability. A decline in sales and profitability may decrease our cash flow and make it more difficult for us to service our level of indebtedness.

Because our business is sensitive to changes in paper prices, our business could be adversely affected if paper prices increase significantly and we are unable to pass through price increases to our customers.

Paper is a key raw material in our operations. Our results of operations and financial condition are affected by the cost of paper, which is determined by constantly changing market forces of supply and demand over which we have no control. If we are unable to pass through price increases to customers or our customers reduce the size of their print advertising programs, significant increases in paper prices could have a material adverse effect on our production volume, profitability and cash flow.

In accordance with industry practice, we attempt to pass through increases in the cost of paper to customers in the costs of our printed products, while decreases in paper costs generally result in lower prices to customers. We can provide no assurances that we will be able to pass through future paper price increases. In addition, increases in the cost of paper, and therefore the cost of printed advertisements, may cause some of our advertising customers to reduce their print advertising programs, which could have a material adverse effect on us.

Increases or decreases in the demand for paper have led to corresponding pricing changes and, in periods of high demand, to limitations on the availability of certain grades of paper, including grades used by us. A loss of the sources of paper supply or a disruption in those sources’ business or their failure to meet our product needs on a timely basis could cause temporary shortages in needed materials that could have a negative effect on our results of operations, including sales and profitability.

Demand for our services may decrease due to a decline in customers’ or an industry sector’s financial condition or due to an economic downturn.

We can provide no assurances that the demand for our services will continue at current levels. Our customers’ demand for our services may change based on their needs and financial condition. In addition, when economic downturns affect particular clients or industry sectors, demand for advertising and marketing services provided to these clients or industry sectors is often adversely affected. A substantial portion of our revenue is generated from customers in the retail industry. There can be no assurance that economic conditions or the demand for our services will improve or that they will not deteriorate. If there is another period of economic downturn or stagnation, our results of operations may be adversely affected.

If we do not keep pace with technological changes, we will not be able to maintain our competitive position.

The premedia services business has experienced rapid and substantial changes during the past few years primarily due to advancements in available technology, including the evolution to electronic and digital formats. Many smaller competitors have left the industry as a result of their inability to keep pace with technological advances required to service customer demands. We expect that further changes in technology will affect our premedia services business, and that we will need to adapt to technological advances as they occur. As technology in our business continues to improve and evolve, we will need to maintain our competitive position. If we are unable to respond appropriately to future changes and advancements in premedia technology, our premedia services business will be adversely affected.

Our noncompliance with or liability for cleanup under environmental regulations or efforts to comply with changes to current environmental regulations could adversely affect our business.

We are subject to federal, state and local laws, regulations and ordinances that:

	•		govern activities or operations that may adversely affect the environment, such as discharges to air and water, as well as handling and disposal practices for solid and hazardous wastes; and

	•		impose liability for the costs of cleaning up, and certain damages resulting from, sites of past spills, disposals or other releases of hazardous substances.

Noncompliance with or liability for cleanup under the environmental laws applicable to us could have a material adverse effect on our results of operations, financial condition and cash flows. In addition, changes in environmental laws and regulations, developments in environmental litigation or technological advances could increase the amount of future expenditures and could have a material adverse effect on our results of operations, financial condition and cash flows.

Metalmark controls us, and its interests and those of the Morgan Stanley Funds could be in conflict with our interests.

The Morgan Stanley Leveraged Equity Fund II, L.P., Morgan Stanley Capital Partners III, L.P., Morgan Stanley Capital Investors, L.P., and MSCP III 892 Investors, L.P., which we refer to collectively as the Morgan Stanley Funds, own shares of common stock of Holdings constituting 52.3% of the outstanding common stock, and 47.2% of the fully diluted common equity, of Holdings. The general partners of such limited partnerships are wholly-owned subsidiaries of Morgan Stanley. Metalmark Capital LLC (“Metalmark”) is an independent private equity firm established in 2004 by former principals of Morgan Stanley Capital Partners. An affiliate of Metalmark manages Morgan Stanley Capital Partners III, L.P. and MSCP III 892 Investors, L.P. pursuant to a subadvisory agreement. In addition, under such subadvisory arrangement, Morgan Stanley Capital Investors, L.P. and The Morgan Stanley Leveraged Equity Fund II, L.P. are effectively obligated to vote or direct the vote and to dispose or direct the disposition of any of our shares owned directly by them on the same terms and conditions as are determined by Metalmark with respect to shares held by Morgan Stanley Capital Partners III, L.P. and MSCP III 892 Investors, L.P. Two of the directors of Holdings, Messrs. Hoffman and Chung, are employees of Metalmark. As a result of these relationships, Metalmark may be deemed to control our management and policies. In addition, Metalmark may be deemed to control all matters requiring stockholder approval, including the election of a majority of our directors, the adoption of amendments to our certificate of incorporation, our payment of dividends (subject to restrictions under our debt agreements) and the approval of mergers and sales of all or substantially all our assets. Circumstances could arise under which the interests of Metalmark or the Morgan Stanley Funds could be in conflict with our interests.

PART II

ITEM 6. SELECTED FINANCIAL DATA

Set forth below is selected financial data for and as of the fiscal years ended March 31, 2007, 2006, 2005, 2004 and 2003. The balance sheet data as of March 31, 2007 and 2006 and the statements of operations data for the fiscal years ended March 31, 2007, 2006 and 2005 are derived from the audited consolidated financial statements for such periods and at such dates. The selected financial data as of March 31, 2005, 2004, and 2003 and for the years ended March 31, 2004 and 2003 is derived from previously issued financial statements adjusted for unaudited restatements of deferred financing costs, accrued vacation, and other immaterial corrections. The selected financial data below, for the fiscal years ended March 31, 2004 and 2003, also reflects our former digital visual effects business (“Digiscope”) as a discontinued operation.

The Company has restated its results for the fiscal years ended March 31, 2003 through March 31, 2007. This restatement resulted from a correction in the accounting treatment of certain deferred financing costs, a correction to the accrued vacation calculation, and the correction of other individually immaterial errors in the respective prior periods within the Company’s consolidated financial statements. (See note 2 to the consolidated financial statements for schedules reconciling the restatement related changes for the fiscal years ended March 31, 2007, 2006 and 2005).

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.

ACG Holdings, Inc.
Selected Financial Data
(Restated)


	Fiscal Year Ended March 31,
	2007			2006			2005			2004			2003
	(Dollars in thousands)
Statements of Operations Data:
Sales	$	445,026			434,489			449,513			471,102			517,139
Cost of sales		396,654			385,777			404,355			409,794			445,316

Gross profit		48,372			48,712			45,158			61,308			71,823
Selling, general and administrative expenses		27,859			27,431			29,029			33,010			37,860
Restructuring costs (benefit) and other charges (a)		(412	)		(531	)		10,032			7,698			1,722

Operating income		20,925			21,812			6,097			20,600			32,241
Interest expense, net		39,940			37,071			33,748			34,032			28,245
Loss on early extinguishment of debt (b)		—			—			—			2,794			—
Other expense (c)		1,714			3,827			313			489			1,503
Income tax expense (benefit) (d)		(193	)		(3,369	)		(1,685	)		11,441			1,559

Income (loss) from continuing operations		(20,536	)		(15,717	)		(26,279	)		(28,156	)		934
Discontinued operations: (e)
Loss from operations, net of $0 tax		—			—			—			12			979
Loss on disposal, net of $0 tax		—			—			—			444			—

Net loss	$	(20,536	)		(15,717	)		(26,279	)		(28,612	)		(45	)

Balance Sheet Data (at end of period):
Working capital deficit	$	(355,948	)		(14,580	)		(6,280	)		(13,425	)		(28,659	)
Total assets	$	226,224			230,632			258,212			267,695			278,216
Long-term debt and capitalized leases, including current installments	$	352,110			324,284			309,951			298,298			231,757
Stockholders’ deficit	$	(244,952	)		(231,519	)		(213,583	)		(188,937	)		(107,986	)
Other Data:
Net cash provided (used) by operating activities	$	(12,574	)		(5,622	)		(3,967	)		20,763			43,678
Net cash used by investing activities	$	(12,703	)		(5,523	)		(7,172	)		(13,118	)		(27,446	)
Net cash provided (used) by financing activities	$	25,277			11,169			11,214			(7,524	)		(20,711	)
Capital expenditures (including capital lease obligations entered into)	$	12,701			12,486			6,907			15,966			28,652
Ratio of earnings to fixed charges (f)		—			—			—			—			1.08x
EBITDA (g)	$	37,841			37,468			28,835			41,149			54,210


NOTES TO SELECTED FINANCIAL DATA

(a)		In March 2005, we approved a restructuring plan for our premedia services segment, which was designed to improve operating efficiencies and overall profitability. We recorded $1.5 million of costs under this plan in the fiscal year ended March 31, 2005 (“Fiscal Year 2005”). We recorded $(0.1) million and $(0.2) million of costs for this plan in the fiscal year ended March 31, 2007 (“Fiscal Year 2007”) and 2006 (“Fiscal Year 2006”), respectively.

		In March 2005, we approved a restructuring plan for our print segment, to reduce manufacturing costs and improve profitability. We recorded $3.1 million of costs under this plan in Fiscal Year 2005. We recorded $(0.5) million of costs for this plan in Fiscal Year 2006.

		In February 2005, we approved a restructuring plan for our print and premedia services segments, to reduce overhead costs and improve operating efficiency and profitability. We recorded $3.5 million of costs under this plan in Fiscal Year 2005. We recorded $(0.2) million of costs for this plan in Fiscal Year 2006.

		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 $5.3 million of costs under this plan in the fiscal year ended March 31, 2004 (“Fiscal Year 2004”). We recorded $(0.2) million and $(0.3) million of costs for this plan in Fiscal Year 2007 and Fiscal Year 2005, respectively.

		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 the fiscal year ended March 31, 2003 (“Fiscal Year 2003”), we approved a restructuring plan for our print and premedia services segments, which was designed to improve operating efficiency and profitability. We recorded $1.2 million of costs under this plan in Fiscal Year 2003. We recorded $(0.2) million of costs for this plan in Fiscal Year 2004.

		In January 2002, we approved a restructuring plan for our print and premedia services segments, which was designed to improve asset utilization, operating efficiency and profitability. We recorded $8.6 million of costs under this plan in the fiscal year ended March 31, 2002 (“Fiscal Year 2002”). We recorded an additional $(0.1) million, $0.5 million, $0.6 million and $0.4 million of costs for this plan in Fiscal Year 2007, Fiscal Year 2006, Fiscal Year 2005 and Fiscal Year 2004, respectively.

		In addition, we recorded $1.6 million, $0.4 million and $0.5 million of other charges in our print and premedia services divisions in Fiscal Year 2005, Fiscal Year 2004 and Fiscal Year 2003, respectively. See note 15 to our consolidated financial statements appearing elsewhere in this Report for further discussion of this restructuring activity.

(b)		As part of a refinancing transaction entered into on July 3, 2003, we recorded a loss related to the early extinguishment of debt of $2.8 million, net of zero taxes. This loss related to the write-off of deferred financing costs associated with our old bank credit agreement and our 12³/4% Senior Subordinated Notes Due 2005 (the “12³/4% Notes”), neither of which remain outstanding or in effect as of the date of this Report.

(c)		In the fourth quarter of the fiscal year ended March 31, 2006, we concluded that certain non-production information technology assets of the print segment were fully impaired as a result of our periodic assessment. This impairment resulted in a charge of $2.8 million. The impairment charge is classified within other, net in the consolidated statement of operations for the fiscal year ended March 31, 2006.

(d)		In Fiscal Year 2007, income tax benefit relates primarily to an adjustment recorded in the first quarter of $0.4 million to reflect the tax benefit associated with a change in estimate with respect to our income tax liability, net of tax expense related to taxable income in foreign jurisdictions. The valuation allowance increased by $5.8 million in Fiscal Year 2007 as a result of changes in the deferred tax items. This increase primarily includes an $8.6 million increase related to the tax effect of temporary differences generating deferred tax assets and a decrease of $2.8 million related to the tax effect of the decrease in the additional minimum pension liability, which is a component of other comprehensive income (loss).


		In Fiscal Year 2006, income tax benefit relates primarily to an adjustment recorded in the third quarter of $3.6 million to reflect the tax benefit associated with a change in estimate with respect to our income tax liability, net of tax expense related to taxable income in foreign jurisdictions. The valuation allowance increased by $7.6 million in Fiscal Year 2006 as a result of changes in the deferred tax items. This increase primarily includes a $6.6 million increase related to the tax effect of temporary differences generating deferred tax assets and an increase of $1.0 million related to the tax effect of the increase in the additional minimum pension liability, which is a component of other comprehensive income (loss).

		In Fiscal Year 2005, income tax benefit relates primarily to tax benefit from losses in foreign jurisdictions and to an adjustment recorded in the third quarter of $0.4 million to reflect the tax benefit associated with a change in estimate with respect to our income tax liability. The valuation allowance increased by $9.8 million in Fiscal Year 2005 as a result of changes in the deferred tax items. This increase included a $9.8 million increase related to the tax effect of temporary differences generating deferred tax assets, net of a decrease of $0.4 million related to the tax effect of the decrease in the additional minimum pension liability, which is a component of other comprehensive income (loss).

		In the second quarter of Fiscal Year 2004, the valuation allowance for deferred tax assets was increased by $12.8 million, resulting in a corresponding debit to deferred income tax expense. This adjustment reflected a change in circumstances which resulted in a judgment that, based on the provisions of Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes” (“SFAS 109”) that restrict our ability to consider forecasts of future income, a corresponding amount of deferred tax assets may not be realized. The change in circumstances arose from our assessment of the economic climate, particularly the continuance of competitive pricing pressures in our industry, and the expected increase in annual interest costs arising from the issuance of our 10% Notes in July 2003 that provided negative evidence about our ability to realize certain deferred tax assets. We will reverse our valuation allowance into income when and to the extent sufficient evidence arises to support the realization of the related deferred tax assets. The valuation allowance increased by $18.3 million in the fiscal year ended March 31, 2004 (“Fiscal Year 2004”) as a result of changes in the deferred tax items. This increase primarily included the $12.8 million increase discussed above and a $5.5 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 additional minimum pension liability, a component of other comprehensive income (loss). In the third quarter of Fiscal Year 2004, we recorded an adjustment of $2.2 million to reflect the tax benefit associated with a change in estimate with respect to our income tax liability.

		The valuation allowance increased by $3.4 million in the fiscal year ended March 31, 2003 (“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 additional minimum pension liability, which is a component of other comprehensive income (loss), partially offset by a decrease in other temporary differences generating deferred tax assets.

(e)		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 benefit. 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 Year 2003 have been reclassified and presented within discontinued operations. Sales attributable to Digiscope for Fiscal Year 2004 and Fiscal Year 2003 were $0.8 million and $3.2 million, respectively.

(f)		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 2007, 2006, 2005 and 2004 was $20.7 million, $19.1 million, $28.0 million and $16.7 million, respectively.

(g)		We have included EBITDA because we believe that investors regard EBITDA as a key measure of a leveraged company’s operating performance as it removes interest, taxes, depreciation and amortization from the operational results of our business. EBITDA is defined as earnings before net interest expense, income tax expense (benefit),


		depreciation and amortization. EBITDA is not a measure of financial performance under U.S. generally accepted accounting principles and should not be considered an alternative to net income (loss) (or any other measure of performance under U.S. generally accepted accounting principles) as a measure of performance or to cash flows from operating, investing or financing activities as an indicator of cash flows or as a measure of liquidity. Our calculation of EBITDA may be different from the calculations used by other companies and therefore comparability may be limited. Certain covenants in our debt agreements are based on, or include EBITDA, subject to certain adjustments. The following table provides a reconciliation of EBITDA to net loss:


	Fiscal Year Ended March 31,
	2007			2006			2005			2004			2003
	Restated			Restated			Restated			Restated			Restated
	(In thousands)
EBITDA	$	37,841			37,468			28,835			41,149			54,210
Depreciation and amortization		(18,630	)		(19,483	)		(23,051	)		(24,288	)		(24,451	)
Interest expense, net		(39,940	)		(37,071	)		(33,748	)		(34,032	)		(28,245	)
Income tax (expense) benefit		193			3,369			1,685			(11,441	)		(1,559	)

Net loss	$	(20,536	)		(15,717	)		(26,279	)		(28,612	)		(45	)

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


	Fiscal Year Ended March 31,
	2007			2006			2005		2004		2003
	Restated			Restated			Restated		Restated
	(In thousands)
Restructuring costs (benefit)	$	(412	)		(531	)		8,364		7,326		1,191
Other charges		—			—			1,668		372		531
Loss on early extinguishment of debt		—			—			—		2,794		—
Loss from discontinued operations		—			—			—		456		979
Impairment of assets		—			2,830			—		—		750

Total	$	(412	)		2,299			10,032		10,948		3,451


ITEM 7.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

The most important drivers of our results of operations include:

	•		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 18 facilities for customers at their offices, which enables us to develop strong and long-term relationships with them.

Our profitability has been negatively impacted over the past several years by significant competitive pricing pressures due largely to continuing excess industry capacity, the prevailing conditions within the retail markets and the aggressive pricing strategies of certain competitors. We continue to be committed, however, to providing comprehensive solutions at competitive prices. We believe we are one of the lowest cost producers of retail advertising inserts and we intend to continue our disciplined focus on overall cost reduction through ongoing productivity and efficiency improvements at our print facilities. In addition, we have been successful in reducing our cost structure in our premedia services business and we expect continued improvements through the implementation and management of disciplined cost containment programs and through the application of certain digital premedia production methodologies and technological leadership.

We are one of the leading printers of retail advertising inserts in the United States. In the fiscal year ended March 31, 2007 (“Fiscal Year 2007”), retail advertising inserts accounted for 82% of our total print segment sales and in the fiscal years ended March 31, 2006 (“Fiscal Year 2006”) and 2005 (“Fiscal Year 2005”) accounted for 81% and 83% of our total print segment sales, respectively. The focus and attention of our entire management team continues to be 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 items impacting our operating results discussed above, the cost of raw materials used in our print business, which are primarily paper and ink, also 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. Paper prices generally increased throughout Fiscal Years 2005 and 2006. During Fiscal Year 2007, paper prices generally decreased. 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 included in sales and changes in the levels of customer supplied paper.

A portion of our print and premedia services business is seasonal in nature, particularly those revenues that are derived from retail advertising inserts. Generally, our sales from retail advertising inserts are highest during the following advertising periods: the Spring advertising season from March to May, the Back-to-School advertising season from July to August, and the Thanksgiving/Christmas advertising season from October to December. Sales of Sunday newspaper comics are not subject to significant seasonal fluctuations. Our strategy includes, and will continue to include, the mitigation of the seasonality of our print business by increasing our sales to customers whose own sales are less seasonal, such as food and drug companies, which utilize retail advertising inserts more frequently.

Restatement of Financial Statements

On August 20, 2007, we, in consultation with our Board of Directors, announced through a Form 8-K filing with the Securities and Exchange Commission (“SEC”), that as a result of certain accounting matters, the financial statements for the fiscal years ended March 31, 2007, 2006 and 2005 would be restated. We have completed our review and have restated the audited financial statements for those periods.

The revisions associated with this restatement, the cumulative impact of which is an increase to accumulated deficit previously reported at March 31, 2007 of $1,314,000, relate principally to a correction in the accounting treatment of certain deferred financing costs (a cumulative impact to increase previously reported accumulated deficit at March 31, 2007 by $478,000) and an adjustment to our accrued vacation liability calculation (a cumulative impact to increase previously reported accumulated deficit at March 31, 2007 by $661,000). These two revisions, as well as certain other corrections of individually immaterial errors (a net cumulative impact to increase previously reported accumulated deficit at March 31, 2007 by $175,000), decreased our net loss by $473,000 in the fiscal year ended March 31, 2007, increased net loss by $1,140,000 and $612,000 in the fiscal years ended March 31, 2006 and 2005, respectively, and increased the accumulated deficit by $ 35,000 as of April 1, 2004.

We have historically capitalized costs associated with our quarterly and annual SEC filings including, without limitation, costs related to legal services, rating agency fees, EDGAR fees and printing services, as deferred financing costs within our consolidated balance sheet. These costs were amortized over future periods through interest expense within our consolidated statements of operations over the remaining term of the underlying debt instrument. We are required to file periodic reports with the SEC as a result of a covenant in the indenture governing the 10% Notes. Due to this covenant requirement (and a covenant requirement to maintain the effectiveness of a registration statement previously filed by us with the SEC), these costs were previously deemed by us to relate specifically to the ongoing indenture requirement, and therefore, provided future economic benefit.

During August 2007, we were advised by Ernst & Young LLP that based on applicable guidance, such costs should be not be capitalized and expensed over future periods, but should be treated as period costs and expensed through the selling, general and administrative expense line item of our consolidated statements of operations. We have reviewed the applicable guidance and determined to conform to this approach. The revisions for the treatment of deferred financing costs decreased net loss by $7,000 in the fiscal year ended March 31, 2007, increased net loss by $115,000 and $128,000 in the fiscal years ended March 31, 2006 and 2005, respectively, and increased the accumulated deficit by $242,000 as of April 1, 2004.

The second primary adjustment related to a revision of our accrued vacation liability calculation, due to the correction of certain underlying supporting data. The correction of this liability increased net loss by $257,000 and $404,000 in the fiscal years ended March 31, 2007 and 2006, respectively.

Accordingly, we have amended our Annual Report on Form 10-K for the fiscal year ended March 31, 2007, as originally filed on June 27, 2007, and have restated the financial statements included within for the fiscal years ended March 31, 2007, 2006 and 2005. (See note 2 to the consolidated financial statements for schedules reconciling the restatement related changes for the fiscal years ended March 31, 2007, 2006 and 2005.)

Recent Performance

During Fiscal Year 2007, we continued to operate in a very challenging and competitive market environment in both our print and premedia services segments. Our print production volume increased 1.3% from Fiscal Year 2006 levels, however, overall print profitability was negatively impacted in Fiscal Year 2007 as a result of:

	•		the continuance of competitive pricing due to a modest amount of excess industry capacity;

	•		incremental costs associated with the start-up of a replacement press in one of our print facilities;

	•		incremental costs associated with the start-up of a newspaper service facility; and

	•		increased foreign exchange losses.

Premedia profitability was negatively impacted in Fiscal Year 2007 as a result of:

	•		reduced volume;

	•		the impact of competitive pricing in this segment; and

	•		reductions in certain service requirements related to one major customer.

In addition, other operations’ expenses were higher as a result of increased corporate expenses due to incremental legal costs associated with two lawsuits in which the Company is the plaintiff.

We anticipate that in the fiscal year ending March 31, 2008 (“Fiscal Year 2008”), we will continue to operate in a very competitive market environment in both our print and premedia services segments. We also expect to make continued progress in reducing our overall cost structure in both segments through the ongoing implementation and management of disciplined cost containment programs.

In September 2006, we improved our overall liquidity position through the formation of American Color Graphics Finance, LLC (“Graphics Finance”), a wholly-owned subsidiary of Graphics, and the execution of a $35 million revolving trade receivables facility (the “Receivables Facility”) between Graphics Finance and Banc of America Securities, LLC, as Sole Lead Arranger and Sole Book Manager, and Bank of America, N.A., as Administrative Agent, Collateral Agent and Lender, and certain other lenders. See “—Liquidity and Capital Resources” and “Risk Factors”.

On August 31, 2007, our 2005 Credit Agreement and Receivables Facility were amended to, among other things, provide that compliance with the first lien coverage ratio covenants in each thereof as of September 30, 2007, will not be measured or determined for any purpose until November 29, 2007 (including, without limitation, for the purpose of determining our entitlement to make additional borrowings under either such facility on or prior to such date). The lenders under both facilities also waived our noncompliance with certain reporting requirements under such facilities subsequent to March 31, 2007. One such waiver related to our failure to deliver our restated consolidated financial statements for the fiscal years ended March 31, 2007, 2006 and 2005 accompanied by a report or opinion of our independent certified public accountants that was not subject to any “going concern” qualification. See the Report of Independent Registered Public Accounting Firm, which contains a “going concern” qualification, accompanying our restated consolidated financial statements included in this Report. The lenders under both facilities waived such noncompliance with respect to the delivery of such Report of Independent Registered Public Accounting Firm until November 29, 2007.

See “—Liquidity and Capital Resources” for updated information about our liquidity and capital resources.

Our Restructuring Results and Cost Reduction Initiatives

We have been successful in implementing significant cost reductions and improved operating efficiencies over the past several years through both specific restructuring programs as well as the implementation of ongoing productivity and income improvement initiatives at our facilities. Since January 2002, our specific restructuring programs have resulted in the elimination of approximately 637 positions within our Company and included the closure of two print facilities and two premedia services facilities, the downsizing of one print facility and one premedia services facility and the consolidation of two premedia services facilities.

With respect to restructuring activity in the last three fiscal years, in the quarter ended March 31, 2005, we approved three restructuring programs which resulted in:

	•		reduced headcount in the manufacturing and the selling and administrative areas;

	•		the closure and sale of the Pittsburg, California print facility; and

	•		the consolidation of our two premedia services facilities in New York, New York.

These combined programs resulted in the elimination of 206 positions within our Company. As a result of these actions, we recognized restructuring expense of $8.4 million and other charges of $1.6 million in Fiscal Year 2005.

In Fiscal Years 2007 and 2006, we recognized net reversals of excess restructuring costs accrued in prior periods of $0.4 million and $0.5 million, respectively. At March 31, 2007, we had accrued restructuring costs of approximately $2.1 million recorded in our consolidated balance sheet. We expect to make cash payments of approximately $1.1 million of the accrued restructuring costs during Fiscal Year 2008, $0.3 million during the fiscal year ending March 31, 2009 (“Fiscal Year 2009”), $0.4 million in the fiscal year ending March 31, 2010 (“Fiscal Year 2010”) and $0.3 million in the fiscal year ending March 31, 2011 (“Fiscal Year 2011”) associated with these programs. See note 15 to our consolidated financial statements appearing elsewhere in this Report.

The following table summarizes the expense (income) recorded relating to the restructuring and other charges incurred in association with our restructuring plans by segment for the three most recent fiscal years (in thousands):


	Fiscal Year			Fiscal Year			Fiscal Year			Three Year
	2005			2006			2007			Total
	(Restated)			(Restated)			(Restated)			(Restated)
*Fiscal Year 2002 Plan Costs*

Restructuring costs:
Severance & other employee costs – Print	$	(29	)		—			—			(29	)
Lease termination costs – Print	670			482			(107		)	1,045
Total restructuring costs		641			482			(107	)		1,016

*Fiscal Year 2003 Plan Costs*

Restructuring costs:
Severance & other employee costs – Premedia		(5	)		—			—			(5	)
Other costs – Premedia		(11	)		—			—			(11	)

Total restructuring benefit		(16	)		—			—			(16	)

*July 2003 Plan Costs*

Restructuring costs:
Severance & other employee costs – Print		12			—			11			23
Severance & other employee costs – Premedia		(12	)		—			—			(12	)

		—			—			11			11

*January 2004 Plan Costs*

Restructuring costs:
Severance & other employee costs – Print		(234	)		(117	)		—			(351	)
Severance & other employee costs – Premedia		(107	)		(66	)		(223	)		(396	)
Lease termination costs – Print		(3	)		—			—			(3	)
Other costs – Print		15			194			(15	)		194
Other costs – Premedia		—			—			—			—

Total restructuring benefit		(329	)		11			(238	)		(556	)

*Fiscal Year 2005 Plant and SG&A Reduction Plan Costs*

Restructuring costs:
Severance & other employee costs – Print		3,044			(263	)		(39	)		2,742
Severance & other employee costs – Premedia		458			—			(3	)		455
Other costs – Print		1			19			6			26
Other costs – Premedia		—			3			—			3

Total restructuring costs (benefit)		3,503			(241	)		(36	)		3,226

The following table summarizes our historical results of continuing operations for Fiscal Years 2007, 2006 and 2005.


	Fiscal Year Ended March 31,
	2007			2006			2005
	(Restated)			(Restated)			(Restated)
	(Dollars in thousands)
Sales
Print	$	396,535			380,648			393,922
Premedia Services		48,491			53,841			55,591

Total	$	445,026			434,489			449,513


Gross Profit
Print	$	35,937			33,788			29,968
Premedia Services		12,425			14,924			15,186
Other		10			—			4

Total	$	48,372			48,712			45,158


Gross Margin
Print		9.1	%		8.9	%		7.6	%
Premedia Services		25.6	%		27.7	%		27.3	%
Total		10.9	%		11.2	%		10.1	%

EBITDA
Print (a)	$	34,116			30,531			22,579
Premedia Services (a)		8,853			10,938			9,942
Other (b)	(5,128		)	(4,001		)	(3,686		)
Total	$	37,841			37,468			28,835


EBITDA Margin
Print		8.6	%		8.0	%		5.7	%
Premedia Services		18.3	%		20.3	%		17.9	%
Total		8.5	%		8.6	%		6.4	%


(a)		In Fiscal Year 2007, EBITDA for the print and premedia services segments includes the impact of restructuring benefit of ($0.1) million and ($0.3) million, respectively. EBITDA for the print and premedia services segments in Fiscal Year 2006 includes the impact of restructuring benefit of ($0.2) million and ($0.3) million, respectively, and for the print segment also includes a non-cash asset impairment charge of $2.8 million. EBITDA for the print and premedia services segments in Fiscal Year 2005 includes the impact of restructuring costs and other charges of $7.8 million and $2.2 million, respectively. For additional information about our restructuring plan, see “ — Our Restructuring Results and Cost Reduction Initiatives” above.

(b)		Other operations include corporate general and administrative expenses. In addition, in Fiscal Year 2007, EBITDA for other operations includes the impact of incremental legal expenses associated with two lawsuits in which the Company is the plaintiff.

EBITDA is presented and discussed because management believes that investors regard EBITDA as a key measure of a leveraged company’s operating performance as it removes interest, taxes, depreciation and amortization from the operational results of our business. “EBITDA” is defined as earnings before net interest expense, income tax expense (benefit), depreciation and amortization. “EBITDA Margin” is defined as EBITDA as a percentage of net sales. EBITDA is not a measure of financial performance under U.S. generally accepted accounting principles and should not be considered an alternative to net income (loss) (or any other measure of performance under U.S. generally accepted accounting principles) as a measure of performance or to cash flows from operating, investing or financing activities as an indicator of cash flows or as a measure of liquidity. Certain covenants in the indenture governing the 10% Notes, the 2005 Credit Agreement and the Receivables Facility are based on, or include EBITDA, subject to certain adjustments. The following table provides reconciliation (in thousands) of EBITDA to net income (loss):


				Premedia
	Print			Services			Other			Total
Fiscal Year 2007 (Restated)
EBITDA	$	34,116			8,853			(5,128	)		37,841
Depreciation and amortization		(16,563	)		(2,067	)		—			(18,630	)
Interest expense, net		—			—			(39,940	)		(39,940	)
Income tax benefit		—			—			193			193

Net income (loss)	$	17,553			6,786			(44,875	)		(20,536	)


Fiscal Year 2006 (Restated)
EBITDA	$	30,531		10,938		(4,001	)	37,468
Depreciation and amortization		(16,767	)	(2,716	)	—		(19,483	)
Interest expense, net				—		(37,071	)	(37,071	)
Income tax benefit		—		—		3,369		3,369

Net income (loss)	$	13,764		8,222		(37,703	)	(15,717	)


Fiscal Year 2005 (Restated)
EBITDA	$	22,579		9,942		(3,686	)	28,835
Depreciation and amortization		(19,867	)	(3,184	)	—		(23,051	)
Interest expense, net		—		—		(33,748	)	(33,748	)
Income tax benefit		—		—		1,685		1,685

Net income (loss)	$	2,712		6,758		(35,749	)	(26,279	)

Historical Results of Operations

Fiscal Year 2007 vs. Fiscal Year 2006

Total sales increased 2.4% to $445.0 million in Fiscal Year 2007 from $434.5 million in Fiscal Year 2006. This increase reflected an increase in print sales of $15.8 million, or 4.2%, offset in part by a decrease in premedia services’ sales of $5.3 million, or 9.9%. Total gross profit decreased to $48.4 million, or 10.9% of sales, in Fiscal Year 2007 from $48.7 million, or 11.2% of sales, in Fiscal Year 2006. EBITDA increased to $37.8 million, or 8.5% of sales, in Fiscal Year 2007 from $37.5 million, or 8.6% of sales, in Fiscal Year 2006. See the discussion of these changes by segment below.

Print

Sales. Print sales increased $15.8 million to $396.5 million in Fiscal Year 2007 from $380.7 million in Fiscal Year 2006. The increase in Fiscal Year 2007 primarily includes an increase in print production volume of 1.3%, certain changes in customer and product mix and a decrease in the level of customer supplied paper. These increases were offset in part by the continued impact of competitive industry pricing. See “ — Value Added Revenue and Print Impressions for the Print Segment” below.

Gross Profit. Print gross profit increased $2.2 million to $36.0 million in Fiscal Year 2007 from $33.8 million in Fiscal Year 2006. Print gross margin increased to 9.1% in Fiscal Year 2007 from 8.9% in Fiscal Year 2006. The increase in gross profit includes the impact of increased print production volume, certain changes in customer and product mix and net benefits from various cost reduction programs at our facilities. These increases were offset in part by the continuing impact of competitive pricing pressures, increased foreign exchange losses and incremental costs associated with the start-up of a replacement press and a newspaper service facility. Our gross margin may not be comparable from period to period because of a) the impact of changes in paper prices included in sales and b) changes in the level of customer supplied paper.

Selling, General and Administrative Expenses. Print selling, general and administrative expenses increased $1.5 million to $18.3 million, or 4.6% of print sales, in Fiscal Year 2007, from $16.8 million, or 4.4% of print sales, in Fiscal Year 2006. This change primarily includes increases in sales related compensation expense. These increases were offset in part by the impact of the change in our estimates related to the allowance for doubtful accounts.

Restructuring Costs (Benefit) and Other Charges. Restructuring costs (benefit) and other charges was a benefit of $(0.1) million in Fiscal Year 2007 versus a benefit of $(0.2) million in Fiscal Year 2006. See “ — Our Restructuring Results and Cost Reduction Initiatives” above.

Other Expense (Income). Other expense (income) decreased $3.3 million to expense of $0.2 million in Fiscal Year 2007 from expense of $3.5 million in Fiscal Year 2006. The Fiscal Year 2006 expense included $2.8 million of non-cash asset impairment charges related to certain non-production information technology assets as a result of our periodic assessment in accordance with Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”).

EBITDA. As a result of the above factors and excluding the impact of depreciation and amortization, EBITDA for the print business increased $3.6 million to $34.1 million in Fiscal Year 2007 from $30.5 million in Fiscal Year 2006.

Premedia Services

Sales. Premedia services’ sales decreased $5.3 million to $48.5 million in Fiscal Year 2007 from $53.8 million in Fiscal Year 2006. The decrease in Fiscal Year 2007 includes a decrease in premedia production volume, the impact of continued competitive pricing pressures in this segment and reductions in certain service requirements related to one major customer.

Gross Profit. Premedia services’ gross profit decreased $2.5 million to $12.4 million in Fiscal Year 2007 from $14.9 million in Fiscal Year 2006. The decrease in gross profit includes the impact of reduced sales, discussed above, offset in part by reduced manufacturing costs related to benefits from various cost containment initiatives at our premedia facilities. Premedia services’ gross margin decreased to 25.6% in Fiscal Year 2007 from 27.7% in Fiscal Year 2006.

Selling, General and Administrative Expenses. Premedia services’ selling, general and administrative expenses decreased $0.9 million to $5.8 million, or 12.0% of premedia services’ sales in Fiscal Year 2007, from $6.7 million, or 12.5% of premedia services’ sales in Fiscal Year 2006. This decrease primarily includes the impact of decreased employee related costs in the administrative areas and reduced amortization expense.

Restructuring Costs (Benefit) and Other Charges. Restructuring costs (benefit) and other charges remained unchanged at a benefit of ($0.3) million in both Fiscal Year 2007 and 2006. See ” — Our Restructuring Results and Cost Reduction Initiatives” above.

Other Expense (Income). Other expense (income) decreased to expense of $0.1 million in Fiscal Year 2007 from expense of $0.3 million in Fiscal Year 2006. This decrease was primarily due to net losses on the sale of fixed assets in Fiscal Year 2006.

EBITDA. As a result of the above factors and excluding the impact of depreciation and amortization, premedia services’ EBITDA decreased $2.0 million to $8.9 million in Fiscal Year 2007 from $10.9 million in Fiscal Year 2006.

Other Operations

Other operations consist primarily of corporate general and administrative expenses. In Fiscal Year 2007, EBITDA for other operations increased to a loss of $5.1 million from a loss of $4.0 million in Fiscal Year 2006. This increased loss is largely related to incremental legal expenses associated with two lawsuits in which the Company is the plaintiff.

Interest Expense

In Fiscal Year 2007, interest expense increased to $40.0 million from $37.2 million in Fiscal Year 2006. The increase in Fiscal Year 2007 is the result of both higher levels of indebtedness and increased borrowing costs. See note 7 to our consolidated financial statements appearing elsewhere in this Report.

Income Taxes

In Fiscal Year 2007, tax benefit decreased to a benefit of $0.2 million from a benefit of $3.4 million in Fiscal Year 2006. This decrease was primarily due to a Fiscal Year 2006 adjustment of $3.6 million recorded to reflect a change in estimate with respect to our income tax liability net of tax expense in foreign jurisdictions, partially offset by a Fiscal Year 2007 adjustment of $0.4 million recorded to reflect a change in estimate with respect to our income tax liability net of Fiscal Year 2007 tax expense in foreign jurisdictions.

The adjustments arose from events that changed the Company’s probability assessment (as discussed in Statement of Financial Accounting Standards No. 5, “Accounting for Contingencies”) regarding the likelihood that certain contingent income tax items would become actual future liabilities.

Net Loss

As a result of the factors discussed above, our net loss increased to $20.5 million in Fiscal Year 2007 from a net loss of $15.7 million in Fiscal Year 2006.

Additional Minimum Pension Liability

In compliance with Statement of Financial Accounting Standards No. 87, “Employers’ Accounting for Pensions” (“SFAS 87”), we decreased our additional minimum pension liability to approximately $14.4 million in Fiscal Year 2007 from approximately $21.6 million in Fiscal Year 2006. This decrease includes the net impact of plan activity including contributions to our plans, benefit payments, investment market returns, plan expenses and an increase in our discount rate from 6.0% to 6.25%. The recording of the reduction of this additional minimum pension liability had no impact on our consolidated statement of operations for Fiscal Year 2007, but was recorded as a component of other comprehensive income (loss) in our consolidated statement of stockholders’ deficit at March 31, 2007.

Fiscal Year 2006 vs. Fiscal Year 2005

Total sales decreased 3.3% to $434.5 million in Fiscal Year 2006 from $449.5 million in Fiscal Year 2005. This decrease reflected a decrease in print sales of $13.2 million, or 3.4%, and a decrease in premedia services’ sales of $1.8 million, or 3.1%. Total gross profit increased to $48.7 million, or 11.2% of sales, in Fiscal Year 2006 from $45.2 million, or 10.1% of sales, in Fiscal Year 2005. EBITDA increased to $37.5 million, or 8.6% of sales, in Fiscal Year 2006 from $28.8 million, or 6.4% of sales, in Fiscal Year 2005. See the discussion of these changes by segment below.

Print

Sales. Print sales decreased $13.2 million to $380.7 million in Fiscal Year 2006 from $393.9 million in Fiscal Year 2005. The decrease in Fiscal Year 2006 includes the continued impact of competitive industry pricing, an increase in the level of customer supplied paper and a slight decrease in print production volume of approximately 1%. These decreases were offset in part by the impact of increased paper prices. See “ — Value Added Revenue and Print Impressions for the Print Segment” below.

Gross Profit. Print gross profit increased $3.8 million to $33.8 million in Fiscal Year 2006 from $30.0 million in Fiscal Year 2005. Print gross margin increased to 8.9% in Fiscal Year 2006 from 7.6% in Fiscal Year 2005. The increase in gross profit includes net benefits from productivity improvements and various cost reduction programs at our facilities. These increases were offset in part by the impact of competitive pricing pressures and increased utility costs. The increase in gross margin includes these items and the impact of increases in the level of customer supplied paper, offset in part by increased paper prices reflected in sales. Our gross margin may not be comparable from period to period because of a) the impact of changes in paper prices included in sales and b) changes in the level of customer supplied paper.

Selling, General and Administrative Expenses. Print selling, general and administrative expenses decreased $2.5 million to $16.8 million, or 4.4% of print sales, in Fiscal Year 2006, from $19.3 million, or 4.9% of print sales, in Fiscal Year 2005. This decrease includes net benefits associated with numerous specific cost containment initiatives in this area.

Restructuring Costs (Benefit) and Other Charges. Restructuring costs (benefit) and other charges decreased $8.0 million to $(0.2) million in Fiscal Year 2006 from $7.8 million in Fiscal Year 2005. See “ — Our Restructuring Results and Cost Reduction Initiatives” above.

Other Expense (Income). Other expense (income) increased $3.5 million to expense of $3.5 million in Fiscal Year 2006 from expense of less than $0.1 million in Fiscal Year 2005. This increase included $2.8 million of non-cash asset impairment charges related to certain non-production information technology assets as a result of our periodic assessment in accordance with SFAS 144.

EBITDA. As a result of the above factors and excluding the impact of depreciation and amortization, EBITDA for the print business increased $7.9 million to $30.5 million in Fiscal Year 2006 from $22.6 million in Fiscal Year 2005.

Premedia Services

Sales. Premedia services’ sales decreased $1.8 million to $53.8 million in Fiscal Year 2006 from $55.6 million in Fiscal Year 2005. The decrease in Fiscal Year 2006 includes the impact of continued competitive pricing pressures in this segment and reductions in certain service requirements related to one major customer. These decreases were offset in part by increased premedia production volume.

Gross Profit. Premedia services’ gross profit decreased $0.3 million to $14.9 million in Fiscal Year 2006 from $15.2 million in Fiscal Year 2005. The decrease in gross profit includes the impact of reduced sales, discussed above, offset in part by reduced manufacturing costs as a result of various cost containment initiatives. Premedia services’ gross margin increased slightly to 27.7% in Fiscal Year 2006 from 27.3% in Fiscal Year 2005.

Selling, General and Administrative Expenses. Premedia services’ selling, general and administrative expenses increased $0.5 million to $6.7 million, or 12.5% of premedia services’ sales in Fiscal Year 2006, from $6.2 million, or 11.2% of premedia services’ sales in Fiscal Year 2005. This increase includes the impact of increased employee related costs in the administrative areas, offset in part by reductions in selling expenses.

Restructuring Costs (Benefit) and Other Charges. Restructuring costs (benefit) and other charges decreased $2.5 million to ($0.3) million in Fiscal Year 2006 from $2.2 million in Fiscal Year 2005. See “ — Our Restructuring Results and Cost Reduction Initiatives” above.

Other Expense (Income). Other expense (income) increased to expense of $0.3 million in Fiscal Year 2006 from income of less than $0.1 million in Fiscal Year 2005. This increase was primarily due to net losses on the sale of fixed assets.

EBITDA. As a result of the above factors and excluding the impact of depreciation and amortization, premedia services’ EBITDA increased $1.0 million to $10.9 million in Fiscal Year 2006 from $9.9 million in Fiscal Year 2005.

Other Operations

Other operations consist primarily of corporate general and administrative expenses. In Fiscal Year 2006, EBITDA for other operations increased to a loss of $4.0 million from a loss of $3.7 million in Fiscal Year 2005. This change includes the impact of increases in certain employee related expenses during Fiscal Year 2006.

Interest Expense

In Fiscal Year 2006, interest expense increased to $37.2 million from $33.8 million in Fiscal Year 2005. The increase in Fiscal Year 2006 is the result of both higher levels of indebtedness and increased borrowing costs. See note 7 to our consolidated financial statements appearing elsewhere in this Report.

Income Taxes

In Fiscal Year 2006, tax benefit improved to a benefit of $3.4 million from benefit of $1.7 million in Fiscal Year 2005. This increase was primarily due to a Fiscal Year 2006 adjustment of $3.6 million recorded to reflect a change in estimate with respect to our income tax liability, net of tax expense in foreign jurisdictions. The Fiscal Year 2005 benefit primarily reflects the tax benefit from losses in foreign jurisdictions and a benefit of $0.4 million relating to a change in estimate with respect to our income tax liability. The change in estimate adjustments arose from events that changed our probability assessment (as discussed in Statement of Financial Accounting Standards No. 5, “Accounting for Contingencies”) regarding the likelihood that certain contingent income tax items would become actual future liabilities.

Net Loss

As a result of the factors discussed above, our net loss improved to $15.7 million in Fiscal Year 2006 from a net loss of $26.3 million in Fiscal Year 2005. Included in the Fiscal Year 2006 and 2005 net losses were restructuring costs (benefit) and other charges of ($0.5) million and $10.0 million, respectively. In addition, the Fiscal Year 2006 net loss includes a $2.8 million non-cash asset impairment charge.

Additional Minimum Pension Liability

In compliance with Statement of Financial Accounting Standards No. 87, “Employers’ Accounting for Pensions” (“SFAS 87”), we increased our additional minimum pension liability to approximately $21.6 million in Fiscal Year 2006 from approximately $19.2 million in Fiscal Year 2005. This increase includes the net impact of plan activity including contributions to our plans, benefit payments, investment market returns, plan expenses and a reduction in our discount rate from 6.25% to 6.0%. The recording of the increase in this additional minimum pension liability had no impact on our consolidated statement of operations for Fiscal Year 2006, but was recorded as a component of other comprehensive income (loss) in our consolidated statement of stockholders’ deficit at March 31, 2006.

Liquidity and Capital Resources

* * *

Overview of Liquidity and Capital Resources

Our primary sources of liquidity are cash provided by operating activities and borrowings under the 2005 Revolving Credit Facility (as defined below under “—May 2005 Refinancing”) and the Receivables Facility (as defined below under “—September 2006 Revolving Trade Receivables Facility”). At March 31, 2007, we had additional borrowing capacity of $30.7 million under our two credit facilities as follows:

	•		$5.9 million under the 2005 Revolving Credit Facility; and

	•		$24.8 million under the Receivables Facility, including $1.1 million based on receivables purchased from Graphics at March 31, 2007 and an additional $23.7 million if Graphics Finance had purchased from Graphics all other eligible receivables at March 31, 2007.

Our cash-on-hand of approximately $2.9 million is presented net of outstanding checks within trade accounts payable at March 31, 2007. Accordingly, cash is presented at a balance of $0 in the March 31, 2007 consolidated balance sheet.

At March 31, 2007, we had total indebtedness of $352.1 million, which consisted of borrowings under the 2005 Term Loan Facility (as defined below under “—May 2005 Refinancing”) of $35.0 million, borrowings under the 2005 Revolving Credit Facility of $26.9 million, borrowings under the Receivables Facility of $4.7 million, capital lease obligations of $5.5 million, and $280 million of our 10% Notes. In addition, we had letters of credit outstanding under the 2005 Revolving Credit Facility of $22.2 million. The estimated fair value of our 10% Notes at March 31, 2007 was $219.8 million, or $60.2 million less than the carrying value. We have no off-balance sheet financial instruments other than operating leases.

At March 31, 2007, and August 31, 2007, we were in compliance with the covenant requirements set forth in the 2005 Credit Agreement and the Receivables Facility, as amended, and the 10% Note indenture. We were not in compliance with certain reporting requirements under our 2005 Credit Agreement and Receivables Facility subsequent to March 31, 2007. On August 31, 2007, the lenders under both facilities waived such noncompliance. One such waiver related to our failure to deliver our restated consolidated financial statements for the fiscal years ended March 31, 2007, 2006 and 2005 accompanied by a report and opinion of our independent certified public accountants that was not subject to any “going concern” qualification. See the Report of Independent Registered Public Accounting Firm, which contains a “going concern” qualification, accompanying our restated consolidated financial statements included in this Report. The lenders under both facilities waived such noncompliance with respect to the delivery of such Report of Independent Registered Public Accounting Firm until November 29, 2007.

During the quarter ended June 30, 2005, we used proceeds from the 2005 Term Loan Facility (as defined below under “—May 2005 Refinancing”) to repay borrowings outstanding under the Old Revolving Credit Facility (as defined below under “—May 2005 Refinancing”), of which the balance was $16.0 million as of March 31, 2005, and settle certain other obligations.

During the Fiscal Year 2007, we used net borrowings from the 2005 Revolving Credit Facility of $26.9 million, net borrowings from the Receivables Facility of $4.7 million and $0.1 million in proceeds from the sale of fixed assets primarily to fund the following:

	•		$12.6 million of operating activities (see our Consolidated Statements of Cash Flows appearing elsewhere in this Report);

	•		$12.7 million in cash capital expenditures; and

	•		$6.3 million to service other indebtedness (including repayment of capital lease obligations of $3.8 million and payment of deferred financing costs of $2.5 million).

Scheduled repayments of existing capital lease obligations during Fiscal Year 2008 are approximately $3.4 million.

Interest on our 10% Notes is payable semiannually in cash on each June 15 and December 15.

A significant portion of Graphics’ long-term obligations, including indebtedness under the 2005 Credit Agreement, and the 10% Notes, has been fully and unconditionally guaranteed by Holdings. Holdings is subject to certain restrictions under its guarantee of indebtedness under the 2005 Credit Agreement, including, among other things, restrictions on mergers, acquisitions, incurrence of additional debt and payment of cash dividends.

We anticipate that our primary needs for liquidity will be to conduct our business, meet debt service requirements, including our required interest payment on the 10% Notes on December 15, 2007, and make capital expenditures. We are continually working to improve our liquidity position.

We believe, based on our management’s current forecasts and our current capital structure (and without giving effect to the proposed Vertis Merger), we will have sufficient liquidity to meet our requirements through November 29, 2007. If the Vertis Merger closes on or prior to such date, we will thereupon become a wholly-owned subsidiary of Vertis.

On August 31, 2007, our 2005 Credit Agreement and Receivables Facility were amended to, among other things, provide that compliance with the first lien coverage ratio covenants in each thereof as of September 30, 2007, will not be measured or determined for any purpose until November 29, 2007 (including, without limitation, for the purpose of determining our entitlement to make additional borrowings under either such facility on or prior to such date). We do not believe that it is probable that we will be in compliance with our first lien coverage ratio covenants under our 2005 Credit Agreement and Receivables Facility at or after November 29, 2007. The lenders under both facilities also waived our noncompliance with certain reporting requirements under such facilities subsequent to March 31, 2007. One such waiver related to our failure to deliver our restated consolidated financial statements for the fiscal years ended March 31, 2007, 2006 and 2005 accompanied by a report or opinion of our independent certified public accountants that was not subject to any “going concern” qualification. See the Report of Independent Registered Public Accounting Firm, which contains a “going concern” qualification, accompanying our restated consolidated financial statements included in this Report. The lenders under both facilities waived such noncompliance with respect to the delivery of such Report of Independent Registered Public Accounting Firm until November 29, 2007.

In the event the merger agreement for the Vertis Merger is not entered into (or the Vertis Merger is not consummated by November 29, 2007), based on our management’s current forecasts and our current capital structure, in order for us to have sufficient liquidity to meet our requirements for liquidity after November 29, 2007, including our next required interest payment on the 10% Notes, we would have to take one or more actions to improve our liquidity or modify our requirements for liquidity, which could include, without limitation, seeking waivers or amendments from the requisite lenders under our 2005 Credit Agreement or our Receivables Facility or the requisite holders of our 10% Notes, or all three thereof, under the documentation therefor, refinancing one or both of our 2005 Credit Agreement or Receivables Facility, incurring additional indebtedness above currently permitted levels (if the requisite lenders under our bank credit facilities and the requisite holders of our 10% Notes permit it), seeking to exchange some or all of our 10% Notes for other securities of the Company, selling the entire Company to another party or disposing of material assets or operations, reducing or delaying capital expenditure or otherwise reducing our expenses, or taking other material actions that could have a material adverse effect on us.

If our business does not generate profitability and cash from operations in line with our management’s current forecast for the period through November 29, 2007 (and the proposed Vertis Merger has not theretofore been consummated), we would be required to take one or more of such actions sooner than November 29, 2007. We can provide no assurances that any such action could be successfully accomplished or as to the timing or terms thereof.

Based on our management’s current forecasts and our current capital structure (and without giving effect to the proposed Vertis Merger or any other actions described above that we may take), we cannot provide any assurance that we will be able to comply with the first lien coverage ratio covenants in the 2005 Credit Agreement and the Receivables Facility after November 29, 2007. Accordingly, pursuant to Emerging Issues Task Force Issue 86-30 “Classification of Obligations When a Violation is Waived by the Creditor” (“EITF 86-30”) and Statement of Financial Accounting Standards No. 78, “Classification of Obligations That Are Callable by the Creditor-an amendment of ARB No. 43, Chapter 3A (“SFAS 78”), we have classified all amounts outstanding under the 2005 Credit Agreement, the Receivables Facility, the 10% Notes, and

all our capital lease obligations as current liabilities in the accompanying March 31, 2007 consolidated balance sheet. No amounts under the 2005 Credit Agreement, Receivables Facility or 10% Notes or capital lease obligations were due but unpaid at March 31, 2007, or August 31, 2007.

May 2005 Refinancing

On May 5, 2005, we entered into an Amended and Restated Credit Agreement with Banc of America Securities, LLC, as Sole Lead Arranger and Sole Book Manager, and Bank of America, N.A., as Administrative Agent, and certain lenders (as amended, the “2005 Credit Agreement”), which resulted in the refinancing of our $70 million senior secured revolving credit facility (the “Old Revolving Credit Facility”), which would have matured on July 3, 2008, and significantly improved our liquidity position. The 2005 Credit Agreement is a $90 million senior secured facility comprised of:

	•		a $55 million revolving credit facility ($40 million of which may be used for letters of credit), maturing on December 15, 2009, which is not subject to a borrowing base limitation (the “2005 Revolving Credit Facility”); and

	•		a $35 million non-amortizing term loan facility, maturing on December 15, 2009 (the “2005 Term Loan Facility”).

Interest on borrowings under the 2005 Credit Agreement is floating, based upon existing market rates, at either (a) LIBOR plus a margin of 5.75% for loans at March 31, 2007, or (b) an alternate base rate (based upon the greater of the agent bank’s prime lending rate or the Federal Funds rate plus 0.5%) plus a margin of 4.75% for loans at March 31, 2007. Margin levels increase as the levels of receivables sold by Graphics to Graphics Finance meet certain thresholds under the Receivables Facility. In addition, Graphics is obligated to pay specified unused commitment, letter of credit and other customary fees.

Borrowings under the 2005 Term Loan Facility must be repaid in full on the facility’s maturity date of December 15, 2009. Graphics is also required to prepay the 2005 Term Loan Facility and the 2005 Revolving Credit Facility under certain circumstances with excess cash flows and proceeds from certain sales of assets, equity issuances and incurrences of indebtedness.

Borrowings under the 2005 Credit Agreement are secured by substantially all of Graphics’ assets. Receivables sold to Graphics Finance under the Receivables Facility are released from this lien at the time they are sold. In addition, Holdings has guaranteed all indebtedness under the 2005 Credit Agreement which guarantee is secured by a pledge of all of Graphics’ capital stock.

The 2005 Credit Agreement, as amended, requires satisfaction of:

	•		a first lien leverage ratio test; and

	•		a minimum total liquidity test.

	•		incur or guarantee additional debt;

	•		create or permit to exist certain liens;

	•		pledge assets or engage in sale-leaseback transactions;

	•		make capital expenditures, other investments or acquisitions;

	•		prepay, redeem, acquire for value, refund, refinance, or exchange certain debt (including the 10% Notes), subject to certain exceptions;

	•		repurchase or redeem equity interests;

	•		change the nature of our business;

	•		pay dividends or make other distributions;

	•		enter into transactions with affiliates;

	•		dispose of assets or enter into mergers or other business combinations; and

	•		place restrictions on dividends, distributions or transfers to us or Holdings from our subsidiaries.

September 2006 Revolving Trade Receivables Facility

On September 26, 2006, American Color Graphics Finance, LLC (“Graphics Finance”), a newly formed wholly-owned subsidiary of Graphics, entered into a $35 million revolving trade receivables facility (as amended, the “Receivables Facility”) with Banc of America Securities, LLC, as Sole Lead Arranger and Sole Book Manager, and Bank of America, N.A., as Administrative Agent, Collateral Agent and Lender, and certain other lenders. The Receivables Facility improved Graphics’ overall liquidity position.

The maximum borrowing availability under the Receivables Facility is $35 million. Availability at any time is limited to a borrowing base linked to 85% of the balances of eligible receivables less certain minimum excess availability requirements. Graphics expects that most of its receivables from U.S. customers will be eligible for inclusion in the borrowing base.

Borrowings under the Receivables Facility are secured by substantially all the assets of Graphics Finance, which consist primarily of any receivables sold by Graphics to Graphics Finance pursuant to a receivables contribution and sale agreement. Graphics services these receivables pursuant to a servicing agreement with Graphics Finance.

The Receivables Facility also requires Graphics, as servicer of the receivables sold by it to Graphics Finance to satisfy the same first lien leverage ratio test and minimum total liquidity test contained in the 2005 Credit Agreement.

In addition, the Receivables Facility contains other customary affirmative and negative covenants and events of default. It also contains other covenants customary for facilities of this type, including requirements related to credit and collection policies, deposits of collections and maintenance by each party of its separate corporate identity, including maintenance of separate records, books, assets and liabilities and disclosures about the transactions in the financial statements of Holdings and its consolidated subsidiaries. The Receivables Facility also requires delivery to the lenders of our annual consolidated financial statements accompanied by a report and opinion of our independent certified public accountants that is not subject to any “going concern” qualification. Failure to meet these covenants could lead to an acceleration of the obligations under the Receivables Facility, following which the lenders would have the right to sell the assets securing the Receivables Facility.

The Receivables Facility expires on December 15, 2009, when all borrowings thereunder become payable in full.

Interest on borrowings under the Receivables Facility is floating, based on existing market rates, at either (a) an adjusted LIBOR rate plus a margin of 4.25% at March 31, 2007 or (b) an alternate base rate (based upon the greater of the agent bank’s prime lending rate or the Federal Funds rate plus 0.5%) plus a margin of 3.25% at March 31, 2007. In addition, Graphics Finance is obligated to pay specified unused commitment and other customary fees.

At March 31, 2007, Graphics Finance had $0.2 million of cash deposits with Bank of America, which have been classified as Other current assets in our consolidated balance sheet, as such funds are pledged to secure payment of borrowings under the Receivables Facility and are therefore not available to meet our cash operating requirements.

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 the costs of paper, ink and subcontract services through to our customers. We have also included print impressions because we use this as an internal measure of production throughput. Although we believe print impressions to be indicative of overall production volume, total impressions may not be fully comparable period to period due to (1) differences in the type, performance and width of press equipment utilized and (2) product mix produced.


	Fiscal Year Ended March 31,
	2007		2006		2005
					(Restated)
Print segment VAR (in thousands)	$	191,366		181,364		188,569

Print impressions (in millions)		11,354		11,207		11,279

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


	Fiscal Year Ended March 31,
	2007			2006			2005
							(Restated)
	(Dollars in thousands)
Print segment sales	$	396,535			380,648			393,922
Paper, ink and subcontract services		(205,169	)		(199,284	)		(205,353	)

Print segment VAR	$	191,366			181,364			188,569

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. Paper prices generally increased throughout Fiscal Year 2005 and 2006. During Fiscal Year 2007, paper prices generally decreased. We expect that, as a result of our strong relationships with key suppliers, our material costs will remain competitive within the industry.

Seasonality

Some of our print and premedia services business is seasonal in nature, particularly those revenues that are derived from advertising inserts. Generally, our sales from advertising inserts are highest during the following advertising periods: the Spring advertising season from March to May, the Back-to-School advertising season from July to August, and the Thanksgiving/Christmas advertising season from October to December. Sales of Sunday newspaper comics are not subject to significant seasonal fluctuations. Our strategy includes, and will continue to include, the mitigation of the seasonality of our print business by increasing our sales to customers whose own sales are less seasonal, such as food and drug companies, which utilize advertising inserts more frequently.

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 that 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, both current and for 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, 2007, 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 December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 123 (revised 2004), “Share Based Payment” (“SFAS 123R”). SFAS 123R superseded Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”) and amended Statement of Financial Accounting Standards No. 95, “Statement of Cash Flows” (“SFAS 95”). Generally, the fair value approach in SFAS 123R is similar to the fair value approach described in SFAS 123. Upon adoption of SFAS 123R on April 1, 2006, we elected to continue using the Black-Scholes-Merton formula to estimate the fair value of stock options granted to employees. The adoption of SFAS 123R had no impact on compensation expense for Fiscal Year 2007 as no options were granted during this period. Additionally, all outstanding options on the date of adoption had a fair value of $0. SFAS 123R also requires that the benefits of tax deductions in excess of recognized compensation cost be reported as a financing cash flow rather than as an operating cash flow. We reported no such financing cash flows in Fiscal Year 2007. For Fiscal Years 2006 and 2005, we recognized no operating cash flows for such excess tax deductions.

In May 2005, the FASB issued Statement of Financial Accounting Standards No. 154, “Accounting Changes and Error Corrections” (“SFAS 154”), a replacement of Accounting Principles Board Opinion No. 20, “Accounting Changes” (“APB 20”) and Statement of Financial Accounting Standards No. 3, “Reporting Accounting Changes in Interim Financial Statements” (“SFAS 3”). SFAS 154 requires retrospective application to prior periods’ financial statements of a voluntary change in accounting principle unless it is impracticable. APB 20 previously required that most voluntary changes in accounting principle be recognized by including in net income of the period of the change the cumulative effect of changing to the new accounting principle. The adoption of SFAS 154 as of April 1, 2006 has had no impact on the consolidated financial statements as a whole.

In July 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”), to clarify the accounting for uncertainty in income taxes in financial statements prepared in accordance with the provisions of SFAS 109 and to provide greater consistency in criteria used to determine benefits related to income taxes. In accounting for uncertain tax positions, we currently apply the provisions of Statement of Financial Accounting Standards No. 5, “Accounting for Contingencies” (“SFAS 5”). SFAS 5 provides that a contingency should be recorded if it is probable that an uncertain position will become an actual future liability. FIN 48 provides that the benefit of an uncertain position should not be recorded unless it is more likely than not that the position will be sustained upon review. FIN 48 is effective for fiscal years beginning after December 15, 2006. In accordance, we will adopt FIN 48 as of April 1, 2007. The cumulative effect of applying FIN 48 will be reported as an adjustment to the April 1, 2007 balance sheet. The adoption of FIN 48 did not have a material impact on the consolidated financial statements as a whole.

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value, establishes the framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. The provisions of SFAS 157 will be effective for us as of April 1, 2008. We are in the process of evaluating the impact, if any, SFAS 157 will have on our consolidated financial statements as a whole.

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 158, “Employer’s Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132(R)” (“SFAS 158”). SFAS 158 requires an entity to (a) recognize in its statement of financial position an asset for a defined benefit postretirement plan’s overfunded status or a liability for a plan’s underfunded status; (b) measure a defined benefit postretirement plan’s assets and obligations that determine its funded status as of the end of the employer’s fiscal year; and (c) recognize changes in the funded status of a defined benefit postretirement plan in comprehensive income (loss) in the year in which the changes occur. The requirement to recognize the funded status of a defined benefit postretirement plan prospectively and the disclosure requirements are effective for the fiscal year ending March 31, 2008. The requirement to measure plan assets and benefit obligations as of the date of our fiscal year end will be effective for the fiscal year ending March 31, 2009. We have begun our analysis of the impact of the adoption of SFAS 158 but do not currently anticipate a significant impact on the consolidated financial statements as a whole.

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Liabilities-Including an amendment to FASB Statement No. 115” (“SFAS 159”). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value at specified elections dates. The provisions of SFAS 159 will be effective for us as of April 1, 2008. We are in the process of evaluating the impact, if any, SFAS 159 will have on our financial statements as a whole.

Critical Accounting Estimates

Our consolidated financial statements and related public financial information are based on the application of generally accepted accounting principles in the United States (“GAAP”). GAAP requires the use of estimates, assumptions, judgments and subjective interpretations of accounting principles that have an impact on the assets, liabilities, revenue and expense amounts reported. These estimates can also affect supplemental information contained in our external disclosures including information regarding contingencies, risk and financial condition. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. Valuations based on estimates are reviewed for reasonableness on a consistent basis throughout our Company. Actual results may differ from these estimates under different assumptions or conditions. See note 1 to our consolidated financial statements appearing elsewhere in this Report for a description of all of the Company’s significant accounting policies.

Critical accounting estimates 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 estimates affect our more significant judgments and assumptions 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 $1.0 million and $1.3 million at March 31, 2007 and 2006, respectively.

Restructuring

During Fiscal Year 2005, we established restructuring reserves for our print and premedia services segments. These reserves, for severance and other exit costs, required the use of estimates, which management reviews periodically for reasonableness and records changes as necessary. As a result of management’s periodic assessment, these reserves were reduced in both Fiscal Year 2007 and 2006 based on annual activity and certain changes in our estimates. Though management believes these reserves accurately reflect the costs of these plans currently, 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, 2007, we had a valuation allowance of $68.4 million established against our deferred tax assets. We considered changes in the allowance when calculating the tax provision in the statement of operations. Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our deferred tax assets. As a result of changing circumstances, we may be required to record changes to the valuation allowance against our deferred tax assets in the future.

Contractual Obligations and Commercial Commitments

The following table gives information about our existing material commitments under our indebtedness and contractual obligations at March 31, 2007, which are net of imputed interest:


			Payments Due By Period
Contractual Obligations	Total		< 1 year		1-3 years		3-5 years		> 5 years
			(Dollars in thousands)
			(Restated)
Long-term debt (a)	$	346,580		346,580		—		—		—
Interest payments on fixed rate debt (b)		28,000		28,000		—		—		—
Capital lease obligations (a)		5,530		5,530		—		—		—
Operating lease obligations		9,792		3,347		5,094		1,351		—
Pension obligations (c)		763		763		—		—		—

Total contractual cash obligations	$	390,665		384,220		5,094		1,351		—


(a)		Although there are contractually required payments in future years related to our long-term debt and capital lease obligations, we are presenting them as a contractual obligation due within the next year as a result of the requirement to reclassify our long-term debt and capital lease obligations to current liabilities (see “—Liquidity and Capital Resources”).

(b)		Future interest payments, beyond one year, have been excluded as a result of the reclassification of the long-term debt to current liabilities (see “-Liquidity and Capital Resources”). The table also excludes interest on $66.6 million of variable rate borrowings outstanding at March 31, 2007, as such borrowing levels and related rates of interest fluctuate.

(c)		Although we expect to make contributions to our pension plan in future years, those amounts cannot be estimated at this time. See note 10 to our consolidated financial statements appearing elsewhere in this Report.

In the fiscal year ended March 31, 1998, 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, 2007 is $41.5 million and is included within Other liabilities in our consolidated balance sheet. At March 31, 2007, we had no other significant contingent commitments. The following table gives information about our other commercial commitments:

Commitment Due By Period

Other Commercial

Commitments

Total

< 1 year

1-3 years

3-5 years

> 5 years

(Dollars in thousands)

Standby letters of credit

22,257

18,723

106

3,370

The standby letters of credit generally serve as collateral and a substantial portion are renewable quarterly pursuant to the terms of certain long-term arrangements.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


	Page No.
The following consolidated financial statements of ACG Holdings, Inc. are included in this Report:

Report of Independent Registered Public Accounting Firm		34
Consolidated Balance Sheets — March 31, 2007 and 2006		35
For the Years Ended March 31, 2007, 2006 and 2005:
Consolidated Statements of Operations		37
Consolidated Statements of Stockholders’ Deficit		38
Consolidated Statements of Cash Flows		39
Notes to Consolidated Financial Statements		41

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, 2007, 2006 and 2005, and as of March 31, 2007 and 2006

	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.

Report of Independent Registered Public Accounting Firm

Board of Directors
ACG Holdings, Inc.

We have audited the accompanying consolidated balance sheets of ACG Holdings, Inc. as of March 31, 2007 and 2006, 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, 2007. Our audits also included the related financial statement schedules listed in the Index at Item 15(a). These financial statements and schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of ACG Holding, Inc. at March 31, 2007, and 2006, and the consolidated results of its operations and its cash flows for each of the three fiscal years in the period ended March 31, 2007, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.

As discussed in Note 2 to the consolidated financial statements, the accompanying consolidated balance sheets as of March 31, 2007 and 2006, 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, 2007, have been restated.

The accompanying consolidated financial statements have been prepared assuming that ACG Holdings, Inc. will continue as a going concern. As more fully described in Note 1, ACG Holdings, Inc. has incurred recurring net losses and has a working capital deficiency. In addition, while American Color Graphics, Inc. has obtained waivers of certain reporting requirement violations under its 2005 Credit Agreement and Receivables Facility for periods ending on or prior to March 31, 2007, management does not believe that it is probable that the Company will remain in compliance with certain covenants under such debt facilities during the fiscal year ending March 31, 2008. These conditions raise substantial doubt about ACG Holdings, Inc’s ability to continue as a going concern. Management’s plans in regard to these matters also are described in Note 1. The fiscal year 2007 consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that my result from the outcome of this uncertainty.


Nashville, Tennessee		/s/ Ernst & Young LLP
June 21, 2007, except for Notes
1, 2, 7, and 18 as to which the
date is August 31, 2007

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


									Other
	Voting		Additional						accumulated
	common		paid-in			Accumulated			comprehensive
	stock		capital			deficit			income (loss)			Total
Balances, March 31, 2004, as previously reported	$	2		2,103			(169,516	)		(21,364	)	$	(188,775	)
Restatement adjustments		—		(127	)		(35	)		—			(162	)

Balances, March 31, 2004, as restated	$	2		1,976			(169,551	)		(21,364	)	$	(188,937	)

Net loss		—		—			(26,279	)		—			(26,279	)
Other comprehensive income (loss), net of tax:
Change in cumulative translation adjustment		—		—			—			593			593
Change in minimum pension liability		—		—			—			1,009			1,009

Comprehensive loss													(24,677	)
Executive stock compensation		—		31			—			—			31

Balances, March 31, 2005	$	2		2,007			(195,830	)		(19,762	)	$	(213,583	)

Net loss		—		—			(15,717	)		—			(15,717	)
Other comprehensive income (loss), net of tax:
Change in cumulative translation adjustment		—		—			—			183			183
Change in minimum pension liability		—		—			—			(2,433	)		(2,433	)

Comprehensive loss													(17,967	)
Executive stock compensation		—		31			—			—			31

Balances, March 31, 2006	$	2		2,038			(211,547	)		(22,012	)	$	(231,519	)

Net loss		—		—			(20,536	)		—			(20,536	)
Other comprehensive income (loss), net of tax:
Change in cumulative translation adjustment		—		—			—			(116	)		(116	)
Change in minimum pension liability		—		—			—			7,219			7,219

Comprehensive loss													(13,433	)

Balances, March 31, 2007	$	2		2,038			(232,083	)		(14,909	)		(244,952	)

See accompanying notes to consolidated financial statements.

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


	Year ended March 31,
	2007			2006			2005
Cash flows from investing activities:
Purchases of property, plant and equipment		(12,701	)		(12,486	)		(6,876	)
Proceeds from sale of property, plant and equipment held for sale (note 4)		—			6,877			—
Proceeds from other sales of property, plant and equipment		145			283			176
Other		(147	)		(197	)		(472	)

Net cash used by investing activities		(12,703	)		(5,523	)		(7,172	)

Cash flows from financing activities:
Net increase (decrease) in revolver borrowings		31,580			(16,000	)		16,000
Net increase (decrease) in long-term debt, net		—			35,000			—
Deferred financing costs paid		(2,549	)		(3,164	)		(408	)
Repayment of capital lease obligations		(3,754	)		(4,667	)		(4,378	)

Net cash provided by financing activities		25,277			11,169			11,214

Effect of exchange rates on cash		—			(24	)		(75	)

Change in cash		—			—			—
Cash and cash equivalents:
Beginning of period		—			—			—

End of period	$	—			—			—

Supplemental disclosure of cash flow information:
Cash paid (received) for:
Interest	$	36,099			33,863			31,480
Income taxes, net of refunds	$	233			15			(887	)
Non-cash investing activities:
Assets purchased under capital lease obligations	$	—			—			31

See accompanying notes to consolidated financial statements.

ACG HOLDINGS, INC.

Notes to Consolidated Financial Statements

(1)		Summary of Significant Accounting Policies

		ACG Holdings, Inc. (“Holdings”) has no operations or significant assets other than its investment in American Color Graphics, Inc. (“Graphics”), (collectively, the “Company”). Holdings is dependent upon distributions from Graphics to fund its obligations. However, Graphics’ ability to pay dividends or lend to Holdings was restricted under the terms of its debt agreements at March 31, 2007. See note 7 below for further discussion of the 2005 Credit Agreement, the Receivables Facility and the 10% Notes (as defined herein). The 2005 Revolving Credit Facility (as defined herein) is secured by substantially all of the assets of Graphics. Receivables sold to Graphics Finance (as defined herein) under the Receivables Facility (as defined herein) are released from this lien at the time they are sold. Holdings has guaranteed Graphics’ indebtedness under the 2005 Credit Agreement, which guarantee is secured by a pledge of all of Graphics’ and Graphics’ subsidiaries’ stock. The Receivables Facility is secured by substantially all the assets of Graphics Finance, which consist primarily of any receivables sold by Graphics to Graphics Finance pursuant to a receivables contribution and sale agreement. Graphics services these receivables pursuant to a servicing agreement with Graphics Finance. The 10% Notes are fully and unconditionally guaranteed on a senior basis by Holdings, and by all future domestic subsidiaries of Graphics.

		The two business segments of the commercial printing industry in which the Company operates are (i) print and (ii) premedia services.

		The Company continues to operate in a challenging business environment due to, among other factors, excess industry capacity and significant competition. Such challenges have resulted in lower levels of profitability, including five consecutive years of net losses and increased levels of indebtedness throughout this same period.

		On July 23, 2007, Holdings entered into a letter of intent with Vertis, Inc. (“Vertis”), with respect to the proposed merger of Holdings with Vertis or an affiliate of Vertis (the “Vertis Merger”). Upon the closing of the Vertis Merger, Graphics would become a wholly-owned subsidiary of Vertis. The closing is subject to the execution of a mutually acceptable definitive merger agreement, the satisfaction of customary closing conditions and the receipt of necessary approvals. The Vertis Merger would be subject to the amendment, refinancing, or repayment in full of the parties’ senior secured credit facilities and the successful exchange of the parties’ outstanding notes (or another mutually satisfactory arrangement). There can be no assurance that a definitive merger agreement can or will be signed or that it will be signed by any particular date. If signed, there can be no assurance that the transaction can or will be completed or that it will be completed by any particular date.

		The letter of intent provides for a period of exclusivity with respect to the negotiations of a merger agreement. Such exclusivity period has been extended to September 3, 2007. The date on which the letter of intent may be terminated by either party thereto has also been extended to September 3, 2007. The parties have also agreed that, for such purposes, such date shall be automatically extended thereafter for additional one week periods, unless either party notifies the other that it will not extend such date prior to the end of any such additional one week period.

		At March 31, 2007, and August 31, 2007, the Company was in compliance with the covenant requirements set forth in the 2005 Credit Agreement and the Receivables Facility, as amended and the 10% Note indenture. It was not in compliance with certain reporting requirements under its 2005 Credit Agreement and Receivables Facility subsequent to March 31, 2007. On August 31, 2007, the lenders under both facilities waived such noncompliance. One such waiver related to the Company’s failure to deliver the Company’s restated consolidated financial statements for the fiscal years ended March 31, 2007, 2006 and 2005 accompanied by a report and opinion of its independent certified public accountants that was not subject to any “going concern” qualification. See the Report of Independent Registered Public Accounting Firm, which contains a “going concern” qualification, accompanying the Company’s restated consolidated financial statements. The lenders under both facilities waived such noncompliance with respect to the delivery of such Report of Independent Registered Public Accounting Firm until November 29, 2007.

		The Company anticipates that its primary needs for liquidity will be to conduct its business, meet debt service requirements, including its required interest payment on the 10% Notes on December 15, 2007, and make capital expenditures. The Company is continually working to improve its liquidity position.

ACG HOLDINGS, INC.

Notes to Consolidated Financial Statements

		The Company believes, based on management’s current forecasts and its current capital structure (and without giving effect to the proposed Vertis Merger), it will have sufficient liquidity to meet its requirements through November 29, 2007. If the Vertis Merger closes on or prior to such date, the Company will thereupon become a wholly-owned subsidiary of Vertis.

		On August 31, 2007, the 2005 Credit Agreement and Receivables Facility were amended to, among other things, provide that compliance with the first lien coverage ratio covenants in each thereof as of September 30, 2007, will not be measured or determined for any purpose until November 29, 2007 (including, without limitation, for the purpose of determining the Company’s entitlement to make additional borrowings under either such facility on or prior to such date). We do not believe that it is probable that the Company will be in compliance with its first lien coverage ratio covenants under its 2005 Credit Agreement and Receivables Facility at or after November 29, 2007. The lenders under both facilities also waived the Company’s noncompliance with certain reporting requirements under such facilities subsequent to March 31, 2007. One such waiver related to the Company’s failure to deliver its restated consolidated financial statements for the fiscal years ended March 31, 2007, 2006 and 2005 accompanied by a report or opinion of our independent certified public accountants that was not subject to any “going concern” qualification. See the Report of Independent Registered Public Accounting Firm, which contains a “going concern” qualification, accompanying our restated consolidated financial statements. The lenders under both facilities waived such noncompliance with respect to the delivery of such Report of Independent Registered Public Accounting Firm until November 29, 2007.

		In the event the merger agreement for the Vertis Merger is not entered into (or the Vertis Merger is not consummated by November 29, 2007), based on management’s current forecasts and the Company’s current capital structure, in order for the Company to have sufficient liquidity to meet its requirements for liquidity after November 29, 2007, including its next required interest payment on the 10% Notes, the Company would have to take one or more actions to improve its liquidity or modify its requirements for liquidity, which could include, without limitation, seeking waivers or amendments from the requisite lenders under the 2005 Credit Agreement or the Receivables Facility or the requisite holders of the 10% Notes, or all three thereof, under the documentation therefor, refinancing one or both of the 2005 Credit Agreement or Receivables Facility, incurring additional indebtedness above currently permitted levels (if the requisite lenders under the Company’s bank credit facilities and the requisite holders of the 10% Notes permit it), seeking to exchange some or all of the 10% Notes for other securities of the Company, selling the entire Company to another party or disposing of material assets or operations, reducing or delaying capital expenditure or otherwise reducing the Company’s expenses, or taking other material actions that could have a material adverse effect on the Company. If the Company’s business does not generate profitability and cash from operations in line with management’s current forecast for the period through November 29, 2007 (and the proposed Vertis Merger has not theretofore been consummated), the Company would be required to take one or more of such actions sooner than November 29, 2007. The Company cannot provide assurances that any such action could be successfully accomplished or as to the timing or terms thereof.

		Based on management’s current forecasts and the Company’s current capital structure (and without giving effect to the proposed Vertis Merger or any other actions described above that the Company may take), the Company cannot provide any assurance that it will be able to comply with the first lien coverage ratio covenants in the 2005 Credit Agreement and the Receivables Facility after November 29, 2007. Accordingly, pursuant to Emerging Issues Task Force Issue 86-30 “Classification of Obligations When a Violation is Waived By the Creditors (“EITF 86-30”) and Statement of Financial Accounting Standards No. 78, “Classification of Obligations That Are Callable by the Creditor-an amendment of ARB No. 43, Chapter 3A (“SFAS 78”), the Company has classified all amounts outstanding under the 2005 Credit Agreement, the Receivables Facility, the 10% Notes, and the Company’s capital lease obligations as current liabilities in the accompanying March 31, 2007 consolidated balance sheet. No amounts under the 2005 Credit Agreement, Receivables Facility, 10% Notes or capital lease obligations were due but unpaid at March 31, 2007 or August 31, 2007.

		Significant accounting policies are as follows:

	(a)		Basis of Presentation

			The consolidated financial statements include the accounts of Holdings and all greater than 50%-owned subsidiaries, which are consolidated under United States generally accepted accounting principles.

			All significant intercompany transactions and balances have been eliminated in consolidation.

			Earnings-per-share data has not been provided since Holdings’ common stock is closely held.

ACG HOLDINGS, INC.

Notes to Consolidated Financial Statements

	(b)		Revenue Recognition

			Print revenues are recognized upon the completion of production. Shipment of printed material generally occurs upon completion of this production process. Materials are printed to unique customer specifications and are not returnable.

			Premedia services revenues are recognized as services are performed. Delivery of electronic files, proofs and plates generally occurs upon completion of the production process. Services are performed to unique customer specifications and are not returnable.

			Credits relating to specification variances and other customer adjustments have historically not been significant for either the print or premedia services business segments.

	(c)		Cash and Cash Equivalents

			The Company uses available cash balances on hand and borrowings under its 2005 Revolving Credit Facility and Receivables Facility (defined herein), to fund operating disbursements and, to the extent applicable, invest in overnight cash investments. Cash on hand of approximately $2.9 million and $6.7 million (including $5.1 million of liquid overnight cash investments) at March 31, 2007 and 2006, respectively, is presented net of outstanding checks, which resulted in a reclassification of $9.6 million and $10.4 million at March 31, 2007 and 2006 respectively, to trade accounts payable in the consolidated balance sheets. The Company considers all highly liquid investments with maturities of three months or less to be cash equivalents.

	(d)		Trade Accounts Receivable

			Trade accounts receivable represents payments due from customers net of allowances for doubtful accounts. The Company continuously monitors collections and payments from its customers. Allowances for doubtful accounts are maintained based on historical payment patterns, aging of accounts receivable and actual write-off history. The Company estimates losses resulting from the inability of its customers to make required payments.

	(e)		Inventories

			Inventories are valued at the lower of first-in, first-out (“FIFO”) cost or market (net realizable value).

	(f)		Property, Plant and Equipment

			Property, plant and equipment is stated at cost. Depreciation, which includes amortization of assets under capital leases, is based on the straight-line method over the shorter of the estimated useful lives of the assets or the remaining terms of the leases. Estimated useful lives used in computing depreciation and amortization expense are 3 to 15 years for furniture and fixtures and machinery and equipment and 15 to 25 years for buildings and improvements. Expenditures related to maintenance and repairs are expensed as incurred.

	(g)		Excess of Cost Over Net Assets Acquired

			The excess of cost over net assets acquired (or “goodwill”) is accounted for in accordance with the guidance set forth in Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”). SFAS 142 requires goodwill to be evaluated at least annually for impairment. The Company performed the required annual impairment tests of goodwill as of December 31, 2006 and 2005, and noted no impairment.

			The Company has goodwill associated with its two distinct segments, print and premedia services, and has determined that there are no additional reporting units within these segments, as there are no further components representing a “business”. Therefore, the impairment test for goodwill is

ACG HOLDINGS, INC.

Notes to Consolidated Financial Statements

calculated for each of the segments. The test is calculated by deducting the estimated carrying value of each reporting unit from the estimated enterprise value of each reporting unit. The estimated enterprise value is calculated by multiplying 12 months trailing EBITDA (defined as earnings before net interest expense, income tax expense, depreciation and amortization) by an assumed market multiple, which the Company believes to be reasonable based upon recent sales activity of businesses operating in comparable industries as the Company’s segments. The estimated carrying value is calculated by deducting the liabilities, excluding interest-bearing debt, from total assets of the respective segment. A calculation in which the estimated enterprise value exceeds the estimated carrying value results in a conclusion of no impairment. If it is determined that the estimated carrying value exceeds the estimated enterprise value, the Company would calculate the implied fair value of goodwill by deducting the fair value of all tangible and intangible net assets, including unrecognized intangible assets, of the segment from the fair value of the segment. If the implied fair value of goodwill is less than the carrying value, an impairment loss would be recognized.

	(h)		Impairment of Long-Lived Assets

			The Company evaluates the recoverability of its long-lived assets in accordance with Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”). SFAS 144 requires periodic assessment of certain long-lived assets for possible impairment when events or circumstances indicate that the carrying amounts may not be recoverable. Long-lived assets are grouped and evaluated for impairment at the lowest level for which there are identifiable cash flows that are independent of the cash flows of other groups of assets. If it is determined that the carrying amounts of such long-lived assets are not recoverable, the assets are written down to their fair value.

			In the fourth quarter of the fiscal year ended March 31, 2006, the Company concluded that certain non-production information technology assets of the print segment were fully impaired as a result of its periodic assessment under SFAS 144. This impairment resulted in a non-cash charge of $2.8 million. The impairment charge was classified within other, net in the consolidated statement of operations for the fiscal year ended March 31, 2006.

	(i)		Other Assets

			Financing costs related to the 2005 Credit Agreement (as defined herein) are deferred and amortized over the term of the agreement. Financing costs related to the Old Revolving Credit Facility (as defined herein) are amortized over the term of the 2005 Credit Agreement. Financing costs related to the Receivables Facility (as defined herein) are deferred and amortized over the term of the agreement. See note 7 for further discussion. Financing costs related to the 10% Notes (as defined herein) are deferred and amortized over the term of the 10% Notes. Covenants not to compete are amortized over the terms of the underlying agreements.

	(j)		Income Taxes

			Income taxes are provided using the liability method in accordance with Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes” (“SFAS 109”). Management evaluates the need for a valuation allowance for deferred tax assets and determines whether the Company’s deferred tax assets will more likely than not be realized through sources of future taxable income as defined by SFAS 109, including the future reversal of existing taxable temporary differences.

	(k)		Foreign Currency Translation

			The assets and liabilities of the Company’s Canadian facility, which include interdivisional balances, are translated at year-end rates of exchange while revenue and expense items are translated at average rates for the year.

ACG HOLDINGS, INC.

Notes to Consolidated Financial Statements

Translation adjustments are recorded as a separate component of stockholders’ deficit. Since the transactions of the Canadian facility are denominated in its functional currency and the interdivisional accounts are of a long-term investment nature, no remeasurement gains and losses pertaining to such balances are included in the Company’s consolidated results of operations.

	(l)		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 provided when assessments and/or remedial efforts are probable and the related amounts can be reasonably estimated.

	(m)		Fair Value of Financial Instruments

			The carrying amounts reflected in the consolidated balance sheets for receivables and payables approximate their respective fair values. A discussion of the carrying value and fair value of the Company’s long-term debt is included in note 7 below. Fair values are based primarily on quoted prices for these or similar instruments. The Company is not a party to any financial instruments with material off-balance-sheet risk.

	(n)		Concentration of Credit Risk

			Financial instruments, which subject the Company to credit risk, consist primarily of trade accounts receivable. Concentration of credit risk with respect to trade accounts receivable is generally diversified due to the large number of entities comprising the Company’s customer base and their geographic dispersion. The Company performs ongoing credit evaluations of its customers and maintains an allowance for potential credit losses.

	(o)		Use of Estimates

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

	(p)		Stock-Based Compensation

			During the fiscal year ended March 31, 2007, the Company accounted for stock based awards under Statement of Financial Accounting Standards No. 123 (revised), “Share Based Payment” (“SFAS 123R”), which requires all share-based payments to employees, including grants of employee stock options and restricted stock, to be recognized in the Company’s financial statements based on their grant date fair values. The Company adopted SFAS 123R on April 1, 2006, applying the modified prospective transition method outlined in the Statement. During the fiscal years ended March 31, 2006 and 2005, the Company accounted for stock based awards under Statement of Financial Accounting Standards, No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”) based on their grant date fair values as the Company believed that including the fair value of compensation plans in determining net income was consistent with accounting for the cost of all other forms of compensation.

	(q)		Shipping and Handling Costs

			The Company’s shipping and handling costs are reflected within Cost of Sales in the Consolidated Statements of Operations.

ACG HOLDINGS, INC.

Notes to Consolidated Financial Statements

	(r)		Impact of Recently Issued Accounting Standards

			In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS 123R, which superseded SFAS 123 and amended Statement of Financial Accounting Standards No. 95, “Statement of Cash Flows” (“SFAS 95”). Generally, the fair value approach in SFAS 123R is similar to the fair value approach described in SFAS 123. Upon adoption of SFAS 123R on April 1, 2006, the Company elected to continue using the Black-Scholes-Merton formula to estimate the fair value of stock options granted to employees. The adoption of SFAS 123R had no impact on compensation expense for the fiscal year ended March 31, 2007 as the Company granted no options during this period. Additionally, all outstanding options on the date of adoption had a fair value of $0. SFAS 123R also requires that the benefits of tax deductions in excess of recognized compensation cost be reported as a financing cash flow rather than as an operating cash flow. The Company reported no such financing cash flows in the fiscal year ended March 31, 2007. For the fiscal years ended March 31, 2006 and 2005, the Company recognized no operating cash flows for such excess tax deductions. In May 2005, the FASB issued Statement of Financial Accounting Standards No. 154, “Accounting Changes and Error Corrections” (“SFAS 154”), a replacement of Accounting Principles Board Opinion No. 20, “Accounting Changes” (“APB 20”) and Statement of Financial Accounting Standards No. 3, “Reporting Accounting Changes in Interim Financial Statements” (“SFAS 3”). SFAS 154 requires retrospective application to prior periods’ financial statements of a voluntary change in accounting principle unless it is impracticable. APB 20 previously required that most voluntary changes in accounting principle be recognized by including in net income of the period of the change the cumulative effect of changing to the new accounting principle. The adoption of SFAS 154 as of April 1, 2006 has had no impact on the consolidated financial statements as a whole.

			In July 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”), to clarify the accounting for uncertainty in income taxes in financial statements prepared in accordance with the provisions of SFAS 109 and to provide greater consistency in criteria used to determine benefits related to income taxes. In accounting for uncertain tax positions, the Company currently applies the provisions of Statement of Financial Accounting Standards No. 5, “Accounting for Contingencies” (“SFAS 5”). SFAS 5 provides that a contingency should be recorded if it is probable that an uncertain position will become an actual future liability. FIN 48 provides that the benefit of an uncertain position should not be recorded unless it is more likely than not that the position will be sustained upon review. FIN 48 is effective for fiscal years beginning after December 15, 2006. In accordance, the Company will adopt FIN 48 as of April 1, 2007. The cumulative effect of applying FIN 48 will be reported as an adjustment to the April 1, 2007 balance sheet. The adoption of FIN 48 did not have a material impact on the consolidated financial statements as a whole.

			In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value, establishes the framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. The provisions of SFAS 157 will be effective for the Company as of April 1, 2008. The Company is in the process of evaluating the impact, if any, SFAS 157 will have on the consolidated financial statements as a whole.

			In September 2006, the FASB issued Statement of Financial Accounting Standards No. 158, “Employer’s Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132(R)” (“SFAS 158”). SFAS 158 requires an entity to (a) recognize in its statement of financial position an asset for a defined benefit postretirement plan’s overfunded status or a liability for a plan’s underfunded status; (b) measure a defined benefit postretirement plan’s assets and obligations that determine its funded status as of the end of the

ACG HOLDINGS, INC.

Notes to Consolidated Financial Statements

			employer’s fiscal year; and (c) recognize changes in the funded status of a defined benefit postretirement plan in comprehensive income (loss) in the year in which the changes occur. The requirement to recognize the funded status of a defined benefit postretirement plan prospectively and the disclosure requirements are effective for the Company for the fiscal year ending March 31, 2008. The requirement to measure plan assets and benefit obligations as of the date of the Company’s fiscal year end will be effective for the fiscal year ending March 31, 2009. The Company has begun its analysis of the impact of the adoption of SFAS 158 but does not currently anticipate a significant impact on the consolidated financial statements as a whole.

			In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities-Including an amendment of FASB Statement No. 115” (“SFAS 159”). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value at specified election dates. The provisions of SFAS 159 will be effective for the Company as of April 1, 2008. The Company is in the process of evaluating the impact, if any, SFAS 159 will have on the consolidated financial statements as a whole.

(2)		Restatement of Financial Statements

		On August 20, 2007, the Company, in consultation with its Board of Directors, announced through a Form 8-K filing with the Securities and Exchange Commission (“SEC”), that as a result of certain accounting matters, the financial statements for the fiscal years ended March 31, 2007, 2006 and 2005 would be restated. The Company has completed its review and has restated the audited financial statements for those periods.

		The revisions associated with this restatement, the cumulative impact of which is an increase to accumulated deficit previously reported at March 31, 2007 of $1,314,000, relate principally to a correction in the accounting treatment of certain deferred financing costs (a cumulative impact to increase previously reported accumulated deficit at March 31, 2007 by $478,000) and an adjustment to the accrued vacation liability calculation (a cumulative impact to increase previously reported accumulated deficit at March 31, 2007 by $661,000). These two revisions, as well as certain other corrections of individually immaterial errors (a net cumulative impact to increase previously reported accumulated deficit at March 31, 2007 by $175,000), decreased our net loss by $473,000 in the fiscal year ended March 31, 2007, increased net loss by $1,140,000 and $612,000 in the fiscal years ended March 31, 2006 and 2005, respectively, and increased the accumulated deficit by $35,000 as of April 1, 2004.

		The Company has historically capitalized costs associated with its quarterly and annual SEC filings including, without limitation, costs related to legal services, rating agency fees, EDGAR fees and printing services, as deferred financing costs on its consolidated balance sheet. These costs were amortized over future periods through interest expense within the Company’s consolidated statements of operations over the remaining term of the underlying debt instrument. The Company is required to file periodic reports with the SEC as a result of a covenant in the indenture governing the 10% Notes. Due to this covenant requirement (and a covenant requirement to maintain the effectiveness of a registration statement previously filed by the Company with the SEC), these costs were previously deemed by the Company to relate specifically to the ongoing indenture requirement, and therefore, provided future economic benefit.

		During August 2007, the Company was advised by Ernst & Young LLP that based on applicable guidance, such costs should not be capitalized and expensed over future periods, but should be treated as period costs and expensed within the selling, general and administrative expense line item of the Company’s consolidated statements of operations. The Company has reviewed the applicable guidance and determined to conform to this approach. The revisions for the revised treatment of deferred financing costs decreased net loss by $7,000 in the fiscal year ended March 31, 2007, increased net loss by $115,000 and $128,000 in the fiscal years ended March 31, 2006 and 2005, respectively, and increased the accumulated deficit by $242,000 as of April 1, 2004.

ACG HOLDINGS, INC.

Notes to Consolidated Financial Statements


	March 31,			Restatement			Debt			March 31,
	2007			Related			Reclassification			2007
	As Reported			Adjustments			(See note 7)			Restated
Assets
Current assets:
Cash and cash equivalents	$	—			—			—			—
Receivables:
Trade accounts, less allowance		44,385			—			—			44,385
Other		2,645			—			—			2,645

Total receivables		47,030			—			—			47,030
Inventories		7,146			—			—			7,146
Deferred income taxes		962			—			—			962
Prepaid expenses and other current assets (a)		4,997			(83	)		—			4,914

Total current assets		60,135			(83	)		—			60,052
Property, plant and equipment, net		81,784			—			—			81,784
Excess of cost over net assets acquired		66,548			—			—			66,548
Other assets (a)		18,266			(426	)		—			17,840

Total assets	$	226,733			(509	)		—			226,224


Liabilities and Stockholders’ Deficit
Current liabilities:
Current portion of long-term capital debt and capital leases	$	3,435			—			348,675			352,110
Trade accounts payable		32,892			199			—			33,091
Accrued expenses (b)		29,651			661			—			30,312
Income tax payable		487			—			—			487

Total current liabilities		66,465			860			348,675			416,000
Long-term debt and capital leases, excluding current		348,675			—			(348,675	)		—
Deferred income taxes		2,677			—			—			2,677
Other liabilities		52,554			(55	)		—			52,499

Total liabilities		470,371			805			—			471,176
Stockholders’ deficit:
Common stock		2			—			—			2
Additional paid-in capital		2,038			—			—			2,038
Accumulated deficit		(230,769	)		(1,314	)		—			(232,083	)
Other accumulated comprehensive loss, net of tax		(14,909	)		—			—			(14,909	)

Total stockholders’ deficit		(243,638	)		(1,314	)		—			(244,952	)

Total liabilities and stockholders’ deficit	$	226,733			(509	)		—			226,224


a)		The revised treatment of deferred financing costs resulted in an increase of $96,000 in prepaid expenses and a decrease of $574,000 in other assets resulting in a net decrease in total assets of $478,000.

b)		The adjustment related to the revision of the accrued vacation liability calculation resulted in an increase in accrued expenses of $661,000.

ACG HOLDINGS, INC.

Notes to Consolidated Financial Statements


	March 31,			Restatement			March 31,
	2006			Related			2006
	As Reported			Adjustments			Restated
Assets
Current assets:
Cash and cash equivalents	$	—			—			—
Receivables:
Trade accounts, less allowance		41,080			—			41,080
Other		3,463			—			3,463

Total receivables		44,543			—			44,543
Inventories		7,714			—			7,714
Deferred income taxes		1,409			(213	)		1,196
Prepaid expenses and other current assets (a)		4,733			(125	)		4,608

Total current assets		58,399			(338	)		58,061
Property, plant and equipment, net		87,766			—			87,766
Excess of cost over net assets acquired		66,548			—			66,548
Other assets (a)		18,789			(532	)		18,257

Total assets	$	231,502			(870	)		230,632


Liabilities and Stockholders’ Deficit

Current liabilities:

Current installments of capital leases	$	3,731			—			3,731
Trade accounts payable		33,845			810			34,655
Accrued expenses (b)		36,367			(2,272	)		34,095
Income tax payable		160			—			160

Total current liabilities		74,103			(1,462	)		72,641
Long-term debt and capital leases, excluding current		320,553						320,553
Deferred income taxes		3,866			(213	)		3,653
Other liabilities		62,712			2,592			65,304

Total liabilities		461,234			917			462,151
Stockholders’ deficit:
Common stock		2			—			2
Additional paid-in capital		2,038			—			2,038
Accumulated deficit		(209,760	)		(1,787	)		(211,547	)
Other accumulated comprehensive loss, net of tax		(22,012	)		—			(22,012	)

Total stockholders’ deficit		(229,732	)		(1,787	)		(231,519	)

Total liabilities and stockholders’ deficit	$	231,502			(870	)		230,632


a)		The revised treatment of deferred financing costs resulted in an increase of $47,000 in prepaid expenses and a decrease of $532,000 in other assets resulting in a net decrease in total assets of $485,000.

b)		The adjustment related to the revision of the accrued vacation liability calculation resulted in an increase in accrued expenses of $404,000.

ACG HOLDINGS, INC.

Notes to Consolidated Financial Statements


	March 31,			Restatement			March 31,
	2005			Related			2005
	As Reported			Adjustments			Restated
Sales	$	449,513			—			449,513
Cost of sales		403,641			714			404,355

Gross profit		45,872			(714	)		45,158
Selling, general and administrative expenses (a)		28,824			205			29,029
Restructuring costs (benefit) and other charges		10,037			(5	)		10,032

Operating income		7,011			(914	)		6,097
Other expense (income):
Interest expense (a)		34,087			(302	)		33,785
Interest income		(37	)		—			(37	)
Other, net		313			—			313

Total other expense		34,363			(302	)		34,061

Loss before income taxes		(27,352	)		(612	)		(27,964	)

Income tax benefit		(1,685	)		—			(1,685	)

Net loss	$	(25,667	)		(612	)		(26,279	)


a)		The revised treatment of deferred financing costs resulted in an increase of $379,000 in selling, general and administrative expenses and a decrease of $251,000 in interest expense resulting in a net increase of $128,000 in net loss.

(3)

Inventories

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


	March 31,
	2007		2006
Paper	$	5,036		5,959
Ink		152		140
Supplies and other		1,958		1,615

Total	$	7,146		7,714

(4)		Assets and Liabilities Held for Sale

		At March 31, 2005, the Company held certain assets and obligations under capital leases for sale at a fair value of $8.1 million and $1.0 million, respectively. On March 16, 2005, the Company ceased operations at the Pittsburg, California facility, resulting in the write-off of certain assets totaling approximately $0.5 million (see note 15). In March 2005, the Company also executed a letter of intent with a prospective buyer to sell certain of the print facility’s other assets, some of which were subject to capital lease obligations. On April 20, 2005, the Company completed the sale of these assets for an aggregate selling price of approximately $8.1 million (including $0.1 million of miscellaneous closing and settlement costs and $6.9 million of property, plant and equipment) and terminated $1.0 million of related capital lease obligations. In accordance with the guidance set forth in SFAS 144, the Company wrote down the assets held for sale to fair value, resulting in a $0.7 million impairment charge, which was classified within restructuring costs and other charges in the consolidated statement of operations for the fiscal year ended March 31, 2005.

ACG HOLDINGS, INC.

Notes to Consolidated Financial Statements

(7)		Notes Payable, Long-Term Debt and Capital Leases

		Long-term debt, including capital leases, is summarized as follows (in thousands):


	March 31,
	2007		2006
2005 Revolving Credit Facility	$	26,900		—
2005 Term Loan Facility		35,000		35,000
Receivables Facility		4,680		—
10% Senior Second Secured Notes Due 2010		280,000		280,000
Capital leases		5,530		9,284

Total long-term debt and capital leases		352,110		324,284
Less: current installments		352,110		3,731

Long-term debt and capital leases, excluding current installments	$	—		320,553

Capital leases have varying maturity dates and implicit interest rates which generally approximate 7%-10%. The Company estimates that the fair value of debt instruments, excluding capital lease obligations, was $286.4 million, or $60.2 million less than the carrying value, at March 31, 2007. The Company estimated that the fair value of the Company’s debt instruments, excluding capital lease obligations, approximated $232.4 million, or $82.6 million less than the carrying value, at March 31, 2006.

May 5, 2005 Refinancing Transaction

On May 5, 2005, the Company entered into an Amended and Restated Credit Agreement with Banc of America Securities, LLC, as Sole Lead Arranger and Sole Book Manager, and Bank of America, N.A., as Administrative Agent, and certain lenders (as amended, the “2005 Credit Agreement”) which resulted in the refinancing of the Company’s $70 million senior secured revolving credit facility (the “Old Revolving Credit Facility”), which would have matured on July 3, 2008, and significantly improved the Company’s liquidity position. The 2005 Credit Agreement is a $90 million secured facility comprised of:

•		a $55 million revolving credit facility ($40 million of which may be used for letters of credit), maturing on December 15, 2009 which is not subject to a borrowing base limitation, (the “2005 Revolving Credit Facility”); and

•		a $35 million non-amortizing term loan facility maturing on December 15, 2009 (the “2005 Term Loan Facility”).

Interest on borrowings under the 2005 Credit Agreement is floating, based upon existing market rates, at either (a) LIBOR plus a margin of 5.75% for loans at March 31, 2007, or (b) an alternate base rate (based upon the greater of the agent bank’s prime lending rate or the Federal Funds rate plus 0.5%) plus a margin of 4.75% for loans at March 31, 2007. Margin levels increase as the levels of receivables sold by Graphics to Graphics Finance (as defined below) meet certain thresholds under the Receivables Facility (as defined below). In addition, Graphics is obligated to pay specified unused commitment, letter of credit and other customary fees.

ACG HOLDINGS, INC.

Notes to Consolidated Financial Statements

Borrowings under the 2005 Credit Agreement are secured by substantially all of Graphics’ assets. Receivables sold to Graphics Finance (as defined below) under the Receivables Facility (as defined below) are released from this lien at the time they are sold. In addition, Holdings has guaranteed all indebtedness under the 2005 Credit Agreement which guarantee is secured by a pledge of all of Graphics’ capital stock.

The 2005 Credit Agreement requires satisfaction of a first lien leverage ratio test. In addition, the 2005 Credit Agreement includes various other customary affirmative and negative covenants and events of default. These covenants, among other things, restrict the Company’s ability to:

	•		incur or guarantee additional debt;

	•		create or permit to exist certain liens;

	•		pledge assets or engage in sale-leaseback transactions;

	•		make capital expenditures, other investments or acquisitions;

	•		prepay, redeem, acquire for value, refund, refinance, or exchange certain debt (including the 10% Notes), subject to certain exceptions;

	•		repurchase or redeem equity interests;

	•		change the nature of its business;

	•		pay dividends or make other distributions;

	•		enter into transactions with affiliates;

	•		dispose of assets or enter into mergers or other business combinations; and

	•		place restrictions on dividends, distributions or transfers to the Company from its subsidiaries.

The 2005 Credit Agreement also requires delivery to the lenders of the Company’s annual consolidated financial statements accompanied by a report and opinion of its independent certified public accountants that is not subject to any “going concern” qualification.

At March 31, 2007, the Company had borrowings outstanding under the 2005 Revolving Credit Facility totaling $26.9 million and had letters of credit outstanding of approximately $22.2 million. As a result, the Company had additional borrowing availability under the 2005 Revolving Credit Facility of approximately $5.9 million. During the quarter ended June 30, 2005, the Company used the proceeds from the 2005 Term Loan Facility to repay borrowings outstanding under the Old Revolving Credit Facility (of which the balance was $16.0 million as of March 31, 2005) and settle certain other of its obligations.

September 26, 2006 Revolving Trade Receivables Facility

On September 26, 2006, American Color Graphics Finance, LLC (“Graphics Finance”), a newly formed wholly-owned subsidiary of Graphics, entered into a $35 million revolving trade receivables facility (as amended, the “Receivables Facility”) with Banc of America Securities, LLC, as Sole Lead Arranger and Sole Book Manager, and Bank of America, N.A., as Administrative Agent, Collateral Agent and Lender and certain lenders. The Receivables Facility improved Graphics’ overall liquidity position.

The maximum borrowing availability under the Receivables Facility is $35 million. Availability at any time is limited to a borrowing base linked to 85% of the balances of eligible receivables less certain minimum excess availability requirements. Graphics expects most of its receivables from U.S. customers will be eligible for inclusion in the borrowing base.

Graphics Finance’s separate assets and liabilities are available to pay Graphics Finance’s separate debts but are neither available to pay the debts of the consolidated entity or any other constituent thereof nor constitute obligations of any other constituent of the consolidated entity. Graphics’ separate assets and liabilities are available to pay Graphics’ separate debts but are neither available to pay the debts of the consolidated entity or any other constituent thereof nor constitute

ACG HOLDINGS, INC.

Notes to Consolidated Financial Statements

obligations of any other constituent of the consolidated entity. The foregoing does not apply to liabilities for which joint and several liability is provided under the Internal Revenue Code or the Employment Retirement Income Security Act (“ERISA”).

The Receivables Facility also requires Graphics, as servicer of the receivables sold by it to Graphics Finance, to satisfy the same first lien leverage ratio test contained in the 2005 Credit Agreement. In addition, the Receivables Facility contains other customary affirmative and negative covenants and events of default. It also contains other covenants customary for facilities of this type, including requirements related to credit and collection policies, deposits of collections and maintenance by each party of its separate corporate identity, including maintenance of separate records, books, assets and liabilities and disclosures about the transactions in the financial statements of Holdings and its consolidated subsidiaries. The Receivables Facility also requires delivery to the lenders of the Company’s annual consolidated financial statements accompanied by a report and opinion of its independent certified public accountants that is not subject to any “going concern” qualification. Failure to meet these covenants could lead to an acceleration of the obligations under the Receivables Facility, following which the lenders would have the right to sell the assets securing the Receivables Facility.

The Receivables Facility expires on December 15, 2009, when all borrowings thereunder become payable in full.

On March 31, 2007, there were borrowings of $4.7 million under the Receivables Facility. Based on receivables purchased from Graphics at March 31, 2007, additional availability under the Receivables Facility was approximately $1.1 million. In addition to this availability, if Graphics Finance had purchased from Graphics all other eligible receivables at March 31, 2007, availability would have further increased by $23.7 million.

At March 31, 2007, Graphics Finance had $0.2 million of cash deposits with Bank of America, which have been classified as Other current assets in the Company’s consolidated balance sheet, as such funds are pledged to secure payment of borrowings under the Receivables Facility and are therefore not available to meet the Company’s cash operating requirements.

10% Senior Second Secured Notes

The 10% Senior Second Secured Notes Due 2010 (the “10% Notes”) mature June 15, 2010, with interest payable semi-annually on June 15 and December 15. The 10% Notes were redeemable at the option of Graphics in whole or in part on June 15, 2007, at 105% of the principal amount, plus accrued interest. The redemption price will decline each year after 2007 and will be 100% of the principal amount of the 10% Notes, plus accrued interest, beginning on June 15, 2009. Upon a change of control, Graphics will be required to make an offer to purchase the 10% Notes, unless such requirement has been waived. The purchase price will equal 101% of the principal amount of the 10% Notes on the date of purchase, plus accrued interest.

Amendments to Credit Facilities

On June 13, 2007, the 2005 Credit Agreement and the Receivables Facility were amended to (a) increase the maximum permissible first lien leverage ratios as of the last day of the fiscal quarters ending September 30, and December 31, 2007, and March 31, 2008, and (b) require that the Company maintain certain levels of minimum total liquidity at November 30, December 13, and December 31, 2007, and at the end of each month thereafter through March 31, 2008.

Covenant Compliance and Liquidity

At March 31, 2007, and August 31, 2007, the Company was in compliance with the covenant requirements set forth in the 2005 Credit Agreement and the Receivables Facility, as amended and the 10% Note indenture. The Company was not in compliance with certain reporting requirements under its 2005 Credit Agreement and Receivables Facility subsequent to March 31, 2007. On August 31, 2007, the lenders under both facilities waived such noncompliance. One such waiver related to the Company’s failure to deliver its restated consolidated financial statements for the fiscal years ended March 31, 2007, 2006 and 2005 accompanied by a report and opinion of its independent certified public accountants that was not subject to any “going concern” qualification. See the Report of Independent Registered Public Accounting Firm, which contains a “going concern” qualification, accompanying our restated consolidated financial statements. The lenders under both facilities waived such noncompliance with respect to the delivery of such Report of Independent Registered Public Accounting Firm until November 29, 2007.

ACG HOLDINGS, INC.

Notes to Consolidated Financial Statements

The Company anticipates that its primary needs for liquidity will be to conduct its business, meet debt service requirements, including its required interest payment on the 10% Notes on December 15, 2007, and make capital expenditures. The Company is continually working to improve its liquidity position.

The Company believes, based on management’s current forecasts and its current capital structure (and without giving effect to the proposed Vertis Merger), it will have sufficient liquidity to meet its requirements through November 29, 2007. If the Vertis Merger closes on or prior to such date, the Company will thereupon become a wholly-owned subsidiary of Vertis.

On August 31, 2007, the 2005 Credit Agreement and Receivables Facility were amended to, among other things, provide that compliance with the first lien coverage ratio covenants in each thereof as of September 30, 2007, will not be measured or determined for any purpose until November 29, 2007 (including, without limitation, for the purpose of determining the Company’s entitlement to make additional borrowings under either such facility on or prior to such date). We do not believe that it is probable that the Company will be in compliance with its first lien coverage ratio covenants under its 2005 Credit Agreement and Receivables Facility at or after November 29, 2007. The lenders under both facilities also waived the Company’s noncompliance with certain reporting requirements under such facilities subsequent to March 31, 2007. One such waiver related to the Company’s failure to deliver its restated consolidated financial statements for the fiscal years ended March 31, 2007, 2006 and 2005 accompanied by a report or opinion of our independent certified public accountants that was not subject to any “going concern” qualification. See the Report of Independent Registered Public Accounting Firm, which contains a “going concern” qualification, accompanying our restated consolidated financial statements. The lenders under both facilities waived such noncompliance with respect to the delivery of such Report of Independent Registered Public Accounting Firm until November 29, 2007.

In the event the merger agreement for the Vertis Merger is not entered into (or the Vertis Merger is not consummated by November 29, 2007), based on management’s current forecasts and the Company’s current capital structure, in order for the Company to have sufficient liquidity to meet its requirements for liquidity after November 29, 2007, including its next required interest payment on the 10% Notes, the Company would have to take one or more actions to improve its liquidity or modify its requirements for liquidity, which could include, without limitation, seeking waivers or amendments from the requisite lenders under the 2005 Credit Agreement or the Receivables Facility or the requisite holders of the 10% Notes, or all three thereof, under the documentation therefor, refinancing one or both of the 2005 Credit Agreement or Receivables Facility, incurring additional indebtedness above currently permitted levels (if the requisite lenders under the Company’s bank credit facilities and the requisite holders of the 10% Notes permit it), seeking to exchange some or all of the 10% Notes for other securities of the Company, selling the entire Company to another party or disposing of material assets or operations, reducing or delaying capital expenditures or otherwise reducing the Company’s expenses, or taking other material actions that could have a material adverse effect on the Company. If the Company’s business does not generate profitability and cash from operations in line with management’s current forecast for the period through November 29, 2007 (and the proposed Vertis Merger has not theretofore been consummated), the Company would be required to take one or more of such actions sooner than November 29, 2007. The Company cannot provide assurances that any such action could be successfully accomplished or as to the timing or terms thereof.

Based on management’s current forecasts and the Company’s current capital structure (and without giving effect to the proposed Vertis Merger or any other actions described above that the Company may take), the Company cannot provide any assurance that it will be able to comply with the first lien coverage ratio covenants in the 2005 Credit Agreement and the Receivables Facility after November 29, 2007. Accordingly, pursuant to Emerging Issues Task Force Issue 86-30 “Classification of Obligations When a Violation is Waived By the Creditors (“EITF 86-30”) and Statement of Financial Accounting Standards No. 78, “Classification of Obligations That Are Callable by the Creditor-an amendment of ARB No. 43, Chapter 3A (“SFAS 78”), the Company has classified all amounts outstanding under the 2005 Credit Agreement, the Receivables Facility, the 10% Notes, and the Company’s capital lease obligations as current liabilities in the accompanying March 31, 2007 consolidated balance sheet. No amounts under the 2005 Credit Agreement, Receivables Facility, 10% Notes or capital lease obligations were due but unpaid at March 31, 2007, or August 31, 2007.

See “Subsequent Event” note 18 for information about the proposed Vertis Merger.

ACG HOLDINGS, INC.

Notes to Consolidated Financial Statements

(8)		Income Taxes

		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. Significant components of the Company’s deferred tax liabilities and assets as of March 31, 2007 and 2006 are as follows (in thousands):


	March 31,
	2007		2006
	(Restated)		(Restated)
Deferred tax liabilities:
Book over tax basis in property, plant and equipment	$	8,508		11,558
Foreign taxes		1,715		1,924
Accumulated amortization		3,207		2,806

Total deferred tax liabilities		13,430		16,288

Deferred tax assets:
Allowance for doubtful accounts		399		500
Accrued expenses and other liabilities		5,361		8,629
Net operating loss carryforwards		65,814		56,467
AMT credit carryforwards		1,203		1,203
Additonal minimum pension liability		5,645		8,477
Cumulative translation adjustment		203		157
Other, net		1,469		996

Total deferred tax assets		80,094		76,429
Valuation allowance for deferred tax assets		68,379		62,598

Net deferred tax assets		11,715		13,831

Net deferred tax liabilities	$	1,715		2,457

		Management has evaluated the need for a valuation allowance for deferred tax assets and believes that certain deferred tax assets will more likely than not be realized through the future reversal of existing taxable temporary differences of the Company. The valuation allowance increased by $5.8 million during the fiscal year ended March 31, 2007 as a result of an increase in the deferred tax items, which is net of a $2.8 million decrease related to the tax effect of the decrease in the additional minimum pension liability, which is a component of other comprehensive income (loss).

		The valuation allowance increased by $7.6 million during the fiscal year ended March 31, 2006 as a result of an increase in the deferred tax items, which includes an increase of $1.0 million related to the tax effect of the increase in the additional minimum pension liability, which is a component of other comprehensive income (loss).

ACG HOLDINGS, INC.

Notes to Consolidated Financial Statements

		During fiscal years ended March 31, 2007 and 2006, the Company recorded adjustments of $0.4 million and $3.6 million, respectively, to reflect the tax benefit associated with changes in estimate with respect to its income tax liability.

		Income tax expense (benefit) attributable to loss from continuing operations consists of (in thousands):


	Year ended March 31,
	2007			2006			2005
Current
Federal	$	—			—			—
State		119			89			129
Foreign		430			174			(990	)

Total current		549			263			(861	)


Deferred
Federal		—			(482	)		(310	)
State		(525	)		47			(417	)
Foreign		(217	)		(3,197	)		(97	)

Total deferred		(742	)		(3,632	)		(824	)

Income tax benefit	$	(193	)		(3,369	)		(1,685	)

The effective tax rates for the fiscal years ended March 31, 2007, 2006 and 2005 were 0.9%, 17.7% and 6.0%, respectively. The difference between these effective tax rates relating to continuing operations and the statutory federal income tax rate is composed of the following items:


	Year Ended March 31,
	2007			2006			2005
	(Restated)			(Restated)			(Restated)
Statutory tax rate		35.0	%		35.0	%		35.0	%
State income taxes, less federal tax impact		0.1			(0.4	)		(0.1	)
Foreign taxes, less federal tax impact		(0.3	)		(0.5	)		2.3
Other nondeductible expenses		—			—			(0.5	)
Change in valuation allowance		(35.4	)		(33.5	)		(31.5	)
Change in cumulative translation adjustment		0.1			(1.0	)		(2.0	)
Previously accrued taxes		2.1			19.1			1.5
Other, net		(0.7	)		(1.0	)		1.3

Effective income tax rate		0.9	%		17.7	%		6.0	%

ACG HOLDINGS, INC.

Notes to Consolidated Financial Statements

		As of March 31, 2007, the Company had available net operating loss carryforwards (“NOLs”) for state purposes of $125.8 million, which can be used to offset future state taxable income. If these NOLs are not utilized, they will begin to expire in 2008 and will be totally expired in 2027.

		As of March 31, 2007, the Company had available NOLs for federal purposes of $172.8 million, which can be used to offset future federal taxable income. If these NOLs are not utilized, they will begin to expire in 2011 and will be totally expired in 2027.

		The Company also had available an alternative minimum tax credit carryforward of $1.2 million, which can be used to offset future taxes in years in which the alternative minimum tax does not apply. This credit can be carried forward indefinitely.

		The Company has alternative minimum tax NOLs in the amount of $186.7 million, which will begin to expire in 2011 and will be totally expired in 2027.

(9)		Other Liabilities

		The components of other liabilities are as follows (in thousands):


	March 31,
	2007		2006
	(Restated)		(Restated)
Deferred revenue agreements (see note 13)	$	41,540		45,641
Postretirement liabilities (see note 10)		3,037		3,457
Pension liabilities and other benefit obligations		5,361		11,601
Restructuring		966		2,484
Other		1,595		2,121

Total	$	52,499		65,304

(10)		Employee Benefit Plans

		*Defined Benefit Pension Plans*

		Pension Plans

		The Company sponsors defined benefit pension plans covering full-time employees of the Company who had at least one year of service at December 31, 1994. Benefits under these plans generally are based upon the employees’ years of service and, in the case of salaried employees, compensation during the years immediately preceding retirement. The Company’s general funding policy is to contribute amounts within the annually calculated actuarial range allowable as a deduction for federal income tax purposes. The plans’ assets are maintained by trustees in separately managed portfolios consisting primarily of equity and fixed income securities. In October 1994, the Board of Directors approved an amendment to the Company’s defined benefit pension plans, which resulted in the freezing of additional defined benefits for future services under the plans effective January 1, 1995.

		Supplemental Executive Retirement Plan

		In October 1994, the Board of Directors approved a new Supplemental Executive Retirement Plan (“SERP”), which is a defined benefit plan, for certain key executives. In July 2005, the Board of Directors approved an amendment to this plan (the “Amended and Restated Supplemental Executive Retirement Plan”). The aggregate accumulated benefit obligation under this plan, as amended, was approximately $0.5 million and $0.6 million at March 31, 2007 and 2006, respectively.

ACG HOLDINGS, INC.

Notes to Consolidated Financial Statements

		*Defined Benefit Postretirement Plans*

		Postretirement Benefits

		The Company provides certain other postretirement benefits, primarily life and health insurance. Full-time employees who are eligible for benefits under the defined benefit pension plans, have attained age 55 and have at least five years of service are entitled to postretirement health care and life insurance coverage. Postretirement life insurance coverage is provided at no cost to eligible retirees. Special cost-sharing arrangements for health care coverage are available to employees whose age plus years of service at the date of retirement equals or exceeds 85 (“Rule of 85”). Any eligible retiree not meeting the Rule of 85 must pay 100% of the required health care insurance premium.

		Effective January 1, 1995, the Company amended the health care plan changing the health care benefit for all employees retiring on or after January 1, 2000. This amendment had the effect of reducing the accumulated postretirement benefit obligation by approximately $3 million. This reduction is reflected as unrecognized prior service cost and is being amortized on a straight line basis over 15.6 years, the average remaining years of service to full eligibility of active plan participants at the date of the amendment.

		Effective February 1, 2006, the Company amended the health care plan changing the post 65 healthcare benefits for all current and future retirees. This amendment had an immaterial impact on the accumulated postretirement benefit obligation at March 31, 2006.

		401(k) *Defined Contribution Plan*

		Effective January 1, 1995, the Company amended its 401(k) defined contribution plan. Eligible participants may contribute up to 15% of their annual compensation subject to maximum amounts established by the Internal Revenue Service and receive an employer-matching contribution on amounts contributed. Through March 16, 2003, the employer-matching contribution was made bi-weekly and equaled 2% of annual compensation for all plan participants plus 50% of the first 6% of annual compensation contributed to the plan by each employee, subject to maximum amounts established by the Internal Revenue Service. Beginning March 17, 2003 through December 31, 2004, the employer matching contribution was made bi-weekly and equaled 25% of the first 6% of annual compensation contributed to the plan by each employee, subject to maximum amounts established by the Internal Revenue Service. Subsequent to December 31, 2004, the employer matching contributions were made bi-weekly and equaled 50% of the first 6% of annual compensation contributed to the plan by each employee, subject to maximum amounts established by the Internal Revenue Service. The Company’s contribution under this Plan amounted to $1.7 million during the fiscal year ended March 31, 2007, $1.6 million during the fiscal year ended March 31, 2006 and $1.1 million during the fiscal year ended March 31, 2005.

ACG HOLDINGS, INC.

Notes to Consolidated Financial Statements

The following table provides a reconciliation of the changes in the defined benefit plans’ benefit obligations and fair value of plan assets for the fiscal years ended March 31, 2007 and 2006 and a statement of the funded status of such plans as of March 31, 2007 and 2006 (in thousands):


	Defined Benefit						Defined Benefit
	Pension Plans						Postretirement Plan
	2007			2006			2007			2006
Change in Benefit Obligation
Benefit obligation at beginning of year	$	72,621			69,624			2,412			2,823
Service cost		455			462			22			34
Interest cost		4,208			4,321			128			179
Plan amendments		—			—			—			(600	)
Plan participants’ contributions		—			—			175			441
Actuarial loss (gain)		(2,432	)		3,537			(131	)		251
Expected benefit payments		(3,774	)		(5,323	)		(470	)		(716	)

Benefit obligation at end of year	$	71,078			72,621			2,136			2,412


Change in Plan Assets
Fair value of plan assets at beginning of year	$	57,283			49,675			—			—
Actual return on plan assets		7,637			3,196			—			—
Employer contributions:
Pension Plans		5,718			8,017			—			—
SERP		50			1,718			—			—
Postretirement Plan		—			—			295			275
Plan participants’ contributions		—			—			175			441
Benefits paid		(3,774	)		(5,323	)		(470	)		(716	)

Fair value of plan assets at end of year	$	66,914			57,283			—			—


Funded Status	$	(4,164	)		(15,338	)		(2,136	)		(2,412	)
Unrecognized net actuarial (gain) loss		14,392			21,611			(12	)		109
Unrecognized prior service gain		—			—			(1,282	)		(1,566	)
Plan participants’ contributions		—			—			93			112
Additional minimum pension liability		(14,392	)		(21,611	)		—			—

Accrued benefit liability	$	(4,164	)		(15,338	)		(3,337	)		(3,757	)

ACG HOLDINGS, INC.

Notes to Consolidated Financial Statements


	Defined Benefit Pension Plans						Defined Benefit Postretirement Plan
	2007			2006			2007			2006
Weighted — Average Assumptions
Discount rate — benefit obligation		6.25	%		6.00	%		6.25	%		6.00	%
Expected return on plan assets		8.50	%		8.50	%		N/A			N/A
Rate of compensation increase		N/A			N/A			N/A			N/A

The Company uses a December 31 measurement date for its defined benefit pension and postretirement plans. For measurement purposes under the defined benefit postretirement plan, a 10 percent annual rate of increase in the per capita cost of covered health care benefits (including prescription drugs) was assumed for March 31, 2007. This rate was assumed to decrease gradually to 5 percent through the fiscal year ending 2013 and remain at that level thereafter.


	Defined Benefit Pension Plans									Defined Benefit Postretirement Plan
	2007			2006			2005			2007			2006			2005
Components of Net Periodic Benefit Cost (in thousands)
Service cost	$	455			462			468			22			34			31
Interest cost		4,208			4,321			4,217			128			179			170
Expected return on plan assets		(4,868	)		(4,262	)		(3,510	)		—			—			—
Amortization of prior service cost		—			—			—			(284	)		(222	)		(222	)
Amortization of unrecognized loss		2,017			2,001			2,022			—			—			—
Settlement loss		—			169			46			—			—			—
Recognized net actuarial (gain) loss		—			—			—			(10	)		2			(43	)

Net periodic benefit cost (income)	$	1,812			2,691			3,243			(144	)		(7	)		(64	)

		Expected Future Benefit Payments

		The following benefit payments are expected to be paid (in thousands) to eligible plan participants under the Company’s defined benefit pension plans and defined benefit postretirement plan.


	Defined Benefit		Defined Benefit
Fiscal Year	Pension Plans		Postretirement Plan (a)
2008	$	4,473		205
2009		4,546		206
2010		4,625		206
2011		4,710		204
2012		4,815		202
2013 — 2017		25,239		934

Total	$	48,408		1,957


(a)		Represents expected benefit payments net of plan participants’ contributions.

ACG HOLDINGS, INC.

Notes to Consolidated Financial Statements

Assumed health care cost trend rates have a significant effect on the amounts reported for the medical component of the defined benefit postretirement plan. A one-percentage point change in the assumed health care cost trend rates would have the following effects (in thousands):


	1% Point		1% Point
	Increase		Decrease
Effect on total of service and interest cost components of expense	$	4		(3	)

Effect on postretirement benefit obligation	$	63		(58	)

		Plan Assets

		The Company’s defined benefit pension plans reflect weighted-average target allocations as of March 31, 2007 and the percentages of the fair value of plan assets by asset category are allocated at March 31, 2007 and 2006 as follows:


	Target
	Allocation			Percentage of Plan Assets
	2007			2007			2006
Global equity securities		73.6	%		74.0	%		73.3	%
Fixed income securities		21.9	%		21.0	%		20.9	%
Real Estate		4.5	%		4.5	%		4.6	%
Cash		0.0	%		0.5	%		1.2	%


Total		100.0	%		100.0	%		100.0	%

		The Company’s pension plans’ long-term target asset allocation is shown above. The long-term allocation targets reflect the Company’s asset class return expectations and tolerance for investment risk within the context of the pension plans’ long-term obligations. The long-term asset allocation is supported by an analysis that incorporates historical and expected returns by asset class as well as volatilities and correlations across asset classes and the Company’s liability profile. Due to market conditions and other factors, actual asset allocations may vary from the target allocation outlined above.

		To develop the expected long-term rate of return on assets assumption, the Company considered the historical returns and future expectations for returns for each asset class, as well as the target asset allocation of the present portfolio. This resulted in the selection of the 8.5% long-term rate of return on asset assumption for 2007.

		It is the Company’s practice to fund amounts for the defined benefit pension plans at least sufficient to meet the minimum requirements set forth in applicable employee benefit laws and local tax laws. Liabilities in excess of these funding levels are included in the Company’s consolidated balance sheets. Employer contributions for the defined benefit pension plans for the fiscal year ending March 31, 2008 are estimated to be approximately $0.8 million.

(11)		Capital Stock

		At March 31, 2007, capital stock consists of Holdings’ common stock (“Common Stock”). Each share of Common Stock is entitled to one vote on each matter common shareholders are entitled to vote. Dividends on the Common Stock are discretionary by the Board of Directors and are restricted by the 2005 Credit Agreement (see note 7).

ACG HOLDINGS, INC.

Notes to Consolidated Financial Statements

(12)		Stock Option Plans

		*Common Stock Option Plans*

		In 1993, the Company established the ACG Holdings, Inc. Common Stock Option Plan. This plan, as amended, (the “1993 Common Stock Option Plan”) is administered by a committee of the Board of Directors (the “Committee”) and currently provides for granting up to 17,322 shares of Common Stock. On January 16, 1998, the Company established another common stock option plan (the “1998 Common Stock Option Plan”). This plan is administered by the Committee and provides for granting up to 36,939 shares of Common Stock. The 1993 Common Stock Option Plan and the 1998 Common Stock Option Plan are collectively referred to as the “Common Stock Option Plans.” Stock options may be granted under the Common Stock Option Plans to officers and other key employees of the Company at the exercise price per share of Common Stock, as determined at the time of grant by the Committee in its sole discretion. All options are 25% exercisable on the first anniversary date of a grant and vest in additional 25% increments on each of the next three anniversary dates of each grant. All options expire 10 years from the date of grant.

		A summary of activity under the Common Stock Option Plans is as follows:


				Weighted-
				Average
				Exercise		Exercisable
	Options			Price ($)		Options (a)
Outstanding at March 31, 2004		9,197			.01		6,946
Granted		—			—
Exercised		—			—
Forfeited		(1,301	)		.01

Outstanding at March 31, 2005		7,896			.01		7,131
Granted		2,504			.01
Exercised		—			—
Forfeited		(1,047	)		.01

Outstanding at March 31, 2006		9,353			.01		6,466
Granted		—			—
Exercised		—			—
Forfeited		—			—

Outstanding at March 31, 2007		9,353			.01		7,475


(a)		At March 31, 2007, 2006 and 2005 all exercisable options had a $.01/option exercise price.

Black-Scholes Option Pricing Model Wtd. Avg. Assumptions

Fiscal Year

Wtd. Avg.

Exercise

Risk Free

Annual

Expected

Ended

Options

Grant Date

Price per

Interest

Dividend

Expected

Life

March 31,

Granted

Fair Value ($)

Option ($)

Rate (%)

Yield (%)

Volatility

(Years)

2007

—

2006

2,504

—

)

2005

—


(a)		As the grant date Fair Value was $0, the Black-Scholes pricing was not calculated.

The weighted-average remaining contractual life of the options outstanding at March 31, 2007 was 4.1 years. A total of 7,974 options for shares (including 2,224 previously exercised options that were subsequently canceled) of Holdings Common Stock were reserved for issuance, but not granted under the Common Stock Option Plans at March 31, 2007.

ACG HOLDINGS, INC.

Notes to Consolidated Financial Statements

There was no stock compensation expense recorded in the fiscal year ended March 31, 2007. The Company recognized net stock compensation expense of less than $0.1 million in both the fiscal year ended March 31, 2006 and March 31, 2005.

(13)		Commitments and Contingencies

		The Company incurred rent expense of $3.6 million, $3.2 million and $4.3 million for the fiscal years ended March 31, 2007, 2006 and 2005, respectively, under various operating leases. Future minimum rental commitments under existing operating lease arrangements at March 31, 2007 are as follows (in thousands):


Fiscal Year
2008	$	3,347
2009		2,941
2010		2,153
2011		1,143
2012		208
Thereafter		—

Total	$	9,792

		The Company has employment agreements with three of its principal officers. These agreements provide for minimum salary levels as well as incentive bonuses, which are payable if specified management goals are attained. The aggregate commitment for future compensation under these agreements, excluding bonuses, is approximately $3.1 million.

		In the fiscal year ended March 31, 1998, the Company entered into multi-year contracts to purchase a portion of the Company’s raw materials to be used in its normal operations. In connection with such purchase agreements, pricing for a portion of the Company’s raw materials is adjusted for certain movements in market prices, changes in raw material costs and other specific price increases while purchase quantity levels are variable based upon certain contractual requirements and conditions. The Company is deferring certain contractual provisions over the life of the contracts, which are being recognized as the purchase commitments are achieved and the related inventory is sold. The amount deferred at March 31, 2007 is $41.5 million and is included within Other liabilities in the Company’s consolidated balance sheet.

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

		Graphics received written notice, dated May 10, 2004, of its potential liability in connection with the Gibson Environmental Site at 2401 Gibson Street, Bakersfield, California. Gibson Environmental, Inc. operated the (six acre) Site as a storage and treatment facility for used oil and contaminated soil from June 1987 through October 1995. Graphics received the notice and a Settlement Offer from LECG, a consultant representing approximately

ACG HOLDINGS, INC.

Notes to Consolidated Financial Statements


	60	companies comprising the Gibson Group Trust. Graphics is investigating this matter but it believes its potential liability in connection with this Site will not be material to its business or the Company’s consolidated financial statements as a whole.

		Based upon an analysis of Graphics’ volumetric share of waste contributed to the sites, the Company maintains a reserve of approximately $0.1 million in connection with these liabilities in its consolidated balance sheets at March 31, 2007 and 2006. The Company believes this amount is adequate to cover such liabilities.

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

(14)		Interim Financial Information (Unaudited)

		Quarterly financial information follows (in thousands):


				Gross		Net Income
		Sales		Profit (a)		(Loss) (b)
				(Restated)		(Restated)
Fiscal Year 2007	Quarter Ended:
	June 30	$	110,010		12,463		(2,738	)
	September 30		111,654		12,330		(4,488	)
	December 31		120,065		13,131		(4,523	)
	March 31		103,297		10,448		(8,787	)

	Total	$	445,026		48,372		(20,536	)


Fiscal Year 2006	Quarter Ended:
	June 30	$	108,270		12,952		(2,441	)
	September 30		105,460		11,605		(4,378	)
	December 31		118,724		14,860		2,236
	March 31		102,035		9,295		(11,134	)(c)

	Total	$	434,489		48,712		(15,717	)


(a)		The restatement of the Company’s consolidated financial statements increased gross profit in the amount of $0.3 million and $0.2 million in the quarters ended June 30, 2006 and March 31, 2007, respectively. The impact of the restatement on gross profit for the quarter ended June 30, 2005 was an increase of $0.3 million and was a decrease of $0.2 million and $0.7 million for the quarters ended September 30, 2006 and March 31, 2006, respectively.

(b)		The restatement of the Company’s consolidated financial statements decreased net loss by $0.6 million and $0.1 million in the quarter ended June 30, 2006 and March 31, 2007, respectively and increased net loss by $0.1 million in each of the quarters ended September 30, 2006 and December 31, 2006. The Company’s net loss was increased in the amount of $0.2 million and $0.9 million in the quarter ended September 30, 2005 and March 31, 2006, respectively, as a result of the restatement.

(c)		The net loss for the quarter ended March 31, 2006 includes a non-cash impairment charge of $2.8 million.

(15)		Restructuring Costs and Other Charges

		*Fiscal Year 2005 Restructuring Costs*

		New York Premedia Consolidation Plan

		In March 2005, the Company’s Board of Directors approved a restructuring plan for the premedia services segment designed to improve operating efficiencies and overall profitability. This plan included the consolidation of the Company’s two premedia facilities located in New York, New York. This action resulted in the elimination of 10 positions within the Company.

ACG HOLDINGS, INC.

Notes to Consolidated Financial Statements

		As a result, the Company recorded a pre-tax restructuring charge of approximately $1.5 million in the quarter ended March 31, 2005 associated with this plan. This charge was classified within restructuring and other charges in the consolidated statement of operations for the fiscal year ended March 31, 2005. The costs of this restructuring plan were accounted for in accordance with the guidance set forth in Statement of Financial Accounting Standards No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS 146”). This restructuring charge was composed of severance and related termination benefits, lease termination costs primarily related to future lease commitments and other costs. In the quarter ended March 31, 2007, the Company reduced the restructuring reserve related to this plan by approximately $0.1 million due to certain changes in assumptions related to lease termination costs. The Company also reduced the restructuring reserve related to this plan by approximately $0.2 million in the quarter ended March 31, 2006. This was primarily the result of lower than anticipated severance and other employee costs due to certain terminated employees obtaining other employment during their severance periods and certain changes in assumptions related to lease termination costs. These reductions of the restructuring reserve are and were classified within restructuring costs (benefit) and other charges in the consolidated statement of operations for the fiscal years ended March 31, 2007 and 2006, respectively.

		The following table summarizes the activity related to this restructuring plan for the fiscal year ended March 31, 2007 (in thousands):


	03/31/06								03/31/07
	Restructuring					Reserve			Restructuring
	Reserve Balance		Activity			Adjustment			Reserve Balance
	(Restated)					(Restated)
Lease termination costs	$	576		(162	)		(79	)		335
Other costs		—		—			12			12

	$	576		(162	)		(67	)		347

		The process of consolidating the two premedia services facilities and the elimination of certain personnel within the Company was substantially completed by April 30, 2005. During the fiscal year ended March 31, 2006, $0.6 million of these costs were paid. As of March 31, 2007 the Company believes the restructuring reserve of approximately $0.3 million is adequate. The Company anticipates that approximately $0.1 million of these costs will be paid during each fiscal year through March 31, 2010. These payments will be funded through cash generated from operations and borrowings under the Company’s 2005 Revolving Credit Facility and Receivables Facility.

		Pittsburg Facility Closure Plan

		In March 2005, the Company’s Board of Directors approved a restructuring plan for the print segment to reduce manufacturing costs and improve profitability. This plan included the closure of the Pittsburg, California print facility. This action resulted in the elimination of 136 positions within the Company.

		As a result, the Company recorded a pre-tax restructuring charge of approximately $3.1 million in the quarter ended March 31, 2005 associated with this plan. This charge was classified within restructuring and other charges in the consolidated statements of operations for the fiscal year ended March 31, 2005. The costs of this restructuring plan were accounted for in accordance with the guidance set forth in SFAS 146. This restructuring charge was composed of severance and related termination benefits, lease termination costs and other costs. The Company reduced the restructuring reserve related to this plan by approximately $0.8 million in the quarter ended December 31, 2005 as a result of lower than anticipated severance and other employee costs due to certain terminated employees obtaining other employment during their severance periods. The Company increased the restructuring reserve related to this plan by approximately $0.3 million in the quarter ended March 31, 2006 as a result of certain changes in assumptions related to lease termination costs and certain costs that could not be accrued for in earlier periods. These changes in the reserve were classified within restructuring costs (benefit) and other charges in the consolidated statements of operations for the fiscal year ended March 31, 2006.

ACG HOLDINGS, INC.

Notes to Consolidated Financial Statements

The following table summarizes the activity related to this restructuring plan for the fiscal year ended March 31, 2007 (in thousands):


	03/31/06							03/31/07
	Restructuring					Reserve		Restructuring
	Reserve Balance		Activity			Adjustment		Reserve Balance
	(Restated)					(Restated)
Lease termination costs	$	599		(1	)		—		598
Other costs		1		(10	)		25		16

	$	600		(11	)		25		614

The process of closing the print facility and the elimination of certain personnel within the Company was completed by March 31, 2005. During each of the fiscal years ended March 31, 2006 and 2005, $1.0 million of these costs were paid. As of March 31, 2007 the Company believes the restructuring reserve of approximately $0.6 million is adequate. The Company anticipates that these costs will be paid by March 31, 2008. These payments will be funded through cash generated from operations and borrowings under the Company’s 2005 Revolving Credit Facility and Receivables Facility.

Plant and SG&A Reduction Plan

In February 2005, the Company’s Board of Directors approved a restructuring plan for the print and premedia services segments to reduce overhead costs and improve operating efficiency and profitability. This plan resulted in the elimination of 60 positions within the Company, including both facility and selling and administrative employees.

As a result, the Company recorded a pre-tax restructuring charge of approximately $3.5 million in the quarter ended March 31, 2005 associated with this plan. This charge was classified within restructuring costs and other charges in the consolidated statements of operations for the fiscal year ended March 31, 2005. The costs of this restructuring plan were accounted for in accordance with the guidance set forth in SFAS 146. This restructuring charge was composed of severance and related termination benefits and other costs. The Company reduced the reserve related to this plan by approximately $0.2 million in the quarter ended March 31, 2006. This reduction was primarily the result of lower than anticipated severance and other employee costs due to certain terminated employees obtaining other employment during their severance periods. This reduction of the reserve was classified within restructuring costs (benefit) and other charges in the consolidated statements of operations for the fiscal year ended March 31, 2006.

The following table summarizes the activity related to this restructuring plan for the fiscal year ended March 31, 2007 (in thousands):


	03/31/06								03/31/07
	Restructuring					Reserve			Restructuring
	Reserve Balance		Activity			Adjustment			Reserve Balance
	(Restated)					(Restated)
Severance and Other employee costs	$	848		(735	)		(42	)		71
Other costs		1		(3	)		5			3

	$	849		(738	)		(37	)		74

Employee terminations related to this plan were substantially completed by March 31, 2005. During the fiscal year ended March 31, 2006, $2.1 million of these costs were paid and during the fiscal year ended March 31, 2005, $0.3 million of those costs were paid. As of March 31, 2007 the Company believes the restructuring

ACG HOLDINGS, INC.

Notes to Consolidated Financial Statements

reserve of approximately $0.1 million is adequate. The Company anticipates these costs will be paid by March 31, 2008. These payments will be funded through cash generated from operations and borrowings under the Company’s 2005 Revolving Credit Facility and Receivables Facility.

Fiscal Year 2004 Restructuring Costs

January 2004 Plan

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

As a result, the Company recorded a pre-tax restructuring charge of approximately $5.2 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 statements of operations for the fiscal year ended March 31, 2004. The costs of this restructuring plan were accounted for in accordance with the guidance set forth in SFAS 146. This restructuring charge was composed primarily of severance and related termination benefits. The Company reduced the restructuring reserve for this plan by approximately $0.2 million in the quarter ended March 31, 2007, as a result of changes in facts and circumstances related to this plan. The Company also reduced the restructuring reserve related to this plan by approximately $0.3 million in the quarter ended March 31, 2005. These reductions were primarily the result of lower than anticipated severance and other employee costs due to the terminated employees obtaining other employment during their severance periods. These reductions are and were classified within restructuring costs (benefit) and other charges in the consolidated statements of operation for the fiscal years ended March 31, 2007, 2006 and 2005, respectively.

The following table summarizes the activity related to this restructuring plan for the fiscal year ended March 31, 2007 (in thousands):


	03/31/06								03/31/07
	Restructuring					Reserve			Restructuring
	Reserve Balance		Activity			Adjustment			Reserve Balance
Severance and other employee costs	$	223		—			(223	)		—
Other costs		110		(95	)		(15	)		—

	$	333		(95	)		(238	)		—

During the fiscal year ended March 31, 2006, $0.5 million of these costs were paid, in the fiscal year ended March 31, 2005, $2.3 million of these costs were paid and in the fiscal year ended March 31, 2004, $1.8 million of these costs were paid. As of March 31, 2007, the Company has paid all costs associated with this plan.

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 and other charges in the consolidated statements of operations for the fiscal year ended March 31, 2004. The cost of this restructuring plan was accounted for in accordance with the guidance set forth in SFAS 146. The restructuring charge was composed of severance and related termination benefits.

ACG HOLDINGS, INC.

Notes to Consolidated Financial Statements

The following table summarizes the activity related to this restructuring plan for the fiscal year ended March 31, 2007 (in thousands):

03/31/06

03/31/07

Restructuring

Reserve

Restructuring

Reserve Balance

Activity

Adjustment

Reserve Balance

Severance and other employee costs

102

(113

)

—

During the fiscal year ended March 31, 2006, $0.3 million of these costs were paid and in each of the fiscal years ended March 31, 2005 and 2004, $0.7 million of these costs were paid. As of March 31, 2007, the Company has paid all costs associated with this plan.

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 for the fiscal year ended March 31, 2002. The cost of this restructuring plan was accounted for in accordance with the guidance set forth in Emerging Issues Task Force Issue 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring)” (“EITF 94-3”). The restructuring charge included severance and related termination benefits, lease termination costs primarily related to future lease commitments, equipment deinstallation costs directly associated with the disassembly of certain printing presses and other equipment, and other costs primarily including legal fees, site clean-up costs and the write-off of certain press related parts that provided no future use or functionality. In the quarter ended March 31, 2007, the Company recorded non-cash imputed interest associated with sub-lease income to this reserve of less than $0.1 million. This imputed interest is classified as interest expense in the consolidated statement of operations for the fiscal year ended March 31, 2007. The Company recorded an additional $(0.1) million, $0.2 million, $0.3 million and $0.6 million of restructuring charges related to this plan in the quarters ended March 31, 2007, March 31, 2006, December 31, 2005 and March 31, 2005, respectively, and an additional $0.2 million in each of the quarters ended March 31, 2004 and September 30, 2003. These charges are primarily related to future lease commitments and were classified within restructuring costs (benefit) and other charges in the consolidated statements of operations for the fiscal years ended March 31, 2007, 2006, 2005 and 2004.

The following table summarizes the activity related to this restructuring plan for the fiscal year ended March 31, 2007 (in thousands):

03/31/06

03/31/07

Restructuring

Reserve

Balance

Activity

Adjustment

Balance

(Restated)

Lease termination costs

1,476

(333

)

(72

)

1,071

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 each of the fiscal years ended March 31, 2006 and 2005, $0.5 million of these costs were paid, in the fiscal

ACG HOLDINGS, INC.

Notes to Consolidated Financial Statements

year ended March 31, 2004, $0.9 million of these costs were paid and in each of the fiscal years ended March 31, 2003 and 2002, $3.4 million of these costs were paid. As of March 31, 2007, 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 in the fiscal year ending March 31, 2008, $0.2 million will be paid during the fiscal year ending March 31, 2009 and $0.3 million will be paid in each of the fiscal years ending March 31, 2010 and 2011. These payments will be funded through cash generated from operations and borrowings under the 2005 Revolving Credit Facility and Receivables Facility.

Other Charges

The Company recorded no other charges in the fiscal years ended March 31, 2007 and 2006. Other charges of approximately $1.6 million were recorded in the fourth quarter of the fiscal year ended March 31, 2005. These other charges represented the impairment associated with restructuring initiatives reflecting the decision to abandon certain Company assets and to write-down other assets to fair value. The $1.6 million impairment charge recorded in the fourth quarter of fiscal year ended March 31, 2005, included $1.2 million related to the write-off of certain assets and the write-down to fair value of the assets held for sale in the Pittsburg, California print facility (see note 4). The provision was based on a review of the Company’s long-lived assets in accordance with SFAS 144. These impairment charges were classified within restructuring costs (benefit) and other charges in the consolidated statements of operations.

(16) Parent Guarantee of Subsidiary Debt

Graphics, the issuer of the 10% Notes, is a wholly owned subsidiary of Holdings. Holdings has no other subsidiaries. Holdings has fully and unconditionally guaranteed the payment of principal and interest on the 10% Notes. The 10% Notes are fully and unconditionally guaranteed on a senior basis by Holdings and by future domestic subsidiaries of Graphics (subject to certain exceptions). Holdings conducts no business other than as the sole shareholder of Graphics and has no significant assets other than the capital stock of Graphics, all of which is pledged to secure Holdings’ obligations under the 2005 Credit Agreement. Holdings is dependent upon distributions from Graphics to fund its obligations. Graphics’ ability to pay dividends or lend funds to Holdings is restricted under the terms of the indenture governing the 10% Notes and the 2005 Credit Agreement (see note 7).

(17) Industry Segment Information

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

The Company has two reportable segments: (1) print and (2) premedia services. The print business produces advertising inserts, comics (Sunday newspaper comics, comic insert advertising and comic books) and other publications. The Company’s premedia services business assists customers in the design, creation and capture, layout, storage, color and brand management, transmission and distribution of images and content. The majority of the premedia services work leads to the production of a file in a format appropriate for use by printers as well as other forms of media.

The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates performance based on segment EBITDA, which is defined as earnings before net interest expense, income tax expense (benefit), depreciation and amortization. The Company generally accounts for intersegment revenues and transfers as if the revenues or transfers were to third parties, that is, at current market prices.

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

ACG HOLDINGS, INC.

Notes to Consolidated Financial Statements


				Premedia			Corporate
	Print			Services			and Other
(In thousands)	(a)			(a)			(b)			Total
Fiscal Year Ended March 31, 2007 (Restated)
Sales	$	396,535			48,491			—			445,026

EBITDA(c)	$	34,116			8,853			(5,128	)		37,841

Depreciation and amortization		(16,563	)		(2,067	)		—			(18,630	)
Interest expense		—			—			(40,040	)		(40,040	)
Interest income		—			—			100			100
Income tax benefit		—			—			193			193


Net income (loss)	$	17,553			6,786			(44,875	)		(20,536	)

Total assets	$	203,104			11,527			11,593			226,224
Total goodwill	$	64,656			1,892			—			66,548
Total capital expenditures	$	11,139			1,562			—			12,701

Fiscal Year Ended March 31, 2006 (Restated)
Sales	$	380,648			53,841			—			434,489

EBITDA(c)	$	30,531			10,938			(4,001	)		37,468

Depreciation and amortization		(16,767	)		(2,716	)		—			(19,483	)
Interest expense		—			—			(37,154	)		(37,154	)
Interest income		—			—			83			83
Income tax benefit		—			—			3,369			3,369


Net income (loss)	$	13,764			8,222			(37,703	)		(15,717	)

Total assets	$	205,581			12,852			12,199			230,632
Total goodwill	$	64,656			1,892			—			66,548
Total capital expenditures	$	10,651			1,835			—			12,486

Fiscal Year Ended March 31, 2005 (Restated)
Sales	$	393,922			55,591			—			449,513

EBITDA(c)	$	22,579			9,942			(3,686	)		28,835
Depreciation and amortization		(19,867	)		(3,184	)		—			(23,051	)
Interest expense		—			—			(33,785	)		(33,785	)
Interest income		—			—			37			37
Income tax benefit		—			—			1,685			1,685


Net income (loss)	$	2,712			6,758			(35,749	)		(26,279	)

Total assets	$	230,174			15,179			12,859			258,212
Total goodwill	$	64,656			1,892			—			66,548
Total capital expenditures	$	5,418			1,489			—			6,907

ACG HOLDINGS, INC.

Notes to Consolidated Financial Statements

(a)		EBITDA for the print and premedia services segments in the fiscal year ended March 31, 2007 includes the impact of restructuring benefit of ($0.1) million and ($0.3) million, respectively. EBITDA for the print and premedia services segments in the fiscal year ended March 31, 2006 includes the impact of restructuring benefit of ($0.2) million and ($0.3) million, respectively, and the print segment also includes a non-cash asset impairment charge of $2.8 million. EBITDA for the print and premedia services segments in the fiscal year ended March 31, 2005 includes the impact of restructuring costs and other charges of $7.8 million and $2.2 million, respectively.

(b)		EBITDA for corporate and other includes corporate general and administrative expenses. In addition, corporate and other in the fiscal year ended March 31, 2007, includes incremental legal expenses associated with two lawsuits in which the Company is the plaintiff.

(c)		The revisions associated with the Company’s restatement of its consolidated financial statements for the fiscal years ended March 31, 2007, 2006 and 2005 resulted in a $0.1 million, ($1.6) million and ($0.9) million, respectively, impact to EBITDA versus previously reported amounts.

(18) Subsequent Event

ITEM 9A. CONTROLS AND PROCEDURES

Our management, including our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2007. Our disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed in this Annual Report on Form 10-K has been appropriately recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive and principal financial officers, to allow timely decisions regarding required disclosure. Based on that evaluation, our principal executive officer and principal financial officer have concluded that, as of March 31, 2007, our disclosure controls and procedures were not effective because of our reporting relating to accounting for deferred financing costs, accrued vacation liability and other individually immaterial items described below. No significant changes were made in our internal controls over financial reporting during the year ended March 31, 2007, that materially affected or are reasonably likely to materially affect our internal controls over financial reporting.

We have historically capitalized costs associated with our quarterly and annual SEC filings including, without limitation, costs related to legal services, rating agency fees, EDGAR fees and printing services, as deferred financing costs within our consolidated balance sheet. These costs were amortized over future periods through interest expense within our consolidated statements of operations over the remaining term of the underlying debt instrument. We are required to file periodic reports with the SEC as a result of a covenant in the indenture governing the 10 % Notes. Due to this covenant requirement (and a covenant requirement to maintain the effectiveness of a registration statement previously filed by us with the SEC), these costs were previously deemed by us to relate specifically to the ongoing indenture requirement, and therefore, provided future economic benefit.

During August 2007, we were advised by Ernst & Young LLP that based on applicable guidance, such costs should not be capitalized and expensed over future periods, but should be treated as period costs and expensed through the selling, general and administrative expense line item of our consolidated statements of operations. We have reviewed the applicable guidance and determined to conform to this approach. The revisions for the treatment of deferred financing costs decreased net loss by $7,000 in the fiscal year ended March 31, 2007, increased net loss by $115,000 and $128,000 in the fiscal years ended March 31, 2006 and 2005, respectively, and increased the accumulated deficit by $242,000 as of April 1, 2004.

In connection with such restatement of financial statements, our management reassessed certain of our disclosure controls and procedures and implemented additional procedures to remedy the lack of effectiveness referenced above.

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) The following documents are filed as a part of this Report:

Reports of Independent Registered Public Accounting Firm

		1 and 2. Financial Statements: The following Consolidated Financial Statements of Holdings are included in Part II, Item 8:

			Consolidated balance sheets — March 31, 2007 and 2006

			For the Years Ended March 31, 2007, 2006 and 2005:

Consolidated statements of operations

Consolidated statements of stockholders’ deficit

Consolidated statements of cash flows

Notes to Consolidated Financial Statements

Financial Statement Schedules: The following financial statement schedules of Holdings are filed as a part of this Report.


	Schedules	Page No.

I.	Condensed Financial Information of Registrant:
	Condensed Financial Statements (parent company only) for the years ended March 31, 2007, 2006 and 2005 and as of March 31, 2007 and 2006		80

II.	Valuation and qualifying accounts		90

Schedules not listed above have been omitted because they are not applicable or are not required, or the information required to be set-forth therein is included in the Consolidated Financial Statements or notes thereto.

3. Exhibits: The exhibits listed on the accompanying Index to Exhibits immediately following the financial statement schedules are filed as part of this Report.


Exhibit No.		Description

3.1		Certificate of Incorporation of Graphics, as amended to date*

3.2		By-laws of Graphics, as amended to date*

3.3		Restated Certificate of Incorporation of Holdings, as amended to date*

3.4		By-laws of Holdings, as amended to date*

10.1		Amended and Restated Credit Agreement dated as of May 5, 2005, among Graphics and Holdings; with Banc of America Securities, as Sole Lead Arranger, and Bank of America, N.A., as Administrative Agent, and certain lenders####

10.1 (a)		First Amendment to May 5, 2005 Amended and Restated Credit Agreement dated as of September 26, 2006, among Graphics and Holdings; with Bank of America, N.A., as Administrative Agent and L/C Issuer; and Banc of America Securities, LLC, as Sole Lead Arranger and Sole Book Manager, and certain lenders****

10.1 (b)		Second Amendment to May 5, 2005 Amended and Restated Credit Agreement dated as of March 30, 2007, among Graphics and Holdings; with Banc of America, N.A. as Agent; and Banc of America Securities, LLC as Sole Lead Arranger and Sole Book Manager, and certain lenders *****

10.1 (c)		Third Amendment to May 5, 2005 Amended and Restated Credit Agreement dated as of June 13, 2007, among Graphics and Holdings; with Bank of America, N.A., as Agent, and certain lendersvv


Exhibit No.		Description

10.1 (d)		Fourth Amendment to May 5, 2005 Amended and Restated Credit Agreement, dated as of August 28, 2007, among Graphics and Holdings; with Bank of America, N.A., as Agent, and certain lenders, effective August 31, 2007. vvv

10.2		Employment Agreement dated as of April 19, 2007, among Graphics, Holdings and Stephen M.Dyott#####

10.3		Severance Letter, dated August 1, 1999, between Graphics and Stuart Reeve***

10.4		Employment Agreement dated as of April 19, 2007, among Graphics, Holdings and Patrick W. Kellick#####

10.5		Severance Letter, dated January 14, 2000, between Graphics and Denis S. Longprév

10.6		Employment Agreement dated as of April 19, 2007, among Graphics, Holdings and Kathleen A. DeKam.#####

10.7		Amended and Restated Stockholders’ Agreement, dated as of August 14, 1995, among Holdings, the Morgan Stanley Leveraged Equity Fund II, L.P., Morgan Stanley Capital Partners III, L.P. and the additional parties named therein**

10.7 (a)		Amendment No. 1, dated January 16, 1998, to Amended and Restated Stockholders’ Agreement dated as of August 14, 1995, among Holdings, the Morgan Stanley Leveraged Equity Fund II, L.P., Morgan Stanley Capital Partners III, L.P., and the additional parties named herein††††

10.8		Stock Option Plan of Holdings††

10.9		Common Stock Option Agreement Form†††††

10.10		Holdings Common Stock Option Plan††††

10.11		Amended and Restated American Color Graphics, Inc. Supplemental Executive Retirement Plan†††††

10.12		Credit Agreement dated as of July 3, 2003, among Graphics; Bank of America, N.A., as Administrative Agent, Collateral Agent and as a Lender; Morgan Stanley Senior Funding, Inc., as Documentation Agent; GECC Capital Markets Group Inc., as Syndication Agent; and the financial institutions named therein as Lenders#

10.12 (a)		First Amendment to Credit Agreement dated as of February 9, 2004 to Credit Agreement dated as of July 3, 2003, among Graphics; Bank of America, N.A., as Administrative Agent, Collateral Agent and as a Lender; Morgan Stanley Senior Funding, Inc., as Documentation Agent; GECC Capital Markets Group Inc., as Syndication Agent; and the financial institutions named therein as Lenders###

10.12 (b)		Second Amendment to Credit Agreement dated as of February 11, 2005 to Credit Agreement dated as of July 3, 2003, among Graphics; Bank of America, N.A., as Administrative Agent, Collateral Agent and as a Lender; GECC Capital Markets Group, Inc., as Syndication Agent; and the financial institutions named therein as Lenders†††

10.12 (c)		Third Amendment to Credit Agreement dated as of April 7, 2005 to Credit Agreement dated as of July 3, 2003, among Graphics; Bank of America, N.A., as Administrative Agent, Collateral Agent and as a Lender; GECC Capital Markets Group, Inc., as Syndication Agent; and the financial institutions named therein as Lenders†

10.13		Indenture (including the form of the 10% Notes) dated as of July 3, 2003, among Graphics, Holdings and The Bank of New York#

10.14		Purchase Agreement dated June 19, 2003, among Graphics, Holdings and Morgan Stanley & Co. Incorporated, Banc of America Securities LLC and Credit Suisse First Boston LLC, as Initial Purchasers##

10.15		Registration Rights Agreement dated June 19, 2003, among Graphics, Holdings and Morgan Stanley & Co. Incorporated, Banc of America Securities LLC and Credit Suisse First Boston LLC##

10.16		Intercreditor Agreement dated July 3, 2003, by and among Bank of America, N.A., The Bank of New York and Graphics##

10.17		Security Agreement dated July 3, 2003, among Graphics, Holdings and the Bank of New York##

10.18		Pledge Agreement dated July 3, 2003, by Graphics and Holdings in favor of The Bank of New York, as Trustee##


Exhibit No.		Description

10.19		Executive Incentive Compensation Program †††††

10.20		Credit Agreement dated as of September 26, 2006, among American Color Graphics Finance, LLC; with Bank of America, N.A., as Administrative Agent and Collateral Agent; and Banc of America Securities, LLC, as Sole Lead Arranger and Sole Book Manager****

10.21		Security Agreement dated as of September 26, 2006, between American Color Graphics Finance, LLC; among Bank of America, N.A., as Collateral Agent****

10.22		Servicing Agreement dated as of September 26, 2006, by and among American Color Graphics, Inc., as Servicer, American Color Graphics Finance, LLC, as Purchaser, and Bank of America, N.A., as Administrative Agent and Collateral Agent****

10.22 (a)		First Amendment to September 26, 2006 Servicing Agreement dated as of March 30, 2007, among Graphics, as Servicer, Graphics Finance, as Purchaser, and Bank of America, N.A. as Administrative Agent, and certain lenders*****

10.23		Contribution and Sale Agreement dated as of September 26, 2006, by and between American Color Graphics, Inc., as Seller and American Color Graphics Finance, LLC, as Purchaser****

10.24		Retention Bonus Agreement (form) dated as of April 19, 2007, between Graphics and employee.#####

10.25		Stock Option Agreement (form) dated as of April 19, 2007, between Holdings and grantee#####

10.26		Omnibus Amendment Of Loan Documents dated as of June 13, 2007, among Graphics, Graphics Finance, and Bank of America, N.A., as Agent, and certain lendersvv

10.27		Limited Waiver and Consent Agreement, dated as of August 28, 2007, among Graphics, Graphics Finance and Bank of America, N.A., as Agent, and certain lenders, effective August 31, 2007.vvv

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

21.1		List of Subsidiaries

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

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

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


*		Incorporated by reference from Amendment No. 2 to Form S-1 filed on October 4, 1993 — Registration number 33-65702.

†		Incorporated by reference from the Annual Report on Form 10-K for the fiscal year ended March 31, 2005 – Commission file number 33-97090.

#		Incorporated by reference from Post Effective Amendment No. 9 to Form S-1 filed on July 16, 2003 – Commission file number 33-97090.

v		Incorporated by reference from the Annual Report on Form 10-K for the fiscal year ended March 31, 2006 – Commission file number 33-97090.

##		Incorporated by reference from Form S-4 filed on November 6, 2003 – Registration number 33-97090.

**		Incorporated by reference from Form S-4 filed on September 19, 1995 – Registration number 33-97090.

††		Incorporated by reference from Amendment No. 2 to Form S-4 filed on November 22, 1995 — Registration number 33-97090.

vv		Incorporated by reference from the Form 8-K filed June 19, 2007 – Commission file number 33-97090.

***		Incorporated by reference from the Quarterly Report on Form 10-Q for the quarter ended September 30, 2006 – Commission file number 33-97090.

†††		Incorporated by reference from the Quarterly Report on Form 10-Q for the quarter ended December 31, 2004 – Commission file number 33-97090.

###		Incorporated by reference from the Quarterly Report on Form 10-Q for the quarter ended December 31, 2003 – Commission file number 33-97090.

****		Incorporated by reference from the Quarterly Report on Form 10-Q for the quarter ended September 30, 2006 – Commission file number 33-97090.

††††		Incorporated by reference from the Annual Report on Form 10-K for the fiscal year ended March 31, 1998 – Commission file number 33-97090.

####		Incorporated by reference from the Form 8-K filed May 6, 2005 – Commission file number 33-97090.

*****		Incorporated by reference from the Form 8-K filed April 13, 2007– Commission file number 33-97090.

†††††		Incorporated by reference from the Quarterly Report on Form 10-Q for the quarter ended December 31, 2005 – Commission file number 33-97090.

#####		Incorporated by reference from the Form 8-K filed April 20, 2007 – Commission file number 33-97090.

vvv		Incorporated by reference from the Form 8-K filed August 31, 2007 – Commission file number 33-97090.

SCHEDULE I — CONDENSED FINANCIAL INFORMATION OF REGISTRANT
ACG HOLDINGS, INC.
Parent Company Only
Notes to Condensed Financial Statements

Description of ACG Holdings, Inc.

ACG Holdings, Inc. was formed in April 1989 under the name GBP Holdings, Inc. to effect the purchase of all the capital stock of GBP Industries, Inc. from its stockholders in a leveraged buyout transaction. In October 1989, GBP Holdings, Inc. changed its name to Sullivan Holdings, Inc. and GBP Industries, Inc. changed its name to Sullivan Graphics, Inc. Effective June 1993, Sullivan Holdings, Inc. changed its name to Sullivan Communications, Inc. Effective July 1997, Sullivan Communications, Inc. changed its name to ACG Holdings, Inc. (“Holdings”) and Sullivan Graphics, Inc. changed its name to American Color Graphics, Inc. (“Graphics”), (collectively, the “Company”).

Holdings has no operations or significant assets other than its investment in Graphics. Holdings is dependent upon distributions from Graphics to fund its obligations. Under the terms of its debt agreements at March 31, 2007, Graphics’ ability to pay dividends or lend to Holdings is restricted, except that Graphics may pay specified amounts to Holdings to fund the payment of Holdings’ obligations pursuant to a tax sharing agreement (see notes 3 and 4).

On April 8, 1993 (the “Acquisition Date”), pursuant to an Agreement and Plan of Merger dated as of March 12, 1993, as amended (the “Merger Agreement”), between Holdings and SGI Acquisition Corp. (“Acquisition Corp.”), Acquisition Corp. was merged with and into Holdings (the “Acquisition”). Acquisition Corp. was formed by The Morgan Stanley Leveraged Equity Fund II, L.P., certain institutional investors, and certain members of management (the “Purchasing Group”) for the purpose of acquiring a majority interest in Holdings. Acquisition Corp. acquired a substantial and controlling majority interest in Holdings in exchange for $40 million in cash. In the Acquisition, Holdings continued as the surviving corporation and the separate corporate existence of Acquisition Corp. was terminated.

1. Basis of Presentation

The accompanying condensed financial statements (parent company only) include the accounts of Holdings and its investments in Graphics accounted for in accordance with the equity method, and do not present the financial statements of Holdings and its subsidiary on a consolidated basis. These parent company only financial statements should be read in conjunction with the ACG Holdings, Inc. consolidated financial statements. The Acquisition was accounted for under the purchase method of accounting applying the provisions of Accounting Principles Board Opinion No. 16 (“APB 16”).

2. Restatement of Financial Statements

On August 20, 2007, the Company, in consultation with its Board of Directors, announced through a Form 8-K filing with the Securities and Exchange Commission (“SEC”), that as a result of certain accounting matters, the financial statements for the fiscal years ended March 31, 2007, 2006 and 2005 would be restated. The Company has completed its review and has restated the audited financial statements for those periods.

The revisions associated with this restatement, the cumulative impact of which is an increase to accumulated deficit previously reported at March 31, 2007 of $1,314,000, relate principally to a correction in the accounting treatment of certain deferred financing costs (a cumulative impact to increase previously reported accumulated deficit at March 31, 2007 by $478,000) and an adjustment to the accrued vacation liability calculation (a cumulative impact to increase previously reported accumulated deficit at March 31, 2007 by $661,000). These two revisions, as well as certain other corrections of individually immaterial errors (a net cumulative impact to increase previously reported accumulated deficit at March 31, 2007 by $175,000), decreased our net loss by $473,000 in the fiscal year ended March 31, 2007, increased net loss by $1,140,000 and $612,000 in the fiscal years ended March 31, 2006 and 2005, respectively, and increased the accumulated deficit by $35,000 as of April 1, 2004.

The Company has historically capitalized costs associated with its quarterly and annual SEC filings including, without limitation, costs related to legal services, rating agency fees, EDGAR fees and printing services, as deferred financing costs on its consolidated balance sheet. These costs were amortized over future periods

SCHEDULE I — CONDENSED FINANCIAL INFORMATION OF REGISTRANT
ACG HOLDINGS, INC.
Parent Company Only
Notes to Condensed Financial Statements

through interest expense within the Company’s consolidated statements of operations over the remaining term of the underlying debt instrument. The Company is required to file periodic reports with the SEC as a result of a covenant in the indenture governing the 10 % Notes. Due to this covenant requirement (and a covenant requirement to maintain the effectiveness of a registration statement previously filed by the Company with the SEC), these costs were previously deemed by the Company to relate specifically to the ongoing indenture requirement, and therefore, provided future economic benefit.

During August 2007, the Company was advised by Ernst & Young LLP that based on applicable guidance, such costs should not be capitalized and expensed over future periods, but should be treated as period costs and expensed within the selling, general and administrative expense line item of the Company’s consolidated statements of operations. The Company has reviewed the applicable guidance and determined to conform to this approach. The revisions for the revised treatment of deferred financing costs decreased net loss by $7,000 in the fiscal year ended March 31, 2007, increased net loss by $115,000 and $128,000 in the fiscal years ended March 31, 2006 and 2005, respectively, and increased the accumulated deficit by $242,000 as of April 1, 2004.

The second primary adjustment related to a revision of the Company’s accrued vacation liability calculation, due to the correction of certain underlying supporting data. The correction of this liability increased net loss by $257,000 and $404,000 in the fiscal years ended March 31, 2007 and 2006, respectively.

Accordingly, the Company has amended its Annual Report on Form 10-K for the fiscal year ended March 31, 2007, as originally filed on June 27, 2007, and has restated the financial statements included within for the fiscal years ended March 31, 2007, 2006 and 2005. See note 2 to the consolidated financial statements for reconciliations of previously reported and restated financial statements.

3. Guarantees

As set forth in ACG Holdings, Inc. consolidated financial statements, a substantial portion of Graphics’ long-term obligations has been guaranteed by Holdings.

Holdings has guaranteed Graphics’ indebtedness under the 2005 Credit Agreement, defined below, which guarantee is secured by a pledge of all of Graphics’ stock. Borrowings under the 2005 Credit Agreement are secured by substantially all assets of Graphics. Holdings is restricted under its guarantee of the 2005 Credit Agreement from, among other things, entering into mergers, acquisitions, incurring additional debt or paying cash dividends.

On July 3, 2003, Graphics issued $280 million of 10% Senior Second Secured Notes Due 2010 (the “10% Notes”) bearing interest at 10% and maturing June 15, 2010. The 10% Notes are fully and unconditionally guaranteed on a senior basis by Holdings and by future domestic subsidiaries of Graphics (subject to certain exceptions).

4. Dividends from Subsidiaries and Investees

No cash dividends were paid to Holdings from any consolidated subsidiaries, unconsolidated subsidiaries or investees accounted for by the equity method during the periods reflected in these condensed financial statements.

SCHEDULE I — CONDENSED FINANCIAL INFORMATION OF REGISTRANT
ACG HOLDINGS, INC.
Parent Company Only
Notes to Condensed Financial Statements

5. Tax Sharing Agreement

Holdings and Graphics are parties to an amended and restated tax sharing agreement effective July 27, 1989. Under the terms of the agreement, Graphics (the income from which is consolidated with that of Holdings for U.S. federal income tax purposes) is liable to Holdings for amounts representing U.S. federal income taxes calculated on a “stand-alone basis”. Each year Graphics pays to Holdings the lesser of (i) Graphics’ U.S. federal tax liability computed on a stand-alone basis and (ii) its allocable share of the U.S. federal tax liability of the consolidated group. Accordingly, Holdings is not currently reimbursed for the separate tax liability of Graphics to the extent Holdings’ losses reduce the consolidated tax liability. Reimbursement for the use of such Holdings’ losses will occur when the losses may be used to offset Holdings’ income computed on a stand-alone basis. Graphics has also agreed to reimburse Holdings in the event of any adjustment (including interest or penalties) to consolidated income tax returns based upon Graphics’ obligations with respect thereto. No reimbursement obligation currently exists between Graphics and Holdings. Also under the terms of the tax sharing agreement, Holdings has agreed to reimburse Graphics for refundable U.S. federal income taxes equal to an amount which would be refundable to Graphics had Graphics filed separate U.S. federal income tax returns for all years under the agreement. Graphics and Holdings have also agreed to treat foreign, state and local income and franchise taxes for which there is consolidated or combined reporting in a manner consistent with the treatment of U.S. federal income taxes as described above.

SCHEDULE I — CONDENSED FINANCIAL INFORMATION OF REGISTRANT
ACG HOLDINGS, INC.
Parent Company Only
Notes to Condensed Financial Statements

6. Notes Payable and Long-Term Debt

May 5, 2005 Refinancing

On May 5, 2005, the Company entered into an Amended and Restated Credit Agreement with Banc of America Securities, LLC, as Sole Lead Arranger and Sole Book Manager, and Bank of America, N.A., as Administrative Agent, and certain lenders (as amended, the “2005 Credit Agreement”) which resulted in the refinancing of the Company’s $70 million senior secured revolving credit facility, which would have matured on July 3, 2008, (the “Old Revolving Credit Facility”) and significantly improved the Company’s liquidity position. The 2005 Credit Agreement is a $90 million secured facility comprised of:

	•		a $55 million revolving credit facility ($40 million of which may be used for letters of credit), maturing on December 15, 2009, which is not subject to a borrowing base limitation, (the “2005 Revolving Credit Facility”); and

	•		a $35 million non-amortizing term loan facility maturing on December 15, 2009 (the “2005 Term Loan Facility”).

Interest on borrowings under the 2005 Credit Agreement is floating, based upon existing market rates, at either (a) LIBOR plus a margin of 5.75% for loans at March 31, 2007, or (b) an alternate base rate (based upon the greater of the agent bank’s prime lending rate or the Federal Funds rate plus 0.5%) plus a margin of 4.75% for loans at March 31, 2007. Margin levels increase as the levels of receivables sold by Graphics to Graphics Finance (as defined below) meet certain thresholds under the Receivables Facility (as defined below). In addition, Graphics is obligated to pay specified unused commitment, letter of credit and other customary fees.

	•		incur or guarantee additional debt;

	•		create or permit to exist certain liens;

	•		pledge assets or engage in sale-leaseback transactions;

	•		make capital expenditures, other investments or acquisitions;

	•		prepay, redeem, acquire for value, refund, refinance, or exchange certain debt (including the 10% Notes), subject to certain exceptions;

	•		repurchase or redeem equity interests;

	•		change the nature of our business;

	•		pay dividends or make other distributions;

	•		enter into transactions with affiliates;

	•		dispose of assets or enter into mergers or other business combinations; and

	•		place restrictions on dividends, distributions or transfers to the Company from its subsidiaries.

SCHEDULE I — CONDENSED FINANCIAL INFORMATION OF REGISTRANT
ACG HOLDINGS, INC.
Parent Company Only
Notes to Condensed Financial Statements

September 26, 2006 Revolving Trade Receivables Facility

On September 26, 2006, American Color Graphics Finance, LLC (“Graphics Finance”), a newly formed wholly-owned subsidiary of Graphics, entered into a $35 million revolving trade receivables facility (as amended, the “Receivables Facility”) with Banc of America Securities, LLC, as Sole Lead Arranger and Sole Book Manager, and Bank of America, N.A., as Administrative Agent, Collateral Agent and Lender, and certain lenders. The Receivables Facility improved Graphics’ overall liquidity position.

The maximum borrowing availability under the Receivables Facility is $35 million. Availability at any time is limited to a borrowing base linked to 85% of the balances of eligible receivables less certain minimum excess availability requirements. Graphics expects most of its receivables from U.S. customers will be eligible for inclusion in the borrowing base.

The Receivables Facility expires on December 15, 2009, when all borrowings thereunder become payable in full.

10% Senior Second Secured Notes

The 10% Notes mature June 15, 2010, with interest payable semi-annually on June 15 and December 15. The 10% Notes were redeemable at the option of Graphics in whole or in part on June 15, 2007, at 105% of the principal amount, plus accrued interest. The redemption price will decline each year after 2007 and will be 100% of the principal amount of the 10% Notes, plus accrued interest, beginning on June 15, 2009. Upon a change of control, Graphics will be required to make an offer to purchase the 10% Notes, unless such requirement has been waived. The purchase price will equal 101% of the principal amount of the 10% Notes on the date of purchase, plus accrued interest.

Amendments to Credit Facilities

SCHEDULE I — CONDENSED FINANCIAL INFORMATION OF REGISTRANT
ACG HOLDINGS, INC.
Parent Company Only
Notes to Condensed Financial Statements

Covenant Compliance and Liquidity

At March 31, 2007, and August 31, 2007, the Company was in compliance with the covenant requirements set forth in the 2005 Credit Agreement and the Receivables Facility, as amended and the 10% Notes indenture. The Company was not in compliance with certain reporting requirements under its 2005 Credit Agreement and Receivables Facility subsequent to March 31, 2007. On August 31, 2007, the lenders under both facilities waived such noncompliance. One such waiver related to the Company’s failure to deliver its restated consolidated financial statements for the fiscal years ended March 31, 2007, 2006 and 2005 accompanied by a report and opinion of its independent certified public accountants that was not subject to any “going concern” qualification. See the Report of Independent Registered Public Accounting Firm, which contains a “going concern” qualification, accompanying the Company’s restated consolidated financial statements. The lenders under both facilities waived such noncompliance with respect to the delivery of such Report of Independent Registered Public Accounting Firm until November 29, 2007.

The Company believes, based on management’s current forecasts and its current capital structure (and without giving effect to the proposed Vertis Merger, defined below), it will have sufficient liquidity to meet its requirements through November 29, 2007. If the Vertis Merger closes on or prior to such date, the Company will thereupon become a wholly-owned subsidiary of Vertis.

On August 31, 2007, the 2005 Credit Agreement and Receivables Facility were amended to, among other things, provide that compliance with the first lien coverage ratio covenants in each thereof as of September 30, 2007, will not be measured or determined for any purpose until November 29, 2007 (including, without limitation, for the purpose of determining the Company’s entitlement to make additional borrowings under either such facility on or prior to such date). We do not believe that it is probable that the Company will be in compliance with its first lien coverage ratio covenants under its 2005 Credit Agreement and Receivables Facility at or after November 29, 2007. The lenders under both facilities also waived the Company’s noncompliance with certain reporting requirements under such facilities subsequent to March 31, 2007. One such waiver related to the Company’s failure to deliver its restated consolidated financial statements for the fiscal years ended March 31, 2007, 2006 and 2005 accompanied by a report or opinion of our independent certified public accountants that was not subject to any “going concern” qualification. See the Report of Independent Registered Public Accounting Firm, which contains a “going concern” qualification, accompanying the Company’s restated consolidated financial statements. The lenders under both facilities waived such noncompliance with respect to the delivery of such Report of Independent Registered Public Accounting Firm until November 29, 2007.

Based on management’s current forecasts and the Company’s current capital structure (and without giving effect to the proposed Vertis Merger or any other actions described above that the Company may take), the Company cannot provide any assurance that it will be able to comply with the first lien coverage ratio covenants in the 2005 Credit Agreement and the Receivables Facility after November 29, 2007. Accordingly, pursuant to Emerging Issues Task Force Issue 86-30 “Classification of Obligations When a Violation is Waived By the Creditors” (“EITF 86-30”) and Statement of Financial Accounting Standards No. 78, “Classification of Obligations That Are Callable by the Creditor—an amendment of ARB No. 43, Chapter 3A (“SFAS 78”), the Company has classified all amounts outstanding under the 2005 Credit Agreement and the Receivables Facility, and the 10% Notes, and all the Company’s capital lease obligations as current liabilities in the March 31, 2007 consolidated balance sheet. No amounts under the 2005 Credit Agreement, Receivables Facility, 10% Notes, or capital lease obligations were due but unpaid at March 31, 2007 and August 31, 2007.

SCHEDULE I — CONDENSED FINANCIAL INFORMATION OF REGISTRANT
ACG HOLDINGS, INC.
Parent Company Only
Notes to Condensed Financial Statements

7. Subsequent Event

SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS
ACG HOLDINGS, INC.


	Balance at											Balance at
	Beginning		Expense /						Other			End of
	of Period		(Income)			Write-offs			Adjustments			Period
						(in thousands)
Fiscal Year ended March 31, 2007

Allowance for doubtful accounts	$	1,275		(237	)		(21	)		—			1,017

Reserve for inventory obsolescence	$	328		(109	)		(68	)		—			151
Income tax valuation allowance (Restated)	$	62,598		—			—			5,781	(a)		68,379

Fiscal Year ended March 31, 2006

Allowance for doubtful accounts	$	1,783		(110	)		(250	)		(148	)		1,275

Reserve for inventory obsolescence	$	267		102			(41	)		—			328
Income tax valuation allowance (Restated)	$	55,026		—			—			7,572	(b)		62,598

Fiscal Year ended March 31, 2005

Allowance for doubtful accounts	$	2,853		257			(1,327	)		—			1,783

Reserve for inventory obsolescence	$	285		114			(132	)		—			267
Income tax valuation allowance (Restated)	$	45,199		—			—			9,827	(a)		55,026


(a)		The increase in the valuation allowance relates to current year losses for which no tax benefit has been recorded, partially offset by a decrease in deferred tax assets related to the additional minimum pension liability.

(b)		The increase in the valuation allowance relates to current year losses for which no tax benefit has been recorded and an increase in deferred tax assets related to the additional minimum pension liability.


		Page
PART I

Item 1A.	Risk Factors		3

PART II

Item 6.	Selected Financial Data		10
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		15
Item 8.	Financial Statements and Supplementary Data		33
Item 9A.	Controls and Procedures		76

PART IV

Item 15.	Exhibits, Financial Statement Schedules		77

	Signatures		91
Ex-12.1 Statement Re: Computation of Ratio of Earnings to Fixed Charges
Ex-21.1 List of Subsidiaries
Ex-31.1 Section 302 Certification of the CEO
Ex-31.2 Section 302 Certification of the CFO
Ex-32.1 Section 906 Certification of the CEO and CFO


	Year ended March 31,
	2007			2006			2005
Cash flows from operating activities:
Net loss	$	(20,536	)		(15,717	)		(26,279	)
Adjustments to reconcile net loss to net cash used by operating activities:
Other charges — non-cash (note 15)		—			—			1,668
Depreciation		18,567			19,130			22,594
Amortization of other assets		63			353			457
Amortization of deferred financing costs		3,172			2,695			2,236
Loss (gain) on disposals of property, plant and equipment		2			312			(75	)
Impairment of asset		—			2,830			—
Deferred income tax benefit		(742	)		(3,632	)		(824	)
Changes in assets and liabilities:
Decrease (increase) in receivables		(2,487	)		6,061			(5,395	)
Decrease (increase) in current income taxes receivable		—			—			(78	)
Decrease (increase) in inventories		568			2,603			(1,959	)
Increase (decrease) in trade accounts payable		(1,564	)		(6,471	)		10,812
Increase (decrease) in accrued expenses		(5,220	)		(3,644	)		(2,094	)
Increase (decrease) in current income taxes payable		327			160			(9	)
Decrease in other liabilities		(4,149	)		(12,082	)		(3,992	)
Other		(575	)		1,780			(1,029	)

Total adjustments		7,962			10,095			22,312

Net cash used by operating activities		(12,574	)		(5,622	)		(3,967	)

(5)		Other Assets

		The components of other assets are as follows (in thousands):

(6)		Accrued Expenses

		The components of accrued expenses are as follows (in thousands):


		/s/ Stephen M. Dyott		Date

		Stephen M. Dyott		August 31, 2007
		Chairman, President and Chief Executive Officer
		ACG Holdings, Inc.
		Chairman and Chief Executive Officer
		American Color Graphics, Inc.
		Director of ACG Holdings, Inc. and American Color Graphics, Inc.


Signature	Title	Date

/s/ Patrick W. Kellick	Senior Vice President	August 31, 2007
Patrick W. Kellick	Chief Financial Officer
	and Secretary
	(Principal Financial Officer)

/s/ Linda G. Plisco	Assistant Corporate Controller	August 31, 2007
Linda G. Plisco	(Principal Accounting Officer)

/s/ Michael C. Hoffman	Director	August 31, 2007
Michael C. Hoffman

/s/ Hwan-Yoon Chung	Director	August 31, 2007
Hwan-Yoon Chung