American Color Graphics Inc (856709) SEC Filing 10-K Annual report for the fiscal year ending Saturday, March 31, 2007

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

(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

or

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

For the transition period from                      to                     

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 þ No o

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. þ

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 May 31, 2007 (all of which are privately owned and not traded on a public market).

DOCUMENTS INCORPORATED BY REFERENCE
None

 

 

INDEX

				Page
PART I
Item 1.		Business			2
Item 1A.		Risk Factors			8
Item 1B.		Unresolved Staff Comments			13
Item 2.		Properties			13
Item 3.		Legal Proceedings			13
Item 4.		Submission of Matters to a Vote of Security Holders			13
PART II
Item 5.		Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities			14
Item 6.		Selected Financial Data			14
Item 7.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			19
Item 7A.		Quantitative and Qualitative Disclosures About Market Risk			35
Item 8.		Financial Statements and Supplementary Data			36
Item 9.		Changes In and Disagreements With Accountants on Accounting and Financial Disclosure			71
Item 9A.		Controls and Procedures			71
Item 9B.		Other Information			71
PART III
Item 10.		Directors, Executive Officers and Corporate Governance			72
Item 11.		Executive Compensation			74
Item 12.		Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			84
Item 13.		Certain Relationships and Related Transactions, and Director Independence			85
Item 14.		Principal Accountant Fees and Services			86
PART IV
Item 15.		Exhibits, Financial Statement Schedules			87
		Signatures			98
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
Ex-31.2 Section 302 Certification
Ex-32.1 Section 906 Certification

PART I

Special Note Regarding Forward-Looking Statements

This Annual Report on Form 10-K (this “Report”) contains forward-looking statements within the meaning of the “safe harbor” provisions of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements reflect our management’s views and assumptions as of the date of this Report regarding future events and operating performance. Statements that are not of historical fact are forward-looking statements and are contained throughout this Report including Items 1, 3, 7 and 7A hereof. Some of the forward-looking statements in this Report can be identified by the use of forward-looking terms such as “believes,” “intends,” “expects,” “may,” “will,” “estimates,” “should,” “could,” “anticipates,” “plans” or other comparable terms. Forward-looking statements are subject to known and unknown risks and uncertainties, many of which may be beyond the control of ACG Holdings, Inc. (“Holdings”), together with its wholly-owned subsidiary, American Color Graphics, Inc. (“Graphics”), 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 1. BUSINESS

Overview

We are one of the leading printers of advertising inserts and newspaper products in the United States developed from a business that commenced operations in 1926. We believe our success is a result of the strong and long-standing relationships that we have developed with our customers by providing high quality, on-time and consistent solutions and our network of facilities, which provides distribution efficiencies and short turnaround times. Customers for our print services include approximately 220 national and regional retailers and approximately 150 newspapers.

We are also one of the most technologically advanced providers of premedia services in the United States. We provide our customers with comprehensive services and solutions for their advertising and brand management programs. Our wide variety of services include digital photography, digital asset management, prepress production, creative and design, color

management services, and workflow consulting for the preparation and management of materials for printing, and other forms of distribution of their content.

Advertising Inserts. Our principal focus is on the printing of retail advertising inserts. In the fiscal years ended March 31, 2007 (“Fiscal Year 2007”), 2006 (“Fiscal Year 2006”), and 2005 (“Fiscal Year 2005”), retail advertising inserts accounted for 82%, 81% and 83%, respectively, of our total print segment sales.

Customers in the advertising insert segment of the print industry, particularly large national accounts, have increasingly demanded more sophisticated distribution capabilities, higher quality and greater flexibility from print service providers. This demand has resulted in the continued consolidation among printers within the industry. Heatset offset is the dominant technology for printing advertising inserts due to its reliability, high print quality and flexibility. The industry has also experienced the increasing interest of newspapers to outsource their commercial printing, inserting and product mailings. As a result, we believe that the key factors for success in the advertising insert segment of the printing industry are price, quality, reliability and proximity to customers’ target markets, as well as strong customer service capabilities that foster lasting relationships.

Premedia Services. Premedia services consist of several processes necessary for the preparation and management of advertising and packaging materials for printing and other mediums, including file preparation, page layout and design, image capture, asset and content management, creative concept, and color and brand management.

Premedia services have become a crucial part of the total mix of services demanded by print customers. In an effort to meet these demands, we, as well as our major competitors in the print segment, offer premedia services to our customers in addition to printing services. We believe that the key factors for our success in the premedia services segment are:

	•		providing comprehensive services, including print services, as well as managed premedia services at customer locations;
	•		enhancing customer workflow through technology leadership.

As a result, we believe that these factors will build customer loyalty and enable us to establish new print customer relationships.

Competitive Strengths

We believe our continued success, strong customer relationships and leading market position are primarily the result of the following competitive strengths:

Leading Provider of Print Solutions to our Customers. We believe our success in serving our customers results primarily from the strong relationships that we have developed with them by providing high quality print and premedia services solutions at competitive prices. We take a proactive approach in adapting our offerings to the specific needs of our customers. We also provide our print customers with comprehensive post-press services, such as mailing and freight management. In our premedia services segment, we believe that we are one of a small number of companies that can provide a full range of premedia services and we use those capabilities to primarily support our print sales. We also manage 18 facilities for customers at their offices, which enables us to develop strong and long-standing relationships with them. We believe that our commitment to technology leadership and our ability and willingness to customize and improve our solutions for our customers significantly enhance our ability to develop and maintain lasting relationships.

Strong, Diverse Customer Base. The core of our customer base consists of growing, national companies with whom we have strong, long-standing relationships. We also serve a broad customer base consisting of geographically diverse companies in a wide variety of industries. We provide printing services to approximately 150 newspapers and approximately 220 national and regional retailers, including hardware and home improvement retailers such as The Home Depot, electronics and appliance retailers such as Best Buy, general merchandisers such as Wal-Mart, drug store chains such as Walgreens, grocery chains such as Supervalu Inc. and clothing retailers such as Federated Department Stores. None of these customers represent more than 10% of our sales. In addition, many of our print customers also use our premedia services. Overall, the customers of our premedia services segment are diverse and include large and medium-sized companies in the retail, publishing, catalog and packaging industries.

High Quality Assets and Investments in Technology. We believe that our 43 web heatset offset, nine flexographic and two coldset offset printing presses are generally among the most advanced in the industry. Through our comprehensive maintenance program, we are committed to extending the life and enhancing the reliability of these valuable assets. We also

strive to incorporate new technology in our presses as it develops, and to acquire auxiliary equipment when needed, to improve our process controls and print quality, as well as to satisfy customer requirements. For example, our continued investment in pre-press, in-line and post-press technology has enabled us to both strengthen existing and develop new partnerships with our customers. In the premedia services segment, customers are continuously seeking ways to improve brand awareness, shorten their production cycles and reduce their costs. We believe that our services and solutions are among the most advanced available and that coupled with our experienced employees position us well to address these requirements. We continuously strive to upgrade our equipment and integrate or develop more advanced software. For example, we offer a variety of solutions which provide our customers with better control of color, increased process control, shorter time to market and lower production costs.

National Scope with Regional Focus. In our print division, we believe our seven printing plants and a newspaper service facility in the United States and one printing plant in Canada form a broad and efficient production and distribution network. These plants are located within convenient distribution distance of a large number of major cities in the United States. Over the past several years, we have restructured our print operations through specific initiatives which have enhanced our production and distribution network’s flexibility, turnaround times and logistical capabilities, allowing us to better distribute print products in a timely manner. These qualities have been and are instrumental to our continued success in serving our customers, whose demands are increasingly complex. For instance, a number of our national customers routinely use numerous versions of the same advertising insert, which are adapted by region of the country. By coupling the flexibility of our heatset offset presses and our comprehensive logistical capabilities, we have become one of the few printers that can reliably meet the demands of the large national and regional accounts. In our premedia services division, we believe that our six stand-alone production facilities allow us to provide strong customer service nationwide. They also provide us with access to highly skilled technical personnel, provide redundancy and extra capacity during peak periods and allow for short turnaround times.

Competitive Cost Structure. We believe that we are one of the lowest cost producers of retail advertising inserts and we intend to continue our disciplined focus on overall cost reduction through ongoing productivity and efficiency improvements at our print facilities. We have also used our economies of scale to reduce the cost of raw materials and enter into long-term agreements with our suppliers. In 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.

Strong Management Team. The six members of our senior management team collectively have approximately 100 years of service with us, and have worked together for us as a team for over 13 years. Our management team maintains a sharp focus on our customers, growth, quality and continued cost reduction, resulting in a strong competitive position and a well-defined strategy for the future.

Our Strategy

We are committed to enhancing the strong and long-standing relationships that we have with our existing customers and to building relationships with new customers by providing high quality, on-time and consistent solutions. As we work to meet our customers’ needs, we are also committed to further reducing our operating costs. More specifically, our strategy consists of:

Growing Print Volumes Profitably through the Strength of our Customer Relationships. A significant number of our major customers are growing companies. We are committed to growing with our existing customers and adding new accounts on a profitable basis. We will continue to focus on providing excellent customer service, high quality print and premedia services solutions and reliable delivery of materials, all of which strengthen our customer relationships. We are also continuing to actively pursue long-term printing and premedia opportunities similar to existing arrangements we have in place with certain of our key customer accounts.

Improving Customer and Service Mix. We expect to continue to adjust the mix of our customers and services within our print segment. We consistently monitor our customer and service mix to optimize profitability and asset utilization. As part of this process, we target customers who have geographic and service needs that match our capabilities. This approach allows us to provide better service to our customers, while generating higher margins. Also as part of this process, we target accounts, such as grocery and drug store chains, that generate weekly, non-seasonal demand for retail advertising insert printing services and enable us to maximize the use of our equipment throughout the year. In our premedia services segment, we continue to pursue large-scale managed service opportunities, where we can work on-site with our customers to

prepare materials for press and other advertising mediums, foster strong long-term relationships and enhance sales of our print solutions. We will continue to focus on high value-added, new business opportunities, particularly projects that utilize the full breadth of the services and technologies we offer.

Continuing to Reduce Costs. We have a disciplined approach to cost reduction through ongoing productivity and efficiency improvements in all of our print facilities. Our cost reduction programs include benefits from various fixed and variable cost containment initiatives that we put into place over the past several years. In our premedia services business, our use of advanced technology and the implementation and management of continued cost containment initiatives will enable us to reduce our capital costs and improve our digital premedia workflow, which we expect to further enhance the productivity of our employees and reduce the overall cost structure in this segment. In addition, we are continually working to develop the most efficient selling, general and administrative cost structure.

Expanding our Printing Solutions through Disciplined Capital Expenditures. We are committed to providing our customers with the solutions they need at competitive prices. We will continue to be proactive in adapting our offerings to the specific needs of our customers, but we will do so only through a disciplined program of capital spending. We will expand our production capacity through the careful addition of equipment when opportunities support such an expansion. In our premedia services segment, we believe that investments in new technology have allowed and will continue to allow us to better market our service offerings to existing and new customers, including customers in our print segment who increasingly use shared service offerings.

Print Segment

Our print business, which accounted for approximately 89% of our sales in Fiscal Year 2007 and 88% of our sales in both Fiscal Year 2006 and 2005, produces advertising inserts, comics and other publications.

Advertising Inserts. Retail advertising inserts accounted for 82% of print sales in Fiscal Year 2007, 81% of print sales in Fiscal Year 2006 and 83% of print sales in Fiscal Year 2005. We believe that we are one of the largest printers of retail advertising inserts in the United States. We print retail advertising inserts for approximately 220 retailers throughout the United States. Advertising inserts are preprinted advertisements, generally in color, which display products sold by a particular retailer or manufacturer, usually for a specific sale period. Advertising inserts are used extensively by many different retailers, including discount, department, supermarket, home center, drug and automotive stores. Inserts are an important and cost effective means of advertising for these merchants. Advertising inserts are primarily distributed through insertion in newspapers, but are also distributed by direct mail or in-store by retailers. As a result, advertising inserts are both time sensitive and seasonal.

Comics. Comics accounted for 8% of print sales in Fiscal Year 2007, 9% of print sales in Fiscal Year 2006 and 10% of print sales in Fiscal Year 2005. We believe that we are one of the largest printers of comics in the United States. Comics consist of Sunday newspaper comics, comic insert advertising and comic books. We print Sunday comics for approximately 150 newspapers in the United States and Canada and print a significant share of the annual comic book requirements of Marvel Entertainment Group, Inc.

Other Publications. Other publications, including local newspapers, TV guide listings and other publications and services, accounted for 10% of print sales in both Fiscal Year 2007 and 2006 and 7% in Fiscal Year 2005.

Print Production. Our network of eight print plants in the United States and Canada is strategically positioned to service our customers, providing us with distribution efficiencies and short turnaround times, two factors that we believe will allow our continuing success in servicing large national and regional accounts. There are primarily three printing processes used to produce advertising inserts and newspaper supplements: offset lithography (heatset and cold), rotogravure and flexography. We principally use heatset offset and flexographic web printing equipment in our print operations. Our printing equipment currently consists of 43 heatset offset presses, two coldset offset presses and nine flexographic presses, 50 of which we own. Most of our advertising inserts, publications and comic books are printed using the offset process, while substantially all of our Sunday newspaper comics and comic advertising inserts are printed using the flexographic process.

In the heatset offset process, the desired printed images are distinguished chemically from the non-image areas of a metal plate. This process allows the image area to attract solvent-based ink, which is then transferred from the plate to a rubber blanket and then to the paper surface, which we also refer to as the web. Once printed, the web goes through an oven that evaporates the solvents from the ink, thereby setting the ink on the paper. In the cold offset process, inks are set by the

absorption of solvents into the paper. Due to the drying process, the heatset offset process can be utilized on a wide variety of papers. Generally, heatset offset presses have the ability to provide a more colorful and attractive product than cold offset presses.

The flexographic process differs from offset printing in that it utilizes relief image plates and water-based (as opposed to solvent-based) inks. The flexographic image area results from application of ink to the raised image surface on the plate, which is transferred directly to the paper. Once printed, the water-based inks are rapidly dried. Our flexographic printing generally can provide vibrant color reproduction at a lower cost than heatset offset printing. The strengths of flexography compared with the rotogravure and offset processes are faster press set-up times, reduced paper waste, reduced energy use and maintenance costs and environmental advantages due to the use of water-based inks and the use of less paper. Faster press set- up times make the process particularly attractive to commercial customers with shorter runs and extensive product versioning.

In addition to press capacity, certain equipment parameters are critical to competing in the advertising insert market, including cut-off length, folder capabilities and certain in-line and off-line finishing capabilities. Cut-off length is one of the determinants of the size of the printed page. Folder capabilities for advertising inserts must include a wide variety of page sizes, page counts and page layouts. Finally, some advertising inserts require gluing or stitching of the product, adding cards, trimming and numbering. These production activities generally are done in-line with the press to meet the expedited delivery schedules required by many customers. We believe that our mix and configuration of presses and press services allows for efficient tailoring of printing services to customers’ product needs.

In combination with our national account status with the United States Postal Service and our experience in such areas as list services, addressing accuracy and postal service, we are able to offer distribution and mailing services that help to maximize the advertising impact and financial return for our customers.

Premedia Services Segment

Our premedia services business accounted for approximately 11% of our sales in Fiscal Year 2007 and 12% in both Fiscal Year 2006 and 2005. We believe we are one of the largest full-service providers of premedia services in the United States (based upon revenues) and a technological leader in this industry. Our premedia services business commenced operations in 1975. We provide premedia services within our print plants, our six stand-alone premedia facilities and through our 18 managed services sites, which are premedia facilities located in a customer site.

We assist customers in the design, creation and capture, layout, storage, color and brand management, transmission and distribution of images and content. The majority of this work leads to the production of a file in a format appropriate for use by printers as well as other forms of media. We make page changes, including type changes, and combine digital page layout information with electronically captured and color-corrected images. From these digital files, proofs, final corrections, and finally, digital files are produced for each page. The final digital files enable printers to prepare plates and cylinders for each required color resulting in the appearance of full color on the printed page generated. Our revenue from these traditional services is being supplemented by additional revenue sources including digital asset and content management, managed services, computer-to-plate services, creative and design, digital photography, consulting and training services, multimedia and Internet services, and software and data-base management. We have been a leader in implementing these new technologies, which enables us to reduce unit costs and effectively service the increasingly complex demands of our customers more quickly than many of our competitors.

Customers and Distribution

Customers. We sell our print products and services to a large number of customers, primarily retailers and newspapers. All of our products are produced in accordance with customer specifications. We perform approximately 50% of our print work, including the printing of retail advertising inserts, Sunday comics and comic books, under contracts ranging in term from one year to ten years. Many of the contracts automatically extend for one year unless there has been notice to the contrary from either of the contracting parties within a certain number of days before the end of any term. For the balance of our print work, we obtain varying time commitments from our customers ranging from job-to-job to annual allocations.

Our premedia services customers consist of retailers, newspaper and magazine publishers, catalog sales organizations, consumer products companies, packaging manufacturers, advertising agencies, printers and direct mail advertisers. Our customers typically have a need for high levels of technical expertise, automated workflow solutions, short turnaround times and responsive customer service. In addition to our historical regional customer base, our premedia services business is

increasingly focused on larger, national accounts that have a need for a broad range of fully integrated services and communication capabilities requiring leading edge technology.

The print and premedia services businesses have historically had certain common customers and our ability to cross-market is an increasingly valuable tool as computer-to-plate, regional versioning, electronic digital imaging, content management, managed services and speed to market remain important to our customers. We believe cross-marketing enables us to provide more comprehensive solutions for our customers’ premedia and printing needs.

No single customer accounted for sales in excess of 10% of our consolidated sales in Fiscal Year 2007. Our top ten customers accounted for approximately 40% of our consolidated sales in Fiscal Year 2007.

Distribution. We distribute our print products primarily by truck to customer-designated locations (primarily newspapers and customer retail stores) and via mail. Distribution costs are generally paid by the customer and most shipping is by common carrier. Our premedia services business generally distributes its products via electronic transmission, overnight express or other methods of personal delivery.

Sales and Marketing

Our print and premedia services divisions each have their own highly skilled sales forces that work together to maximize our sales leverage by offering our customers multiple solutions utilizing the products and services of both our print and premedia services segments. Each sales force is trained in the specific requirements of the market it serves to further allow us to maximize our sales success and works closely with our customers to help them successfully market their products.

Our print division employs approximately 30 sales professionals who are divided into three segments, corporate sales, new business sales and newspaper services. These groups all specialize in the retail, newspaper and comic book markets. The premedia services division employs 18 sales professionals who focus on the retail, commercial, publications, catalog and packaging markets.

Competition

Commercial printing in the United States is a large, highly fragmented, capital-intensive industry and we compete with numerous national, regional and local printers. We believe that our largest competitors are Vertis, Inc. and Quebecor World Inc., and to a lesser degree, R. R. Donnelley & Sons Company. A trend of industry consolidation in recent years can be attributed to customer preferences for larger printers with a greater range of services, capital requirements and competitive pricing pressures. We believe that competition in the print business is based primarily on quality and service at a competitive price.

Our premedia services segment competes with several premedia services firms on both a national and regional basis. The premedia 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 and also from software technology companies offering certain premedia related workflow solutions.

Raw Materials

The primary raw materials used in our print business are paper and ink. We purchase most of our paper, ink and related products under long-term supply contracts. Raw materials used in our premedia services processes include digital media, limited film usage and proofing substrate materials. In both of our business segments, there is an adequate supply of the necessary materials available from multiple vendors. We are not dependent on any single supplier and have had no significant problems in the past obtaining necessary raw materials.

Seasonality

Some of our print and premedia services business is seasonal in nature, particularly those revenues that are derived from advertising inserts. Generally, our sales from advertising inserts are highest during the following advertising periods: the Spring advertising season from March to May, the Back-to-School advertising season from July to August, and the Thanksgiving/Christmas advertising season from October to December. Sales of Sunday newspaper comics are not subject 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.

Backlog

Because our print and premedia services products are required to be delivered soon after final customer orders are received, we do not experience any backlog of unfilled customer orders.

Our Employees

As of May 31, 2007, we had a total of approximately 2,060 employees. Approximately 142 employees are represented by a collective bargaining agreement. We consider our relations with our employees to be excellent.

Governmental and Environmental Regulations

We are subject to regulation under various federal, state and local laws relating to employee safety and health, and to the generation, storage, transportation, disposal and emission into the environment of hazardous substances. We believe that we are in material compliance with such laws and regulations. Although compliance with such laws and regulations in the future is likely to entail additional capital expenditures, we do not anticipate that such expenditures will be material. See “Legal Proceedings-Environmental Matters” appearing elsewhere in this Report.

ITEM 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.

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.

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 $21.2 million, $17.9 million, $27.4 million and $16.9 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 refinance or restructure our indebtedness, sell the entire company or dispose of material assets or operations, reduce or delay capital expenditures or take other 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.

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.

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.

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.

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. 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.

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% Note 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 and the Receivables Facility contain customary cross default provisions. The 10% Note 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.

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” 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. Three of the directors of Holdings, Messrs. Fry, 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.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

We operate in 15 locations in 11 states and Canada. We own seven print plants in the United States and one in Canada and lease one newspaper service facility in the United States. Our premedia services business has six stand-alone production locations, all of which are leased. The premedia services division also operates 18 managed service sites, which are premedia facilities located in a customer site. In addition, we maintain one small executive office in Connecticut and our headquarters facility in Brentwood, Tennessee, both of which are leased. We believe that our plants and facilities are adequately equipped and maintained for present and planned operations.

ITEM 3. LEGAL PROCEEDINGS

We have been named as a defendant in several legal actions arising from our normal business activities. In the opinion of management, any liabilities that may arise from such actions will not, individually or in the aggregate, have a material adverse effect on our financial condition, results of operations or cash flows.

Environmental Matters

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

Graphics received written notice, dated May 10, 2004, of its potential liability in connection with the Gibson Environmental Site at 2401 Gibson Street, Bakersfield, California. Gibson Environmental, Inc. operated the (six acre) Site as a storage and treatment facility for used oil and contaminated soil from June 1987 through October 1995. Graphics received the notice and a Settlement Offer from LECG, a consultant representing approximately 60 companies comprising the Gibson Group Trust. We are investigating this matter but we believe our potential liability in connection with this Site will not be material to our business or consolidated financial statements as a whole.

Based upon an analysis of Graphics’ volumetric share of waste contributed to these sites, we maintain a reserve of approximately $0.1 million in connection with these liabilities in our consolidated balance sheet at March 31, 2007. We believe this amount is adequate to cover such liabilities.

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

None.

PART II

ITEM 5.		MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

There is no established public market for the common stock of either Holdings or Graphics.

Holders

As of May 31, 2007, there were approximately 120 record holders of Holdings’ common stock. Holdings is the sole shareholder of Graphics’ common stock.

Dividends

There have been no cash dividends declared on any class of common equity for the three most recent fiscal years. See restrictions on Holdings’ ability to pay dividends and Graphics’ ability to transfer funds to Holdings in note 1 to our consolidated financial statements appearing elsewhere in this Report.

Recent Sales of Unregistered Securities

There have been no sales of unregistered securities during the three most recent fiscal years.

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, 2006, 2005, 2004, 2003 and the statements of operations data for the fiscal years ended March 31, 2007, 2006, 2005, 2004 and 2003 are derived from the audited consolidated financial statements for such periods and at such dates. The selected financial data below, for the fiscal years ended March 31, 2004 and 2003, also reflects our former digital visual effects business (“Digiscope”) as a discontinued operation.

This data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements appearing elsewhere in this Report.

ACG Holdings, Inc.
Selected Financial Data

		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			397,115				385,150				403,641				409,321				445,493
Gross profit			47,911				49,339				45,872				61,781				71,646
Selling, general and administrative expenses			27,539				26,792				28,824				32,734				37,614
Restructuring costs (benefit) and other charges (a)			(445	)			(1,167	)			10,037				8,140				1,722
Operating income			20,817				23,714				7,011				20,907				32,310
Interest expense, net			40,305				37,541				34,050				34,166				28,584
Loss on early extinguishment of debt (b)			—				—				—				3,196				—
Other expense (c)			1,714				4,119				313				489				1,503
Income tax expense (benefit) (d)			(193	)			(3,369	)			(1,685	)			11,441				1,559
Income (loss) from continuing operations			(21,009	)			(14,577	)			(25,667	)			(28,385	)			664
Discontinued operations: (e)
Loss from operations, net of $0 tax			—				—				—				12				979
Loss on disposal, net of $0 tax			—				—				—				444				—
Net loss		$	(21,009	)			(14,577	)			(25,667	)			(28,841	)			(315	)
Balance Sheet Data (at end of period):
Working capital deficit		$	(6,330	)			(15,704	)			(10,660	)			(15,772	)			(29,820	)
Total assets		$	226,733				231,502				258,898				267,913				278,441
Long-term debt and capitalized leases, including current installments		$	352,110				324,284				309,951				298,298				231,757
Stockholders’ deficit		$	(243,638	)			(229,732	)			(212,740	)			(188,775	)			(107,699	)
Other Data:
Net cash provided (used) by operating activities		$	(12,167	)			(5,213	)			(3,575	)			21,163				45,647
Net cash used by investing activities		$	(12,703	)			(5,523	)			(7,172	)			(13,118	)			(27,446	)
Net cash provided (used) by financing activities		$	24,870				10,760				10,822				(7,924	)			(22,680	)
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)			—				—				—				—				1.07	x
EBITDA (g)		$	37,733				39,078				29,749				41,054				54,279

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 Fiscal Year 2005. We recorded $(0.1) million and $(0.3) million of costs for this plan in Fiscal Year 2007 and 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 $(0.9) 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 $3.8 million of costs under this plan in Fiscal Year 2005. We recorded $(0.1) million and $(0.4) million of costs for this plan in Fiscal Year 2007 and Fiscal Year 2006, respectively.
		In January 2004, we approved a restructuring plan for our print and premedia services segments, which was designed to improve operating efficiency and profitability. We recorded $5.7 million of costs under this plan in Fiscal Year 2004. We recorded $(0.2) million, $(0.1) million and $(0.7) million of costs for this plan in Fiscal Year 2007, Fiscal Year 2006 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 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 Fiscal Year 2002. We recorded an additional $0.5 million, $0.7 million and $0.4 million of costs for this plan in 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 14 to our consolidated financial statements appearing elsewhere in this Report for further discussion of this restructuring activity.
(b)		As part of a refinancing transaction entered into on July 3, 2003, we recorded a loss related to the early extinguishment of debt of $3.2 million, net of zero taxes. This loss related to the write-off of deferred financing costs associated with 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 $6.0 million in Fiscal Year 2007 as a result of changes in the deferred tax items. This increase primarily includes an $8.8 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 $7.1 million in Fiscal Year 2006 as a result of changes in the deferred tax items. This increase primarily includes a $6.1 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 $9.6 million in Fiscal Year 2005 as a result of changes in the deferred tax items. This increase included a $9.6 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 $18.4 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 $5.6 million increase related to the tax effect of temporary differences generating deferred tax assets, which is net of a decrease of $1.3 million related to the tax effect of the decrease in the 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 $3.5 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 $21.2 million, $17.9 million, $27.4 million and $16.9 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
		(In thousands)
EBITDA		$	37,733				39,078				29,749				41,054				54,279
Depreciation and amortization			(18,630	)			(19,483	)			(23,051	)			(24,288	)			(24,451	)
Interest expense, net			(40,305	)			(37,541	)			(34,050	)			(34,166	)			(28,584	)
Income tax (expense) benefit			193				3,369				1,685				(11,441	)			(1,559	)
Net loss		$	(21,009	)			(14,577	)			(25,667	)			(28,841	)			(315	)

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

		Fiscal Year Ended March 31,
		2007				2006				2005				2004				2003
		(In thousands)
Restructuring costs (benefit)		$	(445	)			(1,167	)			8,369				7,768				1,191
Other charges			—				—				1,668				372				531
Loss on early extinguishment of debt			—				—				—				3,196				—
Loss from discontinued operations			—				—				—				456				979
Impairment of assets			—				2,830				—				—				750
Total		$	(445	)			1,663				10,037				11,792				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 Fiscal Year 2007, retail advertising inserts accounted for 82% of our total print segment sales and in Fiscal Years 2006 and 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.

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 utility costs and 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 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. See “-Liquidity and Capital Resources” and “Risk Factors”.

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 $1.2 million, respectively. At March 31, 2007, we had accrued restructuring costs of approximately $2.2 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”) and approximately $0.4 million in each of the fiscal years ending March 31, 2010 (“Fiscal Year 2010”) and March 31, 2011 (“Fiscal Year 2011”) associated with these programs. See note 14 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
Fiscal Year 2002 Plan Costs
Restructuring costs:
Severance & other employee costs – Print		$	(29	)			—				—				(29	)
Lease termination costs – Print			739				465				—				1,204
Total restructuring costs			710				465				—				1,175
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	)
Total restructuring costs			—				—				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			(275	)			117				(15	)			(173	)
Other costs – Premedia			(75	)			—				—				(75	)
Total restructuring benefit			(694	)			(66	)			(238	)			(998	)
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			200				(124	)			(50	)			26
Other costs – Premedia			50				—				(47	)			3
Total restructuring costs (benefit)			3,752				(387	)			(139	)			3,226

		Fiscal Year				Fiscal Year				Fiscal Year				Three Year
		2005				2006				2007				Total
Fiscal Year 2005 Pittsburg Facility Closure Plan Costs
Restructuring costs:
Severance & other employee costs – Print			2,293				(812	)			—				1,481
Lease termination costs – Print			803				(117	)			—				686
Other costs – Print			40				—				—				40
Total restructuring costs (benefit)			3,136				(929	)							2,207
Other charges:
Asset impairment charge – Print			1,266				—				—				1,266
Total other charges			1,266				—				—				1,266
Fiscal Year 2005 New York Premedia Consolidation Plan Costs
Restructuring costs:
Severance & other employee costs – Premedia			195				(40	)			—				155
Lease termination costs – Premedia			1,271				(207	)			(79	)			985
Other costs – Premedia			15				(3	)			—				12
Total restructuring costs (benefit)			1,481				(250	)			(79	)			1,152
Other charges:
Asset impairment charge – Premedia			402				—				—				402
Total other charges			402				—				—				402
Total restructuring costs (benefit)			8,369				(1,167	)			(445	)			6,757
Total other charges			1,668				—				—				1,668
Total restructuring costs (benefit) and other charges		$	10,037				(1,167	)			(445	)			8,425

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
		(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		$	35,598				34,205				30,575
Premedia Services			12,303				15,134				15,293
Other			10				—				4
Total		$	47,911				49,339				45,872
Gross Margin
Print			9.0	%			9.0	%			7.8	%
Premedia Services			25.4	%			28.1	%			27.5	%
Total			10.8	%			11.4	%			10.2	%
EBITDA
Print (a)		$	33,730				31,571				22,997
Premedia Services (a)			8,777				11,070				10,059
Other (b)			(4,774	)			(3,563	)			(3,307	)
Total		$	37,733				39,078				29,749
EBITDA Margin
Print			8.5	%			8.3	%			5.8	%
Premedia Services			18.1	%			20.6	%			18.1	%
Total			8.5	%			9.0	%			6.6	%

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
EBITDA		$	33,730				8,777				(4,774	)			37,733
Depreciation and amortization			(16,563	)			(2,067	)			—				(18,630	)
Interest expense, net			—				—				(40,305	)			(40,305	)
Income tax benefit			—				—				193				193
Net income (loss)		$	17,167				6,710				(44,886	)			(21,009	)
Fiscal Year 2006
EBITDA		$	31,571				11,070				(3,563	)			39,078
Depreciation and amortization			(16,767	)			(2,716	)			—				(19,483	)
Interest expense, net			—				—				(37,541	)			(37,541	)
Income tax benefit			—				—				3,369				3,369
Net income (loss)		$	14,804				8,354				(37,735	)			(14,577	)
Fiscal Year 2005
EBITDA		$	22,997				10,059				(3,307	)			29,749
Depreciation and amortization			(19,867	)			(3,184	)			—				(23,051	)
Interest expense, net			—				—				(34,050	)			(34,050	)
Income tax benefit			—				—				1,685				1,685
Net income (loss)		$	3,130				6,875				(35,672	)			(25,667	)

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 $47.9 million, or 10.8% of sales, in Fiscal Year 2007 from $49.3 million, or 11.4% of sales, in Fiscal Year 2006. EBITDA decreased to $37.7 million, or 8.5% of sales, in Fiscal Year 2007 from $39.1 million, or 9.0% 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 $1.4 million to $35.6 million in Fiscal Year 2007 from $34.2 million in Fiscal Year 2006. Print gross margin remained unchanged at 9.0% in both Fiscal Year 2007 and 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 utility costs, 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 $1.7 million to $18.3 million, or 4.6% of print sales, in Fiscal Year 2007, from $16.6 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 $(0.9) million in Fiscal Year 2006. See “ — Our Restructuring Results and Cost Reduction Initiatives” above.

Other Expense (Income). Other expense (income) decreased $3.5 million to expense of $0.2 million in Fiscal Year 2007 from expense of $3.7 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”) and $0.4 million of non-recurring costs related to the closure of our Pittsburg, California print facility, incurred in Fiscal Year 2006, which we were unable to accrue as part of restructuring costs in Fiscal Year 2005.

EBITDA. As a result of the above factors and excluding the impact of depreciation and amortization, EBITDA for the print business increased $2.1 million to $33.7 million in Fiscal Year 2007 from $31.6 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 $2.8 million to $12.3 million in Fiscal Year 2007 from $15.1 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 25.4% in Fiscal Year 2007 from 28.1% 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 12.4% 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 $0.4 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 $2.3 million to $8.8 million in Fiscal Year 2007 from $11.1 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 $4.8 million from a loss of $3.6 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 $40.4 million from $37.6 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 6 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 $21.0 million in Fiscal Year 2007 from a net loss of $14.6 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 $49.3 million, or 11.4% of sales, in Fiscal Year 2006 from $45.9 million, or 10.2% of sales, in Fiscal Year 2005. EBITDA increased to $39.1 million, or 9.0% of sales, in Fiscal Year 2006 from $29.7 million, or 6.6% 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 $3.6 million to $34.2 million in Fiscal Year 2006 from $30.6 million in Fiscal Year 2005. Print gross margin increased to 9.0% in Fiscal Year 2006 from 7.8% 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 $2.9 million to $16.6 million, or 4.4% of print sales, in Fiscal Year 2006, from $19.5 million, or 5.0% 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 $8.7 million to $(0.9) 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 $3.6 million to expense of $3.7 million in Fiscal Year 2006 from expense of $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 and $0.4 million of non-recurring costs related to the closure of our Pittsburg, California print facility, incurred in Fiscal Year 2006, which we were unable to accrue as part of restructuring costs in Fiscal Year 2005.

EBITDA. As a result of the above factors and excluding the impact of depreciation and amortization, EBITDA for the print business increased $8.6 million to $31.6 million in Fiscal Year 2006 from $23.0 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 $0.2 million to $15.1 million in Fiscal Year 2006 from $15.3 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 28.1% in Fiscal Year 2006 from 27.5% 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 12.4% 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 $0.4 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 $1.1 million to $11.1 million in Fiscal Year 2006 from $10.0 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 $3.6 million from a loss of $3.3 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 $37.6 million from $34.1 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 6 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 $14.6 million in Fiscal Year 2006 from a net loss of $25.7 million in Fiscal Year 2005. Included in the Fiscal Year 2006 and 2005 net losses were restructuring costs (benefit) and other charges of ($1.2) million and $10.0 million, respectively. In addition, the Fiscal Year 2006 net loss includes a $2.8 million non-cash asset impairment charge and non-recurring costs of $0.4 million related to the closure of our Pittsburg, California print facility.

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.

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. See “Risk Factors”. We paid consenting lenders an aggregate amendment fee of $1.25 million in connection with such amendments.

We are currently in compliance with the covenant requirements set forth in the 2005 Credit Agreement and the Receivables Facility, as amended.

We anticipate that our primary needs for liquidity will be to conduct our business, meet our debt service requirements and make capital expenditures. We believe that we have sufficient liquidity to meet our requirements during Fiscal Year 2008.

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:

	•		$12.2 million of operating activities (see our Consolidated Statements of Cash Flows appearing elsewhere in this Report);
	•		$12.7 million in cash capital expenditures; and
	•		$6.7 million to service other indebtedness (including repayment of capital lease obligations of $3.8 million and payment of deferred financing costs of $2.9 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.

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.

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.

As of April 30, 2005, we had approximately $2.8 million of unamortized deferred financing costs associated with the Old Revolving Credit Facility. These costs are being amortized over the term of the 2005 Credit Agreement in accordance with the guidance set forth in Emerging Issues Task Force Issue 98-14, “Debtor’s Accounting for Changes in Line-of-Credit or Revolving–Debt Arrangements” (“EITF 98-14”).

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. 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
Print segment VAR (in thousands)		$	191,366				181,364				188,422
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
		(Dollars in thousands)
Print segment sales		$	396,535				380,648				393,922
Paper, ink and subcontract services			(205,169	)			(199,284	)			(205,500	)
Print segment VAR		$	191,366				181,364				188,422

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 the 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. We do not believe the adoption of FIN 48 will have a material impact 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 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.

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 $67.9 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)
Long-term debt		$	346,580				—				66,580				280,000				—
Interest payments on fixed rate debt (a)			98,000				28,000				56,000				14,000				—
Capital lease obligations			5,530				3,435				2,095				—				—
Operating lease obligations			9,792				3,347				5,094				1,351				—
Pension obligations (b)			713				713				—				—				—
Total contractual cash obligations		$	460,615				35,495				129,769				295,351				—

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

< 1 year

1-3 years

3-5 years

> 5 years

Commitments

Total

(Dollars in thousands)

Standby letters of credit

$

22,257

18,723

106

58

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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Quantitative Information. At March 31, 2007, we had fixed rate and variable rate debt (both excluding capitalized lease obligations) approximating $280.0 million and $66.6 million, respectively. At March 31, 2006, we had fixed rate and variable rate debt (both excluding capitalized lease obligations) approximating $280.0 million and $35.0 million, respectively. The estimated fair value of our debt instruments excluding capital lease obligations, at March 31, 2007 was $286.4 million, or $60.2 million less than the carrying value. The estimated fair value of our debt instruments, excluding capital lease obligations, at March 31, 2006 was $232.4 million, or $82.6 million less than the carrying value. At our March 31, 2007 and 2006 borrowing levels, a 1% adverse change in interest rates would result in an approximate $15 million reduction in the fair value of our fixed rate debt and would have resulted in additional annual interest expense and related payments of approximately $0.7 million at March 31, 2007 and approximately $0.4 million at March 31, 2006 on our variable rate debt.

Qualitative Information. In the ordinary course of business, our exposure to market risks is limited as discussed below. Market risk is the potential loss arising from adverse changes in market rates and prices, such as interest and foreign currency exchange rates. Currently, we do not utilize derivative financial instruments such as forward exchange contracts, future contracts, options and swap agreements to mitigate such exposures.

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

We have only one print facility outside the United States, in Canada, which is subject to foreign currency exchange rate risk; however, any fluctuations in net asset values as a result of changes in foreign currency exchange rates associated with activity at this one facility have been, and are expected to continue to be, immaterial to our Company as a whole.

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

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

		Page No.
The following consolidated financial statements of ACG Holdings, Inc. are included in this Report:
Report of Independent Registered Public Accounting Firm			37
Consolidated Balance Sheets — March 31, 2007 and 2006			38
For the Years Ended March 31, 2007, 2006 and 2005:
Consolidated Statements of Operations			40
Consolidated Statements of Stockholders’ Deficit			41
Consolidated Statements of Cash Flows			42
Notes to Consolidated Financial Statements			44

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. 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 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 Holdings, 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.

/s/ Ernst & Young LLP                                                             

Nashville, Tennessee
June 21, 2007

ACG HOLDINGS, INC.

Consolidated Balance Sheets

(In thousands)

		March 31,
		2007				2006
Assets
Current assets:
Cash and cash equivalents		$	—				—
Receivables:
Trade accounts, less allowance for doubtful accounts of $1,017 and $1,275 at March 31, 2007 and 2006, respectively			44,385				41,080
Other			2,645				3,463
Total receivables			47,030				44,543
Inventories			7,146				7,714
Deferred income taxes			962				1,409
Prepaid expenses and other current assets			4,997				4,733
Total current assets			60,135				58,399
Property, plant and equipment:
Land and improvements			3,185				3,058
Buildings and improvements			29,959				28,332
Machinery and equipment			223,737				212,904
Furniture and fixtures			14,369				13,007
Leased assets under capital leases			22,972				23,119
Equipment installations in process			2,334				6,850
			296,556				287,270
Less accumulated depreciation			(214,772	)			(199,504	)
Net property, plant and equipment			81,784				87,766
Excess of cost over net assets acquired			66,548				66,548
Other assets			18,266				18,789
Total assets		$	226,733				231,502

See accompanying notes to consolidated financial statements.

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

		March 31,
		2007				2006
Liabilities and Stockholders’ Deficit
Current liabilities:
Current installments of capital leases		$	3,435				3,731
Trade accounts payable			32,892				33,845
Accrued expenses			29,651				36,367
Income tax payable			487				160
Total current liabilities			66,465				74,103
Long-term debt and capital leases, excluding current installments			348,675				320,553
Deferred income taxes			2,677				3,866
Other liabilities			52,554				62,712
Total liabilities			470,371				461,234
Commitments and contingencies
Stockholders’ deficit:
Common stock, voting, $.01 par value, 5,852,223 shares authorized, 158,205 shares issued and outstanding at March 31, 2007 and March 31, 2006			2				2
Additional paid-in capital			2,038				2,038
Accumulated deficit			(230,769	)			(209,760	)
Other accumulated comprehensive loss, net of tax			(14,909	)			(22,012	)
Total stockholders’ deficit			(243,638	)			(229,732	)
Total liabilities and stockholders’ deficit		$	226,733				231,502