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, ~~2006~~2007


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

For the transition period from to

Commission file number 33-97090

ACG HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)		62-1395968 (I.R.S. Employer Identification No.)
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 (State or other jurisdiction of incorporation or organization)		16-1003976 (I.R.S. Employer Identification No.)
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

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 ~~158~~173,~~205~~254 shares outstanding of its common stock, $.01 Par Value, as of May 31, ~~2006~~2007 (all of which are privately owned and not traded on a public market).

DOCUMENTS INCORPORATED BY REFERENCE
None

INDEX

		Page
PART I	~~PART I~~
Item 1.	Business		2
Item 1A.	Risk Factors		8
Item 1B.	Unresolved Staff Comments		1113
Item 2.	Properties		1113
Item 3.	Legal Proceedings		1113
Item 4.	Submission of Matters to a Vote of Security Holders		1213
PART II	~~PART II~~
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		1314
Item 6.	Selected Financial Data		1314
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		1819
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk		3335
Item 8.	Financial Statements and Supplementary Data		3436
Item 9.	Changes In and Disagreements With Accountants on Accounting and Financial Disclosure		6971
Item 9A.	Controls and Procedures		6971
Item 9B.	Other Information		6971
PART III	~~PART III~~
Item 10.	Directors, ~~and~~ Executive Officers ofand ~~the~~Corporate ~~Registrant~~Governance		7072
Item 11.	Executive Compensation		7274
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		7684
Item 13.	Certain Relationships and Related Transactions, and Director Independence		7785
Item 14.	Principal Accountant Fees and Services		7886
PART IV	~~PART IV~~
Item 15.	Exhibits, ~~and~~ Financial Statement Schedules		7987
	Signatures		8998
Ex-10.5 Severance Letter, dated January 14, 2000
Ex-12.1 Statement Re: Computation of Ratio of Earnings to Fixed Charges
Ex-21.1 List of Subsidiaries
Ex-31.1 Section 302 Certification of the CEO
Ex-31.1 Section 302 Certification
Ex-31.2 Section 302 Certification of the CFO
Ex-31.2 Section 302 Certification
Ex-32.1 Section 906 Certification of the CEO & CFO
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 ~~230~~220 national and regional retailers and approximately ~~155~~150 newspapers.

We are also one of the most technologically advanced providers of premedia services in the United States. ~~Our~~We ~~premedia~~provide ~~services segment provides~~ our customers with acomprehensive ~~complete~~services ~~solution~~and solutions for ~~the preparation~~their advertising and brand management ofprograms. ~~materials~~Our ~~for~~wide ~~printing,~~variety ~~including~~of ~~the~~services ~~design,~~include ~~creation~~digital ~~and~~photography, ~~capture;~~digital ~~manipulation;~~asset ~~storage;~~management, ~~transmission~~prepress ~~and~~production, ~~distribution~~creative ofand ~~images.~~design, color

~~Advertising~~management ~~Inserts.~~services, ~~Our~~and ~~principal focus is on the printing of retail advertising inserts. In the~~workflow ~~fiscal~~consulting ~~year ended March 31, 2006 (“Fiscal Year 2006”) retail advertising inserts accounted~~ for ~~81% of our total print segment sales, in~~ the ~~fiscal~~preparation ~~year~~and ~~ended~~management ~~March 31,~~of ~~2005~~materials ~~(“Fiscal~~for ~~Year 2005”)~~printing, ~~accounted~~ ~~for 83%~~ and inother ~~the~~forms ~~fiscal~~of distribution ~~year~~of ~~ended~~their ~~March 31, 2004 (“Fiscal Year 2004”), accounted for 86%~~content.

~~Customers~~Advertising 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 providersInserts. ~~This~~Our ~~demand~~principal ~~has~~focus ~~resulted~~is inon the ~~continued consolidation~~printing ~~among~~of ~~printers~~retail ~~within~~advertising ~~the industry~~inserts. ~~Heatset~~In ~~offset has become~~ the ~~dominant~~ ~~technology~~fiscal ~~for~~years ~~printing~~ended ~~advertising~~March 31, ~~inserts~~2007 ~~due~~(“Fiscal toYear ~~its reliability~~2007”), ~~high~~2006 ~~print~~(“Fiscal ~~quality~~Year ~~and flexibility. The industry is also experiencing the increasing interest of newspapers to outsource their commercial printing~~2006”), ~~inserting~~ and ~~product~~2005 (“Fiscal ~~mailings.~~Year ~~As a result of these factors~~2005”), ~~we believe~~retail ~~that~~advertising ~~the~~inserts ~~key~~accounted ~~factors~~ for ~~success in the advertising insert segment of the printing industry are price~~82%, ~~quality,~~81% ~~reliability~~ and ~~proximity~~83%, ~~to customers’ target markets~~respectively, ~~as well as strong~~of ~~customer~~our ~~service~~total ~~capabilities~~print ~~that~~segment ~~foster lasting relationships~~sales.

~~Premedia~~Customers ~~Services.~~in ~~Premedia~~the ~~services~~advertising ~~consist~~insert segment of athe ~~number~~print ofindustry, ~~necessary~~particularly ~~steps~~large innational accounts, ~~the~~have ~~production~~increasingly demanded more sophisticated distribution capabilities, higher quality and greater flexibility from print service providers. This demand has resulted in the continued ~~management~~consolidation ofamong ~~materials~~printers ~~for~~within ~~printing,~~the ~~including~~industry. Heatset offset is the ~~design~~dominant technology for printing advertising inserts due to its reliability, ~~creation~~high print quality and ~~capture;~~flexibility. ~~manipulation;~~The ~~storage;~~industry ~~transmission~~has ~~and~~also ~~distribution~~experienced the increasing interest of ~~images~~newspapers to outsource their commercial printing, ~~the~~inserting ~~majority~~and ofproduct ~~which~~mailings. ~~lead~~As toa result, we believe that the ~~production~~key factors for success in the advertising insert segment of athe printing industry are price, quality, reliability and ~~four-color~~proximity ~~image~~to incustomers’ atarget ~~format~~markets, ~~appropriate~~as ~~for~~well ~~use~~as bystrong ~~printers~~customer service capabilities that foster lasting relationships.

~~Unlike~~Premedia Services. ~~the~~Premedia ~~advertising~~services ~~insert~~consist ~~segment~~ of ~~the~~several ~~printing~~processes necessary ~~industry,~~for the ~~premedia~~preparation ~~services segment remains highly fragmented, with a large number of service providers~~ and ~~many in-house departments~~ atmanagement ~~larger retailers. We believe that premedia services are increasingly becoming a part~~ of ~~the total~~advertising ~~mix of services that print customers demand~~ and ~~most~~packaging ofmaterials ~~our major competitors in the print services segment offer premedia services. We believe that the key factors~~ for ~~success~~printing inand ~~the premedia~~other ~~services segment are the ability to provide comprehensive services~~mediums, including ~~both print~~file ~~services~~preparation, ~~and~~page ~~managed~~layout ~~premedia~~and ~~services~~design, asimage ~~well~~capture, asasset ~~technology~~and ~~leadership~~content management, ~~which~~creative ~~enhances customer~~concept, ~~loyalty~~ and ~~helps~~color ~~establish~~and ~~new~~brand ~~print customer relationships~~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~~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 1418 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 ~~have~~serve a broad customer base consisting of geographically diverse companies in a wide variety of industries. We provide printing services to approximately ~~155~~150 newspapers and approximately ~~230~~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 ~~Jewel~~Supervalu ~~Foods~~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~~ nine flexographic and two coldset offset printing presses are generally among the most advanced in ~~the~~ the industry. Through our comprehensive maintenance program, we are committed to extending the ~~life~~ life and enhancing the reliability of these valuable assets. We also ~~strive to incorporate new~~ technology in our presses as it develops, and to acquire auxiliary equipment when needed, to improve our process controls and print quality, as well as to satisfy customer requirements. For example, our continued investment in pre-press, in-line and post-press technology has enabled us to both strengthen existing and develop new partnerships with our customers. In the premedia services segment, customers are continuously seeking ways to shorten their production cycles and reduce their costs. We believe that our equipment and software are among the most advanced available and position us well to address these requirements. We continuously strive to upgrade our equipment and

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 ~~few~~ 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 ~~to reduce~~ our ~~overall~~disciplined ~~operating~~focus ~~costs.~~on Inoverall ~~our~~cost ~~print~~reduction ~~business,~~through weongoing ~~have~~productivity ~~reduced~~ and ~~are~~efficiency ~~continuing~~improvements ~~to work to reduce the variable and fixed costs of production~~ at our print facilities ~~and our selling, general and administrative expenses~~. ~~This has been accomplished through benefits related to our prior restructuring programs and disciplined cost containment initiatives.~~ 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 ~~have~~expect ~~reduced~~continued ~~and~~improvements ~~are~~through ~~continuing~~the toimplementation ~~reduce~~and management ~~our~~of ~~operating~~disciplined ~~expenses~~cost ~~primarily~~containment programs and through the application of certain digital premedia production methodologies, ~~facility consolidation~~ and ~~disciplined~~ ~~cost~~technological ~~containment~~leadership.

Strong Management Team. The six members of our senior management team collectively have approximately 95100 years of service with us, and have worked together for us as a team for over ~~twelve~~ 13 years. Our management team maintains a sharp focus on our customers, growth, quality and ~~continued~~ 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 ~~actively~~continuing ~~pursuing~~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,~~ 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 that is implemented on a plant-by-plant basis, and we are aggressively working to further reduce costs in our manufacturing operations. Our cost reduction programs include savings resulting from various restructuring initiatives that we put into place over the past few years as well as numerous other specific cost reduction initiatives and efficiency improvements which have been implemented. In our premedia services business, our use of advanced technology and continued cost containment initiatives will enable us to

~~reduce~~prepare ~~our~~materials ~~capital~~for ~~costs~~ press and ~~improve~~other ~~our~~advertising ~~digital premedia workflow~~mediums, ~~which~~foster westrong ~~expect~~long-term torelationships ~~further~~ and enhance ~~the~~sales ~~productivity~~ of our ~~employees~~print solutions. ~~and~~We ~~reduce~~will ~~the~~continue ~~overall~~to ~~cost~~focus ~~structure~~on inhigh ~~this~~value-added, ~~segment. In~~new ~~addition~~business opportunities, weparticularly projects ~~are~~that ~~continually~~utilize ~~working~~the tofull ~~further~~breadth ~~reduce~~of ~~our~~the ~~selling,~~services ~~general~~ and ~~administrative expenses~~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 8889% of our sales in ~~both~~ Fiscal Year ~~2006~~2007 and ~~2005~~ ~~and 89~~88% of our sales in both Fiscal Year ~~2004~~2006 and 2005, produces advertising inserts, comics and other publications.

Advertising Inserts. Retail advertising inserts accounted for 8182% of print sales in Fiscal Year ~~2006~~2007, 8381% of print sales in Fiscal Year ~~2005~~2006 and 8683% of print sales in Fiscal Year ~~2004~~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 ~~230~~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 98% of print sales in Fiscal Year ~~2006~~2007, 109% of print sales in Fiscal Year ~~2005~~2006 and 810% of print sales in Fiscal Year ~~2004~~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 ~~155~~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 ~~2006,~~2007 7%and in2006 ~~Fiscal Year 2005~~ and 6 7% in Fiscal Year ~~2004~~2005.

Print Production. Our network of eight print plants in the United States and Canada is strategically ~~well~~ positioned to service our customers, providing us with distribution efficiencies ~~and~~ and short turnaround times, two factors that we believe will allow our continuing success in ~~servicing~~ 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~~ 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~~ 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~~absorption ~~maintenance~~of ~~costs~~solvents ~~and~~into ~~environmental~~the ~~advantages~~paper. ~~due~~Due to the ~~use~~drying ofprocess, ~~water-based~~the ~~inks~~heatset ~~and~~offset process ~~the~~can ~~use of~~be ~~less~~utilized ~~paper.~~on ~~Faster~~a ~~press~~wide ~~set-up~~variety ~~times~~of ~~make~~papers. ~~the~~Generally, ~~process~~heatset ~~particularly~~offset ~~attractive~~presses tohave ~~commercial~~the ~~customers~~ability ~~with~~to ~~shorter~~provide ~~runs~~a more colorful and ~~extensive~~attractive product ~~versioning~~than cold offset presses.

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 1211% of our sales in ~~both~~ Fiscal Year ~~2006~~ ~~and~~2007 ~~2005~~ and 1112% ofin ~~our~~both Fiscal Year ~~2004~~2006 ~~sales~~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~~ technological leader in this industry. Our premedia services business commenced operations in 1975. We provide premedia ~~these~~ services within our print plants, our six stand-alone ~~service~~premedia ~~locations~~facilities and through our 18 14 managed services sites, which are premedia ~~services~~ facilities atlocated ain ~~customer~~a ~~location~~customer site.

We assist customers in the design, creation and capture;, ~~manipulation;~~layout, storage;, ~~transmission~~color and brand management, transmission and distribution of images and content. The majority of this work leads to the production of a ~~four-color~~file ~~image~~ in a format appropriate for use by printers as well as other forms of media. We make page changes, including type changes, and combine digital page layout information with electronically captured and color-corrected ~~four-color~~ images. From these digital files, proofs, final corrections, and finally, ~~four-color films or~~ digital files are produced for each page. The final ~~four-color films or~~ digital files enable printers to prepare plates 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 ~~services, conventional~~ 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. ~~We have also been one of the leaders in the integration of electronic page~~ ~~make-up, desktop computer-based design and layout, and digital cameras into premedia production.~~

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, ~~printers,~~ 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, managed services and speed to market become more important to our customers. We believe cross-marketing enables us to provide more comprehensive solutions for our customers’ premedia and printing needs.

Noincreasingly ~~single~~focused ~~customer~~on ~~accounted~~larger, ~~for~~national ~~sales~~accounts inthat ~~excess~~have ofa ~~10%~~need offor ~~our~~a ~~consolidated~~broad ~~sales~~range inof ~~Fiscal Year~~fully ~~2006.~~integrated ~~Our~~services ~~top~~and ~~ten~~communication ~~customers~~capabilities ~~accounted~~requiring ~~for~~leading ~~approximately~~edge ~~41% of our consolidated sales in Fiscal Year 2006~~technology.

~~Distribution.~~The Weprint ~~distribute~~and ~~our~~premedia ~~print~~services ~~products~~businesses ~~primarily~~have byhistorically ~~truck~~had tocertain ~~customer-designated~~common ~~locations (primarily~~customers ~~newspapers~~ and our ~~customer~~ability ~~retail~~to ~~stores)~~cross-market ~~and~~is ~~via~~an ~~mail.~~increasingly ~~Distribution~~valuable ~~costs~~tool ~~are~~as ~~generally~~computer-to-plate, regional ~~paid~~versioning, byelectronic ~~the~~digital ~~customer~~imaging, content management, managed services and ~~most~~speed ~~shipping~~to ismarket remain byimportant ~~common~~to ~~carrier~~our customers. ~~Our~~We ~~premedia~~believe ~~services~~cross-marketing ~~business generally~~enables ~~distributes~~us ~~its~~to ~~products~~provide ~~via~~more comprehensive ~~electronic~~solutions ~~transmission,~~for ~~overnight~~our ~~express,~~customers’ orpremedia ~~other~~and ~~methods of~~printing ~~personal delivery~~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 28approximately 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 1418 sales ~~professionals~~ professionals who focus inon 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 ~~numerous~~several premedia services firms on both a national and regional basis. The premedia industry isconsists ~~highly fragmented, primarily consisting~~ of ~~smaller~~small local and regional companies, with only a few national full-service premedia services companies such as usGraphics, 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.

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, ~~2006~~2007, we had a total of approximately 2,~~040~~060 employees. Approximately ~~138~~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 ~~debt~~indebtedness. ~~Our~~At ~~significant~~March 31, ~~amount~~2007, ofwe ~~debt~~had ~~could~~total ~~have~~indebtedness ~~important~~of ~~consequences for our financial condition~~$352. ~~For example~~1 million, itcomprised ~~could~~of:

• ~~make~~$61.9 itmillion ~~more~~of ~~difficult~~borrowings ~~for~~outstanding ~~us to satisfy our obligations~~ under our ~~10%~~$90.0 ~~Senior~~million ~~Second Secured Notes Due 2010 (the “10% Notes”) and to the lenders under our~~ 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 ~~increase~~a ~~our~~$35.0 ~~vulnerability~~million toterm ~~general~~loan ~~adverse~~payable ~~economic~~in ~~and~~full ~~general~~on ~~industry~~December ~~conditions~~15, ~~including~~2009 ~~interest~~(the ~~rate~~“2005 ~~fluctuations,~~Term ~~because~~Loan aFacility”) ~~portion~~and of$26.9 ~~our~~million of borrowings ~~are~~under ~~and~~a ~~will~~revolving ~~continue~~credit tofacility bethat atexpires ~~variable~~on ~~rates~~December of15, ~~interest;~~2009 •(the ~~require~~“2005 usRevolving toCredit ~~dedicate~~Facility”), awhen ~~substantial~~all ~~portion~~borrowings ofthereunder ~~our~~become ~~cash~~payable ~~flow~~in ~~from~~full; ~~operations~~• to$4.7 ~~payments~~million onof borrowings outstanding under our ~~debt,~~$35 ~~which~~million ~~would~~revolving ~~reduce~~trade receivables facility (as amended, the ~~availability~~“Receivables ofFacility”) ~~our~~entered ~~cash~~into ~~flow~~on ~~from~~September ~~operations~~26, to2006 ~~fund~~with ~~working~~Banc ~~capital~~of America Securities, ~~capital~~LLC, ~~expenditures~~as orSole ~~other~~Lead ~~general~~Arranger ~~corporate~~and ~~purposes;~~Sole •Book ~~limit~~Manager, ~~our~~and ~~flexibility~~Bank inof ~~planning~~America, ~~for~~N.A., oras ~~reacting~~Administrative toAgent, ~~changes~~Collateral inAgent ~~our~~and ~~business~~Lender, and ~~industry;~~certain •other ~~place~~lenders us(which atfacility aexpires ~~disadvantage~~on ~~compared~~December ~~with~~15, ~~competitors~~2009, ~~that~~when ~~have~~all ~~proportionately~~borrowings ~~less~~thereunder ~~debt;~~become ~~and~~payable in full); • ~~limit~~$280.0 million of our ~~ability~~outstanding to10% ~~borrow~~Senior ~~additional~~Second ~~funds~~Secured inNotes Due 2010 (the ~~future~~“10% Notes”), ifwhich wemature ~~need~~on ~~them~~June 15, ~~due~~2010; toand ~~financial~~• ~~and~~$5.5 ~~restrictive~~million ~~covenants~~of incapital ~~our~~lease ~~debt~~obligations.

~~Despite~~In addition, ~~current~~we ~~indebtedness~~had ~~levels,~~letters weof ~~may~~credit beoutstanding ~~able~~under tothe ~~incur~~2005 Revolving ~~additional~~Credit ~~indebtedness~~Facility inof ~~the~~$22.2 ~~future~~million. See “Management’s Discussion and Analysis of Financial Condition and Results of IfOperations—Liquidity ~~new~~and ~~debt~~Capital isResources” ~~added~~for toadditional ~~our~~information ~~current~~about ~~debt~~our ~~levels~~indebtedness, including information about our additional borrowing capacity under the ~~related~~2005 ~~risks~~Credit ~~that~~Agreement weand ~~now~~the ~~face~~Receivables ~~would intensify~~Facility.

~~In Fiscal Years 2006, 2005, 2004 and 2002, our earnings were insufficient to cover fixed charges.~~ Our ~~ability~~significant toamount ~~make~~of ~~payments~~indebtedness oncould ~~our~~have ~~debt~~important ~~depends~~consequences onfor our ~~ability~~financial condition. toFor ~~generate~~example, ~~cash~~it ~~in the future.~~could:

~~Our~~• ~~earnings~~make ~~were~~it ~~insufficient~~more todifficult ~~cover fixed charges~~ for ~~the~~us ~~Fiscal Years 2006, 2005, 2004 and 2002 by $17.9 million, $27.4 million, $16.9 million and $2.9 million, respectively. The deficiency of earnings~~ to ~~cover~~satisfy ~~fixed~~our ~~charges~~obligations isunder ~~computed~~our by10% ~~subtracting earnings before fixed charges~~Notes, ~~income taxes~~our ~~and~~2005 ~~discontinued~~Credit ~~operations~~Agreement ~~from fixed charges. Fixed charges consist of interest expense, net amortization of debt issuance expense,~~ and ~~that~~our ~~portion~~Receivables ~~of operating lease rental expense which we deem to be representative of interest.~~ Facility;

We can provide no assurances that we will be able to improve our earnings before fixed charges or that we will be able to meet our debt service obligations, including our obligations under the 2005 Credit Agreement and the 10% Notes. If we do not generate sufficient cash flow to meet our debt service obligations, we could face liquidity problems and if we cannot raise alternative financing, we might be required to dispose of material assets or operations to meet our obligations. We can provide no assurances of the timing of any sales or the proceeds that we could obtain from any sales. In addition, borrowings under our 2005 Credit Agreement bear interest at floating rates. At March 31, 2006, we had $35.0 million of borrowings outstanding under our 2005 Credit Agreement. If interest rates rise significantly, our ability to meet our debt service obligations may be adversely affected.

~~Our~~• ~~ability~~require us to ~~generate~~dedicate ~~the~~a ~~significant~~substantial ~~amount~~portion of our cash ~~needed~~flow tofrom ~~make~~operations to payments on our ~~debt~~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 ~~operate~~ purchase paper and other raw materials under satisfactory credit terms thereby limiting our ~~business~~sources ~~depends~~of onsupply ~~many~~or ~~factors~~increasing ~~beyond~~the cash required to fund operations, or both; • limit our ~~control~~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.

~~Our~~Despite ~~ability~~current toindebtedness ~~make~~levels, ~~payments~~we onmay ~~our~~be ~~debt~~able ~~and~~ to ~~fund~~incur ~~working~~additional ~~capital~~indebtedness ~~needs and planned capital expenditures will depend on our ability to generate cash and secure financing~~ in the future. ~~This~~ ~~ability,~~If tonew andebt ~~extent,~~ is ~~subject~~added to ~~general economic, financial, competitive, legislative, regulatory and other factors beyond~~ our ~~control.~~current Ifindebtedness ~~our business does not generate sufficient cash flow from operations~~levels, ~~and sufficient future borrowings are not available to us under~~ the ~~2005 Credit~~related ~~Agreement~~risks ~~or from other sources of financing, we may not be able to repay our debt, operate our business or fund our other liquidity needs. We can provide no assurances~~ that we ~~will~~now beface able to obtain additional financing, particularly because we pledged substantially all our assets as collateral to secure the 2005 Credit Agreement and the 10% Notes, and because of our anticipated high levels of debt and the debt incurrence restrictions imposed by the agreements governing our debt. If we cannot meet or refinance our obligations when they are due, we may have to sell assets, reduce capital expenditures or take other actions that could have a material adverse effect on us. The proceeds from any sale of assets in all likelihood would ~~have to be applied to the reduction of~~ ~~our first priority secured debt~~intensify.

~~The~~In ~~agreements~~Fiscal ~~and~~Years ~~instruments~~2007, ~~governing~~2006, 2005, and 2004, our ~~debt~~earnings ~~contain~~were ~~restrictions~~insufficient ~~and~~to ~~limitations~~cover ~~that~~fixed ~~could~~charges. ~~significantly~~Our ~~affect~~ability to make payments on our ~~ability~~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.

~~The~~Our earnings were insufficient to cover fixed charges for the Fiscal Years 2007, 2006, 2005 ~~Credit~~and 2004 ~~Agreement~~by ~~requires~~$21.2 million, ~~satisfaction~~$17.9 million, of$27.4 million aand ~~specified~~$16.9 million, ~~first-lien~~respectively. ~~debt-~~The deficiency of earnings to- cover fixed charges is computed by subtracting earnings ~~ratio~~before fixed charges, income taxes and discontinued operations from fixed charges. Fixed charges consist of interest expense, Innet ~~addition~~amortization of debt issuance expense, and the ~~2005~~portion ~~Credit~~of ~~Agreement~~operating ~~includes~~lease ~~various~~rental ~~other~~expense ~~customary~~that we ~~affirmative~~deem ~~and~~to ~~negative covenants~~be representative of interest. Borrowings under our 2005 Credit Agreement and Receivables ~~events~~Facility ofbear ~~default~~interest at floating rates. ~~These~~If ~~covenants,~~interest ~~among~~rates ~~other~~rise ~~things~~significantly, ~~restrict~~ our fixed ~~ability~~charges will increase and ~~the~~ our ability ofto ~~Holdings~~meet ~~to:~~our debt service obligations may be adversely affected.

•Our ~~change~~ability ~~the~~to ~~nature~~make ofpayments on our ~~business;~~indebtedness, •to ~~pay~~refinance ~~dividends~~our orexisting ~~make~~indebtedness, ~~other~~and ~~distributions;~~to fund •working ~~make~~ capital ~~expenditures~~needs, ~~other~~planned ~~investments~~capital orexpenditures ~~acquisitions;~~and ~~• enter into transactions with affiliates; • dispose of assets or enter into mergers or~~ other ~~business~~general ~~combinations;~~corporate •requirements will ~~incur~~depend oron ~~guarantee~~our ~~additional~~ability ~~debt;~~to •generate ~~repay~~significant ~~debt~~amounts orof ~~repurchase~~cash orand ~~redeem~~secure ~~equity~~financing ~~interests~~ and refinancing ~~debt;~~in •the ~~place~~future. ~~limitations~~This ~~on dividends~~ability, ~~distributions or transfers~~ to usan orextent, ~~Holdings~~is ~~from~~subject ~~our~~to ~~subsidiaries;~~general •economic, ~~create~~financial, competitive, orlegislative, ~~permit~~regulatory ~~to exist certain liens;~~ and •other ~~pledge~~factors ~~assets~~beyond orour ~~engage in sale-leaseback transactions~~control.

~~These~~If ~~restrictions~~our ~~could~~business ~~limit~~does ~~our~~not ~~ability~~generate tosufficient ~~obtain~~cash ~~future~~flow ~~financing~~from operations, ~~make~~and ~~acquisitions~~sufficient ~~or needed~~future ~~capital~~borrowings ~~expenditures,~~are ~~withstand~~not aavailable ~~future~~to ~~downturn~~us inunder ~~our~~the ~~business~~2005 orCredit Agreement, the ~~economy~~Receivables inFacility ~~general,~~or ~~conduct~~from ~~operations~~other sources of financing, we may not be able to repay or ~~otherwise~~refinance ~~take~~our ~~advantage~~indebtedness, ofoperate our business ~~opportunities~~or ~~that~~fund ~~may~~our ~~arise~~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, ~~President~~ and Chief Executive Officer, Patrick W. Kellick, our Chief Financial Officer, Kathleen A. DeKam, our President, ~~Print~~of ~~and Premedia Services~~Graphics, Stuart R. Reeve, our President, New Business Development and Denis S. Longpré, our Executive Vice President of , 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.

9We 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

Wefocused ~~have~~on delivering ~~experienced~~advanced ~~significant~~technology ~~competitive~~based ~~pricing~~workflow ~~pressures~~solutions ~~in recent years as a result of industry over capacity~~ and ~~the~~superior ~~aggressive~~customer ~~pricing~~service ~~strategies~~in oforder ~~certain competitors which have~~to ~~negatively~~remain ~~impacted~~competitive ~~our~~with ~~profitability~~U. ~~There continues to be a modest amount of excess capacity in the printing industry~~S. ~~Continued competitive pricing or any future periods of economic downturn could further adversely affect our profitability~~ and ~~overall~~offshore ~~levels~~based ~~of cash flow~~companies.

~~Our~~Any ~~premedia~~future ~~services~~periods ~~business~~of ~~competes~~economic ~~with~~downturn ~~numerous~~could ~~premedia~~result ~~services~~in ~~firms~~continuing onincreased ~~both~~competition ~~a national~~ and possibly ~~regional~~affect ~~basis.~~our ~~The~~sales ~~industry~~and isprofitability. ~~highly~~A ~~fragmented,~~decline ~~primarily~~in ~~consisting~~sales ~~of smaller local~~ and ~~regional~~ ~~companies,~~profitability ~~with~~may ~~only~~decrease ~~a few national full-service premedia services companies such as~~our ~~American~~cash ~~Color,~~flow ~~none~~and ofmake ~~which~~it ~~has~~more adifficult ~~significant~~for ~~nationwide~~us ~~market share. We believe that the premedia services sector will continue~~ to beservice ~~subject~~our tolevel ~~high levels~~ of ~~ongoing technological change and we will need to keep up with such change~~indebtedness.

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.

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 ~~which~~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.

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.~~

1012

~~Demand~~regulations, ~~for~~developments ~~our~~in ~~services~~environmental ~~may~~litigation or ~~decrease~~technological ~~due~~advances tocould aincrease ~~decline~~the inamount ~~customers’~~of orfuture anexpenditures ~~industry~~and ~~sector’s~~could have a ~~financial~~material ~~condition~~adverse oreffect ~~due~~on toour anresults ~~economic~~of ~~downturn~~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 1415 locations in 1011 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 1418 ~~premedia~~managed ~~services~~service ~~facilities~~sites, ~~on the~~which ~~premises~~are ofpremedia ~~our~~facilities ~~customers~~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~~ 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.

11Based 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.

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, 2006. We believe this amount is adequate to cover such liabilities.

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

None.

1213

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, ~~2006~~2007, there were approximately ~~100~~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

~~During~~There ~~the~~have ~~third~~been ~~quarter~~no ofsales ~~Fiscal Year 2004, a former officer exercised options to purchase 1,125 shares~~ of ~~Holdings’~~unregistered ~~common stock for $.01/share. The~~ securities ~~that~~during ~~were sold were exempt from registration on~~ the ~~basis~~three ~~that~~most ~~such~~recent ~~officer is an “accredited investor” as~~fiscal ~~defined by the rules of the Securities Act of 1933, as amended~~years.

ITEM 6. SELECTED FINANCIAL DATA

Set forth below is selected financial data for and as of the fiscal years ended March 31, ~~2006~~2007, 2006, 2005, 2004, ~~2003~~ and ~~2002~~2003. The balance sheet data as of March 31, 2007, 2006, 2005, 2004, 2003, ~~2002~~ and the statements of operations data for the fiscal years ended March 31, 2007, 2006, 2005, 2004, ~~2003~~ and ~~2002~~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, ~~2003~~ and ~~2002,~~ 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,
	2006			2005			2004			2003			2002
	(Dollars in thousands)
Statements of Operations Data:
Sales	$	434,489			449,513			471,102			517,139			539,208
Cost of sales		385,150			403,641			409,321			445,493			460,283
Gross profit		49,339			45,872			61,781			71,646			78,925
Selling, general and administrative expenses		26,792			28,824			32,734			37,614			38,523
Restructuring costs (benefit) and other charges (a)		(1,167	)		10,037			8,140			1,722			12,920
Operating income		23,714			7,011			20,907			32,310			27,482
Interest expense, net		37,541			34,050			34,166			28,584			29,806
Loss on early extinguishment of debt (b)		—			—			3,196			—			—
Other expense (c)		4,119			313			489			1,503			624
Income tax expense (benefit) (d)		(3,369	)		(1,685	)		11,441			1,559			(5,073	)
Income (loss) from continuing operations		(14,577	)		(25,667	)		(28,385	)		664			2,125
Discontinued operations: (e)
Loss from operations, net of $0 tax		—			—			12			979			1,403
Loss on disposal, net of $0 tax		—			—			444			—			—
Net income (loss)	$	(14,577	)		(25,667	)		(28,841	)		(315	)		722
Balance Sheet Data (at end of period):
Working capital deficit	$	(15,704	)		(10,660	)		(15,772	)		(29,820	)		(865	)
Total assets	$	231,502			258,898			267,913			278,441			280,513
Long-term debt and capitalized leases, including current installments	$	324,284			309,951			298,298			231,757			252,792
Stockholders’ deficit	$	(229,732	)		(212,740	)		(188,775	)		(107,699	)		(96,020	)
Other Data:
Net cash provided (used) by operating activities	$	(5,213	)		(3,575	)		21,163			45,647			38,216
Net cash used by investing activities	$	(5,523	)		(7,172	)		(13,118	)		(27,446	)		(16,493	)
Net cash provided (used) by financing activities	$	10,760			10,822			(7,924	)		(22,680	)		(17,189	)
Capital expenditures (including capital lease obligations entered into)	$	12,486			6,907			15,966			28,652			24,550
Ratio of earnings to fixed charges (f)		—			—			—			1.07x			—
EBITDA (g)	$	39,078			29,749			41,054			54,279			56,654

~~NOTES~~ACG TOHoldings, ~~SELECTED~~Inc. Selected ~~FINANCIAL~~Financial ~~DATA~~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 $(0.3) million of costs for this plan in Fiscal Year 2006. 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 $(0.4) million of costs for this plan in Fiscal Year 2006. In January 2004, we approved a restructuring plan for our print and premedia services segments, which was designed to improve operating efficiency and profitability. We recorded $5.7 million of costs under this plan in Fiscal Year 2004. We recorded $(0.1) million and $(0.7) million of costs for this plan in 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, $0.5 million and $4.3 million of other charges in our print and premedia services divisions in Fiscal Year 2005, Fiscal Year 2004, Fiscal Year 2003 and Fiscal Year 2002, respectively. See note 15 to our consolidated financial statements appearing elsewhere in this Report for further discussion of this restructuring activity. (b) As part of a refinancing transaction entered into on July 3, 2003, we recorded a loss related to the early extinguishment of debt of $3.2 million, net of zero taxes. This loss related to the write-off of deferred financing costs associated with the old bank credit agreement and the 123/4% Senior Subordinated Notes Due 2005 (the “123/4% Notes”). (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 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 minimum pension liability, which is a component of other comprehensive 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


	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

~~2005~~NOTES asTO aSELECTED ~~result~~FINANCIAL 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 minimum pension liability, which is a component of other comprehensive loss.DATA

		In the second quarter of Fiscal Year 2004, the valuation allowance for deferred tax assets was increased by $12.8 million, resulting in a corresponding debit to deferred income tax expense. This adjustment reflected a change in circumstances which resulted in a judgment that, based on the provisions of Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes” (“SFAS 109”) that restrict our ability to consider forecasts of future income, a corresponding amount of deferred tax assets may not be realized. The change in circumstances arose from our assessment of the economic climate, particularly the continuance of competitive pricing pressures in our industry, and the expected increase in annual interest costs arising from the issuance of our 10% Senior Second Secured Notes Due 2010 (the “10% Notes”) in July 2003 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 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 minimum pension liability, a component of other comprehensive loss. In the third quarter of Fiscal Year 2004, we recorded an adjustment of $2.2 million to reflect the tax benefit associated with a change in estimate with respect to our income tax liability.
		The valuation allowance increased by $3.5 million in 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 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.
		In the fourth quarter of the fiscal year ended March 31, 2002 (“Fiscal Year 2002”), the valuation allowance for deferred tax assets was reduced by $5.5 million, resulting in a corresponding credit to deferred income tax expense. This adjustment reflected a change in circumstances which resulted in a judgment that a corresponding amount of our deferred tax assets would be realized in future years. The valuation allowance decreased by $0.1 million during Fiscal Year 2002 as a result of changes in the deferred tax items. This decrease primarily included the $5.5 million decrease discussed above and a $4.2 million increase related to the tax effect of the minimum pension liability, which is a component of other comprehensive income (loss).
(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 Years 2003 and 2002 have been reclassified and presented within discontinued operations. Sales attributable to Digiscope for Fiscal Year 2004 were $0.8 million and for Fiscal Years 2003 and 2002 were $3.2 million in each year.
(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 2006, 2005, 2004 and 2002 was $17.9 million, $27.4 million, $16.9 million and $2.9 million, respectively.

(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).

~~(g)~~In WeFiscal ~~have~~Year ~~included~~2006, ~~EBITDA~~income ~~because~~tax webenefit ~~believe~~relates ~~that~~primarily ~~investors~~to ~~regard~~an ~~EBITDA~~adjustment asrecorded ain ~~key~~the ~~measure~~third quarter of $3.6 million to reflect the tax benefit associated with a ~~leveraged~~change ~~company’s~~in ~~operating~~estimate ~~performance~~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 ita ~~removes~~result ~~interest~~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, ~~taxes~~which is a component of other comprehensive income (loss). In Fiscal Year 2005, ~~depreciation~~income ~~and~~tax ~~amortization~~benefit relates primarily to tax benefit from losses in foreign jurisdictions and to an adjustment recorded in the ~~operational~~third ~~results~~quarter of $0.4 million to reflect the tax benefit associated with a change in estimate with respect to our ~~business~~income tax liability. ~~EBITDA~~The isvaluation ~~defined~~allowance increased by $9.6 million in Fiscal Year 2005 as ~~earnings~~a ~~before~~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 ~~interest~~of ~~expense~~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” (~~benefit~~“SFAS 109”) that restrict our ability to consider forecasts of future income, ~~depreciation~~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 ~~amortization~~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. ~~EBITDA~~We iswill ~~not~~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 ~~measure~~result of ~~financial~~changes ~~performance~~in ~~under~~the Udeferred tax items.S This increase primarily included the $12.8 ~~generally~~million ~~accepted~~increase ~~accounting~~discussed ~~principles~~above and ~~should~~a ~~not~~$5.6 bemillion ~~considered~~increase anrelated ~~alternative~~ 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). ~~(or~~In ~~any~~the ~~other~~third ~~measure~~quarter of ~~performance~~Fiscal ~~under~~Year U2004, we recorded an adjustment of $2.S2 million to reflect the tax benefit associated with a change in estimate with respect to our income tax liability. ~~generally~~The ~~accepted~~valuation ~~accounting~~allowance ~~principles~~increased by $3.5 million in the fiscal year ended March 31, 2003 (“Fiscal Year 2003”) as a ~~measure~~result of ~~performance~~changes orin the deferred tax items. This increase is primarily due to ~~cash~~a ~~flows~~$5.0 ~~from~~million ~~operating~~increase related to the tax effect of the additional minimum pension liability, ~~investing~~which oris ~~financing~~a ~~activities~~component asof another ~~indicator~~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 ~~cash~~our ~~flows~~digital orvisual 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 ~~measure~~discontinued operation, and accordingly, Digiscope’s operations are segregated in our consolidated financial statements. Sales, cost of ~~liquidity~~sales and selling, general and administrative expenses attributable to Digiscope for Fiscal Year 2003 have been reclassified and presented within discontinued operations. ~~Our~~Sales ~~calculation~~attributable to Digiscope for Fiscal Year 2004 and Fiscal Year 2003 were $0.8 million and $3.2 million, respectively. (f) The ratio of ~~EBITDA~~earnings ~~may~~to befixed ~~different~~charges is calculated by dividing earnings (representing consolidated pretax income or loss from ~~the~~continuing ~~calculations~~operations) ~~used~~before fixed charges by ~~other~~fixed ~~companies~~charges. Fixed charges consist of interest expense, net amortization of debt issuance expense, and ~~therefore~~that ~~comparability~~portion ~~may~~of operating lease rental expense which we deem to be ~~limited~~representative of interest. ~~Certain~~The ~~covenants~~deficiency in ~~our~~earnings ~~debt~~to ~~agreements~~cover ~~are~~fixed ~~based~~charges onis ~~EBITDA~~computed by subtracting earnings before fixed charges, ~~subject~~income totaxes ~~certain~~and ~~adjustments~~discontinued operations from fixed charges. The ~~following~~deficiency ~~table~~in ~~provides~~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 ~~reconciliation~~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 tois defined as earnings before net interest expense, income tax expense (~~loss~~benefit):, depreciation and amortization. EBITDA is not a measure of financial performance under U.S. generally accepted

	Fiscal Year Ended March 31,
	2006			2005			2004			2003			2002
	(In thousands)
EBITDA	$	39,078			29,749			41,054			54,279			56,654
Depreciation and amortization		(19,483	)		(23,051	)		(24,288	)		(24,451	)		(31,199	)
Interest expense, net		(37,541	)		(34,050	)		(34,166	)		(28,584	)		(29,806	)
Income tax (expense) benefit		3,369			1,685			(11,441	)		(1,559	)		5,073
Net income (loss)	$	(14,577	)		(25,667	)		(28,841	)		(315	)		722

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

	Fiscal Year Ended March 31,
	2006			2005		2004		2003		2002
	(In thousands)
Restructuring costs (benefit)	$	(1,167	)		8,369		7,768		1,191		8,638
Other charges		—			1,668		372		531		4,282
Loss on early extinguishment of debt		—			—		3,196		—		—
Loss from discontinued operations		—			—		456		979		1,403
Impairment of assets		2,830			—		—		750		—
Total	$	1,663			10,037		11,792		3,451		14,323

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 ~~are~~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 1418 facilities for customers at their offices, which enables us to develop strong and long-term relationships with them.

WeOur ~~have~~profitability ~~experienced~~has ~~significant~~been ~~competitive~~negatively ~~pricing~~impacted ~~pressures~~ over the past several years asby asignificant ~~result~~competitive ofpricing apressures ~~weak~~due ~~retail~~largely ~~market,~~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 ~~that~~ we are one of the lowest cost producers of retail advertising inserts, and we intend to continue ~~to reduce~~ our ~~overall~~disciplined ~~operating costs.~~focus Inon ~~our print business, we continue to be successful in reducing our~~ overall ~~manufacturing~~ cost ~~base~~reduction through ~~benefits related to our prior restructuring programs and~~ ongoing ~~disciplined cost containment initiatives. Overall~~ productivity and efficiency ~~levels~~improvements at our print facilities ~~continue to improve~~. In ~~our premedia services business~~addition, we have ~~reduced~~been ~~and~~successful ~~are~~in ~~continuing to~~reducing ~~reduce~~our ~~manufacturing~~cost ~~costs~~structure ~~primarily~~in ~~through~~our ~~the~~premedia ~~benefits~~services ~~related~~business toand ~~our~~we ~~prior~~expect ~~restructuring programs~~continued ~~and~~improvements through the ~~continuance~~implementation and management of disciplined cost containment ~~initiatives~~programs and through the application of certain digital premedia production methodologies and technological leadership. ~~See “–Recent Performance”~~ ~~and “–Our Restructuring and Cost Reduction Initiatives” below.~~

We are one of the leading printers of retail advertising inserts in the United States. In Fiscal Year ~~2006~~2007, retail advertising inserts accounted for 8182% of our total print segment sales and in Fiscal Years ~~2005~~2006 and ~~2004~~2005 accounted for 8381% and 8683% of our total print segment sales, respectively. The focus and attention of our entire management team iscontinues to be dedicated to serving the retail advertising insert market. We have made, and will continue to make, disciplined ~~strategic~~ strategic capital investments to enable us to maintain our position as a leader in the retail ~~advertising~~ advertising insert market.

In addition to the ~~drivers~~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. ~~During~~Paper ~~Fiscal~~prices ~~Year~~generally ~~2004,~~increased ~~paper~~throughout ~~prices~~Fiscal ~~fluctuated~~Years 2005 and ~~ended~~2006. atDuring ~~levels~~Fiscal ~~which~~Year ~~were~~2007, ~~higher~~paper ~~on average than the prior year. Paper~~ prices generally ~~increased throughout Fiscal Year 2005 and 2006~~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 2006, we continued to operate in a very competitive market environment. Our profitability was negatively impacted by the competitive pricing environment in both the print and premedia segments. Our print production volume for the full year decreased approximately 1% from Fiscal Year 2005 levels. As a result of aggressive competitive bidding and continued weak pricing due to a modest amount of excess industry capacity, we anticipate that we will continue to operate in a very competitive pricing environment in the fiscal year ending March 31, 2007 (“Fiscal Year 2007”).

We continue to be extremely focused on improved productivity and disciplined cost management. During Fiscal Year 2006, we have been able to offset the negative impact of the competitive pricing environment through benefits related to prior restructuring initiatives and the continuance of other cost reduction and productivity improvement programs across our print and premedia operations as well as reductions in our selling, general and administrative expense categories (see “–Our Restructuring Results and Cost Reduction Initiatives” below). We anticipate continued improvements in our cost structure during Fiscal Year 2007.

In April 2005, we executed a plan resulting in the sale of our print facility located in Pittsburg, California for an aggregate selling price of approximately $8.1 million (including $0.1 million of miscellaneous closing and settlement costs). See note 4 to our consolidated financial statements appearing elsewhere in this Report. This action has improved our profitability and liquidity. This facility was closed in March 2005 as a result of an approved restructuring plan (see “–Our Restructuring Results and Cost Reduction Initiatives” below).

In May 2005, we further improved our overall liquidity position through the execution of an amended and restated credit agreement with Banc of America Securities, as Sole Lead Arranger, and Bank of America N.A., as Administrative Agent, and certain lenders, which resulted in the refinancing of our $70 million senior secured revolving credit facility with a new $90 million credit facility (see “–Liquidity and Capital Resources” below and note 7 to our consolidated financial statements found elsewhere in this Report).

Our Restructuring Results and Cost Reduction Initiatives

We have successfully implemented significant cost reductions annually over the past several years. In the fourth quarter of Fiscal Year 2002, we approved a restructuring plan that was designed to improve asset utilization to achieve new levels of operating efficiencies and greater profitability for our print and premedia services segments. The key initiatives under this restructuring plan included:

• closing our Hanover, Pennsylvania print facility and our West Palm Beach, Florida premedia services facility; • downsizing our Buffalo, New York premedia services facility; and • eliminating certain administrative positions.

These actions resulted in the elimination of 189 positions within our Company.

A large portion of work performed at the closed and downsized facilities, as well as the equipment removed from those facilities, was reallocated to our other print and premedia services facilities. These restructuring initiatives allowed us to improve our overall asset utilization. Profitability was improved as a result of the reduction in overhead costs while we continued to service our print customers and many of premedia services customers from the closed and downsized facilities at our other print and premedia services facilities.

In the fourth quarter of Fiscal Year 2003, we implemented a restructuring plan designed to further improve profitability. We closed our premedia services facility in Nashville, Tennessee, which allowed us to reallocate certain employees and equipment from that facility to our other facilities. This plan resulted in the elimination of 30 positions within our Company.

InRecent ~~July 2003, we implemented a restructuring plan to further reduce selling, general and~~Performance ~~administrative expenses in our print and premedia services segments. This plan resulted in the termination of four administrative employees.~~

InDuring ~~January 2004~~Fiscal Year 2007, we ~~approved~~continued ato ~~restructuring~~operate ~~plan~~in ~~for~~a ~~the~~very ~~print~~challenging and ~~premedia~~competitive ~~services segments that~~market ~~was~~environment ~~designed~~in toboth ~~improve~~our ~~operating~~print ~~efficiency~~ and ~~profitability.~~premedia ~~This~~services ~~plan~~segments. ~~included~~Our aprint ~~consolidation~~production volume ofincreased ~~capacity~~1.3% ~~and~~from ~~the~~Fiscal ~~related~~Year ~~downsizing~~2006 ~~of our print facility in Stevensville~~levels, ~~Ontario~~however, aoverall ~~reduction of personnel in other~~ print ~~and~~profitability ~~premedia~~was ~~facilities and the elimination of certain selling and~~negatively ~~administrative~~impacted ~~positions.~~in ~~These~~Fiscal ~~actions~~Year ~~included~~2007 ~~the~~as ~~elimination~~a ofresult ~~208 positions within our~~of: ~~Company.~~

In• the ~~quarter~~continuance ~~ended~~of ~~March 31,~~competitive ~~2005,~~pricing wedue ~~approved~~to ~~three~~a ~~restructuring~~modest ~~programs~~amount ~~which~~of ~~resulted~~excess inindustry ~~(1) reduced~~capacity; ~~headcount~~• inincremental ~~the~~costs ~~manufacturing~~associated ~~and~~with the ~~selling~~start-up ~~and administrative areas, (2) the closure and sale~~ of ~~the~~a ~~Pittsburg,~~replacement ~~California~~press ~~print~~in ~~facility~~one ~~and (3) the consolidation~~ of our ~~two~~print ~~premedia services~~ facilities; in• ~~New~~incremental ~~York,~~costs ~~New~~associated ~~York.~~with ~~These combined programs resulted in~~ the ~~elimination~~start-up of ~~206~~ ~~positions~~a ~~within~~newspaper ~~our~~service ~~Company.~~facility; ~~Through these initiatives we have continued our discipline~~ and ~~ongoing~~ ~~commitment~~• toincreased ~~maintain~~utility ~~the~~costs ~~most competitive~~ and ~~efficient~~foreign ~~cost~~exchange ~~structure possible~~losses.

InPremedia ~~summary,~~profitability ~~our~~was ~~restructuring~~negatively ~~initiatives~~impacted ~~since January 2002 have resulted~~ in ~~the~~Fiscal ~~elimination~~Year ~~of approximately~~2007 ~~637~~as positions within our Company, 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. As a result of ~~these actions,~~: we recognized restructuring expenses of $8.4 million, $7.7 million, $1.2 million and $8.6 million in Fiscal Years 2005, 2004, 2003 and 2002, respectively. In Fiscal Years 2005, 2004, 2003 and 2002, we also recorded other charges associated with these programs of $1.6 million, $0.4 million, $0.5 million and $4.3 million, respectively. In Fiscal Year 2006, we recognized net reversals of excess restructuring costs accrued in prior periods of $1.2 million. We expect to make cash payments of approximately $2.5 million of the accrued restructuring costs during Fiscal Year 2007, $0.7 million during the fiscal year ending March 31, 2008 (“Fiscal Year 2008”), approximately $0.5 million, in the fiscal year ending March 31, 2009 (“Fiscal Year 2009”) and $0.4 million in total for years subsequent to Fiscal Year 2009 associated with these programs. See note 15 to our consolidated financial statements appearing elsewhere in this Report.

In• ~~addition~~reduced tovolume; ~~benefits~~• ~~related to~~ the ~~above~~impact ~~restructuring~~of ~~programs,~~competitive wepricing ~~have also been successful~~ in ~~continuing~~this tosegment; ~~improve our efficiencies~~ and ~~reducing~~• ~~our~~reductions ~~overall costs through ongoing productivity and income improvement initiatives at our operating facilities. We have also been successful~~ in ~~reducing~~certain ~~our~~service ~~selling,~~requirements ~~general~~related ~~and~~to ~~administrative~~one ~~cost~~major ~~structure~~customer.

~~The~~In ~~following~~addition, ~~table~~other ~~summarizes~~operations’ ~~the~~expenses ~~expense~~were ~~(income) recorded~~higher ~~relating~~as toa ~~the~~result ~~restructuring~~of ~~and other~~increased ~~charges~~corporate ~~incurred~~expenses indue to ~~association~~incremental ~~with~~legal ~~our~~costs ~~restructuring~~associated ~~plans~~with bytwo ~~segment~~lawsuits ~~for~~in which the ~~three~~Company ~~most recent~~is ~~fiscal~~the ~~years (in thousands):~~plaintiff.

	Fiscal Year			Fiscal Year			Fiscal Year		Three Year
	2004			2005			2006		Total
Fiscal Year 2002 Plan Costs
Restructuring costs:
Severance & other employee costs — Print	$	120			(29	)		—		91
Severance & other employee costs — Premedia		(19	)		—			—		(19	)
Lease termination costs — Print		584			739			465		1,788
Lease termination costs — Premedia		(235	)		—			—		(235	)
Other costs — Print		(24	)		—			—		(24	)
Other costs — Premedia		(20	)		—			—		(20	)
Total restructuring costs		406			710			465		1,581

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

	Fiscal Year			Fiscal Year			Fiscal Year			Three Year
	2004			2005			2006			Total
Fiscal Year 2003 Plan Costs
Restructuring costs:
Severance & other employee costs — Print		(242	)		—			—			(242	)
Severance & other employee costs — Premedia		(87	)		(5	)		—			(92	)
Lease termination costs — Premedia		(7	)		—			—			(7	)
Other costs — Premedia		164			(11	)		—			153
Total restructuring benefit		(172	)		(16	)		—			(188	)
July 2003 Plan Costs
Restructuring costs:
Severance & other employee costs — Print		1,479			12			—			1,491
Severance & other employee costs — Premedia		287			(12	)		—			275
Total restructuring costs		1,766			—			—			1,766
January 2004 Plan Costs
Restructuring costs:
Severance & other employee costs — Print		4,692			(234	)		(117	)		4,341
Severance & other employee costs — Premedia		498			(107	)		(66	)		325
Lease termination costs — Print		117			(3	)		—			114
Other costs — Print		386			(275	)		117			228
Other costs — Premedia		75			(75	)		—			—
Total restructuring costs (benefit)		5,768			(694	)		(66	)		5,008
Other charges:
Asset impairment charge — Print		372			—			—			372
Total other charges		372			—			—			372
Fiscal Year 2005 Plant and SG&A Reduction Plan Costs
Restructuring costs:
Severance & other employee costs — Print		—			3,044			(263	)		2,781
Severance & other employee costs — Premedia		—			458			—			458
Other costs — Print		—			200			(124	)		76
Other costs — Premedia		—			50			—			50
Total restructuring costs (benefit)		—			3,752			(387	)		3,365
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

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
	2004		2005			2006			Total
	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
Severance & other employee costs – Premedia		195		(40	)		—			155
Lease termination costs — Premedia		—		1,271			(207	)		1,064
Lease termination costs – Premedia		1,271		(207	)		(79	)		985
Other costs — Premedia		—		15			(3	)		12
Other costs – Premedia		15		(3	)		—			12
Total restructuring costs (benefit)		—1,481		~~1,481~~(250	)		(~~250~~79	)		1,~~231~~152
Other charges:
Asset impairment charge — Premedia		—		402			—			402
Asset impairment charge – Premedia		402		—			—			402
Total other charges		—402		~~402~~—			—			402
Total restructuring costs (benefit)		78,~~768~~369		8(1,~~369~~167	)		(~~1,167~~445	)		146,~~970~~757
Total other charges		~~372~~1,668		~~1,668~~—			—			21,~~040~~668
Total restructuring costs (benefit) and other charges	$	810,~~140~~037		10(1,~~037~~167	)		(~~1,167~~445	)		178,~~010~~425

The following table summarizes our historical results of continuing operations for Fiscal Years 2006, 2005 and 2004.

	Fiscal Year Ended March 31,
	2006			2005			2004
	(Dollars in thousands)
Sales
Print	$	380,648			393,922			418,004
Premedia Services		53,841			55,591			53,098
Total	$	434,489			449,513			471,102
Gross Profit
Print	$	34,205			30,575			47,537
Premedia Services		15,134			15,293			14,239
Other		—			4			5
Total	$	49,339			45,872			61,781
Gross Margin
Print		9.0	%		7.8	%		11.4	%
Premedia Services		28.1	%		27.5	%		26.8	%
Total		11.4	%		10.2	%		13.1	%

	Fiscal Year Ended March 31,
	2006			2005			2004
	(Dollars in thousands)
EBITDA
Print (a)	$	31,571			22,997			38,789
Premedia Services (a)		11,070			10,059			9,564
Other (b)		(3,563	)		(3,307	)		(7,299	)
Total	$	39,078			29,749			41,054
EBITDA Margin
Print		8.3	%		5.8	%		9.3	%
Premedia Services		20.6	%		18.1	%		18.0	%
Total		9.0	%		6.6	%		8.7	%

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

(a)	EBITDA for the print and premedia services segments in Fiscal Year 2006 includes the impact of restructuring benefit of ($0.9) million and ($0.3) million, respectively, and for the print segment also includes a non-cash asset impairment charge of $2.8 million. EBITDA for the print and premedia services segments in Fiscal Year 2005 includes the impact of restructuring costs and other charges of $7.8 million and $2.2 million, respectively. In Fiscal Year 2004, EBITDA for the print and premedia services segments includes the impact of restructuring costs and other charges of $7.5 million and $0.6 million, respectively. For additional information about our restructuring plan, see “ — Our Restructuring Results and Cost Reduction Initiatives” above.
	Fiscal Year Ended March 31,
(b)	Other operations include corporate general and administrative expenses, as well as revenues and expenses in Fiscal Year 2004 associated with our former digital visual effects business, Digiscope. Digiscope was sold on June 5, 2003. The EBITDA loss of Digiscope included in the EBITDA table above for Fiscal Year 2004 was ($0.4) million. In addition, other operations includes the write-off of deferred financing costs related to a refinancing transaction entered into on July 3, 2003 of $3.2 million in Fiscal Year 2004.
	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	%


(a)		In Fiscal Year 2007, EBITDA for the print and premedia services segments includes the impact of restructuring benefit of ($0.1) million and ($0.3) million, respectively. EBITDA for the print and premedia services segments in Fiscal Year 2006 includes the impact of restructuring benefit of ($0.9) million and ($0.3) million, respectively, and for the print segment also includes a non-cash asset impairment charge of $2.8 million. EBITDA for the print and premedia services segments in Fiscal Year 2005 includes the impact of restructuring costs and other charges of $7.8 million and $2.2 million, respectively. For additional information about our restructuring plan, see “ — Our Restructuring Results and Cost Reduction Initiatives” above.

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

EBITDA is presented and discussed because management believes that investors regard EBITDA as a key measure of a leveraged company’s operating performance as it removes interest, taxes, ~~depreciation~~ 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, ~~and~~ the 2005 Credit Agreement and the Receivables Facility are based on, or include EBITDA, subject to certain adjustments. The following table ~~provides~~ 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	)
Fiscal Year 2004
EBITDA	$	38,789			9,564			(7,299	)		41,054
Depreciation and amortization		(20,733	)		(3,529	)		(26	)		(24,288	)
Interest expense, net		—			—			(34,166	)		(34,166	)
Income tax expense		—			—			(11,441	)		(11,441	)
Net income (loss)	$	18,056			6,035			(52,932	)		(28,841	)

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~~ from $30.6 million in Fiscal Year 2005. Print gross margin increased to 9.0% in Fiscal Year 2006 ~~from~~ from 7.8% in Fiscal Year 2005. The increase in gross profit includes net benefits from ~~productivity~~ 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 1a) the impact of changes in paper prices included in sales and 2b) 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 ~~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 $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.

2527

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~~ 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 76 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~~ investment market returns, plan expenses and a reduction in our discount rate from 6.25% to 6.0%. ~~This~~ ~~liability~~The ~~represents~~recording ~~the amount by which the accumulated benefit obligation exceeds the fair value~~ of the ~~plan~~increase ~~assets~~in atthis ~~March 31,~~additional ~~2006~~minimum ~~and~~pension ~~March 31, 2005. The recording of this~~ liability had no impact on our consolidated ~~statements~~statement of operations for Fiscal ~~Years~~Year 2006 ~~and 2005~~, but was recorded as a component of other comprehensive ~~loss~~income (loss) in our consolidated ~~statements~~statement of stockholders’ deficit at March 31, 2006 ~~and March 31, 2005~~.

Fiscal Year 2005 vs. Fiscal Year 2004

Total sales decreased 4.6% to $449.5 million in Fiscal Year 2005 from $471.1 million in Fiscal Year 2004. This decrease reflected a decrease in print sales of $24.1 million, or 5.8%, offset in part by an increase in premedia services’ sales of $2.5 million, or 4.7%. Total gross profit decreased to $45.9 million, or 10.2% of sales, in Fiscal Year 2005 from $61.8 million, or 13.1% of sales, in Fiscal Year 2004. EBITDA decreased to $29.7 million, or 6.6% of sales, in Fiscal Year 2005 from $41.1 million, or 8.7% of sales, in Fiscal Year 2004. See the discussion of these changes by segment below.

Sales. Print sales decreased $24.1 million to $393.9 million in Fiscal Year 2005 from $418.0 million in Fiscal Year 2004. The decrease in Fiscal Year 2005 includes a decrease in print production volume of approximately 13% and the impact of continued competitive pricing pressures. The volume decline was largely attributable to certain share losses associated with the aggressive pricing strategies of certain competitors. These decreases were offset in part by the impact of increased paper prices and a decrease in customer supplied paper. See “—Value Added Revenue and Print Impressions for the Print Segment” below.

Gross Profit. Print gross profit decreased $16.9 million to $30.6 million in Fiscal Year 2005 from $47.5 million in Fiscal Year 2004. Print gross margin decreased to 7.8% in Fiscal Year 2005 from 11.4% in Fiscal Year 2004. The decrease in gross profit includes the impact of reduced print production volume and continued competitive pricing pressures. These decreases were offset in part by net benefits from productivity improvements and various cost reduction programs at our facilities. The decrease in gross margin includes these items, coupled with the impact of increased paper prices and decreased levels of customer supplied paper reflected in sales. Our gross margin may not be comparable from period to period because of 1) the impact of changes in paper prices included in sales and 2) changes in the level of customer supplied paper.

Selling, General and Administrative Expenses. Print selling, general and administrative expenses decreased $2.3 million to $19.5 million, or 5.0% of print sales, in Fiscal Year 2005, from $21.8 million, or 5.2% of print sales, in Fiscal Year 2004. This decrease includes benefits related to various cost containment initiatives and the impact of the change in our estimates related to the allowance for doubtful accounts.

Restructuring Costs (Benefit) and Other Charges. Restructuring costs and other charges increased $0.3 million to $7.8 million in Fiscal Year 2005 from $7.5 million in Fiscal Year 2004. 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 2005 from expense of $0.2 million in Fiscal Year 2004.

EBITDA. As a result of the above factors and excluding the impact of depreciation and amortization, EBITDA for the print business decreased $15.8 million to $23.0 million in Fiscal Year 2005 from $38.8 million in Fiscal Year 2004.

Premedia Services

Sales. Premedia services’ sales increased $2.5 million to $55.6 million in Fiscal Year 2005 from $53.1 million in Fiscal Year 2004. These results are attributable primarily to increases in our premedia production volume, including increases in our premedia packaging business. These increases were offset in part by continued competitive pricing pressures in this segment.

Gross Profit. Premedia services’ gross profit increased $1.1 million to $15.3 million in Fiscal Year 2005 from $14.2 million in Fiscal Year 2004. Premedia services’ gross margin increased to 27.5% in Fiscal Year 2005 from 26.8% in Fiscal Year 2004. The increases in gross profit and gross margin reflect increased premedia production volume and the impact of continued cost containment initiatives.

Selling, General and Administrative Expenses. Premedia services’ selling, general and administrative expenses decreased $1.3 million to $6.2 million, or 11.2% of premedia services’ sales in Fiscal Year 2005, from $7.5 million, or 14.0% of premedia services’ sales in Fiscal Year 2004. This decrease includes reductions in both the selling and administrative areas due to our ongoing cost containment initiatives.

Restructuring Costs (Benefit) and Other Charges. Restructuring costs and other charges increased $1.6 million to $2.2 million in Fiscal Year 2005 from $0.6 million in Fiscal Year 2004. See “—Our Restructuring Results and Cost Reduction Initiatives” above.

Other Expense (Income). Other expense (income) improved to income of less than $0.1 million in Fiscal Year 2005 from expense of $0.1 million in Fiscal Year 2004.

EBITDA. As a result of the above factors and excluding the impact of depreciation and amortization, premedia services’ EBITDA increased $0.4 million to $10.0 million in Fiscal Year 2005 from $9.6 million in Fiscal Year 2004.

Other Operations

Other operations consist primarily of corporate general and administrative expenses. In Fiscal Year 2005, EBITDA for other operations improved to a loss of $3.3 million from a loss of $7.3 million in Fiscal Year 2004. This change is primarily related to a $3.2 million loss on early extinguishment of debt related to the write-off of deferred financing costs associated with our old bank credit agreement and the 123/4% Notes (redeemed on August 3, 2003) and a $0.4 million loss related to the discontinued operations of Digiscope in Fiscal Year 2004. The improvement also includes the impact of reductions in certain employee related expenses during Fiscal Year 2005 as a result of our ongoing cost containment initiatives.

Interest Expense

In Fiscal Year 2005, interest expense decreased slightly to $34.1 million from $34.2 million in Fiscal Year 2004. This decrease includes $1.7 million of incremental interest expense included in Fiscal Year 2004 related to the 30-day call provision associated with the 123/4% Notes, offset in part by higher overall levels of indebtedness. See note 7 to our consolidated financial statements appearing elsewhere in this Report.

Income Taxes

In Fiscal Year 2005, tax expense improved to a benefit of $1.7 million from expense of $11.4 million in Fiscal Year 2004. This improvement was primarily due to a Fiscal Year 2004 adjustment to the valuation allowance of $12.8 million, which resulted in a corresponding debit to deferred income tax expense, which was partially offset by a Fiscal Year 2004 adjustment of $2.2 million recorded to reflect a change in estimate with respect to our income tax liability. The Fiscal Year 2005 benefit primarily reflects the tax benefit from losses in foreign jurisdictions and a benefit of $0.4 million to reflect a change in estimate with respect to our income tax liability. The Fiscal Year 2004 adjustment to the valuation allowance of $12.8 million reflected a change in circumstances which resulted in a judgment that, based on the provisions of SFAS 109 that restrict our ability to consider forecasts of future income, a corresponding amount of deferred tax assets may not be realized. The change in circumstances arose from our assessment of the economic climate, particularly the continuance of competitive pricing pressures in our industry, and the expected increase in annual interest costs arising from the issuance of our 10% Notes in July 2003 that provided negative evidence about our ability to realize certain deferred tax assets. We will reverse our valuation allowance into income when and to the extent sufficient positive evidence arises to support the realization of the related deferred tax assets.

Discontinued Operations

In June 2003, we sold the operations of Digiscope for a de minimis amount. This resulted in a net loss of approximately $0.4 million in the quarter ended June 30, 2003, which is net of zero income tax benefit. As a result of this sale, Digiscope has been accounted for as a discontinued operation. Sales attributable to Digiscope for Fiscal Year 2004 were $0.8 million.

Net Loss

As a result of the factors discussed above, our net loss improved to $25.7 million in Fiscal Year 2005 from $28.8 million in Fiscal Year 2004. Included in the Fiscal Year 2005 net loss were restructuring costs and other charges of $10.0 million. Included in the Fiscal Year 2004 net loss were the following charges which aggregate $24.1 million: (1) $8.1 million of restructuring costs and other charges, (2) net non-cash deferred tax expense of $10.6 million associated with changes in estimates related to our income tax accounts, (3) refinancing related expenses of $4.9 million including the loss on early extinguishment of debt and incremental interest related to the 30-day call provision associated with the 123/4% Notes and (4) discontinued operations losses of $0.5 million.

Minimum Pension Liability

In compliance with SFAS 87, we decreased our minimum pension liability to approximately $19.2 million in Fiscal Year 2005 from approximately $20.2 million in Fiscal Year 2004. This decrease includes the net impact of plan activity including contributions to our plans, benefit payments and investment market returns, offset in part by pension payments to plan participants, plan expenses and a reduction in our discount rate from 6.5% to 6.25%. This liability represents the amount by which the accumulated benefit obligation exceeds the fair value of the plan assets at March 31, 2005 and March 31, 2004. The recording of this liability had no impact on our consolidated statements of operations for Fiscal Years 2005 and 2004, but was recorded as a component of other comprehensive loss in our consolidated statements of stockholders’ deficit at March 31, 2005 and March 31, 2004.

Liquidity and Capital Resources

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

	•		a $55 million revolving credit facility ($40 million of which may be used for letters of credit), which is not subject to a borrowing base limitation, maturing on December 15, 2009 (the “2005 Revolving Credit Facility”); and
	•		a $35 million non-amortizing term loan facility maturing on December 15, 2009 (the “2005 Term Loan Facility”).

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:

Interest on borrowings under the 2005 Credit Agreement is floating, based upon existing market rates, plus agreed upon margin levels. In addition, Graphics is obligated to pay specified commitment and letter of credit fees.

	•		$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.

~~Borrowings~~Our ~~under~~cash-on-hand ~~the~~of ~~2005~~approximately ~~Term~~$2.9 million ~~Loan~~is ~~Facility~~presented ~~must~~net beof ~~repaid~~outstanding inchecks ~~full~~within ontrade accounts ~~the~~payable ~~facility’s~~at ~~maturity date of December~~March 1531, ~~2009~~2007. ~~Graphics~~Accordingly, cash is ~~also~~presented ~~required~~at toa ~~prepay~~balance ~~the~~of ~~2005~~$0 ~~Term~~in ~~Loan Facility and~~ the ~~2005~~March ~~Revolving Credit Facility under certain circumstances with excess cash flows and proceeds from certain sales of assets~~31, ~~equity~~2007 ~~and~~consolidated ~~incurrence~~balance ~~of indebtedness~~sheet.

~~Borrowings~~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 ~~Agreement~~Facility ~~are~~of ~~secured~~$26.9 million, byborrowings ~~substantially~~under ~~all~~the Receivables Facility of ~~Graphics’~~$4.7 million, ~~assets~~capital lease obligations of $5.5 million, and $280 million of our 10% Notes. In addition, ~~Holdings~~we ~~has~~had ~~guaranteed~~letters ~~all~~of ~~such~~credit ~~indebtedness~~outstanding under the 2005 Revolving Credit ~~Agreement~~Facility of $22.2 million. The estimated fair value of our 10% Notes at March 31, ~~which~~2007 was ~~guarantee~~$219.8 million, isor ~~secured~~$60.2 million byless athan ~~pledge~~the ofcarrying ~~all~~value. ofWe ~~Graphics’~~have ~~capital~~no ~~stock~~off-balance sheet financial instruments other than operating leases.

~~The~~On June 13, 2007, the 2005 Credit Agreement ~~requires~~and ~~satisfaction~~the ofReceivables Facility were amended to (a) increase ~~specified~~the maximum permissible first- lien ~~debt-to-earnings~~leverage ~~ratio.~~ratios as of the last day of our fiscal Inquarters ~~addition~~ending September 30, ~~the~~and ~~2005~~December 31, ~~Credit~~2007, ~~Agreement~~and ~~includes~~March 31, ~~various~~2008, ~~other~~and ~~customary~~(b) require ~~affirmative~~that we maintain certain levels of minimum total liquidity at November 30, December 13, and ~~negative~~December 31, ~~covenants~~2007, and ~~events~~at the end of ~~default.~~each ~~The~~month ~~2005~~thereafter ~~Credit~~through ~~Agreement~~March 31, 2008. ~~places~~See ~~conditions~~“Risk ~~upon~~Factors”. ~~our~~We ~~ability~~paid ~~to,~~consenting lenders an ~~among~~aggregate ~~other~~amendment ~~things:~~fee of $1.25 million in connection with such amendments.

•We ~~change~~are ~~the~~currently ~~nature~~in ofcompliance ~~our business; • pay dividends or make other distributions; • make capital expenditures, other investments or acquisitions; • enter into transactions~~ with ~~affiliates;~~the •covenant ~~dispose~~requirements ofset ~~assets~~forth orin ~~enter~~the ~~into~~2005 ~~mergers~~Credit Agreement ~~or other business combinations; • incur or guarantee additional debt; • repay debt or repurchase or redeem equity interests~~ and ~~debt;~~the •Receivables ~~place restrictions on dividends~~Facility, ~~distributions~~as ~~or transfers to us or Holdings from our subsidiaries; • create or permit to exist certain liens; and • pledge assets or engage in sale-leaseback transactions~~amended.

AsWe ofanticipate ~~April 30,~~that ~~2005,~~our weprimary ~~had~~needs ~~approximately~~for ~~$2.8 million~~liquidity ofwill ~~unamortized~~be ~~deferred~~to ~~financing~~conduct ~~costs associated~~our ~~with~~business, ~~the~~meet ~~Revolving~~our ~~Credit Facility. These costs are being amortized over the term of~~debt ~~the~~service ~~2005~~requirements ~~Credit~~and ~~Agreement~~make incapital ~~accordance~~expenditures. ~~with~~We ~~the~~believe ~~guidance~~that ~~set~~we ~~forth~~have insufficient ~~Emerging~~liquidity ~~Issues Task Force~~to ~~Issue~~meet ~~98-14,~~our ~~“Debtor’s~~requirements ~~Accounting~~during ~~for~~Fiscal ~~Changes~~Year ~~in Line-of-Credit or Revolving-Debt Arrangement” (“EITF 98-14”)~~2008.

~~Our~~During ~~primary~~the ~~sources~~quarter ofended ~~liquidity~~June 30, ~~are~~2005, ~~cash~~we ~~provided~~used byproceeds ~~operating~~from ~~activities and borrowings under~~ the 2005 ~~Revolving~~Term ~~Credit~~Loan Facility. At(as defined ~~March 31,~~below ~~2006,~~under we“—May 2005 ~~had~~Refinancing”) noto repay borrowings outstanding under the ~~2005 Revolving~~Old Revolving Credit Facility ~~and~~(as ~~had~~defined ~~letters~~below ofunder ~~credit~~“—May 2005 ~~outstanding~~Refinancing”), of ~~approximately~~which the balance was $2516.4 0 million. ~~As a~~as ~~result~~of March 31, we2005, ~~had~~and ~~additional~~settle ~~borrowing~~certain ~~availability~~other ~~of approximately~~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.

~~$29.6~~May ~~million~~2005 ~~under this facility. In addition to this borrowing availability, we had liquid~~Refinancing ~~overnight cash investments on March 31, 2006 of approximately $5.1 million. Scheduled repayments of existing capital lease obligations during Fiscal Year 2007 are approximately $3.7 million.~~

~~During~~On ~~the quarter ended June~~May 305, 2005, we ~~used~~entered ~~proceeds~~into ~~from~~an ~~the~~Amended ~~2005~~and ~~Term~~Restated ~~Loan~~Credit ~~Facility~~Agreement towith ~~repay~~Banc of America ~~borrowings~~Securities, ~~outstanding~~LLC, ~~under~~as ~~the~~Sole ~~Revolving~~Lead ~~Credit~~Arranger ~~Facility~~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 ~~balance~~refinancing ~~was~~of our $~~16.0~~70 million senior secured revolving ascredit offacility ~~March~~(the Old “Revolving Credit Facility”), which would have matured on July 313, ~~2005)~~2008, and ~~settle~~significantly ~~certain~~improved ~~other~~our ~~obligations~~liquidity position. The 2005 Credit Agreement is a $90 million senior secured facility comprised of:

During the Fiscal Year 2006, we used net borrowings from bank financing activities of $19.0 million and $7.2 million in proceeds from the sale of fixed assets primarily to fund the following:

	•		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 5.275% ~~million~~for ofloans ~~cash~~at ~~used~~March 31, by2007, ~~operating~~or ~~activities~~(b) an alternate base rate (~~see~~based ~~our~~upon ~~Consolidated~~the ~~Statements~~greater of ~~Cash~~the ~~Flows~~agent ~~appearing~~bank’s ~~elsewhere~~prime inlending ~~this~~rate ~~Report);~~or •the ~~$12~~Federal Funds rate plus 0.5%) ~~million~~plus ina ~~cash~~margin ~~capital~~of ~~expenditures;~~4.75% ~~and~~for •loans $8at March 31, 2007.3 ~~million~~Margin tolevels ~~service~~increase ~~other~~as ~~indebtedness~~the ~~(including~~levels of ~~capital~~receivables ~~lease~~sold ~~obligations~~by ofGraphics $4to Graphics Finance meet certain thresholds under the Receivables Facility.7 ~~million~~In ~~and~~addition, ~~deferred~~Graphics ~~financing~~is ~~fees~~obligated to pay specified unused commitment, letter of ~~$3.6~~credit and ~~million)~~other customary fees.

~~Our~~Borrowings ~~cash~~under onthe ~~hand~~2005 ofTerm ~~approximately~~Loan ~~$6.7 million~~Facility ~~(including~~must ~~$5.1 million~~be ofrepaid ~~liquid~~in ~~overnight~~full ~~cash~~on the facility’s maturity date ~~investments)~~of December 15, 2009. Graphics is ~~presented~~also ~~net~~required ofto ~~outstanding~~prepay ~~checks~~the ~~within~~2005 ~~trade~~Term ~~accounts~~Loan ~~payable~~Facility atand ~~March 31,~~the 2005 ~~2006.~~Revolving ~~Accordingly,~~Credit Facility under certain circumstances with excess cash isflows ~~presented~~and atproceeds afrom certain ~~balance~~sales of ~~$0 million~~assets, inequity ~~the~~issuances ~~March 31,~~and ~~2006~~incurrences ~~consolidated balance~~of ~~sheet~~indebtedness.

AtBorrowings ~~March 31, 2006, we had total indebtedness of $324.3 million, including borrowings~~ under the 2005 ~~Term~~ ~~Loan~~Credit ~~Facility~~Agreement ofare ~~$35.0 million,~~secured ~~$280.0 million~~by ofsubstantially ~~our~~all ~~10%~~of ~~Notes~~Graphics’ ~~and capital lease obligations~~assets. ofReceivables ~~$9.3 million.~~sold ~~The~~to ~~estimated~~Graphics ~~fair~~Finance ~~value~~under ofthe ~~our~~Receivables ~~10%~~Facility ~~Notes~~are ~~was~~released ~~$197.4 million,~~from orthis ~~$82.6 million~~lien at ~~less~~the ~~than~~time ~~the~~they ~~carrying~~are ~~value~~sold. WeIn ~~have~~addition, noHoldings ~~off-balance~~has ~~sheet~~guaranteed ~~financial~~all ~~instruments~~indebtedness ~~other~~under ~~than~~the 2005 ~~operating~~Credit ~~leases.~~Agreement Wewhich ~~are~~guarantee ~~currently~~is insecured ~~compliance~~by ~~with~~a ~~the~~pledge ~~covenant~~of ~~requirements~~all ~~set~~of ~~forth~~Graphics’ incapital ~~the 2005 Credit Agreement~~stock.

WeThe ~~anticipate~~2005 ~~that~~Credit ~~our primary needs for liquidity will be to conduct our business~~Agreement, ~~meet~~as ~~our debt service requirements and make capital expenditures. We believe that we have sufficient liquidity to meet our requirements over the next 12 months. We will~~amended, ~~however,~~requires ~~continue~~satisfaction ~~to be challenged by~~of: ~~difficult industry conditions.~~

A• ~~significant~~a ~~portion~~first oflien ~~Graphics’~~leverage ~~long-term~~ratio ~~obligations,~~test; ~~including indebtedness under the 2005 Credit Agreement~~ and ~~the~~• ~~10%~~a ~~Notes,~~minimum ~~has~~total ~~been~~liquidity ~~fully and unconditionally guaranteed by Holdings~~test. 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.

	•		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,
	2006		2005		2004
	2007		2006		2005
Print segment VAR (in thousands)	$	~~181~~191,~~364~~366		~~188~~181,~~422~~364		~~214~~188,~~675~~422
Print impressions (in millions)		11,~~207~~354		11,~~279~~207		1211,~~920~~279

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

	Fiscal Year Ended March 31,
	2006			2005			2004
	2007			2006			2005
	(Dollars in thousands)
Print segment sales	$	~~380~~396,~~648~~535			~~393~~380,~~922~~648			~~418~~393,~~004~~922
Paper, ink and subcontract services		(~~199~~205,~~284~~169	)		(~~205~~199,~~500~~284	)		(~~203~~205,~~329~~500	)
Print segment VAR	$	~~181~~191,~~364~~366			~~188~~181,~~422~~364			~~214~~188,~~675~~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. ~~During~~Paper ~~Fiscal~~prices ~~Year~~generally ~~2004~~increased ~~paper prices fluctuated~~throughout ~~and~~Fiscal ~~ended~~Year at2005 ~~levels~~and ~~which~~2006. ~~were~~During ~~higher~~Fiscal onYear ~~average~~2007, ~~than~~paper ~~the prior year. Paper~~ prices generally ~~increased~~ ~~throughout Fiscal Year 2005 and 2006~~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 ~~which~~ 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, ~~currently~~both current and infor 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, ~~2006~~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 ~~January~~December ~~2003~~2004, the Financial Accounting Standards Board (“FASB”) issued ~~Interpretation~~Statement of Financial Accounting Standards No. ~~46, “Consolidation~~123 of(revised ~~Variable~~2004), ~~Interest~~“Share ~~Entities~~Based Payment” (“~~FIN~~SFAS 46123R”),. ~~which~~SFAS ~~was later revised in December 2003,~~123R tosuperseded ~~expand~~Statement ~~upon~~of ~~and~~Financial ~~strengthen~~Accounting ~~existing~~Standards ~~accounting~~No. 123, ~~guidance~~“Accounting ~~that~~for ~~addresses~~Stock-Based Compensation” ~~when~~(“SFAS a123”) ~~company~~and ~~should include~~amended inStatement ~~its~~of ~~financial~~Financial ~~statements~~Accounting ~~the~~Standards ~~assets~~No. 95, “Statement ~~liabilities~~of ~~and~~Cash ~~activities~~Flows” of(“SFAS ~~another entity~~95”). ~~Historically~~ Generally, athe ~~company~~fair ~~generally~~value ~~has~~approach ~~included another entity~~ in ~~its~~SFAS ~~consolidated~~123R ~~financial~~is similar ~~statements~~to ~~only~~the iffair itvalue ~~controlled~~approach ~~the~~described ~~entity~~in ~~through~~SFAS ~~voting interests~~123. ~~FIN~~Upon ~~46,~~adoption asof ~~revised~~SFAS ~~and interpreted,~~123R ~~changes~~on ~~that guidance by requiring a variable interest entity~~April 1, ~~as defined~~2006, ~~to be~~we ~~consolidated~~elected byto acontinue ~~company~~using ifthe ~~that~~Black-Scholes-Merton ~~company~~formula ~~is subject~~ to aestimate ~~majority of~~ the ~~risk~~fair value of ~~loss from the~~stock ~~variable~~options ~~interest~~granted ~~entity’s~~to ~~activities~~employees. orThe isadoption ~~entitled~~of toSFAS ~~receive~~123R ahad ~~majority~~no ofimpact ~~the~~on ~~entity’s~~compensation ~~residual~~expense for ~~returns~~the orFiscal ~~both.~~Year ~~FIN~~2007 46as ~~also~~no ~~requires~~options ~~disclosure~~were ~~about~~granted ~~variable~~during ~~interest~~this ~~entities~~period. ~~that a company~~Additionally, isall ~~not~~outstanding ~~required~~options toon ~~consolidate~~the ~~but~~date inof ~~which~~adoption ithad ~~has~~ a ~~significant~~fair ~~variable~~value ~~interest~~of $0. ~~The consolidation~~SFAS ~~requirements~~123R ofalso ~~FIN~~requires that 46the ~~applied~~benefits ~~immediately~~of totax ~~variable~~deductions ~~interest~~in ~~entities~~excess ~~created after~~of ~~December 31,~~recognized ~~2003~~compensation ~~and~~cost tobe ~~existing~~reported ~~entities~~as ~~created~~a financing ~~before~~cash ~~December 31,~~flow ~~2003~~rather inthan ~~the~~as ~~first fiscal~~an ~~year~~operating ~~beginning~~cash ~~after December 15, 2004~~flow. We ~~have~~reported no ~~variable~~such ~~interest~~financing ~~entities created after~~cash ~~December 31,~~flows ~~2003.~~in ~~The~~Fiscal ~~adoption~~Year of2007. ~~FIN~~For 46Fiscal asYears of2006 ~~April 1,~~and 2005 ~~for variable interest entities~~, ~~created~~we ~~before~~recognized ~~December 31, 2003 has had~~ no ~~effect~~operating oncash ~~our~~flows ~~consolidated~~for ~~financial~~such ~~statements~~excess astax ~~a whole~~deductions.

3132

In ~~December~~May ~~2004~~2005, the FASB issued Statement of Financial Accounting Standards No. ~~123 (revised)~~154, “Accounting Changes ~~for~~and ~~Stock-Based~~Error ~~Compensation~~Corrections” (“SFAS ~~123R~~154”)., Wea ~~account~~replacement ~~for~~of ~~share-based~~Accounting ~~payments~~Principles ~~using~~Board Opinion ~~the~~No. 20, ~~fair~~“Accounting ~~value~~Changes” ~~based~~(“APB ~~method~~20”) ~~described~~and inStatement ~~SFAS~~of ~~123.~~Financial ~~The~~Accounting ~~requirements~~Standards ofNo. 3, “Reporting ~~SFAS~~Accounting ~~123R~~Changes ~~generally~~in ~~are~~Interim ~~the same~~Financial asStatements” (“SFAS ~~123,~~3”). ~~except that~~ SFAS ~~123R~~154 ~~provides significant additional guidance regarding the~~requires ~~valuation~~retrospective ofapplication ~~employee~~to ~~stock~~prior ~~options.~~periods’ Wefinancial ~~currently~~statements ~~use~~of ~~the~~a ~~Black-Scholes-Merton~~voluntary ~~formula~~change ~~to estimate~~in ~~the~~accounting ~~value~~principle ofunless ~~stock~~it ~~options~~is ~~granted~~impracticable. toAPB ~~employees~~20 ~~and~~previously ~~expect~~required tothat ~~continue~~most ~~to use this acceptable~~voluntary ~~option~~changes ~~valuation~~in ~~model~~accounting ~~upon~~principle ~~the~~be ~~required~~recognized ~~adoption~~by ofincluding ~~SFAS~~in ~~123R~~net onincome ~~April 1,~~of ~~2006.~~the ~~SFAS~~period ~~123R~~of ~~also~~the ~~requires~~change ~~that~~ the ~~benefits~~cumulative ofeffect ~~tax deductions in excess~~ of ~~recognized~~changing ~~compensation~~to ~~cost~~the benew ~~reported as~~accounting aprinciple. ~~financing~~The ~~cash~~adoption ~~flow,~~of ~~rather~~SFAS ~~than~~ 154 as anof ~~operating cash flow as required under current guidance. For the fiscal years ended March~~April 311, 2006, ~~2005~~has ~~and~~had ~~2004, we recognized~~ no ~~operating cash flows for such excess tax deductions. We do not anticipate the adoption of SFAS 123R will have a material~~ impact on ~~our~~the consolidated financial statements as a whole.

~~Critical~~In July 2006, the FASB issued Interpretation No. 48, “Accounting ~~Policies~~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.

~~Our~~In ~~consolidated~~September 2006, ~~financial~~the ~~statements~~FASB ~~and~~issued ~~related~~Statement ~~public~~of ~~financial~~Financial ~~information~~Accounting ~~are~~Standards ~~based~~No. 158, ~~on the~~“Employer’s ~~application~~Accounting offor ~~generally~~Defined ~~accepted~~Benefit ~~accounting~~Pension ~~principles~~and inOther ~~the~~Postretirement ~~United~~Plans, ~~States~~an amendment of FASB Statements No. 87, 88, 106 and 132(R)” (“~~GAAP~~SFAS 158”). ~~GAAP~~ SFAS 158 requires ~~the~~an ~~use~~entity to (a) recognize in its statement of ~~estimates,~~financial ~~assumptions,~~position ~~judgments~~an ~~and~~asset ~~subjective~~for ~~interpretations~~a ofdefined ~~accounting~~benefit postretirement plan’s ~~principles~~overfunded ~~that~~status ~~have~~or ana ~~impact~~liability onfor ~~the~~a ~~assets,~~plan’s ~~liabilities,~~underfunded ~~revenue~~status; ~~and~~(b) measure ~~expense~~a ~~amounts~~defined ~~reported.~~benefit ~~These~~postretirement ~~estimates~~plan’s ~~can~~assets ~~also~~and ~~affect~~obligations ~~supplemental~~that ~~information~~determine ~~contained~~its infunded ~~our~~status ~~external~~as ~~disclosures including~~of ~~information~~the ~~regarding~~end ~~contingencies,~~of ~~risk~~the employer’s fiscal year; and ~~financial~~(c) recognize ~~condition.~~changes Wein ~~base~~the ~~our~~funded ~~estimates on~~status ~~historical~~of ~~experience~~a ~~and~~defined onbenefit postretirement ~~various~~plan ~~other~~in ~~assumptions~~comprehensive ~~that~~income we(loss) in ~~believe~~the ~~are~~year ~~reasonable~~in ~~under~~which the ~~circumstances.~~ ~~Valuations~~changes ~~based~~occur. onThe requirement ~~estimates~~to ~~are~~recognize ~~reviewed~~the ~~for~~funded ~~reasonableness~~status onof a ~~consistent~~defined ~~basis~~benefit postretirement plan prospectively ~~throughout~~and ~~our~~the ~~Company.~~disclosure ~~Actual~~requirements ~~results~~are ~~may~~effective ~~differ~~for ~~from~~the ~~these~~fiscal ~~estimates~~year ~~under~~ending ~~different~~March 31, ~~assumptions~~2008. The orrequirement ~~conditions.~~to ~~See~~measure ~~note~~plan 1assets toand ~~our~~benefit ~~consolidated~~obligations ~~financial~~as ~~statements~~of ~~appearing~~the ~~elsewhere~~date inof ~~this~~our fiscal year end ~~Report~~will be effective for athe ~~description~~fiscal year ending March 31, 2009. We have begun our analysis of ~~all~~the impact of the ~~Company’s~~adoption ~~accounting~~of ~~policies~~SFAS 158 but do not currently anticipate a significant impact on the consolidated financial statements as a whole.

Critical ~~accounting~~Accounting ~~policies are defined as those that are reflective of significant judgments and~~Estimates uncertainties, and potentially result in materially different results under different assumptions and conditions. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements:

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 $1.30 million and $1.83 million at March 31, ~~2006~~2007 and ~~2005~~2006, respectively.

Restructuring

During Fiscal ~~Years~~Year 2005 ~~and 2004~~, we established restructuring reserves for our print and premedia ~~services~~ 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.

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, 2006, we had a valuation allowance of $61.9 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, ~~2006~~2007, which are net of imputed interest:

	~~Payments Due By Period~~		Payments Due By Period
Contractual Obligations	Total		< 1 year		1-3 years		3-5 years		> 5 years
	~~(Dollars in thousands)~~		(Dollars in thousands)
Long-term debt	$	~~315~~346,~~000~~580		—		—66,580		~~315~~280,000		—
Interest payments on fixed rate debt		126,000		28,000		56,000		42,000		—
Interest payments on fixed rate debt (a)		98,000		28,000		56,000		14,000		—
Capitalized lease obligations		9,284		3,731		5,349		204		—
Capital lease obligations		5,530		3,435		2,095		—		—
Operating lease obligations		109,~~560~~792		3,~~308~~347		45,~~575~~094		21,~~531~~351		~~146~~—
Pension obligations (a)		5,759		5,759		—		—		—
Pension obligations (b)		713		713		—		—		—
Total contractual cash obligations	$	~~466~~460,~~603~~615		4035,~~798~~495		65129,~~924~~769		~~359~~295,~~735~~351		~~146~~—

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


(a)		Excludes interest on $66.6 million of variable rate borrowings outstanding at March 31, 2007, as such borrowing levels and related rates of interest fluctuate.

(b)		Although we expect to make contributions to our pension plan in future years, those amounts cannot be estimated at this time. See note 9 to our consolidated financial statements appearing elsewhere in this Report.

~~In the fiscal year ended March 31, 1998, we entered into multi-year contracts to purchase a portion~~34 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, 2006 is $45.6 million and is included within Other liabilities in our consolidated balance sheet. At March 31, 2006, we had no other significant contingent commitments. The following table gives information about our other commercial commitments:

Commitment Due By Period

Other Commercial

Commitments

Total

< 1 year

1-3 years

3-5 years

> 5 years

(Dollars in thousands)

Standby letters of credit

25,357

20,381

500

106

4,370

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

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, ~~2006~~2007, we had fixed rate and variable rate debt (both excluding capitalized lease obligations) approximating $280.0 million and $3566.06 million, respectively. At March 31, ~~2005~~2006, we had fixed rate and variable rate debt (both excluding capitalized lease obligations) approximating $280.0 million and $1635.0 million, respectively. The estimated fair value of our debt instruments excluding capital lease obligations, at March 31, ~~2006~~2007 was $~~232~~286.4 million, or $8260.62 million less than the carrying value. The estimated fair value of our debt instruments, excluding capital lease obligations, at March 31, ~~2005~~2006 was $~~200~~232.84 million, or $9582.26 million less than the carrying value. At our March 31, ~~2006~~2007 and ~~2005~~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 $0.47 million at March 31, ~~2006~~2007 and approximately $0.24 million at March 31, ~~2005~~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	35	37
Consolidated Balance Sheets — March 31, 2006 and 2005	36
Consolidated Balance Sheets — March 31, 2007 and 2006		38
For the Years Ended March 31, 2006, 2005 and 2004:
For the Years Ended March 31, 2007, 2006 and 2005:
Consolidated Statements of Operations	38	40
Consolidated Statements of Stockholders’ Deficit	39	41
Consolidated Statements of Cash Flows	40	42
Notes to Consolidated Financial Statements	42	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, 2006, 2005 and 2004, and as of March 31, 2006 and 2005
II. Valuation and qualifying accounts

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.

3436

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, ~~2006~~2007 and ~~2005~~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, ~~2006~~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, ~~2006~~2007 and ~~2005~~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, ~~2006~~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 1621, ~~2006~~2007

3537

ACG HOLDINGS, INC.

Consolidated Balance Sheets

(In thousands)

	March 31,
	2006			2005
	2007			2006
Assets
Current assets:
Cash	$	—			—
Cash and cash equivalents	$	—			—
Receivables:
Trade accounts, less allowance for doubtful accounts of $1,275 and $1,783 at March 31, 2006 and 2005, respectively		41,080			46,992
Trade accounts, less allowance for doubtful accounts of $1,017 and $1,275 at March 31, 2007 and 2006, respectively		44,385			41,080
Income tax receivable		—			78
Other		2,645			3,463
Other		3,463			3,420
Total receivables		47,030			44,543
Total receivables		44,543			50,490
Inventories		7,146			7,714
Inventories		7,714			10,447
Deferred income taxes		962			1,409
Deferred income taxes		1,409			2,235
Prepaid expenses and other current assets		4,997			4,733
Prepaid expenses and other current assets		4,733			5,192
Total current assets		60,135			58,399
Assets held for sale		—			8,112
Total current assets		58,399			76,476
Property, plant and equipment:
Land and improvements		3,~~058~~185			23,~~990~~058
Buildings and improvements		2829,~~332~~959			2728,~~280~~332
Machinery and equipment		~~212~~223,~~904~~737			~~215~~212,~~463~~904
Furniture and fixtures		1314,~~007~~369			1213,~~722~~007
Leased assets under capital leases		2322,~~119~~972			23,~~309~~119
Equipment installations in process		62,~~850~~334			56,~~331~~850
		287,270			287,095
		296,556			287,270
Less accumulated depreciation		(~~199~~214,~~504~~772	)		(~~189~~199,~~626~~504	)
Net property, plant and equipment		8781,~~766~~784			9787,~~469~~766
Excess of cost over net assets acquired		66,548			66,548
Other assets		18,~~789~~266			18,~~405~~789
Total assets	$	~~231~~226,~~502~~733			~~258~~231,~~898~~502

See accompanying notes to consolidated financial statements.

3638

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

	March 31,
	2006			2005
	2007			2006
Liabilities and Stockholders’ Deficit
Current liabilities:
Current installments of capitalized leases	$	3,731			3,631
Current installments of capital leases	$	3,435			3,731
Obligations under capital leases held for sale		—			1,036
Trade accounts payable		32,892			33,845
Trade accounts payable		33,845			40,365
Accrued expenses		29,651			36,367
Accrued expenses		36,367			42,104
Income tax payable		487			160
Income tax payable		160			—
Total current liabilities		66,465			74,103
Total current liabilities		74,103			87,136
Long-term debt and capital leases, excluding current installments		348,675			320,553
Long-term debt and capitalized leases, excluding current installments		320,553			305,284
Deferred income taxes		2,677			3,866
Deferred income taxes		3,866			8,148
Other liabilities		52,554			62,712
Other liabilities		62,712			71,070
Total liabilities		470,371			461,234
Total liabilities		461,234			471,638
Commitments and contingencies
Stockholders’ deficit:
Common stock, voting, $.01 par value, 5,852,223 shares authorized, 158,205 and 160,067 shares issued and outstanding at March 31, 2006 and 2005, respectively		2			2
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,~~203~~038
Accumulated deficit		(~~209~~230,~~760~~769	)		(~~195~~209,~~183~~760	)
Other accumulated comprehensive loss, net of tax		(2214,~~012~~909	)		(1922,~~762~~012	)
Total stockholders’ deficit		(~~229~~243,~~732~~638	)		(~~212~~229,~~740~~732	)
Total liabilities and stockholders’ deficit	$	~~231~~226,~~502~~733			~~258~~231,~~898~~502

See accompanying notes to consolidated financial statements.

3739

ACG HOLDINGS, INC.

Consolidated Statements of Operations

(In thousands)

	Year ended March 31,
	2006			2005			2004
	2007			2006			2005
Sales	$	~~434~~445,~~489~~026			~~449~~434,~~513~~489			~~471~~449,~~102~~513
Cost of sales		~~385~~397,~~150~~115			~~403~~385,~~641~~150			~~409~~403,~~321~~641
Gross profit		4947,~~339~~911			4549,~~872~~339			6145,~~781~~872
Selling, general and administrative expenses		2627,~~792~~539			2826,~~824~~792			3228,~~734~~824
Restructuring costs (benefit) and other charges		(~~1,167~~445	)		10(1,~~037~~167	)		810,~~140~~037
Operating income		2320,~~714~~817			723,~~011~~714			207,~~907~~011
Other expense (income):
Interest expense		3740,~~624~~405			3437,~~087~~624			34,~~175~~087
Interest income		(83100	)		(3783	)		(937	)
Loss on early extinguishment of debt		—			—			3,196
Other, net		1,714			4,119			313
Other, net		4,119			313			489
Total other expense		42,019			41,660			34,363
Total other expense		41,660			34,363			37,851
Loss before income taxes		(21,202	)		(17,946	)		(27,352	)
Loss from continuing operations before income taxes		(17,946	)		(27,352	)		(16,944	)
Income tax benefit		(193	)		(3,369	)		(1,685	)
Income tax expense (benefit)		(3,369	)		(1,685	)		11,441
Net loss	$	(21,009	)		(14,577	)		(25,667	)
Loss from continuing operations		(14,577	)		(25,667	)		(28,385	)
Discontinued operations:
Loss from operations, net of $0 tax		—			—			12
Loss on disposal, net of $0 tax		—			—			444
Net loss	$	(14,577	)		(25,667	)		(28,841	)

See accompanying notes to consolidated financial statements.

3840

ACG HOLDINGS, INC.

Consolidated Statements of Stockholders’ Deficit

(In thousands)

									Other
	Voting		Additional						accumulated
	common		paid-in			Accumulated			comprehensive
	stock		capital			deficit			income (loss)			Total
Balances, March 31, 2003	$	2		58,816			(140,655	)		(25,862	)	$	(107,699	)
Net loss		—		—			(28,841	)		—			(28,841	)
Other comprehensive income (loss), net of tax:
Change in cumulative translation adjustment		—		—			—			1,295			1,295
Change in minimum pension liability		—		—			—			3,203			3,203
Comprehensive loss													(24,343	)
Repurchase of preferred stock		—		(56,942	)		—			—			(56,942	)
Executive stock compensation		—		229			—			—			229
Purchase of treasury stock		—		—			(20	)		—			(20	)
Balances, March 31, 2004	$	2		2,103			(169,516	)		(21,364	)	$	(188,775	)
Net loss		—		—			(25,667	)		—			(25,667	)
Other comprehensive income (loss), net of tax:
Change in cumulative translation adjustment		—		—			—			593			593
Change in minimum pension liability		—		—			—			1,009			1,009
Comprehensive loss													(24,065	)
Executive stock compensation		—		100			—			—			100
Balances, March 31, 2005	$	2		2,203			(195,183	)		(19,762	)	$	(212,740	)
Net loss		—		—			(14,577	)		—			(14,577	)
Other comprehensive income (loss), net of tax:
Change in cumulative translation adjustment		—		—			—			183			183
Change in minimum pension liability		—		—			—			(2,433	)		(2,433	)
Comprehensive loss													(16,827	)
Executive stock compensation		—		(165	)		—			—			(165	)
Balances, March 31, 2006	$	2		2,038			(209,760	)		(22,012	)	$	(229,732	)
Net loss		—		—			(21,009	)		—			(21,009	)
Other comprehensive income (loss), net of tax:
Change in cumulative translation adjustment		—		—			—			(116	)		(116	)
Change in minimum pension liability		—		—			—			7,219			7,219
Comprehensive loss													(13,906	)
Balances, March 31, 2007	$	2		2,038			(230,769	)		(14,909	)		(243,638	)

See accompanying notes to consolidated financial statements.

3941

ACG HOLDINGS, INC.

Consolidated Statements of Cash Flows

(In thousands)

	Year ended March 31,
	2006			2005			2004
	2007			2006			2005
Cash flows from operating activities:
Net loss	$	(1421,~~577~~009	)		(2514,~~667~~577	)		(2825,~~841~~667	)
Adjustments to reconcile net loss to net cash provided (used) by operating activities:
Adjustments to reconcile net loss to net cash used by operating activities:
Other charges — non-cash (note 15)		—			1,668			328
Other charges — non-cash (note 14)		—			—			1,668
Loss on early extinguishment of debt — non-cash		—			—			3,196
Depreciation		18,567			19,130			22,594
Depreciation		19,130			22,594			23,587
Amortization of other assets		63			353			457
Depreciation related to discontinued operations		—			—			26
Amortization of deferred financing costs		3,537			3,001			2,487
Amortization of other assets		353			457			675
Loss (gain) on disposals of property, plant and equipment		2			312			(75	)
Amortization of deferred financing costs		3,001			2,487			2,191
Impairment of asset		—			2,830			—
Loss (gain) on disposals of property, plant and equipment		312			(75	)		93
Deferred income tax benefit		(742	)		(3,632	)		(824	)
Impairment of asset		2,830			—			—
Changes in assets and liabilities:
Deferred income tax expense (benefit)		(3,632	)		(824	)		10,534
Decrease (increase) in receivables		(2,487	)		6,061			(5,395	)
Discontinued operations, net of tax		—			—			873
Decrease (increase) in current income taxes receivable		—			78			(78	)
Changes in assets and liabilities, net of effects of discontinued operations:
Decrease (increase) in inventories		568			2,759			(1,968	)
Decrease (increase) in receivables		6,061			(5,395	)		6,777
Increase (decrease) in trade accounts payable		(953	)		(6,611	)		10,440
Decrease (increase) in current income taxes receivable		78			(78	)		233
Increase (decrease) in accrued expenses		(7,465	)		(6,679	)		385
Decrease (increase) in inventories		2,759			(1,968	)		1,765
Increase (decrease) in current income taxes payable		327			160			(9	)
Increase (decrease) in trade accounts payable		(6,611	)		10,440			(9,626	)
Decrease in other liabilities		(2,190	)		(9,880	)		(6,312	)
Increase (decrease) in accrued expenses		(6,679	)		385			10,146
Other		(385	)		1,482			(1,278	)
Increase (decrease) in current income taxes payable		160			(9	)		9
Total adjustments		8,842			9,364			22,092
Decrease in other liabilities		(9,880	)		(6,312	)		(82	)
Net cash used by operating activities		(12,167	)		(5,213	)		(3,575	)
Other		1,482			(1,278	)		(721	)
Total adjustments		9,364			22,092			50,004
Net cash provided (used) by operating activities		(5,213	)		(3,575	)		21,163

4042

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

	Year ended March 31,
	2006			2005			2004
	2007			2006			2005
Cash flows from investing activities:
Purchases of property, plant and equipment		(12,~~486~~701	)		(612,~~876~~486	)		(136,~~096~~876	)
Proceeds from sale of property, plant and equipment held for sale (note 4)		6,877			—			—
Proceeds from sale of property, plant and equipment held for sale (note 3)		—			6,877			—
Proceeds from other sales of property, plant and equipment		~~283~~145			~~176~~283			24176
Other		(~~197~~147	)		(~~472~~197	)		(46472	)
Net cash used by investing activities		(512,~~523~~703	)		(75,~~172~~523	)		(137,~~118~~172	)
Cash flows from financing activities:
Net increase (decrease) in revolver borrowings		~~(16~~31,~~000~~580	)		(16,000	)		—16,000
Net increase (decrease) in long-term debt, net		~~35,000~~—			—35,000			~~(39,185~~—	)
Repayment of 123/4% senior subordinated notes		—			—			(170,055	)
Deferred financing costs paid		(2,956	)		(3,573	)		(800	)
Proceeds from issuance of 10% senior second secured notes		—			—			280,000
Repayment of capital lease obligations		(3,754	)		(4,667	)		(4,378	)
Deferred financing costs paid		(3,573	)		(800	)		(14,633	)
Net cash provided by financing activities		24,870			10,760			10,822
Repayment of capital lease obligations		(4,667	)		(4,378	)		(7,089	)
Effect of exchange rates on cash		—			(24	)		(75	)
Repurchase and retirement of preferred stock and cancellation of preferred stock options		—			—			(56,942	)
Purchase of treasury stock		—			—			(20	)
Net cash provided (used) by financing activities		10,760			10,822			(7,924	)
Effect of exchange rates on cash		(24	)		(75	)		(121	)
Change in cash		—			—			—
Cash:
Cash and cash equivalents:
Beginning of period		—			—			—
End of period	$	—			—			—
Supplemental disclosure of cash flow information:
Cash paid (received) for:
Interest	$	3336,~~863~~099			3133,~~480~~863			2731,~~668~~480
Income taxes, net of refunds	$	15233			~~(887~~15	)		~~509~~(887	)
Non-cash investing activities:
Assets purchased under capital lease obligations	$	—			31—			~~2,870~~31

See accompanying notes to consolidated financial statements.

ACG HOLDINGS, INC.

Notes to Consolidated Financial Statements

(1)		Summary of Significant Accounting Policies
		ACG Holdings, Inc. (“Holdings”) has no operations or significant assets other than its investment in American Color Graphics, Inc. (“Graphics”), (collectively the “Company”). Holdings is dependent upon distributions from Graphics to fund its obligations. However, Graphics’ ability to pay dividends or lend to Holdings was restricted under the terms of its debt agreements at March 31, 2006. See note 7 below for further discussion of the 2005 Credit Agreement and the 10% Notes (as defined herein). The 2005 Revolving Credit Facility (as defined herein) is secured by substantially all of the assets of Graphics. Holdings has guaranteed Graphics’ indebtedness under the 2005 Credit Agreement which guarantee is secured by a pledge of all of Graphics’ and Graphics’ subsidiaries’ stock. The 10% Notes are fully and unconditionally guaranteed on a senior basis by Holdings, and by all future domestic subsidiaries of Graphics.
		The two business segments of the commercial printing industry in which the Company operates are (i) print and (ii) premedia services.
		The Company continues to operate in a challenging business environment due to, among other factors, excess industry capacity, significant competition, and rising raw material and production costs. Such challenges have contributed to three straight years of net losses and cash used in operating activities for the past two fiscal years. While management has prepared analyses indicating that the Company’s forecasted results of operations for the fiscal year ending March 31, 2007 will allow it to remain in compliance with debt covenants and maintain sufficient liquidity to meet its operating requirements for the twelve month period subsequent to March 31, 2006, such analyses contain certain estimates and assumptions deemed reasonable by management that could differ from actual results. Management believes that the Company will continue to be challenged by difficult industry conditions.
		Significant accounting policies are as follows:

(a) Basis of Presentation The consolidated financial statements include the accounts of Holdings and all greater than 50%-owned subsidiaries, which are consolidated under United States generally accepted accounting principles. All significant intercompany transactions and balances have been eliminated in consolidation. Earnings-per-share data has not been provided since Holdings’ common stock is closely held. (b) Revenue Recognition Print revenues are recognized upon the completion of production. Shipment of printed material generally occurs upon completion of this production process. Materials are printed to unique customer specifications and are not returnable. Premedia services revenues are recognized as services are performed. Delivery of electronic files, films, proofs and plates generally occurs upon completion of the production process. Services are performed to unique customer specifications and are not returnable. Credits relating to specification variances and other customer adjustments have historically not been significant for either the print or premedia services business segments. (c) Cash and Cash Equivalents The Company uses available cash balances on hand and borrowings under its 2005 Revolving Credit Facility (defined herein), to fund operating disbursements and, to the extent applicable, invest in overnight cash investments. Cash on hand of approximately $6.7 million (including $5.1 million of

ACG HOLDINGS, INC.

Notes to Consolidated Financial Statements

liquid overnight cash investments) and $2.5 million at March 31, 2006 and 2005 respectively, is presented net of outstanding checks, which resulted in a reclassification of $10.4 million and $15.5 million at March 31, 2006 and 2005 respectively, to trade accounts payable in the consolidated balance sheets. The Company considers all highly liquid investments with maturities of three months or less to be cash equivalents. (d) Trade Accounts Receivable Trade accounts receivable represents payments due from customers net of allowances for doubtful accounts. The Company continuously monitors collections and payments from its customers. Allowances for doubtful accounts are maintained based on historical payment patterns, aging of accounts receivable and actual write-off history. The Company estimates losses resulting from the inability of our customers to make required payments. (e) Inventories Inventories are valued at the lower of first-in, first-out (“FIFO”) cost or market (net realizable value). (f) Property, Plant and Equipment Property, plant and equipment is stated at cost. Depreciation, which includes amortization of assets under capital leases, is based on the straight-line method over the shorter of the estimated useful lives of the assets or the remaining terms of the leases. Estimated useful lives used in computing depreciation and amortization expense are 3 to 15 years for furniture and fixtures and machinery and equipment and 15 to 25 years for buildings and improvements. Expenses related to maintenance and repairs are expensed as incurred. (g) Excess of Cost Over Net Assets Acquired The excess of cost over net assets acquired (or “goodwill”) is accounted for in accordance with the guidance set forth in Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”). SFAS 142 requires goodwill to be evaluated at least annually for impairment. The Company performed the required annual impairment tests of goodwill as of December 31, 2005 and 2004, and noted no impairment. Due to changes in circumstances resulting from certain changes in business operations, the Company also performed an impairment test of goodwill as of March 31, 2005, and noted no impairment. The Company has goodwill associated with its two distinct segments, print and premedia services, and has determined that there are no additional reporting units within these segments, as there are no further components representing a “business”. Therefore, the impairment test for goodwill is calculated for each of the segments. The test is calculated by deducting the estimated carrying value of each reporting unit from the estimated enterprise value of each reporting unit, respectively. The estimated enterprise value is calculated by multiplying 12 months trailing EBITDA (defined as earnings before net interest expense, income tax expense, depreciation and amortization) by an assumed market multiple, which the Company believes to be reasonable based upon recent sales activity of businesses operating in comparable industries as the Company’s segments. The estimated carrying value is calculated by deducting the liabilities, excluding interest-bearing debt, from total assets of the respective segment. A calculation in which the estimated enterprise value exceeds the estimated carrying value results in a conclusion of no impairment. If it is determined that the estimated carrying value exceeds the estimated enterprise value, the Company would calculate the implied fair value of goodwill by deducting the fair value of all tangible and intangible net assets, including unrecognized intangible assets, of the segment from the fair value of the segment. If the implied fair value of goodwill is less than the carrying value, an impairment loss would be recognized.

ACG HOLDINGS, INC.

Notes to Consolidated Financial Statements

(h) Impairment of Long-Lived Assets The Company evaluates the recoverability of its long-lived assets in accordance with Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”). SFAS 144 requires periodic assessment of certain long-lived assets for possible impairment when events or circumstances indicate that the carrying amounts may not be recoverable. Long-lived assets are grouped and evaluated for impairment at the lowest level for which there are identifiable cash flows that are independent of the cash flows of other groups of assets. If it is determined that the carrying amounts of such long-lived assets are not recoverable, the assets are written down to their fair value. In the fourth quarter of the fiscal year ended March 31, 2006, the Company concluded that certain non-production information technology assets of the print segment were fully impaired as a result of its periodic assessment under SFAS 144. This impairment resulted in a non-cash charge of $2.8 million. The impairment charge is classified within other, net in the consolidated statement of operations for the fiscal year ended March 31, 2006. (i) Other Assets Financing costs related to the 2005 Credit Agreement (as defined herein) are deferred and amortized over the term of the agreement. Financing costs related to the Revolving Credit Facility (as defined herein) are amortized over the term of the 2005 Credit Agreement. See note 7 for further discussion. Financing costs related to the 10% Notes (as defined herein) are deferred and amortized over the term of the 10% Notes. Covenants not to compete are amortized over the terms of the underlying agreements. (j) Income Taxes Income taxes have been provided using the liability method in accordance with Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes” (“SFAS 109”). Management has evaluated the need for a valuation allowance for deferred tax assets and believes that certain deferred tax assets will more likely than not be realized through the future reversal of existing taxable temporary differences. (k) Foreign Currency Translation The assets and liabilities of the Company’s Canadian facility, which include interdivisional balances, are translated at year-end rates of exchange while revenue and expense items are translated at average rates for the year. Translation adjustments are recorded as a separate component of stockholders’ deficit. Since the transactions of the Canadian facility are denominated in its functional currency and the interdivisional accounts are of a long-term investment nature, no remeasurement gains and losses pertaining to such balances are included in the Company’s consolidated results of operations. (l) Environmental Environmental expenditures that relate to current operations are expensed or capitalized as appropriate. Expenditures that relate to an existing condition caused by past operations, and which do not contribute to current or future period revenue generation, are expensed. Environmental liabilities are provided when assessments and/or remedial efforts are probable and the related amounts can be reasonably estimated.

(1)		Summary of Significant Accounting Policies

		ACG Holdings, Inc. (“Holdings”) has no operations or significant assets other than its investment in American Color Graphics, Inc. (“Graphics”), (collectively, the “Company”). Holdings is dependent upon distributions from Graphics to fund its obligations. However, Graphics’ ability to pay dividends or lend to Holdings was restricted under the terms of its debt agreements at March 31, 2007. See note 6 below for further discussion of the 2005 Credit Agreement, the Receivables Facility and the 10% Notes (as defined herein). The 2005 Revolving Credit Facility (as defined herein) is secured by substantially all of the assets of Graphics. Receivables sold to Graphics Finance (as defined herein) under the Receivables Facility (as defined herein) are released from this lien at the time they are sold. Holdings has guaranteed Graphics’ indebtedness under the 2005 Credit Agreement, which guarantee is secured by a pledge of all of Graphics’ and Graphics’ subsidiaries’ stock. The Receivables Facility is secured by substantially all the assets of Graphics Finance, which consist primarily of any receivables sold by Graphics to Graphics Finance pursuant to a receivables contribution and sale agreement. Graphics services these receivables pursuant to a servicing agreement with Graphics Finance. The 10% Notes are fully and unconditionally guaranteed on a senior basis by Holdings, and by all future domestic subsidiaries of Graphics.

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

		The Company continues to operate in a challenging business environment due to, among other factors, excess industry capacity and significant competition. Such challenges have contributed to three consecutive fiscal years of net losses and cash used by operating activities. While management has prepared analyses indicating that the Company’s forecasted results of operations for the fiscal year ending March 31, 2008 will allow it to remain in compliance with debt covenants and maintain sufficient liquidity to meet its operating requirements for the twelve month period subsequent to March 31, 2007, such analyses contain certain estimates and assumptions deemed reasonable by management that could differ from actual results. Management believes that the Company will continue to be challenged by difficult industry conditions.

		Significant accounting policies are as follows:

	(a)		Basis of Presentation

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

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

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

	(b)		Revenue Recognition

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

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

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

ACG HOLDINGS, INC.

Notes to Consolidated Financial Statements

(mc) ~~Fair~~Cash ~~Value~~and ofCash ~~Financial~~Equivalents ~~Instruments~~ The ~~carrying~~Company ~~amounts~~uses ~~reflected~~available incash ~~the~~balances ~~consolidated~~on ~~balance~~hand ~~sheets~~and ~~for~~borrowings ~~receivables~~under its 2005 Revolving Credit Facility and ~~payables~~Receivables ~~approximate~~Facility ~~their~~(defined ~~respective~~herein), ~~fair~~to ~~values.~~fund Aoperating ~~discussion~~disbursements ofand, to the ~~carrying~~extent ~~value~~applicable, ~~and~~invest ~~fair~~in ~~value~~overnight ofcash ~~the~~investments. ~~Company’s~~Cash ~~long-term~~on ~~debt~~hand isof ~~included~~approximately in$2.9 ~~note~~million 7and ~~below~~$6.7 ~~Fair~~million ~~values~~(including ~~are~~$5.1 ~~based~~million ~~primarily~~of onliquid ~~quoted~~overnight ~~prices~~cash ~~for~~investments) ~~these~~at orMarch ~~similar~~31, ~~instruments.~~2007 ~~The~~and ~~Company~~2006, respectively, is ~~not~~presented anet ~~party~~of tooutstanding ~~any~~checks, ~~financial~~which ~~instruments~~resulted ~~with~~in ~~material~~a ~~off-balance-sheet~~reclassification ~~risk~~of $9.6 ~~(n)~~million ~~Concentration~~and of$10.4 ~~Credit~~million ~~Risk~~at ~~Financial~~March ~~instruments~~31, ~~which~~2007 ~~subject~~and ~~the~~2006 ~~Company~~respectively, to ~~credit~~trade ~~risk,~~accounts ~~consist~~payable ~~primarily~~in ofthe ~~trade~~consolidated ~~accounts~~balance ~~receivable~~sheets. ~~Concentration~~The ofCompany ~~credit~~considers ~~risk~~all ~~with~~highly ~~respect~~liquid toinvestments ~~trade~~with ~~accounts~~maturities ~~receivable~~of isthree ~~generally~~months ~~diversified~~or ~~due~~less to ~~the~~be ~~large~~cash ~~number~~equivalents. of(d) ~~entities~~Trade ~~comprising~~Accounts ~~the~~Receivable ~~Company’s~~Trade ~~customer~~accounts ~~base~~receivable ~~and~~represents ~~their~~payments ~~geographic~~due ~~dispersion~~from customers net of allowances for doubtful accounts. The Company ~~performs~~continuously ~~ongoing~~monitors ~~credit~~collections ~~evaluations~~and ofpayments from its customers. ~~and~~Allowances ~~maintains~~for andoubtful ~~allowance~~accounts ~~for~~are ~~potential~~maintained ~~credit~~based ~~losses.~~on ~~(o)~~historical ~~Use~~payment ofpatterns, ~~Estimates~~aging ~~The~~of ~~preparation~~accounts ofreceivable ~~the~~and ~~financial~~actual ~~statements~~write-off inhistory. ~~conformity~~The ~~with~~Company ~~United~~estimates ~~States~~losses ~~generally~~resulting ~~accepted~~from ~~accounting~~the ~~principles~~inability ~~requires~~of ~~management~~its customers to make ~~estimates~~required ~~and~~payments. ~~assumptions~~(e) ~~that~~Inventories ~~affect~~Inventories ~~the~~are ~~amounts~~valued ~~reported~~at in the ~~financial~~lower ~~statements~~of ~~and~~first-in, ~~accompanying~~first-out ~~notes.~~(“FIFO”) ~~Actual~~cost ~~results~~or ~~could~~market ~~differ~~(net ~~from~~realizable ~~those estimates~~value). (pf) ~~Stock-Based~~Property, ~~Compensation~~Plant ~~The~~and ~~Company~~Equipment ~~has~~Property, ~~elected~~plant toand ~~follow~~equipment ~~Statement~~is ofstated ~~Financial~~at ~~Accounting Standards No~~cost. ~~123~~Depreciation, ~~“Accounting~~which ~~for~~includes ~~Stock-Based~~amortization ~~Compensation”~~of ~~(“SFAS~~assets ~~123”)~~under capital leases, inis ~~accounting~~based ~~for~~on ~~its~~the ~~stock~~straight-~~based~~line ~~compensation~~method ~~plan.~~over ~~The~~the ~~Company~~shorter ~~believes~~of ~~that~~the ~~including~~estimated useful lives of the ~~fair~~assets ~~value~~or ofthe ~~compensation~~remaining ~~plans~~terms inof ~~determining~~the ~~net~~leases. ~~income~~Estimated isuseful ~~consistent~~lives ~~with~~used ~~accounting~~in ~~for~~computing ~~the~~depreciation ~~cost~~and ofamortization ~~all~~expense ~~other~~are ~~forms~~3 ofto ~~compensation.~~15 ~~(q)~~years ~~Shipping~~for furniture and ~~Handling~~fixtures ~~Costs~~and ~~The~~machinery ~~Company’s~~and ~~shipping~~equipment and ~~handling~~15 ~~costs~~to ~~are~~25 ~~reflected~~years ~~within~~for ~~Cost~~buildings ofand ~~Sales~~improvements. inExpenditures ~~the~~related ~~Consolidated~~to ~~Statements~~maintenance ofand ~~Operations~~repairs are expensed as incurred. (rg) ~~Impact~~Excess of ~~Recently~~Cost ~~Issued~~Over ~~Accounting~~Net ~~Standards~~Assets InAcquired ~~January~~The ~~2003,~~excess ~~the~~of ~~Financial~~cost ~~Accounting~~over ~~Standards~~net ~~Board~~assets acquired (or “~~FASB~~goodwill”) ~~issued~~is ~~Interpretation~~accounted for in accordance with the guidance set forth in Statement of Financial Accounting Standards No. 46142, “~~Consolidation~~Goodwill ofand ~~Variable~~Other ~~Interest~~Intangible ~~Entities~~Assets” (“~~FIN~~SFAS 46142”),. ~~which~~SFAS ~~was~~142 ~~later~~requires ~~revised~~goodwill ~~in December 2003,~~ to ~~expand~~be ~~upon~~evaluated ~~and~~at ~~strengthen~~least ~~existing~~annually ~~accounting~~for ~~guidance~~impairment. ~~that~~The ~~addresses~~Company ~~when~~performed athe ~~company~~required ~~should~~annual ~~include~~impairment intests ~~its~~of ~~financial~~goodwill ~~statements~~as ~~the~~of ~~assets~~December 31, ~~liabilities~~2006 and ~~activities~~2005, ofand ~~another~~noted ~~entity~~no impairment. ~~Historically,~~The aCompany ~~company~~has ~~generally~~goodwill ~~has~~associated ~~included~~with ~~another~~its ~~entity~~two indistinct ~~its~~segments, ~~consolidated~~print ~~financial~~and ~~statements~~premedia ~~only~~services, ifand ithas ~~controlled~~determined ~~the~~that ~~entity~~there ~~through~~are ~~voting~~no ~~interests.~~additional ~~FIN~~reporting 46units within these segments, as ~~revised~~there ~~and~~are ~~interpreted,~~no ~~changes~~further ~~that~~components ~~guidance~~representing bya ~~requiring~~“business”. aTherefore, ~~variable~~the ~~interest~~impairment ~~entity,~~test asfor ~~defined,~~goodwill tois becalculated ~~consolidated~~for byeach aof ~~company~~the ifsegments. ~~that~~The ~~company~~test is ~~subject~~calculated toby adeducting ~~majority~~the ofestimated ~~the~~carrying ~~risk~~value of ~~loss~~each reporting unit from the ~~variable~~estimated ~~interest~~enterprise ~~entity’s~~value ~~activities~~of oreach reporting unit. The estimated enterprise value is ~~entitled~~calculated toby ~~receive~~multiplying a12 ~~majority~~months oftrailing ~~the~~EBITDA ~~entity’s~~(defined ~~residual~~as ~~returns~~earnings orbefore ~~both.~~net ~~FIN~~interest 46expense, ~~also~~income ~~requires~~tax ~~disclosure~~expense, ~~about~~depreciation ~~variable~~and ~~interest~~amortization) ~~entities~~by ~~that~~an aassumed ~~company~~market ismultiple, ~~not~~which ~~required~~the Company believes to ~~consolidate~~be ~~but~~reasonable inbased ~~which~~upon itrecent ~~has~~sales aactivity ~~significant~~of ~~variable~~businesses ~~interest~~operating in comparable industries as the Company’s segments. The ~~consolidation~~estimated ~~requirements~~carrying ofvalue ~~FIN~~is 46calculated ~~applied~~by ~~immediately~~deducting tothe ~~variable~~liabilities, excluding interest-bearing ~~entities~~debt, ~~created~~from ~~after~~total ~~December~~assets ~~31,~~of ~~2003~~the ~~and~~respective tosegment. ~~existing~~A ~~entities~~calculation ~~created~~in ~~before~~which ~~December~~the ~~31,~~estimated ~~2003~~enterprise invalue exceeds the ~~first~~estimated ~~fiscal~~carrying ~~year~~value ~~beginning~~results ~~after~~in ~~December~~a ~~15,~~conclusion ~~2004~~of no impairment. ~~The~~If ~~Company~~it ~~has~~is nodetermined ~~variable~~that ~~interest~~the ~~entities~~estimated ~~created~~carrying ~~after~~value ~~December~~exceeds 31the estimated enterprise value, ~~2003.~~the ~~The~~Company ~~adoption~~would calculate the implied fair value of ~~FIN~~goodwill 46by asdeducting the fair value of ~~April~~all 1tangible and intangible net assets, ~~2005~~including ~~for~~unrecognized ~~variable~~intangible ~~interest~~assets, ~~entities~~of ~~created~~the ~~before~~segment ~~December~~from ~~31,~~the ~~2003~~fair ~~has~~value ~~had~~of nothe ~~effect~~segment. onIf the ~~Company’s~~implied ~~consolidated~~fair ~~financial~~value ~~statements~~of asgoodwill ais ~~whole~~less than the carrying value, an impairment loss would be recognized.

ACG HOLDINGS, INC.

Notes to Consolidated Financial Statements

In(h) ~~December~~Impairment ~~2004,~~of Long-Lived Assets The Company evaluates the ~~FASB~~recoverability ~~issued~~of its long-lived assets in accordance with Statement of Financial Accounting Standards No. ~~123 (revised)~~144, “Accounting for ~~Stock~~the Impairment or Disposal of Long-~~Based~~Lived ~~Compensation~~Assets” (“SFAS ~~123R~~144”). ~~The~~SFAS ~~Company~~144 ~~accounts~~requires periodic assessment of certain long-lived assets for ~~share~~possible impairment when events or circumstances indicate that the carrying amounts may not be recoverable. Long-~~based~~lived ~~payments~~assets ~~using~~are grouped and evaluated for impairment at the ~~fair~~lowest ~~value~~level ~~based~~for ~~method~~which ~~described~~there inare ~~SFAS~~identifiable ~~123~~cash flows that are independent of the cash flows of other groups of assets. ~~The~~If ~~requirements~~it is determined that the carrying amounts of ~~SFAS~~such ~~123R~~long-lived ~~generally~~assets are not recoverable, the ~~same~~assets asare ~~SFAS~~written ~~123~~down to their fair value. In the fourth quarter of the fiscal year ended March 31, ~~except~~2006, the Company concluded that certain non-production information technology assets of the print segment were fully impaired as a result of its periodic assessment under SFAS ~~123R~~144. ~~provides~~This ~~significant~~impairment ~~additional~~resulted ~~guidance~~in ~~regarding~~a non-cash charge of $2.8 million. The impairment charge was classified within other, net in the ~~valuation~~consolidated statement of ~~employee~~operations ~~stock~~for ~~options~~the fiscal year ended March 31, 2006. ~~The~~(i) ~~Company~~Other ~~currently~~Assets ~~uses~~Financing costs related to the ~~Black-Scholes-Merton~~2005 ~~formula~~Credit Agreement (as defined herein) are deferred and amortized over the term of the agreement. Financing costs related to ~~estimate~~the Old Revolving Credit Facility (as defined herein) are amortized over the ~~value~~term of ~~stock~~the ~~options~~2005 ~~granted~~Credit Agreement. Financing costs related to ~~employees~~the Receivables Facility (as defined herein) are deferred and ~~expects~~amortized toover ~~continue~~the toterm ~~use~~of ~~this~~the ~~acceptable~~agreement. ~~option~~See ~~valuation~~note ~~model~~6 ~~upon~~for further discussion. Financing costs related to the ~~required~~10% ~~adoption~~Notes of(as ~~SFAS~~defined ~~123R~~herein) onare ~~April~~deferred 1,and ~~2006~~amortized over the term of the 10% Notes. ~~SFAS~~Covenants ~~123R~~not ~~also~~to ~~requires~~compete ~~that~~are amortized over the ~~benefits~~terms of ~~tax~~the ~~deductions~~underlying agreements. (j) Income Taxes Income taxes are provided using the liability method in ~~excess~~accordance with Statement of ~~recognized~~Financial ~~compensation~~Accounting ~~costs~~Standards beNo. ~~reported~~109, as“Accounting for Income Taxes” (“SFAS 109”). Management evaluates the need for a ~~financing~~valuation ~~cash~~allowance ~~flow,~~for ~~rather~~deferred tax assets and determines whether the Company’s deferred tax assets will more likely than asnot anbe ~~operating~~realized ~~cash~~through ~~flow~~sources of future taxable income as ~~required~~defined ~~under~~by ~~current~~SFAS ~~guidance.~~109, ~~For~~including the ~~fiscal~~future ~~years~~reversal ~~ended~~of ~~March~~existing ~~31,~~taxable ~~2006,~~temporary ~~2005~~differences. (k) Foreign Currency Translation The assets and ~~2004,~~liabilities of the Company’s ~~recognized~~Canadian nofacility, ~~operating~~which ~~cash~~include ~~flows~~interdivisional ~~for~~balances, ~~such~~are ~~excess~~translated ~~tax~~at ~~deductions~~year-end rates of exchange while revenue and expense items are translated at average rates for the year. ~~The~~Translation ~~Company~~adjustments ~~does~~are ~~not~~recorded ~~anticipate~~as a separate component of stockholders’ deficit. Since the ~~adoption~~transactions of ~~SFAS~~the ~~123R~~Canadian ~~will~~facility ~~have~~are denominated in its functional currency and the interdivisional accounts are of a ~~material~~long-term ~~impact~~investment onnature, ~~its~~no remeasurement gains and losses pertaining to such balances are included in the Company’s consolidated ~~financial~~results ~~statements~~of operations. (l) Environmental Environmental expenditures that relate to current operations are expensed or capitalized as aappropriate. ~~whole~~Expenditures that relate to an existing condition caused by past operations, and which do not contribute to current or future period revenue generation, are expensed. Environmental liabilities are provided when assessments and/or remedial efforts are probable and the related amounts can be reasonably estimated.

(2)		Discontinued Operations
		In June 2003, the Company sold its digital visual effects business, Digiscope, for a de minimis amount, which resulted in a loss of approximately $0.4 million, which is net of zero income tax benefit. As a result of this sale, Digiscope has been accounted for as a discontinued operation, and accordingly, Digiscope’s operations are segregated and reported within discontinued operations in the accompanying consolidated financial statements. Sales, cost of sales, selling, general and administrative expenses and other expenses attributable to Digiscope for the fiscal year ended March 31, 2004 have been classified and presented within discontinued operations. Sales attributable to Digiscope for the fiscal year ended March 31, 2004 were $0.8 million.
(3)		Inventories
		The components of inventories are as follows (in thousands):

	March 31,
	2006		2005
Paper	$	5,959		8,503
Ink		140		171
Supplies and other		1,615		1,773
Total	$	7,714		10,447

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

ACG HOLDINGS, INC.

Notes to Consolidated Financial Statements

(m) Fair Value of Financial Instruments The ~~following~~carrying ~~table~~amounts ~~summarizes~~reflected in the ~~assets~~consolidated balance sheets for receivables and ~~obligations~~payables ~~under~~approximate ~~capital~~their ~~leases~~respective ~~held~~fair values. A discussion of the carrying value and fair value of the Company’s long-term debt is included in note 6 below. Fair values are based primarily on quoted prices for ~~sale~~these ator similar instruments. The Company is not a party to any financial instruments with material off-balance-sheet risk. (n) Concentration of Credit Risk Financial instruments, which subject the Company to credit risk, consist primarily of trade accounts receivable. Concentration of credit risk with respect to trade accounts receivable is generally diversified due to the large number of entities comprising the Company’s customer base and their geographic dispersion. The Company performs ongoing credit evaluations of its customers and maintains an allowance for potential credit losses. (o) Use of Estimates The preparation of the financial statements in conformity with United States generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. (p) Stock-Based Compensation During the fiscal year ended March 31, 2007, the Company accounted for stock based awards under Statement of Financial Accounting Standards No. 123 (revised), “Share Based Payment” (“SFAS 123R”), which requires all share-based payments to employees, including grants of employee stock options and restricted stock, to be recognized in the Company’s financial statements based on their grant date fair values. The Company adopted SFAS 123R on April 1, 2006, applying the modified prospective transition method outlined in the Statement. During the fiscal years ended March 31, 2006 and 2005, the Company accounted for stock based awards under Statement of Financial Accounting Standards, No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”) based on their grant date fair values as the Company believed that including the fair value of compensation plans in ~~thousands~~determining net income was consistent with accounting for the cost of all other forms of compensation. (q) Shipping and Handling Costs The Company’s shipping and handling costs are reflected within Cost of Sales in the Consolidated Statements of Operations. (r) Impact of Recently Issued Accounting Standards In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS 123R, which superseded SFAS 123 and amended Statement of Financial Accounting Standards No. ~~assets~~95, or“Statement ~~liabilities~~of ~~were~~Cash ~~held~~Flows” (“SFAS 95”). Generally, the fair value approach in SFAS 123R is similar to the fair value approach described in SFAS 123. Upon adoption of SFAS 123R on April 1, 2006, the Company elected to continue using the Black-Scholes-Merton formula to estimate the fair value of stock options granted to employees. The adoption of SFAS 123R had no impact on compensation expense for ~~sale~~the atfiscal year ended March 31, 2007 as the Company granted no options during this period. Additionally, all outstanding options on the date of adoption had a fair value of $0. SFAS 123R also requires that the benefits of tax deductions in excess of recognized compensation cost be reported as a financing cash flow rather than as an operating cash flow. The Company reported no such financing cash flows in the fiscal year ended March 31, 2007. For the fiscal years ended March 31, 2006 and 2005, the Company recognized no operating cash flows for such excess tax deductions.

	March 31, 2005
Other receivables	$	112
Property, plant and equipment, net		6,877
Other assets		1,123
Total assets held for sale		8,112
Obligations under capital leases held for sale		(1,036	)
Net assets and liabilities held for sale	$	7,076

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

	March 31,
	2006		2005
Deferred financing costs, less accumulated amortization of $7,183 in 2006 and $4,182 in 2005	$	11,466	$	10,894
Spare parts inventory, net of valuation allowance of $100 in 2006 and 2005		6,965		6,308
Other		358		1,203
Total	$	18,789		18,405

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

	March 31,
	2006		2005
Compensation and related taxes	$	4,849		2,817
Employee benefits		15,159		17,328
Interest		9,268		8,504
Restructuring		4,127		9,922
Other		2,964		3,533
Total	$	36,367		42,104

ACG HOLDINGS, INC.

Notes to Consolidated Financial Statements

In May 2005, the FASB issued Statement of Financial Accounting Standards No. 154, “Accounting Changes and Error Corrections” (7“SFAS 154”), ~~Notes~~a ~~Payable~~replacement of Accounting Principles Board Opinion No. 20, ~~Long-Term~~“Accounting ~~Debt~~Changes” (“APB 20”) and ~~Capitalized~~Statement ~~Leases~~ of Financial Accounting Standards No. 3, “Reporting Accounting Changes in Interim Financial Statements” (“SFAS 3”). SFAS 154 requires retrospective application to prior periods’ financial statements of a voluntary change in accounting principle unless it is impracticable. APB 20 previously required that most voluntary changes in accounting principle be recognized by including in net income of the period of the change the cumulative effect of changing to the new accounting principle. The adoption of SFAS 154 as of April 1, 2006 has had no impact on the consolidated financial statements as a whole. In July 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”), to clarify the accounting for uncertainty in income taxes in financial statements prepared in accordance with the provisions of SFAS 109 and to provide greater consistency in criteria used to determine benefits related to income taxes. In accounting for uncertain tax positions, the Company currently applies the provisions of Statement of Financial Accounting Standards No. 5, “Accounting for Contingencies” (“SFAS 5”). SFAS 5 provides that a contingency should be recorded if it is probable that an uncertain position will become an actual future liability. FIN 48 provides that the benefit of an uncertain position should not be recorded unless it is more likely than not that the position will be sustained upon review. FIN 48 is effective for fiscal years beginning after December 15, 2006. In accordance, the Company will adopt FIN 48 as of April 1, 2007. The cumulative effect of applying FIN 48 will be reported as an adjustment to the April 1, 2007 balance sheet. The Company does 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 Company for the fiscal year ending March 31, 2008. The requirement to measure plan assets and benefit obligations as of the date of the Company’s fiscal year end will be effective for the fiscal year ending March 31, 2009. The Company has begun its analysis of the impact of the adoption of SFAS 158 but does not currently anticipate a significant impact on the consolidated financial statements as a whole.

~~Long-term~~(2) ~~debt,~~Inventories ~~including~~The ~~capitalized~~components ~~leases,~~of isinventories ~~summarized~~are as follows (in thousands):

	March 31,
	2006		2005
	2007		2006
Revolving Credit Facility	$	—		16,000
Paper	$	5,036		5,959
2005 Term Loan Facility		35,000		—
Ink		152		140
10% Senior Second Secured Notes Due 2010		280,000		280,000
Supplies and other		1,958		1,615
Capitalized leases		9,284		13,951
Total	$	7,146		7,714
Total long-term debt and capitalized leases		324,284		309,951
Less current installments		3,731		4,667
Long-term debt and capitalized leases, excluding current installments	$	320,553		305,284

May 5, 2005 Refinancing Transaction

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

	•		a $55 million revolving credit facility ($40 million of which may be used for letters of credit), which is not subject to a borrowing base limitation, maturing on December 15, 2009 (the “2005 Revolving Credit Facility”); and
	•		a $35 million non-amortizing term loan facility maturing on December 15, 2009 (the “2005 Term Loan Facility”).

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 and incurrence of indebtedness.

ACG HOLDINGS, INC.

Notes to Consolidated Financial Statements

The 2005 Credit Agreement requires satisfaction of a specified first-lien debt-to-earnings ratio. In addition, the 2005 Credit Agreement includes various other customary affirmative and negative covenants and events of default. The 2005 Credit Agreement places conditions upon the Company’s ability to, among other things:

(3)		Assets and Liabilities Held for Sale

		At March 31, 2005, the Company held certain assets and obligations under capital leases for sale at a fair value of $8.1 million and $1.0 million, respectively. On March 16, 2005, the Company ceased operations at the Pittsburg, California facility, resulting in the write-off of certain assets totaling approximately $0.5 million (see note 14). In March 2005, the Company also executed a letter of intent with a prospective buyer to sell certain of the print facility’s other assets, some of which were subject to capital lease obligations. On April 20, 2005, the Company completed the sale of these assets for an aggregate selling price of approximately $8.1 million (including $0.1 million of miscellaneous closing and settlement costs and $6.9 million of property, plant and equipment) and terminated $1.0 million of related capital lease obligations. In accordance with the guidance set forth in SFAS 144, the Company wrote down the assets held for sale to fair value, resulting in a $0.7 million impairment charge, which was classified within restructuring costs and other charges in the consolidated statement of operations for the fiscal year ended March 31, 2005.

(4)		Other Assets

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

• change the nature of its business; • pay dividends or make other distributions; • make capital expenditures, other investments or acquisitions; • enter into transactions with affiliates; • dispose of assets or enter into mergers or other business combinations; • incur or guarantee additional debt; • repay debt or repurchase or redeem equity interests and debt; • place restrictions on dividends, distributions or transfers to the Company or Holdings from its subsidiaries; • create or permit to exist certain liens; and • pledge assets or engage in sale-leaseback transactions.


	March 31,
	2007		2006
Deferred financing costs, less accumulated amortization of $10,720 in 2007 and $7,183 in 2006	$	10,885	$	11,466

Spare parts inventory, net of valuation allowance of $100 in 2007 and 2006		7,315		6,965

Other		66		358

Total	$	18,266		18,789

~~The~~(5) ~~Company~~Accrued ~~was~~Expenses inThe ~~compliance~~components ~~with~~of ~~the~~accrued ~~covenant~~expenses ~~requirements~~are ~~set~~as ~~forth~~follows (in ~~the 2005 Credit Agreement at March 31, 2006.~~ thousands):

As of April 30, 2005, the Company had approximately $2.8 million of unamortized deferred financing costs associated with the 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”).


	March 31,
	2007		2006
Compensation and related taxes	$	5,876		4,849
Employee benefits		10,176		15,159
Interest		10,012		9,268
Restructuring		1,140		4,127
Other		2,447		2,964

Total	$	29,651		36,367

At March 31, 2006, the Company had no borrowings outstanding under the 2005 Revolving Credit Facility and had letters of credit outstanding of approximately $25.4 million. As a result, the Company had additional borrowing availability under the 2005 Revolving Credit Facility of approximately $29.6 million. In addition to this borrowing availability, the Company had liquid overnight cash investments on March 31, 2006 of approximately $5.1 million. During the quarter ended June 30, 2005, the Company used the proceeds from the 2005 Term Loan Facility to repay borrowings outstanding under the Revolving Credit Facility (of which the balance was $16.0 million as of March 31, 2005) and settle certain other of its obligations.

The 10% Senior Second Secured Notes Due 2010 (the “10% Notes”) mature June 15, 2010, with interest payable semi-annually on June 15 and December 15. The 10% Notes are redeemable at the option of Graphics in whole or in part on June 15, 2007, at 105% of the principal amount, plus accrued interest. The redemption price will decline each year after 2007 and will be 100% of the principal amount of the 10% Notes, plus accrued interest, beginning on June 15, 2009. Upon a change of control, Graphics will be required to make an offer to purchase the 10% Notes. The purchase price will equal 101% of the principal amount of the 10% Notes on the date of purchase, plus accrued interest. In addition, before June 15, 2006, Graphics may redeem up to 35% of the aggregate principal amount of the 10% Notes with the proceeds of sales of certain kinds of capital stock at 110% of its principal amount, plus accrued interest to the redemption date. Graphics may make such redemption only if, after any such redemption, at least $150 million aggregate principal amount of the 10% Notes remains outstanding.

ACG HOLDINGS, INC.

Notes to Consolidated Financial Statements

~~Future~~(6) ~~maturities~~Notes ofPayable, ~~long~~Long-~~term~~Term ~~debt~~Debt and ~~future~~Capital ~~minimum~~Leases ~~obligations~~Long-term ~~under~~debt, ~~capitalized~~including ~~leases at~~capital ~~March 31~~leases, ~~2006~~is ~~are~~summarized as follows (in thousands):

	Long-Term		Capitalized
	March 31,
Fiscal Year	Debt		Leases
	2007		2006
2007	$	—	$	4,351
2005 Revolving Credit Facility	$	26,900		—
2008		—		3,736
2005 Term Loan Facility		35,000		35,000
2009		—		1,966
Receivables Facility		4,680		—
2010		35,000		206
10% Senior Second Secured Notes Due 2010		280,000		280,000
2011		280,000		—
Capital leases		5,530		9,284
Total	$	315,000		10,259
Total long-term debt and capital leases		352,110		324,284
Imputed interest				(975	)
Less: current installments		3,435		3,731
Present value of minimum lease payments			$	9,284
Long-term debt and capital leases, excluding current installments	$	348,675		320,553

Capital leases have varying maturity dates and implicit interest rates which generally approximate 7%-10%. The Company estimates that the fair value of debt instruments, excluding capital lease obligations, was $232.4May ~~million~~5, or2005 ~~$82.6 million~~Refinancing ~~less than the carrying value,~~Transaction at March 31, 2006. The Company estimated that the fair value of the Company’s debt instruments, excluding capital lease obligations, approximated $200.8 million, or $95.2 million less than the carrying value, at March 31, 2005.

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

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

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

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

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

ACG HOLDINGS, INC.

Notes to Consolidated Financial Statements

~~(8)~~The ~~Income~~2005 ~~Taxes~~Credit Agreement requires satisfaction of a first lien leverage ratio test. In addition, the 2005 Credit Agreement includes various other customary affirmative and negative covenants and events of default. These covenants, among other things, restrict the Company’s ability to:

~~Deferred~~• ~~income~~incur ~~taxes~~or ~~reflect~~guarantee ~~the~~additional ~~net~~debt; ~~tax~~• ~~effects~~create ofor ~~temporary~~permit ~~differences~~to ~~between~~exist ~~the carrying~~certain ~~amounts~~liens; of• pledge assets ~~and~~or ~~liabilities~~engage in sale-leaseback transactions; • make capital expenditures, other investments or acquisitions; • prepay, redeem, acquire for ~~financial~~value, ~~reporting~~refund, ~~purposes~~refinance, ~~and~~or exchange certain debt (including the ~~amounts as~~10% ~~measured~~Notes), bysubject ~~tax~~to ~~laws~~certain ~~and~~exceptions; ~~regulations.~~• ~~Significant~~repurchase ~~components~~or ofredeem equity interests; • change the ~~Company’s~~nature ~~deferred tax~~of ~~liabilities~~its ~~and~~business; ~~assets~~• aspay dividends or make other distributions; • enter into transactions with affiliates; • dispose of ~~March 31,~~assets ~~2006~~or enter into mergers or other business combinations; and ~~2005~~• ~~are~~place asrestrictions ~~follows~~on ~~(in~~dividends, ~~thousands):~~ distributions or transfers to the Company from its subsidiaries.

	March 31,
	2006		2005
Deferred tax liabilities:
Book over tax basis in fixed assets	$	11,558		15,493
Foreign taxes		1,924		4,953
Accumulated amortization		2,806		2,428
Other, net		—		2,921
Total deferred tax liabilities		16,288		25,795
Deferred tax assets:
Allowance for doubtful accounts		500		699
Accrued expenses and other liabilities		8,546		18,515
Net operating loss carryforwards		55,892		46,484
AMT credit carryforwards		1,203		1,203
Minimum pension liability		8,477		7,524
Cumulative translation adjustment		157		229
Other, net		953		—
Total deferred tax assets		75,728		74,654
Valuation allowance for deferred tax assets		61,897		54,772
Net deferred tax assets		13,831		19,882
Net deferred tax liabilities	$	2,457		5,913

The Company was in compliance with the covenant requirements set forth in the 2005 Credit Agreement, as amended as of March 31, 2007.

~~Management~~As ~~has~~of ~~evaluated~~April 30, 2005, the ~~need~~Company ~~for~~had aapproximately ~~valuation~~$2.8 million ~~allowance~~of ~~for~~unamortized deferred ~~tax assets and~~financing ~~believes~~costs ~~that~~associated ~~certain~~with ~~deferred~~the ~~tax~~Old ~~assets~~Revolving ~~will~~Credit ~~more~~Facility. ~~likely~~These ~~than~~costs ~~not~~are bebeing ~~realized~~amortized ~~through~~over the ~~future~~ ~~reversal~~ term of ~~existing taxable temporary differences of~~ the ~~Company.~~2005 ~~The~~Credit ~~valuation allowance~~Agreement ~~increased~~in byaccordance ~~$7.1 million~~with ~~during~~ the ~~fiscal~~guidance ~~year~~set ~~ended~~forth ~~March 31,~~in ~~2006~~Emerging asIssues ~~a result~~Task ofForce anIssue ~~increase in the deferred tax items~~98-14, ~~which~~“Debtor’s ~~includes~~Accounting anfor ~~increase~~Changes ofin ~~$1.0 million related to the tax effect~~ Line-of-Credit ~~the~~or ~~minimum pension liability, which is a component of other~~Revolving-Debt ~~comprehensive~~Arrangements” ~~loss~~(“EITF 98-14”).

~~The~~At ~~valuation~~March 31, ~~allowance~~2007, ~~increased~~the byCompany had borrowings outstanding under the 2005 Revolving Credit Facility totaling $926.69 million ~~during~~and ~~the~~had ~~fiscal~~letters ~~year~~of ~~ended~~credit ~~March~~outstanding of approximately $22.2 31million. As a result, the Company had additional borrowing availability under the 2005 as aRevolving ~~result~~Credit Facility of anapproximately ~~increase~~$5.9 million. inDuring the ~~deferred~~quarter ~~tax~~ended ~~items~~June 30, ~~which~~2005, isthe ~~net~~Company ofused athe proceeds ~~decrease~~from ofthe ~~$0.4 million~~2005 ~~related~~Term Loan Facility to repay borrowings outstanding under the ~~tax~~Old ~~effect~~Revolving Credit Facility (of which the ~~minimum~~balance ~~pension~~was ~~liability,~~$16.0 million ~~which~~as isof aMarch 31, ~~component~~2005) ofand settle certain other ~~comprehensive~~of ~~loss~~its obligations.

September 26, 2006 Revolving Trade Receivables Facility

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

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

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

ACG HOLDINGS, INC.

Notes to Consolidated Financial Statements

~~During~~obligations ~~fiscal~~of ~~years~~any ~~ended~~other ~~March 31,~~constituent ~~2006~~of ~~and 2005,~~ the ~~Company~~consolidated ~~recorded~~entity. ~~adjustments~~The offoregoing ~~$3.6~~does not ~~million~~apply ~~and~~to ~~$0.4 million,~~liabilities ~~respectively,~~for towhich ~~reflect~~joint ~~the~~and ~~tax~~several ~~benefit~~liability ~~associated~~is ~~with~~provided ~~changes~~under inthe Internal Revenue ~~estimate~~Code ~~with~~or ~~respect~~the toEmployment ~~its~~Retirement ~~income~~Income ~~tax~~Security ~~liability~~Act (“ERISA”).

~~Income~~The ~~tax~~Receivables ~~expense~~Facility ~~(benefit) attributable~~also requires Graphics, as servicer of the receivables sold by it to Graphics ~~loss~~Finance, ~~from~~to ~~continuing~~satisfy ~~operations~~the ~~consists~~same first lien leverage ratio test contained in the 2005 Credit Agreement. In addition, the Receivables Facility contains other customary affirmative and negative covenants and events of (default. It also contains other covenants customary for facilities of this type, including requirements related to credit and collection policies, deposits of collections and maintenance by each party of its separate corporate identity, including maintenance of separate records, books, assets and liabilities and disclosures about the transactions in the financial ~~thousands):~~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.

	Year ended March 31,
	2006			2005			2004
Current
Federal	$	—			—			—
State		89			129			203
Foreign		174			(990	)		704
Total current		263			(861	)		907
Deferred
Federal		(482	)		(310	)		8,069
State		47			(417	)		1,528
Foreign		(3,197	)		(97	)		937
Total deferred		(3,632	)		(824	)		10,534
Provision (benefit) for income taxes	$	(3,369	)		(1,685	)		11,441

The Company was in compliance with the covenant requirements set forth in the Receivables Facility, as amended, as of March 31, 2007.

The ~~effective~~Receivables ~~tax~~Facility ~~rates~~expires ~~for~~on ~~the fiscal years ended March~~December 3115, ~~2006~~2009, ~~2005~~when ~~and~~all ~~2004~~borrowings ~~were~~thereunder ~~18.8%,~~become ~~6.2%~~payable ~~and~~in ~~(67~~full.~~5)%, respectively. The difference between these effective tax rates relating to~~ ~~continuing operations and the statutory federal income tax rate is composed of the following items:~~

	Year Ended March 31,
	2006			2005			2004
Statutory tax rate		35.0	%		35.0	%		35.0	%
State income taxes, less federal tax impact		(0.4	)		(0.1	)		(8.9	)
Foreign taxes, less federal tax impact		(0.5	)		2.3			(2.7	)
Other nondeductible expenses		—			(0.5	)		7.2
Change in valuation allowance		(33.4	)		(31.4	)		(104.0	)
Change in cumulative translation adjustment		(1.1	)		(2.0	)		(3.1	)
Previously accrued taxes		20.2			1.6			13.1
Other, net		(1.0	)		1.3			(4.1	)
Effective income tax rate		18.8	%		6.2	%		(67.5	)%

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

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

10% Senior Second Secured Notes

Amendments to Credit Facilities

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

The Company is currently in compliance with the covenant requirements set forth in the 2005 Credit Agreement and the Receivables Facility, as amended.

ACG HOLDINGS, INC.

Notes to Consolidated Financial Statements

AsFuture maturities of ~~March 31,~~long-term ~~2006,~~debt ~~the~~and ~~Company~~future ~~had~~minimum ~~available~~obligations ~~net~~under ~~operating~~capital ~~loss~~leases ~~carryforwards (“NOLs”) for~~at ~~state purposes of $102.1~~March ~~million~~31, ~~which~~2007 ~~can be used to offset future state taxable income. If these NOLs~~ are ~~not~~as ~~utilized,~~follows ~~they will begin to expire~~ (in ~~2007 and will be totally expired in~~thousands): ~~2026.~~

As of March 31, 2006, the Company had available NOLs for federal purposes of $147.4 million, which can be used to offset future federal taxable income. If these NOLs are not utilized, they will begin to expire in 2011 and will be totally expired in 2026.


	Long-Term		Capital
Fiscal Year	Debt		Leases
2008	$	—	$	3,713

2009		—		1,966

2010		66,580		207

2011		280,000		—

2012		—		—


Total	$	346,580		5,886


Imputed interest				(356	)


Present value of minimum lease payments			$	5,530

Capital leases have varying maturity dates and implicit interest rates which generally approximate 7%-10%. The Company ~~also~~estimates ~~had~~that ~~available~~the anfair ~~alternative~~value ~~minimum~~of ~~tax~~debt ~~credit~~instruments, ~~carryforward~~excluding capital oflease obligations, was $1286.24 million, ~~which~~ ~~can~~or be$60.2 million ~~used~~less tothan ~~offset~~the ~~future~~carrying ~~taxes~~value, at inMarch 31, ~~years~~2007. inThe ~~which~~Company estimated that the ~~alternative~~fair ~~minimum~~value ~~tax~~of ~~does~~the Company’s debt ~~not~~instruments, ~~apply~~excluding capital lease obligations, approximated $232.4 million, ~~This~~or ~~credit~~$82.6 million ~~can~~less bethan ~~carried~~the ~~forward~~carrying ~~indefinitely~~value, at March 31, 2006.

The Company has alternative minimum tax NOLs in the amount of $159.0 million, which will begin to expire in 2011 and will be totally expired in 2026.

(9) Other Liabilities

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

	March 31,
	2006		2005
Deferred revenue agreements (see note 13)	$	45,641		50,385
Postretirement liabilities (see note 10)		3,457		3,804
Pension liabilities and other benefit obligations		11,601		14,094
Other		2,013		2,787
Total	$	62,712		71,070

(10) Employee Benefit Plans

Defined Benefit Pension Plans

Pension Plans

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

Supplemental Executive Retirement Plan

In October 1994, the Board of Directors approved a new Supplemental Executive Retirement Plan (“SERP”), which is a defined benefit plan, for certain key executives. The aggregate accumulated benefit obligation under this plan was approximately $1.9 million at March 31, 2005.

ACG HOLDINGS, INC.

Notes to Consolidated Financial Statements

In(7) ~~July 2005,~~Income ~~the~~Taxes ~~Board~~Deferred ofincome ~~Directors~~taxes ~~approved~~reflect anthe ~~amendment~~net totax ~~this~~effects ~~plan~~of (temporary differences between the ~~“Amended~~carrying ~~and Restated~~amounts ~~Supplemental~~of ~~Executive~~assets ~~Retirement~~and ~~Plan”).~~liabilities ~~The~~for ~~aggregate~~financial ~~accumulated~~reporting ~~benefit obligation~~purposes ~~under~~and ~~this~~the ~~plan,~~amounts as ~~amended,~~measured ~~was~~by ~~approximately~~tax $0laws and regulations.~~6 million~~ atSignificant components of the Company’s deferred tax liabilities and assets as of March 31, 2007 and 2006. are as follows (in thousands):

Defined Benefit Postretirement Plans


	March 31,
	2007		2006
Deferred tax liabilities:

Book over tax basis in property, plant and equipment	$	8,508		11,558

Foreign taxes		1,715		1,924

Accumulated amortization		3,207		2,806


Total deferred tax liabilities		13,430		16,288

Deferred tax assets:

Allowance for doubtful accounts		399		500

Accrued expenses and other liabilities		5,164		8,546

Net operating loss carryforwards		65,536		55,892

AMT credit carryforwards		1,203		1,203

Additonal minimum pension liability		5,645		8,477

Cumulative translation adjustment		203		157

Other, net		1,429		953


Total deferred tax assets		79,579		75,728

Valuation allowance for deferred tax assets		67,864		61,897


Net deferred tax assets		11,715		13,831


Net deferred tax liabilities	$	1,715		2,457

~~Postretirement Benefits~~Management has evaluated the need for a valuation allowance for deferred tax assets and believes that certain deferred tax assets will more likely than not be realized through the future reversal of existing taxable temporary differences of the Company. The valuation allowance increased by $6.0 million during the fiscal year ended March 31, 2007 as a result of an increase in the deferred tax items, which is net of a $2.8 million decrease related to the tax effect of the decrease in the additional minimum pension liability, which is a component of other comprehensive income (loss). The valuation allowance increased by $7.1 million during the fiscal year ended March 31, 2006 as a result of an increase in the deferred tax items, which includes an increase of $1.0 million related to the tax effect of the increase in the additional minimum pension liability, which is a component of other comprehensive income (loss).

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

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

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

401(k) Defined Contribution Plan

Effective January 1, 1995, the Company amended its 401(k) defined contribution plan. Eligible participants may contribute up to 15% of their annual compensation subject to maximum amounts established by the Internal Revenue Service and receive an employer-matching contribution on amounts contributed. Through March 16, 2003, the employer-matching contribution was made bi-weekly and equaled 2% of annual compensation for all plan participants plus 50% of the first 6% of annual compensation contributed to the plan by each employee, subject to maximum amounts established by the Internal Revenue Service. Beginning March 17, 2003 through December 31, 2004, the employer matching contribution was made bi-weekly and equaled 25% of the first 6% of annual compensation contributed to the plan by each employee, subject to maximum amounts established by the Internal Revenue Service. Subsequent to December 31, 2004, the employer matching contributions were made bi-weekly and equaled 50% of the first 6% of annual compensation contributed to the plan by each employee, subject to maximum amounts established by the Internal Revenue Service. The Company’s contribution under this Plan amounted to $1.6 million during the fiscal year ended March 31, 2006, $1.1 million during the fiscal year ended March 31, 2005 and $0.8 million during the fiscal year ended March 31, 2004.

ACG HOLDINGS, INC.

Notes to Consolidated Financial Statements

~~The~~During ~~following~~fiscal ~~table~~years ~~provides~~ended aMarch ~~reconciliation~~31, of2007 ~~the~~and ~~changes~~2006, in the ~~defined~~Company ~~benefit~~recorded ~~plans’~~adjustments ~~benefit obligations~~of ~~and~~$0.4 ~~fair~~million ~~value~~and of$3.6 ~~plan~~million, ~~assets~~respectively, ~~for~~to reflect the ~~fiscal~~tax ~~years~~benefit ~~ended~~associated ~~March 31,~~with ~~2006~~changes ~~and~~in ~~2005~~estimate ~~and~~with ~~a statement~~respect ofto ~~the~~its ~~funded~~income ~~status~~tax ofliability. ~~such~~Income ~~plans~~tax asexpense of(benefit) ~~March 31,~~attributable ~~2006~~to ~~and~~loss ~~2005~~from continuing operations consists of (in thousands):

	Defined Benefit						Defined Benefit
	Year ended March 31,
	Pension Plans						Postretirement Plan
	2007			2006			2005
	2006			2005			2006			2005
Current
Change in Benefit Obligation
Federal	$	—			—			—
Benefit obligation at beginning of year	$	69,624			67,185			2,823			2,801
State		119			89			129
Service cost		462			468			34			31
Foreign		430			174			(990	)
Interest cost		4,321			4,217			179			170
Total current		549			263			(861	)
Plan amendments		—			—			(600	)		—
Deferred
Plan participants’ contributions		—			—			441			368
Federal		—			(482	)		(310	)
Actuarial loss (gain)		3,537			1,725			251			141
State		(525	)		47			(417	)
Expected benefit payments		(5,323	)		(3,971	)		(716	)		(688	)
Foreign		(217	)		(3,197	)		(97	)
Benefit obligation at end of year	$	72,621			69,624			2,412			2,823
Total deferred		(742	)		(3,632	)		(824	)
Change in Plan Assets
Income tax benefit	$	(193	)		(3,369	)		(1,685	)
Fair value of plan assets at beginning of year	$	49,675			40,193			—			—
Actual return on plan assets		3,196			4,176			—			—
Employer contributions:
Pension Plans		8,017			8,777			—			—
SERP		1,718			500			—			—
Postretirement Plan		—			—			275			319
Plan participants’ contributions		—			—			441			368
Benefits paid		(5,323	)		(3,971	)		(716	)		(687	)
Fair value of plan assets at end of year	$	57,283			49,675			—			—
Funded Status	$	(15,338	)		(19,949	)		(2,412	)		(2,823	)
Unrecognized net actuarial (gain) loss		21,611			19,178			109			(141	)
Unrecognized prior service gain		—			—			(1,566	)		(1,188	)
Plan participants’ contributions		—			—			112			48
Additional minimum pension liability		(21,611	)		(19,178	)		—			—
Accrued benefit liability	$	(15,338	)		(19,949	)		(3,757	)		(4,104	)

The effective tax rates for the fiscal years ended March 31, 2007, 2006 and 2005 were 0.9%, 18.8% and 6.2%, respectively. The difference between these effective tax rates relating to continuing operations and the statutory federal income tax rate is composed of the following items:


	Year Ended March 31,
	2007			2006			2005
Statutory tax rate		35.0	%		35.0	%		35.0	%
State income taxes, less federal tax impact		0.1			(0.4	)		(0.1	)
Foreign taxes, less federal tax impact		(0.3	)		(0.5	)		2.3
Other nondeductible expenses		—			—			(0.5	)
Change in valuation allowance		(35.4	)		(33.4	)		(31.4	)
Change in cumulative translation adjustment		0.1			(1.1	)		(2.0	)
Previously accrued taxes		2.0			20.2			1.6
Other, net		(0.6	)		(1.0	)		1.3

Effective income tax rate		0.9	%		18.8	%		6.2	%

ACG HOLDINGS, INC.

Notes to Consolidated Financial Statements

	Defined Benefit Pension Plans						Defined Benefit Postretirement Plan
	As of March 31, 2007, the Company had available net operating loss carryforwards (“NOLs”) for state purposes of $125.1 million, which can be used to offset future state taxable income. If these NOLs are not utilized, they will begin to expire in 2008 and will be totally expired in 2027.
	2006			2005			2006			2005
	As of March 31, 2007, the Company had available NOLs for federal purposes of $172.1 million, which can be used to offset future federal taxable income. If these NOLs are not utilized, they will begin to expire in 2011 and will be totally expired in 2027.
Weighted — Average Assumptions
	The Company also had available an alternative minimum tax credit carryforward of $1.2 million, which can be used to offset future taxes in years in which the alternative minimum tax does not apply. This credit can be carried forward indefinitely.
Discount rate — benefit obligation		6.00	%		6.25	%		6.00	%		6.25	%
	The Company has alternative minimum tax NOLs in the amount of $186.0 million, which will begin to expire in 2011 and will be totally expired in 2027.
Expected return on plan assets		8.50	%		8.50	%		N/A			N/A
(8)	Other Liabilities
Rate of compensation increase		N/A			N/A			N/A			N/A
	The components of other liabilities are as follows (in thousands):

The Company uses a December 31 measurement date for its defined benefit pension and postretirement plans. For measurement purposes under the defined benefit postretirement plan, an 11 percent annual rate of increase in the per capita cost of covered health care benefits (including prescription drugs) was assumed for March 31, 2006. This rate was assumed to decrease gradually to 5 percent through the fiscal year ending 2013 and remain at that level thereafter.


	March 31,
	2007		2006
Deferred revenue agreements (see note 12)	$	41,540		45,641

Postretirement liabilities (see note 9)		3,037		3,457

Pension liabilities and other benefit obligations		5,361		11,601

Restructuring		1,125		—

Other		1,491		2,013


Total	$	52,554		62,712

	Defined Benefit Pension Plans									Defined Benefit Postretirement Plan
(9)	Employee Benefit Plans
	2006			2005			2004			2006			2005			2004
	Defined Benefit Pension Plans
Components of Net Periodic Benefit Cost(in thousands)
	Pension Plans
Service cost	$	462			468			390			34			31			30
	The Company sponsors defined benefit pension plans covering full-time employees of the Company who had at least one year of service at December 31, 1994. Benefits under these plans generally are based upon the employees’ years of service and, in the case of salaried employees, compensation during the years immediately preceding retirement. The Company’s general funding policy is to contribute amounts within the annually calculated actuarial range allowable as a deduction for federal income tax purposes. The plans’ assets are maintained by trustees in separately managed portfolios consisting primarily of equity and fixed income securities. In October 1994, the Board of Directors approved an amendment to the Company’s defined benefit pension plans, which resulted in the freezing of additional defined benefits for future services under the plans effective January 1, 1995.
Interest cost		4,321			4,217			4,211			179			170			182
	Supplemental Executive Retirement Plan
Expected return on plan assets		(4,262	)		(3,510	)		(2,710	)		—			—			—
	In October 1994, the Board of Directors approved a new Supplemental Executive Retirement Plan (“SERP”), which is a defined benefit plan, for certain key executives. In July 2005, the Board of Directors approved an amendment to this plan (the “Amended and Restated Supplemental Executive Retirement Plan”). The aggregate accumulated benefit obligation under this plan, as amended, was approximately $0.5 million and $0.6 million at March 31, 2007 and 2006, respectively.
Amortization of prior service cost		—			—			—			(222	)		(222	)		(222	)
Amortization of unrecognized loss		2,001			2,022			2,441			—			—			—
Settlement loss		169			46			31			—			—			—
Recognized net actuarial (gain) loss		—			—			—			2			(43	)		(62	)
Net periodic benefit cost (income)	$	2,691			3,243			4,363			(7	)		(64	)		(72	)

Expected Future Benefit Payments

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

	Defined Benefit		Defined Benefit
Fiscal Year	Pension Plans		Postretirement Plan (a)
2007	$	4,282		217
2008		4,385		221
2009		4,488		223
2010		4,566		224
2011		4,660		223
2012 — 2016		24,801		1,046
Total	$	47,182		2,154

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

ACG HOLDINGS, INC.

Notes to Consolidated Financial Statements

~~Assumed~~Defined Benefit Postretirement Plans Postretirement Benefits The Company provides certain other postretirement benefits, primarily life and health insurance. Full-time employees who are eligible for benefits under the defined benefit pension plans, have attained age 55 and have at least five years of service are entitled to postretirement health care and life insurance coverage. Postretirement life insurance coverage is provided at no cost ~~trend~~to ~~rates~~eligible ~~have~~retirees. aSpecial ~~significant~~cost-sharing ~~effect~~arrangements onfor health care coverage are available to employees whose age plus years of service at the ~~amounts~~date ~~reported~~of ~~for~~ retirement equals or exceeds 85 (“Rule of 85”). Any eligible retiree not meeting the ~~medical~~Rule ~~component~~of 85 must pay 100% of the ~~defined~~required health care insurance premium. Effective January 1, 1995, the Company amended the health care plan changing the health care benefit for all employees retiring on or after January 1, 2000. This amendment had the effect of reducing the accumulated postretirement benefit obligation by approximately $3 million. This reduction is reflected as unrecognized prior service cost and is being amortized on a straight line basis over 15.6 years, the average remaining years of service to full eligibility of active plan participants at the date of the amendment. AEffective ~~one-percentage~~February ~~point change~~1, in2006, the ~~assumed~~Company amended the health care ~~cost~~plan ~~trend~~changing ~~rates~~the ~~would~~post ~~have~~65 healthcare benefits for all current and future retirees. This amendment had an immaterial impact on the ~~following~~accumulated ~~effects~~postretirement benefit obligation at March 31, 2006. 401(~~in thousands~~k): Defined Contribution Plan Effective January 1, 1995, the Company amended its 401(k) defined contribution plan. Eligible participants may contribute up to 15% of their annual compensation subject to maximum amounts established by the Internal Revenue Service and receive an employer-matching contribution on amounts contributed. Through March 16, 2003, the employer-matching contribution was made bi-weekly and equaled 2% of annual compensation for all plan participants plus 50% of the first 6% of annual compensation contributed to the plan by each employee, subject to maximum amounts established by the Internal Revenue Service. Beginning March 17, 2003 through December 31, 2004, the employer matching contribution was made bi-weekly and equaled 25% of the first 6% of annual compensation contributed to the plan by each employee, subject to maximum amounts established by the Internal Revenue Service. Subsequent to December 31, 2004, the employer matching contributions were made bi-weekly and equaled 50% of the first 6% of annual compensation contributed to the plan by each employee, subject to maximum amounts established by the Internal Revenue Service. The Company’s contribution under this Plan amounted to $1.7 million during the fiscal year ended March 31, 2007, $1.6 million during the fiscal year ended March 31, 2006 and $1.1 million during the fiscal year ended March 31, 2005.

	1% Point		1% Point
	Increase		Decrease
Effect on total of service and interest cost components of expense	$	4		(4	)
Effect on postretirement benefit obligation	$	73		(68	)

Plan Assets

The Company’s defined benefit pension plans reflect weighted-average target allocations as of March 31, 2006 and the percentages of the fair value of plan assets are allocated at March 31, 2006 and 2005 by asset category as follows:

	Target
	Allocation			Percentage of Plan Assets
	2006			2006			2005
Global equity securities		73.5	%		73.3	%		75.2	%
Fixed income securities		22.0	%		20.9	%		23.2	%
Real Estate		4.5	%		4.6	%		—
Cash		0.0	%		1.2	%		1.6	%
Total		100.0	%		100.0	%		100.0	%

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

To develop the expected long-term rate of return on assets assumption, the Company considered the historical returns and future expectations for returns for each asset class, as well as the target asset allocation of the present portfolio. This resulted in the selection of the 8.5% long-term rate of return on asset assumption for 2006.

It is the Company’s practice to fund amounts for the defined benefit pension plans at least sufficient to meet the minimum requirements set forth in applicable employee benefit laws and local tax laws. Liabilities in excess of these funding levels are included in the Company’s consolidated balance sheets. Employer contributions for the defined benefit pension plans for the fiscal year ending March 31, 2007 are estimated to be approximately $5.8 million.

(11) Capital Stock

At March 31, 2006, capital stock consists of Holdings’ common stock (“Common Stock”). Each share of Common Stock is entitled to one vote on each matter common shareholders are entitled to vote. Dividends on the Common Stock are discretionary by the Board of Directors and are restricted by the 2005 Credit Agreement (see note 7).

ACG HOLDINGS, INC.

Notes to Consolidated Financial Statements

~~(12)~~The ~~Stock~~following ~~Option~~table ~~Plans~~provides a reconciliation of the changes in the defined benefit plans’ benefit obligations and fair value of plan assets for the fiscal years ended March 31, 2007 and 2006 and a statement of the funded status of such plans as of March 31, 2007 and 2006 (in thousands):

Common Stock Option Plans


	Defined Benefit						Defined Benefit
	Pension Plans						Postretirement Plan
	2007			2006			2007			2006
Change in Benefit Obligation

Benefit obligation at beginning of year	$	72,621			69,624			2,412			2,823

Service cost		455			462			22			34

Interest cost		4,208			4,321			128			179

Plan amendments		—			—			—			(600	)

Plan participants’ contributions		—			—			175			441

Actuarial loss (gain)		(2,432	)		3,537			(131	)		251

Expected benefit payments		(3,774	)		(5,323	)		(470	)		(716	)


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


Change in Plan Assets

Fair value of plan assets at beginning of year	$	57,283			49,675			—			—

Actual return on plan assets		7,637			3,196			—			—

Employer contributions:
Pension Plans		5,718			8,017			—			—
SERP		50			1,718			—			—
Postretirement Plan		—			—			295			275
Plan participants’ contributions					—			175			441

Benefits paid		(3,774	)		(5,323	)		(470	)		(716	)


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


Funded Status	$	(4,164	)		(15,338	)		(2,136	)		(2,412	)

Unrecognized net actuarial (gain) loss		14,392			21,611			(12	)		109

Unrecognized prior service gain		—			—			(1,282	)		(1,566	)

Plan participants’ contributions		—			—			93			112
Additional minimum pension liability		(14,392	)		(21,611	)		—			—


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

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

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

				Weighted-
				Average
				Exercise		Exercisable
	Options			Price ($)		Options (a)
Outstanding at March 31, 2003		10,322			.01		6,617
Granted		—			—
Exercised		(1,125	)		.01
Forfeited		—			—
Outstanding at March 31, 2004		9,197			.01		6,946
Granted		—			—
Exercised		—			—
Forfeited		(1,301	)		.01
Outstanding at March 31, 2005		7,896			.01		7,131
Granted		2,504			.01
Exercised		—			—
Forfeited		(1,047	)		.01
Outstanding at March 31, 2006		9,353			.01		6,466

(a) At March 31, 2006, 2005 and 2004 all exercisable options had a $.01/option exercise price.

					Black-Scholes Option Pricing Model Wtd. Avg. Assumptions
Fiscal Year	#		Wtd. Avg.		Exercise			Risk Free			Annual						Expected
Ended	Options		Grant Date		Price per			Interest			Dividend			Expected			Life
March 31,	Granted		Fair Value ($)		Option ($)			Rate (%)			Yield %			Volatility			(Years)
2006		2,504		—		(a	)		(a	)		(a	)		(a	)		(a	)
2005		—		—		—			—			—			—			—
2004		—		—		—			—			—			—			—

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

The weighted-average remaining contractual life of the options outstanding at March 31, 2006 was 5.1 years. A total of 7,974 options for shares (including 2,224 previously exercised options that were subsequently canceled) of Holdings Common Stock were reserved for issuance, but not granted under the Common Stock Option Plans at March 31, 2006.

ACG HOLDINGS, INC.

Notes to Consolidated Financial Statements

As a result of SFAS 123 requirements, the Company recorded a net reversal of prior years’ stock compensation expense of approximately $0.2 million in the fiscal year ended March 31, 2006, and recognized net stock compensation expense of $0.1 million in the fiscal year ended March 31, 2005 and $0.2 million in the fiscal year ended March 31, 2004.


							Defined Benefit
	Defined Benefit Pension Plans						Postretirement Plan
	2007			2006			2007			2006
Weighted – Average Assumptions

Discount rate – benefit obligation		6.25	%		6.00	%		6.25	%		6.00	%

Expected return on plan assets		8.50	%		8.50	%		N/A			N/A

Rate of compensation increase		N/A			N/A			N/A			N/A

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

In the fiscal year ended March 31, 1998, the Company established the ACG Holdings, Inc. Series AA and Series BB convertible preferred stock (collectively “Preferred Stock”) Option Plan (the “Preferred Stock Option Plan”). This plan was administered by the Committee and provided for granting up to 583 shares of Preferred Stock.


	Defined Benefit Pension Plans									Defined Benefit Postretirement Plan
	2007			2006			2005			2007			2006			2005
Components of Net Periodic Benefit Cost (in thousands)

Service cost	$	455			462			468			22			34			31

Interest cost		4,208			4,321			4,217			128			179			170

Expected return on plan assets		(4,868	)		(4,262	)		(3,510	)		—			—			—

Amortization of prior service cost		—			—			—			(284	)		(222	)		(222	)

Amortization of unrecognized loss		2,017			2,001			2,022			—			—			—

Settlement loss		—			169			46			—			—			—

Recognized net actuarial (gain) loss		—			—			—			(10	)		2			(43	)


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

~~Stock~~Expected ~~options~~Future ~~could~~Benefit bePayments ~~granted~~The ~~under~~following ~~this~~benefit ~~Preferred~~payments ~~Stock~~are ~~Option~~expected ~~Plan~~ to ~~officers~~be ~~and~~paid ~~other key employees of the Company at the exercise price per share of Preferred Stock, as determined at the time of grant by the Committee~~ (in ~~its~~thousands) ~~sole discretion. All options were fully vested and 100% exercisable at the date of grant. All options would have expired 10 years from date of grant. All 582 outstanding options~~ to ~~purchase~~eligible ~~shares~~plan ofparticipants ~~Preferred Stock of Holdings were canceled concurrently with the refinancing transaction entered into on July 3, 2003. As a result, there were no options outstanding~~ under the ~~Preferred~~Company’s ~~Stock~~defined ~~Option Plan~~benefit atpension ~~March 31,~~plans ~~2004,~~and ~~2005~~defined orbenefit ~~2006~~postretirement plan.

(13) Commitments and Contingencies


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


Total	$	48,408		1,957

~~The~~(a) ~~Company~~Represents ~~incurred~~expected ~~rent~~benefit ~~expense~~payments ofnet ~~$3.2 million for the fiscal year ended March 31, 2006 and incurred $4.3 million in each~~ of ~~the~~plan ~~fiscal~~participants’ ~~years ended March 31, 2005 and 2004 under various operating leases~~contributions. ~~Future minimum rental commitments under existing operating lease arrangements at March 31, 2006 are as follows (in thousands):~~

Fiscal Year
2007	$	3,308
2008		2,498
2009		2,077
2010		1,642
2011		889
Thereafter		146
Total	$	10,560

ACG HOLDINGS, INC.

Notes to Consolidated Financial Statements

~~The~~Assumed ~~Company~~health ~~has~~care ancost ~~employment~~trend ~~agreement~~rates ~~with~~have ~~one~~a ofsignificant ~~its~~effect ~~principal~~on ~~officers.~~the ~~This~~amounts ~~agreement provides~~reported for athe ~~minimum~~medical ~~salary~~component ~~level~~of asthe ~~well~~defined asbenefit ~~incentive~~postretirement ~~bonuses,~~plan. ~~which~~A ~~are~~one-percentage ~~payable~~point ~~if specified~~change ~~management~~in ~~goals~~the ~~are~~assumed ~~attained.~~health ~~The~~care ~~aggregate~~cost ~~commitment~~trend ~~for~~rates ~~future~~would ~~compensation~~have ~~at March 31,~~the ~~2006,~~following ~~excluding~~effects ~~bonuses,~~(in ~~is approximately $1.7 million.~~ thousands):

In the fiscal year ended March 31, 1998, the Company entered into multi-year contracts to purchase a portion of the Company’s raw materials to be used in its normal operations. In connection with such purchase agreements, pricing for a portion of the Company’s raw materials is adjusted for certain movements in market prices, changes in raw material costs and other specific price increases while purchase quantity levels are variable based upon certain contractual requirements and conditions. The Company is deferring certain contractual provisions over the life of the contracts, which are being recognized as the purchase commitments are achieved and the related inventory is sold. The amount deferred at March 31, 2006 is $45.6 million and is included within Other liabilities in the Company’s consolidated balance sheet.


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

Effect on postretirement benefit obligation	$	63		(58	)

~~Graphics,~~Plan ~~together~~Assets ~~with~~The ~~over~~Company’s ~~300~~defined ~~other~~benefit ~~persons,~~pension ~~has~~plans ~~been~~reflect ~~designated~~weighted-average bytarget ~~the~~allocations ~~U. S. Environmental Protection Agency~~ as aof ~~potentially~~March ~~responsible party (a “PRP”) under the Comprehensive Environmental Response Compensation and Liability Act (“CERCLA”~~31, ~~also~~2007 ~~known as “Superfund”) at a solvent recovery operation that closed in 1989. Although liability under CERCLA may be imposed on a joint~~ and ~~several basis and~~ the ~~Company’s~~percentages ~~ultimate~~of ~~liability is not precisely determinable,~~ the ~~PRPs~~fair ~~have~~value ~~agreed in writing that Graphics’ share~~ of ~~removal costs~~plan isassets ~~approximately~~by ~~0.583%;~~asset ~~therefore~~category ~~Graphics~~are ~~believes~~allocated ~~that its share of the anticipated remediation costs~~ at ~~such~~March ~~site~~31, ~~will~~2007 ~~not~~and be2006 ~~material to its business or the Company’s consolidated financial statements~~ as ~~a whole.~~ follows:

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


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


Total		100.0	%		100.0	%		100.0	%

Based upon an analysis of Graphics’ volumetric share of waste contributed to the sites, the Company maintains a reserve of approximately $0.1 million in connection with these liabilities in its consolidated balance sheets at March 31, 2006 and 2005. The Company believes this amount is adequate to cover such liabilities.

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

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

		It is the Company’s practice to fund amounts for the defined benefit pension plans at least sufficient to meet the minimum requirements set forth in applicable employee benefit laws and local tax laws. Liabilities in excess of these funding levels are included in the Company’s consolidated balance sheets. Employer contributions for the defined benefit pension plans for the fiscal year ending March 31, 2008 are estimated to be approximately $0.7 million.

(10)		Capital Stock

		At March 31, 2007, capital stock consists of Holdings’ common stock (“Common Stock”). Each share of Common Stock is entitled to one vote on each matter common shareholders are entitled to vote. Dividends on the Common Stock are discretionary by the Board of Directors and are restricted by the 2005 Credit Agreement (see note 6).

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

ACG HOLDINGS, INC.

Notes to Consolidated Financial Statements

(14) Interim Financial Information (Unaudited)

(11)		Stock Option Plans

		*Common Stock Option Plans*

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

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

Quarterly financial information follows (in thousands):


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

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

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

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

						Net
				Gross		Income
		Sales		Profit		(Loss)
Fiscal Year 2006	Quarter Ended:
	June 30	$	108,270		12,650		(2,390	)
	September 30		105,460		11,776		(4,198	)
	December 31		118,724		14,911		2,252	(a)
	March 31		102,035		10,002		(10,241	) (b)
	Total	$	434,489		49,339		(14,577	)
Fiscal Year 2005	Quarter Ended:
	June 30	$	110,850		12,863		(2,188	)
	September 30		106,605		10,623		(3,463	)
	December 31		123,652		13,392		(2,286	)
	March 31		108,406		8,994		(17,730	) (c)
	Total	$	449,513		45,872		(25,667	)


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

(a) Includes ($0.5) million of pre-tax restructuring benefit. (b) Includes ($0.7) million of pre-tax restructuring benefit and a non-cash asset impairment charge of $2.8 million. (c) Includes $10.0 million of pre-tax restructuring costs and other charges.

Black-Scholes Option Pricing Model Wtd. Avg. Assumptions

Fiscal Year

Wtd. Avg.

Exercise

Risk Free

Annual

Expected

Ended

Options

Grant Date

Price per

Interest

Dividend

Expected

Life

March 31,

Granted

Fair Value ($)

Option ($)

Rate (%)

Yield (%)

Volatility

(Years)

2007

—

2006

2,504

—

)

2005

—

(15a) ~~Restructuring~~As ~~Costs~~the ~~and~~grant ~~Other~~date ~~Charges~~ Fair Value was $0, the Black-Scholes pricing was not calculated.

~~Fiscal~~The ~~Year~~weighted-average ~~2005~~remaining ~~Restructuring~~contractual ~~Costs~~ life of the options outstanding at March 31, 2007 was 4.1 years. A total of 7,974 options for shares (including 2,224 previously exercised options that were subsequently canceled) of Holdings Common Stock were reserved for issuance, but not granted under the Common Stock Option Plans at March 31, 2007.

New York Premedia Consolidation Plan

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

As a result, the Company recorded a pre-tax restructuring charge of approximately $1.5 million in the quarter ended March 31, 2005 associated with this plan. This charge was classified within restructuring and other charges in the consolidated statement of operations for the fiscal year ended March 31, 2005. The costs of this restructuring plan were accounted for in accordance with the guidance set forth in Statement of Financial Accounting Standards No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS 146”). This restructuring charge was composed of severance and related termination benefits, lease termination costs primarily related to future lease commitments and other costs. The Company reduced the restructuring reserve related to this plan by approximately $0.3 million in the quarter ended March 31, 2006. This was primarily the result of lower than anticipated severance and other employee costs due to certain terminated employees obtaining other employment during their severance periods and certain changes in assumptions related to lease termination costs. The reduction of the restructuring reserve is classified within restructuring costs (benefit) and other charges in the consolidated statement of operations for the fiscal year ended March 31, 2006.

ACG HOLDINGS, INC.

Notes to Consolidated Financial Statements

The following table summarizes the activity related to this restructuring plan for the fiscal year ended March 31, 2006 (in thousands):

		There was no stock compensation expense recorded in the fiscal year ended March 31, 2007. The Company recorded a net reversal of prior years’ stock compensation expense of approximately $0.2 million in the fiscal year ended March 31, 2006, and recognized net stock compensation expense of $0.1 million in the fiscal year ended March 31, 2005.

(12)		Commitments and Contingencies

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

	03/31/05								03/31/06
Fiscal Year
	Restructuring					Reserve			Restructuring
2008	$	3,347
	Reserve Balance		Activity			Adjustment			Reserve Balance
2009		2,941
Severance and other employee costs	$	195		(155	)		(40	)		—
2010		2,153
Lease termination costs		1,271		(488	)		(207	)		576
2011		1,143
Other costs		15		—			(3	)		12
2012		208
	$	1,481		(643	)		(250	)		588
Thereafter		—
Total	$	9,792

The ~~process~~Company has employment agreements with three of ~~consolidating~~its principal officers. These agreements provide for minimum salary levels as well as incentive bonuses, which are payable if specified management goals are attained. The aggregate commitment for future compensation under these agreements, excluding bonuses, is approximately $3.1 million. In the ~~two~~fiscal ~~premedia~~year ~~services~~ended ~~facilities~~March ~~and~~31, 1998, the ~~elimination~~Company entered into multi-year contracts to purchase a portion of ~~certain~~ ~~personnel~~the ~~within~~Company’s raw materials to be used in its normal operations. In connection with such purchase agreements, pricing for a portion of the Company’s ~~was~~raw ~~substantially~~materials ~~completed~~is byadjusted ~~April 30~~for certain movements in market prices, ~~2005~~changes in raw material costs and other specific price increases while purchase quantity levels are variable based upon certain contractual requirements and conditions. AsThe Company is deferring certain contractual provisions over the life of ~~March 31~~ the contracts, ~~2006~~which are being recognized as the ~~Company~~purchase ~~believes~~commitments are achieved and the ~~restructuring~~related ~~reserve~~inventory ofis ~~approximately~~sold. The amount deferred at March 31, 2007 is $041.6 5 million and is ~~adequate~~included within Other liabilities in the Company’s consolidated balance sheet. ~~The~~Graphics, together with over 300 other persons, has been designated by the U. S. Environmental Protection Agency as a potentially responsible party (a “PRP”) under the Comprehensive Environmental Response Compensation and Liability Act (“CERCLA”, also known as “Superfund”) at a solvent recovery operation that closed in 1989. Although liability under CERCLA may be imposed on a joint and several basis and the Company’s ~~anticipates~~ultimate liability is not precisely determinable, the PRPs have agreed in writing that Graphics’ share of removal costs is approximately $0.~~2 million~~583%; therefore Graphics believes that its share of ~~these~~the anticipated remediation costs at such site will not be ~~paid~~ ~~during~~material ~~each~~to ~~fiscal~~its ~~year~~business ~~through~~or ~~March 31,~~the ~~2009~~Company’s ~~and~~consolidated ~~the~~financial ~~remaining~~statements ~~less~~as ~~than~~a $0whole.~~1 million will~~ beGraphics ~~paid~~received ~~during~~written notice, dated May 10, 2004, of its potential liability in connection with the ~~fiscal~~Gibson ~~year~~Environmental ~~ending~~Site ~~March 31~~at 2401 Gibson Street, ~~2010~~Bakersfield, California. ~~These~~Gibson ~~payments~~Environmental, ~~will~~Inc. beoperated ~~funded through~~the ~~cash~~(six ~~generated~~acre) ~~from~~Site ~~operations~~as a storage and ~~borrowings~~treatment ~~under~~facility ~~the~~for ~~Company’s~~used ~~2005~~oil ~~Revolving Credit~~and ~~Facility~~contaminated soil from June 1987 through October 1995. Graphics received the notice and a Settlement Offer from LECG, a consultant representing approximately

Pittsburg Facility Closure Plan

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

As a result, the Company recorded a pre-tax restructuring charge of approximately $3.1 million in the quarter ended March 31, 2005 associated with this plan. This charge was classified within restructuring and other charges in the consolidated statements of operations for the fiscal year ended March 31, 2005. The costs of this restructuring plan were accounted for in accordance with the guidance set forth in SFAS 146. This restructuring charge was composed of severance and related termination benefits, lease termination costs and other costs. The Company reduced the restructuring reserve related to this plan by approximately $0.8 million in the quarter ended December 31, 2005 as a result of lower than anticipated severance and other employee costs due to certain terminated employees obtaining other employment during their severance periods. The Company further reduced the restructuring reserve related to this plan by approximately $0.1 million in the quarter ended March 31, 2006 as a result of certain changes in assumptions related to lease termination costs. The reduction of the reserve is classified within restructuring costs (benefit) and other charges in the consolidated statements of operations for the fiscal year ended March 31, 2006.

The following table summarizes the activity related to this restructuring plan for the fiscal year ended March 31, 2006 (in thousands):

	03/31/05								03/31/06
	Restructuring					Reserve			Restructuring
	Reserve Balance		Activity			Adjustment			Reserve Balance
Severance and other employee costs	$	1,329		(517	)		(812	)		—
Lease termination costs		774		(58	)		(117	)		599
Other costs		37		(11	)		—			26
	$	2,140		(586	)		(929	)		625

ACG HOLDINGS, INC.

Notes to Consolidated Financial Statements

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

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

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

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

(13)		Interim Financial Information (Unaudited)

		Quarterly financial information follows (in thousands):

Plant and SG&A Reduction Plan


						Net
				Gross		Income
		Sales		Profit		(Loss)
Fiscal Year 2007	Quarter Ended:
	June 30	$	110,010		12,146		(3,342	)
	September 30		111,654		12,347		(4,374	)
	December 31		120,065		13,118		(4,454	)
	March 31		103,297		10,300		(8,839	)(a)

	Total	$	445,026		47,911		(21,009	)


Fiscal Year 2006	Quarter Ended:
	June 30	$	108,270		12,650		(2,390	)
	September 30		105,460		11,776		(4,198	)
	December 31		118,724		14,911		2,252	(b)
	March 31		102,035		10,002		(10,241	)(c)

	Total	$	434,489		49,339		(14,577	)

In(a) ~~February 2005,~~Includes ~~the~~($0.4) ~~Company’s~~million ~~Board~~ of ~~Directors~~pre-tax ~~approved a~~ restructuring ~~plan~~benefit. ~~for~~(b) ~~the print~~Includes ~~and~~($0.5) ~~premedia~~million ~~services~~of ~~segments~~pre-tax torestructuring ~~reduce~~benefit. ~~overhead~~(c) ~~costs~~Includes ~~and improve operating efficiency and profitability~~($0.7) ~~This~~million ~~plan resulted in the elimination~~ of 60pre-tax ~~positions~~restructuring ~~within the~~benefit ~~Company,~~and ~~including~~a ~~both~~non-cash ~~facility~~asset ~~and~~impairment ~~selling~~charge ~~and~~of ~~administrative~~$2.8 ~~employees~~million.

As a result, the Company recorded a pre-tax restructuring charge of approximately $3.8 million in the quarter ended March 31, 2005 associated with this plan. This charge was classified within restructuring costs and other charges in the consolidated statements of operations for the fiscal year ended March 31, 2005. The costs of this restructuring plan were accounted for in accordance with the guidance set forth in SFAS 146. This restructuring charge was composed of severance and related termination benefits and other costs. The Company reduced the reserve related to this plan by approximately $0.4 million in the quarter ended March 31, 2006. This reduction was primarily the result of lower than anticipated severance and other employee costs due to certain terminated employees obtaining other employment during their severance periods. This reduction of the reserve is classified within restructuring costs (benefit) and other charges in the consolidated statements of operations for the fiscal year ended March 31, 2006.

(14)		Restructuring Costs and Other Charges

		*Fiscal Year 2005 Restructuring Costs*

		New York Premedia Consolidation Plan

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

		As a result, the Company recorded a pre-tax restructuring charge of approximately $1.5 million in the quarter ended March 31, 2005 associated with this plan. This charge was classified within restructuring and other

The following table summarizes the activity related to this restructuring plan for the fiscal year ended March 31, 2006 (in thousands):

	03/31/05								03/31/06
	Restructuring					Reserve			Restructuring
	Reserve Balance		Activity			Adjustment			Reserve Balance
Severance and other employee costs	$	3,208		(2,097	)		(263	)		848
Other costs		249		(22	)		(124	)		103
	$	3,457		(2,119	)		(387	)		951

Employee terminations related to this plan were substantially completed by March 31, 2005. During the fiscal year ended March 31, 2005, $0.3 million of these costs were paid. As of March 31, 2006 the Company believes the restructuring reserve of approximately $1.0 million is adequate. The Company anticipates that $0.9 million of these costs will be paid by March 31, 2007 and the remaining $0.1 million will be paid by March 31, 2008. These payments will be funded through cash generated from operations and borrowings under the Company’s 2005 Revolving Credit Facility.

Fiscal Year 2004 Restructuring Costs

January 2004 Plan

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

As a result, the Company recorded a pre-tax restructuring charge of approximately $5.7 million in the quarter ended March 31, 2004 associated with this plan. This charge was classified within restructuring costs and other

ACG HOLDINGS, INC.

Notes to Consolidated Financial Statements

charges in the consolidated ~~statements~~statement of operations for the fiscal year ended March 31, ~~2004~~ 2005. The costs of this restructuring plan were accounted for in accordance with the guidance set forth in Statement of Financial Accounting Standards No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS 146”). This restructuring charge was composed ~~primarily~~ of severance and related termination benefits, lease termination costs primarily related to future lease commitments and other costs. ~~The~~In the quarter ended March 31, 2007, the Company reduced the restructuring reserve related to this plan by approximately $0.1 million ~~and~~due to certain changes in assumptions related to lease termination costs. The Company also reduced the restructuring reserve related to this plan by approximately $0.7 3 million in the ~~quarters~~quarter ended March 31, 2006 ~~and 2005, respectively~~. ~~These~~This ~~reductions~~was ~~were~~ primarily the result of lower than anticipated severance and other employee costs due to ~~the~~certain terminated employees obtaining other employment during their severance periods and certain changes in assumptions related to lease termination costs. These reductions of the restructuring reserve are and were classified within restructuring costs (benefit) and other charges in the consolidated ~~statements~~statement of ~~operation~~ operations for the fiscal years ended March 31, ~~2006~~2007 and ~~2005~~2006, respectively. The following table summarizes the activity related to this restructuring plan for the fiscal year ended March 31, 2007 (in thousands):

The following table summarizes the activity related to this restructuring plan for the fiscal year ended March 31, 2006 (in thousands):


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

	$	588		(162	)		(79	)		347

	03/31/05								03/31/06
	Restructuring					Reserve			Restructuring
	Reserve Balance		Activity			Adjustment			Reserve Balance
Severance and other employee costs	$	813		(407	)		(183	)		223
Other costs		77		(84	)		117			110
	$	890		(491	)		(66	)		333

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

		Pittsburg Facility Closure Plan

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

		As a result, the Company recorded a pre-tax restructuring charge of approximately $3.1 million in the quarter ended March 31, 2005 associated with this plan. This charge was classified within restructuring and other charges in the consolidated statements of operations for the fiscal year ended March 31, 2005. The costs of this restructuring plan were accounted for in accordance with the guidance set forth in SFAS 146. This restructuring charge was composed of severance and related termination benefits, lease termination costs and other costs. The Company reduced the restructuring reserve related to this plan by approximately $0.8 million in the quarter ended December 31, 2005 as a result of lower than anticipated severance and other employee costs due to certain terminated employees obtaining other employment during their severance periods. The Company further reduced the restructuring reserve related to this plan by approximately $0.1 million in the quarter ended March 31, 2006 as a result of certain changes in assumptions related to lease termination costs. These reductions of the reserve were classified within restructuring costs (benefit) and other charges in the consolidated statements of operations for the fiscal year ended March 31, 2006.

During the fiscal year ended March 31, 2005, $2.3 million of these costs were paid and in the fiscal year ended March 31, 2004, $1.8 million of these costs were paid. As of March 31, 2006, the Company believes the restructuring reserve of approximately $0.3 million is adequate. The Company anticipates the remaining $0.3 million will be paid during the fiscal year ending March 31, 2007. These payments will be funded through cash generated from operations and borrowings under the 2005 Revolving Credit Facility.

July 2003 Plan

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

As a result of this plan, the Company recorded a pre-tax restructuring charge of approximately $1.8 million in the quarter ended September 30, 2003. This charge was classified within restructuring costs and other charges in the consolidated statements of operations for the fiscal year ended March 31, 2004. The cost of this restructuring plan was accounted for in accordance with the guidance set forth in SFAS 146. The restructuring charge was composed of severance and related termination benefits.

The following table summarizes the activity related to this restructuring plan for the fiscal year ended March 31, 2006 (in thousands):

03/31/05

03/31/06

Restructuring

Reserve Balance

Activity

Reserve Balance

Severance and other employee costs

430

(328

)

102

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

ACG HOLDINGS, INC.

Notes to Consolidated Financial Statements

~~Fiscal~~The ~~Year~~following ~~2002~~table ~~Restructuring~~summarizes ~~Costs~~ the activity related to this restructuring plan for the fiscal year ended March 31, 2007 (in thousands):

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


	03/31/06					03/31/07
	Restructuring					Restructuring
	Reserve Balance		Activity			Reserve Balance
Lease termination costs	$	599		(1	)		598
Other costs		26		(10	)		16

	$	625		(11	)		614

AsThe aprocess ~~result~~of closing the print facility and the elimination of ~~this~~certain ~~plan,~~personnel within the Company ~~recorded~~was acompleted ~~pre-tax~~by ~~restructuring~~March ~~charge~~31, ~~of approximately~~2005. During the fiscal year ended March 31, 2006, $80.6 million inof ~~the~~these ~~fourth~~costs ~~quarter~~were ofpaid and in the fiscal year ended March 31, ~~2002~~2005, $1. ~~This~~0 ~~charge~~million ~~was~~of ~~classified~~these ~~within~~costs ~~restructuring~~were ~~costs~~paid. ~~and~~As ~~other~~of ~~charges~~March in31, 2007 the ~~consolidated statements~~Company believes the restructuring reserve of ~~operations~~approximately ~~for~~$0.6 ~~the~~million ~~fiscal~~is ~~year~~adequate. ~~ended~~The Company anticipates that these costs will be paid by March 31, ~~2002~~2008. ~~The~~These ~~cost~~payments ofwill ~~this restructuring~~be ~~plan~~funded ~~was~~through ~~accounted~~cash ~~for~~generated infrom ~~accordance~~operations ~~with~~and borrowings under the ~~guidance~~Company’s ~~set~~2005 ~~forth~~Revolving inCredit ~~Emerging Issues~~Facility ~~Task~~and ~~Force~~Receivables ~~Issue~~Facility. ~~94-3~~Plant and SG&A Reduction Plan In February 2005, ~~“Liability~~the ~~Recognition~~Company’s ~~for~~Board ~~Certain~~of ~~Employee~~Directors ~~Termination Benefits~~approved a restructuring plan for the print and ~~Other~~premedia ~~Costs~~services segments to ~~Exit~~reduce anoverhead ~~Activity~~costs ~~(Including~~and ~~Certain~~improve ~~Costs~~operating ~~Incurred~~efficiency inand ~~a Restructuring)”~~profitability. ~~(“EITF~~This ~~94-3”).~~plan ~~The~~resulted ~~restructuring~~in ~~charge~~the ~~included~~elimination ~~severance~~of ~~and~~60 ~~related termination~~positions ~~benefits~~within the Company, ~~lease~~including ~~termination~~both ~~costs~~facility ~~primarily~~and ~~related~~selling toand ~~future~~administrative ~~lease~~employees. ~~commitments~~As a result, ~~equipment~~ ~~deinstallation~~the ~~costs~~Company ~~directly~~recorded ~~associated~~a ~~with~~pre-tax ~~the~~restructuring ~~disassembly~~charge of ~~certain~~approximately ~~printing presses~~$3.8 ~~and~~million ~~other~~in ~~equipment~~the quarter ended March 31, ~~and~~2005 ~~other~~associated ~~costs~~with ~~primarily~~this ~~including~~plan. ~~legal~~This ~~fees,~~charge ~~site~~was ~~clean-up~~ classified within restructuring costs and other charges in the ~~write-off~~consolidated statements of ~~certain~~operations ~~press~~for ~~related~~the ~~parts~~fiscal ~~that~~year ~~provided~~ended noMarch ~~future~~31, ~~use or functionality~~2005. The ~~Company~~costs ~~recorded~~of anthis ~~additional~~restructuring ~~$0.2 million,~~plan $0were accounted for in accordance with the guidance set forth in SFAS 146.~~3 million~~ This restructuring charge was composed of severance and $0related termination benefits and other costs.~~7 million~~ ofThe ~~restructuring~~Company ~~charges~~reduced the reserve related to this plan by approximately $0.1 million in the ~~quarters~~quarter ended March ~~31,~~ ~~2006, December~~ 31, ~~2005~~2007 and ~~March 31,~~approximately ~~2005, respectively, and an additional~~ $0.2 4 million in ~~each of~~ the ~~quarters~~quarter ended March 31, ~~2004 and September 30, 2003~~2006. These ~~charges~~reductions ~~are~~were primarily ~~related~~ tothe ~~future~~result ~~lease~~of ~~commitments~~lower than anticipated severance and other employee costs due to certain terminated employees obtaining other employment during their severance periods. These reductions of the reserve are and were classified within restructuring costs (benefit) and other charges in the consolidated statements of operations for the fiscal years ended March 31, 2007 and 2006, ~~2005~~respectively. ~~and~~The ~~2004.~~ following table summarizes the activity related to this restructuring plan for the fiscal year ended March 31, 2007 (in thousands):

The following table summarizes the activity related to this restructuring plan for the fiscal year ended March 31, 2006 (in thousands):


	03/31/06								03/31/07
	Restructuring					Reserve			Restructuring
	Reserve Balance		Activity			Adjustment			Reserve Balance
Severance and Other employee costs	$	848		(735	)		(42	)		71
Other costs		103		(3	)		(97	)		3

	$	951		(738	)		(139	)		74

03/31/05

03/31/06

Restructuring

Reserve Balance

Activity

Reserve Adjustment

Reserve Balance

Lease termination costs

1,524

(461

)

465

1,528

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

The process of closing two facilities and downsizing one facility, including equipment deinstallation and relocation of that equipment to other facilities within the Company, was completed by March 31, 2002. During the fiscal years ended March 31, 2005 and 2004, $0.5 million and $0.9 million of these costs were paid, respectively, and in each of the fiscal years ended March 31, 2003 and 2002, $3.4 million of these costs were paid. As of March 31, 2006, the Company believes the restructuring reserve of approximately $1.5 million is adequate. The Company anticipates that $0.4 million of the restructuring reserve balance will be paid in each of the fiscal years ending March 31, 2007 and 2008, $0.3 million will be paid during the fiscal year ending March 31, 2009 and $0.2 million will be paid each fiscal year following through March 31, 2011. These payments will be funded through cash generated from operations and borrowings under the 2005 Revolving Credit Facility.

Other Charges

The Company recorded no other charges in the fiscal year ended March 31, 2006. Other charges of approximately $1.6 million and $0.4 million were recorded in the fourth quarter of the fiscal years ended March 31, 2005 and 2004, respectively. These other charges represented the impairment associated with restructuring initiatives reflecting the decision to abandon certain Company assets and to write-down other assets to fair value. The $1.6 million impairment charge recorded in the fourth quarter of fiscal year ended March 31, 2005, included $1.2 million related to the write-off of certain assets and the write-down to fair value of the assets held for sale in the Pittsburg, California print facility (see note 4). The provision was based on a review of the Company’s long-lived assets in accordance with SFAS 144. These impairment charges were classified within restructuring costs (benefit) and other charges in the consolidated statements of operations.

ACG HOLDINGS, INC.

Notes to Consolidated Financial Statements

(16)		Parent Guarantee of Subsidiary Debt
		Graphics, the issuer of the 10% Notes, is a wholly owned subsidiary of Holdings. Holdings has no other subsidiaries. Holdings has fully and unconditionally guaranteed the payment of principal and interest on the 10% Notes. The 10% Notes are fully and unconditionally guaranteed on a senior basis by Holdings and by all future domestic subsidiaries of Graphics. Holdings conducts no business other than as the sole shareholder of Graphics and has no significant assets other than the capital stock of Graphics, all of which is pledged to secure Holdings’ obligations under the 2005 Credit Agreement. Holdings is dependent upon distributions from Graphics to fund its obligations. Graphics’ ability to pay dividends or lend funds to Holdings is restricted under the terms of the indenture governing the 10% Notes and the 2005 Credit Agreement (see note 7).
(17)		Industry Segment Information
		The Company has significant operations principally in two industry segments: (1) print and (2) premedia services. All of the Company’s print business and assets are attributed to the print division and all of the Company’s premedia services business and assets are attributed to the premedia services division. The Company’s corporate expenses have been segregated and do not constitute a reportable segment.
		The Company has two reportable segments: (1) print and (2) premedia services. The print business produces advertising inserts, comics (Sunday newspaper comics, comic insert advertising and comic books) and other publications. The Company’s premedia services business assists customers in the design, creation and capture; manipulation; storage; transmission and distribution of images. The majority of the premedia services work leads to the production of four-color separations in a format appropriate for use by printers.
		The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates performance based on segment EBITDA, which is defined as earnings before net interest expense, income tax expense (benefit), depreciation and amortization. The Company generally accounts for intersegment revenues and transfers as if the revenues or transfers were to third parties, that is, at current market prices.
		In the first quarter of the fiscal year ended March 31, 2004, the Company sold its digital visual effects business, Digiscope, for a de minimis amount and recorded a net loss of approximately $0.4 million. Segment operating results for the fiscal year ended March 31, 2004 present Digiscope’s operating results as a discontinued operation.
		The Company’s reportable segments are business units that offer different products and services. They are managed separately because each segment requires different technology and marketing strategies. A substantial portion of the revenue, long-lived assets and other assets of the Company’s reportable segments are attributed to or located in the United States.

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

		*Fiscal Year 2004 Restructuring Costs*

		January 2004 Plan

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

		As a result, the Company recorded a pre-tax restructuring charge of approximately $5.7 million in the quarter ended March 31, 2004 associated with this plan. This charge was classified within restructuring costs and other charges in the consolidated statements of operations for the fiscal year ended March 31, 2004. The costs of this restructuring plan were accounted for in accordance with the guidance set forth in SFAS 146. This restructuring charge was composed primarily of severance and related termination benefits. The Company reduced the restructuring reserve for this plan by approximately $0.2 million in the quarter ended March 31, 2007, as a result of changes in facts and circumstances related to this plan. The Company also reduced the restructuring reserve related to this plan by approximately $0.1 million and $0.7 million in the quarters ended March 31, 2006 and 2005, respectively. These reductions were primarily the result of lower than anticipated severance and other employee costs due to the terminated employees obtaining other employment during their severance periods. These reductions are and were classified within restructuring costs (benefit) and other charges in the consolidated statements of operation for the fiscal years ended March 31, 2007, 2006 and 2005, respectively.

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


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

	$	333		(95	)		(238	)		—

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

		July 2003 Plan

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

		As a result of this plan, the Company recorded a pre-tax restructuring charge of approximately $1.8 million in the quarter ended September 30, 2003. This charge was classified within restructuring costs and other charges in the consolidated statements of operations for the fiscal year ended March 31, 2004. The cost of this restructuring plan was accounted for in accordance with the guidance set forth in SFAS 146. The restructuring charge was composed of severance and related termination benefits.

ACG HOLDINGS, INC.

Notes to Consolidated Financial Statements

				Premedia			Corporate
	Print			Services			and Other
(In thousands)	(a)			(a)			(b)			Total
Fiscal Year Ended March 31, 2006
Sales	$	380,648			53,841			—			434,489
EBITDA	$	31,571			11,070			(3,563	)		39,078
Depreciation and amortization		(16,767	)		(2,716	)		—			(19,483	)
Interest expense		—			—			(37,624	)		(37,624	)
Interest income		—			—			83			83
Income tax benefit		—			—			3,369			3,369
Net income (loss)	$	14,804			8,354			(37,735	)		(14,577	)
Total assets	$	205,753			12,852			12,897			231,502
Total goodwill	$	64,656			1,892			—			66,548
Total capital expenditures	$	10,651			1,835			—			12,486
Fiscal Year Ended March 31, 2005
Sales	$	393,922			55,591			—			449,513
EBITDA	$	22,997			10,059			(3,307	)		29,749
Depreciation and amortization		(19,867	)		(3,184	)		—			(23,051	)
Interest expense		—			—			(34,087	)		(34,087	)
Interest income		—			—			37			37
Income tax benefit		—			—			1,685			1,685
Net income (loss)	$	3,130			6,875			(35,672	)		(25,667	)
Total assets	$	230,490			15,179			13,229			258,898
Total goodwill	$	64,656			1,892			—			66,548
Total capital expenditures	$	5,418			1,489			—			6,907
Fiscal Year Ended March 31, 2004
Sales	$	418,004			53,098			—			471,102
EBITDA	$	38,789			9,564			(7,299	)		41,054
Depreciation and amortization		(20,733	)		(3,529	)		—			(24,262	)
Depreciation from discontinued operations		—			—			(26	)		(26	)
Interest expense		—			—			(34,175	)		(34,175	)
Interest income		—			—			9			9
Income tax expense		—			—			(11,441	)		(11,441	)
Net income (loss)	$	18,056			6,035			(52,932	)		(28,841	)
Total assets	$	237,680			15,316			14,917			267,913
Total goodwill	$	64,656			1,892			—			66,548
Total capital expenditures	$	14,465			1,501			—			15,966

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

03/31/06

03/31/07

Restructuring

Reserve

Restructuring

Reserve Balance

Activity

Adjustment

Reserve Balance

Severance and other employee costs

102

(113

)

—

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

		*Fiscal Year 2002 Restructuring Costs*

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

		As a result of this plan, the Company recorded a pre-tax restructuring charge of approximately $8.6 million in the fourth quarter of the fiscal year ended March 31, 2002. This charge was classified within restructuring costs and other charges in the consolidated statements of operations for the fiscal year ended March 31, 2002. The cost of this restructuring plan was accounted for in accordance with the guidance set forth in Emerging Issues Task Force Issue 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring)” (“EITF 94-3”). The restructuring charge included severance and related termination benefits, lease termination costs primarily related to future lease commitments, equipment deinstallation costs directly associated with the disassembly of certain printing presses and other equipment, and other costs primarily including legal fees, site clean-up costs and the write-off of certain press related parts that provided no future use or functionality. In the quarter ended March 31, 2007, the Company recorded non-cash imputed interest associated with sub-lease income to this reserve of less than $0.1 million. This imputed interest is classified as interest expense in the consolidated statement of operations for the fiscal year ended March 31, 2007. The Company recorded an additional $0.2 million, $0.3 million and $0.7 million of restructuring charges related to this plan in the quarters ended March 31, 2006, December 31, 2005 and March 31, 2005, respectively, and an additional $0.2 million in each of the quarters ended March 31, 2004 and September 30, 2003. These charges are primarily related to future lease commitments and were classified within restructuring costs (benefit) and other charges in the consolidated statements of operations for the fiscal years ended March 31, 2006, 2005 and 2004.

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

03/31/06

03/31/07

Restructuring

Reserve

Balance

Activity

Adjustment

Balance

Lease termination costs

1,528

(333

)

1,230

ACG HOLDINGS, INC.

Notes to Consolidated Financial Statements

(a) EBITDA for the print and premedia services segments in the fiscal year ended March 31, 2006 includes the impact of restructuring benefit of ($0.9) million and ($0.3) million, respectively, and the print segment also includes a non-cash asset impairment charge of $2.8 million. EBITDA for the print and premedia services segments in the fiscal year ended March 31, 2005 includes the impact of restructuring costs and other charges of $7.8 million and $2.2 million, respectively. In the fiscal year ended March 31, 2004, EBITDA for the print and premedia services segments includes the impact of restructuring costs and other charges of $7.5 million and $0.6 million, respectively.

		year ended March 31, 2004, $0.9 million of these costs were paid and in each of the fiscal years ended March 31, 2003 and 2002, $3.4 million of these costs were paid. As of March 31, 2007, the Company believes the restructuring reserve of approximately $1.2 million is adequate. The Company anticipates that $0.3 million of the restructuring reserve balance will be paid in the fiscal year ending March 31, 2008, $0.2 million will be paid during the fiscal year ending March 31, 2009, $0.3 million will be paid in the fiscal year ending March 31, 2010 and $0.4 million will be paid in the fiscal year ending March 31, 2011. These payments will be funded through cash generated from operations and borrowings under the 2005 Revolving Credit Facility and Receivables Facility.

		*Other Charges*

		The Company recorded no other charges in the fiscal years ended March 31, 2007 and 2006. Other charges of approximately $1.6 million were recorded in the fourth quarter of the fiscal year ended March 31, 2005. These other charges represented the impairment associated with restructuring initiatives reflecting the decision to abandon certain Company assets and to write-down other assets to fair value. The $1.6 million impairment charge recorded in the fourth quarter of fiscal year ended March 31, 2005, included $1.2 million related to the write-off of certain assets and the write-down to fair value of the assets held for sale in the Pittsburg, California print facility (see note 3). The provision was based on a review of the Company’s long-lived assets in accordance with SFAS 144. These impairment charges were classified within restructuring costs (benefit) and other charges in the consolidated statements of operations.

(15)		Parent Guarantee of Subsidiary Debt

		Graphics, the issuer of the 10% Notes, is a wholly owned subsidiary of Holdings. Holdings has no other subsidiaries. Holdings has fully and unconditionally guaranteed the payment of principal and interest on the 10% Notes. The 10% Notes are fully and unconditionally guaranteed on a senior basis by Holdings and by future domestic subsidiaries of Graphics (subject to certain exceptions). Holdings conducts no business other than as the sole shareholder of Graphics and has no significant assets other than the capital stock of Graphics, all of which is pledged to secure Holdings’ obligations under the 2005 Credit Agreement. Holdings is dependent upon distributions from Graphics to fund its obligations. Graphics’ ability to pay dividends or lend funds to Holdings is restricted under the terms of the indenture governing the 10% Notes and the 2005 Credit Agreement (see note 6).

(16)		Industry Segment Information

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

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

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

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

(b) EBITDA for corporate and other includes corporate general and administrative expenses, as well as revenues and expenses in the fiscal year ended March 31, 2004 associated with our former digital visual effects business, Digiscope. Digiscope was sold on June 5, 2003. The EBITDA loss of Digiscope included in the EBITDA table above for the fiscal year ended March 31, 2004 was ($0.4) million. In addition, corporate and other includes the write-off of deferred financing costs related to a refinancing transaction entered into on July 3, 2003 of $3.2 million in the fiscal year ended March 31, 2004.

ACG HOLDINGS, INC.

Notes to Consolidated Financial Statements


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

EBITDA	$	33,730			8,777			(4,774	)		37,733

Depreciation and amortization		(16,563	)		(2,067	)		—			(18,630	)
Interest expense		—			—			(40,405	)		(40,405	)
Interest income		—			—			100			100
Income tax benefit		—			—			193			193


Net income (loss)	$	17,167			6,710			(44,886	)		(21,009	)

Total assets	$	203,135			11,527			12,071			226,733
Total goodwill	$	64,656			1,892			—			66,548
Total capital expenditures	$	11,139			1,562			—			12,701

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

EBITDA	$	31,571			11,070			(3,563	)		39,078

Depreciation and amortization		(16,767	)		(2,716	)		—			(19,483	)
Interest expense		—			—			(37,624	)		(37,624	)
Interest income		—			—			83			83
Income tax benefit		—			—			3,369			3,369


Net income (loss)	$	14,804			8,354			(37,735	)		(14,577	)

Total assets	$	205,753			12,852			12,897			231,502
Total goodwill	$	64,656			1,892			—			66,548
Total capital expenditures	$	10,651			1,835			—			12,486

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

EBITDA	$	22,997			10,059			(3,307	)		29,749

Depreciation and amortization		(19,867	)		(3,184	)		—			(23,051	)
Interest expense		—			—			(34,087	)		(34,087	)
Interest income		—			—			37			37
Income tax benefit		—			—			1,685			1,685


Net income (loss)	$	3,130			6,875			(35,672	)		(25,667	)

Total assets	$	230,490			15,179			13,229			258,898
Total goodwill	$	64,656			1,892			—			66,548
Total capital expenditures	$	5,418			1,489			—			6,907

ACG HOLDINGS, INC.

Notes to Consolidated Financial Statements


(a)		EBITDA for the print and premedia services segments in the fiscal year ended March 31, 2007 includes the impact of restructuring benefit of ($0.1) million and ($0.3) million, respectively. EBITDA for the print and premedia services segments in the fiscal year ended March 31, 2006 includes the impact of restructuring benefit of ($0.9) million and ($0.3) million, respectively, and the print segment also includes a non-cash asset impairment charge of $2.8 million. EBITDA for the print and premedia services segments in the fiscal year ended March 31, 2005 includes the impact of restructuring costs and other charges of $7.8 million and $2.2 million, respectively.

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


ITEM 9.		CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

As of March 31, ~~2006~~2007, an evaluation was performed under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended). Based on that evaluation, our management, including the Chief Executive Officer and Chief Financial Officer, concluded that the disclosure controls and procedures were effective as of March 31, ~~2006~~2007. There have been no significant changes in our internal controls or in other factors that could significantly affect internal controls subsequent to March 31, ~~2006~~2007. There have not been any changes in our internal controls over financial reporting during the period covered by this ~~annual report~~Report ~~on Form 10-K~~ that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

ITEM 9B. OTHER INFORMATION

None.

6971

PART III

ITEM 10. DIRECTORS, ~~AND~~ EXECUTIVE OFFICERS OFAND ~~THE~~CORPORATE ~~REGISTRANT~~GOVERNANCE

The following table provides certain information about each of the current directors and executive officers of Holdings and Graphics (ages as of March 31, ~~2006~~2007). All directors hold office until their successors are duly elected and qualified.

Name	Age		Position with Graphics and/or Holdings
Stephen M. Dyott		5455	Chairman, President of Holdings, Chief Executive Officer and Director
Kathleen A. DeKam		4546	President, ~~Print and Premedia Services~~Graphics
Patrick W. Kellick		4849	Senior Vice President/Chief Financial Officer and Secretary
Stuart R. Reeve		4243	President, New Business Development
Denis S. Longpré		5152	Executive Vice President, Sales
Eric T. Fry		3940	Director
Michael C. Hoffman		4344	Director
Hwan-Yoon Chung		32	Director
Hwan-Yoon F. Chung		33	Director

Stephen M. Dyott has been the Chairman and Chief Executive Officer of Graphics and Holdings since September 1996, President of Holdings since February 1995, ~~President of Graphics since 1991~~ and Director of Graphics and Holdings since September 1994. Mr. Dyott was President of Graphics from 1991 to 2007, Chief Operating Officer of Holdings from February 1995 to September 1996 and Chief Operating Officer of Graphics from 1991 to September 1996. Prior to joining Graphics, Mr. Dyott was the Vice President and General Manager - — Flexible Packaging of American National Can Company (“ANCC”) from 1988 to 1991 and the Vice President and General Manager — Tube Packaging of ANCC from 1985 to 1987.

Kathleen A. DeKam has been President, ~~Print~~of ~~and~~Graphics ~~Premedia Services~~ since ~~2004~~2007. Prior to ~~2004~~2007, Ms. DeKam was the President of Print and Premedia Services from 2004 to 2007, President of Premedia Services from 1998 to 2004, the Vice President, of Human Resources of Premedia Services from 1996 to 1998, Director, of Human Resources of Premedia Services from 1995 to 1996 and Manager, of Human Resources for various print plants of Graphics from 1986 to 1995.

Patrick W. Kellick has been ~~Secretary~~President of Graphics Finance, since 2006, Secretary of Graphics and Holdings since 2005 and ~~has been~~ the Senior Vice President and Chief Financial Officer of Holdings and Graphics since 2002. ~~and~~Mr. Kellick was Assistant Secretary of Holdings and Graphics from 1995 to 2005. Prior to 2002, Mr. Kellick was the Senior Vice President/Corporate Controller of Holdings and Graphics from 1997 to 2002, Vice President/Corporate Controller of Holdings and Graphics from 1989 to 1997 and Corporate Controller of Graphics from 1987 to 1989. Prior to joining Holdings and Graphics, he served in various financial positions with Williams Precious Metals (a division of Brush Wellman, Inc.) from 1984 to 1987, including Chief Financial Officer from 1986 to 1987 and was an auditor with KPMG from 1979 to 1984.

Stuart R. Reeve has been the President, New Business Development since 2003. Prior to 2003, Mr. Reeve served as President, Retail and Newspaper Services of Graphics from 2002 to 2003, Executive Vice President, Operations of Graphics from 1999 to 2002, Executive Vice President, Sales and Marketing of Graphics from 1997 to 1999, Senior Vice President, Commercial Sales of Graphics from 1995 to 1997, Vice President Midwest Sales — of Graphics from 1994 to 1995, Vice President West Sales — of Graphics from 1991 to 1994 and as a Sales Executive of Graphics from 1989 to 1991.

Denis S. Longpré has been Executive Vice President, of Sales since 2004. Prior to 2004, Mr. Longpré served as Senior Vice President, Sales of Graphics from 2003 to 2004, Area Vice President, Mid-Atlantic Sales of Graphics from 1995 to 2003, Vice President, Canada/New England Sales of Graphics from 1993 to 1995 and as Sales Manager-Canada of Graphics from 1992 to 1993.

Eric T. Fry has been a Director of Holdings and Graphics since 1996. Mr. Fry has been a Managing Director of Metalmark Capital LLC since its formation in 2004. Prior to joining Metalmark, he was a Managing Director of Morgan Stanley & Co. Incorporated (“MS & Co.”) and Morgan Stanley Capital Partners from 2002 to 2004, and Executive Director of Morgan Stanley Capital Partners from 1998 to 2001. He joined MS & Co. initially in 1989. Mr. Fry serves as a Director of Mericap Credit Corporation, EnerSys, Vanguard Health Systems, Direct Response Corporation, and Homesite Group, Inc. ~~and The Underwriter Group Limited.~~

7072

Michael C. Hoffman has been a Director of Holdings and Graphics since 2003. Mr. Hoffman has been a Managing Director of Metalmark Capital LLC since its formation in 2004. Prior to joining Metalmark, he was a Managing Director of Morgan Stanley Capital Partners from 1998 to 2004. He joined MS & Co. in 1986 and worked in the firm’s Strategic Planning Group prior to joining Morgan Stanley Private Equity in 1990. Mr. Hoffman is a Director of Aventine Renewable Energy, Inc. and ~~Enersys~~ EnerSys, and is a former Director of Jefferson Smurfit Corporation and eAccess Limited.

Hwan-Yoon F. Chung has been a Director of Holdings and Graphics since 2004. Mr. Chung has been a Principal of Metalmark Capital LLC since its formation in 2004. Prior to joining Metalmark, he was an Executive Director of Morgan Stanley Capital Partners from 2003 to 2004. He joined Morgan Stanley Capital Partners in 1998. Prior to joining Morgan Stanley Capital Partners, he was an Associate in the Restructuring and Reorganization Group at the Blackstone Group L.P. Mr. Chung serves as a Director of EnerSys.

Code of Ethics

We have adopted a code of ethics that applies to our principal executive officer, principal financial officer, principal accounting officer ~~or controller~~ and all other employees. We will provide a copy of the code of ethics to any person, without charge, upon written request made to our Corporate Secretary at American Color Graphics, Inc., 100 Winners Circle, Suite 300, Brentwood, ~~Tennessee~~ Tennessee 37027.

Audit Committee Financial Expert

We are not required to maintain an audit committee or an audit committee financial expert as we do not have exchange listed securities. However, many of the functions of an audit committee are performed by the Company’s Board of Directors.

ITEM 11. EXECUTIVE COMPENSATION

Summary Compensation Table

The following table presents information concerning compensation for services to Holdings and Graphics during Fiscal Years 2006, 2005 and 2004 of the Chief Executive Officer and the four other most highly compensated executive officers who we refer to as the Named Executive Officers of Holdings and/or Graphics.

Summary Compensation Table

								Long-Term Compensation
		Annual Compensation						Awards				Payouts
										Securities
						Other				Under-
						Annual		Restricted		lying				All Other
Name and Principal						Compen-		Stock		Options/		LTIP		Compen-
Position	Period	Salary		Bonus		sation		Award(s)		SARs (#)		Payouts (a)		sation (b)
Stephen M. Dyott	Fiscal Year 2006	$	575,000	$	275,000		—		—		—		—	$	497,363
Chairman, President,	Fiscal Year 2005	$	575,000	$	—		—		—		—		—		—
Chief Executive	Fiscal Year 2004	$	575,000	$	325,000		—		—		—	$	2,362,797		—
Officer & Director
Kathleen A. DeKam	Fiscal Year 2006	$	350,000	$	225,000		—		—		1,702		—		—
President, Print and	Fiscal Year 2005	$	324,039	$	—		—		—		—		—		—
Premedia Services	Fiscal Year 2004	$	275,000	$	75,000		—		—		—		—		—
Patrick W. Kellick	Fiscal Year 2006	$	325,000	$	225,000		—		—		802		—	$	175,269
Senior Vice President,	Fiscal Year 2005	$	304,231	$	—		—		—		—		—		—
Chief Financial Officer &	Fiscal Year 2004	$	265,000	$	100,000		—		—		—	$	219,377		—
Secretary
Stuart R. Reeve	Fiscal Year 2006	$	350,000	$	125,000		—		—		—		—	$	117,168
President, New Business	Fiscal Year 2005	$	350,000	$	—		—		—		—		—		—
Development	Fiscal Year 2004	$	350,000	$	50,000		—		—		—		—		—
Denis S. Longpré	Fiscal Year 2006	$	275,000	$	125,000		—		—		—		—		—
Executive Vice President	Fiscal Year 2005	$	302,609	$	25,000		—		—		—		—		—
Sales	Fiscal Year 2004	$	213,566	$	52,262		—		—		—		—		—

(a)		Represents a gain recognized from the cancellation of all outstanding options to purchase shares of preferred stock of Holdings held by certain key officers as a part of the refinancing transaction entered into on July 3, 2003.
(b)		See “—Supplemental Executive Retirement Plan” below.

The following table presents information concerning the options granted to the Named Executive Officers during the last fiscal year.

Option/SAR Grants in Last Fiscal Year

Alternative

To (f) and (g)

Individual Grants

Grant Date Value

% of Total

Number of

Options/ SARs

Securities

Granted to

Grant

Underlying

Employees

Exercise or Base

Date

Options/SARs

in Fiscal Year

Price

Expiration

Present

Name

Granted (#)

2006

($/sh)

Date

Value ($)

Common Stock Option Plans

Kathleen A. DeKam

1,702

0.01

12/05/2015

)

Patrick W. Kellick

802

0.01

12/05/2015

)

(a) At March 31, 2006, we believe the market value of common stock was $0, therefore no present value is calculated.

The following table presents information concerning the fiscal year-end value of unexercised stock options held by the Named Executive Officers.

Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year-End Option/SAR Values

Number of Securities

Value of Unexercised

Underlying Unexercised

In-the-Money Options/ SARs at

Shares Acquired

Value

Options/ SARs at 3/31/06

3/31/06 Exercisable/Unexercisable

on Exercise (#)

Realized($)

Exercisable/Unexercisable (#)

($)

Common Stock Option Plans (a)

Stephen M. Dyott

—

0/0

)

Kathleen A. DeKam

—

402.25 / 1,702.00

)

Patrick W. Kellick

—

675.00 / 1,027.00

)

Stuart R. Reeve

—

380.25 / 90.00

)

Denis S. Longpré

—

750.00/0

)

(a) Holdings’ common stock has not been registered or publicly traded and therefore, a public market price of the stock is not available. At March 31, 2006 we believe the fair market value to be $0 per share of Common Stock.

Pension Plan

Graphics sponsors the American Color Graphics, Inc. Salaried Employees’ Pension Plan (the “Pension Plan”), a defined benefit pension plan covering full-time salaried employees of Graphics who had at least one year of service as of December 31, 1994.

In October 1994, the Board of Directors approved an amendment to the Pension Plan that resulted in the freezing of additional defined benefits for future services under such plan effective January 1, 1995 (see note 10 to our consolidated financial statements appearing elsewhere in this Report).

At March 31, 2006, the following Named Executive Officers were vested in the Pension Plan and had the following amounts of credited service (original hire date through January 1, 1995) and annual benefit payable upon retirement at age 65 under the Pension Plan: Stephen M. Dyott (3 years, 3 months; $8,220), Kathleen A. DeKam (8 years, 4 months; $4,556), Patrick W. Kellick (6 years, 5 months; $11,456) and Stuart R. Reeve (5 years, 4 months; $9,185) .

The basic benefit payable under the Pension Plan is a five-year certain single life annuity equivalent to (a) 1% of a participant’s “final average monthly compensation” plus (b) 0.6% of a participant’s “final average monthly compensation” in excess of 40% of the monthly maximum Social Security wage base in the year of retirement multiplied by years of credited service (not to exceed 30 years of service). For purposes of the Pension Plan, “final average compensation” (which, for the Named Executive Officers, is reflected in the salary and bonus columns of the Summary Compensation Table) means the average of a participant’s five highest consecutive calendar years of total earnings (which includes bonuses) from the last 10 years of service. The maximum monthly benefit payable from the Pension Plan is $5,000.

The basic benefit under the Pension Plan is payable upon completion of five years of vesting service and retirement on or after attaining age 65. Participants may elect early retirement under the Pension Plan upon completion of five years of vesting service and the attainment of age 55, and receive the basic benefit reduced by 0.4167% for each month that the benefit commencement date precedes the attainment of age 65. A deferred vested benefit is available to those participants who separate from service before retirement provided the participant has at least five years of vesting service.

Supplemental Executive Retirement Plan

In July 2005, we amended and restated the Supplemental Executive Retirement Plan (the “Amended and Restated Supplemental Executive Retirement Plan”), which is a defined benefit plan. At March 31, 2006, the plan included one Named Executive Officer (Kathleen A. DeKam) and one former executive. After five years of vesting service (through July 5, 2010) the plan provides that Ms. DeKam will be eligible for an annual benefit payable upon retirement on or after attaining age 65, or the present value of such benefit at an earlier date under certain circumstances. As specified in a schedule attached to the plan, at March 31, 2006, Kathleen A. DeKam had a $50,000 annual benefit payable at age 65.

~~The~~11. ~~following~~EXECUTIVE ~~three Named Executive Officers received payments which represented the present value~~COMPENSATION ~~of 100% of their vested benefit under the Amended and Restated Supplemental Executive Retirement Plan in July 2005 in the following amounts:~~

Stephen M. Dyott	$	497,363
Patrick W. Kellick	$	175,269
Stuart R. Reeve	$	117,168

Compensation Discussion and Analysis

AsThe afollowing ~~result~~discussion relates to the compensation of ~~these~~Stephen ~~payments,~~M. ~~the~~Dyott ~~above~~(our ~~Named~~Chairman and Chief Executive ~~Officers~~Officer), ~~have~~Kathleen noA. ~~further~~DeKam ~~current~~(President, orGraphics), Patrick W. Kellick (Senior Vice ~~future~~President, ~~vested~~Chief ~~interest~~Financial inOfficer ~~benefits~~and ~~under~~Secretary), ~~the~~Stuart ~~Amended~~R. Reeve (President, New Business Development) and ~~Restated~~Denis ~~Supplemental~~S. Longpré (Executive ~~Retirement~~Vice President, Sales). These individuals were our ~~Plan~~five most highly-compensated executive officers as of March 31, 2007 and are referred to herein as the “Named Executive Officers” or the “Executives”.

~~Compensation~~OVERALL ofOBJECTIVES ~~Directors~~OF EXECUTIVE COMPENSATION PROGRAM

~~Directors~~Our ofcompensation ~~Holdings~~program for our Named Executive Officers is designed to attract, motivate and retain ~~Graphics~~highly doqualified ~~not~~individuals ~~receive~~with athe ~~salary~~leadership orskills annecessary ~~annual~~to ~~retainer~~achieve ~~for~~our ~~their~~annual ~~services~~and ~~but~~long-term ~~are~~business ~~reimbursed~~objectives. ~~for~~Our ~~expenses~~executive ~~incurred~~compensation ~~with~~program ~~respect~~is tobased ~~such~~on ~~services.~~the following underlying principles:

~~Employment~~• ~~Agreements~~ executives’ total direct compensation (consisting of salary, annual incentive compensation and long-term equity incentive opportunities) should be competitive; • a substantial portion of executives’ compensation should be at risk and should vary based on our financial and operational performance as well as the executives’ level of responsibility and individual performance; and • compensation should be designed to reward both individual and collective achievement in order to align the interests of management with those of our shareholders.

OnELEMENTS ~~October 19,~~OF ~~1998,~~EXECUTIVE ~~Graphics entered into an employment agreement with Stephen M. Dyott, which we~~COMPENSATION refer to as the Dyott Employment Agreement, which replaced the agreement entered into by Graphics and Mr. Dyott on April 3, 1993. The Dyott Employment Agreement has an initial term of three years. The term under the Dyott Employment Agreement is automatically extended for one-year periods absent at least one year’s written notice of an intent by either party not to renew. The Dyott Employment Agreement provides for the payment of an annual salary, annual bonus and all other employee benefits and perquisites made available to Graphics’ senior executives generally.

~~Under~~The ~~the~~executive ~~Dyott~~compensation ~~Employment~~program ~~Agreement, if the employee’s employment~~ is ~~terminated~~comprised ~~by Graphics “without cause” (“cause”, as defined in the Dyott Employment Agreement, means a material breach by the employee~~ of ~~his obligations under~~ the ~~Dyott~~following ~~Employment Agreement; continued failure or refusal~~elements: of the employee to substantially perform his duties to Graphics; a willful and material violation of Federal or state law applicable to Graphics or the employee’s conviction of a felony or perpetration of a common law fraud; or other willful misconduct that is injurious to Graphics) or by the employee for “good reason” (which, as defined in the Dyott Employment Agreement, means a decrease in base pay or a failure by Graphics to pay material compensation due and payable; a material diminution of the employee’s responsibilities or title; a material change in the employee’s principal employment location; or a material breach by Graphics of a material term of the Dyott Employment Agreement), the employee will be entitled to a pro rata portion of the bonus for the year employment was terminated payable at the time bonuses are generally paid and salary continuation payments (and certain other benefits) for a period of three years beginning on the date of termination. The Dyott Employment Agreement contains confidentiality obligations that survive indefinitely, non-solicitation obligations that end on the second anniversary of the date employment has ceased and non-competition obligations that end on the third anniversary of the date employment has ceased.

On• ~~November 19,~~Direct ~~2000~~compensation, ~~Graphics~~consisting entered into a severance agreement with Kathleen A. DeKam which provides that in the event the employee’s employment is terminated by Graphics without “cause”, as defined above (but also including as “cause” competition with Graphics), or by the employee for “good reason”, as defined above, the employee will be entitled to a pro rata portion of the bonus for the year employment was terminated payable at the time bonuses are generally paid and salary and benefit continuation for two years following termination. The severance agreement contains confidentiality obligations that survive indefinitely and non-solicitation and non-competition obligations that end on the second anniversary of the date employment ceased. :

~~Graphics~~- isBase also party to a severance agreement dated as of October 3, 1996 and amended on August 30, 2004, with Patrick Kellick, which provides that in the event the employee’s employment is terminated by Graphics without “cause”, as defined above (but also including as “cause” competition with Graphics), or by the employee for “good reason”, as defined above, the employee will be entitled to a pro rata portion of the bonus for the year employment was terminated payable at the time bonuses are generally paid and the employee will be entitled to salary; ~~and~~- ~~benefit continuation~~Annual ~~for~~incentive ~~two~~opportunities; ~~years following termination. The severance agreement contains confidentiality obligations that survive indefinitely~~ and ~~non~~-~~solicitation~~ ~~and non~~Long-~~compete~~term ~~obligations~~incentives ~~that~~through ~~end on~~ the ~~second~~issuance ~~anniversary~~ of ~~the~~stock ~~date employment ceased~~options.

	•		Other compensation and benefits, consisting of participation in our broad-based employee benefit plans

	•		Severance benefits

	•		Special retention bonuses

Consistent with the principles outlined above, a substantial portion of total direct compensation varies based upon the achievement of our financial and operational objectives, as well as an executive’s individual performance level. We do not have a pre-established policy or target for allocating between fixed and variable compensation or among the different types of variable compensation. Instead, we strive to provide fixed pay (base salary) at levels sufficient to attract and retain qualified executives. The remaining portion of total direct compensation is comprised of variable compensation in the form of annual incentive compensation and long-term equity incentives. We believe that our executives should be rewarded for achieving annual performance goals, but that consistent and sustained performance is the single most important influence on long-term shareholder value. Additionally, we believe that the interests of the Named Executive Officers should be aligned with the interests of our shareholders.

Base Salaries

We offer all our Named Executive Officers an annual base salary to compensate them for services rendered during the year. Competitive base salaries are essential for the attraction and retention of talented executives. Salaries are reviewed periodically and adjusted by Mr. Dyott through consultation with our Board of Directors. Mr. Dyott’s salary is determined by our Board of Directors. Changes to base salaries, if any, are based upon both individual and overall company performance. We also periodically review competitor’s salaries for similar executive positions to ensure maintenance of a competitive compensation scale. There were no increases to the base salaries of our Named Executive Officers over the two fiscal year period ended March 31, 2007, except for Mr. Longpré.

OnAnnual ~~August 1,~~Cash ~~1999,~~Incentive ~~Graphics entered into a severance agreement with Stuart R. Reeve which provides~~Compensation that in the event the employee’s employment is terminated by Graphics without “cause”, as defined above (but also including as “cause” competition with Graphics), or by the employee for “good reason”, as defined above, the employee will be entitled to a pro rata portion of the bonus for the year employment was terminated payable at the time bonuses are generally paid and salary and benefit continuation for two years following termination. Such base salary and benefit payments will be reduced, after the first twelve months from the date of termination, to the extent the employee receives compensation from another employer. The severance agreement contains confidentiality obligations that survive indefinitely and non-solicitation and non-competition obligations that end on the second anniversary of the date employment has ceased.

OnOur ~~January 14,~~Board ~~2000,~~of ~~Graphics~~Directors ~~entered~~annually ~~into~~adopts a ~~severance~~bonus ~~agreement~~plan ~~with~~and ~~Denis~~performance S.criteria ~~Longpré~~upon which ~~provides~~ ~~that in~~ the ~~event~~annual bonuses ~~the~~of ~~employee’s~~our ~~employment~~executives isare ~~terminated~~based. byPursuant ~~Graphics~~to ~~without~~their ~~“cause”~~employment agreements, asthe minimum annual ~~defined~~target ~~above~~bonus ~~(but~~is ~~also~~75% ~~including~~of asbase ~~“cause”~~salary ~~competition~~(as ~~with~~defined ~~Graphics~~therein), orfor Mr. Dyott byand ~~the~~50% ~~employee~~of ~~for “good~~base ~~reason”,~~salary (as defined ~~above,~~therein) ~~the~~for ~~employee~~Ms. DeKam ~~will~~and beMr. Kellick. ~~entitled~~There toare ano ~~pro~~minimum ~~rata~~target ~~portion~~bonus oflevels ~~the bonus~~ for ~~the~~our ~~year~~other ~~employment~~Named ~~was~~Executive ~~terminated~~Officers. ~~payable~~The minimum atannual ~~the~~target ~~time~~bonus ~~bonuses~~levels ~~are~~were ~~generally~~determined ~~paid~~based ~~and~~upon ~~salary and~~our ~~benefit~~Named ~~continuation~~Executive ~~for~~Officers’ responsibilities ~~one year following termination. Such base salary~~ and ~~benefit~~their ~~payments will~~individual becontribution ~~reduced,~~ to the ~~extent~~company. ~~the~~Any ~~employee~~other ~~receives~~executive ~~compensation~~bonuses ~~from~~are discretionary ~~another~~and ~~employer.~~are ~~The severance~~determined ~~agreement~~based ~~contains~~upon ~~confidentiality~~individual ~~obligations~~and ~~that~~overall ~~survive~~company ~~indefinitely~~performance. ~~and~~There were ~~non-solicitation~~no ~~and~~incentive ~~non-competition~~compensation ~~obligations~~bonuses ~~that~~paid ~~end~~to on the ~~anniversary~~Named ofExecutive Officers ~~the~~for ~~date~~Fiscal ~~employment has~~Year ~~ceased~~2007.

~~Compensation~~Long-term ~~Committee~~Incentives ~~Interlocks~~through ~~and~~the ~~Insider~~Issuance ~~Participation~~of inStock ~~Compensation Decisions~~Options

WeOur doBoard ~~not~~of ~~maintain~~Directors amay, ~~formal~~in ~~compensation~~its ~~committee. Compensation~~discretion, ~~decisions~~issue ~~are~~grants ~~made~~of bycommon ~~the~~stock ~~Board~~options of ~~Directors~~Holdings into the ~~consultation~~Executives, ~~with~~as ~~the~~well ~~Chief~~as ~~Executive Officer~~to other employees.

Other Compensation and Benefits

The Executives are eligible to participate in the benefit plans available to our eligible employees, including health care, disability, and life insurance programs as well as a tax-qualified 401(k) plan, on the same basis as other eligible employees. We also provide certain Executives with automobile allowances.

Severance Benefits

As described in detail below under “-Termination and Change in Control Payments,” employment agreements for Mr. Dyott, Ms. DeKam and Mr. Kellick, and severance agreements for Mr. Reeve and Mr. Longpré, specify certain severance benefits to be paid in the event of an Executive’s involuntary termination of employment without “Cause” or the Executive’s resignation for “Good Reason”. We have entered into these agreements because we believe that protecting Executives in the event of a termination without Cause or upon their resignation for Good Reason is necessary to attract and retain the talented executives we need to run our business.

Special Retention Bonuses

We paid special retention bonuses to the Named Executive Officers in April 2007, as a result of retention bonus agreements entered into on July 1, 2005, in the following amounts: Mr. Dyott ($325,000); Ms. DeKam ($225,000); Mr. Kellick ($225,000); Mr. Reeve ($125,000); and Mr. Longpré ($125,000). These special retention bonuses were payable pursuant to the retention bonus agreements and such payments were made as a result of the Named Executive Officer having remained in the active employ of the Company through March 31, 2007, subject to the specific terms and provisions of the agreements.

In addition, we paid, in April 2007, special retention bonuses to the Named Executive Officers in the following amounts: Mr. Dyott ($325,000); Ms. DeKam ($225,000); Mr. Kellick ($225,000); Mr. Reeve ($125,000); and Mr. Longpré ($125,000). These additional special retention bonuses were payable pursuant to the employment agreements of Messrs. Dyott and Kellick and Ms. DeKam (see “Employment Agreements with Named Executive Officers” below) and retention bonus agreements entered into on April 19, 2007 for Mr. Reeve and Mr. Longpré. If the Named Executive Officer resigns without Good Reason or the Named Executive Officer’s employment is terminated for Cause prior to April 1, 2008, the Named Executive Officer is required to repay the special retention bonus within five business days of termination of employment, together with interest from the date the Named Executive Officer received the bonus (calculated at the prime rate as published in The Wall Street Journal on the date the Named Executive Officer received the bonus) to the date of repayment. These special retention bonuses were paid as an incentive to retain our key executives.

For Messrs. Dyott and Kellick and Ms. DeKam, “Cause” and “Good Reason” have the meanings described below under “-Termination and Change in Control Payments”. For purposes of the special retention bonus agreements for Mr. Reeve and Mr. Longpré:

~~ITEM~~• ~~12.~~“Cause” ~~SECURITY~~means ~~OWNERSHIP~~termination OFof ~~CERTAIN~~employment ~~BENEFICIAL~~by ~~OWNERS~~Graphics ~~AND~~because ~~MANAGEMENT AND RELATED STOCKHOLDER MATTERS~~of:

~~The~~- ~~following~~any ~~table~~act ~~sets~~or ~~forth~~omission ~~information,~~that asconstitutes ofa ~~March 31,~~material ~~2006,~~breach ~~concerning~~by the ~~persons~~Executive ~~having beneficial~~of ~~ownership~~any of ~~more~~his ~~than~~obligations ~~five~~under ~~percent~~the ofretention bonus agreement; - the ~~capital~~continued ~~stock~~willful failure or refusal of ~~Holdings~~the ~~and~~Executive to substantially perform the ~~beneficial ownership~~duties ~~thereof~~reasonably byrequired ~~each~~of ~~director~~him as an employee of Graphics; - any willful and ~~Named~~material violation by the Executive ~~Officer~~of any Federal or state law or regulation applicable to the business of Graphics, Holdings ~~and~~or byany ~~all~~of ~~directors~~their ~~and executive~~respective ~~officers~~subsidiaries, or the Executive’s conviction of ~~Holdings~~a asfelony, or any willful perpetration by the Executive of a ~~group.~~common ~~Each~~law ~~holder~~fraud ~~below~~that ~~has~~is ~~sole~~materially ~~voting~~injurious ~~power~~to ~~and~~Graphics; ~~sole investment~~or ~~power~~- ~~over~~any other willful misconduct by the ~~shares~~Executive ~~designated~~which ~~below.~~ is materially injurious to the financial condition or business reputation of, or is otherwise materially injurious to, Graphics, Holdings or any of their respective subsidiaries or affiliates;

	Shares of
	Holdings
Name	Common Stock		Percent of Class
Morgan Stanley Capital Partners III, L.P.		22,497.9		14.2
MSCP 892 Investors, L.P. c/o Metalmark Capital LLC 1177 Avenue of the Americas New York, NY 10036
Morgan Stanley Capital Investors, L.P.		835.1		0.5
The Morgan Stanley Leveraged Equity Fund II, L.P.		59,450.0		37.6
1585 Broadway New York, NY 10036
First Plaza Group Trust		17,000.0		10.8
c/o Mellon Bank, N.A. 1 Mellon Bank Center Pittsburgh, PA 15258
Directors and Named Executive Officers:
Stephen M. Dyott		14,970.0		9.5
Kathleen A. DeKam (a)		1,809.0		1.1
Patrick W. Kellick (b)		2,484.0		1.6
Stuart R. Reeve (c)		2,610.0		1.6
Denis S. Longpré (d)		750.0		0.5
Eric T. Fry		—		—
Michael C. Hoffman		—		—
Hwan-Yoon Chung		—		—
All directors and executive officers as a Group (eight persons, including Messrs. Dyott, Kellick, Reeve and Longpré and Ms. DeKam) (e)		22,623.0		14.1

			provided, however, (x) the good faith performance by the Executive of the duties required of him pursuant to the retention bonus agreement, or (y) any act or omission of the Executive based upon authority given by or pursuant to an action of the Board of Directors or upon the advice of counsel for Graphics, is conclusively presumed not to be willful or to constitute a failure or refusal on the part of the Executive. In addition, if any such Cause relates to the Executive’s obligations under the retention bonus agreement, Graphics must provide the Executive written notice of its intention to terminate and of the grounds for such termination, and the Executive has 20 business days to cure such Cause to the reasonable satisfaction of the Board (or in the event such Cause is not susceptible to cure within such period, Cause will not exist if the Executive has taken all reasonable steps within such period to cure such Cause, to the reasonable satisfaction of the Board, as promptly as practicable thereafter).

	•		“Good Reason” means any of the following, without the Executive’s prior written consent:

(- a) ~~Includes~~decrease ~~402.25~~in ~~common~~the ~~stock~~Executive’s ~~options~~base ~~exercisable~~rate ~~within~~of 60compensation ~~days.~~or ~~(b)~~a ~~Includes~~failure ~~675.00~~by ~~common~~Graphics ~~stock~~to ~~options~~pay ~~exercisable~~material ~~within~~compensation 60due ~~days.~~and ~~(c)~~payable ~~Includes~~to ~~470.25~~the ~~common~~Executive ~~stock~~in ~~options~~connection ~~exercisable~~with ~~within~~his 60employment; ~~days.~~- ~~(d)~~a ~~Includes~~material ~~750.00~~diminution ~~common~~of ~~stock~~the ~~options~~responsibilities ~~exercisable~~or ~~within~~title

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Filing Compare · AMERICAN COLOR GRAPHICS INC