American Color Graphics 10-Q 2008 Q3 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended December 31, 2007

or

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

For the transition period from ______________________ to _______________________

Commission file number 33-97090

ACG HOLDINGS, INC.

(Exact Name of Registrant as Specified in Its Charter)

Delaware	62-1395968
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)
100 Winners Circle, Brentwood, Tennessee	37027
(Address of Principal Executive Offices)	(Zip Code)

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

AMERICAN COLOR GRAPHICS, INC.

(Exact Name of Registrant as Specified in Its Charter)

New York	16-1003976
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)
100 Winners Circle, Brentwood, Tennessee	37027
(Address of Principal Executive Offices)	(Zip Code)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yeso       Nox

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 filero                  Accelerated filero                 Non-accelerated filerx

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yeso       Nox

ACG Holdings, Inc. has 175,532 shares outstanding of its Common Stock, $.01 Par Value, as of January 31, 2008 (all of which are privately owned and not traded on a public market).

INDEX

	PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Condensed Consolidated Balance Sheets as of December 31, 2007 and March 31, 2007		3
Condensed Consolidated Statements of Operations for the Three Months Ended December 31, 2007 and 2006		5
Condensed Consolidated Statements of Operations for the Nine Months Ended December 31, 2007 and 2006		6
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended December 31, 2007 and 2006		7
Notes to Condensed Consolidated Financial Statements		8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.		21
Item 3. Quantitative and Qualitative Disclosures About Market Risk.		29
Item 4. Controls and Procedures.		29
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.		30
Item 6. Exhibits.		30
SIGNATURES		31
EXHIBIT INDEX		32
Ex-10.1(f) Sixth Amendment to May 5, 2005 Amended and Restated Credit Agreement
Ex-10.11(b) Amendment, dated February 5, 2008, to Amended and Restated American Color Graphics, Inc. Supplemental Executive Retirement Plan
Ex-10.31 Second Amendment and Tempory Waiver Agreement
EX-12.1 STATEMENT RE: COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
EX-31.1 SECTION 302 CERTIFICATION OF THE CEO
EX-31.2 SECTION 302 CERTIFICATION OF THE CFO
EX-32.1 SECTION 906 CERTIFICATION OF THE CEO & CFO

2

ACG HOLDINGS, INC.

Condensed Consolidated Balance Sheets

(In thousands)

	December 31,			March 31,
	2007			2007
	(Unaudited)
Assets
Current assets:
Cash	$	—			—
Receivables:
Trade accounts, less allowance for doubtful accounts of $1,224 and $1,017 at December 31, 2007 and March 31, 2007, respectively		46,016			44,385
Other		3,034			2,645
Total receivables		49,050			47,030
Inventories		7,756			7,146
Deferred income taxes		623			962
Prepaid expenses and other current assets		5,207			4,914
Total current assets		62,636			60,052
Property, plant and equipment		304,879			296,556
Less accumulated depreciation		(228,002	)		(214,772	)
Net property, plant and equipment		76,877			81,784
Excess of cost over net assets acquired		66,548			66,548
Other assets		18,019			17,840
Total assets	$	224,080			226,224

See accompanying notes to condensed consolidated financial statements.

3

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

	December 31,			March 31,
	2007			2007
	(Unaudited)
Liabilities and Stockholders’ Deficit
Current liabilities:
Current portion of long-term debt and capital leases	$	379,851			352,110
Trade accounts payable		37,116			33,091
Accrued expenses		21,994			30,312
Income tax payable		28			487
Total current liabilities		438,989			416,000
Deferred income taxes		6,194			2,677
Other liabilities		48,790			52,499
Total liabilities		493,973			471,176
Commitments and contingencies (note 8)
Stockholders’ deficit:
Common stock, voting, $.01 par value, 5,852,223 shares authorized, 175,532 shares and 158,205 shares issued and outstanding at December 31, 2007 and March 31, 2007, respectively		2			2
Additional paid-in capital		2,038			2,038
Accumulated deficit		(258,758	)		(232,083	)
Other accumulated comprehensive loss, net of tax		(13,175	)		(14,909	)
Total stockholders’ deficit		(269,893	)		(244,952	)
Total liabilities and stockholders’ deficit	$	224,080			226,224

See accompanying notes to condensed consolidated financial statements.

4

ACG HOLDINGS, INC.

Condensed Consolidated Statements of Operations

(In thousands)

(Unaudited)

	Three Months Ended
	December 31,
	2007			2006
				(Restated)
Sales	$	118,892			120,065
Cost of sales		105,776			106,934
Gross profit		13,116			13,131
Selling, general and administrative expenses		6,498			6,724
Restructuring costs (benefit)		(250	)		51
Operating income		6,868			6,356
Other expense (income):
Interest expense		11,403			10,203
Interest income		(11	)		(43	)
Other, net		2,631			581
Total other expense		14,023			10,741
Loss before income taxes		(7,155	)		(4,385	)
Income tax expense (benefit):
Current		86			223
Deferred		(38	)		(85	)
Total income tax expense		48			138
Net loss	$	(7,203	)		(4,523	)

See accompanying notes to condensed consolidated financial statements.

5

ACG HOLDINGS, INC.

Condensed Consolidated Statements of Operations

(In thousands)

(Unaudited)

	Nine Months Ended
	December 31,
	2007			2006
				(Restated)
Sales	$	326,111			341,729
Cost of sales		291,646			303,805
Gross profit		34,465			37,924
Selling, general and administrative expenses		19,390			19,097
Restructuring benefit		(161	)		(105	)
Operating income		15,236			18,932
Other expense (income):
Interest expense		32,820			29,666
Interest income		(23	)		(93	)
Other, net		5,132			1,256
Total other expense		37,929			30,829
Loss before income taxes		(22,693	)		(11,897	)
Income tax expense (benefit):
Current		437			494
Deferred		3,545			(642	)
Total income tax expense (benefit)		3,982			(148	)
Net loss	$	(26,675	)		(11,749	)

See accompanying notes to condensed consolidated financial statements.

6

ACG HOLDINGS, INC.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

	Nine Months Ended
	December 31,
	2007			2006
				(Restated)
Cash flows provided (used) by operating activities:
Net loss	$	(26,675	)		(11,749	)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation		13,417			13,854
Amortization of other assets		17			32
Amortization of deferred financing costs		3,077			2,295
Deferred income tax expense (benefit)		3,545			(642	)
Increase (decrease) in working capital deficiency and other		4,228			(19,685	)
Net cash used by operating activities		(2,391	)		(15,895	)
Cash flows provided (used) by investing activities:
Purchases of property, plant and equipment		(7,069	)		(9,184	)
Proceeds from sales of property, plant and equipment		60			62
Other		(316	)		(135	)
Net cash used by investing activities		(7,325	)		(9,257	)
Cash flows provided (used) by financing activities:
Net increase in revolver borrowings		10,731			30,471
Proceeds from additional term loan borrowings		5,000			—
Repayment of capital lease obligations		(2,665	)		(2,813	)
Payment of deferred financing costs		(3,374	)		(2,506	)
Net cash provided by financing activities		9,692			25,152
Effect of exchange rates on cash		24			—
Net change in cash		—			—
Cash:
Beginning of period		—			—
End of period	$	—			—

See accompanying notes to condensed consolidated financial statements.

7

ACG HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Description of the Company

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

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and are in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. The operating results for the three and nine months ended December 31, 2007 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2008. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in the Company’s Form 10-K and 10-K/A for the fiscal year ended March 31, 2007.

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

2. Restatement of Financial Statements

On August 31, 2007, the Company filed its Annual Report on Form 10-K/A for the fiscal year ended March 31, 2007. This report included restated consolidated financial statements for the fiscal years ended March 31, 2007, 2006 and 2005. Accordingly, the prior year financial results for the three and nine months ended December 31, 2006 reflect the impact of the restatement.

The issues causing the restatement, noted above, included a correction of the Company’s accounting treatment of certain deferred financing costs and an adjustment to the Company’s accrued vacation liability calculation, and certain other corrections of individually immaterial errors including adjustments to the Company’s utility and restructuring liabilities. The revisions associated with this restatement increased the Company’s previously reported net loss during the three months ended December 31, 2006 by $69,000 and decreased the previously reported net loss during the nine months ended December 31, 2006 by $421,000.

The following condensed statements of operations reconcile previously reported and restated financial information for the three and nine months ended December 31, 2006:

8

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

	Three Months						Three Months
	Ended						Ended
	December 31,			Restatement			December 31,
	2006			Related			2006
	As Reported			Adjustments			Restated
Sales	$	120,065			—			120,065
Cost of sales(b)(c)(e)		106,947			(13	)		106,934
Gross profit		13,118			13			13,131
Selling, general and administrative expenses(a)(b)(e)		6,595			129			6,724
Restructuring costs(d)		—			51			51
Operating income		6,523			(167	)		6,356
Other expense (income):
Interest expense(a)		10,301			(98	)		10,203
Interest income		(43	)		—			(43	)
Other, net		581			—			581
Total other expense		10,839			(98	)		10,741
Loss before income taxes		(4,316	)		(69	)		(4,385	)
Income tax expense		138			—			138
Net loss	$	(4,454	)		(69	)		(4,523	)

(a)	The revised treatment of deferred financing costs resulted in an increase of $138,000 in selling, general and administrative expenses and a decrease of $98,000 in interest expense.
(b)	The adjustment related to the revision of the accrued vacation liability calculation resulted in an increase in cost of sales of $71,000 and a decrease in selling, general and administrative expenses of $8,000.
(c)	The adjustment related to the utility liability resulted in a decrease in cost of sales of $85,000.
(d)	The adjustment related to the restructuring liability resulted in a restructuring expense of $51,000.
(e)	Other immaterial adjustments resulted in a net increase in cost of sales of $1,000 and a net decrease in selling, general and administrative expenses of $1,000.

9

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

	Nine Months						Nine Months
	Ended						Ended
	December 31,			Restatement			December 31,
	2006			Related			2006
	As Reported			Adjustments			Restated
Sales	$	341,729			—			341,729
Cost of sales(b)(c)(e)		304,118			(313	)		303,805
Gross profit		37,611			313			37,924
Selling, general and administrative expenses(a)(b)(e)		18,840			257			19,097
Restructuring costs (benefit)(d)		—			(105	)		(105	)
Operating income		18,771			161			18,932
Other expense (income):
Interest expense(a)		29,926			(260	)		29,666
Interest income		(93	)		—			(93	)
Other, net		1,256			—			1,256
Total other expense		31,089			(260	)		30,829
Loss before income taxes		(12,318	)		421			(11,897	)
Income tax benefit		(148	)		—			(148	)
Net loss	$	(12,170	)		421			(11,749	)

(a)	The revised treatment of deferred financing costs resulted in an increase of $283,000 in selling, general and administrative expenses and a decrease of $260,000 in interest expense.
(b)	The adjustment related to the revision of the accrued vacation liability calculation resulted in an increase in cost of sales of $217,000 and a decrease in selling, general and administrative expenses of $23,000.
(c)	The adjustment related to the utility liability resulted in a decrease in cost of sales of $532,000.
(d)	The adjustment related to the restructuring liability resulted in a restructuring benefit of $105,000.
(e)	Other immaterial adjustments resulted in an increase in cost of sales of $2,000 and a decrease in selling, general and administrative expenses of $3,000.

3. Inventories

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

	December 31,		March 31,
	2007		2007
Paper	$	5,833		5,036
Ink		138		152
Supplies and other		1,785		1,958
Total inventories	$	7,756		7,146

10

4. Notes Payable and Long-Term Debt

*       *       *

On October 4, 2007, the Company announced that its Board of Directors had determined to conduct a review of its strategic options. The Company said it would work with its financial advisor, Lehman Brothers, in connection with the review. The Company said its strategic options could include, among other things, seeking to sell Holdings, seeking to exchange some or all of the 10% Notes for other securities of Holdings, seeking waivers or amendments from the requisite lenders under the Company’s bank credit facilities and the 10% Notes, seeking to incur additional indebtedness above currently permitted levels (if the requisite lenders under the Company’s existing bank credit facilities and the 10% Notes permit it), seeking to refinance the Company’s current bank credit facilities, or taking other actions that could have a material effect on the Company. The Company has considered, and will continue to consider, one or more of these options. The Company cannot provide any assurance that any such option will be pursued or can be accomplished or as to the timing or terms of any such action.

*       *       *

Covenant Compliance and Liquidity

At December 31, 2007, the Company was in compliance with the covenant requirements set forth in the 2005 Credit Agreement and the Receivables Facility, as amended, and the 10% Notes indenture. See the description elsewhere in this “Covenant Compliance and Liquidity” and in “Amendments to Credit Facilities” concerning (a) certain amendments and waivers under the 2005 Credit Agreement and the Receivables Facility that were entered into or granted by the lenders thereunder on June 13, 2007, August 31, 2007, November 14, 2007 and February 14, 2008, and (b) the agreement of holders of in excess of 90% of the aggregate principal amount of the 10% Notes to defer to March 15, 2008, the semi-annual payment of cash interest on the 10% Notes held by such holders, which would otherwise have been due on December 15, 2007, and the amendment of certain covenants in the 10% Notes indenture.

The Company anticipates that its primary needs for liquidity will be to conduct its business, meet debt service requirements, and make capital expenditures. The Company is continually working to improve its liquidity position. The Company believes, based on current forecasts prepared by its management, it will have sufficient liquidity to meet its forecasted requirements through March 13, 2008. The Company’s ability to maintain sufficient liquidity may be affected by events beyond its control. If the Company’s business does not generate cash from operations, or the Company does not otherwise maintain sufficient liquidity, in line with its management’s current forecasts for the period through March 13, 2008, the Company would be required to seek to take one or more additional actions sooner than March 13, 2008, to provide additional liquidity, which could include seeking to incur additional indebtedness above currently permitted levels. The Company can provide no assurance that any such action it may seek to take could be successfully accomplished or as to the timing or terms thereof.

On November 14, 2007, holders of in excess of 90% of the aggregate principal amount of the 10% Notes agreed with the Company to (a) defer to March 15, 2008, the semi-annual payment of cash interest on the 10% Notes held by such holders, which would otherwise have been due on December 15, 2007, and (b) amend certain covenants in the 10% Notes indenture. In consideration thereof, the Company issued to each such holder a senior second secured noninterest-bearing promissory note due March 15, 2008, of Graphics with a principal amount equal to the sum of the amount of the cash interest payment deferred on the 10% Notes held by such holder and a consent fee equal to 1% of the

principal amount of the 10% Notes held by such holder (collectively, the “2007 Promissory Notes”). Such 2007 Promissory Notes are fully and unconditionally guaranteed by Holdings.

On November 14, 2007, certain provisions of the 2005 Credit Agreement and Receivables Facility were also amended or waived to (a) provide for an additional $5 million term loan to Graphics under the 2005 Term Loan Facility, (the “Supplemental Term Loan”), and (b) temporarily waive until February 15, 2008, any default under such bank credit facilities resulting from non-compliance with the first lien coverage ratio covenant in each such bank credit facility as of September 30, and December 31, 2007, for all purposes of such bank credit facilities (including, without limitation, for the purpose of determining Graphics’ entitlement to make additional borrowings under either such bank credit facility on or prior to such date). Such amendment and waiver also (a) amended the covenant in each of the Company’s bank credit facilities requiring Graphics to maintain certain levels of minimum total liquidity and (b) temporarily waived until February 15, 2008, Graphics’ noncompliance with its obligation thereunder to deliver the Company’s restated consolidated financial statements for the fiscal year ended March 31, 2007 accompanied by a report or opinion of the Company’s independent certified public accountants that was not subject to any “going concern” explanatory paragraph.

The Report of Independent Registered Public Accounting Firm accompanying the Company’s restated consolidated financial statements included in the Company’s Report on Form 10K/A dated August 31, 2007, contains a “going concern” explanatory paragraph.

On February 14, 2008, certain provisions of the Company’s 2005 Credit Agreement and Receivables Facility were also amended or waived to temporarily waive through and including March 13, 2008, any default under such bank credit facilities resulting from noncompliance with the first lien coverage ratio covenant in each such bank credit facility as of September 30, and December 31, 2007, for all purposes of such bank credit facilities (including, without limitation, for the purpose of determining Graphics’ entitlement to make additional borrowings under either such bank credit facility on or prior to such date). Such amendment and waiver also (a) waived through and including March 13, 2008, the requirement that Graphics repay the $5.0 million Supplemental Term Loan, which was consummated on November 14, 2007, (b) amended certain terms relating to borrowings thereunder, including, without limitation, (i) requiring that all new loans be base rate or prime rate loans, (ii) amending the rates applicable to borrowings to, in effect, increase such rates prospectively, and (iii) changing required interest payment dates on base rate or prime rate loans from quarterly to monthly, (c) requires that the Company maintain certain daily levels of minimum total availability under its bank credit facilities going forward (and deletes the total liquidity maintenance covenant in each such facility), and (d) waived through and including March 13, 2008, Graphics’ noncompliance with its obligation thereunder to deliver the Company’s restated consolidated financial statements for the fiscal year ended March 31, 2007 accompanied by a report or opinion of the Company’s independent certified public accountants that was not subject to any “going concern” explanatory paragraph. The Company paid consenting lenders an aggregate amendment fee of $650,000.00 in connection with such amendments.

The Company does not believe it is probable that it will be in compliance with the first lien coverage ratio covenants under the 2005 Credit Agreement or the Receivables Facility after March 13, 2008. Based on current forecasts prepared by the Company’s management, in order for the Company to have sufficient liquidity to meet its requirements for liquidity after March 13, 2008, including payment of the principal of and accrued interest on the Supplemental Term Loan on March 14, 2008, and payment of the principal of the 2007 Promissory Notes on March 15, 2008, the Company would have to take one or more additional actions to improve its liquidity or modify its requirements for liquidity, which could include, without limitation, seeking to sell Holdings to another party, seeking to exchange some or all of the 10% Notes and the 2007 Promissory Notes for other securities of Holdings, seeking waivers or amendments from the requisite lenders under the 2005 Credit Agreement or the Receivables Facility or the requisite holders of the 10% Notes or the 2007 Promissory Notes, or all four thereof, under the documentation therefor, seeking to incur additional indebtedness above currently permitted levels (if the requisite lenders under the Company’s bank credit facilities and the requisite holders of the 10% Notes and 2007 Promissory Notes permit it), seeking to refinance one or both of the 2005 Credit Agreement or Receivables Facility, or taking other actions that could have a material adverse effect on the Company. If the Company’s business does not generate cash from operations, or the Company does not otherwise maintain sufficient liquidity, in line with its management’s current forecasts for the period through March 13, 2008, the Company would be required to seek to take one or more additional actions sooner than March 13, 2008, to provide additional liquidity, which could include seeking to incur additional indebtedness above currently permitted levels. The Company can provide no assurance that any such action it may seek to take could be successfully accomplished or as to the timing or terms thereof.

Based on the Company’s management’s current forecasts and its current capital structure (and without giving effect to any additional actions described above that the Company may take), the Company cannot provide any assurance that it will be able to comply with the first lien coverage ratio covenants in the 2005 Credit Agreement and the Receivables Facility after March 13, 2008. Accordingly, pursuant to Emerging Issues Task Force Issue 86-30 “Classification of Obligations When a Violation is Waived by the Creditor” (“EITF 86-30”) and Statement of Financial Accounting Standards No. 78, “Classification of Obligations That Are Callable by the Creditor-an amendment of ARB No. 43, Chapter 3A (“SFAS 78”), the Company has classified all amounts outstanding under the 2005 Credit Agreement, the Receivables Facility, the 10% Notes, and all its capital lease obligations as current liabilities in the accompanying September 30, 2007 condensed consolidated balance sheet. No amounts under the 2005 Credit Agreement, Receivables Facility or 10% Notes or capital lease obligations were due but unpaid at December 31, 2007.

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Special Note Regarding Forward Looking Statements”.

May 5, 2005 Refinancing Transaction

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

liquidity position. In addition, on November 14, 2007 the 2005 Credit Agreement was amended and additional term loan borrowings of $5.0 million were provided. As a result, the 2005 Credit Agreement is a $95 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”);

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

• a $5 million addition to the 2005 Term Loan Facility maturing on March 14, 2008.

Interest on borrowings under the 2005 Credit Agreement is floating, based upon existing market rates, at either (a) LIBOR plus a margin of 6.0% for loans at December 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 5.0% for loans at December 31, 2007. Margin levels under the 2005 Credit Agreement have increased as the level of receivables sold by Graphics to Graphics Finance (as defined below) under the Receivables Facility (as defined below) have increased. In addition, Graphics is obligated to pay specified unused commitment, letter of credit and other customary fees.

Borrowings of $35 million under the 2005 Term Loan Facility must be repaid in full on the facility’s maturity date of December 15, 2009. The additional borrowings of $5 million provided under the 2005 Term Loan Facility must be repaid on the maturity date of March 14, 2008. Graphics is also required to prepay the 2005 Term Loan Facility and the 2005 Revolving Credit Facility under certain circumstances with excess cash flows and proceeds from certain sales of assets, equity issuances and incurrences of indebtedness.

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

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

• incur or guarantee additional debt;

• create or permit to exist certain liens;

• pledge assets or engage in sale-leaseback transactions;

• make capital expenditures, other investments or acquisitions;

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

• repurchase or redeem equity interests;

• change the nature of its business;

• pay dividends or make other distributions;

• enter into transactions with affiliates;

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

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

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

At December 31, 2007, the Company had borrowings outstanding under the 2005 Revolving Credit Facility totaling $29.9 million and had letters of credit outstanding of approximately $20.6 million. As a result, the Company had additional borrowing availability under the 2005 Revolving Credit Facility of approximately $4.5 million.

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 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. Most of Graphics’ receivables from U.S. customers are 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 availability test contained in the 2005 Credit Agreement. In addition, the Receivables Facility contains other customary affirmative and negative covenants and events of default. It also contains other covenants customary for facilities of this type, including requirements related to credit and collection policies, deposits of collections and maintenance by each party of its separate corporate identity, including maintenance of separate records, books, assets and liabilities and disclosures about the transactions in the

financial statements of Holdings and its consolidated subsidiaries. The Receivables Facility also requires delivery to the lenders of the Company’s annual consolidated financial statements accompanied by a report and opinion of its independent certified public accountants that is not subject to any “going concern” explanatory paragraph. 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 December 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 December 31, 2007. In addition, Graphics Finance is obligated to pay specified unused commitment and other customary fees.

On December 31, 2007, there were borrowings of $12.4 million under the Receivables Facility. Based on receivables purchased from Graphics at December 31, 2007, additional availability under the Receivables Facility was approximately $8.5 million. In addition to this availability, if Graphics Finance had purchased from Graphics all other eligible receivables at December 31, 2007, availability would have further increased by $7.1 million.

At December 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 condensed consolidated balance sheet, as such funds are pledged to secure payment of borrowings under the Receivables Facility and are therefore not available to meet the Company’s cash operating requirements.

10% Senior Second Secured Notes

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

2007 Promissory Notes

On November 14, 2007, holders of in excess of 90% of the aggregate principal amount of the 10% Notes agreed with the Company to (a) defer to March 15, 2008, the semi-annual payment of cash interest on the 10% Notes held by such holders, which would otherwise

have been due on December 15, 2007, and (b) amend certain covenants in the 10% Notes indenture. In consideration thereof, the Company issued to each such holder a senior second secured noninterest-bearing promissory note due March 15, 2008, of Graphics with a principal amount equal to the sum of the amount of the cash interest payment deferred on the 10% Notes held by such holder and a consent fee equal to 1% of the principal amount of the 10% Notes held by such holder (collectively, the “2007 Promissory Notes”). Such 2007 Promissory Notes are fully and unconditionally guaranteed by Holdings. As of December 31, 2007, the Company had recorded $14.7 million related to the 2007 Promissory Notes classified as current portion of long term debt in the condensed consolidated balance sheet.

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.

On August 31, 2007, the 2005 Credit Agreement and Receivables Facility were amended to, among other things, provide that compliance with the first lien coverage ratio covenants in each thereof as of September 30, 2007, would not be measured or determined for any purpose until November 29, 2007 (including, without limitation, for the purpose of determining Graphics’ entitlement to make additional borrowings under either such facility on or prior to such date). The lenders under both facilities also waived the Company’s noncompliance with certain reporting requirements under such facilities subsequent to March 31, 2007. One such waiver related to the Company’s failure to deliver its restated consolidated financial statements for the fiscal year ended March 31, 2007 accompanied by a report or opinion of the Company’s independent certified public accountants that was not subject to any “going concern” explanatory paragraph. The Report of Independent Registered Public Accounting Firm accompanying the Company’s restated consolidated financial statements included in its Report on Form 10K/A dated August 31, 2007, contains a “going concern” explanatory paragraph. The lenders under both facilities waived such noncompliance with respect to the delivery of such Report of Independent Registered Public Accounting Firm until November 29, 2007.

See “Covenant Compliance and Liquidity” and “Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” for discussion of additional amendments and waivers entered into November 14, 2007 and February 14, 2008.

5. Comprehensive Income (Loss)

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

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

Total comprehensive loss for the three and nine months ended December 31, 2007 and 2006 is as follows (in thousands):

	Three Months Ended						Nine Months Ended
	December 31,						December 31,
	2007			2006			2007			2006
				(Restated)						(Restated)
Net loss	$	(7,203	)		(4,523	)		(26,675	)		(11,749	)
Foreign currency translation adjustment, net of tax		223			(471	)		1,734			(91	)
Total comprehensive loss	$	(6,980	)		(4,994	)		(24,941	)		(11,840	)

6. Income Taxes

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

The Company recorded income tax expense of less than $0.1 million and approximately $4.0 million for the three and nine months ended December 31, 2007, respectively. The expense in the nine months ended December 31, 2007 is primarily a non-cash expense related to an increase in the deferred tax asset valuation allowance. This increase was recorded because, due to the financing and capital structure alternatives under consideration by the Company, certain taxable temporary differences are not expected to reverse in years in which deductible temporary differences or net operating loss carryforwards (“NOLs”) are expected to be available. Consequently, under SFAS 109, additional deferred tax asset valuation allowance is required for the tax effect of the future deductions that are not more likely than not to be utilized. The income tax benefit from U.S. losses in the three and nine months ended December 31, 2007 was offset by an increase in the deferred tax asset valuation allowance.

The Company recorded income tax expense of $0.1 million for the three months ended December 31, 2006 and recorded income tax benefit of $0.1 million for the nine months ended December 31, 2006. The benefit in the nine months ended December 31, 2006 relates primarily to an adjustment of $0.4 million, recorded in the three months ended June 30, 2006, to reflect a change in estimate with respect to the Company’s income tax liability. The adjustment arose from events that changed the Company’s probability assessment, as discussed in Statement of Financial Accounting Standards No. 5, “Accounting for Contingencies” (“SFAS 5”) regarding the likelihood that certain contingent income tax items would become actual future liabilities. The adjustment was partially offset by foreign tax expense. The income tax benefit from U.S. losses in the three and nine months ended December 31, 2006 was offset by an increase in the deferred tax asset valuation allowance.

On April 1, 2007, the Company adopted Financial Accounting Standards Board (“FASB”) Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109.” The adoption resulted in reclassification of an immaterial amount from long term deferred tax liabilities to long term income taxes payable. The reclassified amount represents the Company’s liability for unrecognized tax benefits, including interest and penalties, as of the adoption date. The Company will recognize interest and penalties related to uncertain tax positions as income tax expense under FIN 48.

11

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

The Company’s tax years beginning with the year ended March 31, 2005 remain open for federal, state and foreign income tax examinations. The Company has U.S. federal and state attributes arising in certain years ended December 31, 1989 and forward that remain available for review by taxing authorities.

7. Employee Benefit Plans

Components of Net Periodic Benefit Cost (in thousands)

	Defined Benefit						Defined Benefit
	Pension Plans						Postretirement Plan
	Three months ended						Three months ended
	December 31,						December 31,
	2007			2006			2007			2006
Service cost	$	112			111			8			(5	)
Interest cost		1,061			1,037			33			(31	)
Expected return on plan assets		(1,384	)		(1,209	)		—			—
Amortization of prior service cost		—			—			(71	)		(71	)
Amortization of unrecognized loss		239			497			—			—
Recognized net actuarial loss		—			—			2			(2	)
Net periodic benefit cost	$	28			436			(28	)		(109	)

	Defined Benefit						Defined Benefit
	Pension Plans						Postretirement Plan
	Nine months ended						Nine months ended
	December 31,						December 31,
	2007			2006			2007			2006
Service cost	$	342			342			20			18
Interest cost		3,207			3,156			101			105
Expected return on plan assets		(4,152	)		(3,652	)		—			—
Amortization of prior service cost		—			—			(213	)		(213	)
Amortization of unrecognized loss		727			1,513			—			—
Recognized net actuarial loss		—			—			6			6
Net periodic benefit cost	$	124			1,359			(86	)		(84	)

8. Commitments and Contingencies

The Company has employment agreements with three of its principal officers. The 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 at December 31, 2007, excluding bonuses, is approximately $3.1 million.

In the fiscal year ended March 31, 1998, the Company entered into multi-year contracts to purchase a portion of the Company’s raw materials to be used in its normal operations. In connection with such purchase agreements, pricing for a portion of the Company’s raw materials is adjusted for certain movements in market

12

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

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 December 31, 2007 and March 31, 2007 is $38.7 million and $41.5 million, respectively, and is included within Other liabilities in the Company’s consolidated balance sheets.

From time to time, Graphics has received notices alleging liability pursuant to environmental laws in connection with the disposal of wastes at off-site disposal sites. Graphics believes its potential liability in connection with these matters will not be material to its business or to the Company’s consolidated financial statements as a whole. Currently pending matters are discussed below.

Graphics, together with over 300 other persons, was 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. The New York State Department of Environmental Conservation (“DEC”) has been overseeing site cleanup. Although liability under CERCLA may be imposed on a joint and several basis and the Company’s ultimate liability is not precisely determinable, the PRPs agreed in writing that Graphics’ share of waste at the site was less than 1% (.603%). In November 2007, Graphics received notice from the PRP Group, of which Graphics is a member, stating that DEC has entered an Order on Consent with the site owner who will assume all obligations to implement the cleanup and pay all future DEC oversight costs and that DEC had said it would not assert further claims against the PRP Group once DEC’s past oversight costs were paid. The notice provided a final assessment for Graphics of $989 to go toward past oversight costs and the remaining outstanding invoices and expenses of the PRP Group. Graphics paid the assessment, bringing its total payments with respect to the site to less than $10,000.

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. In November 2007, Graphics received a notice and a settlement offer from Barg Coffin Lewis & Trapp, a law firm representing approximately 60 companies comprising the Gibson Group Trust which has conducted the cleanup at the site. Graphics is investigating the possibility of participating in that settlement.

Graphics received notice in 1997 from AlliedSignal Inc. alleging that Graphics had liability in connection with the disposal of waste at the Alltift landfill site. Graphics responded in December of 1997 stating that the waste it disposed of at the site was not hazardous and constituted a de minimis percentage of total waste at the site. Graphics heard nothing more with respect to this matter until it received a notice in August 2007 from Honeywell International Inc. (formerly named AlliedSignal) stating that Honeywell had incurred the majority of cleanup costs at the site, proposing that Graphics and Honeywell negotiate a resolution to the matter. Graphics is formulating a response to that notice and anticipates its response will be substantially similar to its first response.

13

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

In November 2007, Graphics received correspondence from TLI Solutions inviting it to join a group of PRPs conducting work with respect to the Frontier Chemical Superfund site in Niagara Falls, New York. This followed an inquiry that Graphics received earlier in the year from the purchaser of Graphics CPS ink division requesting information with respect to a notice the purchaser had received from DEC alleging liability with respect to the Frontier Chemical Site, to which Graphics responded. Graphics sent a de minimis amount of drum waste to this site and believes it will be able to settle its liability for a de minimis amount as it did in connection with the “Tank Phase” of this site.

In April 1994 USEPA had advised Graphics that it was a de minimis PRP in connection with the “Tank Phase” of site cleanup at the Frontier Chemical Site. Graphics entered into a de minimis settlement with USEPA in June 1994 for less than $1,000 with respect to the “Tank Phase”. Graphics was not one of the PRPs notified by USEPA in September 1994 with respect to the other phase of site cleanup at the site.

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 included within Other liabilities in its condensed consolidated balance sheet at December 31, 2007. 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.

9. Restructuring Costs

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

14

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

The following table summarizes the activity related to this restructuring plan for the nine months ended December 31, 2007, (in thousands):

	03/31/07								12/31/07
	Restructuring					Reserve			Restructuring
	Reserve Balance		Activity			Adjustment			Reserve Balance
Lease termination costs	$	335		(101	)		(8	)		226
Other costs		12		—			(12	)		—
	$	347		(101	)		(20	)		226

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 years ended March 31, 2007 and 2006, $0.2 million and $0.6 million of these costs were paid, respectively. As of December 31, 2007 the Company believes the restructuring reserve of approximately $0.2 million is adequate. The Company anticipates that less than $0.1 million will be paid during the remainder of the fiscal year ending March 31, 2008 and $0.1 million will be paid during each of the fiscal years ending March 31, 2009 and March 31, 2010. These payments will be funded through cash generated from operations and borrowings under the 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 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 SFAS 146. This restructuring charge was composed of severance and related termination benefits, lease termination costs and other costs. The Company reduced the restructuring reserve related to this plan by approximately $0.8 million in the quarter ended December 31, 2005 as a result of lower than anticipated severance and other employee costs due to certain terminated employees obtaining other employment during their severance periods.

The Company increased the restructuring reserve related to this plan by approximately $0.3 million in the quarter ended March 31, 2006 as a result of certain changes in assumptions related to lease termination costs and certain costs that could not be accrued for in prior periods. These changes in the reserve were classified within restructuring costs (benefit) and other charges in the consolidated statements of operations for the fiscal year ended March 31, 2006.

15

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

The following table summarizes the activity related to this restructuring plan for the nine months ended December 31, 2007 (in thousands):

	03/31/07								12/31/07
	Restructuring					Reserve			Restructuring
	Reserve Balance		Activity			Adjustment			Reserve Balance
Lease termination costs	$	598		(19	)		11			590
Other costs		16		—			(16	)		—
	$	614		(19	)		(5	)		590

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, 2007, less than $0.1 million of these costs were paid. During each of the fiscal years ended March 31, 2006 and 2005, $1.0 million of these costs were paid. As of December 31, 2007 the Company believes the restructuring reserve of approximately $0.6 million is adequate. The Company anticipates that these costs will be paid during the remainder of the fiscal year ending March 31, 2008. These payments will be funded through cash generated from operations and borrowings under the 2005 Revolving Credit Facility and Receivables Facility.

Plant and SG&A Reduction Plan

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

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

The following table summarizes the activity related to this restructuring plan for the nine months ended December 31, 2007 (in thousands):

	03/31/07								12/31/07
	Restructuring					Reserve			Restructuring
	Reserve Balance		Activity			Adjustment			Reserve Balance
Severance and other employee costs	$	71		(79	)		8			—
Other costs		3		—			(3	)		—
	$	74		(79	)		5			—

16

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

Employee terminations related to this plan were substantially completed by March 31, 2005. During the fiscal years ended March 31, 2007, 2006 and 2005, $0.8 million, $2.1 million and $0.3 million of these costs were paid, respectively. As of December 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 each of the quarters ended December 31, 2007, September 30, 2007 and 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 and was classified as interest expense in the consolidated statement of operations for the quarters ended December 31, 2007, and September 30, 2007 and for the fiscal year ended March 31, 2007. The Company recorded an additional $(0.2) million, $0.1 million, $(0.1) million, $0.2 million, $0.3 million and $0.6 million of restructuring charges related to this plan in the quarters ended December 31, 2007, September 30, 2007, March 31, 2007, March 31, 2006, December 31, 2005 and March 31, 2005, respectively, and $0.2 million in each of the quarters ended March 31, 2004 and September 30, 2003. These charges primarily related to future lease commitments. The charges are and were classified within restructuring costs (benefit) and other charges in the consolidated statements of operations for the quarters ended December 31, 2007 and September 30, 2007 and for the fiscal years ended March 31, 2007, 2006, 2005 and 2004.

The following table summarizes the activity related to this restructuring plan for the nine months ended December 31, 2007 (in thousands):

	03/31/07								12/31/07
	Restructuring					Reserve			Restructuring
	Reserve Balance		Activity			Adjustment			Reserve Balance
Lease termination costs	$	1,071		(196	)		(141	)		734

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. In the fiscal year ended March 31, 2007, $0.3 million of these costs were paid, during each of the fiscal years ended

17

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

March 31, 2006 and 2005, $0.5 million of these costs were paid, in the fiscal 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 December 31, 2007, the Company believes the restructuring reserve of approximately $0.7 million is adequate. The Company anticipates that $0.1 million will be paid during the remainder of fiscal year ending March 31, 2008 and $0.2 million will be paid during each of the fiscal years ending March 31, 2009, 2010 and 2011. These payments will be funded through cash generated from operations and borrowings under the 2005 Revolving Credit Facility and Receivables Facility.

10. Industry Segment Information

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

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

The accounting policies of the segments are the same as those used by the Company in its condensed consolidated financial statements. 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.

				Premedia			Corporate
(In thousands)	Print			Services			and Other			Total
Nine Months Ended December 31, 2007
Sales	$	291,818			34,293			—			326,111
EBITDA	$	25,729			5,212			(7,403	)		23,538
Depreciation and amortization		(12,200	)		(1,234	)		—			(13,434	)
Interest expense		—			—			(32,820	)		(32,820	)
Interest income		—			—			23			23
Income tax expense		—			—			(3,982	)		(3,982	)
Net income (loss)	$	13,529			3,978			(44,182	)		(26,675	)
Total assets	$	201,811			10,809			11,460			224,080
Total goodwill	$	64,656			1,892			—			66,548
Total capital expenditures	$	6,655			414			—			7,069

18

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

				Premedia			Corporate
(In thousands)	Print			Services			and Other			Total
Nine Months Ended December 31, 2006 (Restated)
Sales	$	304,574			37,155			—			341,729
EBITDA	$	28,267			6,972			(3,677	)		31,562
Depreciation and amortization		(12,334	)		(1,552	)		—			(13,886	)
Interest expense		—			—			(29,666	)		(29,666	)
Interest income		—			—			93			93
Income tax benefit		—			—			148			148
Net income (loss)	$	15,933			5,420			(33,102	)		(11,749	)
Total assets	$	209,522			10,824			12,693			233,039
Total goodwill	$	64,656			1,892			—			66,548
Total capital expenditures	$	8,626			558			—			9,184
Sales	$	107,627			11,265			—			118,892
EBITDA	$	10,040			1,657			(3,252	)		8,445
Depreciation and amortization		(3,809	)		(399	)		—			(4,208	)
Interest expense		—			—			(11,403	)		(11,403	)
Interest income		—			—			11			11
Income tax expense		—			—			(48	)		(48	)
Net income (loss)	$	6,231			1,258			(14,692	)		(7,203	)
Total assets	$	201,811			10,809			11,460			224,080
Total goodwill	$	64,656			1,892			—			66,548
Total capital expenditures	$	2,652			287			—			2,939
Three Months Ended December 31, 2006 (Restated)
Sales	$	108,330			11,735			—			120,065
EBITDA	$	10,184			1,704			(1,508	)		10,380
Depreciation and amortization		(4,089	)		(516	)		—			(4,605	)
Interest expense		—			—			(10,203	)		(10,203	)
Interest income		—			—			43			43
Income tax expense		—			—			(138	)		(138	)
Net income (loss)	$	6,095			1,188			(11,806	)		(4,523	)
Total assets	$	209,522			10,824			12,693			233,039
Total goodwill	$	64,656			1,892			—			66,548
Total capital expenditures	$	1,735			199			—			1,934

19

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

11. Impact of Recently Issued Accounting Standards

In July 2006, the FASB issued 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. 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. The adoption of FIN 48 as of April 1, 2007 had no material impact on the condensed consolidated financial statements as a whole (see note 6).

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value, establishes the framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. The provisions of SFAS 157 will be effective for the Company as of April 1, 2008. The Company is in the process of evaluating the impact, if any, SFAS 157 will have on the condensed 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 132R” (“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 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 condensed consolidated financial statements as a whole.

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

12. Subsequent Event

On February 14, 2008, certain provisions of the Company’s 2005 Credit Agreement and Receivables Facility were amended or waived to temporarily waive through and including March 13, 2008, any default under such bank credit facilities resulting from noncompliance with the first lien coverage ratio covenant in each such bank credit facility as of September 30, and December 31, 2007, for all purposes of such bank credit facilities (including, without limitation, for the purpose of determining Graphics’ entitlement to make additional borrowings under either such bank credit facility on or prior to such date). Such amendment and waiver also (a) waived through and including March 13, 2008, the requirement that Graphics repay the $5.0 million Supplemental Term Loan, which was consummated on November 14, 2007, (b) amended certain terms relating to borrowings thereunder, including, without limitation, (i) requiring that all new loans be base rate or prime rate loans, (ii) amending the rates applicable to borrowings to, in effect, increase such rates prospectively, and (iii) changing required interest payment dates on base rate or prime rate loans from quarterly to monthly, (c) requires that the Company maintain certain daily levels of minimum total availability under its bank credit facilities going forward (and deletes the total liquidity maintenance covenant in each such facility), and (d) waived through and including March 13, 2008, Graphics’ noncompliance with its obligation thereunder to deliver the Company’s restated consolidated financial statements for the fiscal year ended March 31, 2007 accompanied by a report or opinion of the Company’s independent certified public accountants that was not subject to any “going concern” explanatory paragraph. The Company paid consenting lenders an aggregate amendment fee of $650,000.00 in connection with such amendments.

20

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

Special Note Regarding Forward Looking Statements

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

• actions, or failures to act, by the lenders under our bank credit facilities and our 10% Notes;

• actions, or failures to act, by our trade creditors, including actions that might affect our ability to purchase paper and other raw materials under satisfactory credit terms or that could increase the cash required to fund our operations;

• actions, or failures to act, by our customers, including with respect to payment for our products and services;

• actions, or failures to act, by third parties that could have an interest in acquiring the Company;

• 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.

Restated Financial Statements

On August 31, 2007, we filed our Annual Report on Form 10-K/A for the fiscal year ended March 31, 2007. This report included restated consolidated financial statements for the fiscal years ended March 31, 2007, 2006 and 2005. Accordingly, the prior year financial results for the three and nine months ended December 31, 2006 reflect the impact of the restatement.

The issues causing the restatement included a correction of our accounting treatment of certain deferred financing costs, an adjustment to our accrued vacation liability calculation, and certain other corrections of individually immaterial errors including adjustments to our utility and restructuring liabilities. The revisions associated with this restatement increased our previously reported net loss during the three months ended December 31, 2006 by $69,000 and decreased the reported net loss during the nine months ended December 31, 2006 by $421,000.

21

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

See note 2 to the condensed consolidated financial statements for reconciliation of previously reported and restated financial information for the three and nine months ended December 31, 2006.

The following table summarizes our results of operations for the three months ended December 31, 2007 (the “2007 Three-Month Period”), the three months ended December 31, 2006 (the “2006 Three-Month Period”), the nine months ended December 31, 2007 (the “2007 Nine-Month Period”) and the nine months ended December 31, 2006 (the “2006 Nine-Month Period”):

	Three Months Ended						Nine Months Ended
	December 31,						December 31,
	2007			2006			2007			2006
				(Restated)						(Restated)
Sales:
Print	$	107,627			108,330			291,818			304,574
Premedia Services		11,265			11,735			34,293			37,155
Total	$	118,892			120,065			326,111			341,729
Gross Profit:
Print	$	10,347			10,446			26,210			28,028
Premedia Services		2,763			2,677			8,245			9,890
Other		6			8			10			6
Total	$	13,116			13,131			34,465			37,924
Gross Margin:
Print		9.6	%		9.6	%		9.0	%		9.2	%
Premedia Services		24.5	%		22.8	%		24.0	%		26.6	%
Total		11.0	%		10.9	%		10.6	%		11.1	%
EBITDA:
Print	$	10,040			10,184			25,729			28,267
Premedia Services		1,657			1,704			5,212			6,972
Other (a)		(3,252	)		(1,508	)		(7,403	)		(3,677	)
Total	$	8,445			10,380			23,538			31,562
EBITDA Margin:
Print		9.3	%		9.4	%		8.8	%		9.3	%
Premedia Services		14.7	%		14.5	%		15.2	%		18.8	%
Total		7.1	%		8.6	%		7.2	%		9.2	%

(a) Other operations include corporate general and administrative expenses and other non-operating expenses.

EBITDA is presented and discussed because management believes that investors regard EBITDA as a key measure of a leveraged company’s operating performance as it removes interest, taxes, depreciation and amortization from the operational results of our business. “EBITDA” is defined as earnings before net interest expense, income tax expense (benefit), depreciation and amortization. “EBITDA Margin” is defined as EBITDA as a percentage of net sales. EBITDA is not a measure of financial performance under U.S. generally

22

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

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% Senior Second Secured Notes Due 2010 (the “10% Notes”), the 2005 Credit Agreement and the Receivables Facility are based on, or include EBITDA, subject to certain adjustments.

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

				Premedia
	Print			Services			Other			Total
Three Months Ended December 31, 2007
EBITDA	$	10,040			1,657			(3,252	)		8,445
Depreciation and amortization		(3,809	)		(399	)		—			(4,208	)
Interest expense, net		—			—			(11,392	)		(11,392	)
Income tax expense		—			—			(48	)		(48	)
Net income (loss)	$	6,231			1,258			(14,692	)		(7,203	)
Three Months Ended December 31, 2006
(Restated)
EBITDA	$	10,184			1,704			(1,508	)		10,380
Depreciation and amortization		(4,089	)		(516	)		—			(4,605	)
Interest expense, net		—			—			(10,160	)		(10,160	)
Income tax expense		—			—			(138	)		(138	)
Net income (loss)	$	6,095			1,188			(11,806	)		(4,523	)
Nine Months Ended December 31, 2007
EBITDA	$	25,729			5,212			(7,403	)		23,538
Depreciation and amortization		(12,200	)		(1,234	)		—			(13,434	)
Interest expense, net		—			—			(32,797	)		(32,797	)
Income tax expense		—			—			(3,982	)		(3,982	)
Net income (loss)	$	13,529			3,978			(44,182	)		(26,675	)
Nine Months Ended December 31, 2006
(Restated)
EBITDA	$	28,267			6,972			(3,677	)		31,562
Depreciation and amortization		(12,334	)		(1,552	)		—			(13,886	)
Interest expense, net		—			—			(29,573	)		(29,573	)
Income tax benefit		—			—			148			148
Net income (loss)	$	15,933			5,420			(33,102	)		(11,749	)

23

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

Print

Sales.In the 2007 Nine-Month Period, print sales decreased $12.8 million to $291.8 million from $304.6 million in the 2006 Nine-Month Period. The decrease in the 2007 Nine-Month Period includes a decrease in print production volume of approximately 6.9%, decreased paper prices and to a lesser degree the continued impact of competitive pricing pressures. The volume decline is largely attributable to a weakening retail environment, certain changes in customer requirements and competitive losses driven by price and merger activity. These decreases were offset in part by benefits related to improved customer and product mix, which in certain cases resulted in lower print production volume,and decreases in the levels of customer supplied paper. See “—Value Added Revenue and Print Impressions for the Print Segment” below.

In the 2007 Three-Month Period, print sales decreased $0.7 million to $107.6 million from $108.3 million in the 2006 Three-Month Period. The decrease in the 2007 Three-Month Period includes a decrease in print production volume of approximately 3.8% and decreased paper prices. The volume decline is largely attributable to a weakening retail environment, certain changes in customer requirements and competitive losses driven by price and merger activity. These decreases were offset in part by benefits related to improved customer and product mix,which in certain cases resulted in lower print production volume, and decreases in the levels of customer supplied paper. See “—Value Added Revenue and Print Impressions for the Print Segment” below.

Gross Profit. In the 2007 Nine-Month Period, print gross profit decreased $1.8 million to $26.2 million from $28.0 million in the 2006 Nine-Month Period. The decrease in the 2007 Nine-Month Period includes the impact of decreased print production volume, incremental losses associated with the start-up of a newspaper service facility, continued, but improving, productivity and cost issues at one of our print facilities and to a lesser degree the continued impact of competitive pricing pressures. These decreases were offset in part by benefits related to improved customer and product mix. In the 2007 Nine-Month Period, print gross margin decreased to 9.0% from 9.2% in the 2006 Nine-Month Period. 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.

In the 2007 Three-Month Period, print gross profit decreased $0.1 million to $10.3 million from $10.4 million in the 2006 Three-Month Period. The decrease in the 2007 Three-Month Period primarily includes the impact of decreased print production volume and to a lesser degree the continued impact of competitive pricing pressures, offset in part by benefits related to improved customer and product mix. In both the 2007 and 2006 Three-Month Periods, print gross margin was 9.6%. 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.In the 2007 Nine-Month Period, print selling, general and administrative expenses increased $0.3 million to $12.4 million, or 4.3% of print sales, from $12.1 million, or 4.0% of print sales, in the 2006 Nine-Month Period. The increase in the 2007 Nine-Month Period includes the impact of the change in our estimates related to the allowance for doubtful accounts.

In the 2007 Three-Month Period, print selling, general and administrative expenses decreased $0.1 million to $4.2 million, or 3.9% of print sales, from $4.3 million, or 4.0% of print sales, in the 2006 Three-Month Period.

Restructuring Costs (Benefit).Restructuring costs (benefit) was a benefit of $0.1 million in both the 2007 and 2006 Nine-Month Period. Restructuring costs (benefit) was a benefit of $0.2 million in the 2007 Three-Month Period versus expense of $0.1 million in the 2006 Three-Month Period. See note 9 to the condensed consolidated financial statements.

24

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

Other Expense (Income).In the 2007 Nine-Month Period, print other expense (income) increased to expense of $0.3 million from expense of $0.1 million in the 2006 Nine-Month Period. In the 2007 Three-Month Period, print other expense (income) increased to expense of $0.1 million from income of $0.1 million in the 2006 Three-Month Period.

EBITDA.As a result of the above factors and excluding the impact of depreciation and amortization, EBITDA for the print business decreased to $25.7 million in the 2007 Nine-Month Period from $28.3 million in the 2006 Nine-Month Period and decreased to $10.0 million in the 2007 Three-Month Period from $10.2 million in the 2006 Three-Month Period.

Premedia Services

Sales.In the 2007 Nine-Month Period, premedia services’ sales decreased approximately $2.8 million to $34.3 million from $37.1 million in the 2006 Nine-Month Period. The decrease in the 2007 Nine-Month Period includes decreased premedia production volume and the impact of continued competitive pricing pressures in this segment.

In the 2007 Three-Month Period, premedia services’ sales decreased approximately $0.4 million to $11.3 million from $11.7 million in the 2006 Three-Month Period. The decrease in the 2007 Three-Month Period is primarily related to decreased premedia production volume.

Gross Profit.In the 2007 Nine-Month Period, premedia services’ gross profit decreased approximately $1.7 million to $8.2 million from $9.9 million in the 2006 Nine-Month Period. This decrease is primarily related to the reduced sales discussed above. In the 2007 Nine-Month Period, premedia services’ gross margin decreased to 24.0% from 26.6% in the 2006 Nine-Month Period.

In the 2007 Three-Month Period, premedia services’ gross profit increased approximately $0.1 million to $2.8 million from $2.7 million in the 2006 Three-Month Period. In the 2007 Three-Month Period, premedia services’ gross margin increased to 24.5% from 22.8% in the 2006 Three-Month Period.

Selling, General and Administrative Expenses.In the 2007 Nine-Month Period, premedia services’ selling, general and administrative expenses decreased $0.1 million to $4.2 million from $4.3 million in the 2006 Nine-Month Period. In both the 2007 and 2006 Three-Month Periods, premedia services’ selling, general and administrative expenses remained unchanged at $1.5 million.

Other Expense (Income).Premedia services’ other expense (income) was expense of $0.1 million in both the 2007 and 2006 Nine-Month Periods. Premedia services’ other expense (income) was expense of $0.1 million in the 2007 Three-Month Period and expense of less than $0.1 million in the 2006 Three-Month period.

EBITDA.As a result of the above factors and excluding the impact of depreciation and amortization, premedia services’ EBITDA decreased to $5.2 million in the 2007 Nine-Month Period from $7.0 million in the 2006 Nine-Month Period and remained unchanged at $1.7 million in both the 2007 and 2006 Three-Month Periods.

25

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

Other Operations

Other operations consist primarily of corporate general and administrative expenses and other non-operating expenses. In the 2007 Nine-Month Period, EBITDA from other operations increased to a loss of $7.4 million from a loss of $3.7 million in the 2006 Nine-Month Period. In the 2007 Three-Month Period, EBITDA from other operations increased to a loss of $3.3 million from a loss of $1.5 million in the 2006 Three-Month Period. These increased losses primarily include incremental professional fees related to our ongoing review of our strategic options.

Interest Expense, Net

In the 2007 Nine-Month Period, interest expense, net increased to $32.8 million from $29.6 million in the 2006 Nine-Month Period. In the 2007 Three-Month Period, interest expense, net increased to $11.4 million from $10.2 million in the 2006 Three-Month Period. These increases are the result of both higher levels of indebtedness and increased borrowing costs.

Income Tax Expense (Benefit)

In the 2007 Nine-Month Period, income tax expense (benefit) changed to expense of $4.0 million from a benefit of $0.1 million in the 2006 Nine-Month Period. In the 2007 Three-Month Period, income tax expense (benefit) decreased to expense of less than $0.1 million from expense of $0.1 million in the 2006 Three-Month Period.

The increase in expense in the 2007 Nine-Month Period is primarily due to an increase in the deferred tax asset valuation allowance. This non-cash increase was recorded in the quarter ended September 30, 2007 because, due to the financing and capital structure alternatives under consideration, certain taxable temporary differences are not expected to reverse in years in which deductible temporary differences or NOLs are expected to be available. Consequently, under SFAS 109, additional deferred tax asset valuation allowance is required for the tax effect of the future deductions that are not more likely than not to be utilized. The increase in expense in the 2007 Nine-Month Period is also due to an adjustment of $0.4 million, recorded in the quarter ended June 30, 2006, to reflect a change in estimate with respect to our income tax liability. The adjustment arose from events that changed our probability assessment, as discussed in SFAS 5, regarding the likelihood that certain contingent income tax items would become actual future liabilities.

Income tax benefit from U.S. losses in the 2007 and 2006 Three and Nine-Month Periods was primarily offset by an increase in the deferred tax asset valuation allowance.

On April 1, 2007, we adopted FIN 48. The adoption resulted in reclassification of an immaterial amount from long term deferred tax liabilities to long term income taxes payable. The reclassified amount represents our liability for unrecognized tax benefits, including interest and penalties, as of the adoption date. We will recognize interest and penalties related to uncertain tax positions as income tax expense under FIN 48.

Our tax years beginning with the year ended March 31, 2005 remain open for federal, state and foreign income tax examinations. We have U.S. federal and state attributes arising in certain years ended December 31, 1989 and forward that remain available for review by taxing authorities.

26

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

Net Income (Loss)

As a result of the factors discussed above, our net loss increased to $26.7 million in the 2007 Nine-Month Period from $11.7 million in the 2006 Nine-Month Period and our net loss increased to $7.2 million in the 2007 Three-Month Period from $4.5 million in the 2006 Three-Month Period.

Liquidity and Capital Resources

*       *       *

On October 4, 2007, we announced that our Board of Directors had determined to conduct a review of our strategic options. We said we would work with our financial advisor, Lehman Brothers, in connection with the review. We said our strategic options could include, among other things, seeking to sell Holdings, seeking to exchange some or all of the 10% Notes for other securities of Holdings, seeking waivers or amendments from the requisite lenders under our existing bank credit facilities and the 10% Notes, seeking to incur additional indebtedness above currently permitted levels (if the requisite lenders under our existing bank credit facilities and the 10% Notes permit it), seeking to refinance our current bank credit facilities, or taking other actions that could have a material effect on us. We have considered, and will continue to consider, one or more of these options. We cannot provide any assurance that any such option will be pursued or can be accomplished or as to the timing or terms of any such action.

*       *       *

Overview of Liquidity and Capital Resources

Our primary sources of liquidity are cash provided by operating activities and borrowings under the 2005 Revolving Credit Facility (as defined below under “—May 2005 Refinancing”) and the Receivables Facility (as defined below under “—September 2006 Revolving Trade Receivables Facility”). At December 31, 2007, we had additional borrowing capacity of $20.1 million under our two credit facilities as follows:

• $4.5 million under the 2005 Revolving Credit Facility; and

• $15.6 million under the Receivables Facility, including $8.5 million based on receivables purchased from Graphics at December 31, 2007 and an additional $7.1 million if Graphics Finance, defined below, had purchased from Graphics all other eligible receivables at December 31, 2007.

See “—May 2005 Refinancing” and “—September 2006 Revolving Trade Receivables Facility” below for further discussion of these credit facilities. As described below, on November 14, 2007, we amended the 2005 Credit Agreement to provide for an additional $5.0 million term loan to Graphics by the existing lenders thereunder.

Our cash-on-hand of approximately $2.2 million is presented net of outstanding checks within trade accounts payable at December 31, 2007. Accordingly, cash is presented at a balance of $0 in the December 31, 2007 condensed consolidated balance sheet.

At December 31, 2007, we had total indebtedness of $379.9 million, which consisted of borrowings under the 2005 Term Loan Facility (as defined below under “—May 2005 Refinancing”) of $40.0 million, borrowings under the 2005 Revolving Credit Facility of $29.9 million, borrowings under the Receivables Facility of $12.4 million, capital lease obligations of $2.9 million, $280.0 million of our 10% Notes and $14.7 million of our 2007 Promissory Notes (as defined below). In addition, we had letters of credit outstanding under the 2005 Revolving Credit Facility of $20.6 million. The estimated fair value of our 10% Notes at December 31, 2007 was $154.0 million, or $126.0 million less than the carrying value. We have no off-balance sheet financial instruments other than operating leases.

At December 31, 2007, we were in compliance with the covenant requirements set forth in the 2005 Credit Agreement and the Receivables Facility, as amended, and the 10% Notes indenture. See the description elsewhere in this “Overview of Liquidity and Capital Resources” concerning (a) certain amendments and waivers under the 2005 Credit Agreement and the Receivables Facility that were entered into or granted by the lenders thereunder on June 13, 2007, August 31, 2007, November 14, 2007, and February 14, 2008, and (b) the agreement of holders of in excess of 90% of the aggregate principal amount of the 10% Notes to defer to March 15, 2008, the semi-annual payment of cash interest on the 10% Notes held by such holders, which would otherwise have been due on December 15, 2007, and the amendment of certain covenants in the 10% Notes indenture.

During the 2007 Nine-Month Period, we used net borrowings from the 2005 Revolving Credit Facility of $3.0 million, net borrowings from the Receivables Facility of $7.7

27

million, additional borrowings from the 2005 Term Loan Facility of $5.0 million and $0.1 million in proceeds from the sale of fixed assets primarily to fund the following:

• $2.4 million of operating activities (see our Condensed Consolidated Statements of Cash Flows appearing elsewhere in this Report);

• $7.1 million in cash capital expenditures; and

• $6.0 million to service other indebtedness (including repayment of capital lease obligations of $2.6 million and payment of deferred financing costs of $3.4 million).

Scheduled repayments of existing capital lease obligations during the remainder of Fiscal Year 2008 are approximately $0.8 million.

Interest on our 10% Notes is payable semiannually in cash on each June 15 and December 15. See the description elsewhere in this “Overview of Liquidity and Capital Resources” concerning the agreement of holders of in excess of 90% of the aggregate principal amount of the 10% Notes to defer to March 15, 2008, the semi-annual payment of cash interest on the 10% Notes held by such holders, which would otherwise have been due on December 15, 2007.

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

We anticipate that our primary needs for liquidity will be to conduct our business, meet debt service requirements, and make capital expenditures. We are continually working to improve our liquidity position. We believe, based on current forecasts prepared by management, we will have sufficient liquidity to meet our forecasted requirements through March 13, 2008. Our ability to maintain sufficient liquidity may be affected by events beyond our control. If our business does not generate cash from operations, or we do not otherwise maintain sufficient liquidity, in line with our management’s current forecasts for the period through March 13, 2008, we would be required to seek to take one or more additional actions sooner than March 13, 2008, to provide additional liquidity, which could include seeking to incur additional indebtedness above currently permitted levels. We can provide no assurances that any such action we may seek to take could be successfully accomplished or as to the timing or terms thereof.

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.

On August 31, 2007, our 2005 Credit Agreement and Receivables Facility were amended to, among other things, provide that compliance with the first lien coverage ratio covenants in each thereof as of September 30, 2007, would not be measured or determined for any purpose until November 29, 2007 (including, without limitation, for the purpose of determining our entitlement to make additional borrowings under either such facility on or prior to such date). The lenders under both facilities also waived our

noncompliance with certain reporting requirements under such facilities subsequent to March 31, 2007. One such waiver related to our failure to deliver our restated consolidated financial statements for the fiscal year ended March 31, 2007 accompanied by a report or opinion of our independent certified public accountants that was not subject to any “going concern” explanatory paragraph. The Report of Independent Registered Public Accounting Firm accompanying our restated consolidated financial statements included in our Report on Form 10K/A dated August 31, 2007, contains a “going concern” explanatory paragraph. The lenders under both facilities waived such noncompliance with respect to the delivery of such Report of Independent Registered Public Accounting Firm until November 29, 2007.

On November 14, 2007, holders of in excess of 90% of the aggregate principal amount of our 10% Notes agreed with us to (a) defer to March 15, 2008, the semi-annual payment of cash interest on the 10% Notes held by such holders, which would otherwise have been due on December 15, 2007, and (b) amend certain covenants in the 10% Notes indenture. In consideration thereof, we issued to each such holder a senior second secured noninterest-bearing promissory note due March 15, 2008, of Graphics with a principal amount equal to the sum of the amount of the cash interest payment deferred on the 10% Notes held by such holder and a consent fee equal to 1% of the principal amount of the 10% Notes held by such holder (collectively, the “2007 Promissory Notes”). Such 2007 Promissory Notes are fully and unconditionally guaranteed by Holdings.

On November 14, 2007, certain provisions of our 2005 Credit Agreement and Receivables Facility were also amended or waived to (a) provide for an additional $5 million term loan to Graphics under the 2005 Term Loan Facility, (the “Supplemental Term Loan”), and (b) temporarily waive until February 15, 2008, any default under such bank credit facilities resulting from noncompliance with the first lien coverage ratio covenant in each such bank credit facility as of September 30, and December 31, 2007, for all purposes of such bank credit facilities (including, without limitation, for the purpose of determining Graphics’ entitlement to make additional borrowings under either such bank credit facility on or prior to such date). Such amendment and waiver also (a) amended the covenant in each of our bank credit facilities requiring Graphics to maintain certain levels of minimum total liquidity and (b) temporarily waived until February 15, 2008, Graphics’ noncompliance with our obligation thereunder to deliver our restated consolidated financial statements for the fiscal year ended March 31, 2007 accompanied by a report or opinion of our independent certified public accountants that was not subject to any “going concern” explanatory paragraph. The Report of Independent Registered Public Accounting Firm accompanying our restated consolidated financial statements included in our Report on Form 10K/A dated August 31, 2007, contains a “going concern” explanatory paragraph.

On February 14, 2008, certain provisions of our 2005 Credit Agreement and Receivables Facility were also amended or waived to temporarily waive through and including March 13, 2008, any default under such bank credit facilities resulting from noncompliance with the first lien coverage ratio covenant in each such bank credit facility as of September 30, and December 31, 2007, for all purposes of such bank credit facilities (including, without limitation, for the purpose of determining Graphics’

entitlement to make additional borrowings under either such bank credit facility on or prior to such date). Such amendment and waiver also (a) waived through and including March 13, 2008, the requirement that Graphics repay the $5.0 million Supplemental Term Loan, which was consummated on November 14, 2007, (b) amended certain terms relating to borrowings thereunder, including, without limitation, (i) requiring that all new loans be base rate or prime rate loans, (ii) amending the rates applicable to borrowings to, in effect, increase such rates prospectively, and (iii) changing required interest payment dates on base rate or prime rate loans from quarterly to monthly, (c) requires that we maintain certain daily levels of minimum total availability under our bank credit facilities going forward (and deletes the total liquidity maintenance covenant in each such facility), and (d) waived through and including March 13, 2008, Graphics’ noncompliance with its obligation thereunder to deliver our restated consolidated financial statements for the fiscal year ended March 31, 2007 accompanied by a report or opinion of our independent certified public accountants that was not subject to any “going concern” explanatory paragraph. We paid consenting lenders an aggregate amendment fee of $650,000.00 in connection with such amendments.

We do not believe it is probable that we will be in compliance with the first lien coverage ratio covenants under the 2005 Credit Agreement or the Receivables Facility after March 13, 2008. Based on current forecasts prepared by our management, in order for us to have sufficient liquidity to meet our requirements for liquidity after March 13, 2008, including payment of the principal of and accrued interest on the Supplemental Term Loan on March 14, 2008, and payment of the principal of the 2007 Promissory Notes on March 15, 2008, we would have to take one or more additional actions to improve our liquidity or modify our requirements for liquidity, which could include, without limitation, seeking to sell Holdings to another party, seeking to exchange some or all of our 10% Notes and the 2007 Promissory Notes for other securities of Holdings, seeking waivers or amendments from the requisite lenders under our 2005 Credit Agreement or our Receivables Facility or the requisite holders of our 10% Notes or the 2007 Promissory Notes, or all four thereof, under the documentation therefor, seeking to incur additional indebtedness above currently permitted levels (if the requisite lenders under our bank credit facilities and the requisite holders of our 10% Notes and 2007 Promissory Notes permit it), seeking to refinance one or both of our 2005 Credit Agreement or Receivables Facility, or taking other actions that could have a material adverse effect on us. If our business does not generate cash from operations, or we do not otherwise maintain sufficient liquidity, in line with our management’s current forecasts for the period through March 13, 2008, we would be required to seek to take one or more additional actions sooner than March 13, 2008, to provide additional liquidity, which could include seeking to incur additional indebtedness above currently permitted levels. We can provide no assurance that any such action it may seek to take could be successfully accomplished or as to the timing or terms thereof.

Based on our management’s current forecasts and our current capital structure (and without giving effect to any additional actions described above that we may take), we cannot provide any assurance that we will be able to comply with the first lien coverage ratio covenants in the 2005 Credit Agreement and the Receivables Facility after March 13, 2008. Accordingly, pursuant to Emerging Issues Task Force Issue 86-30 “Classification of Obligations When a Violation is Waived by the Creditor” (“EITF 86-30”) and Statement of Financial Accounting Standards No. 78, “Classification of Obligations That Are Callable by the Creditor-an amendment of ARB No. 43, Chapter

3A (“SFAS 78”), we have classified all amounts outstanding under the 2005 Credit Agreement, the Receivables Facility, the 10% Notes, and all our capital lease obligations as current liabilities in the accompanying September 30, 2007 condensed consolidated balance sheet. No amounts under the 2005 Credit Agreement, Receivables Facility or 10% Notes or capital lease obligations were due but unpaid at December 31, 2007.

See “Special Note Regarding Forward Looking Statements”.

May 2005 Refinancing

On May 5, 2005, we entered into the 2005 Credit Agreement which resulted in the refinancing of our $70 million senior secured revolving credit facility (the “Old Revolving Credit Facility”), which would have matured on July 3, 2008, and significantly improved our liquidity position. In addition, on November 14, 2007 the 2005 Credit Agreement was amended and additional term loan borrowings of $5.0 million were provided. As a result, the 2005 Credit Agreement, as amended, is a $95 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”);

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

• a $5 million addition to the 2005 Term Loan Facility maturing on March 14, 2008.

Interest on borrowings under the 2005 Credit Agreement is floating, based upon existing market rates, at either (a) LIBOR plus a margin of 6.0% for loans at December 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 5.0% for loans at December 31, 2007. Margin levels under the 2005 Credit Agreement have increased as the level of receivables sold by Graphics to Graphics Finance (as defined below) under the Receivables Facility (as defined below) have increased. In addition, Graphics is obligated to pay specified unused commitment, letter of credit and other customary fees.

Borrowings of $35 million under the 2005 Term Loan Facility must be repaid in full on the facility’s maturity date of December 15, 2009. The additional borrowings of $5 million provided under the 2005 Term Loan Facility must be repaid on the maturity date of March 14, 2008. Graphics is also required to prepay the 2005 Term Loan Facility and the 2005 Revolving Credit Facility under certain circumstances with excess cash flows and proceeds from certain sales of assets, equity issuances and incurrences of indebtedness.

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

all indebtedness under the 2005 Credit Agreement which guarantee is secured by a pledge of all of Graphics’ capital stock.

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

• a first lien leverage ratio test; and

• a minimum total availability test.

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

• incur or guarantee additional debt;

• create or permit to exist certain liens;

• pledge assets or engage in sale-leaseback transactions;

• make capital expenditures, other investments or acquisitions;

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

• repurchase or redeem equity interests;

• change the nature of our business;

• pay dividends or make other distributions;

• enter into transactions with affiliates;

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

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

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

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 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. Most of Graphics’ receivables from U.S. customers are 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 availability test contained in the 2005 Credit Agreement. In addition, the Receivables Facility contains other customary affirmative and negative covenants and events of default. It also contains other covenants customary for facilities of this type, including requirements related to credit and collection policies, deposits of collections and maintenance by each party of its separate corporate identity, including maintenance of separate records, books, assets and liabilities and disclosures about the transactions in the financial statements of Holdings and its consolidated subsidiaries. The Receivables Facility also requires delivery to the lenders of our annual consolidated financial statements accompanied by a report and opinion of our independent certified public accountants that is not subject to any “going concern” explanatory paragraph. 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 December 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 December 31, 2007. In addition, Graphics Finance is obligated to pay specified unused commitment and other customary fees.

At December 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 condensed 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.

	Three Months Ended				Nine Months Ended
	December 31,				December 31,
	2007		2006		2007		2006
Print segment VAR (in thousands)	$	52,010		51,207		146,487		146,272
Print segment impressions (in millions)		2,982		3,098		8,201		8,810

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

	Three Months Ended						Nine Months Ended
	December 31,						December 31,,
	2007			2006			2007			2006
	(in thousands)						(in thousands)
Print segment sales	$	107,627			108,330			291,818			304,574
Paper, ink and subcontract services		(55,617	)		(57,123	)		(145,331	)		(158,302	)
Print segment VAR	$	52,010			51,207			146,487			146,272

New Accounting Pronouncements

In July 2006, the FASB issued FIN 48, to clarify 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. 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. The adoption of FIN 48 on April 1, 2007 had no material impact on the condensed consolidated financial statements as a whole. See “—Income Tax Expense (Benefit)” above.

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

In September 2006, the FASB issued SFAS 157. SFAS 157 defines fair value, establishes the framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. The provisions of SFAS 157 will be effective for us as of April 1, 2008. We are in the process of evaluating the impact, if any, SFAS 157 will have on our condensed consolidated financial statements as a whole.

In September 2006, the FASB issued 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 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 our fiscal year ending March 31, 2008. The requirement to measure plan assets and benefit obligations as of the date of our fiscal year end will be effective for the fiscal year ending March 31, 2009. We have begun our analysis of the impact of the adoption of SFAS 158 but do not currently anticipate a significant impact on the condensed consolidated financial statements as a whole.

In February 2007, the FASB issued SFAS 159. SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value at specified election dates. The provisions of SFAS 159 will be effective for us as of April 1, 2008. We are in the process of evaluating the impact, if any, SFAS 159 will have on our condensed financial statements as a whole.

Contractual Obligations

There have been no material changes in our contractual obligations from those disclosed in our Form 10-K/A for the fiscal year ended March 31, 2007 filed with the SEC on August 31, 2007.

28

ACG HOLDINGS, INC.
PART I — FINANCIAL INFORMATION

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Quantitative Information.At December 31, 2007 we had fixed and variable rate debt (both excluding capital lease obligations) of approximately $294.7 million and $82.3 million, respectively. At March 31, 2007, we had fixed and variable rate debt (both excluding capital lease obligations) of approximately $280.0 million and $66.6 million, respectively. The estimated fair value of our debt instruments, excluding capital lease obligations, at December 31, 2007 was $251.0 million, or $126.0 million less than the carrying value, and at March 31, 2007 was $286.4 million, or $60.2 million less than the carrying value. At our December 31, 2007 and March 31, 2007 borrowing levels, a 1% adverse change in interest rates would result in an approximate $3.5 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 $0.8 million at December 31, 2007 and approximately $0.7 million at March 31, 2007 on our variable rate debt.

Qualitative Information.In the ordinary course of business, our exposure to market risks is limited as is described below. Market risk is the potential loss arising from adverse changes in market rates and prices, such as interest and foreign currency exchange rates. Currently, we do not utilize derivative financial instruments such as forward exchange contracts, futures 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 4. Controls and Procedures.

As of December 31, 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 our disclosure controls and procedures were effective as of December 31, 2007. There have been no significant changes in our internal controls or in other factors that could significantly affect internal controls subsequent to December 31, 2007. There have not been any changes in our internal controls over financial reporting during the period covered by this quarterly report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

29

ACG HOLDINGS, INC.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings.

There have been no significant changes since March 31, 2007. Reference is made to “Business — Legal Proceedings” disclosure in our Form 10-K filed for the fiscal year ended March 31, 2007.

Item 6. Exhibits.

Exhibit No.			Description
	10.1	(f)	Sixth Amendment to May 5, 2005 Amended and Restated Credit Agreement dated as of February 12, 2008, among Graphics, Holdings, Bank of America, N.A., as Agent, and certain lenders.
	10.11	(b)	Amendment, dated February 5, 2008, to Amended and Restated American Color Graphics, Inc. Supplemental Executive Retirement Plan.
	10.31		Second Amendment and Temporary Waiver Agreement dated as of February 12, 2008, among Graphics, Graphics Finance and Bank of America, N.A., as Agent, and certain lenders.
	12.1		Statement Re: Computation of Ratio of Earnings to Fixed Charges
	31.1		Rule 13a — 14(a)/15d-14(a) Certification of Chief Executive Officer
	31.2		Rule 13a — 14(a)/15d-14(a) Certification of Chief Financial Officer
	32.1		Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350

30

SIGNATURES

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

	ACG Holdings, Inc. American Color Graphics, Inc.
Date: February 15, 2008	By /s/ Stephen M. Dyott
	Stephen M. Dyott
	Chairman, President and Chief Executive Officer ACG Holdings, Inc. Chairman and Chief Executive Officer American Color Graphics, Inc. (Authorized Officer)

Date: February 15, 2008	By /s/ Patrick W. Kellick
	Patrick W. Kellick
	Executive Vice President/Chief Financial Officer and Secretary (Authorized Officer and Principal Financial Officer)

31

EXHIBIT INDEX

Exhibit No.			Description
	10.1	(f)	Sixth Amendment to May 5, 2005 Amended and Restated Credit Agreement dated as of February 12, 2008, among Graphics, Holdings, Bank of America, N.A., as Agent, and certain lenders.
	10.11	(b)	Amendment, dated February 5, 2008, to Amended and Restated American Color Graphics, Inc. Supplemental Executive Retirement Plan.
	10.31		Second Amendment and Temporary Waiver Agreement dated as of February 12, 2008, among Graphics, Graphics Finance and Bank of America, N.A., as Agent, and certain lenders.
	12.1		Statement Re: Computation of Ratio of Earnings to Fixed Charges
	31.1		Rule 13a — 14(a)/15d-14(a) Certification of Chief Executive Officer
	31.2		Rule 13a — 14(a)/15d-14(a) Certification of Chief Financial Officer
	32.1		Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350

32