##### Table of Contents



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, 2005
 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.
  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
 AMERICAN COLOR GRAPHICS, INC.
  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
 þ o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer
þ
 o þ




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##### 



INDEX
 PAGEPART I.
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial Statements.Condensed Consolidated Balance Sheets as of December 31, 2005 and March 31, 2005
    
    
    3Condensed Consolidated Statements of Operations for the Three Months Ended December 31, 2005 and 2004
    
    
    5Condensed Consolidated Statements of Operations for the Nine Months Ended December 31, 2005 and 2004
    
    
    6Condensed Consolidated Statements of Cash Flows for the Nine Months Ended  December 31, 2005 and 2004
    
    
    7Notes to Condensed Consolidated Financial Statements
    
    
    8Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations.
    
    
    20Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk.
    
    
    29Item 4.
    
    Controls and Procedures.
    
    
    29PART II.
    
    OTHER INFORMATIONItem 1.
    
    Legal Proceedings.
    
    
    30Item 6.
    
    Exhibits.
    
    
    30SIGNATURES
    
    
    31EXHIBIT INDEX
    
    
    32EX-10.9  COMMON STOCK OPTION AGREEMENT FORMEX-10.11  SUPPLEMENTAL EXECUTIVE RETIREMENT PLANEX-10.19  EXECUTIVE INCENTIVE COMPENSATION PROGRAMEX-12.1  COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGESEX-31.1  SECTION 302 CEO CERTIFICATIONEX-31.2  SECTION 302 CFO CERTIFICATIONEX-32.1  SECTION 906 CEO AND CFO CERTIFICATION
  2




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##### Table of Contents



ACG HOLDINGS, INC.
 
 Condensed Consolidated Balance Sheets
  December 31, 2005
    
    
    March 31, 2005(Unaudited)AssetsCurrent assets:Cash
    
    $
    
    
    
    
    Receivables:Trade accounts, less allowance for
doubtful accounts of $1,598 and
$1,783 at December 31, 2005 and March
31, 2005, respectively
    
    
    47,302
    
    
    
    46,992Income tax receivable
    
    
    
    
    
    
    78Other
    
    
    4,639
    
    
    
    3,420Total receivables
    
    
    51,941
    
    
    
    50,490Inventories
    
    
    9,442
    
    
    
    10,447Deferred income taxes
    
    
    2,235
    
    
    
    2,235Prepaid expenses and other current assets
    
    
    4,373
    
    
    
    5,192Assets held for sale
    
    
    
    
    
    
    8,112Total current assets
    
    
    67,991
    
    
    
    76,476Property, plant and equipment
    
    
    290,233
    
    
    
    287,095Less accumulated depreciation
    
    
    (200,613
    )
    
    
    (189,626
    )Net property, plant and equipment
    
    
    89,620
    
    
    
    97,469Excess of cost over net assets acquired
    
    
    66,548
    
    
    
    66,548Other assets
    
    
    20,359
    
    
    
    18,405Total assets
    
    $
    244,518
    
    
    
    258,898
  3




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##### Table of Contents



ACG HOLDINGS, INC.
Condensed Consolidated Balance Sheets
 December 31, 2005
    
    
    March 31, 2005(Unaudited)Liabilities and Stockholders DeficitCurrent liabilities:Current installments of capitalized leases
    
    $
    3,651
    
    
    
    3,631Obligations under capital leases held for sale
    
    
    
    
    
    
    1,036Trade accounts payable
    
    
    36,581
    
    
    
    40,365Accrued expenses
    
    
    33,164
    
    
    
    42,104Income tax payable
    
    
    120
    
    
    
    Total current liabilities
    
    
    73,516
    
    
    
    87,136Long-term debt and capitalized leases,
excluding current installments
    
    
    321,516
    
    
    
    305,284Deferred income taxes
    
    
    4,726
    
    
    
    8,148Other liabilities
    
    
    61,795
    
    
    
    71,070Total liabilities
    
    
    461,553
    
    
    
    471,638Commitments and contingencies (note 8)Stockholders deficit:Common stock, voting, $.01 par value, 5,852,223
shares authorized, 158,205 shares and 160,067
shares issued and outstanding at December 31,
2005 and March 31, 2005, respectively
    
    
    2
    
    
    
    2Additional paid-in capital
    
    
    2,031
    
    
    
    2,203Accumulated deficit
    
    
    (199,519
    )
    
    
    (195,183
    )Other accumulated comprehensive loss, net of tax
    
    
    (19,549
    )
    
    
    (19,762
    )Total stockholders deficit
    
    
    (217,035
    )
    
    
    (212,740
    )Total liabilities and stockholders deficit
    
    $
    244,518
    
    
    
    258,898
  4




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##### Table of Contents



ACG HOLDINGS, INC.
 
 Condensed Consolidated Statements of Operations
   Three Months EndedDecember 31,2005
    
    
    2004Sales
    
    $
    118,724
    
    
    
    123,652Cost of sales
    
    
    103,813
    
    
    
    110,260Gross profit
    
    
    14,911
    
    
    
    13,392Selling, general and administrative expenses
    
    
    7,119
    
    
    
    7,642Restructuring costs (benefit)
    
    
    (502
    )
    
    
    Operating income
    
    
    8,294
    
    
    
    5,750Other expense (income):Interest expense
    
    
    9,473
    
    
    
    8,560Interest income
    
    
    (14
    )
    
    
    (35
    )Other, net
    
    
    7
    
    
    
    (16
    )Total other expense
    
    
    9,466
    
    
    
    8,509Loss before income taxes
    
    
    (1,172
    )
    
    
    (2,759
    )Income tax expense (benefit):Current
    
    
    121
    
    
    
    81Deferred
    
    
    (3,545
    )
    
    
    (554
    )Total income tax benefit
    
    
    (3,424
    )
    
    
    (473
    )Net income (loss)
    
    $
    2,252
    
    
    
    (2,286
    )
  5




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##### Table of Contents



ACG HOLDINGS, INC.
 
 Condensed Consolidated Statements of Operations
   Nine Months EndedDecember 31,2005
    
    
    2004Sales
    
    $
    332,454
    
    
    
    341,107Cost of sales
    
    
    293,117
    
    
    
    304,229Gross profit
    
    
    39,337
    
    
    
    36,878Selling, general and administrative expenses
    
    
    19,113
    
    
    
    21,095Restructuring costs (benefit)
    
    
    (502
    )
    
    
    Operating income
    
    
    20,726
    
    
    
    15,783Other expense (income):Interest expense
    
    
    28,036
    
    
    
    25,417Interest income
    
    
    (77
    )
    
    
    (35
    )Other, net
    
    
    489
    
    
    
    (164
    )Total other expense
    
    
    28,448
    
    
    
    25,218Loss before income taxes
    
    
    (7,722
    )
    
    
    (9,435
    )Income tax expense (benefit):Current
    
    
    208
    
    
    
    (875
    )Deferred
    
    
    (3,594
    )
    
    
    (623
    )Total income tax benefit
    
    
    (3,386
    )
    
    
    (1,498
    )Net loss
    
    $
    (4,336
    )
    
    
    (7,937
    )
  6




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##### Table of Contents



ACG HOLDINGS, INC.
 
 Condensed Consolidated Statements of Cash Flows
   Nine Months EndedDecember 31,2005
    
    
    2004Cash flows provided (used) by operating activities:Net loss
    
    $
    (4,336
    )
    
    
    (7,937
    )Adjustments to reconcile net loss to net cash used
by operating activities:Depreciation
    
    
    14,397
    
    
    
    17,099Amortization of other assets
    
    
    215
    
    
    
    358Amortization of deferred financing costs
    
    
    2,242
    
    
    
    1,847Deferred income tax benefit
    
    
    (3,594
    )
    
    
    (623
    )Increase in working capital and other
    
    
    (21,019
    )
    
    
    (23,149
    )Net cash used by operating activities
    
    
    (12,095
    )
    
    
    (12,405
    )Cash flows provided (used) by investing activities:Purchases of property, plant and equipment
    
    
    (6,475
    )
    
    
    (4,521
    )Proceeds from sale of property, plant and equipment held for sale (note 3)
    
    
    6,877
    
    
    
    Proceeds from other sales of property, plant and equipment
    
    
    213
    
    
    
    170Other
    
    
    (184
    )
    
    
    (350
    )Net cash provided (used) by investing activities
    
    
    431
    
    
    
    (4,701
    )Cash flows provided (used) by financing activities:Proceeds from 2005 term loan facility (note 4)
    
    
    35,000
    
    
    
    Net increase (decrease) in revolver borrowings
    
    
    (16,000
    )
    
    
    20,752Repayment and buyout of capital lease obligations
    
    
    (3,784
    )
    
    
    (3,094
    )Payment of deferred financing costs
    
    
    (3,526
    )
    
    
    (468
    )Net cash provided by financing activities
    
    
    11,690
    
    
    
    17,190Effect of exchange rates on cash
    
    
    (26
    )
    
    
    (84
    )Net change in cash
    
    
    
    
    
    
    Cash:Beginning of period
    
    
    
    
    
    
    End of period
    
    $
    
    
    
    
    Non-cash investing activity:Equipment purchases under capital leases
    
    $
    
    
    
    
    31
  7




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##### Table of Contents



ACG HOLDINGS, INC.
 
 Notes to Condensed Consolidated Financial Statements
  Description of the Company
  1. Basis of Presentation
   2. Inventories
  December 31,
    
    
    March 31,2005
    
    
    2005Paper
    
    $
    7,481
    
    
    
    8,503Ink
    
    
    166
    
    
    
    171Supplies and other
    
    
    1,795
    
    
    
    1,773Total inventories
    
    $
    9,442
    
    
    
    10,447
 3.
Assets and Liabilities Held For Sale
  8




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##### Table of Contents



ACG HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
  4. May 5, 2005 Refinancing Transaction
  
    
    $55 million revolving credit
facility ($40
million of which
may be used for
letters of credit),
which is not
subject to a
borrowing base
limitation,
maturing on
December 15, 2009
(the 2005
Revolving Credit Facility); and
    
    $35 million
non-amortizing term
loan facility
maturing on
December 15, 2009
(the 2005 Term
Loan Facility).
     
    
    change the nature of its business;
    
    pay dividends or make other distributions;
    
    make capital expenditures, other investments or acquisitions;
    
    enter into transactions with affiliates;
    
    dispose of assets or enter into mergers or other business combinations;
    
    incur or guarantee additional debt;
    
    repay debt or repurchase or redeem equity interests and debt;
    
    place restrictions on dividends, distributions or transfers to the Company or Holdings
from its subsidiaries;
    
    create or permit to exist certain liens; and
    
    pledge assets or engage in sale-leaseback transactions.
 9




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##### Table of Contents



ACG HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
    5. Comprehensive Income (Loss)
   Three Months Ended
    
    
    Nine Months EndedDecember 31,
    
    
    December 31,2005
    
    
    2004
    
    
    2005
    
    
    2004Net income (loss)
    
    $
    2,252
    
    
    
    (2,286
    )
    
    
    (4,336
    )
    
    
    (7,937
    )Foreign currency
translation adjustment,
net of tax
    
    
    96
    
    
    
    137
    
    
    
    213
    
    
    
    526Total comprehensive income (loss)
    
    $
    2,348
    
    
    
    (2,149
    )
    
    
    (4,123
    )
    
    
    (7,411
    )
 6. Income Taxes
    10




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##### Table of Contents



ACG HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
  7. Employee Benefit Plans
 Components of Net Periodic Benefit Cost (in thousands)
 Defined Benefit
    
    
    Defined BenefitPension Plans
    
    
    Postretirement PlanThree months ended
    
    
    Three months endedDecember 31,
    
    
    December 31,2005
    
    
    2004
    
    
    2005
    
    
    2004Service cost
    
    $
    123
    
    
    
    118
    
    
    
    8
    
    
    
    (3
    )Interest cost
    
    
    1,107
    
    
    
    1,065
    
    
    
    50
    
    
    
    (33
    )Expected return on plan assets
    
    
    (1,065
    )
    
    
    (878
    )
    
    
    
    
    
    
    Amortization of prior service
cost
    
    
    
    
    
    
    
    
    
    
    (55
    )
    
    
    (56
    )Amortization of unrecognized
loss
    
    
    508
    
    
    
    506
    
    
    
    
    
    
    
    Recognized net actuarial gain
    
    
    
    
    
    
    
    
    
    
    10
    
    
    
    (10
    )Net periodic benefit cost
    
    $
    673
    
    
    
    811
    
    
    
    13
    
    
    
    (102
    )
 Nine months ended
    
    
    Nine months endedDecember 31,
    
    
    December 31,2005
    
    
    2004
    
    
    2005
    
    
    2004Service cost
    
    $
    357
    
    
    
    353
    
    
    
    33
    
    
    
    20Interest cost
    
    
    3,346
    
    
    
    3,186
    
    
    
    170
    
    
    
    101Expected return on plan assets
    
    
    (3,196
    )
    
    
    (2,633
    )
    
    
    
    
    
    
    Amortization of prior service
cost
    
    
    
    
    
    
    
    
    
    
    (166
    )
    
    
    (167
    )Amortization of unrecognized
loss
    
    
    1,511
    
    
    
    1,517
    
    
    
    
    
    
    
    Recognized net actuarial gain
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    (31
    )Net periodic benefit cost
    
    $
    2,018
    
    
    
    2,423
    
    
    
    38
    
    
    
    (77
    )
 8. Commitments and Contingencies
  11




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##### Table of Contents



ACG HOLDINGS, INC.
 Notes to Condensed Consolidated Financial Statements
       9. Restructuring Costs
 Fiscal Year 2005 Restructuring Costs
 New York Premedia Consolidation Plan
   12




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##### Table of Contents



ACG HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
   03/31/05
    
    
    
    
    
    
    12/31/05Restructuring
    
    
    
    
    
    
    RestructuringReserve Balance
    
    
    Activity
    
    
    Reserve BalanceSeverance and other
employee costs
    
    $
    195
    
    
    
    (155
    )
    
    
    40Lease termination costs
    
    
    1,271
    
    
    
    (378
    )
    
    
    893Other costs
    
    
    15
    
    
    
    
    
    
    
    15$
    1,481
    
    
    
    (533
    )
    
    
    948
  Pittsburg Facility Closure Plan
    03/31/05
    
    
    
    
    
    
    
    
    
    
    12/31/05Restructuring
    
    
    
    
    
    
    Reserve
    
    
    RestructuringReserve Balance
    
    
    Activity
    
    
    Adjustment
    
    
    Reserve BalanceSeverance and other
employee costs
    
    $
    1,329
    
    
    
    (497
    )
    
    
    (802
    )
    
    
    30Lease termination costs
    
    
    774
    
    
    
    (57
    )
    
    
    
    
    
    
    717Other costs
    
    
    37
    
    
    
    (11
    )
    
    
    
    
    
    
    26$
    2,140
    
    
    
    (565
    )
    
    
    (802
    )
    
    
    773
 13




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##### Table of Contents



ACG HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
  Plant and SG&A Reduction Plan
    03/31/05
    
    
    
    
    
    
    12/31/05Restructuring
    
    
    
    
    
    
    RestructuringReserve Balance
    
    
    Activity
    
    
    Reserve BalanceSeverance and other employee costs
    
    $
    3,208
    
    
    
    (1,682
    )
    
    
    1,526Other costs
    
    
    249
    
    
    
    (22
    )
    
    
    227$
    3,457
    
    
    
    (1,704
    )
    
    
    1,753
  Fiscal Year 2004 Restructuring Costs
 January 2004 Plan
   14




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##### Table of Contents



ACG HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
   03/31/05
    
    
    
    
    
    
    
    
    
    
    12/31/05Restructuring
    
    
    
    
    
    
    Reserve
    
    
    RestructuringReserve Balance
    
    
    Activity
    
    
    Adjustment
    
    
    Reserve BalanceSeverance and
other employee
costs
    
    $
    813
    
    
    
    (377
    )
    
    
    (104
    )
    
    
    332Other costs
    
    
    77
    
    
    
    (61
    )
    
    
    104
    
    
    
    120$
    890
    
    
    
    (438
    )
    
    
    
    
    
    
    452
  July 2003 Plan
    03/31/05
    
    
    
    
    
    12/31/05Restructuring
    
    
    
    
    
    RestructuringReserve Balance
    
    Activity
    
    Reserve BalanceSeverance and other employee costs
    
    
    $ 430
    
    
    
    (234
    )
    
    
    196
  15




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##### Table of Contents



ACG HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
 Fiscal Year 2002 Restructuring Costs
    03/31/05
    
    
    
    
    
    
    
    
    
    12/31/05Restructuring
    
    
    
    
    
    Reserve
    
    RestructuringReserve Balance
    
    Activity
    
    Adjustment
    
    Reserve BalanceLease termination costs
    
    
    $ 1,524
    
    
    
    (315
    )
    
    
    300
    
    
    
    1,509
  16




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##### Table of Contents



ACG HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
 10. Industry Segment Information
     Premedia
    
    
    Corporate(In thousands)
    
    Print
    
    
    Services
    
    
    and Other
    
    
    TotalNine Months Ended December 31, 2005Sales
    
    $
    291,219
    
    
    
    41,235
    
    
    
    
    
    
    
    332,454EBITDA
    
    $
    28,587
    
    
    
    8,730
    
    
    
    (2,468
    )
    
    
    34,849Depreciation and amortization
    
    
    (12,635
    )
    
    
    (1,977
    )
    
    
    
    
    
    
    (14,612
    )Interest expense
    
    
    
    
    
    
    
    
    
    
    (28,036
    )
    
    
    (28,036
    )Interest income
    
    
    
    
    
    
    
    
    
    
    77
    
    
    
    77Income tax benefit
    
    
    
    
    
    
    
    
    
    
    3,386
    
    
    
    3,386Net income (loss)
    
    $
    15,952
    
    
    
    6,753
    
    
    
    (27,041
    )
    
    
    (4,336
    )Total assets
    
    $
    214,966
    
    
    
    15,117
    
    
    
    14,435
    
    
    
    244,518Total goodwill
    
    $
    64,656
    
    
    
    1,892
    
    
    
    
    
    
    
    66,548Total capital expenditures
    
    $
    5,576
    
    
    
    899
    
    
    
    
    
    
    
    6,475
 17




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##### Table of Contents



ACG HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
 Premedia
    
    
    Corporate(In thousands)
    
    Print
    
    
    Services
    
    
    and Other
    
    
    TotalNine Months Ended December 31, 2004Sales
    
    $
    298,705
    
    
    
    42,402
    
    
    
    
    
    
    
    341,107EBITDA
    
    $
    25,901
    
    
    
    9,796
    
    
    
    (2,293
    )
    
    
    33,404Depreciation and amortization
    
    
    (15,061
    )
    
    
    (2,396
    )
    
    
    
    
    
    
    (17,457
    )Interest expense
    
    
    
    
    
    
    
    
    
    
    (25,417
    )
    
    
    (25,417
    )Interest income
    
    
    
    
    
    
    
    
    
    
    35
    
    
    
    35Income tax benefit
    
    
    
    
    
    
    
    
    
    
    1,498
    
    
    
    1,498Net income (loss)
    
    $
    10,840
    
    
    
    7,400
    
    
    
    (26,177
    )
    
    
    (7,937
    )Total assets
    
    $
    238,139
    
    
    
    16,341
    
    
    
    13,628
    
    
    
    268,108Total goodwill
    
    $
    64,656
    
    
    
    1,892
    
    
    
    
    
    
    
    66,548Total capital expenditures
    
    $
    3,367
    
    
    
    1,185
    
    
    
    
    
    
    
    4,552Three Months Ended December 31, 2005Sales
    
    $
    105,006
    
    
    
    13,718
    
    
    
    
    
    
    
    118,724EBITDA
    
    $
    11,149
    
    
    
    2,711
    
    
    
    (822
    )
    
    
    13,038Depreciation and amortization
    
    
    (4,126
    )
    
    
    (625
    )
    
    
    
    
    
    
    (4,751
    )Interest expense
    
    
    
    
    
    
    
    
    
    
    (9,473
    )
    
    
    (9,473
    )Interest income
    
    
    
    
    
    
    
    
    
    
    14
    
    
    
    14Income tax benefit
    
    
    
    
    
    
    
    
    
    
    3,424
    
    
    
    3,424Net income (loss)
    
    $
    7,023
    
    
    
    2,086
    
    
    
    (6,857
    )
    
    
    2,252Total assets
    
    $
    214,966
    
    
    
    15,117
    
    
    
    14,435
    
    
    
    244,518Total goodwill
    
    $
    64,656
    
    
    
    1,892
    
    
    
    
    
    
    
    66,548Total capital expenditures
    
    $
    1,777
    
    
    
    386
    
    
    
    
    
    
    
    2,163Three Months Ended December 31, 2004Sales
    
    $
    109,057
    
    
    
    14,595
    
    
    
    
    
    
    
    123,652EBITDA
    
    $
    9,015
    
    
    
    3,274
    
    
    
    (734
    )
    
    
    11,555Depreciation and amortization
    
    
    (4,976
    )
    
    
    (813
    )
    
    
    
    
    
    
    (5,789
    )Interest expense
    
    
    
    
    
    
    
    
    
    
    (8,560
    )
    
    
    (8,560
    )Interest income
    
    
    
    
    
    
    
    
    
    
    35
    
    
    
    35Income tax benefit
    
    
    
    
    
    
    
    
    
    
    473
    
    
    
    473Net income (loss)
    
    $
    4,039
    
    
    
    2,461
    
    
    
    (8,786
    )
    
    
    (2,286
    )Total assets
    
    $
    238,139
    
    
    
    16,341
    
    
    
    13,628
    
    
    
    268,108Total goodwill
    
    $
    64,656
    
    
    
    1,892
    
    
    
    
    
    
    
    66,548Total capital expenditures
    
    $
    808
    
    
    
    543
    
    
    
    
    
    
    
    1,351
 18




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##### Table of Contents



ACG HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
 11. Impact of Recently Issued Accounting Standards
   19




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##### Table of Contents



ACG HOLDINGS, INC.
 
 Managements Discussion and Analysis of
 Financial Condition and Results of Operations
 Special Note Regarding Forward Looking Statements
  
    
    a failure to achieve expected cost reductions or to execute other key strategies;
    
    fluctuations in the cost of paper, ink and other key raw materials;
    
    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.
   20




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##### Table of Contents



ACG HOLDINGS, INC.
Managements Discussion and Analysis of
Financial Condition and Results of Operations
  Three Months Ended
    
    
    Nine Months EndedDecember 31,
    
    
    December 31,2005
    
    
    2004
    
    
    2005
    
    
    2004Sales:Print
    
    $
    105,006
    
    
    
    109,057
    
    
    
    291,219
    
    
    
    298,705Premedia Services
    
    
    13,718
    
    
    
    14,595
    
    
    
    41,235
    
    
    
    42,402Total
    
    $
    118,724
    
    
    
    123,652
    
    
    
    332,454
    
    
    
    341,107Gross Profit:Print
    
    $
    11,098
    
    
    
    9,118
    
    
    
    27,816
    
    
    
    24,718Premedia Services
    
    
    3,814
    
    
    
    4,267
    
    
    
    11,524
    
    
    
    12,155Other
    
    
    (1
    )
    
    
    7
    
    
    
    (3
    )
    
    
    5Total
    
    $
    14,911
    
    
    
    13,392
    
    
    
    39,337
    
    
    
    36,878Gross Margin:Print
    
    
    10.6
    %
    
    
    8.4
    %
    
    
    9.6
    %
    
    
    8.3
    %Premedia Services
    
    
    27.8
    %
    
    
    29.2
    %
    
    
    27.9
    %
    
    
    28.7
    %Total
    
    
    12.6
    %
    
    
    10.8
    %
    
    
    11.8
    %
    
    
    10.8
    %EBITDA:Print
    
    $
    11,149
    
    
    
    9,015
    
    
    
    28,587
    
    
    
    25,901Premedia Services
    
    
    2,711
    
    
    
    3,274
    
    
    
    8,730
    
    
    
    9,796Other (a)
    
    
    (822
    )
    
    
    (734
    )
    
    
    (2,468
    )
    
    
    (2,293
    )Total
    
    $
    13,038
    
    
    
    11,555
    
    
    
    34,849
    
    
    
    33,404EBITDA Margin:Print
    
    
    10.6
    %
    
    
    8.3
    %
    
    
    9.8
    %
    
    
    8.7
    %Premedia Services
    
    
    19.8
    %
    
    
    22.4
    %
    
    
    21.2
    %
    
    
    23.1
    %Total
    
    
    11.0
    %
    
    
    9.3
    %
    
    
    10.5
    %
    
    
    9.8
    %
 
   21




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##### Table of Contents



ACG HOLDINGS, INC.
Managements Discussion and Analysis of
Financial Condition and Results of Operations
  PremediaPrint
    
    
    Services
    
    
    Other
    
    
    TotalThree Months Ended December 31, 2005EBITDA
    
    $
    11,149
    
    
    
    2,711
    
    
    
    (822
    )
    
    
    13,038Depreciation and amortization
    
    
    (4,126
    )
    
    
    (625
    )
    
    
    
    
    
    
    (4,751
    )Interest expense, net
    
    
    
    
    
    
    
    
    
    
    (9,459
    )
    
    
    (9,459
    )Income tax benefit
    
    
    
    
    
    
    
    
    
    
    3,424
    
    
    
    3,424Net income (loss)
    
    $
    7,023
    
    
    
    2,086
    
    
    
    (6,857
    )
    
    
    2,252
 Three Months Ended December 31, 2004EBITDA
    
    $
    9,015
    
    
    
    3,274
    
    
    
    (734
    )
    
    
    11,555Depreciation and amortization
    
    
    (4,976
    )
    
    
    (813
    )
    
    
    
    
    
    
    (5,789
    )Interest expense, net
    
    
    
    
    
    
    
    
    
    
    (8,525
    )
    
    
    (8,525
    )Income tax benefit
    
    
    
    
    
    
    
    
    
    
    473
    
    
    
    473Net income (loss)
    
    $
    4,039
    
    
    
    2,461
    
    
    
    (8,786
    )
    
    
    (2,286
    )
 Nine Months Ended December 31, 2005EBITDA
    
    $
    28,587
    
    
    
    8,730
    
    
    
    (2,468
    )
    
    
    34,849Depreciation and amortization
    
    
    (12,635
    )
    
    
    (1,977
    )
    
    
    
    
    
    
    (14,612
    )Interest expense, net
    
    
    
    
    
    
    
    
    
    
    (27,959
    )
    
    
    (27,959
    )Income tax benefit
    
    
    
    
    
    
    
    
    
    
    3,386
    
    
    
    3,386Net income (loss)
    
    $
    15,952
    
    
    
    6,753
    
    
    
    (27,041
    )
    
    
    (4,336
    )
 Nine Months Ended December 31, 2004EBITDA
    
    $
    25,901
    
    
    
    9,796
    
    
    
    (2,293
    )
    
    
    33,404Depreciation and amortization
    
    
    (15,061
    )
    
    
    (2,396
    )
    
    
    
    
    
    
    (17,457
    )Interest expense, net
    
    
    
    
    
    
    
    
    
    
    (25,382
    )
    
    
    (25,382
    )Income tax benefit
    
    
    
    
    
    
    
    
    
    
    1,498
    
    
    
    1,498Net income (loss)
    
    $
    10,840
    
    
    
    7,400
    
    
    
    (26,177
    )
    
    
    (7,937
    )
 Print
 Sales.
 22




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##### Table of Contents



ACG HOLDINGS, INC.
Managements Discussion and Analysis of
Financial Condition and Results of Operations
  Gross Profit
  Selling, General and Administrative Expenses.
  Restructuring Costs (Benefit).
 Other Expense (Income).
 23




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##### Table of Contents



ACG HOLDINGS, INC.
Managements Discussion and Analysis of
Financial Condition and Results of Operations
   EBITDA.
 Premedia Services
 Sales.
  Gross Profit.
  Selling, General and Administrative Expenses.
  Other Expense (Income).
 24




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##### Table of Contents



ACG HOLDINGS, INC.
Managements Discussion and Analysis of
Financial Condition and Results of Operations
 EBITDA.
 Other Operations
  Interest Expense, Net
  Income Tax Expense (Benefit)
    Net Income (Loss)
  25




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##### Table of Contents



ACG HOLDINGS, INC.
Managements Discussion and Analysis of
Financial Condition and Results of Operations
 Liquidity and Capital Resources
  
    
    $55 million revolving credit facility ($40 million of which may be used for letters
of credit), which is not subject to a borrowing base limitation, maturing on December
15, 2009 (the 2005 Revolving Credit Facility); and
    
    $35 million non-amortizing term loan facility maturing on December 15, 2009 (the
2005 Term Loan Facility).
     
    
    change the nature of our business;
    
    pay dividends or make other distributions;
    
    make capital expenditures, other investments or acquisitions;
    
    enter into transactions with affiliates;
    
    dispose of assets or enter into mergers or other business combinations;
    
    incur or guarantee additional debt;
    
    repay debt or repurchase or redeem equity interests and debt;
    
    place restrictions on dividends, distributions or transfers to us or Holdings from our subsidiaries;
    
    create or permit to exist certain liens; and
    
    pledge assets or engage in sale-leaseback transactions.
   26




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##### Table of Contents



ACG HOLDINGS, INC.
Managements Discussion and Analysis of
Financial Condition and Results of Operations
   
    
    $12.1 million of operating activities (see our condensed consolidated statements of cash
flows appearing elsewhere in this Report);
    
    $6.5 million in cash capital expenditures; and
    
    $7.3 million to service other indebtedness (including repayment and buy out of capital
lease obligations of $3.8 million and payment of deferred
financing fees of $3.5 million).
     Value Added Revenue and Print Impressions for the Print Segment
  Three Months Ended
    
    Nine Months EndedDecember 31,
    
    December 31,2005
    
    2004
    
    2005
    
    2004Print segment VAR (in thousands)
    
    $
    49,444
    
    
    
    49,520
    
    
    
    139,129
    
    
    
    143,127Print segment impressions (in
millions)
    
    
    3,121
    
    
    
    3,043
    
    
    
    8,569
    
    
    
    8,509
 27




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##### Table of Contents



ACG HOLDINGS, INC.
Managements Discussion and Analysis of
Financial Condition and Results of Operations
  Three Months Ended
    
    
    Nine Months EndedDecember 31,
    
    
    December 31,2005
    
    
    2004
    
    
    2005
    
    
    2004(In thousands)Print segment sales
    
    $
    105,006
    
    
    
    109,057
    
    
    
    291,219
    
    
    
    298,705Paper, ink and subcontract services
    
    
    (55,562
    )
    
    
    (59,537
    )
    
    
    (152,090
    )
    
    
    (155,578
    )Print segment VAR
    
    $
    49,444
    
    
    
    49,520
    
    
    
    139,129
    
    
    
    143,127
 New Accounting Pronouncements
   Contractual Obligations
  28




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##### Table of Contents



ACG HOLDINGS, INC.
PART I  FINANCIAL INFORMATION
 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk.
 Quantitative Information.
 Qualitative Information .
    
 Item 4. Controls and Procedures.
  29




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##### Table of Contents



ACG HOLDINGS, INC.
 
 PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings.
  
 Item 6. Exhibits.
 Exhibit No.
 
    

    
    Description10.9


    
    

    
    
    Common Stock Option Agreement Form10.11


    
    

    
    
    Amended and Restated American Color Graphics, Inc. Supplemental
Executive Retirement Plan10.19
    
    

    
    
    Executive Incentive Compensation Program12.1
    
    

    
    
    Statement Re: Computation of Ratio of Earnings to Fixed Charges31.1
    
    

    
    
    Rule 13a  14(a)/15d-14(a) Certification of Chief Executive Officer31.2
    
    

    
    
    Rule 13a  14(a)/15d-14(a) Certification of Chief Financial Officer32.1
    
    

    
    
    Certification of Chief Executive Officer and Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350
 30




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##### Table of Contents



SIGNATURES
  ACG Holdings, Inc.
American Color Graphics, Inc.Date: February 13, 2006
    By

/s/ Stephen M. DyottStephen M. DyottChairman, President and Chief Executive Officer
(Authorized Officer)Date: February 13, 2006
 By
    
 /s/ Patrick W. KellickPatrick W. KellickSenior Vice President/Chief Financial Officer
and Secretary
(Authorized Officer and
Principal Financial Officer) 31




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##### Table of Contents



EXHIBIT INDEX
 Exhibit No.
    
    Description10.9
    
    Common Stock Option Agreement Form10.11
    
    Amended and Restated American Color Graphics, Inc. Supplemental
Executive Retirement Plan10.19
    
    Executive Incentive Compensation Program12.1
    
    Statement Re: Computation of Ratio of Earnings to Fixed Charges31.1
    
    Rule 13a  14(a)/15d-14(a) Certification of Chief Executive Officer31.2
    
    Rule 13a  14(a)/15d-14(a) Certification of Chief Financial Officer32.1
    
    Certification of Chief Executive Officer and Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350
 32